Paul Shea

Learning by Doing, Short‐sightedness and Indeterminacy

This article introduces firm‐specific learning by doing into a real business cycle (RBC) model. This assumption results in indeterminacy of the wage over a large portion of the parameter space: when firms use sufficiently high discount factors and when newly employed labour is relatively unproductive. When firms and households use the same discount factor, the effects of indeterminacy are limited to adding volatility to the wage rate. If these discount factors differ, however, then indeterminacy also destabilises newly employed labour and total hours. This result helps to explain the high amount of volatility that newly employed labour exhibits in the US data.

Predicting the Winner of Tied National Football League Games Do the Details Matter

We construct a data set of all 429 tied at the half regular season National Football League (NFL) games between 1994 and 2012. We then examine whether or not the path taken to reach the tie (e.g., rushing yards, turnovers, etc.) has any ability to predict the eventual winner. Our main finding is that only the point spread is significantly predictive, although there is weak evidence to suggest that allowing more sacks reduces the chances of winning. Surprisingly, we find that the team receiving the first possession of the second half does not enjoy a statistically significant advantage. Teams should thus simply try to maximize their first half lead without expecting that first half strategies such as “establishing the run” will pay dividends in the second half.

A Note On Bubbles, Worthless Assets, And The Curious Case Of General Motors

Since the company declared bankruptcy in June 2009, shares of General Motors stock (now known as Motors Liquidation Company) have continued to trade at a high volume while maintaining a market capitalization near

LEARNING, HEDGING, AND THE NATURAL RATE HYPOTHESIS

300 million through most of 2010. Anecdotal evidence strongly suggests that both rational speculators and uninformed investors (often mistaking Motors Liquidation for the new, reorganized GM) have purchased the stock. We develop a theoretical asset-pricing model that includes both types of agents. We present two major results. First, the most frequent state is one where a small fraction of rational agents ensure that the share price behaves as if all agents are rational. A second state exists where all rational agents exit and the share price is inflated. Second, fitting the model to Motors Liquidation, we find evidence of irrational asset pricing for this firm. We find little evidence of similar behavior in the share prices of the thirty stocks that compose the Dow Jones Industrial Average.

Optimal Setting of Point Spreads

We assume that firms actively manage risk by learning and hedging in two macroeconomic models, a simple cobweb model and a model of monopolistic competition that allows for the analysis of monetary policy and welfare. In both models, firms that learn (by paying a cost to observe the model’s stochastic shocks) face less uncertainty and produce more output than firms that hedge. Parameter or policy changes that increase the attractiveness of learning therefore induce a higher steady state level of output. When we introduce monetary policy into the latter model, we obtain three results that are profoundly different from all or most of the related literature. First, by affecting the volatility of the system, monetary policy affects the supply side decisions of producers and therefore affects the steady state level of output and not just its second moment. Second, if the fraction of firms that learn is exogenous, then the optimal policy maximizes steady state output and welfare by minimizing the volatility of the aggregate price level. Third, if the fraction of firms that learn is endogenous, then the optimal policy maximizes steady state output by ensuring an intermediate level of price stability, close to the minimum stability needed to induce the maximum amount of learning.