support@economics.utoronto.ca (IT Support) support@economics.utoronto.ca (IT Support) Wed, 16 May 2012 07:20:54 EDT Department of Economics, University of Toronto en-ca 720 Research http://www.economics.utoronto.ca/index.php/index/research/workingPapers Working Papers http://www.dev.economics.utoronto.ca/templates/images/rss_deptlogo.jpg http://www.economics.utoronto.ca/index.php/index/research/workingPapers http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/454 http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/454 Mon, 30 Apr 2012 00:00:00 EDT This paper presents a tractable framework for studying frictionless matching in school, work, and marriage when individuals have heterogeneous social and cognitive skills. In the model, there are gains to specialization and team production, but specialization requires communication and coordination between team members, and individuals with more social skills communicate and coordinate at lower resource cost. The theory delivers full task specialization in the labor and education markets, but incomplete specialization in marriage. It also captures well-known matching patterns in each of these sectors, including the commonly observed many-to-one matches in firms and schools. Equilibrium is equivalent to the solution of an utilitarian social planner solving a linear programming problem. http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/453 http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/453 Fri, 20 Apr 2012 00:00:00 EDT In this paper we extend the parametric, asymmetric, stochastic volatility model (ASV), where returns are correlated with volatility, by flexibly modeling the bivariate distribution of the return and volatility innovations nonparametrically. Its novelty is in modeling the joint, conditional, return-volatility, distribution with a infinite mixture of bivariate Normal distributions with mean zero vectors, but having unknown mixture weights and covariance matrices. This semiparametric ASV model nests stochastic volatility models whose innovations are distributed as either Normal or Student-t distributions, plus the response in volatility to unexpected return shocks is more general than the fixed asymmetric response with the ASV model. The unknown mixture parameters are modeled with a Dirichlet Process prior. This prior ensures a parsimonious, finite, posterior, mixture that bests represents the distribution of the innovations and a straightforward sampler of the conditional posteriors. We develop a Bayesian Markov chain Monte Carlo sampler to fully characterize the parametric and distributional uncertainty. Nested model comparisons and out-of-sample predictions with the cumulative marginal-likelihoods, and one-day-ahead, predictive log-Bayes factors between the semiparametric and parametric versions of the ASV model shows the semiparametric model forecasting more accurate empirical market returns. A major reason is how volatility responds to an unexpected market movement. When the market is tranquil, expected volatility reacts to a negative (positive) price shock by rising (initially declining, but then rising when the positive shock is large). However, when the market is volatile, the degree of asymmetry and the size of the response in expected volatility is muted. In other words, when times are good, no news is good news, but when times are bad, neither good nor bad news matters with regards to volatility. http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/452 http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/452 Fri, 13 Apr 2012 00:00:00 EDT The IMF's 2002 proposal for a new Sovereign Debt Restructuring Mechanism (SDRM) attracted considerable criticism from both emerging market sovereign debt issuers and from private sector financial institutions. This paper outlines the features of the SDRM and its advantages as perceived by the Official Sector. The paper explains the criticisms leveled by emerging market and private sector players. It analyses the likely market responses of lenders in the period prior to any threatened filing under the SDRM and shows how these responses are likely to reduce lending to risky sovereigns and to provoke earlier defaults. With such responses, the expected benefits of any SDRM in terms of the reduction in the frequency and severity of sovereign crises are likely to evaporate. http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/451 http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/451 Wed, 4 Apr 2012 00:00:00 EDT The East African Community (EAC) has fast-tracked its plans to create a single currency for the five countries making up the region, and hopes to conclude negotiations on a monetary union protocol by the end of 2012. While the benefits of lower transactions costs from a common currency may be significant, countries will also lose the ability to use monetary policy to respond to different shocks. Evidence presented shows that the countries differ in a number of respects, facing asymmetric shocks and different production structures. Countries have had difficulty meeting convergence criteria, most seriously as concerns fiscal deficits. Preparation for monetary union will require effective institutions for macroeconomic surveillance and enforcing fiscal discipline, and euro zone experience indicates that these institutions will be difficult to design and take a considerable time to become effective. This suggests that a timetable for monetary union in the EAC should allow for a substantial initial period of institution building. In order to have some visible evidence of the commitment to monetary union, in the meantime the EAC may want to consider introducing a common basket currency in the form of notes and coin, to circulate in parallel with national currencies. http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/450 http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/450 Wed, 21 Mar 2012 00:00:00 EDT An average person born in the United States in the second half of the nineteenth century completed 7 years of schooling and spent 58 hours a week working in the market. By contrast, an average person born at the end of the twentieth century completed 14 years of schooling and spent 40 hours a week working. In the span of 100 years, completed years of schooling doubled and working hours decreased by 30 percent. What explains these trends? We consider a model of human capital and labor supply to quantitatively assess the contribution of exogenous variations in productivity (wage) and life expectancy in accounting for the secular trends in educational attainment and hours of work. We find that the observed increase in wages and life expectancy account for 80 percent of the increase in years of schooling and 88 percent of the reduction in hours of work. Rising wages alone account for 75 percent of the increase in schooling and almost all the decrease in hours in the model, whereas