Belief heterogeneity and survival in incomplete markets

In complete markets economies (Sandroni in Econometrica 68:1303–1341, 2000), or in economies with Pareto optimal outcomes (Blume and Easley in Econometrica 74:926–966, 2006), the market selection hypothesis holds, as long as traders have identical discount factors. Traders who survive must have beliefs that merge with the truth. We show that in incomplete markets, regardless of traders’ discount factors, the market selects for a range of beliefs, at least some of which do not merge with the truth. We also show that impatient traders with incorrect beliefs can survive and that these incorrect beliefs impact prices. These beliefs may be chosen so that they are far from the truth.     

Purification of incentive compatible allocations

In implementation theory it is common to consider social choice functions that map to lotteries over outcomes. For example, virtual implementation has been used widely with social choice functions that involve randomization. This paper investigates (in incomplete information environments) the possibility of purification of such social choice functions, where purification means that the “replacement” social choice function maps to outcomes rather than distributions over outcomes, is incentive compatible and generates the same distribution over payoffs and outcomes as the original social choice function. Received: July 31, 2000; revised version: December 2, 2002 RID="*" ID="*" Thanks are due to Ole Nielsen, Terence Tao and Lin Zhou for helpful conversations. Thanks are also due to an anonymous referee for detailed comments.     

Entrepreneurship and second-best institutions: going beyond Baumol’s typology

This paper reconsiders the predominant typology pioneered by Baumol (J Polit Econ 98(5):893–921, 1990) among productive, unproductive and destructive entrepreneurship. It is shown that the foundation of Baumol’s classification scheme is the restrictive concept of first-best outcomes, and therefore it easily fails to appreciate the true impact of entrepreneurship in real-world circumstances characterized by suboptimal institutions. We present an alternative way of generalizing the notion of entrepreneurship and show how and why it encompasses the Baumol typology as a special case. Our main distinction is between business and institutional entrepreneurship. We draw on Schumpeter and introduce the entrepreneur in an additional function: as a potential disturber of an institutional equilibrium. Various subsets of institutional entrepreneurship are posited and discussed. It is shown that changing the workings of institutions constitutes an important set of entrepreneurial profit opportunities. An implication of this is that entrepreneurial efforts to reform or offset inefficient institutions can, in many cases, be welfare-improving.     

Pricing inputs to induce efficient Make-or-Buy decisions

We investigate input pricing regimes that induce efficient Make-or-Buy decisions by entrants when there is constant returns in the production of the input(s) and simultaneous noncooperative price competition in downstream retail markets. Necessary and sufficient conditions for efficient Make-or-Buy decisions are derived. The necessary condition shows that input prices are relevant for Make-or-Buy decisions except under restrictive and often unverifiable assumptions on the demand structure, and that the least informationally-demanding way to ensure efficient Make-or-Buy decisions is to price inputs at marginal cost provided changes in the entrant’s cost have a “normal” effect on the entrant’s profit. The conditions also show that pricing the incumbent’s input at the entrant’s marginal cost always ensures efficient Make- or-Buy decisions. The extent to which input prices can depart from marginal cost while still inducing efficient Make-or-Buy decisions increases with the efficiency differential between the incumbent and entrant and with the demand displacement ratio.      

Market power, survival and accuracy of predictions in financial markets

In a standard General Equilibrium framework, we consider an agent strategically using her large volume of trade to influence asset prices to increase her consumption. We show that, as in Sandroni (Econometrica 68:1303–1341, 2000) for the competitive case, if markets are dynamically complete and some general conditions on market preferences are met then this agent’ long-run consumption will vanish if she makes less accurate predictions than the market, and will maintain her market power otherwise. We thus argue that the Market Selection Hypothesis extends to this situation of market power, in contrast to Alchian (J Pol Econ 58:211–221, 1950) and Friedman (Essays in Positive Economics, University of Chicago Press, Chicago, 1953) who claimed that this selection was solely driven by the competitiveness of markets. I would like to thank T. Hens, A. Kirman and A. Sandroni for many stimulating conversations and encouragements. Two anonymous referees also provided very valuable comments.     

Uncertainty and the size distribution of rewards from innovation

 Previous research has shown that the distribution of profit outcomes from technological innovations is highly skew. This paper builds upon those detailed findings to ask: what stochastic processes can plausibly be inferred to have generated the observed distributions? After reviewing the evidence, this paper reports on several stochastic model simulations, including a pure Gibrat random walk with monthly changes approximating those observed for high-technology startup company stocks and a more richly specified model blending internal and external market uncertainties. The most highly specified simulations suggest that the set of profit potentials tapped by innovators is itself skew-distributed and that the number of entrants into innovation races is more likely to be independent of market size than stochastically dependent upon it.     

