Published Papers and Working Papers

Published Papers

Microeconomic Theory

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.

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.

Political Economy

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.

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.

Working papers

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).

Functionings, Capabilities and the 2010 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 merits of this change by evaluating the tradeoffs between the core dimensions of wellbeing implied by the index and try to understand the extent to which those tradeoffs are problematic in light of the normative principles that the 2010 HDI is designed to satisfy. I also compare the rankings that ensue to those produced by alternatives brought forth by Ravallion (2010) building on work by Chakravarty (2003). In practice, all methodologies agree considerably in terms of how they rank countries, but when they differ, the 2010 HDI arguably produces results more consistent with what the HDI is intended to measure: human development and capabilities, as conceptualized by Sen (1985).

A Solution to Proebsting's Paradox, or "How to Skim a Bettor if you Must." Proebsting's Paradox is an argument that appears to show that the betting rule known as the Kelly criterion can lead a bettor to risk an arbitrarily high proportion of his wealth on the outcome of a single event. In this paper I show that a large class of betting criteria, including fractional Kelly, also suffer from the same shortcoming and use standard tools from microeconomic theory 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 bettor's attitudes towards capital preservation and from him becoming rapidly pessimistic about his chances of winning the better odds he is offered.

The Credibility Problem in Politics: Theory and Evidence from State-Level Abortion Legislation, with Francisco Rodriguez. This paper proposes a simple mechanism for evaluating the relevance of credibility problems in politics. If parties are capable of making credible policy promises, we will not expect them to systematically adopt platforms that entail large probabilities of losing an election. This is because the adoption of very extreme platforms has the effect of shifting expected policies away from their ideal points. Parties who lack the capacity of making credible commitments, in turn, are unable to affect voters' expectations of the policies they will adopt upon reaching office. We test these predictions on a panel of US states by studying the relationship between the preferences of party constituents and enacted policies. We estimate this relationship using an econometric methodology that fully accounts for the possibility of multiple equilibria and find that its slope is in general not positive, a result that is inconsistent with the existence of a commitment technology.

Priors That Do Not Rule Out Strategic Uncertainty Cannot Lead to Nash Equilibrium.Consider a two player game that is to be played once. The players receive information that they use to help them predict the choices made by each other. A decision rule for each player captures how each player uses the information received in making their choices. Priors in this context are probability distributions over the information that may be received and over the decision rules that their opponents may use. I investigate the existence of prior beliefs for each player that satisfy the following properties: (R) they do not rule out their opponent using a rational decision rule, (K) they do not rule out the existence of information that that would reveal the choice made by the opponent, and (SU) they do not rule out strategic uncertainty -a belief diversity condition. In this paper I show that for a large class of games there are no prior beliefs that satisfy properties (R), (K) and (SU). In the paper I discuss the implications of this result, in particular regarding whether one should expect a Nash equilibrium to arise in a game that is to be played once.

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.

A couple of papers I wrote while on leave at the Venezuelan Central Bank (2003-2004)

Central Bank Independence in a (Very) Non-Neoclassical World. What if it could be possible to convince a completely non-neoclassical economist of the importance of Central Bank independence? The profession currently favors arguments in favor of Central Bank independence that are based on the seminal work by Barro and Gordon (1983 a,b), a model with naturally strong neoclassical assumptions. As a consequence of this, the argument in favor of Central Bank independence routinely given by economists is often not bought by those who question the validity of the neoclassical assumptions. In this paper I argue that Central Bank independence can be beneficial for society even when the economy is entirely non-neoclassical, that is, when workers are all unionized, firms are completely cartelized and inflation is the result of distributive struggles between these groups. 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.

On Some Subtle Implications of the Choice of Numeraire for Monetary Policy. Numeraire choice is often deemed a problem of purely analytical convenience. In this paper I show that there is more to numeraire selection than meets the eye for the formulation of monetary policy. I show how (a) improper numeraire choice can dramatically overstate or understate Central Bank profits and (b) how this can threaten the ability of a Central Bank to keep inflation under control. I show point (a) in the context of Monte Carlo experiments calibrated for the Venezuelan economy and point (b) in an infinitely lived representative agent model that illustrates the problem of joint determination of the ideal level of foreign currency reserves and of the desired level of transfers of Central Bank profits to the Treasury when the objective is to eliminate the possibility of a hyperinflation.

Older papers

Public Economies and the Endogenous Choice of Institutions. In this paper I 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?

Consensus and Common Knowledge Reconciled. Heifetz (1997) argues by example that eventual consensus need not be common knowledge among interacting agents. I argue in the present note that his construction is delicate in the sense that eventual common knowledge is indeed necessary for eventual consensus.