Contractual Mix Between Cash and Kind Wages of Casual Workers in an Agrarian Economy

A two‐agent general‐equilibrium model is developed for explaining the mix of wage payment between cash and kind among landowners and workers. Its focus is on how, in the absence of insurance instruments but in the presence of heterogeneous tastes and attitudes toward risk among agents, the payment mix between cash and kind can serve as a welfare‐improving, risk‐hedging device. The model is used to determine how this optimal mix of wage payment would be affected by changes in risk‐aversion, consumption preferences, technology, price risk, and production risk. While the complexity and nonlinearity of the model make it impossible to obtain clear‐cut analytical results, simulation results are derived and shown to be rather robust. These results are also broadly supported by the findings of a small‐scale survey of agricultural wage contracts in India.     

The Production Life Cycle

Tasks in production have different dynamics from individuals products. We build a general equilibrium model where three forces (i.e., offshoring, learning, and wage) interact to determine how production fragmentation evolves over time. We show that the production process follows a life cycle: its fragmentation emerges, deepens, and converges. Our model is stylized and versatile, and it can be used to tractably characterize the loci of global output, productivity, welfare, and value‐added distribution as production fragmentation progresses.     

Resource allocation in a general equilibrium model of production under uncertainty

The purpose of this paper is to examine the implications of uncertainty for resource allocation, real income, and income distribution in terms of a simple two-sector general equilibrium model of a small country where uncertainty is introduced by assuming that production in one sector occurs in a stochastic environment. Assuming decreasing risk aversion, we show that an increase in uncertainty causes the movement of the resources away from the uncertain sector, a decline in expected real income, and a shift in the distribution of income against the factor employed intensively by the uncertain sector.     

Local public goods with mobility: Existence and optimality of a general equilibrium

The existence and optimality of a general equilibrium in a model with a finite number of locations among which the continuum of individuals (each individual belonging to one of a finite number of types) have to choose is investigated. Each community finances its own production of public goods by taxes. The way in which the tax burden in shared among the different types in the different regions is left arbitrary. The model allows for: restrictions on the mobility of either residents and/or workers, congestion and externalities in both production and consumption, commuting costs, preferences of an individual may also depend on his location as well as on the distribution of all individuals across locations.     

Price and quantity regulation in general equilibrium

We consider a general equilibrium model with a production externality (e.g. pollution), where the regulator does not observe firm productivity shocks. We examine quantity (permit) regulation and price (tax) regulation. The quantity of permits issued by the regulator are independent of the productivity shock, since shocks are unobserved. Price regulation implies use of the regulated input is an increasing function of the productivity shock because firms take advantage of a good productivity shock by increasing input use. Thus price regulation generates higher average, but more variable, production. Therefore, we show that in general equilibrium the relative advantage of quantity versus price regulation depends not only on the slopes of marginal benefits and costs, but on general equilibrium effects such as risk aversion. The general equilibrium effects are often more important than the slopes of the marginal benefits and cost curves. In the simplest model, a reasonable risk aversion coefficient implies quantity regulation generates higher welfare regardless of the benefit function.     

A general equilibrium model of production with a random marginal rate of substitution

This paper examines the qualitative effects of risk aversion in a two-sector general equilibrium model where uncertainty is due to random production in one of the sectors. Technology is more general than used previously and provides for a random marginal rate of substitution. Also, the possibility that risk is decreasing in factor usage is considered. Results show that earlier qualitative conclusions on the effects of changing risk may be reversed under these cases.     

Endogenous technological progress in a multi-sector growth model

This paper presents an endogenous growth model driven by human capital, where human capital can be allocated across three sectors: the production of the final consumption good, the educational sector and the production of technological capital (in the form of knowledge or ideas). In our model, which also includes public expenditure and population growth, labor augmenting technical progress is endogenous and this enriches the transitional dynamics of the economy. With respect to ideas-based growth models, we assume knowledge is produced according to a neoclassical technology, combining ideas and human capital. Such an assumption is motivated by empirical works showing the existence of significant decreasing returns in the creation of ideas at the aggregate level (as Kortum, 1993; and Pessoa, 2005) and of the weak relationship between some inputs of the knowledge production process (as the number of researchers) and the total factor productivity growth rate (as Jones, 2002). Under some general conditions, this economy exhibits the existence of a steady state equilibrium and an unstable multidimensional manifold. Numerical examples are provided to show the existence of stable arms.     

