# 2002

02-01. Chatterji, S. and Chattopadhyay, S.,*"Functional Sunspot Equilibria"*

**Abstract:** Consider a one step forward looking self-referential model with a one dimensional state variable where the information set available to agents when they make their forecast for the next period includes the current realization of an extrinsic random process but does not include the current value of the state variable. Agents thus iterate twice on their beliefs about the law of motion of the system to generate their forecasts; this is as in models of learning and in contrast to the specification considered in the literature on sunspot equilibria where the extrinsic random process is the state variable. This paper demonstrates (and characterizes the conditions for) the existence of self-fulfilling stochastic equilibria with bounded fluctuations driven purely by extrinsic beliefs for the model described above; furthermore, the existence of these equilibria is shown to be independent of the determinacy properties of the perfect foresight dynamics of the model. (Traditional sunspot equilibria appear as a special case of the formulation of the paper). The paper indicates that the problem of multiplicity of rational expectations equilibria in these models is more severe than believed erstwhile.

02-02. Pratap, S., and Quintin, E., *"Are Labor Markets Segmented in Argentina? A Semiparametric Approach"*

**Abstract:** We use data from Argentina's household survey to evaluate the hypothesis that informal workers would expect higher wages in the formal sector. Using various definitions of informal employment we find that, on average, formal wages are higher than informal wages. Parametric tests suggest that a formal premium remains after controlling for individual and establishment characteristics. However, this approach suffers from several econometric problems, which we address with semiparametric methods. The resulting formal premium estimates prove either small and insignificant, or negative. In other words, we find no evidence that Argentina's labor markets are segmented along formal/informal lines.

02-03. Reynoso, A., *"Using Signal Processing Tools for Regulation Analysis and Implementation" *

**Abstract:** Regulators often face the challenge of designing and implementing rules that both, respond to the policy objectives and that can be clearly referred to the day-to-day operations and practices in the marketplace. In many cases, the actual codes end up being a cumbersome collection of conditions that are very difficult to evaluate and re-design. This paper suggests that some of the most commonly used tools in Signal Processing could offer a convenient vehicle for tackling these difficulties. By starting from a SIMULINK(R) model of the regulation of Banco de Mexico on the foreign exchange transactions of commercial banks, this paper offers an example of how those tools could be used in this context.

02-04. Reynoso, A., *"On the Effects of Regulation-Induced Forex Market Segmentation in Small Open Economies"*

**Abstract:**** **The central banks of small open economies have to procure the proper operation of the payments system for transactions with the rest of the world. They do so facing the constraint of a limited stock of international reserves. To make ends meet, they usually rely on three instruments: the choice of an exchange rate regime, the regulation of the foreign exchange transactions of commercial banks and general exchange controls. Based on some stylized facts of the Mexican experience of the past three decades, this paper uses a SIMULINK(R) model to show the effects of different institutional constructs on some key nominal variables. For a reasonable set of simulation parameters, it shows that either the complete segmentation of the peso-dollar market or a full integration of both markets are preferable to intermediate arrangements that contemplate some form of partial financial liberalization.

02-05. Reynoso, A., *"Can subsidiaries of foreign banks contribute to the stability of the Forex market in Emerging Economies?"*

**Abstract:** Over the last decade, the ownership of the banking sector in Latin America has changed hands from local shareholders to large foreign banks from Spain and the United States. It is also a fact that the foreign exchange market in these countries has been segmented through various kinds of restrictions, because the central bank is unable to function as a lender of last resort in a currency other than its own. The standing issue is whether in practice, a parent bank effectively takes the role of such lender of last resort in supporting its subsidiaries overseas. If that were to be the case, the question is if having a significant participation of foreign subsidiaries is a necessary condition for lifting such restrictions. The data on the compliance of domestic and foreign banks with the dollar reserve requirements in Mexico is used to try to address this question. The answer is a qualified yes. When there are weak domestic banks, it seems that subsidiaries fo foreign banks have a better access to funding in foreign exchange, specially in times of stress. However, when compared with strong domestic banks, the evidence suggests that these local entities can do as well or even better than the foreign subsidiaries.

02-06. Dubra, J.,and Herrera, H., *"Market Participation, Information and Volatility"*

**Abstract:**** **We analyze how the entry of less informed participants in a market for a risky asset affects the volatility of the price of the asset. In an endogenous participation model, we show that in equilibrium the new market entrants are less informed than the rest of the participants. We study how volatility depends on market participation and on the level of information of the participants. The condition that guarantees that new market participation leads to increased asset price volatility, is that all investors are sufficiently risk-averse. In the increasing volatility case, a higher volatility is associated with a higher welfare for the new entrants.

02-07. Chatterji, S., y Govindan, S., **"Message Spaces for Perfect Correlated Equilibria"**

**Abstract:****: **We show that a perfect correlated equilibrium distribution of an N-person game, as defined by Dhillon and Mertens (1996) can be achieved using a finite number of copies of the strategy space as the message space.

