Repeated auctions of franchises for nonrenewable resources

In maximizing the net total government take from exploitation of nonrenewable natural resource endowments, the government faces the problem that extraction companies possess private information about extraction capacities (adverse selection). In a repeated auctions model, I show that it is optimal to deviate from bidding parity, even in the absence of moral hazard. The second period auction is biased to mitigate the externality problem that stems from intertemporal dynamics in extraction costs.This research has been financed by the Research Council of Norway. I would like to thank K»re P, Hagen, Geir B. Asheim, Diderik Lund, and two anonymous referees for helpful comments. I have also benefited from comments at a seminar at the Norwegian School of Economics and Business Administration, and at the International Institute of Public Finance (IIPF), 51st congress, Lisbon, August 1995. The paper is a refined version of Discussion paper 1/95, Institute of Economics, Norwegian School of Economics and Business Administration.     

Ascending auctions for multiple objects: the case for the Japanese design

Summary. We consider two ascending auctions for multiple objects, namely, an English and a Japanese auction, and derive a perfect Bayesian equilibrium of the Japanese auction by exploiting its strategic equivalence with the survival auction, which consists of a finite sequence of sealed-bid auctions. Thus an equilibrium of a continuous time game is derived by means of backward induction in finitely many steps. We then show that all equilibria of the Japanese auction induce equilibria of the English auction, but that many collusive or signaling equilibria of the English auction do not have a counterpart in the Japanese auction.Received: 2 September 2004, Revised: 20 April 2005, JEL Classification Numbers: C72, D44.Fabrizio Germano: Correspondence toWe are indebted to Philippe Jehiel for useful discussions and to Nicolas Vieille for suggestions in the proof of Proposition 2; we also thank seminar audiences in Athens, Basel, Beer-Sheva, Berlin, Brussels, Cambridge, Edinburgh, Exeter, Lausanne, Lisbon, London, Louvain-la-Neuve, Namur and Tel Aviv. Germano acknowledges financial support from Euopean Commission, TMR Network Grant ERBFMRXCT0055, “Cooperation and Information” as well from the Spanish Ministry of Science and Technology, Grants SEC2001-0792, SEJ2004-06319, and in form of a Ramon y Cajal Fellowship. Lovo is member of GREGHEC, unité CNRS, FRE-2810. The support of the Economic and Social Research Council (ESRC) is also gratefully acknowledged. The work was part of the programme of the ESRC Research for Economic Learning and Social Evolution.     

Schumpeter and the revival of evolutionary economics: an appraisal of the literature

During the last two decades we have seen a revival of interest in the works of Joseph Schumpeter and “evolutionary” ideas in economics more generally. A professional society honouring Schumpeter's name has been founded, and linked to it we have had for more than fifteen years now a professional journal devoted to this stream of thought. However, it has been argued that, despite these developments, the link between Schumpeter's own work and the more recent contributions to evolutionary economics is in fact rather weak. This paper considers this claim. Based on an analysis of Schumpeter's contribution to economics the paper presents an overview and assessment of the more recent literature in this area. It is argued that although there are important differences between Schumpeter's work and some of the more recent contributions, there nevertheless remains a strong common core that clearly distinguishes the evolutionary stream from other approaches (such as, for instance, so-called “new growth theory”). RID="*" ID="*" Many people have contributed to this paper in various ways. Jon Hekland at the Norwegian Research Council started it all by asking me to make an overview of the contribution from “evolutionary economics” to our understanding of contemporary economies. Several people helped me on the way by supplying written material, comments and suggestions, and I am indebted to all of them. Brian Arthur, Stan Metcalfe, Keith Pavitt, Erik Reinert, Paolo Saviotti and Bart Verspagen may be particularly mentioned. A preliminary version was presented at the conference “Industrial R&D and Innovation Policy Learning – Evolutionary Perspectives and New Methods for Impact Assessment” organised by the Norwegian Research Council (“SAKI”) at Leangkollen, Asker, April 18–19.2002. I wish to thank the discussant, Tor Jakob Klette, and the participants at the conference for useful feedback. Moreover I have benefited from comments and suggestions from the editors and referees of this journal. The final responsibility is mine, however. Economic support from the Norwegian Research Council (“SAKI”) is gratefully acknowledged.     

