# 2004

1. Aguirre, V., and M. Domínguez, *"Efficient Method of Moments in Misspecified IID Models,"** *Econometric Theory, **20** (2004): 513-534.

**Abstract:**

****The paper presents the asymptotic theory of EMM when the model of interest is not correctly specified. The paper assumes a sequence of i.i.d. observations and a global misspecification. It is found that the limiting distribution of the estimator is still asymptotically normal, but it suffers a strong impact in the covariance matrix. A consistent estimator of this covariance matrix is provided. The large sample distribution on the estimated moment function is also obtained. These results are used to discuss the situation when the moment conditions hold but the model is misspecified. It is shown also that the overidentifying restrictions test has asymptotic power one whenever the limit moment function is different from zero. It is also proved that the bootstrap distributions converge almost surely to the above mentioned distributions and hence they could be used as an alternative to draw inferences under misspecification. Interestingly, it is also shown that bootstrap can be reliably applied even if the number of bootstrap replications is very small.

2. Castellanos, S., R. García-Verdú., and D. Kaplan, *"Nominal Wage Rigidities in Mexico: Evidence from Social Security Records,"** *Journal of Development Economics, **75** (2004): 507-533.

**Abstract:**

****This paper analyses the existence and extent of downward nominal wage rigidities in the Mexican labor market using data from the administrative records of the Mexican Social Security Institute (IMSS). This establishment-level, panel data set allows us to track workers employed with the same firm, observe their wage profiles, and calculate the nominal-wage changes they experience over time. Based on the estimated density functions of nominal wage changes, we are able to calculate some standard tests of nominal wage rigidity that have been proposed in the literature. Furthermore, we extend these tests to take into account the presence of minimum wage laws that may affect the distribution of nominal wage changes. The densities and tests calculated using these data are similar to those obtained using administrative data from other countries, and constitute a significant improvement over the measures of nominal wage rigidities obtained from household survey data. We document the importance of minimum wages in the Mexican labor market, as evidenced by the large fraction of minimum wage earners and the indexation of wage changes to the minimum wage increases. We find onsiderably more nominal wage rigidity than previous estimates obtained for Mexico using data from the National Urban Employment Survey suggest, but lower than that reported for developed countries by other studies that use comparable data.

3. Chatterji, S., *"Subjective Temporary Equilibrium,"** *Journal of Economic Dynamics and Control,* ***28** (2004): 1757-1780.

**Abstract:**

****This paper introduces, within the framework of a simple example, the notion of a subjective temporary equilibrium. The underlying relation linking forecasts to equilibrium values of the state variable is linear. However, agents perceive a non linear law that governs the rate of adjustment between successive periods and forecast using linear approximations to the non linear law of motion. This is shown to generate a non linear law of motion for the state variable with the feature that the agent's model describes correctly the period wise evolution of the economy. The resulting non linear law of motion is referred to as a subjective temporary equilibrium as its specification is determined largely by the subjective beliefs of the agents regarding the dynamics of the system. In a subjective equilibrium, agents forecasts are generated by taking linear approximations to a correctly specified law of motion and the forecasts may accordingly be interpreted as being boundedly rational in a first order sense. There exist specifications that admit the possibility of cyclical behaviour.

4. Chatterji, S., and S. Ghosal, *"Local coordination and market equilibria,"** *Journal of Economic Theory, **114** (2004): 255-279.

**Abstract:**

****We reformulate the local stability analysis of market equilibria in a competitive market as a local coordination problem in a market game. In the market game, the map which associates market prices to the best-responses of all traders is common knowledge and is well-defined both in and out of equilibrium. Initial expectations over market variables (a) differ from the equilibrium values of the same market variables and (b) are not common knowledge. This creates a coordination problem as traders use the structure of the game to converge back to equilibrium. In the simultaneous move market game, we derive the resulting coordination dynamics with heterogenous expectations as a consequence of local rationalizability. In the special case of homogenous expectations, we derive a link with discrete-time tatonnement analysis. With sequential moves, our analysis of local coordination allows to link, in a common framework, the local stability analysis of cobweb dynamics with local extensive-form rationalizability. JEL classification numbers: C72, D50, D59. Keywords: coordination, markets, rationalizability, stability.