POLITICALLY REALISTIC IMPLEMENTATION WITH INSPECTION: THE EQUITY-HONESTY-WELFARE TRADE-OFF

We study dominant strategy mechanisms where the planner knows the distribution of types and the agents are instructed to announce their types to the planner. It is assumed that the planner has access to a technology of inspection which is costly but perfect, and that he can penalize an agent who is inspected after announcements have been made if he is found to have lied about his type. It shall be shown that, in general, the welfare-maximizing mechanism that respects minimal equity will induce some agents to lie about their types.     

Rent, risk, and replication: Preference adaptation in winner-take-all markets

We study the evolution of an economy where agents who are heterogeneous with respect to risk attitudes can either earn a certain income or enter a risky rent-seeking contest. We assume that agents behave rationally given their preferences, but that the population distribution of preferences evolves over time in response to material payoffs. We show that, in particular, initial distributions with full support converge to stationary states where all types are still present. Although rents are perfectly dissipated in material terms at a steady state, efficiency is greater than if everybody had been risk neutral, since risk lovers specialize in rent seeking.     

Unawareness and bankruptcy: A general equilibrium model

Summary. We present a consistent pure-exchange general equilibrium model where agents may not be able to foresee all possible future contingencies. In this context, even with nominal assets and complete asset markets, an equilibrium may not exist without appropriate assumptions. Specific examples are provided. An existence result is proved under the main assumption that there are sufficiently many states that all the agents foresee. An intrinsic feature of the model is bankruptcy, which agents may involuntarily experience in the unforeseen states. Received: April 23, 1997; revised version: May 19, 1997     

Stochastic strategy adjustment in coordination games

Summary. The paper explores a model of equilibrium selection in coordination games, where agents from an infinite population stochastically adjust their strategies to changes in their local environment. Instead of playing perturbed best-response, it is assumed that agents follow a rule of ‘switching to better strategies with higher probability’. This behavioral rule is related to bounded-rationality models of Rosenthal (1989) and Schlag (1998). Moreover, agents stay with their strategy in case they successfully coordinate with their local neighbors. Our main results show that both strict Nash equilibria of the coordination game correspond to invariant distributions of the process, hence evolution of play is not ergodic but instead depends on initial conditions. However, coordination on the risk-dominant equilibrium occurs with probability one whenever the initial fraction contains infinitely many agents, independent of the spatial distribution of these agents. Received: March 14, 2000; revised version: June 21, 2001     

Disaggregated approach to government spending shocks: a theoretical analysis

We calibrate a dynamic stochastic general equilibrium model that features a transmission mechanism with different types of government spending, while the literature usually treats government spending as a homogenous compound. In this regard, we manage to distinguish between different types of government spending (namely: government investment, government wage component consumption and non-wage component consumption) where each type of spending has a varied role in the economy. The government wage increase has the largest positive effect both on private consumption and output by affecting the economy through the government production. This is a natural consequence of government production being complementary to private consumption in our model. Other two government spending types, namely government non-wage consumption and government investment, also have positive effects on output, whereas their responses on (private) consumption are mostly negative. These results provide an alternative explanation for the wide range of multipliers existing in the literature as our setup enables them to produce different effects on macroeconomic variables.     

Optimism and firm formation

This paper analyses firm formation and innovation in an economy where agents differ with respect to their optimism in the face of ambiguity. Individuals choose between starting a firm or working in one; and also between employing a traditional technology or a new technology about which little is known. In the face of ambiguity, decision-makers are either optimistic or pessimistic. We study the innovation-proof equilibria of the economy: wages clear all labor markets when agents make optimal occupational choices, and no mutually beneficial opportunity for innovation remains unexploited. In equilibrium, optimists are more likely to form firms, but also more likely to be workers in firms using the ambiguous technology. This phenomenon sheds new light on the relationship between firm culture and technology. We find that three types of firms emerge in equilibrium: entrepreneurial firms, where both owners and workers are optimists operating a highly ambiguous technology; traditional firms, where an optimistic owner employs a pessimistic worker and uses a less ambiguous technology; and bureaucratic firms where both owners and workers are pessimists employing a well-known technology. We also suggest how the relative scarcity of the optimists may help to explain the commonly observed S-shaped diffusion profile for successful innovations.     