Risk preference and productivity measurement under output price uncertainty

This paper deals with joint estimation of production and risk preference functions in the presence of output price uncertainty. We use quadratic production and utility functions under the assumption that producers maximize expected utility of anticipated profit. A panel data on Norwegian salmon farms is used for this purpose. Empirical results show that all salmon farmers are risk averse. Relative risk premium (the implicit cost of private risk bearing) is found to be about 15% of mean profit. We also find rapid technological change taking place (3.75% per year) in the salmon farming industry. First version received: February 2000/Final version received: February 2001     

OWNERSHIP,CONTROL, AGENCY AND RESIDUAL CLAIMS IN HEALTHCARE: INSIGHTS ON COOPERATIVES AND NON‐PROFIT ORGANIZATIONS

Many issues surrounding healthcare entities’ performance can be traced to their governance and ownership. Increasingly, public services are being provided by non‐profit organizations and/or cooperatives, particularly in the healthcare sector. This is not unproblematic. We draw on the conceptual separation of ownership and control, and the notion of firm ownership to derive a taxonomy of dimensions along which a contractual‐ and property rights theory of the firm can be structured, in order to determine the nature of firms’ differences. We utilize the taxonomy to illustrate important distinctions between non‐profit and cooperative firms in the primary healthcare sector and propose testable hypotheses. Funders and regulators must recognise the differences between these firms, if public funding of healthcare is to achieve the expected outcomes.     

Strategic manipulation of a pollution permit market and international trade

We consider a framework where firms which compete in an international product market are not all submitted to a pollution permit market. Using the Brander and Spencer’s framework (J Int Econ 18:83–100, 1985), we seek to determine the optimal strategies of both a dominant firm in the pollution permit market and the regulator in a such context. We first show that the dominant firm pursues a strategic manipulation to increase its profit. We also find that the regulator uses a sophisticated strategic policy to increase the domestic welfare by using two instruments: the initial allocation of pollution permits and the pollution cap.     

Estimation of technical inefficiency effects using panel data and doubly heteroscedastic stochastic production frontiers

In previous studies, measures of technical inefficiency effects derived from stochastic production frontiers have been estimated from residuals which are sensitive to specification errors. This study corrects for this inaccuracy by extending the doubly heteroscedastic stochastic cost frontier suggested by Hadri (1999) to the model for technical inefficiency effects. This model is a stochastic frontier production function for panel data as proposed by Battese and Coelli (1995). The study uses, for illustration of the techniques, data on 101 mainly cereal farms in England. We find that the correction for heteroscedasticity is supported by the data. Both point estimates and confidence intervals for technical efficiencies are provided. The confidence intervals are constructed by extending the “Battese-Coelli” method reported by Horrace and Schmidt (1996) by allowing the technical inefficiency to be time varying and the disturbance terms to be heteroscedastic. The confidence intervals reveal the precision of technical efficiency estimates and show the deficiencies of making inferences based exclusively on point estimates. First version received: March 2000/Final version received: Oct. 2001 RID="*" ID="*"  The authors are grateful to the Economic and Social Research Council for access to their Data Archive which has provided the data for this research. We are indebted to Badi Baltagi and two anonymous referees for their helpful comments and suggestions. The usual caveat applies.     

Political pressures and the credibility of regulation: can profit sharing mitigate regulatory risk?

When price-cap rules determine the structure of prices for a long period, they suffer a credibility problem and introduce an element of risk especially if a firm’s profits are “too large”. Profit sharing may be seen as a device to pre-determine price adjustments and thus to decrease regulatory risk. We analyse the effects of profit sharing on the incentives to invest, using a real option approach. Absent credibility issues, a well designed profit sharing system may be neutral relative to a pure price cap. With regulatory risk, profit sharing is preferable to a pure price-cap one, if it intervenes for high enough profit levels.

On Intersectoral allocations,factors substitutability and multiple long-run growth paths

Summary. This article considers a two-sector model of economic growth with “labour-augmenting” intersectoral external effects stemming from the aggregate capital stock. It is shown that equilibrium balanced growth paths with a non-trivial labour allocation scheme become available. A set of sufficient conditions for the existence of multiple equilibrium growth rays is provided and their determinacy properties are then characterised. Finally, examination of a parameterised C.E.S. economy illustrates the central role of non-unitary values for the elasticity of substitution in the multiplicity issue. Received: October 31, 2000; revised version: September 25, 2001     

Double Moral Hazard,Monitoring, and the Nature of Contracts

generalized double-sided moral-hazard model, with risk-averse parties who mutually monitor each other (to get a reasonable idea of outcome/effort). The model considers trade-off between monitoring costs and moral hazard costs, which are endogenously determined by the extent of monitoring. Using this model, we formally prove a generalized version of Coase's conjecture – that the optimal contract minimizes the agency and risk costs. We then show how varying assumptions about the feasibility or cost of monitoring of the outcome or the worker's effort lead to different contracts being optimal. The analysis is then used to explain the nature of contracts observed in practice under many different situations. We will give an explanation as to why industrial workers typically work under wage contracts, while share contracts are common in agriculture and will explain why profit sharing is more common for senior managers than for the production workers. Received September 19, 2000; revised version received October 30, 1997     

