Econometrica

Published by Econometric Society
Online ISSN: 1468-0262
Publications
Article
Much of the extensive empirical literature on insurance markets has focused on whether adverse selection can be detected. Once detected, however, there has been little attempt to quantify its welfare cost, or to assess whether and what potential government interventions may reduce these costs. To do so, we develop a model of annuity contract choice and estimate it using data from the U.K. annuity market. The model allows for private information about mortality risk as well as heterogeneity in preferences over different contract options. We focus on the choice of length of guarantee among individuals who are required to buy annuities. The results suggest that asymmetric information along the guarantee margin reduces welfare relative to a first best symmetric information benchmark by about £127 million per year, or about 2 percent of annuitized wealth. We also find that by requiring that individuals choose the longest guarantee period allowed, mandates could achieve the first-best allocation. However, we estimate that other mandated guarantee lengths would have detrimental effects on welfare. Since determining the optimal mandate is empirically difficult, our findings suggest that achieving welfare gains through mandatory social insurance may be harder in practice than simple theory may suggest.
 
Article
"This paper estimates semiparametric reduced-form neoclassical models of life-cycle fertility in Sweden.... The estimated model integrates aspects of life cycle fertility that have previously been studied in isolation of each other: completed fertility, childlessness, interbirth intervals, and the time series of annual birth rates. The main objective of this paper is to determine which aspects of life cycle fertility, if any, are sensitive to male income and female wages."
 
Article
This paper formulates and estimates multistage production functions for child cognitive and noncognitive skills. Output is determined by parental environments and investments at different stages of childhood. We estimate the elasticity of substitution between investments in one period and stocks of skills in that period to assess the benefits of early investment in children compared to later remediation. We establish nonparametric identification of a general class of nonlinear factor models. A by-product of our approach is a framework for evaluating childhood interventions that does not rely on arbitrarily scaled test scores as outputs and recognizes the differential effects of skills in different tasks. Using the estimated technology, we determine optimal targeting of interventions to children with different parental and personal birth endowments. Substitutability decreases in later stages of the life cycle for the production of cognitive skills. It increases in later stages of the life cycle for the production of noncognitive skills. This finding has important implications for the design of policies that target the disadvantaged. For some configurations of disadvantage and outcomes, it is optimal to invest relatively more in the later stages of childhood.
 
Article
PIP This paper examines the sharing of risks between generations in the framework of an overlapping generations model of social security with shocks to the productivity of labor and capital and demographic shocks. The study focused on stationary long run allocations. The concept of interim optimality was utilized, which amounts to standard Pareto optimality once the state of the world in which the agents are born is known. The set of interim optimal allocations was characterized and the equilibria associated with various institutional forms of social security from the point of view of the optimal criterion were also studied. In addition, the analogs of two traditional welfare theorems of microeconomic theory were obtained.
 
Article
This paper develops methods for evaluating marginal policy changes. We characterize how the effects of marginal policy changes depend on the direction of the policy change, and show that marginal policy effects are fundamentally easier to identify and to estimate than conventional treatment parameters. We develop the connection between marginal policy effects and the average effect of treatment for persons on the margin of indifference between participation in treatment and nonparticipation, and use this connection to analyze both parameters. We apply our analysis to estimate the effect of marginal changes in tuition on the return to going to college.
 
Article
This paper uses a structural model to understand, predict, and evaluate the impact of an exogenous microcredit intervention program, the ThaiMillion Baht Village Fund program. We model household decisions in the face of borrowing constraints, income uncertainty, and high-yield indivisible investment opportunities. After estimation of parameters using pre-program data, we evaluate the model’s ability to predict and interpret the impact of the village fund intervention. Simulations from the model mirror the data in yielding a greater increase in consumption than credit, which is interpreted as evidence of credit constraints. A cost-benefit analysis using the model indicates that some households value the program much more than its per household cost, but overall the program costs 20 percent more than the sum of these benefits.
 
