I investigate how the presence of learning affects the market dynamics in three different market settings. The first chapter studies how the interplay of individual and social learning affects price dynamics. I consider a monopolist selling a new experience good over time to many buyers. Buyers learn from their own private experiences (individual learning ) as well as by observing other buyers’ experiences (social learning). Individual learning generates ex post heterogeneity, which affects the buyers’ purchasing decisions and the firm’s pricing strategy. When learning is through good news signals, the monopolist’s incentive to exploit the known buyers causes experimentation to be terminated too early. After the arrival of a good news signal, the price could instantaneously go down in order to induce the remaining unknown buyer to experiment. When learning is through bad news signals, experimentation is efficient, since only the homogeneous unknown buyers purchase the experience good. The second chapter is based on the observation that workers learn at different rates about their productivity and therefore expect different wage paths across firms. We show that under strict supermodularity there is always positive assortative matching: differential learning is always dominated by the impact of productivity. Surprisingly, this holds even if learning is faster in the low type firm. The key assumption driving this result is that this is a pure Bayesian learning model. We also derive a new equilibrium condition in this class of continuous time models in addition to the common smooth-pasting and value-matching conditions. This no-deviation condition captures sequential rationality and results in a restriction on the second derivative of the value function. The third chapter develops a continuous-time war of attrition model with learning to investigate whether learning is possible to make it easier to reach an agreement. I show that with exogenous private learning, it may be easier to reach an agreement initially but it becomes more and more difficult over time. The expected delay will always be higher than the expected delay without learning. I also show that when allowing only one player to learn leads to a shorter delay than allowing both to learn.

My dissertation devotes to the understanding of peoples interactions under uncertainty. It contains four essays on Microeconomics with Incomplete Information.1 Chapter 1 focuses on the existence of rational bubbles in an Allen-Morris-Postlewaite 1993) setting, and finds positive and negative results for bubbles in an asset market featuring rational expectations equilibrium. An expected bubble is said to exist if it is mutual knowledge that the price of the asset is higher than the expected dividend. Similarly we call it a strong bubble if everyone knows that the price is higher than the maximum possible dividend. Substituting common knowledge for mutual knowledge, I develop the new concepts of a common expected bubble and a common strong bubble. In a simple finite horizon model with asymmetric information and short sales constraints, I show that the following results hold for any finite number of agents. First, under the implicit assumption of perfect memory, common strong bubbles never exist in any rational expectations equilibrium. Second, it is possible to have one that is both a strong bubble and a common expected bubble in a rational expectations equilibrium. Based on these results, this paper, as well as Conlon 2004) and many others, provides a partial answer to the question: What properties do rational bubbles have in a rational expectations equilibrium? In Chapter 2, I study the relationship between information improvement and welfare outcomes in a finite-player finite-state model with incomplete information. In a context of strategic interactions, it is possible that people may prefer to be ignorant rather than knowledgeable. Three simple examples are studied carefully in order to provide economic insight for this observation: if players were allowed to not forced to) forget at no cost, they might have incentives to do so in equilibrium, and their expected payoff could actually be improved. In a general setting where players simultaneously choose whether to forget or not before the state of the world is realized, I show that players actions would reveal additional information and that their preferences must be negatively correlated, for forgetfulness to be part of a possible equilibrium strategy. This finding indicates that in a world of incomplete information, people may not be made better off by obtaining more information, and they may even have incentive to be forgetful. These results will have important applications in policy design. Many economic models of rational bubbles are not very robust to perturbations. The existence of bubbles in these models requires strong conditions to be satisfied. In Chapter 3, we first study the bubble examples in the first Chapter and show that those bubbles are robust to both strongly symmetric perturbations in beliefs and very symmetric perturbations in dividends, but not robust to general perturbations. Then we construct a new three-period two-agent robust bubble example where small variations in parameters do not eliminate the bubble equilibria. The idea is that assuming continuum of states can lead to a robust bubble equilibrium where each bad type of the seller pools with some good type of the seller. This provides a new answer to the question: How robust can rational bubbles be in a finite horizon model? Morris, Shin and Postlewaite 1993) show an upper bound of asset prices in Rational Expectations Equilibrium. Chapter 4 is a note that strengthens their result by providing a tighter upper bound and hence offers a better answer to the question: How large can a bubble be in equilibrium? 1 Chapter 3 is based on joint work with John Conlon University of Mississippi).

