NAJ Economics

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Editorial Board

Susan Athey
Ted Bergstrom
Michele Boldrin
V.V. Chari
Drew Fudenberg
David K. Levine
Thomas R. Palfrey
Wolfgang Pesendorfer
Matt Rabin
Ariel Rubinstein
Jose A. Scheinkman
Jean Tirole

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Volume 5 - August 04, 2002 Previous Next

1. Mario J. Crucini and Mototsugu Shintani Persistence in Law-of-One-Price Deviations: Evidence From Micro-Price Data

A long-standing puzzle in the theory of exchange rates is that short-term exchange rate variations appear to have a half life of 3-5 years - difficult to explain as a consequence of nominal rigidities. Current thinking is that violations in the law of one price between countries is due to real factors, such as differences in the prices of non-traded inputs (such as land). Crucini and Shintani use prices on 270 goods across 90 countries and 13 US cities to study the long and short-term adjustment of prices. They find strong evidence that there are long-term price differences between cities, but not within the US. On the other hand, adjustment back to these long-term prices following short-term exchange rate shocks is rapid, with a half life of a year or less, both between countries and within the US.
original link cached copy reviewed by David K. Levine on 08/04/02

2. Doh-Shin Jeon and Domenico Menicucci Buyer Coalition Against Monopolistic Screening: On the Role of Asymmetric Information among Buyers

A monopolist can achieve a degree of price discrimination by allowing consumers to self-select among a menu of alternatives. But what if the consumers collude? This paper establishes the surprising result that the monopolist can do as well in the face of collusion as in its absence. It does so by exploiting the fact that consumers also face asymmetric information.
original link cached copy reviewed by David K. Levine on 08/30/02

3. Andrea Wilson Bounded Memory and Biases in Information Processing

This paper shows that some forms of biases in information processing are consistent with the optimal use of a finite memory. An infinitely-lived decision maker receives a sequence of signals, after which she must make a decision. The agent has a fixed number of memory states available, and chooses the updating rule and the map from memory to actions to maximize her expected payoff. The paper obtains a strikingly sharp characterization of the optimal rule when the agent is likely to observe a great many signals before needing to act.
original link cached copy reviewed by Drew Fudenberg on 04/17/03

4. Franklin Allen, Stephen Morris and Hyun S. Shin Beauty Contests, Bubbles and Iterated Expectations in Asset Markets

This paper points out that the law of iterated expectations doesn't apply when averaged over a group of agents. Consequently, in a financial market with short-lived traders, the date 1 price need not equal the date 1 average expectation of the date 3 price: In constrast to representative-agent models, there need not be a martingale representation of the price process.
original link cached copy reviewed by Drew Fudenberg on 04/17/03

5. B. D. Bernheim and Antonio Rangel Addiction and Cue-Conditioned Cognitive Processes

Bernheim and Rangel use facts on drug addiction to motivate an ingenious dynamic model of decision making featuring interactions of two separate cognitive systems, emotion and (rational) cognition. Agents always consume the drug when in a "hot mode", and may consume in a "cold mode". Level of addiction is a state variable, which goes up after consumption and goes down after abstention. They characterize the value function and show that for addictive goods it is declining in the state, so rational agents should never intentionally consume. The paper is a showcase piece for behavioral economics. The model is well-grounded in facts about neuroscience and addiction, and leads to interesting and testable empirical predictions with significant welfare implications.
original link cached copy reviewed by Thomas R. Palfrey on 06/14/03