Published Papers and Working Papers
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Public Economies and the Endogenous Choice of Institutions, with Patrick Holder. In this paper we provide a framework in which to formalize the seminal work of Elinor Ostrom on the study of public economies, a prominent theoretical construct aimed to provide answers to the following questions: (a) Why some societies are able to solve their collective action problems and others are not? and (b) Why societies choose the particular institutions they choose from a vast array of possible choices? Homo Oeconomicus, forthcoming.
Rationality, Strategic Uncertainty and Belief Diversity in Non-cooperative Games. I investigate the existence of interactive belief systems for complete information games that satisfy the following properties: (R) players do not rule out their opponents use rational ex ante strategies for deriving their choices, (K) they do not rule out, ex ante, that they can come to know the action profile that is ultimately played and (SU) they do not rule out strategic uncertainty. In this paper I show that for a large class of games there are no prior beliefs that satisfy properties (R), (K) and (SU). International Journal of Economic Theory, forthcoming.
Should a Central Bank Transfer its Profits to the Treasury?, with Fernando Álvarez-Parra and Adriana Arreaza. In this paper we show how two seemingly irrelevant accounting principles for central banks -the choice of the unit of account for its balance sheet and the method of inventory valuation of foreign currency reserves- can overstate or understate profits transferred to the treasury and how this can threaten the ability of central banks to control inflation. We show the first point through Monte Carlo experiments calibrated for the Venezuelan economy and the second point in an infinitely lived representative agent model that illustrates the problem of the joint determination of the level of central bank assets and the size of profits transferred to the treasury when the objective of the central bank is to eliminate the possibility of a hyperinflation. Economía, 18(2), Spring, 2018.
A ‘Rights-Based’ Approach to Optimal Tax Policy This paper derives the tax system and size of government implied by principles of economic efficiency and aversion to the violation of individual rights. The optimal policy equalizes the gains individuals obtain from the governmental activity, relative to what they have a right to in its absence. Optimal taxes are progressive. However, because industrious individuals would fare well either way there will be limits to how much redistribution is recommended by the optimal policy. in A. Mishra, and T. Ray (eds.) Markets, Governance, and Institutions in the Process of Economic Development, Ch. 19, Oxford University Press, 2018.
The 'Troubling Tradeoffs' Paradox and a Resolution. Ravallion (2012a) argues that the Human Development Index (HDI) embeds questionable tradeoffs between the dimensions used to compute the index. To alleviate these problems he proposes the adoption of one of the indices developed by Chakravarty (2003). In this paper I identify the following paradox: while the Chakravarty indices clearly exhibit more sensible tradeoffs than the HDI, the HDI produces more sensible rankings than the Chakravarty indices. To solve the paradox I identify the axioms behind each methodology responsible for the unintuitive tradeoffs and rankings and illustrate how to develop an index with these questionable axioms removed. This approach can result in methodologies that exhibit more intuitive tradeoffs by design, as it seeks inputs from the public as to what those tradeoffs ought to be, and produces rankings that are more in line with what the HDI wishes to measure: human development and capabilities, as conceptualized by Sen (1985). Review of Income and Wealth, 63(3), September, 2017.
Solving the Kidney Shortage via the Creation of Kidney Donation Co-operatives, with KC Eames and Patrick Holder. Many people object to the creation of a market for kidneys on the grounds that such reform would hurt those patients unable to afford the market price of a kidney and that donors do not understand the risks they’re taking when donating. In this paper, we propose a mechanism, the kidney co-operative, designed to provide sufficient incentives to alleviate the kidney shortage while at the same time addressing the concerns regarding the potential losers from reform. We show that it is reasonable to expect that the number of transplants will be larger under the kidney co-operative mechanism than under either the status quo or a conventional market mechanism. Journal of Health Economics, 54, July, 2017. (Online Appendix).
'Vintage' Nash Bargaining Without Convexity. In this note I study Nash bargaining when the utility possibility set of the bargaining problem is non-convex. A simple variation of Nash's symmetry axiom is all that is necessary to establish a set valued version of Nash's solution in non-convex settings. Economics Letters, 141, 2016.
