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 EBIT Stands for "earnings before interest and taxes" which is used as a measure of earnings performance of firms that is not clouded by changes in debt or equity types, or tax rules. Source: econterms EconLit An electronic bibliography of economics literature organized by the American Economics Association, derived partly from the Journal of Economic Literature. EconLit is made available through libraries and universities. See http://www.econlit.org for more information. Source: econterms econometric model An economic model formulated so that its parameters can be estimated if one makes the assumption that the model is correct. Source: econterms Econometrica A journal whose web site is at http://www.econometricsociety.org/es/journal.html . Source: econterms econometrics econometrics Source: econterms Econometrics Econometrics is the field of economics that is concerned with the application of mathematical statistics and the tools of statistical inference to the empirical measurement of relationships postulated by economic theory. That is, econometrics (hopefully) uses some clever combination of economic theory and mathematical statistics. Typically, application of econometric methods involves the following elements:• formulating an economic model appropriate to the questions to be answered; • reviewing the available statistical models and the assumptions underlying these models, and selecting the form most suitable for the problem at hand; • obtaining appropriate data, properly defined and matching the concepts of the economic model; • finding suitable computer software to enable the calculations necessary for estimating and testing the econometric model.The ultimate goal of an econometric exercise is to see whether an economic model is consistent with empirical (observed) behavior as reflected in the data. Note that econometrics is mostly based on large samples, i.e., on observing economic relationships over a long period of time or for a large number of individuals at the same time (or both, as in the case of longitudinal or panel data). Note also that econometricians usually have to use data that were not created in a controlled experiment (as in natural and some other social sciences). An important aspect of applied work is therefore to assess whether the sample used for estimation is actually a random sample drawn from the population for which the underlying model is supposed to be appropriate ? in other words, whether the relationship of interest is empirically identified. For example, this might not be the case if there are selection problems. Source: SFB 504 Economic decision rule A rule in economics asserting that if the marginal benefit of an action is higher than the marginal cost, then one should undertake the action; however if the marginal cost is higher than the marginal benefit of the action, one should not undertake it. Source: EconPort economic discrimination in labor markets: the presence of different pay for workers of the same ability but who are in different groups, e.g. black, white; male, female. Source: econterms economic environment In a model, a specification of preferences, technology, and the stochastic processes underlying the forcing variables. Source: econterms economic growth Paraphrasing directly from Mokyr, 1990: Economic growth has four basic causes: 1) Investment, meaning increases in the capital stock (Solovian growth) 2) Increases in trade (Smithian growth) 3) Size or scale effects, e.g. by overcoming fixed costs, or achieving specialization 4) Increases in knowledge, most of which is called technological progress (Schumpeterian growth). Further elaboration is in Mokyr's book. Source: econterms Economic profit Profit that takes into account both explicit and implicit costs of production. It is calculated as Total revenues minus implicit and explicit costs. Source: EconPort Economic Rent In equilibrium of a market or game, the traders (or players) participate voluntarily because their payoff exceeds the one from abstaining to engage in the trade (or to play the game): in equilibrium, the participants earn profits. Part of the equilibrium profits is explained by ordinary trading or exchange activity; part of it accrues to a trader (player) by owning a fixed idiosyncratic resource which is not consumed in the transaction (interaction). The last part is called a player's (trader's) rent. An economic rent is thus the 'wage' for some fixed resource which is necessary for and valuable in a transaction but in monopolistic possession of some trader.Apart from the costs of not using his outside options (i.e. turning to another partner for exchange), it is the rent on such idiosyncratic factors which must be conceded to a player in order to ensure his participation in the exchange process. For example, traders draw a rent from making accessible a fixed resource like 'land' (which is where the term comes from), from uniquely owning a patent or license protecting a technological achievement or professional activity, or from uniquely owning private information about a fact that influences all players' payoffs.In analogy to rents acrrueing to a trader from possessing idiosyncratic property rights