A theory of capital gains taxation and business turnover

We present a theory concerning the realization of capital gains where ownership and control are linked as in Holmes and Schmitz (J. Pol. Econ. 103: 1005–1038, 1995). The model developed is a version of a Lucas-tree economy in which the productivity of a technology depends on the ownership of the technology. The existence and uniqueness of equilibrium follow from the Contraction Mapping Theorem. The theory implies that impediments to asset trading, such as capital gains taxation, negatively affect production efficiency. Moreover, we calibrate the model economy to U.S. data on small-business turnover and find that indexing deductions for inflation is capable of increasing capital-gains tax revenues. We thank an anonymous referee for helpful comments, and well as Tom Holmes, Ed Prescott, Jim Schmitz and Neil Wallace for insightful conversations. Cavalcanti is grateful for financial support from CNPq, as well as the hospitality from the University of Toronto during his visiting appointment at the Department of Economics in 2006. Erosa acknowledges the support from the Institute for Policy Analysis at the University of Toronto and the Social Sciences and Humanities Research Council of Canada.     

The all-pay auction with complete information

Summary In a (first price) all-pay auction, bidders simultaneously submit bids for an item. All players forfeit their bids, and the high bidder receives the item. This auction is widely used in economics to model rent seeking, R&D races, political contests, and job promotion tournaments. We fully characterize equilibrium for this class of games, and show that the set of equilibria is much larger than has been recognized in the literature. When there are more than two players, for instance, we show that even when the auction is symmetric there exists a continuum of asymmetric equilibria. Moreover, for economically important configurations of valuations, there is no revenue equivalence across the equilibria; asymmetric equilibria imply higher expected revenues than the symmetric equilibrium.We are grateful to Jacques Crémer, Chuangyin Dang, Jürgen Dennert, Chaim Fershtman, Martin Hellwig, Arthur Robson, Heinrich Ursprung, Eric van Damme, Ton Vorst, and the referees for helpful comments. We benefitted from presentations at the World Congress of the Econometric Society in Barcelona, the European Meeting on the Economics of Information at Tilburg University, the Midwest Mathematical Economics Meetings at the University of Illinois, and seminars at Texas A&M University, The Pennsylvania State University, Tilburg University and the University of Montreal. Baye is grateful for support from the CentER for Economic Research at Tilburg University and the Tinbergen Institute where earlier versions of this paper were completed. Kovenock acknowledges support from Erasmus Universiteit Rotterdam, the Tinbergen Institute, the Center for Economic Studies at the University of Munich, the Institut d'Analisi Economica CSIC at the Universitat Autonoma de Barcelona, the Krannert School of Management, and the Jay N. Ross Young Faculty Scholar Award.     

Bertrand-Edgeworth duopoly with unit cost asymmetry

Summary This paper characterizes the set of Nash equilibria in a price setting duopoly in which firms have limited capacity, and in which unit costs of production up to capacity may differ. Assuming concave revenue and efficient rationing, we show that the case of different unit costs involves a tractable generalization of the methods used to analyze the case of identical costs. However, the supports of the two firms' equilibrium price distributions need no longer be connected and need not coincide. In addition, the supports of the equilibrium price distributions need no longer be continuous in the underlying parameters of the model.As an application of our characterization, we examine the Kreps-Scheinkman model of capacity choice followed by Bertrand-Edgeworth price competition and show that, unlike in the case of identical costs, Cournot equilibrium capacity levels need not arise as subgame-perfect equilibria. The low-cost firm has greater incentive to price its rival out of the market than exists under Cournot behavior.We are grateful to Joseph Harrington, Marie Thursby, Casper de Vries and, especially, William Novshek for helpful discussions and comments. Thomas Faith and Ioannis Tournas provided valuable research assistance. This paper was presented at the Winter Meetings of the Econometric Society in December 1988, the Midwest Mathematical Economics Conference in April 1989, the Sixteenth Annual Congress of the European Association for Research in Industrial Economics in August 1989, the European Meetings of the Econometric Society in September 1989, and in seminars at the Ecole Nationale des Ponts et Chaussées, Erasmus University Rotterdam, Indiana University, INSEAD, Texas A&M University, Tilburg University, the University of Bonn and the University of Florida. Deneckere acknowledges financial support through National Science Foundation Grant SES-8619012 and the Kellogg Graduate School of Management's Beatrice/Esmark Research Chair. Kovenock acknowledges financial support through Erasmus University Rotterdam, the Purdue Research Foundation, the Ford Motor Company Fund, and an Ameritech Foundation Summer Faculty Research Grant.     