5. Domínguez, M., *"On the Power of Bootstrapped Specification Tests,"** *Econometric Reviews, **23** (2004): 215-228.

**Abstract:**

****Decisions based on econometric model estimates may not have the expected effect if the model is misspecified. Thus, specification tests should precede any analysis. Bierens' specification test is consistent and has optimality properties against some local alternatives. A shortcoming is that the test statistic is not distribution free, even asymptotically. This makes the test unfeasible. There have been many suggestions to circumvent this problem, including the use of upper bounds for the critical values. However, these suggestions lead to tests that lose power and optimality against local alternatives. In this paper we show that bootstrap methods allow us to recover power and optimality of Bierens' original test. Bootstrap also provides reliable p-values, which have a central role in Fisher's theory of hypothesis testing. The paper also includes a discussion of the properties of the bootstrap Nonlinear Least Squares Estimator under local alternatives.

6 . Domínguez, M., ** "Consistent specification testing of econometric models: A partial survey," **Estadistica,

**56**(2004): 61-86.

**Abstract:**

****Most econometric models are defined in terms of conditional moment restrictions, including the mean regression model, the simultaneous equation model and the quantile regression model among others. When those restrictions are not satisfied, the parameters in the model change their interpretation and economic conclusions based on them may not hold. Even the statistical properties of the estimators may change. There are two main strategies to test conditional moment restrictions. Hart (1997) explains the main contributions in one of the approaches. This paper surveys the main results in the other approach.

7. Domínguez, M., and Lobato, *"Consistentestimation of models defined by conditional moment restrictions," *Econometrica,**72** (2004): 1601-1615.

**Abstract:**

**** In econometrics, models stated as conditional moment restrictions are typically estimated by means of the generalized method of moments (GMM). The GMM estimation procedure can render inconsistent estimates since the number of arbitrarily chosen instruments is finite. In fact, consistency of the GMM estimators relies on additional assumptions that imply unclear restrictions on the data generating process. This article introduces a new, simple and consistent estimation procedure for these models which is directly based on the definition of the conditional moments. The main feature of our procedure is its simplicity since its implementation does not require the selection of any user-chosen number and statistical inference is straightforward since the proposed estimator is asymptotically normal. In addition, we suggest an asymptotically efficient estimator constructed by carrying out one Newton-Raphson step in the direction of the efficient GMM estimator.

8. Garratt, R., T. Keister., and K. Shell, *"Comparing Sunspot Equilibrium and Lottery Equilibrium Allocations: The Finite Case,"** *International Economic Review, **45 **(2004): 351-386.

**Abstract:**

Sunspot equilibrium and lottery equilibrium are two stochastic solution concepts for nonstochastic economies. Recent work on nonconvex exchange economies has shown that when the randomizing device is a continuous random variable, applying the two concepts to the same fundamental economy yields the same set of equilibrium allocations. In the present paper, we examine economies based on a discrete randomizing device, which corresponds to the case where there is only a finite number of sunspot states. We extend the lottery model so that it can constrain the randomization possibilities available to agents in the same way that the sunspots model can. Every equilibrium allocation of our constrained lottery model has a corresponding sunspot equilibrium allocation. For almost all finite randomizing devices, the converse is also true. There are exceptions, however: for some randomizing devices, there exist sunspot equilibrium allocations with no lottery equilibrium counterpart.

9. Gomberg, A.,** "Sorting Equilibrium in a Multi-jurisdiction Model,"**

*Journal of Economic Theory,*

**116**(2004): 138-154.

**Abstract:**

I analyze how an exogenous cost of entry in a risky asset market affects two endogenous variables: the degree of market participation and price volatility. I show that different entry costs generate different participation equilibria and that a multiplicity of equilibria may arise, but that the new market entrants are always more risk-averse than the rest of the participants. Every participation equilibrium is associated with a volatility of the asset price. Increased market participation leads to increased asset price volatility and higher welfare.

10. Gomberg, A., F. Marhuenda., and I. Ortuño-Ortín,** "A Model of Endogenous Political Party Platforms,**

*"*Economic Theory,

**24**(2004): 373-394.

**Abstract:**

We develop a model of endogenous party platform formation in a multidimensional policy space. Party platforms depend on the composition of the parties' primary electorate. The overall social outcome is taken to be a weighted average of party platforms and individuals vote strategically. Equilibrium is defined to obtain when no group of voters can shift the social outcome in its favor by deviating and the party platforms are consistent with their electorate. We provide sufficient conditions for existence of equilibria.