or 'tangible' assets, the equilibrium profits acrrueing to a player solely from possessing payoff-relevant information are called his information rent. The familiar consumer's surplus from microeconomics is a simple example. The consumer is left a surplus from being able to buy all the quantities consumed at the price of the last consumed unit, instead of having to pay higher prices for earlier units consumed. This 'surplus' corresponds to her information rent for knowing her entire schedule of marginal willingnesses-to-pay for different quantities of the object. If the seller instead knew this schedule of marginal valuations, he could squeeze out all the profits from the customer by selling each unit at a different price, just demanding the consumer's marginal valuation for each unit. The fact that the consumer's information is private thus guarantees him a consumer's rent.If the seller faces a single customer that she knows very well, having observed his choices at varying prices for a long time, she could devise a schedule of quantity discounts that extracts nearly all of the consumer's rent. This changes when the seller faces a set of competing consumers, each of which has private information on his marginal willingness-to-pay for different quantities. The schedule of discounts must now prevent lower-valued consumers from copying the quantity demanded by higher-valued consumers (and thus get much for a small payment). Typically, this is achieved by selling each additional unit of quantity at a slightly lower price than the previous one, thus inducing customers with higher valuations to choose quantities such large that low-valuation customers will find it too costly to mimic choosing a large quantity. (See the entry on incentive compatibility.) In this way, however, the seller thus increases the equilibrium profits of high-valuation customers disproportionately (relative to those for low-valuations customers), i.e. she pays larger information rents to higher marginal valuations (types) of customers.The upshot of all this is that in a game where the seller designs an incentive compatible price schedule so that the players implicitly 'sell' their private information by revealing it through their equilibrium choices, the players do not loose their information rents. Instead, the very possibility that lower typed customers can mimic the choices of higher typed customers forces the seller to leave higher information rents to higher types, which which own 'more valuable' private information. In this sense, paying information rents to economic agents is intimately related to providing incentives for the revelation private information in strategic contexts. Source: SFB 504 economic sociology Piore (1996) writes of two definitions of economics, a narrow one organized around optimization and a broad one organized around scarcity, and suggests that the subjects included by the larger one but not in the smaller one are the subjects of economic sociology discussed in the Handbook (1994). More specifically, the broad definition of economics is "the study of how people employ scarce resources and distribute them over time and among competing demands" paraphrasing Paul Samuelson (1961). The narrower definition is from Gary Becker (1976): "The combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly . . . [B]ehavior [of] participants who maximize their utility from a stable set of preferences and accumulate an optimal amount of information and other inputs in a variety of markets." A bit more specifically -- optimization and formal equilibrium are not natural subjects or methods of economic sociology, but the general subjects of economics are. Economic sociology is more likely than economics to use groups or organizations rather than individuals as units of analysis. The practical definition seems to be evolving over time. Source: econterms Economics The study of the allocation of scarce (limited) resources. Source: EconPort economies of scale Usually one says there are economies of scale in production of cost per unit made declines with the number of units produced. It is a descriptive, quantitative term. One measure of the economies of scale is the cost per unit made. There can be analosous economies of scale in marketing or distribution of a product or service too. The term may apply only to certain ranges of output quantity. Source: econterms Economies of Scale See increasing returns to scale Source: EconPort ECU European Currency Unit Source: econterms Editor's comment on time series A frequent and dangerous mistake for those not familiar with this language is to think that discussion of 'time series' are about data values in a sample. Actually, they are about probability distributions. It has taken this author years to get used to that, which may just be normal. An example of the error is to think that a discussion about E[Xt] is testable or measurable. Usually it's not. It's assumed in the discussion. A sample has a computable mean, but whether a time series has a trend, or a unit root, or heteroskedasticity are statements about a conjectured process, not statements about data. Source: econterms education production function Usually a function mapping quantities of measured inputs