Auctions for Universal Service Subsidies

The Telecommunications Act of 1996 requires that telephone service be available in high-cost areas at rates that are affordable and reasonably comparable to those charged in low-cost areas. It also requires that carriers serving high-cost areas at below-cost rates be compensated with explicit and sufficient subsidies. This paper analyzes an auction mechanism for the allocation of such subsidies. It shows that in a wide range of circumstances auctions are more efficient than traditional subsidy schemes. It also shows, however, that auction designs aimed at stimulating competition among several subsidized carriers may be particularly vulnerable to collusion.     

Augmented serial rules for an excludable public good

Summary. We present a new class of rules named augmented serial rules for the provision of an excludable public good. First, we characterize this class by the four axioms of strategy-proofness, envy-freeness, access independence, and nonbossiness. Second, we identify two important subclasses by imposing an additional axiom: (i) anonymous augmented serial rules by anonymity, and (ii) Moulins serial rule by individual rationality.Received: 31 December 2002, Revised: 9 June 2004, JEL Classification Numbers: D71, D82, H41.This paper is a substantial revision of Serial cost sharing with simple games. I would like to thank Hervé Moulin, Yoshikatsu Tatamitani, an associate editor, and three anonymous referees for helpful suggestions and detailed comments. This research was partially supported by the Ministry of Education, Culture, Sports, Science, and Technology in Japan (Grant-in-Aid for 21st Century COE Program Microstructure and Mechanism Design in Financial Markets).     

Learning for Innovation and the Skill Premium

The computer revolution took very long to pay off in productivity growth in the computer-using sectors. The relative wage of skilled workers, however, has risen sharply from the early days of the computer revolution onward. As skilled workers wages reflect their productivity, the two observations together pose a puzzle.This paper provides a micro-based explanation for the long diffusion period of the computer revolution. The general equilibrium model of growth zooms in on the research process and provides an explanation for sluggish growth with booming relative wages of the skilled. Technological progress in firms is driven by research aimed at improving the production technology (innovation) and by assimilation of ideas or principles present outside the firm (learning). A new General Purpose Technology (GPT) like the computer revolution generates an initial slowdown in economic growth and an increase in the skill premium.Acknowledgement I am indebted to Theo van de Klundert for suggestions and encouragement. Suggestions by Jan Boone, Bas Jacobs, Patrick Francois, Henri de Groot, Lex Meijdam, Niek Nahuis Sjak Smulders, Harald Uhlig and anonymous referees have contributed to the paper.     

Friedrich Hayek's Theory of Spontaneous Order: Two Problems

The paper finds Hayek's basic building block, the natural/artificialcontrast, to be illuminating. But the manner in which Hayek classifiesentities according to the contrast generates two major problemsin his socio-economic theory. First, Hayek's concept designconfuses the technical construction of, e.g., a chair with thedeliberate organization of division of labor within the firm.Second, Hayek's notion spontaneous order fails to note twokinds of natural order — firms and markets.     

Exchange rates and bertrand oligopoly

The impact of exchange-rate changes on industrial prices seems ambiguous. Incomplete and even perverse pass-through has been observed: the import prices in the depreciating country decrease while those in the appreciating country increase. To explain these counterintuitive price reactions we consider a situation of international Bertrand competition: two firms, based in different countries, are selling in both countries simultaneously. The profit-maximizing duopolists set the prices for their products in each of the two markets which are segmented on the demand side. We then study the qualitative effect of an exogenous exchange-rate change on the Bertrand-Nash equilibrium. Under the strong assumption of linear demand and cost functions we have normal exchange-rate pass-through. However, allowing for more general cost structures in this simple static model enables us to show that the import prices in both countries might move in counterintuitive directions.     

Public-Choice Analysis of a New International Organization: The International Sea-Bed Authority

The usefulness of the public-choice approach for a better understanding of international organizations can be demonstrated by applying it to the analysis of the structure and functions of a new international organization, the International Sea-Bed Authority, established in 1994, after two decades of negotiations under the auspices of the United Nations, with the aim to control the oceans' mineral resources beyond the limits of national jurisdictions (which have been proclaimed by the U.N. Assembly common heritage of mankind). First, the reasons for establishing this organization, whose basis is the common heritage of mankind nature of ocean resources, are examined under two aspects: 1) definition and protection of property rights; 2) environmental control of sea-bed mining activities. Secondly, the organization's decisionmaking system is presented, including such features as the assembly, council with chamber voting, finance committee with decision by consensus, features that balance the voting power of members and protect those countries that bear the financial responsibility for the budget. Finally, some comments are offered about more general aspects of the theory of international organizations: the bureaucracy (and diplomacy) of these organizations as well as the interdependence among international organizations, which opens the way to forms of international logrolling and makes it advisable for countries not to exit from these organizations, even when they have no primary interest in them.     

