Santa Clara University

Economics Department Working Papers Index

 

 
2014 Working Papers
WP-09 Judd K,, Maliar L, Maliar S,  Lower Bounds on Approximation Errors: ....
Lower Bounds on Approximation Errors: Testing the Hypothesis That a Numerical Solution Is Accurate (PDF)

Kenneth L. Judd judd@hoover.stanford.edu

Lilia Maliar maliarl@stanford.edu

Serguei Maliar smaliar@scu.edu


Abstract

We propose a novel methodology for evaluating the accuracy of numeri- cal solutions to dynamic economic models. Speci,cally, we construct a lower bound on the size of approximation errors. A small lower bound on errors is a necessary condition for accuracy: If a lower error bound is unacceptably large, then the actual approximation errors are even larger, and hence, we reject the hypothesis that a numerical solution is accurate. Our accuracy analysis is logically equivalent to hypothesis testing in statistics. As an il- lustration of our methodology, we assess approximation errors in the ,rst- and second-order perturbation solutions for two stylized models: a neoclas- sical growth model and a new Keynesian model. The errors are small for the former model but unacceptably large for the latter model under some empirically relevant parameterizations.

JEL classif ication : C61, C63, C68, E31, E52

Key Words : approximation errors; best case scenario, error bounds, Euler equation residuals; accuracy; numerical solution; algorithm; new Key- nesian model

WP-08 Arellano C, Maliar L, Maliar S, Tsyrennikov V.  Envelope Condition Method ....

Envelope Condition Method with an Application to Default Risk Models (PDF)

Cristina Arellano arellano.cristina@gmail.com

Lilia Maliar maliarl@stanford.edu

Serguei Maliar smaliar@scu.edu

Viktor Tsyrennikov vt68@cornell.edu

Abstract

We develop an envelope condition method (ECM) for dynamic program- ming problems ‹a tractable alternative to expensive conventional value func- tion iteration. ECM has two novel features: First, to reduce the cost, ECM replaces expensive backward iteration on Bellman equation with relatively cheap forward iteration on an envelope condition. Second, to increase the accuracy of solutions, ECM solves for derivatives of a value function jointly with a value function itself. We complement ECM with other computational techniques that are suitable for high-dimensional problems, such as simulation- based grids, monomial integration rules and derivative-free solvers. The result- ing value-iterative ECM method can accurately solve models with at least up to 20 state variables and can successfully compete in accuracy and speed with state-of-the-art Euler equation methods. We also use ECM to solve a chal- lenging default risk model with a kink in value and policy functions, and we ,nd it to be fast, accurate and reliable.

EL classification : C6, C61, C63, C68

Key Words : Dynamic programming; Value function iteration; Bellman equation; Endogenous grid; Envelope condition; Curse of dimensionality; Large scale; Sovereign debt; Default risk

WP-07 Shapiro T. Availability of Higher Education and Educational Outcomes ....

Availability of Higher Education and Educational Outcomes: Quantifying the Impacts of College Openings and Cohort Size (PDF)

Teny Shapiro tshapiro@scu.edu

Abstract

Research has established the benets of higher education and the importance of aordability, however less is known about how the availability of higher education aects educational attain- ment. By constructing a comprehensive dataset on college openings in the U.S. from 1969 to 1991, I show that exogenous variation in two-year and four-year college availability, caused by changed birth cohort sizes and local college openings, substantially aects educational attain- ment. New four-year colleges increase the likelihood of obtaining a Bachelor's degree, while new two-year colleges only aect Associate's degree attainment. Additionally, results show that students from larger cohorts are crowded out of four-year colleges. This crowd-out results in lower lifetime educational attainment by pushing students to two-year colleges.

JEL: I21, I23

Keywords: higher education, college access, demand for schooling, cohort size, college openings

WP-06 Kim J, Shin D. Information Provision before a Contract is Offered ...

 Information Provision before a Contract is Offered (PDF)

Jaesoo Kim jaeskin@iupui.edu

Dongsoo Shin dshin@scu.edu

Abstract

This paper considers an agency model in which the agent can update the principalís belief before the contract o§er. We identify that the agent who has a bad potential to perform the task has a small chance to receive information rent, but if he receives it, he receives a large amount. Thus, the agent may choose to provide more information that shifts the principalís belief to the negative direction if the prior belief is optimistic.