to a school and student characteristics to some measure of school output, like the test scores of students from the school. For empirical purposes one might assume this function is linear and generate the linear regression: Y = X'b + S'c + e where Y is a measure of school outputs like a vector of student test scores, X is a set of measures of student attributes (collectively or individually), S is vector of measures of schools those students attend, b and c are coefficients, and e is a disturbance term. Source: econterms EEH An abbreviation for the journal Explorations in Economic History. Source: econterms EER An abbreviation for European Economic Review. Source: econterms effective labor In the context of a Solow model, if labor time is denoted L and labor's effectiveness, or knowledge, is A, then by effective labor we mean AL. In general means 'efficiency units' of labor or 'productive effort' as opposed to time spent. Source: econterms efficiency Has several meanings. Sometimes used in a theoretical context as a synonym for Pareto efficiency. Below is the econometric/statistical definition. Efficiency is a criterion by which to compare unbiased estimators. For scalar parameters, one estimator is said to be more efficient than another if the first has smaller variance. For multivariate estimators, one estimator is said to be more efficient than another if the covariance matrix of the second minus the covariance matrix of the first is a positive semidefinite matrix. Sometimes properties of the most efficient estimator can be computed; see efficiency bound. Computation of efficiency is defined on the basis of assumed distributions of errors ('disturbance terms'). It is not calculated directly on the basis of sample information unless the sample information come from a simulation where the actual error distribution was known. Source: econterms Efficiency Analysis of efficiency in the context of resource allocation has always been a central concern of economics, and it is an essential element of modern microeconomic theory. The ends of economic activity are the satisfaction of human needs within resource constraints, preferences, and technological constraints. In this broad sense, an efficient use of scarce resources within a given technological environment is one that maximizes the satisfaction of aggregate needs for a given set of preferences. In a narrower sense, efficiency is a commonly agreed upon criterion to compare the economic desirability of different allocations, or states of the economy, and different allocation mechanisms or institutions. The incomparability of economic preferences gives rise to a criterion that is independent of the distributional characteristics of the allocations (or institutions) compared (Pareto efficiency). Whether construed as a general purpose of economic activity, or as a criterion for evaluating different allocations and exchange institutions, efficiency is a purely technical notion that is neither related to justness or equality criteria, nor to any moral or ethic questions of economic activity. Source: SFB 504 efficiency bound The minimum possible variance for an estimator given the statistical model in which it applies. An estimator which achieves this variance is called efficient. Source: econterms efficiency units Usually interpretable as "output per worker per hour." More generally: An abstract measure of the amount produced for a constant production technology by a worker in some time period. Often the context is theoretical and the time period and production technology do not have to be specified. But efficiency units can be conceived of (and theorized about) as a function of each worker's characteristics, of the vintage of equipment, of the date in history, of the production technology, and so forth. Source: econterms efficiency wage hypothesis The hypothesis that workers' productivity depends positively on their wages. (For reasons this might be the case see the entry on efficiency wages.) This could explain why employers in some industries pay workers more than employers in other industries do, even if the workers have apparently comparable qualifications and jobs. A contrasting explanation is that of hedonic models in which these differentials are explained by quality differences in the jobs. Source: econterms efficiency wages A higher than market-clearing wage set by employers to, for example: -- discourage shirking by raising the cost of being fired -- encourage worker loyalty -- raise group output norms -- improve the applicant pool -- raise morale Labor productivity in efficiency wage models is positively related to wage. By contrast, consider models in which the wage is equal to labor productivity in equilibrium, or models in which wages are set to reduce the likelihood of unionization (union threat models). In these, productivity is not a function of the wage. Source: econterms efficient A description of either: -- an allocation that is Pareto efficient or -- an estimator that has the minimum possible variance given the statistical model; see efficiency bound. Source: econterms Efficient capital market Market efficiency is one of the major paradigms of financial economics, focussing on informational efficiency as