02-08. Obiols-Homs, F.,*"Trade Effects on the Personal Distribution of Wealth"*

**Abstract:**** **This paper develops a dynamic Heckscher-Ohlin model and studies the interaction between international trade and wealth distribution dynamics. I also study how differences in the cost of financial intermediation among countries may affect the pattern of trade and wealth dynamics. Relative to the inequality it would have prevailed under autarky, I find that trade promotes a decline (an increase) in inequality when the economy converges to the steady state form below (above). However, with trade inequality increases (declines) during the transition from below (above). I also find that trade may alleviate frictions in the financial intermediation sector in economies where these frictions are larger. In those economies, trade may in fact promote a higher income than under autarky.

02-09. Restuccia, D., and Urrutia, C., *"Intergenerational Persistence of Earnings: The Role of Early and College Education"*

**Abstract:** Recent empirical studies show that the intergenerational persistence of economic status in the U.S. is much higher than previously thought. We develop a quantitative theory of inequality and intergenerational transmission of human capital where parents invest in early and college education of their children subject to borrowing constraints. Children differ exogenously in innate abilities, which can be correlated with their parent's innate ability. An important feature of the environment is that the quality of early education determines the probability of college completion. We calibrate a stationary equilibrium of this economy to relevant statistics in aggregate U.S. data, and use it to investigate the sources of inequality and persistence in earnings. In our benchmark model, about half of the intergenerational persistence and one fourth of the inequality in earnings are accounted for by endogenous investments in education. We find that early investments in education account for most of the endogenous persistence in earnings, while college education generates most of the endogenous inequality in earnings. Our theory is suited to study the effect of educational policies on the persistence of inequality. We show that public resources devoted to early education have the largest impact on earnings mobility. Moreover, non-progressive college subsidies generate more intergenerational persistence of earnings.

02-10. Martinelli, C., *"Would Rational Voters Acquire Costly Information?"*

**Abstract:** We analyze an election in which voters are uncertain about which of two alternatives is better for them. Voters can, however, acquire some costly information about the alternatives. As the number of voters increases, individual investment in political information declines to zero. However, the election outcome is likely to correspond to the interest of the majority if the marginal cost of information acquisition approaches zero as the information acquired becomes nearly irrelevant. Under certain conditions, the election outcome corresponds to the interests of the majority with probability approaching one. Thus, "rationally ignorant" voters are consistent with a well-informed electorate. JEL D72, D82. Keywords: voting, information acquisition, information aggregation.

02-11. Gomberg, A., Martinelli, C., and Torres, R., *"Anonymity in Large Societies"*

**Abstract:** In a social choice model with an infinite number of agents, there may occur "equal size" coalitions that a preference aggregation rule should treat in the same manner. We introduce an axiom of equal treatment with respect to a measure of coalition size and explore its interaction with common axioms of social choice. We show that, provided the measure space is sufficiently rich in coalitions of the same measure, the new axiom is the natural extension of the concept of anonymity, and in particular plays a similar role in the characterization of preference aggregation rules. JEL D71, C69

02-12. Obiols-Homs, F., and Urrutia, C., *"Evolution of the Distribution of Assets in the Neoclassical Growth Model"*

**Abstract:** We study the evolution of the distribution of assets in a deterministic version of the Neoclassical Growth Model with log-utility, a minimum consumption requirement, and Cobb-Douglas technology. Agents are heterogeneous in their initial endowment of assets only. The dynamics of the aggregate variables behaves as in a standard representative agent model. We prove that the disparity in assets decreases monotonically in a transition to the steady state from below, as long as (i) the minimum consumption requirement is zero or negative, or (ii) the consumption requirement is positive but not too large and the initial capital stock is large enough. This result is not based on a local approximation of the model around the steady state, nor on numerical computations, as it has been the case in previous literature. We also show how a positive minimum consumption requirement or a small elasticity of substitution between capital and labor can generate non-monotonic paths for the disparity in assets along a transition. Our work extends the result in Chatterjee (1994) on the evolution of the distribution of lifetime wealth (or consumption) to the evolution of the distribution of assets (or capital).

02-13. Torres, R.,* "Smallness of Invisible Dictators"*

**Abstract:** Fishburn (1970) showed that in an infinite society Arrow's axioms for a preference aggregation rule do not necessarily imply a dictator. Kirman and Sondermann (1972) showed that, in this case, nondictatorial rules imply an invisible dictator that, whenever the agent set is an atomless finite measure space, can be viewed as the limit of coalitions of arbitrarily small size. We show first that, when admissible coalitions are restricted to an algebra, there are two sorts of invisible dictators. We next show that, in most cases of interest, we do not need to resort to measures on the agent space to give a precise meaning to the statement that invisible dictators are the limit of arbitrarily small decisive coalitions.

JEL: D71, C69.