Article
Across a wide set of non-group insurance markets, applicants are rejected based on observable, often high-risk, characteristics. This paper argues that private information, held by the potential applicant pool, explains rejections. I formulate this argument by developing and testing a model in which agents may have private information about their risk. I first derive a new no-trade result that theoretically explains how private information could cause rejections. I then develop a new empirical methodology to test whether this no-trade condition can explain rejections. The methodology uses subjective probability elicitations as noisy measures of agents beliefs. I apply this approach to three non-group markets: long-term care, disability, and life insurance. Consistent with the predictions of the theory, in all three settings I find significant amounts of private information held by those who would be rejected; I find generally more private information for those who would be rejected relative to those who can purchase insurance; and I show it is enough private information to explain a complete absence of trade for those who would be rejected. The results suggest private information prevents the existence of large segments of these three major insurance markets.
 
Article
We analyze the identification and estimation of parameters β satisfying the incomplete linear moment restrictions E(z T(x β−y)) = E(zTu(z)) where z is a set of instruments and u(z) an unknown bounded scalar function. We first provide empirically relevant examples of such a set-up. Second, we show that these conditions set identify β where the identified set B is bounded and convex. We provide a sharp characterization of the identified set not only when the number of moment conditions is equal to the number of parameters of interest but also in the case in which the number of conditions is strictly larger than the number of parameters. We derive a necessary and sufficient condition of the validity of supernumerary restrictions which generalizes the familiar Sargan condition. Third, we provide new results on the asymptotics of analog estimates constructed from the identification results. When B is a strictly convex set, we also construct a test of the null hypothesis, β0 ε B, whose size is asymptotically correct and which relies on the minimization of the support function of the set B − { β 0}. Results of some Monte Carlo experiments are presented.
 
Article
The process through which individuals accumulate information on their productive traits has been analyzed extensively. The manner in which firms utilize this information has received little attention. This paper examines the latter problem in a simple optimal assignment framework. The optimal assignment is characterized, and the impact of improved information quality on the equilibrium level of output, wages, and degree of specialization is investigated.
 
Article
This paper deals with two single-equation estimators in a set of simultaneous linear stochastic equations--namely, ordinary least squares (OLS) and two-stage least squares (2SLS). Under the assumption that all predetermined variables in the model are exogenous, necessary and sufficient conditions are obtained for the existence of even moments of the above estimators. It is shown that for the general case with an arbitrary number of included endogenous variables, even moments of the 2SLS estimator are finite if and only if the order is less than K2 - G1 + 1. Furthermore, even moments of the OLS estimator exist if and only if the order is less than N - K1 - G1 + 1, where N is the sample size, G1 + 1 is the number of included endogenous variables, K1 and K2 respectively are the number of included and excluded exogenous variables in the equation to be estimated.
 
Article
This paper provides a proof of the consistency and asymptotic normality of the quasi-maximum likelihood estimator in GARCH(1,1) and IGARCH(1,1) models. In contrast to the case of a unit root in the conditional mean, the presence of a 'unit root' in the conditional variance does not affect the limiting distribution of the estimators; in both models, estimators are normally distributed. In addition, a consistent estimator of the covariance matrix is available, enabling the use of standard test statistics for inference. Copyright 1996 by The Econometric Society.
 
Article
The effect of economic constraints upon fertility are analyzed within the theory of household production and allocation of time. The interaction of individual components of family income and the direct economic costs of children are shown to have an increasingly large impact upon Swedish fertility as industrialization proceeds.
 
Article
This paper considers the application of various models of consumer demand to United Kingdom time series from 1900 to 1970. As well as testing the various forms of the "Rotterdam" model, reparametrization of that system is carried out in order to test the linear expenditure system and the direct addilog system on an exactly comparable basis. A further variant of the Rotterdam model is also introduced; this is intermediate between symmetry and additivity and allows for the calculation of all cross price elasticities from information on own price and income elasticities alone. The results of testing these models on a nine commodity model using maximum likelihood estimation are presented and discussed. Unlike most previous work, and in spite of some anomalous results, the United Kingdom experience seems broadly consistent with neoclassical demand theory. However, all restrictions more stringent than those directly implied by the theory are rejected, though it is maintained that these may still be of considerable practical significance in particular instances.
 
