# Center for Economic Research Discussion Papers

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This series of discussion papers arose from seminars and research conducted at the Center for Economic Research and includes work by three Nobel Prize in Economics laureates.

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Item Activity-Based Costing for Economic Value Added(Center for Economic Research, Department of Economics, University of Minnesota, 1994-12) Jordan, J.S.; Anctil, Regina; Mukherji, ArijitEconomic value added (EVA), which is the currently popular term for the traditional accounting concept of residual income, subtracts from operating income an interest charge for invested capital. This paper provides both a normative justification for EVA and an activity-based cost system that supports EVA maximization. We construct a model of participatory budgeting for a multi-activity firm in which we show that, if investment decisions are made myopically each period to maximize EVA, the resulting path of plant and equipment vectors asymptotically approximates the path that maximizes discounted cash flows. The cost system allocates plant and equipment cost to products using a formula that includes the interest charge.Item An Adjusted Maximum Likelihood Estimator of Autocorrelation in Disturbances(Center for Economic Research, Department of Economics, University of Minnesota, 1971-10) Hildreth, Clifford; Dent, Warren T.Item An Aggregate Model of Firm Specific Capital with and without Commitment(Center for Economic Research, Department of Economics, University of Minnesota, 1995-08) Kwok, Siu-Kit ClaudianThis paper studies the implications of an agency problem on the equilibrium outcome of an intertemporal model. The model considered is a two-period lived overlapping generations model with an aggregate productivity shock. In each generation, a subset of the agents, the entrepreneurs, choose the asset specificity of their projects. An agency problem exists because the entrepreneurs cannot commit to supplying their human capital which is essential to the project. I compare equilibria with and without commitment. The main result is that in the long run, the equilibrium without commitment has lower asset specificity and per capita output, and the productivity shocks have more lasting effects. However, it need not have larger aggregate fluctuations.Item Allocation and Prediction in Stochastic Environments: An Elementary Theory(Center for Economic Research, Department of Economics, University of Minnesota, 1981-01) Jordan, J.S.Item Allocational Implications of Sophisticated-Naivete(Center for Economic Research, Department of Economics, University of Minnesota, 1974-06) Danforth, John P.Item Amemiya's Generalized Least Squares and Tests of Overidentification in Simultaneous Equation Models with Qualitative or Limited Dependent Variables(Center for Economic Research, Department of Economics, University of Minnesota, 1991-05) Lee, Lung-FeiAmemiya's generalized least squares method for the estimation of simultaneous equation models with qualitative or limited dependent variables is known to be efficient relative to many popular two-stage estimators. This note points out that test statistics for overidentification restrictions can be obtained as by-products of Amemiya's generalized least squares procedure. Amemiya's procedure is shown to be a minimum chi-square method. The Amemiya procedure is valuable both for efficient estimation and for model evaluation of such models.Item The Analysis of Macroeconomic Policies in Perfect Foresight Equilibrium(Center for Economic Research, Department of Economics, University of Minnesota, 1979-12) Brock, William A.; Turnovsky, Stephen J.Item An ANC Payoff Function for Networks with Sequentially Nash Coherent Plans(Center for Economic Research, Department of Economics, University of Minnesota, 2005-10) Nieva, RicardoI add endogenous bargaining possibilities do develop criteria to determine which statements are credible in a three-player model with complete information where pairs, in a sequential order, can formulate simultaneous negotiation statements. Joint plans are credible if they are the outcome of a plan Nash bargaining problem-the pair bargains cooperatively over the equilibrium payoffs induced by tenable and reliable plans-unless one or both bargainers are indifferent to bargaining. Then, a credible plan is up to the future-request by the oldest pair ("of friends") among the past pairs that successfully cooperated and included one of the indifferent players. I interpret this model as an almost non cooperative (ANC) modification of the three-player Aumann-Myerson (1988) sequential network formation game. Whenever discussing a link two players can bargain non cooperatively out of the sum of their Myerson values (1977) in the prospective network and enunciate simultaneous negotiation statements. The disagreement plan suggests link rejection. Sequentially Nash (1950) coherent plans can be defined and exist. Analytical payoffs are unique. In strictly superadditive cooperative games the complete graph never forms.Item An Approach to the Study of Money and Nonmoney Exchange Structures(Center for Economic Research, Department of Economics, University of Minnesota, 1971-06) Wallace, NeilItem Approximation of Contractible Valued Correspondences by Functions(Center for Economic Research, Department of Economics, University of Minnesota, 1989-12) McLennan, AndrewItem Are There Exogenous Variables in Short-Run Production Relations?