rising life expectancy alone accounts for 25 percent of the increase in schooling and almost none of the decrease in hours of work. http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/449 http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/449 Wed, 14 Mar 2012 00:00:00 EDT This paper deals with the identification and estimation of dynamic games when players' beliefs about other players' actions are biased, i.e., beliefs do not represent the probability distribution of the actual behavior of other players conditional on the information available. First, we show that a exclusion restriction, typically used to identify empirical games, provides testable nonparametric restrictions of the null hypothesis of equilibrium beliefs. Second, we prove that this exclusion restriction, together with consistent estimates of beliefs at several points in the support of the special state variable (i.e., the variable involved in the exclusion restriction), is sufficient for nonparametric point-identification of players' payoff and belief functions. The consistent estimates of beliefs at some points of support may come either from an assumption of unbiased beliefs at these points in the state space, or from available data on elicited beliefs for some values of the state variables. Third, we propose a simple two-step estimation method and a sequential generalization of the method that improves its asymptotic and finite sample properties. We illustrate our model and methods using both Monte Carlo experiments and an empirical application of a dynamic game of store location by retail chains. The key conditions for the identification of beliefs and payoffs in our application are the following: (a) the previous year's network of stores of the competitor does not have a direct effect on the profit of a firm, but the firm's own network of stores at previous year does affect its profit because the existence of sunk entry costs and economies of density in these costs; and (b) firms' beliefs are unbiased in those markets that are close, in a geographic sense, to the opponent's network of stores, though beliefs are unrestricted, and potentially biased, for unexplored markets which are farther away from the competitors' network. Our estimates show significant evidence of biased beliefs. http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/448 http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/448 Tue, 13 Mar 2012 00:00:00 EDT This paper develops an efficient approach to model and forecast time-series data with an unknown number of change-points. Using a conjugate prior and conditional on time-invariant parameters, the predictive density and the posterior distribution of the change-points have closed forms. The conjugate prior is further modeled as hierarchical to exploit the information across regimes. This framework allows breaks in the variance, the regression coefficients or both. Regime duration can be modeled as a Poisson distribution. A new efficient Markov Chain Monte Carlo sampler draws the parameters as one block from the posterior distribution. An application to Canada inflation time series shows the gains in forecasting precision that our model provides. http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/447 http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/447 Thu, 8 Mar 2012 00:00:00 EST We study optimal patent design in a setting with sequential innovation. Firms innovate by undertaking "research" activities to generate new ideas and by undertaking "development" activities to transform these ideas into viable products. Both innovation incentives and the welfare costs of patent monopoly are multidimensional. We characterize optimal patent policy, and in particular, the tradeoff between patent length and patent breadth in this setting. The optimal size of the patent reward is smaller for patents associated with a higher deadweight loss. For a given reward size, a better patent that generates higher social surplus is shorter but broader. The optimal patent length may be finite or infinite. http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/446 http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/446 Thu, 1 Mar 2012 00:00:00 EST Between 1940 and 2000 there has been a substantial increase of educational attainment in the United States. What caused this trend? We develop a model of human capital accumulation that features a non-degenerate distribution of educational attainment in the population. We use this framework to assess the quantitative contribution of technological progress and changes in life expectancy in explaining the evolution of educational attainment. The model implies an increase in average years of schooling of 24 percent which is the increase observed in the data. We find that technological variables and in particular skill-biased technical change represent the most important factors in accounting for the increase in educational attainment. The strong response of schooling to changes in income is informative about the potential role of educational policy and the impact of other trends affecting lifetime income. http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/445 http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/445 Thu, 16 Feb 2012 00:00:00 EST We consider a standard social choice environment with linear utilities and independent, one-dimensional, private types. We prove that for any Bayesian incentive compatible mechanism there exists an equivalent dominant strategy incentive compatible mechanism that delivers the same interim expected utilities for all agents and the same ex ante expected social surplus. The short proof is based on an extension of an elegant result due to Gutmann et al. (Annals of Probability, 1991). We also show that the equivalence between Bayesian and dominant strategy implementation generally breaks down when the main assumptions underlying the social choice model are relaxed, or when the equivalence concept is strengthened to apply to interim expected allocations. http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/444 http://www.economics.utoronto.ca/index.php/index/research/workingPaperDetails/444 Wed, 8 Feb 2012 00:00:00 EST The literature on the returns to training has pointed out that, immediately following a training episode, wages of participants in employer-sponsored training increase substantially while wages of participants in government-sponsored training hardly change. We argue that a clear selection issue has been overlooked by the literature - most of the government-sponsored trainees are occupation switchers while most participants in employer-sponsored training are occupation stayers. An occupational switch involves a substantial destruction of human capital, and once we account for the associated decline in wages we find a large positive impact of both employer- and government-sponsored training on workers' human capital.