Strategy-proof and individually rational social choice functions for public good economies

Summary We consider the problem of choosing an allocation in an economy in which there are one private good and one public good. Our purpose is to identify the class of procedures of choosing an allocation which satisfy strategy-proofness, individual rationality, no exploitation and non-bossiness. Any such procedure is a scheme of semi-convex cost sharing determined by the minimum demand principle.I wish to thank Professors Salvador Barbera, Matthew Jackson, Herve Moulin and William Thomson for their helpful suggestions and two anonymous referees for their detailed comments. Conversations with Professors Hideo Konishi, Shinji Oseto Ken-ichi Shimomura and Stephen Ching were helpful. This work is supported by the Japan Economic Research Foundation and Research Grants PB89-0294 and PB89-0075 from the Direcion General de Investigacion Cientifica y Tecnica, Spanish Ministry of Education.     

Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development

We estimate the respective contributions of institutions, geography, and trade in determining income levels around the world, using recently developed instrumental variables for institutions and trade. Our results indicate that the quality of institutions trumps everything else. Once institutions are controlled for, conventional measures of geography have at best weak direct effects on incomes, although they have a strong indirect effect by influencing the quality of institutions. Similarly, once institutions are controlled for, trade is almost always insignificant, and often enters the income equation with the wrong (i.e., negative) sign. We relate our results to recent literature, and where differences exist, trace their origins to choices on samples, specification, and instrumentation.     

Discriminatory Price Auctions in Electricity Markets: Low Volatility at the Expense of High Price Levels

A pay-as-offered or discriminatory price auction (DPA) has been proposed to solve the problem of inflated and volatile wholesale electricity prices. Using the experimental method we compare the DPA with a uniform price auction (UPA), strictly controlling for unilateral market power. We find that a DPA indeed substantially reduces price volatility. However, in a no market power design, prices in a DPA converge to the high prices of a uniform price auction with structural market power. That is, the DPA in a no market power environment is as anti-competitive as a UPA with structurally introduced market power.     

Fully endogenous mechanism selection on finite outcome sets

Summary This paper defines a choice process over social outcomes in which agents choose the institutional rules ormechanisms themselves without outside interference. Truly endogenizing the mechanism selection process in this way, however, involves facing an infinite regress problem in which outcomes are chosen by games which are themselves chosen by games, ad infinitum. This paper allows the possibility of such an infinite regress which we callfully endogenous mechanism selection.We introduce the notion ofFree Choice which restricts the class of mechanisms in the regress to those which prevent agents from being locked in to an equilibrium outcome by the actions of others. Under this condition, the infinite regress is shown to get truncated with the number of selection iterations endogenously determined. It turns out that the outcomes resulting from a Free Choice-constrained regress are (Weakly) Pareto optimal; in particular, these outcomes solve a weighted Rawlsian Maxmin criterion. We also show that these outcomes are invariant to the equilibrium concept used to evaluate games in the regress.This paper is based on the author's dissertation from the University of Minnesota (November, 1989).I am very grateful for the guidance, advice, and encouragement from my advisor, Marcel K. Richter, and for the many helpful suggestions from David Levine. I have also benefited from conversations with Nabil Al-Najjar, Gerhard Glomm, Leonid Hurwicz, James Jordan, Ramon Marimon, Andrew McClennan, Ariel Rubinstein, and William Thomson.     

Full-cost pricing in the classical competitive process: A model of convergence to long-run equilibrium

In the last 10–15 years a lot of attempts has been devoted to study the calssical process of convergence of market prices toward natural prices. The two forces that one has thought could achieve this target were capital mobility, that determines the dynamics of output, and demand-supply forces, that determine the dynamics of prices. In this article a model of classical competition is proposed in which a full-cost pricing mechanism is adopted in the rule of evolution of market prices. An asymptotical stability result of long-run equilibrium is proved for a two-commodity model with and without a final demand.     

An Austrian Theory of the Firm

The modern Theory of the Firm uses the concept of rent and makes implicit assumptions about equilibrium. An Austrian (Market Process) Theory of the Firm should have something to say about each of these. Two strategic perspectives are analyzed, the neoclassical microeconomic perspective (using the Ricardo-Marshall approach to rent) and the Market Process perspective (using the Fetter approach to rent). In a neoclassical world, rents indicate unsolved or unexploited inefficiencies as every hypothetical outcome is viewed against the standard of perfect competition. By contrast, in the Market Process world there is no single ideal standard by which to measure any particular outcome. All action takes place in an open ended universe in which the future is continually being created, in which competition is a discovery process.     