Constant per capita consumption paths with exhaustible resources and decaying produced capital

We introduce decay in produced capital and exogenous technical progress to the recent “Solow Model” of Asheim et al. with population growth and observe the possible collapse of the economy given too high a rate of decay. “Enough” technical progress can restore sustainable per capita consumption.     

Using volume to prove Sperner’s Lemma

We provide a novel proof of Sperner’s Lemma that is intuitive and elementary if certain simple properties of Lebesgue measure are known. The research of A. McLennan is partly funded by the Australian Research Council grant DP0773324. This paper was partly written while he was a member of the Discipline of Economics, The University of Sydney. McLennan also gratefully acknowledges the hospitality of the Economic Theory Center of the University of Melbourne. The research of R. Tourky is partly funded by the Australian Research Council grant A00103450. This paper was partly written while he was a member of the Department of Economics, Purdue University.     

Resolving distributional conflicts between generations

Summary. We describe a new approach to the problem of resolving distributional conflicts between an infinite and countable number of generations. We impose conditions on the social preferences that capture the following idea: If preference (or indifference) holds between truncated paths for infinitely many truncating times, then preference (or indifference) holds also between the untruncated infinite paths. In this framework we use such conditions to (1) characterize different versions of leximin and utilitarianism by means of equity conditions well-known from the finite setting, and (2) illustrate the problem of combining Strong Pareto and impartiality in an intergenerational setting.Received: 8 May 2002, Revised: 12 June 2003, JEL Classification Numbers: D63, Q01.Correspondence to: Geir B. AsheimWe thank Kaushik Basu, Marc Fleurbaey, David Miller, Tapan Mitra, Lars-Gunnar Svensson, and an anonymous referee for helpful comments. Asheim gratefully acknowledges the hospitality of the Stanford University research initiative on the Environment, the Economy and Sustainable Welfare, and financial support from the Hewlett Foundation through this research initiative.     

Mean-Gini analysis of stochastic externalities: The case of groundwater contamination

The mean-Gini approach is used to analyze stochastic externalities generated by agricultural production. The model addresses the problem of groundwater pollution caused by excessive fertilizer application. Inherent in the mean-Gini approach to expected utility maximization is a two-fold value: the simplicity of the two-parameter mean-variance model and satisfaction of necessary and sufficient conditions for stochastic dominance. Price and quantity policy recommendations to control externalities are formulated based upon the relative assessment of uncertainty by the regulatory authority and the farmers. Using the Gini as a measure of risk allows for the quantification of control policy measures under differentiated risk aversion and multiple sources of pollution. The model shows that when producers underestimate uncertainty, quota policies restricting fertilizer are more efficient than tax policies in reducing groundwater contamination.Work on this paper was carried out when visiting the University of Maryland. Financial aid for the work was provided by the USDA ERS-NRED under a cooperative agreement between the Department of Agricultural and Resource Economics, University of Maryland, and the USDA — Economic Research Service — Natural Resource Economics Division, I am grateful to John Miranowski and Darrell Hueth for that support. I am indebted as well to Lana Shalit, who helped me revise the paper.     

Expectations,substitution, and scrapping in a putty-clay model

The paper presents a framework for analyzing the effect of changing expectations about future prices on a firm's choice of technique, and on its anticipated scrapping of capital equipment. Assuming a putty-clay technology, particular attention is paid to the way in which the scrapping age depends on the degree of ex ante input substitution. Numerical illustrations — based on data for Norwegian manufacturing for the years 1964–1983, an ex ante technology represented by a Generalized Leontief cost function in materials, energy, labor, and capital, and an ARMA representation of the price expectation mechanism — are presented. The results indicate that the price changes in this period may have had a substantial impact on planned scrapping, and on the chosen production techniques.     