11. Lobato, I., and C. Velasco, ** "A simple test of normality for time series," **Econometric Theory,

**20**(2004): 671-689.

**Abstract:**

This article considers testing for normality for correlated data. The proposed test procedure employs the skewness-kurtosis test statistic, but studentized by standard error estimators that are consistent under serial dependence of the observations. The standard error estimators are sample versions of the asymptotic quantities that do not incorporate any downweighting and, hence, no smoothing parameter is needed. Therefore, the main feature of our proposed test is its simplicity since it does not require the selection of any user-chosen parameter such as a smoothing number or the order of an approximating model.

12. Maurer, N., and A. Gomberg,*"When the State is Untrustworthy: Public Finance and Private Banking in Porfirian Mexico,"** *Journal of Economic History, **64** (2004): 1087-1107.

**Abstract:**

All sovereign governments face a commitment problem: how can they prom-ise to honor their own agreements? The standard solutions involve reputation or political institutions capable of tying the hands of the government. Mexico's government in the 1880s used neither solution. It compensated its creditors by enabling them to extract rents from the rest of the economy. These rents came through special privileges over banking services and the right to administer federal taxes. Returns were extremely high: as long as creditors believed that the government would refrain from confiscating all their assets (let alone repaying their debts) less than twice a decade, they would break even.

13. Pratap, S., and C. Urrutia, *"Firm Dynamics, Investment & Debt Portfolio: Balance Sheet Effects of the Mexican Crisis of 1994,"** *Journal of Development Economics, **75 **(2004): 535-563.

**Abstract:**

We build a partial equilibrium model of firm dynamics under exchange rate uncertainty. Firms face idiosyncratic productivity shocks and observe the current level of the real exchange rate each period. Given their current level of capital stock, firms make their export decisions and choose how much to invest. Investment is financed through one period loans from foreign lenders. The interest rate charged by each lender is set to satisfy an expected zero-profit condition. The model delivers a distribution of firms over productivity, capital stocks and debt portfolios, as well as an exit rule. We calibrate the model using data from a panel of Mexican firms, from 1989 to 2000, and analyze the effect of the 1994 crisis on these variables. As a result of the real exchange rate depreciation, the model predicts: (i) an increase in the debt burden, (ii) an increase in exports, and (iii) a large decline in investment. These real effects are consistent with the evidence for the Mexican crisis.

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

*American Economic Review,*

**94**(2004): 1354-1378.

**Abstract:**

Recent empirical evidence for the U.S. indicates a high degree of intergenerational persistence in economic status. Assessing the effectiveness of various public policies in reducing persistence and equalizing opportunities in society requires measures of the contribution of major sources of persistence. In this paper we provide a quantitative model of intergenerational human capital transmission and earnings inequality that focuses on three sources of persistence: innate ability, early education, and college education. We find that about half of the intergenerational persistence and one fourth of the cross-sectional inequality in permanent earnings are accounted for by parental investments in education. Our model implies that early education accounts for most of the persistence generated by parental investments while college education accounts for most of the inequality. We show that these results have important implications for education policy. Our model indicates that a 20% increase in public resources devoted to early education has a 10% increase on earnings mobility while a similar increase in college subsidies has virtually no effect on earnings mobility. Despite this result, the rogressivity of the college subsidy affects earnings mobility largely because of the indirect incentive effects on investments in early education by poor parents.

15. Zuleta, H.,** "Persistence and Expansion of Guerrilla Activities: the case of Colombia,"**

*Journal of Income Distribution,*

**13**(2004): 105-115.

**Abstract:**

In this paper I present a dynamic model that provides an explanation for why violent movements arise, why armed conflicts can persist over long periods, why guerrilla movements operate in rich places, and whether or not redistributive policies can eliminate the incentives for guerrilla movements. I analyze these questions using a model of competitive markets, three inputs and two types of agents. Apart from the standard results, I find that: (i) The existence of guerrilla movements increases wages in the short run but reduces them in the long run. (ii) If workers or guerrilla members benefit from learning by doing, the persistence of the conflict leads to an endogenous heterogeneity that increases the difficulties of eliminating the incentives for guerrilla activity. (iii) Once on place, guerrilla activity flows to the most productive economies together with labor and capital.