Competitive and core allocations in large economies with differential information

Summary. We study the core and competitive allocations in exchange economies with a continuum of traders and differential information. We show that if the economy is “irreducible”, then a competitive equilibrium, in the sense of Radner (1968, 1982), exists. Moreover, the set of competitive equilibrium allocations coincides with the “private core” (Yannelis, 1991). We also show that the “weak fine core” of an economy coincides with the set of competitive allocations of an associated symmetric information economy in which the traders information is the joint information of all the traders in the original economy. Received March 22, 2000; revised version: May 1, 2000     

Peaks or tails – What distinguishes financial data?

We argue against the view that it is mostly the peaks of the empirical densities of stock returns (and of other risky returns as well) that set such data aside from “normal” variables. We show that peaks depend on sample size and on the way returns are standardized, and that for given data sets of stock returns, both higher peaks and lower peaks than in a standard normal case can be obtained. First version received: March 1998/Final version received: April 2000     

Competitive search markets for durable goods

Summary. This paper considers a dynamic version of Akerlof's (1970) lemons problem where buyers and sellers must engage in search to find a trading partner. We show that if goods are durable, the market itself may provide a natural sorting mechanism. In equilibrium, high-quality goods sell at a higher price than low-quality goods but also circulate longer. This accords with the common wisdom that sellers who want to sell fast may have to accept a lower price. We then compare the equilibrium outcomes under private information with those under complete information. Surprisingly, we find that for a large range of parameter values the quilibrium outcomes under the two information regimes coincide, despite the fact that circulation time is used to achieve separation. Received: August 24, 2000; revised version: October 24, 2000     

Externalities, monopoly and the objective function of the firm

This paper provides a theory of general equilibrium with externalities and/or monopoly. We assume that the firm’s decisions are based on the preferences of shareholders and/or other stakeholders. Under these assumptions a firm will produce fewer negative externalities than the comparable profit maximising firm. In the absence of externalities, equilibrium with a monopoly will be Pareto efficient if the firm can price discriminate. The equilibrium can be implemented by a two-part tariffWe would like to thank John Fender, Herakles Polemarchakis, Les Reinhorn, John Roberts, John Roemer, Colin Rowat, Erkan Yalcin two anonymous referees and participants in seminars at the Universities of Birmingham, Durham, Heidelberg, Mannheim and Queens, the Public Economic Theory conference at the University of Warwick, July 2000, and the EEA congress, Lausanne 2001 for comments and suggestions     

Macroeconomic changes and mortality in Mexico

While previous studies examine how the business cycle affects mortality in developed countries, less is known about this relationship in developing countries. In this paper, we investigate whether the procyclical nature of mortality in developed countries found by Ruhm (Q J Econ 115(2):617–650, 2000) and others is also present in Mexico. We assemble a unique panel data set that contains state-level data on mortality rates by age and cause of death, GDP per capita, and socioeconomic status. We find that for Mexico total mortality rates are procyclical, with the largest impact on those aged 20–49. While these findings are similar to those in Ruhm (Q J Econ 115(2):617–650, 2000), the effects of business cycles on mortality rates differ for several specific causes of death. These results suggest that whereas total mortality may be procyclical in both developed and developing countries, significant differences may exist for some causes of death.     

Commitment,first-mover-, and second-mover advantage

We identify circumstances under which a firm with a first-mover advantage may get leapfrogged by a follower. At the market stage we assume a Stackelberg structure, i.e. the leader commits to a quantity and the follower reacts to it. We allow the owners of both firms to select the internal organization and the production technology before quantities are set. That is, leader and follower can additionally use two commitment strategies alternatively or in combination: investing in R&D and delegating quantity decisions to managers. Despite the symmetry of options for the two firms, we find that there is a unique equilibrium in which both firms invest in process R&D, only the follower delegates, and the follower can overcome the first-mover advantage of the quantity leader and obtain a higher profit than the leader. Our analysis reveals that there are some important differences between the two commitment devices “cost-reducing R&Dt” and “delegation to managers”.      

Profit maximization mitigates competition?

Summary. We consider oligopolistic markets in which the notion of shareholders’utility is well-defined and compare the Bertrand-Nash equilibria in case of utility maximization with those under the usual profit maximization hypothesis. Our main result states that profit maximization leads to less price competition than utility maximization. Since profit maximization tends to raise prices, it may be regarded as beneficial for the owners as a whole. Moreover, if profit maximization is a good proxy for utility maximization, then there is no need for a general equilibrium analysis that takes the distribution of profits among consumers fully into account and partial equilibrium analysis suffices.