This dissertation presents two essays on Markov-Switching dynamic stochastic general equilibrium models. The first essay is “Perturbation Methods for Markov-Switching Models,” which is co-authored with Juan Rubio-Ramirez, Dan Waggoner, and Tao Zha. This essay develops an perturbation-based approach to solving dynamic stochastic general equilibrium models with Markov-Switching, which implies that parameters governing policies or the environment evolve over time in a discrete manner. Our approach has the advantages that it introduces regime switching from first principles, allows for higher-order approximations, shows non-certainty equivalence of first-order approximations, and allows checking the solution for determinacy. We explain the model setup, introduce an iterative procedure to solve the model, and illustrate it using a real business cycle example. The second essay considers a model with financial frictions and studies the role of expectations and unconventional monetary policy during financial crises. During a financial crisis, the financial sector has reduced ability to provide credit to productive firms, and the central bank may help lessen the magnitude of the downturn by using unconventional monetary policy to inject liquidity into credit markets. The model allows agents in the economy to expect policy changes by allowing parameters to change according to a Markov process, so agents have expectations about the probability of the central bank intervening during a crisis, and also have expectations about the central banks exit strategy post-crisis. Using this Markov Regime Switching specification, the paper addresses three issues. First, it considers the effects of different exit strategies, and shows that, after a crisis, if the central bank sells off its accumulated assets too quickly, the economy can experience a double-dip recession. Second, it analyzes the effects of expectations of intervention policy on pre-crisis behavior. In particular, if the central bank commits to always intervening during crises, there is a loss of output in pre-crisis times relative to if the central bank commits to never intervening. Finally, it considers the welfare implications of committing to intervening during crises, and shows that committing can raise or lower welfare depending upon the exit strategy used, and that committing before a crisis can be welfare decreasing but then welfare increasing once a crisis occurs.

This dissertation presents three essays in econometrics and international economics. The first chapter displays a Bayesian econometric framework for evaluation of dynamic stochastic general equilibrium DSGE) models. Like Del Negro and Schorfheide 2004), the framework uses a structural vector autoregression SVAR) model as a benchmark. It improves on the earlier framework by providing a clear and less arbitrary mapping between the DSGE identification and the SVAR identification. Additionally, it imposes the identifying restrictions of a DSGE model with increased uncertainty on the benchmark SVAR model when the DSGE model fits poorly. In the second chapter, I apply the econometric framework of the first chapter and evaluate a two-country DSGE model for the U.S. and Europe, which leads to two main results. First, a benchmark SVAR model achieves a substantially better data fit than does the two-country DSGE model. I present evidence that the output and real exchange rate responses to a technology shock and a demand shock are important sources of misspecifications of the two-country DSGE model. Second, I find that the uncovered interest parity UIP) fails conditionally for some structural shocks. Empirical open economy models often introduce a non-structural shock to accommodate the failure of an equilibrium condition for exchange rates such as the Backus-Smith condition or UIP. The idea that the failure can be ascribed to a non-structural shock, while the equilibrium condition is imposed in tracing out conditional impulse responses to structural shocks, is one important source of conflict with the data in the two-country DSGE model. The third chapter concerns the international transmission of shocks in a two-good, two-country model in which financial intermediaries are borrowing-constrained. The model generates the international business cycle comovement through endogenous fluctuations of international relative prices. I show that financial frictions due to a borrowing constraint on banks that intermediate funds between households and firms amplify the impacts of the productivity and financial shocks domestically and across countries and further increase the international business cycle comovement. Banks are directly exposed to foreign shocks through foreign asset holdings. A negative country-specific shock deteriorates the balance-sheet condition of banks across countries, which further reduces lending to firms and deepens a recession across countries.

