Showing papers by "CEMFI published in 2007"
TL;DR: In this paper, a recursive extension of the two-step PML, called nested pseudo likelihood (NPL), is proposed to deal with the indeterminacy problem associated with the existence of multiple equilibria and the computational burden in the solution of the game.
Abstract: This paper studies the estimation of dynamic discrete games of incomplete information. Two main econometric issues appear in the estimation of these models: the indeterminacy problem associated with the existence of multiple equilibria and the computational burden in the solution of the game. We propose a class of pseudo maximum likelihood (PML) estimators that deals with these problems, and we study the asymptotic and finite sample properties of several estimators in this class. We first focus on two-step PML estimators, which, although they are attractive for their computational simplicity, have some important limitations: they are seriously biased in small samples; they require consistent nonparametric estimators of players' choice probabilities in the first step, which are not always available; and they are asymptotically inefficient. Second, we show that a recursive extension of the two-step PML, which we call nested pseudo likelihood (NPL), addresses those drawbacks at a relatively small additional computational cost. The NPL estimator is particularly useful in applications where consistent nonparametric estimates of choice probabilities either are not available or are very imprecise, e.g., models with permanent unobserved heterogeneity. Finally, we illustrate these methods in Monte Carlo experiments and in an empirical application to a model of firm entry and exit in oligopoly markets using Chilean data from several retail industries.
457 citations
TL;DR: This paper found that the fraction of entrepreneurs who work in the region where they were born is significantly higher than the corresponding fraction for dependent workers in more developed regions and positively related to the degree of local financial development.
Abstract: We document that the fraction of entrepreneurs who work in the region where they were born is significantly higher than the corresponding fraction for dependent workers. This difference is more pronounced in more developed regions and positively related to the degree of local financial development. Firms created by locals are more valuable and bigger (in terms of capital and employment), operate with more capital intensive technologies, and are able to obtain greater financing per unit of capital invested, than firms created by non-locals. This evidence suggests that there are so many local entrepreneurs because locals can better exploit the financial opportunities available in the region where they were born. This can help explaining how local financial development cause persistent disparities in entrepreneurial activity, technology, and income.
268 citations
TL;DR: In this paper, a class of pseudo maximum likelihood (PML) estimators is proposed to deal with the indeterminacy problem associated with the existence of multiple equilibria and the computational burden in the solution of the game.
Abstract: This paper studies the estimation of dynamic discrete games of incomplete information. Two main econometric issues appear in the estimation of these models: the indeterminacy problem associated with the existence of multiple equilibria, and the computational burden in the solution of the game. We propose a class of pseudo maximum likelihood (PML) estimators that deals with these problems and we study the asymptotic and finite sample properties of several estimators in this class. We first focus on two-step PML estimators which, though attractive for their computational simplicity, have some important limitations: they are seriously biased in small samples; they require consistent nonparametric estimators of players' choice probabilities in the first step, which are not always feasible for some models and data; and they are asymptotically inefficient. Second, we show that a recursive extension of the two-step PML, which we call nested pseudo likelihood (NPL), addresses those drawbacks at a relatively small additional computational cost. The NPL estimator is particularly useful in applications where consistent nonparametric estimates of choice probabilities are either not available or very imprecise, e.g., models with permanent unobserved heterogeneity. Finally, we illustrate these methods in Montecarlo experiments and in an empirical application to a model of firm entry and exit in oligopoly markets using Chilean data from several retail industries.
156 citations
TL;DR: In this paper, the authors provide a characterization of the class of weights that produce estimators that are first-order unbiased and show that such bias-reducing weights must depend on the data unless an orthogonal reparameterization or an essentially equivalent condition is available.
Abstract: Many approaches to estimation of panel models are based on an average or integrated likelihood that assigns weights to different values of the individual effects. Fixed effects, random effects, and Bayesian approaches all fall in this category. We provide a characterization of the class of weights (or priors) that produce estimators that are first-order unbiased. We show that such bias-reducing weights must depend on the data unless an orthogonal reparameterization or an essentially equivalent condition is available. Two intuitively appealing weighting schemes are discussed. We argue that asymptotically valid confidence intervals can be read from the posterior distribution of the common parameters when N and T grow at the same rate. Finally, we show that random effects estimators are not bias reducing in general and discuss important exceptions. Three examples and some Monte Carlo experiments illustrate the results.
