A public contracting evolutionary game with corruption

In this paper, firms are randomly matched from a continuous population to play a public contracting game (say, building a bridge). Price is given, so firms compete in quality; the higher the quality offer, the less the profit. According to the official rules of the contest, the firm bidding the highest quality wins; however, we consider the possibility that firms attempt to corrupt the public officer in charge in order to be sure to win even if bidding a lower quality (quality bids are not publicly observable). Whether or not firms attempt to corrupt depends on how rewarding corruption is w. r. t. being honest. Within a dynamic evolutionary framewark, we investigate how social conventions with or without corruption are established under various assumptions concerning the corruptability of the public officer and the possibility of an external monitoring of the officer's decisions by a super partes authority.     

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.     

Chasing Phantoms in a Hollow Defense of Coase

Patrick Gunning refuses to acknowledge the most salient arguments against the Chicago law and economics case for negligence made by Austrian economists. Because of this, he makes the same errors in his defense of Coase that permeate the Chicago paradigm. In particular, his defense of Coasean type analysis completely ignores Austrian cost theory, i.e., that all economically relevant costs are strictly subjective and therefore conceptually impossible to measure. He also fails to grasp the implications of disequilibrium market process theory for the use of any kind of least-cost-avoider rule in the economic analysis of the law. As a result, Gunning's defense of Coase suffers from the same pretense of knowledge as the analysis that he is defending.     

Geographical Proximity and the Transmission of Tacit Knowledge

Since at least the publication of Pigou's The Economics of Welfare (Pigou 1932) and Arrow's seminal article on Economic Welfare and the Allocation of Resources of Invention (Arrow 1962), most economic theorists have argued that knowledge is expensive to produce but cheap to reproduce. Following Hayek (1948) and Polanyi (1958), scholars working in the tradition of Austrian economists have dissented from that view by pointing out that if a good deal of knowledge, such as the price of gold, can be easily codified and transmitted, much important knowledge is tacit and dependent on the particular circumstances of time and place. One line of work that supports the Austrian view can be found in economic geography and neighboring disciplines where the geographic concentration of economic activity is explained, among other factors, by the importance of geographical proximity between individuals in the transmission of tacit knowledge. This paper therefore argues that the spatial agglomeration of economic activities constitutes a powerful vindication of Austrian insights.     

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.     

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.     

From “tax state” to “debt state”

The paper is motivated by Joseph A. Schumpeter's The Crisis of the Tax State. It inquires whether the buildup of government debt in peacetimeprosperity is a threat to the stability, existence or creation of viable tax states. The paper begins by setting out Schumpeter's conception of the tax state and the nature of recent political-economic events which have reinvigorated the concept. Next the paper sets out some simple debt dynamics and sketches a debt-induced business cycle arising from heavy reliance on debt finance in peacetimeprosperity. Finally, the paper assesses threats to the tax state in light of recent work on path dependence and positive feedback. An attempt is made to throw some light on whether the plethora of new, and often small, states spawned by the demise of communism can be viable tax states.Essay on Government, the Tax State and Economic Dynamics submitted to the Third Schumpeter Prize Competition.     

Sparen und Einkommensverteilung

Summary The wage and salary bill in Austrian manufacturing industry is divided into a fixed and a variable part on the assumption that wages of skilled labour and salaries can be regarded as fixed, wages of unskilled and semi-skilled workers as variable cost. The excess of value added (factor incomes) over the variable wage cost (gross profit) is shown to be more stable in the trade cycle than the excess of value added over the total wage cost (net profit); this accords with the idea of a relatively stable mark-up on variable cost.As a proportion of value added, gross profit and even more net profit in the above sense decline gradually over the period 1956 to 1972. This would indicate a declining degree of monopoly or increasing degree of competition which presumably applies mainly to the export markets. The hypothesis is advanced that more active competition has taken place in foreign markets which enabled Austrian manufacturing to increase its share in those markets. The reduction in profit margins was made possible by tax allowances i.e. by the quick write-off a considerable part of new investment. This tax allowances amounts to an interest free government loan to the investor, which in fact will not be repaid of the depreciation funds are reinvested immediately after the equipment is fully written off. The proportion of the industry's capital which is in this sense financed by the government increases over time as investment expands; a profit rate has to be earned only on the remaining capital stock, so that without reduction of the return on private capital the profit margins may be reduced. (The tax allowances thus amount to a virtual reduction of the capital coefficient which proceeds gradually over a long time.)The paper finally shows the relation between the share of savings and the share of corporate incomes in the total private income during the cycle. The share of saving moves with the cycle and this is made possible by a shift to corporate income.     

