Paul Krugman might like Roger Myerson's New Paper . Chicago's Most Recent Nobel Laureate writes down a model in which it can be pareto optimal for the taxpayers to bail out the bankers! Will everyone at Chicago celebrate this new paper?
I skimmed this paper and it is certainly interesting but as a retired theorist I have a basic question. How are we to judge this model? As other researchers write down their models of the crisis, how do we go about ranking them? In the original Real Business Cycle literature, the macro guys generated data based on their models and compared it to actual time series. The "distance" between the predicted and actual data was used to rank the models. Will a similar metric be used here?
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