This dissertation consists of 4 papers that propose methods for modeling and estimation in a dynamic or nonstationary environment. An underlying theme throughout the thesis the belief that bioeconomic equilibriums are moving over time and that steady state models are often inappropriate in dynamic setting. Two empirical dynamic settings are explored. The first showing a regime change in the biological characteristics with consideration of the economic impact to the fisheries. The second proposes estimation methods in a nonstationary environment. Policy implications are explored and suggestions are made where appropriate. Chapter 1 models common-pool industries which experience exogenous technology shocks. Shocks are modeled as a compound Poisson process for total factor productivity and induce off-equilibrium dynamics that lower the equilibrium resource stock while causing capital buildup. The steady state changes from a stable node to a shifting focus with boom and bust cycles, even if only technology is uncertain. A fisheries application is developed, but the results apply to many settings with discontinuous changes in value and open access with costly exit. Chapter 2 provides a fisheries relevant empirical analysis of the biological dynamics of a fisheries that has undergone a regime shift. Key stock assessment statistics are computed for the Northern anchovy over 1981-2009. Spatial and temporal variation of the eggs, larvae is characterized and modeled. We find that recent low recruitment productivity that can be attributed largely to poor environmental conditions. An economic appendix explores the determinants of catch in the anchovy fishery. Chapter 3 further explores the modeling and estimation of jump diffusion processes as they apply to financial time series. A framework is proposed for estimating and forecasting realized volatility in the presence of jumps. An optimal method for threshold selection is proposed that minimizes the out-of-sample forecasting loss. We find that large truncation thresholds may not be optimal from a forecasting perspective. An extensive simulation study and an empirical application to S&P 500 futures demonstrate the effectiveness of the proposed method. Chapter 4 models a dynamic environment as regime shifts in a spatial bioeconomic framework. Regime shifts are induced through a cyclic time varying parameter meant to mimic environmental oscillations. The optimal economic resource exploitation policy is derived, explicitly showing the impact of spatial connectedness in this dynamic setting. Through simulation alternative management policies are explored that ignore the spatial connectedness and the corresponding impacts on economic variables and resources stock.

The notion of complementarity is fundamental to economics, as reflected in the large and growing number of studies that invoke alternate conceptions of this idea. Though complementarity has been studied for many years, its connection with theory of supermodularity is far more recent. Taking advantage of these techniques, the first three chapters of this dissertation study aspects of interest in network markets； endogenous information acquisition； and some insights into the comparison of players equilibrium strategies. The last chapter applies this methodology to econometric identification. Chapter one provides a thorough analysis of oligopolistic markets with positive demand-side network externalities and perfect compatibility. With a general complementarity structure on the model primitives allowing for products with low or high stand-alone values, a nontrivial fulfilled-expectations equilibrium exists. We formalize the concept of industry viability, investigate its determinants, and show that viability is always enhanced by having more firms in the market and/or by technological progress. The second chapter studies covert information acquisition in common value Bayesian games of strategic complementarities. Using the supermodular stochastic order to arrange the structures of information increasingly in terms of preferences, we provide novel, easily interpretable conditions under which the value of information is globally convex, and study the implications in terms of the equilibrium configuration. Our analysis also enlightens the effect of information on players behavior. Chapter three proposes a simple approach to compare players equilibrium choices in asymmetric games with strategic complementarities. We offer three applications of our idea to industrial organization and behavioral economics. The last chapter studies nonparametric) partial identification of treatment response with social interactions. It imposes economically driven monotone conditions to the primitives of the model, i.e., the structural equations, and shows that they imply shape restrictions on the distribution of potential outcomes by means of monotone comparative statics. We propose precise conditions that validate counterfactual predictions in models with multiple equilibria. Under three sets of assumptions, we identify sharp distributional bounds in terms of stochastic dominance) on the potential outcomes given observable data. We illustrate our results by studying the effect of police per-capita on crime rates in New York state.

Markets arise from the interaction of consumers with suppliers. As consumers and suppliers evolve, so do markets. Changes in conduct behavior among suppliers can also cause markets to evolve. This collection of papers studies how particular factors shape demand, supply, and conduct. Regarding demand, consumers may benefit from more choice. The benefits of increasing choice of health insurance plans for employees is estimated using a proprietary data set covering over ten million Americans between 1999 and 2006. Estimates suggest consumers are willing to pay twenty percent higher premiums for more choice. I study supply by estimating sunk entry costs for multi-unit firms that expand gradually. Dis-economies of scale, arising from scarce management or lack of financial resources, may have constrained expansion in the Mexican supermarket industry between 1999 and 2006. An entry model with inter-market dependencies is developed to estimate these dis-economies. I find WalMart’s per-store entry costs increase by one to two percent for each additional store opened in the same year. Firm’s finances are also found to affect sunk entry costs significantly. Conduct is studied in the context of the US airline industry. A model of multimarket competition is developed, where hub-&-spoke carriers can freely readjust seat allocations across routes that share a common leg. Carriers are found to compete less aggressively when they overlap on routes in which at least one rival can readjust, but not when they overlap on other routes. This contrasts with the mutual forbearance hypothesis that states carriers compete less aggressively as the degree of overlap increases, regardless of the type of route. The predictions of the model are validated empirically using data between 1993 and 2007 and are found to be four fold stronger than those of the mutual forbearance hypothesis. Implications for merger policy are discussed.