Convention, Social Order, and the Two Coordinations

The word coordination has two meanings, and thesemeanings are often conflated. One meaning, associated with ThomasSchelling, is seen in situations like choosing whether to driveon the left or the right; the drivers must coordinate to eachother's behavior. The other meaning, associated with FriedrichHayek, means that a concatenation of activities is arranged soas to produce good results. Along with the Schelling sense ofcoordination comes the notion of convention, such as drivingon the right. Some conventions are consciously designed; othersemerge without design (or are emergent). Along with the Hayeksense of coordination comes the notion of social order. Somesocial orders, such as the skeleton of activities within thefirm or within the hypothetical socialist economy, are consciouslyplanned. Other social orders, such as the catallaxy of the freesociety, function without central planning (or are spontaneous).Distinguishing between the two coordinations (and, in parallelfashion, between convention and social order) clarifies thinkingand resolves some confusions that have arisen in discussionsof coordination and spontaneous order. The key distinctionsare discussed in the context of the thought of, on the one hand,Menger, Schelling, David Lewis, and the recent path-dependencetheorists, and, on the other hand, Smith, Hayek, Polanyi, Coase,and the modern Austrian economists. The paper concludes witha typology that encompasses the several distinctions.     

The Austrian Theory of Institutions Applied to Science-Industry Relationships: The Relevance of Innovative Institutions

This contribution aims at using an Austrian approach of institutions to discuss specific institutional arrangements in the current working of science-industry relationships. By combining distinctive characteristics between Menger's and Hayek's research programs, we establish a typology of institutions that goes beyond the usual way to approach business institutions and allows us to identify transitory types of institutional arrangements called innovative institutions. We apply that Austrian approach of institutions and address its relevance to highlight some puzzling issues derived from empirical evidence. Then, innovative institutions reveal particularly suited to understand how public and private research work together in science-industry relationships.     

Austrian Economics as a Progressive Paradigm: Explaining More Complex Economic Phenomena

This article examines two major issues of Austrian economics. The first is the alleged superiority of Austrian over neoclassical economics. The second is the capacity of Austrian economics to support new theoretical research. The analysis shows that Austrian economics has the widest domain of validity for explaining economic phenomena. It is also shown that Austrian economics has a progressive theoretical character due to the fact that there exist a number of analytical phenomena that Austrian economics cannot explain in its present state but that may be explained by means of a leap with continuity from Austrian anthropological presuppositions.     

Hot vs. Cold: Sequential Responses and Preference Stability in Experimental Games

In experiments with two-person sequential games we analyze whether responses to favorable and unfavorable actions depend on the elicitation procedure. In our hot treatment the second player responds to the first player's observed action while in our cold treatment we follow the strategy method and have the second player decide on a contingent action for each and every possible first player move, without first observing this move. Our analysis centers on the degree to which subjects deviate from the maximization of their pecuniary rewards, as a response to others' actions. Our results show no difference in behavior between the two treatments. We also find evidence of the stability of subjects' preferences with respect to their behavior over time and to the consistency of their choices as first and second mover.     