123 citations
TL;DR: The authors derived the statistical properties of the SNP densities of Gallant and Nychka (1987) and showed that these densities, which are always positive, are more general than the truncated Gram-Charlier expansions of Jondeau and Rockinger (2001), who impose parameter restrictions to ensure positivity.
Abstract: We derive the statistical properties of the SNP densities of Gallant and Nychka (1987). We show that these densities, which are always positive, are more general than the truncated Gram-Charlier expansions of Jondeau and Rockinger (2001), who impose parameter restrictions to ensure positivity. We also use the SNP densities for option valuation. We relate real and risk-neutral measures, obtain closed-form prices for European options, and study the 'Greeks'. We show that SNP densities generate wider option price ranges than the truncated expansions. In an empirical application to S&P 500 index options, we find that the SNP model beats the standard and Practitioner's Black-Scholes formulas, and the truncated expansions.
100 citations
TL;DR: The authors decompose the low-frequency movements in labour productivity into an investment-neutral and investment-specific technology component, and show that neutral technology shocks cause an increase in job creation and job destruction and lead to a reduction in aggregate employment.
Abstract: We decompose the low-frequency movements in labour productivity into an investment-neutral and investment-specific technology component. We show that neutral technology shocks cause an increase in job creation and job destruction and lead to a reduction in aggregate employment. Investment-specific technology shocks reduce job destruction, have mild effects on job creation and are expansionary. We construct a general equilibrium search model with neutral and investment-specific technological progress. We show that the model can replicate these findings if neutral technological progress is mainly embodied into new jobs, while investment-specific technological progress benefits (almost) equally old and new jobs. Thus neutral technological advances prompt waves of Schumpeterian creative destruction, while the adoption of investment-specific technologies operates mainly as in the standard neoclassical growth model.
84 citations
TL;DR: The authors analyzes the interplay between firms' self-regulation as opposed to the formal regulation of a negative externality and finds that consumers benefit from the behavior of firms, yet they have access to cheaper (although less ecient) goods.
Abstract: This paper analyzes the interplay between firms’ self-regulation (often denoted as corporate social responsability) as opposed to the formal regulation of a negative externality. Firms respond to increasing activism in the market (conscious consumers that take into account the external eects of their purchase) by providing more socially responsible goods. However, because regulation is the outcome of a political process, an increase in activism might imply an ineciently high externality level. This may happen when a majority of non-activist consumers collectively free-ride on conscious consumers. By determining a softer than optimal regulation, they benefit from the behavior of firms, yet they have access to cheaper (although less ecient) goods.
82 citations
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TL;DR: In this article, the effects of neutral and investment-specific technology shocks on hours worked and unemployment were analyzed in terms of job separation and job finding rates, and it was shown that job separation rates mainly account for the impact response of unemployment while job-finding rates for movements along its adjustment path.
Abstract: We analyze the effects of neutral and investment-specific technology shocks on hours worked and unemployment. We characterize the response of unemployment in terms of job separation and job finding rates. We find that job separation rates mainly account for the impact response of unemployment while job finding rates for movements along its adjustment path. Neutral shocks increase unemployment and explain a substantial portion of unemployment and output volatility; investment-specific shocks expand employment and hours worked and mostly contribute to hours worked volatility. We show that this evidence is consistent with the view that neutral technological progress prompts Schumpeterian creative destruction, while investment specific technological progress has standard neoclassical features.
36 citations
TL;DR: In this paper, the authors examined the links between infant mortality and fertility in an environment with unobserved heterogeneity in infant mortality risk across mothers, and they explicitly introduced learning by mothers in a dynamic stochastic model of life-cycle marital fertility, and estimate the model's structural parameters using Malaysian panel data.
Abstract: This article examines the links between infant mortality and fertility in an environment with unobserved heterogeneity in infant mortality risk across mothers. In such an environment, replacement behavior (i.e., the fertility response to an experienced child death) might be influenced by mothers' learning about a family-specific component of infant mortality risk. I explicitly introduce learning by mothers in a dynamic stochastic model of life-cycle marital fertility, and I estimate the model's structural parameters using Malaysian panel data. The framework is used to estimate replacement rates and to correct for birth selectivity in the estimation of the relationship between infant mortality risk and “health inputs.”
32 citations
TL;DR: A new non-cooperative approach to multilateral bargaining in which players with higher concession costs obtain higher shares of the pie; their increased bargaining power stems from their ability to credibly commit to a demand earlier.
