The Equivalence of Wage and Price Staggering in Monetary Business Cycle Models

This paper considers the persistence puzzle documented by V. Chari, P. Kehoe, and E. McGratten (2000, Econometrica68, 1151–1179). Specifically, it addresses a claim by T. Andersen (1998, European Economic Review42, 593–603) and K. Huang and Z. Liu (1999, “Staggered Contracts and Business Cycle, Persistence,” Federal Reserve Bank of Minneapolis Discussion Paper 127) that staggered-wage models are better able to generate persistent real responses to monetary shocks than are staggered-price models. The paper argues that this result hinges on the assumption of homogeneous factor markets and shows that by assuming firm-specific factor inputs the staggered-price model is as capable as the staggered-wage model is of generating persistent real responses to monetary shocks. Journal of Economic Literature Classification Numbers: E24, E31, E32     

Price Level Determinacy under a Pure Interest Rate Peg

In this article we reexamine a famous result by T. J. Sargent and N. Wallace (1975, Journal of Political Economy83, 241–254) according to which a “pure interest rate peg” leads to nominal price indeterminacy. We use P. Weil's (1991, International Economic Review32, 37–53) generalization of the Sidrauski–Brock model, where arrival of new “generations” of infinitely lived agents is allowed, and we obtain the following results: (i) Nominal indeterminacy holds in the traditional Sidrauski–Brock framework; (ii) This nominal indeterminacy disappears as soon as new generations arrive in time, via some rigorous version of Patinkin's “real balance effect”; (iii) A multiplicity of solutions may still remain, but full determinacy occurs in some cases, depending notably on fiscal policy or the distribution of endowments in time. Journal of Economic Literature Classification Numbers: E4, E5     

Political system and economic efficiency: The east European context

Sections 1 and 2 reexamine the proposition about democratization of socialism as a factor of economic efficiency—in the light of the challenge contained in the article by Stanislaw Gomutka, “Economic Factors in the Democratization of Socialism and the Socialization of Capitalism” (J. Comp. Econ., Dec. 1977, 1, 4:389–406). The author takes issue with Gomulka's conclusions, which view democracy as of little relevance for economic efficiency under socialism. Dissident views on the link between democracy and efficiency are discussed. Section 3 goes beyond this controversy in an attempt to analyze the prospects and efficiency aspects of a limited change within the existing Soviet-type political system (“Kadarism”).     

Does Intrinsic Habit Formation Actually Resolve the Equity Premium Puzzle?

G. M. Constantinides (1990, Journal of Political Economy98, 519–543) describes a simple model of intrinsic habit formation that appears to resolve the “equity premium puzzle” of R. Mehra and E. C. Prescott (1985, Journal of Monetary Economics15, 145–161). This finding is particularly important, since it has motivated a broader consideration of the implications of habit formation preferences in dynamic equilibrium models. However, consumption growth actually behaves very differently pre- and post-1948, and the explanatory power of the habit formation model is driven by the pre-1948 data. Using data from 1949 to 2000, constructed in a manner comparable to R. Mehra and E. C. Prescott, I demonstrate that intrinsic habit cannot rationalize the unconditional moments of discrete consumption and real asset returns with values of the risk aversion coefficient that are less than four times larger than the values found by G. M. Constantinides for any feasible calibration of the model. Journal of Economic Literature Classification Numbers: E21, G12.     

Starting Small and Commitment

I study a model of a long-term partnership with two-sided incomplete information. The partners jointly determine the stakes of their relationship and individually decide whether to cooperate with or betray each other over time. I characterize the extremal—interim incentive efficient—equilibria. In these equilibria, the partners generally “start small,” and the level of interaction grows over time. The types of players separate quickly. Further, cooperation between “good” types is viable regardless of how pessimistic the players are about each other initially. The quick nature of separation in an extremal equilibrium contrasts with the outcome selected by a strong renegotiation criterion (as studied in Watson (1999, J. Econ. Theory85, 52–90). Journal of Economic Literature Classification Numbers: C72, C73, D74.     

How Communication Improves Efficiency in Bargaining Games

We study a double auction with two-sided private information and preplay communication, for which Myerson and Satterthwaite (1983, J. Econ. Theory28, 265–281) showed that all equilibria are inefficient and the Chatterjee–Samuleson linear equilibrium is most efficient. Like several others, we find that players use communication to surpass equilibrium levels of efficiency, especially when the communication is face-to-face. Our main contribution is an analysis of how communication helps the parties achieve such high levels of efficiency. We find that when preplay communication is allowed, efficiency above equilibrium levels is a result of what we call “dyadic” strategies that allow the parties to coordinate on a single price that reflects both parties' valuations. Journal of Economic Literature Classification Numbers: C78, D82.     