Democracy and Opinion Falsification: Towards a New Austrian Political Economy

Hayek's view of democracy as a process of forming opinion is taken as a starting point for inquiring into issues largely neglected by Public Choice and Constitutional Economics. In an Austrian perspective, fallible individual knowledge, political entrepreneurs and dissenting minorities attain a distinctive role in the process of political competition. Based on the observation that political opinions consist of preferences and theories, the concept of opinion falsification is introduced. It is a spontaneous result of social interaction creating preference falsification - the disguise of true feelings, but also knowledge falsification – the discovery of false beliefs. Democratic constitutions can limit the scope of preference falsification and increase the potential for knowledge falsification, thus supporting Hayek's view that it is in its dynamic, rather than its static, aspects, that the value of democracy proves itself.     

Marktstruktur und Preisverhalten in der österreichischen Industrie

Summary Being part of a larger investigation concerning forms and intensity of competition in the Austrian economy this paper deals with the characteristics of market structure and pricing behaviour in the industrial sector. Mainly based on a detailed questionnaire this study is representative for the group of larger Austrian industrial enterprises (sales of more than 100 Mill. AS) which produced more than two thirds of total industrial ouput. According to this study the dominant market structure of the Austrian industry is that of a close oligopoly. The subjective estimation of the price elasticity of demand by the firms participating in our survey was generally very pessimistic, being the lower the larger the market share of the respective firm.The most common principle of price formation for new products in the Austrian industry is a system of flexible full cost pricing, meaning cost orientation plus variable profit margins. Our study also shows that a large majority (60% resp. 80%) of the enterprises under investgation use discount, i.e. price differentiation in their pricing policies. These aspects indicate that-in line with marginalistic theories — demand situations obviously exercise a substantial influence on pricing behaviour. Considering the causes for price changes, however, cost oriented influences were clearly dominating. This stresses the great importance of the Austrian pricecontrol mechanism, the Paritätische Kommission, the institutionalized form of incomes policy in Austria.An econometric analysis of the process of price formation in the Austrian industry showed that the main factors of price changes were changes in labour costs and in international price levels, especially in the level of export prices. Our investigation also dealt with the question, whether differences in market-structure result in different, responses to demand fluctuations. Considering both the concepts of actual and potential competition it can be shown that enerprises in a more competitive situation react towards changes in demand conditions in a more stabilizing way that monopolistic firms: The reduce prices earlier in recession and they react to boom periods by expanding their capacities rather than by raising prices. Market structure and the intensity of competition thus seem to influence the position of the Phillips-curve in an economy.     

Nachfragesysteme für österreich

Summary This paper gives an empirical reexamination of the Linear-Expenditure-hypothesis for Austria. It starts with a brief theoretical discussion of the principal properties and restrictions of the Linear-Expenditure-System (LES). To obtain empirical estimates of the parameters of the LES two different estimation procedures are applied, i.e. the original method used byStone and a simplified version of the Systems-Least-Squares-approach (following theMarquardt-algorithm). There are no essential differences between these estimates. They all seem plausible and satisfy the theoretical restrictions.Usually the stability (i.e. time-invariance) of the parameters is accepted without proof. Using the Moving-Window-Regression-technique, however, most of the estimates vary significantly in time. To obtain a direct proof of the time-dependence of the parameters the LES is reestimated now including trend-factors. Especially results considering time-dependent marginal-budget-shares are considerably better than the static-model results.The conclusion of this paper is that the static version of the LES does not explain the consumer behaviour in Austria and that much more effort should be spent on the estimation of dynamic demand systems.     

Empirical evidence on the rational expectations hypothesis using reported expectations