Article
This article relates the events that led to the establishment of the journal Econometrica, with particular emphasis on the role played by Ragnar Frisch. The origin of the name of the journal is explained. The editorial views, style, and habits of Ragnar Frisch as Editor of Econometrica is recounted. Copyright 1995 by The Econometric Society.
 
Article
United States imports of manufactured products during the period 1947 to 1958 are examined in order to investigate the importance of changes in relative prices, ad valorem tariffs, and domestic production as explanatory variables. A cross section technique using first differences of product data over time is employed. Calculations were made after some stratifications of the data in order to illuminate additional aspects of the problem. Variable time lengths were used in the estimating process in an effort to evaluate the effect of time itself on the parameter estimates and also to determine whether peculiarities exist with respect to the particular years involved. The results were interpreted as reflecting institutional changes that have occurred in United States trade policy during this period.
 
Article
This paper is concerned with the estimation of an econometric model for the Israeli economy as it existed through 1965. The model is disaggregated to seven sectors and contains substantial detail for import and export equations. Multiplier analysis suggests that the economy is stable for unemployment rates around eight percent but is unstable at full employment unless discretionary fiscal and monetary policies are applied. A new version of the IS-LM curve is developed to explain this result. The model is used to "forecast" the recession of 1966 and it is determined that the ex post record is more successful than official government predictions issued at that time.
 
Article
In this paper we construct a model that describes the behavior of the foreign exchange market and Exchange Fund. Cross-spectral and regression analysis of daily data are used to show that official intervention contributed significantly to the short-run stability of Canadian exchange rates.
 
Article
This paper specifies and estimates a four-equation disequilibrium model of the consumption goods market in a centrally planned economy(CPE).The data are from Poland for the period 1955-1980, but the analysis is more general and will be applied to other CPEs as soon as the appropriate data sets are complete.This work is based on previous papers of Portes and Winter (P-W) and Charemza and Quandt(C-Q).P-W applied to each of four CPEs a discrete-switching disequilibrium model with a household demand equation for consumption goods, a planners' supply equation, and a "min" condition stating that the observed quantity transacted is the lesser of the quantities demanded and supplied.C-Q considered how an equation for the adjustment of planned quantities could be integrated into a CPE model with fixed prices and without the usual price adjustment equation.They made plan formation endogenous and permitted the resulting plan variables to enter the equations determining demand and supply.This paper implements the C-Q proposal in the P-W context.It uses a unique new data set of time series for plans for the major macroeconomic variables in Poland and other CPEs.The overall framework is applicable to any large organization which plans economic variables.
 
Article
The purpose of this article is to provide a deeper empirical insight into the structural change of an industry which is more relevant than that obtained by an analysis based on the traditionally estimated average production function. The main contribution is a long run analysis of technical progress and structural change by means of the short-run industry production function introduced by Johansen [13], and based on micro data for individual production units. For that purpose we have developed Johansen's approach into an operational framework for discrete capacity distributions including a special algorithm for the computation of the short-run industry production function.
 
Article
The authors specify and estimate a four-equation disequilibrium model of the consumption goods market in a centrally planned econo my. This work is based on previous papers of R. Portes and D. Winter_(1977) and W. Charemza and R. Quandt_(1982). The model contains a household demand equation , a planners' supply equation, a "min" condition and plan adjustment equation through which plan formation becomes endogenous. The paper uses a unique new data set of time series for plans for the major macroeconomic variables in Poland. The overall framework is applicable to any large organization which plans economic variables. Coauthors are Richard E. Quandt, David Winter, and Stephen Yeo. Copyright 1987 by The Econometric Society.
 