The Perils of Taylor Rules

Since John Taylor's (1993, Carnegie–Rochester Conf. Ser. Publ Policy39, 195–214), seminal paper, a large literature has argued that active interest rate feedback rules, that is, rules that respond to increases in inflation with a more than one-for-one increase in the nominal interest rate, are stabilizing. In this paper, we argue that once the zero bound on nominal interest rates is taken into account, active interest rate feedback rules can easily lead to unexpected consequences. Specifically, we show that even if the steady state at which monetary policy is active is locally the unique equilibrium, typically there exist an infinite number of equilibrium trajectories originating arbitrarily close to that steady state that converge to a liquidity trap, that is, a steady state in which the nominal interest rate is near zero and inflation is possibly negative. Journal of Economic Literature Classification Numbers: E52, E31, E63.     

Mutual Insurance,Individual Savings,and Limited Commitment

We examine a dynamic model of mutual insurance when households can also engage in self-insurance by storage. We assume that there is no enforcement mechanism, so that any insurance is informal and must be self-enforcing. We show that consumption allocations satisfy a modified Euler condition and that an enhanced storage technology can either improve or diminish welfare. Furthermore we show that the ex ante transfers introduced into dynamic informal insurance models recently by Gauthier et al. (Gauthier, C., Poitevin, M., and González, P. (1997). Journal of Economic Theory76, 106–144) are only used here in the first period, with the role of ex ante transfers being replaced by differential individual storage. Journal of Economic Literature Classification Numbers: C61, C73, D90, E21.     

Generic 4 × 4 Two Person Games Have at Most 15 Nash Equilibria

The maximal generic number of Nash equilibria for two person games in which the two agents each have four pure strategies is shown to be 15. In contrast to Keiding (1997),Games Econ. Behav.21, 148–160, who arrives at this result by referring to the enumeration of Grünbaum and Sreedharan (1967),J. Combin. Theory2, 437–465, our argument is based on a collection of lemmas that constrain the set of equilibria. Several of these pertain to any common numberdof pure strategies for the two agents.Journal of Economic LiteratureClassification Number: C72.     

Business Cycle Asymmetries: International Evidence

This paper uses the Triples test of Randles et al. (1980, Journal of the American Statistical Association, 75, 168–172) to detect asymmetries in U.S. as well as international GDP fluctuations. The test does not detect any asymmetry in the distribution of the U.S. GDP, which is consistent with previous empirical findings. However, significant asymmetries are found in international data. Detection of asymmetries is a first step toward model-selection process such that stylized facts can be replicated. Journal of Economic Literature Classification Numbers: E3, E32, C14.     

Job Matching and Coalition Formation with Utility or Disutility of Co-workers

This paper studies the job matching market in Kelso and Crawford (1982), Econometrica50, 1483–1504, with one exception, that co-workers may generate utility or disutility in the workplace. We provide a simple idea to show how a great number of sufficient conditions for a nonempty core in the literature can be extended to this labor market. A generalized competitive equilibrium with a tax/subsidy system is also discussed. Journal of Economic Literature Classification Number: D71.     

Zermelo and the Early History of Game Theory

In the modern literature on game theory there are several versions of what is known as Zermelo's theorem. It is shown that most of these modern statements of Zermelo's theorem bear only a partial relationship to what Zermelo really did. We also give a short survey and discussion of the closely related but almost unknown work by König (1927, Acta Sci. Math. Szeged, 3, 121–130) and Kálmar (1928/29, Acta Sci. Math. Szeged, 4, 65–85). Their papers extend and considerably generalize Zermelo's approach. A translation of Zermelo's paper is included in the Appendix. Journal of Economic Literature Classification Numbers: B19; C70; C72.     

Local versus Global Assessment of Mobility*

Mobility indices are popular tools designed to quantify the extent of income changes by aggregating “local” distributional change into a “global” scalar according to some rule. For some mobility measures, this aggregation rule is only implicit in their standard definition. We derive an insightful approximation to the (statistical) aggregation rule for the important class of mobility indices introduced by Shorrocks (Journal of Economic Theory 19 (1978), 376–93) and further generalized by Maasoumi and Zandvakili (Economic Letters 22 (1986), 97–102), which enables us to characterize their normative properties. We also develop methods for estimation and inference. A substantive empirical contribution emerges from the comparison of mobility between the United States and Germany. Our methods reveal why income mobility is higher in Germany than in the United States: Higher German mobility in the bottom of the distribution is combined with an implicitly higher weighting by the mobility index at the bottom.     

