An entropy-driven cosmic expansion

We examine the evolution of the Friedmann Universe within our recent model of space-time identified with an elastic continuous medium whose deformations are described by a vector field constrained to obey a generalized four-dimensional version of the equilibrium equations of standard elasticity. It is found that the demand that the entropy associated with such elastic deformations be always extremal during the expansion of such a Universe turns these equilibrium equations into a single differential equation governing the evolution of the Hubble parameter H. The solution to the resulting dynamics admits both a power-law expansion, analogous to the one induced by an inflaton field, as well as a power-law expansion analogous to the one induced by a phantom field. Analyzing both types of expansions via the induced elastic energy and pressure permits to assign the former to the early Universe and the latter to its late-time expansion. We discuss the possible way for the dynamics to avoid the Big Rip singularity that would otherwise result. We succinctly discuss the possible way to avoid also the Big Bang singularity and how to obtain the large scale structure of the Universe from the present model.Comment: 15 pages. Matches the published versio

Explosive Roots in Level Vector Autoregressive Models

Level vector autoregressive (VAR) models are used extensively in empirical macroeconomic research. However, estimated level VAR models may contain explosive roots, which is at odds with the widespread consensus among macroeconomists that roots are at most unity. This paper investigates the frequency of explosive roots in estimated level VAR models in the presence of stationary and nonstationary variables. Monte Carlo simulations based on datasets from the macroeconomic literature reveal that the frequency of explosive roots exceeds 40% in the presence of unit roots. Even when all the variables are stationary, the frequency of explosive roots is substantial. Furthermore, explosion increases significantly, to as much as 100% when the estimated level VAR coefficients are corrected for small-sample bias. These results suggest that researchers estimating level VAR models on macroeconomic datasets encounter explosive roots, a phenomenon that is contrary to common macroeconomic belief, with a very high frequency. Monte Carlo simulations in the paper reveal that imposing unit roots in the estimation can substantially reduce the frequency of explosion. Hence one way to mitigate explosive roots is to estimate vector error correction models.Level VAR Models, Explosive Roots, Bias Correction

Coarse Thinking and Collusion in Bertrand Duopoly with Increasing Marginal Costs

Mullainathan, Schwartzstein, & Shleifer [Quarterly Journal of Economics, May 2008] put forward a model of coarse thinking. The essential idea behind coarse thinking is that agents put situations into categories and then apply the same model of inference to all situations in a given category. We extend the argument to strategies in a game-theoretic setting and propose the following: Agents split the choice-space into categories in comparison with salient choices and then choose each option in a given category with equal probability. We provide an alternative explanation for the puzzling results obtained in a Bertrand competition experiment as reported in Abbink & Brandts [Games and Economic Behavior, 63, 2008]Laboratory experiments, Oligopoly, Price competition, Co-ordination games, Coarse Thinking

The social norm of leaving the toilet seat down: A game theoretic analysis

We model the toilet seat problem as a 2 player non-cooperative game. We find that the social norm of leaving the toilet seat down is inefficient. However, to the dismay of “mankind”, we also find that the social norm of leaving the seat down after use is a trembling-hand perfect equilibrium. Hence, sadly, this norm is not likely to go away.Trembling-hand perfection; social norm

News Shocks and Learning-by-doing

The idea that expectations about future economic fundamentals can drive business cycles dates back to the early twentieth century. However, the standard real business cycle (RBC) model fails to generate positive comovement in output, consumption, labor-hours and investment in response to news shocks. This paper proposes a simple and intuitive solution to this puzzling feature of the RBC model, based on a mechanism that has strong empirical support: learning-by-doing (LBD). First, we show that the one-sector RBC model augmented by LBD can generate aggregate comovement in response to news shock about technology. Second, we show that in the two-sector RBC model, LBD along with an intratemporal adjustment cost can generate sectoral comovement in response to news about three types of shocks: i) neutral technology shock, ii) consumption technology shock, and iii) investment technology shock. We show that these results hold for contemporaneous technology shocks and for different specifications of LBD.News Shocks, Learning-by-Doing, Pigou Cycles

Does Coarse Thinking Matter for Option Pricing? Evidence from an Experiment

Mullainathan et al [Quarterly Journal of Economics, May 2008] present a model of coarse thinking or analogy based thinking. The essential idea behind coarse thinking is that people put situations into categories and the values assigned to attributes in a given situation are affected by the values of corresponding attributes in other co-categorized situations. We test this hypothesis in an experiment on financial options against the benchmark of arbitrage-free pricing. Firstly, we test whether a financial option is priced in analogy with its underlying stock (transference). Secondly, we test for whether variations in the analogy between a financial option and its underlying stock matter (framing). We find evidence in support of both transference and framing.Coarse Thinking, Financial Options, Arbitrage-Free Pricing

Information Transmission in Emerging Markets: The Case of a Unique Financing Instrument

Information flows are necessary for well-functioning financial markets. However, in many emerging markets, the legal and institutional preconditions for proper information flow are not met. How do such markets respond? We argue that they respond by developing innovative information transmission mechanisms. We identify one such mechanism associated with the evolution of equity markets in South Asia. The mechanism operates through a financing instrument unique to India and Pakistan, called badla in local parlance. We develop a signaling model in which a broker-financier signals his private information to investors by choosing various levels of financing to provide in the badla market for stocks. A fully separating equilibrium exists allowing full discrimination of various types of stocks. Hence, information transmission takes place through this channel.Signaling, Information Transmission, Separating Equilibrium, Badla-Financing, Emerging Markets