Asset markets and the information revealed by prices

Summary When nominal assets serve to transfer revenues across states of the world, noninformative rational expectations equilibria exist. At noninformative prices, the restricted information under which individuals optimize can be modelled as restricted participation of the individuals in asset markets. When assets are nominal, the indeterminacy of equilibrium prices, and, generically, allocations as well, which characterizes economies with restricted participation guarantees that noninformative equilibrium prices exist.This work was supported in part by grant No 26 from the program Pole d' Attraction Interuniversitaire — Deuxieme phase of the Belgian government of CORE, Universite' Catholique De Louvain. The second author acknowledges the generous support of the Graduate School of Business of Columbia University. We wish to thank David Cass for very helpful comments.     

Portfolio delegation under short-selling constraints

Summary. In this paper we study delegated portfolio management when the manager’s ability to short-sell is restricted. Contrary to previous results, we show that under moral hazard, linear performance-adjusted contracts do provide portfolio managers with incentives to gather information. We find that the risk-averse manager’s effort is an increasing function of her share in the portfolio’s return. This result affects the risk-averse investor’s choice of contracts. Unlike previous results, the purely risk-sharing contract is now shown to be suboptimal. Using numerical methods we show that under the optimal linear contract, the manager’s share in the portfolio return is higher than what it is under a purely risk sharing contract. Additionally, this deviation is shown to be: (i) increasing in the manager’s risk aversion and (ii) larger for tighter short-selling restrictions. As the constraint is relaxed the deviation converges to zero.Received: 25 July 2002, Revised: 12 December 2004, JEL Classification Numbers: D81, D82, J33.Juan-Pedro Gómez: Correspondence toAn earlier version of the paper was circulated under the title “Providing Managerial Incentives: Do Benchmarks Matter?” We are grateful to an anonymous referee whose comments helped to improve the paper. We also thank comments by Viral Acharya, Alexei Goriaev, Ernst Maug, Kristian Rydqvist, Neil Stoughton, Rangarajan Sundaram, Fernando Zapatero and seminar participants at the 1999 SED meetings in Sardinia, the 1999 Workshop in Mutual Fund Performance at EIASM, Brussels, the 2000 EFA meetings in London, the Bank of Norway, the Stockholm Schools of Economics, the Norwegian School of Management and the 2001 WFA meetings in Tucson. Sharma gratefully acknowledges financial support from the Asociacion Mexicana de Cultura.     

Some empirical evidence on the ‘discouraged worker’ effect

This note produces empirical evidence on the existence of a significant ‘discouraged worker’ effect in US data–namely, on the tendency for groups of secondary workers to move in and out of the labor force with the business cycle, looking for jobs when these are available, while giving up job search during recessions — by focusing on the behavior of the ‘not in the labor force’ series, as well as of two of its segments (‘going to school’, and ‘keeping house’), at the business-cycle frequencies. Both in the aggregate, and for a number of age–sex groups, the series display a clear counter-cyclical pattern, thus lending support to the discouraged worker notion.     

Markovian equilibrium in a class of stochastic games: existence theorems for discounted and undiscounted models

Summary We study a strategic version of the neoclassical growth model under possible production uncertainty. For a general specification of the problem, we establish (i) the existence of stationary Markov equilibria in pure strategies for the discounted game, and (ii) the convergence, under a boundedness condition, of discounted equilibrium strategies to a pure strategy stationary Markovian equilibrium of the undiscounted game as the discount factor tends to unity. The same techniques can be used to prove that such convergence also obtains in all finitestate, finite-action stochastic games satisfying a certain full communicability condition. These results are of special interest since there are well known examples in the literature in which the limit of discounted equilibria fails to be an equilibrium of the undiscounted game.We are grateful to Marcus Berliant, M. Ali Khan, Mukul Majumdar, and an anonymous referee for helpful suggestions, and to Bonnie Huck for technical assistance. The first author acknowledges research support from the Columbia University Council for the Social Sciences.     