Evolutionary Learning in Signalling Games

We study equilibrium selection by evolutionary learning in monotone two-type signalling games. The learning process we study extends that introduced by Young (1993, Econometrica61, 57–84) to deal with incomplete information and sequential moves; it thus involves stochastic trembles. For vanishing trembles the process gives rise to strong selection among sequential equilibria: if the game has separating equilibria, then in the long run only play according to the so-called Riley equilibrium will be observed frequently. Journal of Economic Literature Classification Number: C72.     

Nash equilibrium search for the best alternative

In a recent paper, Weitzman (Econometrica47 (1979) 641–654) described a policy of “optimal search for the best alternative.” The present paper is concerned with the development and characterization of a policy of “Nash equilibrium search for the best alternative.” Specifically, it is shown that, under certain monotonicity assumptions, and under the assumption that firms have incomplete information regarding the results of rivals' search behavior, a Nash equilibrium search policy exists and has the same form as Weitzman's optimal search policy.     

Dynamic Analysis of an Endogenous Growth Model with Investment‐specific Technological Change

This paper examines a dynamically optimal subsidy policy in a continuous‐time version of the endogenous growth model developed by Krusell (Krusell, P. (1998) “Investment‐Specific R&D and the Decline in the Relative Price of Capital”, Journal of Economic Growth, vol. 3, no. 2, pp. 131–141), in which investment‐specific technological progress occurs endogenously because of R&D performed by monopolistic firms. It is demonstrated that a combination of the time‐invariant subsidy for investment and the time‐variant subsidy for R&D enables the market equilibrium to replicate the socially optimal allocation.     

The Optimal Inflation Tax

We determine the second best rule for the inflation tax in monetary general equilibrium models where money is dominated in rate of return. The results in the literature are ambiguous and inconsistent across different monetary environments. We derive and compare the optimal inflation tax solutions across the different environments and find that Friedman's policy recommendation of a zero nominal interest rate is the right one.Journal of Economic LiteratureClassification Numbers: E31, E41, E58, E62.     

On the informational efficiency of the competitive resource allocation process

The purpose of this paper is to formalize the competitive process as a parametric process, and then prove the minimality of its message space among the message spaces for a broad class of parametric processes that includes the class of processes considered by Hurwicz (in “Studies in Resource Allocation Processes” (K. J. Arrow and L. Hurwicz, Eds.), pp. 413–423, Cambridge Univ. Press, Cambridge, 1977), Mount and Reiter (J. Econ. Theory6 (1974), 161–192), and Osana (J. Econ. Theory17 (1978), 66–78). The proof of this result turns crucially on the “asymmetry property” (which is stronger than the well-known “uniqueness property” of Hurwicz) and on an injectiveness lemma which is applicable to parametric processes.     

Temporal risk and the nature of induced preferences

It has been known since the work of H. Markowitz (“Portfolio Selection: Efficient Diversification of Investments,” Yale Univ. Press, 1959) and J. Mossin (Amer. Econ. Rev.59 (1969), 172–174) that even an individual whose underlying preferences satisfy the von Neumann-Morgenstern axioms will not choose over delayed (i.e., “temporal”) risky prospects in a manner which can be modelled as expected utility maximizing. Since most economically important instances of risk taking (insurance, real investment, agriculture, career training) involve delayed as opposed to immediately resolved risk, the standard use of expected utility theory to model such decisions must be questioned. In this paper the technique of “generalized expected utility analysis” (M. J. Machina, Econometrica50 (1982), 277–323) and the theory of support functions (R. T. Rockafellar, “Convex Analysis,” Princeton Univ. Press, 1970) are applied to exactly model and hence determine the nature of preferences over temporal risky prospects.     

A Note on Viable Proposals*

Sengupta and Sengupta (“Viable Proposals,”International Economic Review 35 (1994), 347–59.) consider a payoff vector of a TU‐game as a viable proposal if it challenges each legitimate contender. They show that for each game the set of viable proposals is nonempty. Their proof, however, has a flaw. I present a proof based upon a result by Kalai and Schmeidler (“An Admissible Set Occurring in Various Bargaining Situations,”Journal of Economic Theory 14 (1977), 402–11) .