Sector-specific capital, “Bang-bang” investment,and the Filippov solution

Bang-bang investment in a two-sector growth model with immobile capital is rational and leads to a unique and globally stable long-run equilibrium along a sliding trajectory. This steady state coincides with the stationary equilibrium in the traditional model with non-sector-specific capital.This article was written while the authors were visiting scholars at Cornell University. We gratefully acknowledge financial assistance from the Erasmus University Trust Fund and the Netherlands Scientific Organization. We would like to thank, without implicating, two anonymous referees, Martijn Herrmann, Jean-Marie Viaene, Claus Weddepohl, and the participants of seminars at the University of Maryland, the University of Montreal, and Erasmus University Rotterdam for perceptive remarks and useful comments. Jeroen Hinloopen and Rien Wagenvoort provided able graphical assistance. The views expressed in this article are those of the authors and not necessarily those of the World Bank.     

Alfred Schütz and George Shackle: Two Views of Choice

Within the Austrian school of economics, Ludwig Lachmann identified Alfred Schütz and George Shackle as master subjectivists. Subjectivists trace aggregate economic phenomena back to the subjective thoughts and expectations of individuals. Schütz was a member of the Mises Circle of Austrian economists. Shackle was a student of the Austrian economist F.A. Hayek, but a follower of Hayek's great rival, John Maynard Keynes. Austrians respect both figures as important subjectivists who offered valuable accounts of the role of uncertainty in human action. The paper serves two purposes. First, it is a useful primer on the distinct theories of Schuts and Shackle. Second, it draws attention to the problem of change and novelty in the work of Schütz and Shackle. Schütz underemphasized the role of novelty in society. Shackle, by contrast, exaggerated the role of novelty in choice. A middle ground position is defended.     

Full price competition and Dupuit's defense of the long-and-short-haul “discrimination”

Condemnation of the long-and-short-haul discrimination has been nearly ubiquitous in the literature on economic theory and transportation. However, the French economist Dupuit developed a case against all transport regulation by relating it to a defense of the practice of place discrimination before the middle of the nineteenth century. He did so, moreover, within an early elaboration of a full price explanation of competitive functioning. This paper analyzes the idea in Dupuit's context and argues that this so-called form of price discrimination is actually an efficient and necessary form of the competitive process.     

Coordination as a Criterion for Economic “Goodness”

Welfare economics requires a criterion for economic goodness in regard to a society. Unlike conventional criteria, coordination (among independent decisionmakers) does not violate methodological individualism. The coordination criterion can be objectively deployed to judge events or policies, referring only to the given preference rankings of relevant individuals, given their initial positions. An important variant refers not to the attained (or unattained) state of achieved coordination, but to the ability of events or policies to affect the process through which a better-coordinated state may be approached. Several implications of the coordination criterion are explored.     

Incentive compatibility and the quantity-setting competitive firm under demand uncertainty

This paper examines the tie between the popular black box neoclassical quantity-setting firm under demand uncertainty and a firm with a rudimentary but explicit employee relation organizational structure in which workers are offered fixed wages for following management directives. Surprisingly, the quantity-setting firm unambiguously mimics optimal employment relation hiring and work rules when the contract is incentive-compatible ex post. The attitude toward risk is shown to be the key determinant of whether or not the quantity-setting firm replicates the optimal employment relation contract when ex post incentive-compatibility is relaxed.     

Strategic Reaction of Vertically Integrated Firms to Downstream Entry: Deterrence or Accommodation

The purpose of this paper is to analyze strategic behavior of vertically integrated firms when there is downstream entry, taking into account the balance between competition in the market and competition for the market. This analysis can serve to explain diverse distributional structures, including the coexistence of vertically integrated firms and independent retailers. And it shows that the relative efficiency of downstream entrants and the level of competition among incumbents are two major factors in determining equilibrium configuration.     

Convergence empirics across economies with (some) capital mobility

This paper uses a model of growth and imperfect capital mobility across multiple economies to characterize the dynamics of (cross-country) income distributions. This allows convenient study of the convergence hypothesis, and reveals, where appropriate, polarization and clumping within subgroups. The data show little cross-country convergence; instead, the important features are persistence, immobility, and polarization, exemplified by convergence club or twin peaks dynamics.     

Auction markets for dispatchable power: How to score the bids

Competitive bidding for electric generating capacity is becoming based on economic dispatch rather than the PURPA must-take norm. Incorporating economic dispatch into bidding requires different price scoring procedures. The avoided cost of a dispatchable project is determined by the energy price offered. Price scoring methods based on a percentage of avoided cost approach are uneconomically biased against baseload projects, because they neglect the duration effects of their dispatch. This bias is illustrated in a simple model of economic dispatch. A number of utilities use the percentage of avoided cost method for dispatchable capacity. They can correct the bias by using a net benefits per kW measure of economic value.