Indefinitely sustained consumption despite exhaustible natural resources

Summary This paper analyzes the feasibility of sustaining uniformly positive consumption forever — even when flows of exhaustible resources are an indispensable input. The main result is a characterization of an economy's capability for sustaining such consumption — under quite general maintained assumptions on technology — in terms of a single, simple capital-resource substitution condition.This is a revised version of CARESS Working Paper #79-27. An even earlier preliminary paper by Mitra [1] contained the seminal idea developed more thoroughly here. Both of our research efforts were supported by the NSF, while much of Cass's participation took place during his tenure as a Sherman Fairchild Distinguished Scholar at Caltech. We thank both institutions for their support and encouragement.     

Equivalence of Lindahl equilibrium with participation prices and the core

Summary In a model of an economy with multiple public goods and differentiated crowding, it is shown that asymptotically the core has the equal treatment property and coincides with the equilibrium outcomes. It follows that all individuals of the same type in the same jurisdiction must pay the same Lindahl taxes and, with strict convexity of preferences, the same Lindahl prices. With only one private good, for sufficiently large economies we show (a) the equivalence of the core and the set of equilibrium outcomes and (b) the nonemptiness of approximate cores and their equivalence to the set of approximate equilibrium outcomes.The author is indebted to Vicky Barham, John Conley, Hideo Konishi, Julian Manning and Roma Jakiwczyk for comments on an earlier draft of this paper. The author gratefully acknowledges the research support of the Social Sciences and Humanities Research Council of Canada.     

Implementing cooperative solution concepts: a generalized bidding approach

This paper provides a framework for implementing and comparing several solution concepts for transferable utility cooperative games. We construct bidding mechanisms where players bid for the role of the proposer. The mechanisms differ in the power awarded to the proposer. The Shapley, consensus and equal surplus values are implemented in subgame perfect equilibrium outcomes as power shifts away from the proposer to the rest of the players. Moreover, an alternative informational structure where these solution concepts can be implemented without imposing any conditions of the transferable utility game is discussed as well. The authors thank Yukihiko Funaki, Andreu Mas-Colell, David Pérez-Castrillo and Jana Vyrastekova for helpful discussions. We also appreciate the comments from the seminar and conference participants at Keele University, Tilburg University, University of Haifa, University of Warwick, CORE at Louvain-la-Neuve, Catholic University Leuven, Pablo de Olavide University in Seville, University of Vigo, the 2006 Annual Conference of the Israeli Mathematical Union in Neve Ilan, Israel, and the 61st European Meeting of the Econometric Society in Vienna, Austria in 2006. In particular, we are grateful to the associate editor and an anonymous referee. Their valuable comments and constructive suggestions contributed to a significant improvement of the paper. Wettstein acknowledges the financial support of the Pinchas Sapir Center for Development in Tel Aviv University.     

The Stability of Monetary Unions: Lessons from the Breakup of Czechoslovakia

In 1993, Czechoslovakia experienced a two-step breakup. On January 1, the country disintegrated as a political union, while preserving an economic and monetary union. Then, the Czech–Slovak monetary union collapsed on February 8. This paper analyzes the economic background of the two breakups from the perspective of the optimum currency area literature. The main finding is that the Czech and Slovak economies were vulnerable to asymmetric economic shocks, such as those induced by the economic transition. In particular, the stability of Czechoslovakia was undermined by the low correlation of permanent output shocks, low labor mobility, and higher concentration of heavy and military industries in Slovakia. J. Comp. Econom., December 1999, 27(4), pp. 753–781. Center for European Integration Studies (ZEI), University of Bonn, Walter-Flex-Strasse 3, 53113 Bonn, Germany, and Center for Economic Research, Tilburg University, Netherlands; Academia Istropolitana Nova, Bratislava, Slovakia, Central European University, Nador u. 9, 1051 Budapest, Hungary, and Center for European Integration Studies (ZEI), University of Bonn, Bonn, Germany; Institute for Advanced Studies (IHS), Stumpergasse 56, 1060 Vienna, Austria.