Article
The authors analyze the substitution bias in Laspeyres-type price indexes, using 101 c ommodities. They construct the tightest theoretical bounds on the cos t-of-living index using nonparametric methods and also construct supe rlative price indexes. Using nonparametric methods, the authors find homothetic preferences are consistent with the data. Sensitivity test s indicate that this result is not vacuous. Under this hypothesis, th e bias is between 0.22 and 0.14 percent per year. Superlative indexes imply a bias of about 0.18 percent. This estimate is somewhat larger than found in earlier studies. Commodity aggregation is found to be a major contributor to measured substitution bias. Copyright 1988 by The Econometric Society.
 
Article
This paper is concerned with the sources of variation in the earnings of American scientists over the decade 1960-70. It focuses on sources of variation over time as well as at a point in time. Earnings variation over time is decomposed into sources due to measurable variables representing an earnings function, a random effect individual variance component in the level of earnings, a random effect individual component in earnings growth, and a serially correlated transitory component. Maximum likelihood estimates of the implied parameters are presented and a method for obtaining GLS estimates of the earnings regression function, when the residual variance components are given, is explored.
 
Article
A recently developed quantile regression technique, which parsimoniously describes the entire conditional distribution, is applied to every March Current Population Survey since 1964. The study examines changes in the returns to schooling and experience at different points of the wage distribution and changes in within-group wage inequality. The results from the one-group and sixteen-group linear models show that the returns to schooling and experience differ across quantiles of the wage distribution but that their patterns of change are similar. Significant differences in wage inequality are also found across the various skill groups. Copyright 1994 by The Econometric Society.
 
Article
Proposals for the computation of competitive equilibria in the presence of taxation contained in recent joint work by the author are applied to a model of the United Kingdom economy and tax system for the period 1968-1970. Difficulties of model specification and parameterization are also discussed. Results provide indications of efficiency, distributional, and welfare impacts for a number of alternative tax changes.
 
Article
This paper provides evidence that the decline in the real value of the minimum wage and in the rate of unionization account for a significant share of the increase in wage inequality in the United States between 1979 and 1988. The role of the minimum wage is particularly important for women, while deunionization has the largest impact on men. The authors develop a semiparametric procedure that applies kernel density methods to appropriately weighted samples. The procedure provides a visually clear representation of where in the density of wages institutional and labor market forces exert the greatest impact. Copyright 1996 by The Econometric Society.
 
Article
A model is presented of a uniform price auction where bidders compete in demand schedules; the model allows for common and private values in the absence of exogenous noise. It is shown how private information yields more market power than the levels seen with full information. Results obtained here are broadly consistent with evidence from asset auctions, may help explain the response of central banks to the crisis, and suggest potential improvements in the auction formats of asset auctions. (JEL: D44, D82, G14, E58) (c) 2010 by the European Economic Association.
 
Article
We show that immigrant managers are substantially more likely to hire immigrants than are native managers. The finding holds when comparing establishments in the same 5-digit industry and location, when comparing different establishments within the same firm, when analyzing establishments that change management over time, and when accounting for within-establishment trends in recruitment patterns. The effects are largest for small and owner-managed establishments in the for-profit sector. Separations are more frequent when workers and managers have dissimilar origin, but only before workers become protected by EPL. We also find that native managers are unbiased in their recruitments of former co-workers, suggesting that information deficiencies are important. We find no effects on entry wages. Our findings suggest that a low frequency of immigrant managers may contribute to the observed disadvantages of immigrant workers.
 
Article
This paper presents a numerical algorithm for computing full information maximum likelihood (FIML) and nonlinear three-stage least squares (3SLS) coefficient estimates for large nonlinear macroeconometric models. The new algorithm, which is demonstrated by actually computing FIML and 3SLS coefficient estimates for two versions of the 97 equation Fair model, is substantially more effective than other algorithms on large FIML and 3SLS estimation problems.
 
