Published Papers and Working Papers

Published Papers

Microeconomic Theory

1. 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.

2. 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.

3. 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.

4. 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

5. 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.

6. 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.

7. 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

8. Expected Utility Inequalities. (Revised: January 2006). 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.

9. Priors That Do Not Rule Out Strategic Uncertainty Cannot Lead to Nash Equilibrium. (New: June 2006). 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.

10. Epistemic Conditions for Rationalizability. (Revised: August 2005). 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. Accepted for publication, Games and Economic Behavior.

11. Nash Bargaining Without Convexity. (Revised: June 2005). 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)

12. Central Bank Independence in a (Very) Non-Neoclassical World. (Revised: December 2005) 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.

13. On Some Subtle Implications of the Choice of Numeraire for Monetary Policy. (Revised: June 2005) 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

14. 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?

15. 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.