Subtle Price Discrimination and Surplus Extraction Under Uncertainty. In this paper I provide a solution to Proebsting’s Paradox, an argument that appears to show that the investment rule known as the Kelly criterion can lead a decision maker to invest a higher fraction of his wealth the more unfavorable the odds he faces are and, as a consequence, risk an arbitrarily high proportion of his wealth on the outcome of a single event. I show that a large class of investment criteria, including ’fractional Kelly,’ also suffer from the same shortcoming and adapt ideas from the literature on price discrimination and surplus extraction to explain why this is so. I also derive a new criterion, dubbed the doubly conservative criterion, that is immune to the problem identified above. Immunity stems from the investor’s attitudes towards capital preservation and from him becoming rapidly pessimistic about his chances of winning the better odds he is offered. Journal of Mathematical Economics, 52, 2014.
An Axiomatization of the Human Development Index . In 2010 the UNDP unveiled a new methodology for the calculation of the Human Development Index (HDI). In this paper I investigate the normative and practical properties of this change vis a vis the original formulation of the HDI in 1990. The main conceptual innovation of the new index can be summarized as follows: the new HDI penalizes both low and uneven achievements across all dimensions of human development, whereas the old formulation is not sensitive to such uneven development. In practice, however, both methodologies agree considerably in terms of how they rank countries, but when they differ, the new methodology produces results more consistent with what the HDI is intended to measure: human development and capabilities, as conceptualized by Sen (1985). Social Choice and Welfare,42(4), 2014.
A Structuralist Theory of Central Bank Independence. Can a heterodox economist find arguments in favor of Central Bank independence? Economists currently favor arguments in favor of Central Bank independence based on Barro-Gordon (1983 a,b), a very ‘orthodox’ model. Consequently, those who view the economic orthodoxy with suspicion tend to question Central Bank independence. I argue that Central Bank independence can be beneficial even in a very ‘structuralist’ economy: one in which workers are unionized, firms are cartelized and inflation arises as the result of distributive struggles among capitalists and workers. This is so because it is the time-inconsistency issue, and not the structure of the economy, that which generates the inflation bias that Central Bank independence is set to eliminate. Economics Bulletin, 34 (4), 2014.
Measuring Key Disparities in Human Development: The Gender Inequality Index. With Amie Gaye, Jeni Klugman, Milorad Kovacevic and Sarah Twigg. Gender inequality remains a major barrier to human development. Girls and women have made major strides since 1990, but they have not yet gained gender equity. In this paper, we review ways to measure and monitor gender inequality, providing a critique of existing measures including the first global gender indices that were launched in the 1995 Human Development Report – the Gender-related Development Index and the Gender Empowerment Measure - and introduce a new index that is presented in the 2010 Human Development Report. The Gender Inequality Index, which addresses the key criticisms of previous measures, is unique in including critical issues of educational attainment, economic and political participation, and reproductive health issues and in accounting for overlapping inequalities at the national level. As such, it represents an important advance on existing global measures of gender equity. Measures of the disadvantages for women raise awareness of problems, permit monitoring of progress towards gender equity objectives and help keep governments accountable. In this light, the Gender Inequality Index is designed to reveal the extent to which the realization of a country’s human development potential is curtailed by gender inequality, and provides empirical foundations for policy analysis and advocacy efforts. We also compare our results with the results of alternative gender inequality indices, finding significant variation in rankings across the various indices due largely to differences in the elements of gender inequality they seek to measure. In: D. Figart and T. Warnecke (eds.), Handbook of Research on Gender and Economic Life, Edward Elgar Publishers, 2013.
Expected Utility Inequalities. Suppose we know the utility function of a risk averse decision maker who values a risky prospect X at a price CE. Based on this information alone I develop upper bounds for the tails of the probabilistic belief about X of the decision maker. I also illustrate how to use these expected utility bounds in a variety of applications, which include the estimation of risk measures from observed data, option valuation, credit risk and the equity premium puzzle. Economic Theory, 36(1), 2008.