Unequal opportunities and human capital formation

This paper develops a tractable, heterogeneous agents general equilibrium model where individuals have different endowments of the factors that complement the schooling process. The paper explores the relationship between inequality of opportunities, inequality of outcomes, and aggregate efficiency in human capital formation. Using numerical solutions we study how the endogenous variables of the model respond to two different interventions in the distribution of opportunities: a mean-preserving spread and a change in the support. The results suggest that a higher degree of inequality of opportunities is associated with lower average level of human capital, a lower fraction of individuals investing in human capital, higher inequality in the distribution of human capital, and higher wage inequality. In particular, the model does not predict a trade-off between aggregate efficiency in human capital formation (as measured by the average level of human capital in the economy) and equality of opportunity.     

A general equilibrium analysis of corporate control and the stock market

This paper studies a general equilibrium model with an investor-controlled firm. Shareholders can vote on the firm??s production plan in an assembly if they dislike management??s decision. Prior to that they may trade shares on the stock market. Since stock market trades determine the distribution of votes, trading is strategic. There is always an equilibrium, where share trading leads to an ownership structure that supports competitive behavior. But there may also be equilibria, where monopolistic behavior prevails.     

Endogenous residual claimancy by vertical hierarchies

In this note we study a model of vertical hierarchies where the allocation of residual claimancy is endogenous and is determined jointly with production and contractual decisions. We show that the (equilibrium) allocation of residual claimancy may be affected by production externalities across hierarchies in a non-trivial manner. Specifically, although revenue-sharing contracts foster agents’ (non-contractible) surplus enhancing effort, we show that principals dealing with exclusive and privately informed agents might still prefer to retain a share of the surplus from production when dealing with inefficient (high-cost) types. This is because reducing the surplus share of those types reduces the information rent given up to efficient (low-cost) types by means of a ‘generalized competing contracts’ effect.     

KNOWLEDGE CREATION AS A SQUARE DANCE ON THE HILBERT CUBE*

This article presents a micromodel of knowledge creation through the interactions among a group of people. The model features myopic agents in a pure externality model of interaction. Surprisingly, for a large set of initial conditions we find that the equilibrium process of knowledge creation converges to the most productive state, where the population splits into smaller groups of optimal size; close interaction takes place within each group only. This optimal size is larger as heterogeneity of knowledge is more important in the knowledge production process. Equilibrium paths are found analytically; they are a discontinuous function of initial heterogeneity.     

A simple model of homophily in social networks

Biases in meeting opportunities have been recently shown to play a key role for the emergence of homophily in social networks (see Currarini et al., 2009). The aim of this paper is to provide a simple microfoundation of these biases in a model where the size and type-composition of the meeting pools are shaped by agents׳ socialization decisions. In particular, agents either inbreed (direct search only to similar types) or outbreed (direct search to population at large). When outbreeding is costly, this is shown to induce stark equilibrium behavior of a threshold type: agents “inbreed” (i.e. mostly meet their own type) if, and only if, their group is above certain size. We show that this threshold equilibrium generates patterns of in-group and cross-group ties that are consistent with empirical evidence of homophily in two paradigmatic instances: high school friendships and interethnic marriages.     

Asset trading volume in a production economy

Judd et al. (J Finance 63: 2203–2217, 2003) show that the stationary Lucas tree model cannot generate nontrivial asset trading: Heterogenous agents will optimally choose a fixed portfolio after initial rebalancing. This paper explores asset trading volume in production economies with heterogeneous agents and dynamically complete market structures. We establish a recursive version of the Negishi approach to prove the existence of a competitive equilibrium. Furthermore, we develop a general method to solve for equilibrium portfolios in production economies within a fairly general set of complete market structures. We thus establish the theoretical reasons why production economies in general generate a nontrivial volume of asset trading even if heterogeneity of the agents is kept to a minimum. We would like to thank W. Brock, D. DeJong and, especially, H. Ennis for comments and suggestions. We also thank seminar participants at Di Tella and San Andrés Universities (Argentina), the Institute for Advanced Studies (Austria), SED Meetings 2005 (Budapest) and SAET Conference 2005 (Vigo).     

The Home Bias in Equities and Distribution Costs

We show that incorporating distribution costs into a general equilibrium model of international portfolio choice helps to explain the home bias in international equity investment. Our model is able to replicate observed investment positions for a wide range of parameter values, even if agents have an incentive to hedge labor income risk by purchasing foreign equity. This is because the existence of a retail sector affects both the correlation of domestic returns with the domestic price level and the correlation between financial and non‐financial income.