31 citations
TL;DR: In this article, the authors evaluated the rate of early (EVR) and sustained virological response (SVR), tolerability and baseline predictive factors associated with EVR and SVR in patients with chronic hepatitis C treated with individualized weight-based dosing regimen for both PegIFN alpha-2b and ribavirin.
Abstract: BACKGROUND AND AIM Increasing evidence to date highlights that individualized treatment regimens with pegylated interferon (PegIFN) and ribavirin represent a better approach for patients nowadays showing negative predictive factors for sustained virological response. The aims of this study were to assess the rate of early (EVR) and sustained virological response (SVR), tolerability and baseline predictive factors associated with EVR and SVR in patients with chronic hepatitis C treated with individualized weight-based dosing regimen for both PegIFN alpha-2b and ribavirin. METHODS The observational analysis included 234 consecutive patients with chronic hepatitis C genotype 1 treated with PegIFN alpha-2b and ribavirin on an out-patient basis between January 2003-March 2006. RESULTS The mean age of the study group was 49.5 years, and 35% were male patients; the group was slightly overweight (mean BMI=26.5 kg/sq.m). EVR was achieved in 84.6% (198/234 patients). The end-of-treatment and sustained biochemical responses were 76.3% and 66.1%, respectively. At the end of follow-up, an overall intent-to-treat SVR was achieved by 71 of 127 patients (in 55.9%). Lower baseline (< 1,000 000 IU/mL) HCV viral load was the only predictive factor associated with EVR (p=0.04); absent or mild fibrosis (F0-1) and a low histological activity (HAI < 8) were independently associated with SVR. Side effects resulted in PegIFN and ribavirin dose reductions in 9.4% and, respectively, 18.1%, but definitive discontinuation of therapy was necessary only in 8.7% of patients. CONCLUSION PegIFN alpha-2b and ribavirin can be safe and successful when using a weight-based dosing regimen, leading to high response rates even in overweight patients.
TL;DR: In this article, the authors show that consumers in choosing which information to acquire do not consider the effects on firm investment incentives and so there are indirect externalities in information gathering, and that a fall in the cost of acquiring information, by changing the pattern of consumers information gathering and thereby firm investment, can paradoxically reduce consumer surplus, profits, and welfare.
Abstract: Goods and services vary along a number of dimensions independently. Customers can choose to acquire information to assess the quality of some dimensions and not others. Their choices affect firms incentives to invest in quality and so lead to indirect externalities in consumers choices. We illustrate these ideas in a simple model with a monopolist selling a product with two characteristics, investment in quality with stochastic realizations, and heterogeneousconsumers. Consumers in choosing which information to acquire do not consider the effects on firm investment incentives and so there are indirect externalities in information gathering. Therefore, a fall in the cost of acquiring information, by changing the pattern of consumers information gathering and thereby firm investment, can paradoxically reduce consumer surplus, profits, and welfare. We briefly consider a number of potential extensions and in particular, highlight a benefit of diversity in tastes.
TL;DR: In this article, the authors explore the business cycle implications of financial distress and bankruptcy law and find that due to the presence of financial imperfections the effect of liquidations on the price of capital goods can generate endogenous fluctuations.
Abstract: This paper explores the business cycle implications of financial distress and bankruptcy law. We find that due to the presence of financial imperfections the effect of liquidations on the price of capital goods can generate endogenous fluctuations. We show that a law reform that ‘softens’ bankruptcy law may increase the amplitude of the cycle in the long run. In contrast, a policy of bailing out businesses during the bust or actively managing the interest rate across the cycle could stabilize the economy in the long run. A comprehensive welfare analysis of these policies is provided as well.
TL;DR: In this paper, the authors extend the class of models that support the habits explanation in order to account for heterogeneity in earnings, wealth, habits and consumption, and find that habit formation does indeed increase the equity premium.
Abstract: Habit formation has been proposed as a possible solution to the equity premiumpuzzle. This paper extends the class of models that support the habits explanation inorder to account for heterogeneity in earnings, wealth, habits and consumption. I findthat habit formation does indeed increase the equity premium. However, contraryto earlier results, the habit hypothesis does not imply a price for risk as big as theone measured in the data. There are three reasons for this. First, households ina habits economy modify their consumption/savings decision. Second, they modifytheir portfolio choice. These two changes in behavior diminish the consumptionfluctuations faced by households. And third, the composition of the set of agentspricing risk in the economy changes so that relatively better self-insured householdsend up pricing risk
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TL;DR: This article showed that the New Keynesian Phillips curve is shifted by immigration if natives' and immigrants' labour supply or bargaining power differ, and they argued that this stems from the immigration boom in Spain over this period.