Keywords

Agency Contracting, Information Provision, Information Rent.

WP-05 Ifcher, J, Herbst C. The Increasing Happiness of Parents ...
The Increasing Happiness of Parents (PDF)

John Ifcher jifcher@scu.edu

Chris M. Herbst chris.herbst@asu.edu

Abstract

Previous research suggests that parents may be less happy than non-parents. We critically assess the extant literature and reexamine the relationship between parental status and happiness using the General Social Survey (N = 42,298) and DDB Lifestyle Survey (N = 75,237). We find that parents are becoming happier over time relative to non-parents, that non-parents' happiness is declining absolutely, and that estimates of the parental happiness gap are sensitive to the timeperiod and age-group analyzed. These results are consistent across two datasets, most subgroups, and various specifications. Finally, we present evidence that suggests children appear to protect parents against social and economic forces that may be reducing happiness among non-parents.

WP-04 Ifcher J. , Zarghamee H. Subjective-Well-Being Inequality and Per Capita Income: Evidence from the ...
Subjective-Well-Being Inequality and Per Capita Income: Evidence from the World Values (PDF)

John Ifcher jifcher@scu.scu

Homa Zarghamee hzargham@barnard.edu

Abstract

The field of "Happiness Research" has grown markedly. A central question is whether higher income and/or economic growth rates are associated with higher levels of Subjective Well Being (SWB). Crosssectional analysis clearly indicates that there is a positive relationship between income and SWB. However, in time series this relationship may vanish (the Easterlin Paradox). In this paper, we examine the relationship between income, economic growth, and SWB inequality using data from the World Values Survey and World Development Indicators. The results indicate that per capita income is inversely related to SWB inequality in cross-sectional analysis. There is also evidence that greater economic growth is associated with a greaterdecrease in SWB inequality. The relationship between income, economic growth, and SWB inequality is not explained by income inequality.

WP-03 Ifcher J. , Zarghamee H.  Pricing Competition: Gender Differences in the Willingness to Compete ...
Pricing Competition: Gender Differences in the Willingness to Compete (PDF)

John Ifcher jifcher@scu.edu

Homa Zarghamee hzargham@barnard.edu

Abstract

Experiments have demonstrated that men are more willing to compete than women. We develop a new instrument to “price” willingness to compete. We find that men value a $2.00 winner‐take‐all payment significantly more (about $0.28 more) than women; and that women require a premium (about 40 percent) to compete. Our new instrument is more sensitive than the traditional binary‐choice instrument, and thus enables us to identify relationships that are not identifiable using the traditional binary‐choice instrument. We find that subjects who are the most willing to compete have high ability, higher GPA’s (men), and take more STEM courses (women).

WP-02 Ifcher J. , Herbst C. , Boyd-Swam C. , Zarghamee H.  The Earned Income Tax Credit,  Mental Health, a ...
The Earned Income Tax Credit, Mental Health, and Happiness (PDF)

John Ifcher jifcher@scu.edu

Casey Boyd-Swan Casey.Cossey@asu.edu

Chris M. Herbst chris.herbst@asu.edu

Homa Zarghamee hzargham@barnard.edu

Abstract

We use the National Survey of Families and Households (NSFH) to study the impact of the 1990 federal EITC expansion on mental health and subjective well-being (SWB). The identification strategy relies on a difference-in-differences framework to estimate intent-to-treat effects for the post-reform period. Our results suggest that the 1990 EITC reform generated sizeable mental-health benefits for low-skilled mothers. Relative to their childless counterparts, such women experienced lower depression symptomatology (experiential SWB) and higher happiness (evaluative SWB), and self-esteem (eudemonic SWB). Married mothers captured most of the mental-health benefits, with unmarried mothers’ mental health changing very little following the reform.

WP-01 Shin D. , Strausz R. Delegation and Dynamic Incentives  ...

