Monte Carlo Simulation - Applications in Econometrics and Economic Modeling

This research focuses on two topics: (1) Asymmetric bidders and coalitions of bidders at first price auctions and, (2) Dynamic latent variables and disequilibrium models. The topics share the characteristic of being analytically intractable and, therefore, requiring numerical techniques for investigation. Hardware and software methods have made a computational approach to these problems feasible. One reason the first topic is important is that the federal government uses first price auctions extensively for both the sale and procurement of commodities. Nevertheless, very little is understood about the feasibility of coalitions forming at these auctions. If all bidders are identical and if coalitions of bidders are possible, then their bids stem from a source that is fundamentally different from the source for the bids of non-colluding bidders. Consequently, a first step in analyzing bidder collusion is to understand the behavior of heterogeneous bidders who act non-cooperatively. Solutions will be obtained for first price auction models and the results utilized to understand and characterize the circumstances under which bidders can profitably collude. One reason the second topic is important is because the latent variable technique can be used in estimating models of the U.S. money demand where a number of important variables are inherently latent (or unobserved) and dynamic. Examples of these variables are expected and permanent income and often the measure of money, itself. The investigators have developed a technique for numerically simulating the unobserved variables that permits inferences to be drawn without removing the latent variables.