SAET Mini-Conference – February 2010

The February 26, 2010 SAET mini-conference at the University of Illinois was organized by Professors Daniela Puzzello and Anne Villamil. The papers presented were:

* denotes conference speaker

Independent Random Matching with Many Types

by Konrad Podczeck* (University of Vienna) and Daniela Puzzello (University of Illinois Urbana-Champaign)

Abstract: Random matching models with a continuum population are widely used in economics to model decentralized environments. A number of economic models—e.g., in evolutionary game theory and monetary theory—explicitly or implicitly assume pairwise random matching with convenient proportionality and independence properties. This paper provides foundations to random matching models of continuum populations with infinitely many types, which are currently used in the literature without an explicit justification. The approach of this paper uses tools of standard measure theory, as opposed to that in Duffie and Sun (Ann Appl Probab 17:386–419, 2007) which is based on nonstandard analysis.

Institutions for Long-run Cooperation: Experiments on Markets with Frictions

by Gabriele Camera* (Purdue University) and Marco Casari (University of Bologna)

Abstract: We study experimental economies of indefinite duration where randomly matched subjects have an opportunity to cooperate. We evaluate how knowledge of past behavior (recordkeeping) affects outcomes relative to a baseline treatment where opponents’ past actions are unobservable. Three prototypical record-keeping institutions are considered. Subjects can either: purchase a record of the opponent’s past actions; contribute to make public the opponent’s record of actions; hold and exchange intrinsically worthless tickets. In theory, neither institution is necessary or sufficient to support the efficient outcome. In practice, relative to the baseline treatment: (1) the possibility to buy private records of actions leads to no significant increase in cooperation, (2) the possibility to create public records of actions brings about a cooperation decline, and (3) with tickets monetary exchange emerges and greatly facilitates coordination on cooperation.

For a copy of the paper, please contact one of the authors.

Interim efficiency with MEU-preferences

by V. Filipe Martins-da-Rocha* (Getulio Vargas Foundation)

Abstract: Recently Kajii and Ui proposed to characterize interim efficient allocations in an
exchange economy under asymmetric information when uncertainty is represented by
multiple posteriors. When agents have Bewley’s incomplete preferences, Kajii and Ui
proposed a necessary and sufficient condition on the set of posteriors. However, when
agents have Gilboa–Schmeidler’s MaxMin expected utility preferences, they only propose
a sufficient condition. The objective of this paper is to complete Kajii and Ui’s work by proposing a necessary
and sufficient condition for interim efficiency for various models of ambiguity aversion
and in particular MaxMin expected utility. Our proof is based on a direct application of
some results proposed by Rigotti, Shannon and Stralecki.

The Optimal Inflation Target in an Economy with Limited Enforcement

by Gaetano Antinolfi* (Washington University and Federal Reserve Bank of St. Louis),
Costas Azariadis (Washington University and Federal Reserve Bank of St. Louis),
and James Bullard (Federal Reserve Bank of St. Louis)

Abstract: We formulate the central bank’s problem of selecting an optimal
long-run inflation rate as the choice of a distorting tax by a planner
who wishes to maximize discounted stationary utility for a heteroge-
neous population of infinitely-lived households in an economy with
constant aggregate income and public information. Households are
segmented into cash agents, who store value in currency alone, and
credit agents who have access to both currency and loans. The plan-
ner’s problem is equivalent to choosing inflation and nominal inter-
est rates consistent with a resource constraint, and with an incentive
constraint that ensures credit agents prefer the superior consumption-
smoothing power of loans to that of currency. We show that the opti-
mum inflation rate is positive, because inflation reduces the value of
the outside option for credit agents and raises their debt limits.