Zusammenfassung Die Arbeit versucht die Hypothese der Rationalen Erwartungen an Hand von empirisch erhobenen Erwartungsdaten zu testen. Diese Vorgangsweise stellt eine Alternative zu den indirekten Testmethoden dar, in denen die Rationalität der Erwartungen durch den Verlauf von objektiven Daten getestet wird (durch Überprüfung einer Erklärungshypothese, in der Erwartungen eine wohl definierte Rolle zukommt). In diesem Fall kann immer nur die gemeinsame Hypothese der Richtigkeit des Modells und der Rationalität der Erwartungen verifiziert werden. Bei Verwendung empirisch gemessener Erwartungen entfällt dieses Problem, doch kommt die Frage der Glaubwürdigkeit der gemessenen Erwartungen hinzu. Eine unvollständige Auskunft darüber gibt eine Untersuchung des Erklärungsbeitrags der Erwartungen und Antizipationen in Konsum und Investitionsfunktionen.Die Hypothese der rationalen Erwartungen kann erst empirisch getest werden, wenn man eine Annahme über die vorhandene Informationsmenge trifft. Als minimaler Informations-stand wird die Kenntnis der vergangenen Entwicklung der zu prognostizierenden Zeitreihe angenommen. Unter dieser Annahme lassen sich die Merkmale Unverzerrtheit, Effizienz, Suffizienz und Konsistenz aus dem Vergleich erwarteter und tatsächlicher Entwicklungen ableiten und empirisch untersuchen.Das empirische Material umfaßt 39 Zeitreihen über die erwartete (geplante) Entwicklung von Umsätzen, investitionen und Preisen aus mehreren Ländern, wobei teilweise Unternehmensbefragungen, teils Konsumentenbefragungen und teilweise Prognosen von Experten zugrundeliegen.     

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.     

Mutually Destructive Bidding: The FCC Auction Design Problem

In general, synergies across license valuations complicate the auction design process. Theory suggests that a simple (i.e., non-combinatorial) auction will have difficulty in assigning licenses efficiently in such an environment. This difficulty increases with increases in fitting complexity. In some environments, bidding may become mutually destructive. Experiments indicate that a properly designed combinatorial auction is superior to a simple auction in terms of economic efficiency and revenue generation in bidding environments with a low amount of fitting complexity. Concerns that a combinatorial auction will cause a threshold problem are not borne out when bidders for small packages can communicate.     

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.     

Anonymous sequential games: Existence and characterization of equilibria

Summary In this paper we consider Anonymous Sequential Games with Aggregate Uncertainty. We prove existence of equilibrium when there is a general state space representing aggregate uncertainty. When the economy is stationary and the underlying process governing aggregate uncertainty Markov, we provide Markov representations of the equilibria.Table of notation Agents' characteristics space ( ) - A Action space of each agent (aA) - Y Y = x A - Aggregate distribution on agents' characteristics - (X) Space of probability measures onX - C(X) Space of continuous functions onX - _X Family of Borel sets ofX - State space of aggregate uncertainty ( ) - x _t=1 aggregate uncertainty for the infinite game - = (₁,₂,...,_t,...) - ^{t t} (₁, ₂,..., _t) - L₁(^t,C ×A),v _t Normed space of measurable functions from ^t toC( x A) - 8o(^t,( x A)) Space of measurable functions from ^tto( x A) - X^t X^t= x _s=1 ^t X - _X ^t Borel field onX ^t - v Distribution on - v_t Marginal distribution of v on ^t - v(^t)((¦^t)) Conditional distribution on given ^t - v^t(^s)(v_t(¦^s)) Conditional distribution on ^t given ^s (wheres) - _t Periodt distributional strategy - Distributional strategy for all periods =(₁,₂,...,_t,...) - _t Transition process for agents' types - ( _t,^t,y)(P _t+1(, _t , ^t ,y)) Transition function associated with _t - u _t Utility function - V _t (, a, , ^t) Value function for each collection (, a, , ^t ) - W _t (, , ^t ) Value function given optimal action a - C() Consistency correspondence. Distributions consistent with and characteristics transition functions - B() Best response correspondence (which also satisfy consistency) - E Set of equilibrium distributional strategies - x _t=1 ( ^t , (x A)) - S Expanded state space for Markov construction - (, a, ) Value function for Markov construction - P( _t ^* , _t y)(P(, _t ^* , _t , _y )) Invariant characteristics transition function for Markov game We wish to acknowledge very helpful conversations with C. d'Aspremont, B. Lipman, A. McLennan and J-F. Mertens. The financial support of the SSHRCC and the ARC at Queen's University is gratefully acknowledged. This paper was begun while the first author visited CORE. The financial support of CORE and the excellent research environment is gratefully acknowledged. The usual disclaimer applies.