Epistemic Conditions for Rationalizability. In this paper I show that, just as with Nash Equilibrium, there are sparse conditions, not involving common knowledge of rationality, that lead to (correlated) rationalizability. The basic observation is that, if the actual world belongs to a set of states where the set Z of action profiles is played, each player knows her own payoffs, everyone is rational and it is mutual knowledge that the action profiles played are in Z, then the actions played at the actual world are rationalizable actions. Alternatively, if at the actual world the support of the conjecture of player i is Di, there is mutual knowledge of: (i) the game being played, (ii) that the players are rational, and (iii) that for every i the support of the conjecture of player i is contained in Di, then every strategy in the support of the conjectures is rationalizable. The results do not require common knowledge of anything, are valid for games with any number of players, and extend to refinements of rationalizability such as independent rationalizability and rationalizable conjectural equilibrium. Games and Economic Behavior, 63(1), 2008.
Testable Implications of Subjective Expected Utility Theory. I show that the predictive content of the hypothesis of subjective expected utility maximization critically depends on what the analyst knows about the details of the problem a particular decision maker faces. When the analyst does not know anything about the agent´s payoffs or beliefs and can only observe the sequence of actions taken by the decision maker any arbitrary sequence of actions can be implemented as the choice of an agent that solves some intertemporal utility maximization problem under uncertainty. Games and Economic Behavior, 53(2), 2005.
Counterfactual Reasoning and Common Knowledge of Rationality in Normal Form. When evaluating the rationality of a player in an epistemic model of a noncooperative game one has to examine counterfactuals such as ``what would happen if the player were to do what he actually does not do?'' In this paper I develop an epistemic model of a normal form game where counterfactuals of this sort are evaluated as in the philosophical literature (cf. Lewis, 1973; Stalnaker , 1968). According to this method one evaluates a statement like ``what would the player believe if he were to do what he actually does not do'' at the world that is closest to the actual world in which the hypothetical deviation actually occurs. I show that, in this extended model, common knowledge of rationality need not lead to rationalizability. I also present assumptions that allow rationalizability to be a consequence of common knowledge of rationality in this extended model. These assumptions suggest that it may be misleading to believe that, from an epistemic point of view, rationalizability relies on weaker assumptions about belief consistency than Nash equilibrium. Topics in Theoretical Economics, 4(1), 2004.
The Interplay Between Analytics and Computation in the Study of Congestion Externalities: The Case of the El Farol Problem. In this paper I study the El Farol problem , a deterministic , boundedly rational , multi - agent model of a resource subject to congestion externalities that was initially studied computationally by Arthur (1994). I represent the interaction as a game , compute the set of Nash equilibria in mixed strategies of this game and show analytically how the method of inductive inference employed by the agents in Arthur's computer simulation leads the empirical distribution of aggregate attendance to be like those in the set of Nash equilibria of the game . This set contains only completely mixed strategy profiles , which explains why aggregate attendance appears random in the computer simulation even though its setup is completely deterministic . A previous version circulated as the SFI Working Paper 97-06-060 E, The Santa Fe Institute . Journal of Public Economic Theory 6(2), 2004.
Social Theories of Authority. Authority is a relation that exists between individuals in which one does as indicated by another what he or she would not do in the absence of such indication . With this as background, the article presents the " pre - modern " notions of authority developed by Plato, Aristotle , Machiavelli and Weber ; and then the perspective given by Arendt , according to which these notions are grounded in an ontological tradition whose time has past . This leads to the point of view of Lukes , according to which it is unavoidable that multiple perspectives exist in the understanding of authority . These perspectives are associated with the different degrees of solidity that one can give to social composites such as culture, language , social groups , and the individual itself . The article then presents the perspectives of Friedman , Flathman , Raz and Zambrano. They reveal that the authority relation is as solid as the beliefs that justify individual choices that , at the interpreted level , are labeled as " ruling " and " following ". The article concludes by pointing out how our understanding of the authority relation may change as a consequence of recent developments in the cognitive science literature , as pioneered by Varela, regarding the non- existence of a solid , centralized , unitary self . Article prepared by invitation for the International Encyclopedia of the Social and Behavioral Sciences, November , 2001.
A Simple Test of the Law of Demand for the United States.