opposed to Pareto efficiency in microeconomic theory.Market efficiency as applied to securities markets means that it is on average impossible to gain from trading on the basis of generally available public information (information-arbitrage efficiency) and that the valuation of an asset reflects accurately the future payments to which the asset gives title (fundamental-valuation efficiency). It is apparent that market efficiency in this sense is only part of overall market efficiency.Fama (1970) distinguishes three forms of informational efficiency: He defines weak, semi-strong and strong form efficiency as holding when the stock market prices reflect all historical price information, all publicly available information, and all information (including insider information), respectively. In order for the price to reflect exactly all information about an asset, nothing can impede the purchase or sale of securities, such as brokerage, fees, taxes and so on. To the extent that impediments exist to the trading of an asset, the prices will only imperfectly reflect information of relevance to the valuation of the security.Most financial markets have generally been shown to be efficient in the weak or semi-strong form, although not necessarily so in the strong sense. Source: SFB 504 efficient markets hypothesis "A market in which prices always 'fully reflect' available information is called 'efficient.'" -- Fama, p. 383 Source: econterms EGARCH Exponential GARCH. The EGARCH(p,q) model is attributed to Nelson, (1991). Source: econterms eigenvalue An eigenvalue or characteristic root of a square matrix A is a scalar L that satisfies the equation: det [ A - LI ] = 0 where "det" is the operator that takes a determinant of its argument, and I is the identity matrix with the same dimensions as A. Source: econterms eigenvalue decomposition Same as spectral decomposition. Source: econterms eigenvector For each eigenvalue L of a square matrix A there is an associated right eigenvector, denoted b that has the dimension of the number of rows of A. The right eigenvector satisfies: Ab = Lb Source: econterms EJ An occasional abbreviation for the British academic journal Economic Journal. Source: econterms elasticity A measure of responsiveness. The responsiveness of behavior measured by variable Z to a change in environment variable Y is the change in Z observed in response to a change in Y. Specifically, this approximation is common: elasticity = (percentage change in Z) / (percentage change in Y) The smaller the percentage change in Y is practical, the better the measure is and the closer it is to the intended theoretically perfect measure. Elasticities are often negative, but are sometimes reported in absolute value (perhaps for brevity) in which case the author is depending on the reader knowing, or quickly applying, some theory. Usually the theory is the theory of supply and demand. Among the elasticities that show up in the economics literature are: elasticity of quantity demanded of some product in response to a change in price of that product-- I think this is 'elasticity of demand' or 'price elasticity of demand'. These are ordinarily negative, and when author reports a positive figure it is usually just an absolute value. A reader has to decide whether the true value is negative; hopefully this is obvious. elasticity of supply, which is analogous elasticity of quantity demanded in response to a change in the potential consumer's income -- called 'income elasticity of demand'. These are normally positive. Inventing another kind of elasticity is plausible. Doing so implies a partial theory of behavior -- e.g. that Y creates a reason for the agent to change behavior Z. Source: econterms Elimination by aspects Tversky (1972): This rule begins by determining the most important attribute and then retrieves a cutoff value for that attribute. All alternatives with values below that cutoff are eliminated. The process continues with the most important remaining attribute(s) until only one alternative remains. Lexicographic Strategy: This strategy first identifies the most important attribute and then selects the alternative that is best on this attribute. In the case of ties, the tied alternatives are compared on the next most important attribute and so on. Equal Weight Strategy: It examines all alternatives and attribute values but ignores the weights (probabilities). It sums the attribute values for an alternative to get an overall score for that alternative and then selects the alternative with the highest evaluation. Satisficing Strategy Simon (1955): This strategy considers one alternative at a time, in the order they are presented. Each attribute of the current alternative is compared to a cutoff. If an attribute fails to exceed the cutoff, then the alternative is rejected. The first alternative to pass all the cutoffs is selected. Source: SFB 504 EMA An occasional abbreviation for the journal Econometrica. Source: econterms embedding effect The tendency of some contingent valuation survey responses to be similar across different survey questions in conflict with theories about what is valued in the utility function. An example from Diamond and Hausman (1994): A survey might come up with a