Article
The authors show that quasimaximum likelihood (QML) estimators for conditional dispersion models can be severely affected by a small number of outliers such as market crashes and rallies, and they propose new estimation strategies (the two-stage Hampel estimators and two-stage S-estimators) resistant to the effects of outliers and study the properties of these estimators. They apply their methods to estimate models of the conditional volatility of the daily returns of the S&P 500 Cash Index series. In contrast to QML estimators, the authors' proposed method resists outliers, revealing an informative new picture of volatility dynamics during 'typical' daily market activity.
 
Article
Many electoral rules require a super-majority vote to change the status quo. Without some restriction on preferences, super-majority rules have paradoxical properties. For example, electoral cycles are possible with anything other than 100 percent majority rule. The auth ors show that these problems do not arise if there is sufficient simi larity of attitudes among the voting population. Their definition of social consensus involves two restrictions on domain: one on individu al preferences, the other on the distribution of preferences. When th is consensus exists, 64 percent majority rule has many desirable prop erties, including the elimination of all electoral cycles. Copyright 1988 by The Econometric Society.
 
Article
A class of parametric tests for heteroscedasticity in linear models is discussed. For models with nonstochastic regressors, new exact tests within this class are suggested which utilize existing tables of the distribution of the von Neumann ratio and of the Durbin-Watson bounding ratios. "Bound tests" for heteroscedasticity in least squares regression are proposed. A rigorous treatment of tests within this class for heteroscedasticity in the errors of structural relations in dynamic simultaneous equations models is provided.
 
Article
A model is developed to describe the allocation of laborers to tasks. The relation between the distributions of earnings and abilities is found to depend on the presence of comparative advantage. Various features of the distribution of earnings are explained in terms of the time taken by a given grade of labor to perform a task of a given difficulty.
 
Article
In this paper, we structurally estimate a sequential model of high school attendance and work decisions. The estimates imply that youths who drop out of high school have different traits than those who graduate, e.g., they have lower school ability and/or motivation, lower expectations about the rewards from graduation, and a comparative advantage at jobs that are done by non-graduates. We also found that working while in school reduces school performance. However, policy experiments indicate that even a complete prohibition on working would have a limited impact on the high school graduation rates of white males.
 
Article
This paper constructs a two-country (Home and Foreign) general equilibrium model of Schumpeterian growth without scale effects. The scale effects property is removed by introducing two distinct specifications in the knowledge production function: the permanent effect on growth (PEG) specification, which allows policy effects on long-run growth; and the temporary effects on growth (TEG) specification, which generates semi-endogenous long-run economic growth. In the present model, the direction of the effect of the size of innovations on the pattern of trade and Home’s relative wage depends on the way in which the scale effects property is removed. Under the PEG specification, changes in the size of innovations increase Home’s comparative advantage and its relative wage, while under the TEG specification, an increase in the size of innovations increases Home’s relative wage but with an ambiguous effect on its comparative advantage.
 
Article
The identifiability of linear dynamic models with autocorrelated errors is considered. Without a priori assuming relative left primeness of the structures, global identifiability conditions in the case of affine cross-equation restrictions and local identifiability conditions in the case of continuously differentiable cross-equation restrictions are derived.
 
Sample selection information.
Sample summary statistics.
Article
This research explores the medical care consumption and absenteeism decisions of employed individuals with acute illnesses in an effort to better understand health care behavior. Using data from the 1987 National Medical Expenditure Survey, the author estimates the structural parameters of an individual's discrete choice stochastic optimization problem, as opposed to employing conventional reduced form estimation methods that are prevalent in the health care literature. The estimates allow for predictions of the change in physician services use and illness-related absenteeism that arise with the introduction of new public policy initiatives involving health insurance and sick-leave coverage.
 
Article
In this paper the method of least absolute deviations is applied to the estimation of the parameters of a structural equation in the simultaneous equations model. A class of estimators called two stage least absolute deviations estimators is defined, their asymptotic properties are derived, and the problem of finding the optimal member of the class is considered.
 
Top-cited authors
James Heckman
  • University of Chicago
Whitney K. Newey
  • Massachusetts Institute of Technology
James H. Stock
  • Harvard University
Pierre Perron
  • Boston University
Paul Milgrom
  • Stanford University