( With Tim Vogelsang ) Werner Hildenbrand formulated in 1994 a hypothesis
that we call the Natural Time Law of Demand , namely , that for any two
time periods t and t' the vector of prices pt and the vector of demands
Qt may be related by ( pt - pt ' )( Qt - Qt ') < 0. In this paper we
formulate a related hypothesis , the Homogeneous Law of Demand , which
is the Natural Time Law of Demand for income - normalized prices . We
test both hypotheses for the United States by using time series techniques
and conclude that both hypotheses are consistent with the data. Importantly
, the Homogeneous Law of Demand is equivalent to the Law of Demand if
the distribution of income varies slowly relative to the speed at which
aggregate income changes over time. Under such assumption we strongly
reject the hypothesis that the Law of Demand fails to hold for the United
States . An additional contribution of the paper is the tabulation of
critical values for new serial correlation / unit root robust tests regarding
the mean of a univariate time series.
Econometrica 68 (4), July , 2000.
Formal Models of Authority : Introduction and Political Economy Applications. Talcot Parsons suggested in 1963 that there are basically three kinds of authority : utilitarian authority , coercive authority , and persuasive authority . In this paper I show that the models developed by Gibbons and Rutten (1997), Hirshleifer (1991), Skaperdas (1992), Akerlof (1976) and Basu (1986) can be viewed as models where issues such as authority , power , influence and ideology , in the sense of Parsons , can be formally discussed . I also show the existence of an interesting difficulty in providing a contractarian interpretation of the State under the Parsonian view of governmental authority discussed in this paper . Rationality and Society 11(2), May, 1999.
On the Emergence of the Market Pattern. I examine the work of Karl Polanyi (The Great Transformation, 1944) to extract from it hypotheses related to the emergence and operation of the capitalist system . I adapt models from the literature on complex adaptive systems and evolutionary game theory to build a fictitious society in which I " test " those hypotheses . The results are encouraging : the model provides functional insight on the relationship between the commoditization of labor and the emergence of a self equilibrating market economy . Journal of Institutional and Theoretical Economics 154(3), September, 1998.
Green Economy Measurements and Indicators (New: March, 2018), with Carmen Herrero, José Pineda and Antonio Villar. An Inclusive Green Economy is one that provides a response to three sets of challenges currently facing humanity: persistent poverty, overstepped planetary boundaries and inequitable sharing of growing prosperity. In this paper we identify some basic desiderata that any inclusive green economy measurement framework ought to satisfy; survey the existing initiatives aimed at tracking whether an economy is green, inclusive, and sustainable; and provide an example of what a green economy measurement framework that satisfies the basic desiderata can look like in practice.
‘Polity’ Human Development Indices. In this paper I develop a normative framework for the design of a measure of human development that contains the UNDP’s Human Development Index (HDI) as a special case. The methodology allows for the collection of information from the public about what tradeoffs between the core variables one ought to find acceptable in the determination of the index while remaining broadly in line with what the HDI wishes to measure: human development and capabilities, as conceptualized by Sen (1985).
Risk-Reward Representations of Expected Utility Theory, with Hayley Stevens. For each individual with von Neumann and Morgernstern’s preferences and for each gamble that can take negative values yet has positive expected value we calculate separately the reservation values of the losses and of the gains of the gamble and denote those values by risk* and reward, respectively. In this paper we show the connection between these numbers and the certainty equivalent of a gamble, explain how the (risk*, reward) pair paints a richer picture about the risk and return characteristics of that gamble to that individual than the one obtained from the (risk premium, expected value) profile, and argue that the resulting risk* measure is a more accurate measure of risk of loss than those that arise from strict considerations of first and second order stochastic dominance.
A Mechanism for Evaluating the Relevance of Credibility Problems in Politics, with Francisco Rodríguez. In this paper we develop a test of whether parties are capable of making credible promises in single-issue elections in which the parties have preferences over policies. Two observations are key: (1) Parties that can commit to specific policies do not adopt platforms that entail large probabilities of losing the election. This is because the adoption of very extreme platforms has the effect of shifting voter's expectations, and expected policies, away from the party's most preferred policy. (2) Parties who lack the capacity of making credible commitments are unable to affect voters' expectations about the policies they will adopt upon reaching office. This is because, absent commitment, voters know that a party will simply adopt its most preferred policy after it wins the election. These observations about voter's expectations and party behavior form the basis for the test.
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