Microeconomic Theory in Canada

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Recent Papers

• Dynamic Competing Mechanisms
  
  Ghosh, Sambuddha, Boston University, sghosh@bu.edu
  Han, Seungjin, McMaster University, hansj@mcmaster.ca
  Competing mechanism games involve multiple principals contracting with one or more agents. This paper extends the static model of Epstein and Peters (1999) to the repeated setting, allowing agents' types to evolve over time according to a Markov process. Actions are perfectly monitored, but types and messages are private information. Perhaps surprisingly, when discounting is low the dynamic game is more tractable in the following senses. First, each principal's minmax value relative to arbitrarily general mechanisms equals that relative to simpler mechanisms, often direct mechanisms. This contrasts with one-shot games, where the minmax cannot be explicitly computed because it is not expresssible in terms of simple mechanisms. Second, the above result allows equilibrium payoffs to be expressed in terms of primitives of the model. From the applied perspective, this paper provides a sufficient class of simple mechanisms to which one can restrict attention without loss of generality.
  Creation Date: 2012-04-04   Revision Date: 2012-04-04
• Compensating Wage Differentials in Stable Job Matching Equilibrium
  
  Han, Seungjin, McMaster University, hansj@mcmaster.ca
  Yamaguchi, Shintaro, McMaster University, yamtaro@mcmaster.ca
  This paper studies a stable job matching equilibrium and the implicit pricing of non-wage job characteristics. It departs from the previous literature by allowing worker heterogeneity in productivity instead of preferences, giving rise to a double transaction problem in a hedonic model. We show explicitly how wage differences across jobs can be decomposed into compensating wage differentials for non-wage job characteristics and differences in worker productivity. We also derive sufficient conditions for an assortative job matching and a stable matching condition in a model with continuous agent types. Empirical evidence from the U.S. Census and job amenity data from the Dictionary of Occupational Titles strongly supports our theory.
  Creation Date: 2012-01-30   Revision Date: 2012-01-30
• Limited Participation in International Business Cycle Models: A Formal Evaluation
  
  Gao, Xiaodan, University of British Columbia, gao.xiaodan@gmail.com
  Hnatkovska, Viktoria, University of British Columbia, hnatkovs@mail.ubc.ca
  Marmer, Vadim, University of British Columbia - Economics, vmarmer@interchange.ubc.ca
  In this paper we study the role of limited asset market participation (LAMP) for international business cycles. We show that when limited participation is introduced into an otherwise standard model of international business cycles, the performance of the model improves significantly, especially in matching cross-country correlations. To perform formal evaluation of the models we develop a novel statistical procedure that adapts the test of Vuong (1989) to DSGE models and accounts for the possibility that models are misspecified. Based on this test we show that the improvements brought out by LAMP are statistically significant, leading a model with LAMP to outperform a representative agent model. Furthermore, when LAMP is introduced, a model with complete markets is found to do better than a model with no trade in financial assets -- a well-known favorite in the literature. Our results remain robust to the inclusion of investment specific technical change.
  Creation Date: 2012-01-24   Revision Date: 2012-01-24
• Instrumental Variables Estimation and Weak-Identification-Robust Inference Based on a Conditional Quantile Restriction
  
  Marmer, Vadim, University of British Columbia - Economics, vmarmer@interchange.ubc.ca
  Sakata, Shinichi, University of Southern California, shinichi.sakata@gmail.com
  Extending the L1-IV approach proposed by Sakata (1997, 2007), we develop a new method, named the $rho_{tau}$-IV estimation, to estimate structural equations based on the conditional quantile restriction imposed on the error terms. We study the asymptotic behavior of the proposed estimator and show how to make statistical inferences on the regression parameters. Given practical importance of weak identification, a highlight of the paper is a proposal of a test robust to the weak identification. The statistics used in our method can be viewed as a natural counterpart of the Anderson and Rubin's (1949) statistic in the $rho_{tau}$-IV estimation.
  Creation Date: 2011-09-28   Revision Date: 2011-09-28
• Reciprocal Relationships and Mechanism Design
  
  Celik, Gorkem, University of British Columbia, celik@interchange.ubc.ca
  Peters, Michael, UBC, peters@econ.ubc.ca
  We study an incomplete information game in which players are involved in a reciprocal relationship that allows them to coordinate their actions by contracting among themselves. We model this as a competing mechanism game in which players have the ability to write contracts. We characterize the set of outcome functions that can be supported as equilibrium in this enhanced game. We use our characterization to show that the set of supportable outcomes is bigger than the set of outcomes supported by a centralized mechanism designer who can offer mechanisms in which all players participate. The difference is that the contracting game makes it possible for players to convey partial information about their type at the time they offer contracts.
  Creation Date: 2011-08-01   Revision Date: 2011-08-01