Abstract: The Phillips curve has flattened in Spain over 1995-2006: unemployment has fallen by 15 percentage points, with roughly constant inflation. This change has been more pronounced than elsewhere. We argue that this stems from the immigration boom in Spain over this period. We show that the New Keynesian Phillips curve is shifted by immigration if natives’ and immigrants’ labour supply or bargaining power differ. Estimation of the curve for Spain indicates that the fall in unemployment since 1995 would have led to an annual increase in inflation of 2.5 percentage points if it had not been largely offset by immigration.
TL;DR: In this paper, the effects of neutral and investment-specific technology shocks on hours worked and unemployment were analyzed in terms of job separation and job finding rates, and it was shown that job separation rates mainly account for the impact response of unemployment while job-finding rates for movements along its adjustment path.
Abstract: We analyze the effects of neutral and investment-specific technology shocks on hours worked and unemployment. We characterize the response of unemployment in terms of job separation and job finding rates. We find that job separation rates mainly account for the impact response of unemployment while job finding rates for movements along its adjustment path. Neutral shocks increase unemployment and explain a substantial portion of unemployment and output volatility; investment-specific shocks expand employment and hours worked and mostly contribute to hours worked volatility. We show that this evidence is consistent with the view that neutral technological progress prompts Schumpeterian creative destruction, while investment specific technological progress has standard neoclassical features.
TL;DR: In this article, the authors characterise the dual objects to those frontiers, and relate them to the frontiers generated with managed portfolios, which are commonly used in empirical work, and also study the implications of a safe asset and other special cases.
Abstract: Portfolio and stochastic discount factor (SDF) frontiers are usually regarded as dual objects, and researchers sometimes use one to answer questions about the other. However, the introduction of conditioning information and active portfolio strategies alters this relationship. For instance, the unconditional portfolio frontier in Hansen and Richard (1987) is not dual to the unconditional SDF frontier in Gallant, Hansen and Tauchen (1990). We characterise the dual objects to those frontiers, and relate them to the frontiers generated with managed portfolios, which are commonly used in empirical work. We also study the implications of a safe asset and other special cases.
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TL;DR: In this paper, the authors present methods for the estimation of dynamic discrete choice structural models and discuss related econometric issues, including single agent models, competitive equilibrium models and dynamic games.
Abstract: This paper reviews methods for the estimation of dynamic discrete choice structural models and discusses related econometric issues. We consider single agent models, competitive equilibrium models and dynamic games. The methods are illustrated with descriptions of empirical studies which have applied these techniques to problems in different areas of economics. Programming codes for the estimation methods are available in a companion web page.
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TL;DR: The role played by legal institutions and the legal framework in the venture capital industry in Europe has been discussed in this paper, where the authors concluded that better laws facilitate faster deal screening and origination, lead to a higher probability of syndication and also facilitate board representation of the investors.
Abstract: This survey article summarises the findings of four research projects on the venture capital industry in Europe and the role played by legal institutions and the legal framework. A study on patent litigation insurance argues that insurance can create a level playing field for small innovators, but that compulsory insurance can only be justified as a transitory scheme. The second study argues that intermediaries from countries with a better legal tradition will provide more governance and value-added services, even when investing abroad. It also provides supportive empirical evidence based on an extensive questionnaire study. The third project investigates the relationship between venture investments and a widely used legality index in thirty-nine countries, finding that better laws facilitate faster deal screening and origination, lead to a higher probability of syndication and also facilitate board representation of the investors. The final study documents a significant performance gap between the European and the US venture capital industry, but argues that the difference can not be attributed to differences in legal origin.
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TL;DR: This paper showed that job inequality, which leads to within-skill wage differences, gives incentives to work longer hours, while a higher probability of losing jobs, a longer duration of unemployment, and in general a less tight labor market discourage working time.
Abstract: We consider a labor market search model where, by working longer hours, individuals acquire greater skills and thereby obtain better jobs. We show that job inequality, which leads to within-skill wage differences, gives incentives to work longer hours. By contrast, a higher probability of losing jobs, a longer duration of unemployment, and in general a less tight labor market discourage working time. We show that the different evolution of labor market conditions in the US and in Continental Europe over the last three decades can quantitatively explain the diverging evolution of the number of hours worked per employee across the two sides of the Atlantic. It can also explain why the fraction of prime age male workers working very long hours has increased substantially in the US, after reverting a trend of secular decline.