My dissertation deals with two topics: collusion in auctions and bargaining； two chapters are devoted to each. Regarding collusion, my goal is to address the following questions a) what can the cartel members achieve via collusion, and b) what are the implications of this activity on social efficiency. The answer to both questions depends on various factors, such as the ability to organize side transfers, the availability of communication and commitment devices, whether future interactions between the colluding parties are expected, and more. I therefore address these questions within two main models, each emphasizing different issues； both, however, share the same mathematical structure: a 2-person IPV setting with a continuum of types. In Chapter 1 I consider the case of a one-shot second-price auction which is preceded by two rounds of bribing, where each bidder can try to bribe his opponent to drop out of the auction. The main result of this chapter is a characterization of the efficient equilibria in monotonic and continuous strategies. Additionally, a first-price auction which is preceded by one round of bribing i.e., a “take-it- or-leave-it” game) is analyzed； it is shown that under the restriction to monotonic and continuous bribing functions, every equilibrium of this game is a bribe-free equilibrium. In Chapter 2 I dispense with the assumption that the players can communicate, exchange money, and deliver and keep) binding promises； instead, I consider in a repeated game setting. Here, the only instruments for collusion are future payoffs and threats. The analysis of this chapter is more general than that of Chapter 1, in the sense that it applies to any standard auction format. Here, the main contribution is the construction of an incentive-compatible collusive scheme, endogenous bid rotation, which delivers payoffs greater than simple bid rotation payoffs. In the special case where the auction format is second-price, the scheme has the following additional properties: 1) it is supported in equilibrium independently of the discount factor, and 2) it is supported in equilibrium even if each bidders participation decision in each auction is not known to his opponent. Finally, in a model with two types, the analog of this scheme delivers first-best collusion. Regarding bargaining, my focus is on the role of outside options. Intuitively, one would expect a bargainers payoff to increase in his outside option. Does this monotonic relation have further implications? In Chapters 3 and 4 I show that indeed it has. Formally, I introduce a new axiom into Nashs 1950) axiomatic bargaining model, disagreement point monotonicity； it requires that a players solution payoff be a strictly increasing function of his disagreement payoff. In Chapter 3 I show that on the domain of strictly comprehensive n-person problems, this axiom, together with Nashs IIA and other standard axioms, uniquely characterizes the family of proportional solutions they were first characterized by Kalai 1977), by means of different monotonicity axioms). In Chapter 4 I show that on the domain of 2-person problems, the Kalai-Smorodinsky bargaining solution due to Kalai and Smorodinsky 1975)) is characterized by disagreement point monotonicity, scale-invariance, and other standard axioms. It is worth noting that from the three major bargaining solutions in the literature—the Nash solution, the Kalai-Smorodinsky solution, and the proportional solution—only the Nash solution is a scale-invariant and IIA-satisfying solution； however, it fails to satisfy disagreement point monotonicity. Each of the other two solutions satisfies exactly one of IIA or scale-invariance, and both satisfy disagreement point monotonicity.

The first of these three essays is a theoretical model of the household that accounts for the decisions of when and how much to purchase, as well as when and how much to consume, in a unified optimal control theory model with inventory as a state variable. It is shown that under a standard budget constraint, the households decision reduces to recurrence intervals in which they behave identically ad infinitum. Necessary conditions are derived that can be used for simulation and econometric modeling. The second essay derives the demand functional forms that are permitted when the restrictions of exact aggregability and homogeneity of degree zero in prices are imposed. It is shown that Laus generalization of Gormans 1953) theory of exact aggregation implies Gormans 1981) functional forms for income and multiplicative separability of the demographic variables and income. The third essay presents the necessary and sufficient condition to allow input demands to be specified as functions of input prices, technology, quasi-fixed inputs, and cost in place of planned/expected outputs. These all are observable when inputs are committed to production. Next we derive a flexible, exactly aggregable, economically regular econometric model of input demands. This model is consistent with any dynamic von Neumann–Morgenstern expected utility function. We combine this framework with a model of the life-cycle production, investment and savings, and consumption decisions of owner/operators who face output and output price risk, and who have opportunities to invest in a conditionally risk free asset, other risky financial assets, and farm assets. The econometric framework allows for location specific technological change and production processes, cross-equation, interspatial, and intertemporal correlation among the error terms, and structural simultaneity between inputs and outputs, input and output prices, investment in durable goods used in agriculture, consumption, savings, and wealth. The result is a consistent dynamic structural model of inputs, outputs, savings, investment, and consumption under risk.