willingness-to-pay amount that was the same for either (a) one lake or (b) five lakes which include the one that was asked about individually. If lakes have some utility value to the respondent, one would have expected that five lakes would be worth more than one. Possibly the difference arises because the respondent was not expressing a specific preference for the first lake, and/or was not taking a budget constraint into account. Diamond and Hausman argue that for this reason among others contingent valuation surveys cannot arrive at good estimates for values of public goods. Source: econterms embodied An attribute of the way technological progress affects productivity. In Solow (1956), any improvement in technology instantaneously affects the productivity of all factors of production. In Solow (1960) however productivity improvements were a property of only of new capital investment. In the second case we say the technologies are embodied in the new equipment, but in the first case they are disembodied. Source: econterms EMS European Monetary System -- founded in 1979, its purpose was to reduce currency fluctuations, and evolved toward offering a common currency. Source: econterms EMU European Monetary Union. Source: econterms endogenous A variable is endogenous in a model if it is at least partly function of other parameters and variables in a model. Contrast exogenous. Source: econterms endogenous growth model An endogenous growth macro model is one in which the long-run growth rate of output per worker is determined by variables within the model, not an exogenous rate of technological progress as in a neoclassical growth model like those following from Ramsey (1928), Solow (1956), Swan (1956), Cass (1965), Koopmans (1965). Influential early endogenous growth models are Romer (1986), Lucas (1988), and Rebelo (1991). See the sources for this entry for more information. Hulten (2000) says 'What is new in endogenous growth theory is the assumption that the marginal product of (generalized) capital is constant, rather than diminishing as in classical theories.' Generalized capital includes the result of investments in research and development (R&D). Source: econterms endowment In a general equilibrium model, an individual's endowment is a vector made up of quantities of every possible good that the individual starts out with. Source: econterms energy intensity energy consumption relative to total output (GDP or GNP). Source: econterms Engel curve On a graph with good 1 on the horizontal axis and good 2 on the vertical axis, envision a convex indifference curve, and a diagonal budget constraint that meets it at one point. Now move the budget constraint in and out and mark the points where the tangencies with indifference curves are. The locus of such points is the Engel curve -- it's the mapping from wealth into the space of the two goods. That is, the Engel curve is (x(w), y(w)) where w is wealth and x() and y() are the amounts of each of the goods purchased at those levels of wealth. Hardle (1990) p 18 defines the Engel curve as the graph of average expenditure (e.g. on food) as a function of income. And on p 118, defines food expenditure as a function of total expenditure. The name refers to 19th century Prussian statistician Ernst Engel, according to Fogel (1979). Source: econterms Engel effects Changes in commodity demands by people because their incomes are rising. A generalization of Engel's law. Source: econterms Engel's law The observation that "the proportion of a family's budget devoted to food declines as the family's income increases." See also Engel effects. Source: econterms English open bid auction Sequential bidding game where the standing bid wins the item unless another, higher bid is submitted. Bidders can submit bids as often as they want to, and they observe (hear) all previous bids. Often, a new bid has to increase the standing bid by some minimal amount (advance). The English auction is known to have been in use since antique times; from this auction format the word derives: the latin word augere means to increase. With stastitically independent private valuations, an English auction is equivalent in terms of payoffs to a second price sealed bid auction. Source: SFB 504 entrenchment A possible description of the actions of managers of firms. Managers can make investments that are more valuable under themselves than under alternative managers. Those investments might not maximize shareholder value. So shareholders have a moral hazard in contracting with managers. Or, in the phrasing of Weisbach (1988): "Managerial entrenchment occurs when managers gain so much power that they are able to use the firm to further their own interests rather than the interests of shareholders." The abstract to Shleifer and Vishny, 1989, p 123, is nicely explicit: "By making manager-specific investments, managers can reduce the probability of being replaced, extract higher wages and larger perquisities from shareholders, and obtain more latitude in determining corporate strategy." Source: econterms EOE European Options Exchange Source: econterms Epanechnikov kernel The Epanechnikov kernel is this function: (3/4)(1-u2) for -1
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