(Center for Economic Research, Department of Economics, University of Minnesota, 1971-08) Sims, Christopher A.Item Arrow's Theorem and Turing Computability(Center for Economic Research, Department of Economics, University of Minnesota, 1994-08) Mihara, H. ReijuA social welfare function for an infinite society satisfies Pairwise Computability if for each pair (x, y) of alternatives, there exists an algorithm that can decide from a description of a profile on {x, y} whether the society prefers x to y. I prove that if a social welfare function satisfying Unanimity and Independence also satisfies Pairwise Computability, then it must be dictatorial. This result severely limits on practical grounds Fishburn's resolution (1970) of Arrow's impossibility. An interpretation of an infinite "society" is also given.Item Assessing the Economic Impact of North American Free Trade(Center for Economic Research, Department of Economics, University of Minnesota, 1992-10) Kehoe, Timothy J.Item Asymptotic Distribution Theory for a Class of Nonlinear Estimation Methods(Center for Economic Research, Department of Economics, University of Minnesota, 1976-07) Sims, Christopher A.Item Asymptotic Normality if Coefficients in a Vector Autoregression With Unit Roots(Center for Economic Research, Department of Economics, University of Minnesota, 1986-06) Sims, Christopher A.Item Axiomatization for an Expected Utility Model with Endogenously Determined Goals(Center for Economic Research, Department of Economics, University of Minnesota, 1975-09) Tesfatsion, LeighIn [7] a "goal-control expected utility model" was formulated which allows the decision maker to specify his acts in the form of "controls" (partial contingency plans) and to simultaneously choose goals and controls in end-mean pairs. It was shown that the Savage expected utility model, the Marschak-Radner team model, the Bayesian statistical decision model, and the standard optimal control model can be viewed as special cases of this model. In this paper the goal-control expected utility representation for the goal-control model primitives is axiomatized.Item "Bayes' Theorem" for Utility(Center for Economic Research, Department of Economics, University of Minnesota, 1976-04) Tesfatsion, LeighAn algorithm is proposed for updating an initial period objective (risk) function by means of transitional utility (loss) assessments, in a manner analogous to Bayes' theorem for probability. Specification of updated probability assessments is not required. The algorithm is shown to be robust with respect to a fully updated procedure, given certain empirically meaningful restrictions. Existence of the initial period objective function is axiomatized in the context of a model which adopts a symmetrical approach to utility and probability.Item Bayesian Learning in Normal Form Games(Center for Economic Research, Department of Economics, University of Minnesota, 1990-07) Jordan, James S.This paper studies the asymptotic behavior of Bayesian learning processes for general finite-player, finite-strategy normal form games. Initially, each player is presumed to know his own payoff function but not the payoff functions of the other players. Strategies are initially determined as a Bayesian Nash equilibrium of the incomplete information game in which each player's private characteristic is his payoff function. These strategies are then observed by all players, causing a revision of beliefs. The new beliefs determine a new Bayesian Nash equilibrium and so on. Assuming that the common prior distribution of payoff functions satisfies independence across players, it is proved that the conditional distributions on strategies converge to the set of Nash equilibria with probability one. Under a further assumption that the prior distributions are sufficiently uniform, convergence to the set of Nash equilibria is proved for every profile of payoff functions, that is, for every normal form game.Item Bayesmth: A Program for Multivariate Bayesian Interpolation(Center for Economic Research, Department of Economics, University of Minnesota, 1986-09) Sims, Christopher A.Item Bounded Rationalities and Computable Economies(Center for Economic Research, Department of Economics, University of Minnesota, 1996-12) Richter, Marcel K.; Wong, Kam-ChauThis paper studies economic equilibrium theory with a "uniformity principle" constraining the magnitudes (prices, quantities, etc.) and the operations (to perceive, evaluate, choose, communicate, etc.) that agents can use. For the special case of computability constraints, all prices, quantities, preference relations, utility functions, demand functions, etc. are required to be computable by finite algorithms. Then we obtain sharper versions of several traditional assertions on utility representation, existence of consumer demand functions, the fundamental welfare theorems, characterizations of market excess demands, and others. These positive results hold despite the fact that commodity and price spaces are no longer topologically complete. On the other hand, we give "computable counterexamples" to several traditional assertions, including the existence of a competitive equilibrium. The results can be interpreted as possibility and impossibility results in both computability-bounded rationality and in computational economics.