Delegation and Dynamic Incentives (PDF)

Dongsoo Shin dshin@scu.edu

Roland Strausz strauszr@wiwi.hu-berlin.de

Abstract

Using an agency model, we show how delegation, by generating additional private in- formation, improves dynamic incentives under limited commitment. It circumvents ratchet e§ects and facilitates the revelation of persistent private information through two e§ects: a play-hardball e§ect, which mitigates an e¢ cient agentís ratchet incentive, and a carrot e§ect which reduces an ine¢ cient agentís take-the-money-and-run incentive. Although delegation entails a loss of control, it is optimal when uncertainty about operational e¢ ciency is large. Moreover, delegation is more e§ective with production complementarity. We also consider di§erent modes of commitment to yield insights into optimal organizational boundaries.

JEL Classication: D82, D86, L22

Key words: Agency, Delegation, Dynamic Incentives, Limited Commitment

 
2013 Working Papers
WP-03 Field, A. The Savings and Loan Insolvencies in the Shadow of 2007-2023  ...

The Savings and Loan Insolvencies in the Shadow of 2007-2023 (PDF)

Alexander Field afield@scu.edu

Abstract

This paper reassesses the macroeconomic significance of the Savings and Loan insolvencies (1986-95) given recent and still unfolding events. Reinhardt and Rogoff (2009) and others classified the S and L events as a financial crisis. With our recalibrated historical sensitivities, are we cheapening the terms by using them to describe these earlier developments? On the other hand, does the fact that the sector or a large part of it was already insolvent (if assets and liabilities were marked to market) at the time of the 1980 and 1982 recessions mean that we should classify these earlier recessions as also accompanied by financial crisis? If the 2007-2023 financial implosion, recession, and slow recovery make some of the hyperbolic descriptions of the S and L meltdown now seem overblown, in what ways did it help establish preconditions for the genuine crisis that followed?

WP-02 Field, A. Schelling, von Neumann, and the Event that didn’t occur  ...

Schelling, von Neumann, and the Event that didn’t occur (PDF)

Alexander Field afield@scu.edu

Abstract

Thomas Schelling was recognized by the Nobel Prize committee as a pioneer in the application of game theory and rational choice analysis to problems of politics and international relations. But although he makes frequent references in his writings to this approach, his main explorations and insights depend upon and require acknowledgment of its limitations. One of his principal concerns was how a country could engage in successful deterrence. If the behavioral assumptions that commonly underpin game theory are taken seriously and applied consistently, however, nuclear adversaries are almost certain to engage in devastating conflict, as John von Neumann forcefully asserted. The history of the last half century falsified von Neumann’s prediction, and the “event that didn’t occur” formed the subject of Schelling’s Nobel lecture.

Keywords: Game Theory, Deterrence, Nuclear Strategy, Schelling, von Neumann

WP-01 Popper, H. , Mandilaras, A., Bird G., Trilemma Stability and International Macroeconomics Archetypes...

Trilemma Stability and International Macroeconomics Archetypes (PDF)

Helen Popper hpopper@scu.edu 
Alex Mandilaras a.mandilaras@surrey.ac.uk  
Graham Bird  g.bird@surrey.ac.uk

Abstract
This paper uses the simple geometry of the classic, open-economy trilemma to introduce a new gauge of the stability of international macroeconomic arrangements. The new stability gauge reects the simultaneity of a country'schoices of exchange rate fixity, financial openness, and monetary sovereignty. So, the new gauge is bounded and correspondingly non-Gaussian. We use the new stability gauge in nonlinear panel estimates to examine the post-Bretton Woods period, and we nd that trilemma policy stability is linkedto ocial holdings of foreign exchange reserves in low income countries.We also find that the combination of fixed exchange rates and financial market openness is the most stable arrangement within the trilemma; and middle-income countries have less stable trilemma arrangements than eitherlow or high-income countries. The paper also characterizes internationalmacroeconomic arrangements in terms of their semblance to definitive policy archetypes; and, it uses the trilemma constraint to provide a new gauge of monetary sovereignty.

Keywords: Trilemma, Foreign Exchange Rate Regimes, Exchange Rates,International Reserves, Financial Openness, Fear of Floating, MonetarySovereignty

 
 
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