Market games with differential information and infinite dimensional commodity spaces: The core

Summary We provide an alternative proof of the existence of core allocations in exchange economies with differential information and infinite dimensional commodity spaces. We also identify a critical feature of information sharing rules that ensures nonemptiness of the core. In essence, the only condition we require on the sharing rules is that profitable insider trading be prohibited. In the absence of insider trading, balancedness is guaranteed and core nonemptiness follows.I thank Dan Arce, Erik Balder, Myrna Wooders, and Nicholas Yannelis for helpful comments. This paper is a greatly revised version of my paper entitled. A Variational Problem Arising in Market Games with Differential Information, written in August of 1991.     

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.     

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.     

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.     

“Buy Domestic” Campaigns and Optimal Tariffs

This paper attempts to analyze the strategic use of optimal tariffs and to examine the effects of national bias on the optimal trade policy and social welfare in a two-country, two-good, price competition model derived from Neven et al. (1991). The major findings are as follows. (1) If all consumers prefer the domestic good, then buy domestic campaigns will decrease the prohibitive tariff rate and increase local welfare. (2) If at least some consumers prefer the foreign good, but not to a great extent, then buy domestic campaigns will not change the optimal tariff rate, but may improve local welfare. (3) When all consumers greatly prefer the foreign good, then promotion of buy domestic decreases the optimal tariff rate, but it cannot improve social welfare. With this framework, we also prove that buy domestic campaigns serve as a substitute for tariffs with respect to a strategic trade policy.     

Vertical and Horizontal Trust Networks in Bureaucracies: Evidence from the Third Reich

In a seminal contribution to the literature on bureaucracy, Breton and Wintrobe (The Logic of Bureaucratic Conduct: An Economic Analysis of Competition, Exchange, and Efficiency in Private and Public Organization. New York, NY: Cambridge University Press, 1982) develop a model wherein subordinates and superiors in a bureaucratic structure trade with each other to advance the objectives of the superiors. The success of such an organizational arrangement (for superiors) is based upon the development of vertical trust networks in a way that facilitates the promise of informal payments by superiors in return for informal services provided by their subordinates. Breton and Wintrobe [Journal of Political Economy 94 (1986) 905] also provide a theoretical application of their model by describing the Nazi bureaucracy as a conglomeration of competing agencies that zealously carried out the Final Solution to the Jewish question. As an extension, this note develops two compelling empirical examples of vertical and horizontal trust networks within the Nazi regime: Einsatzgruppen As (Special Action Detachments) attempt to liquidate all Lithuanian Jews after the German invasion of the U.S.S.R. in 1941 and the 20 July 1944 attempt to assassinate Adolf Hitler.JEL Classification: D23, D73.     

Individual Decision Making in a Negative Externality Experiment

The experimental treatments analysed in this paper are simple in that there is a unique Nash equilibrium resulting in each player having a dominant strategy. However, the data show quite clearly that subjects do not always choose this strategy. In fact, when this dominant strategy is not a focal outcome it does not even describe the average decision adequately. It is shown that average individual decisions are best described by a decision error model based on a censored distribution as opposed to the truncated regression model which is typically used in similar studies. Moreover it is shown that in the treatments where the dominant strategy is not focal dynamics are important with average subject decisions initially corresponding to the focal outcome and then adjusting towards the Nash prediction. Overall, 66.7% of subjects are consistent with Payoff Maximization, 27.8% are consistent with an alternate preference maximization and 5.6% are random.     

Information processing for a finite resource allocation mechanism

Summary deal with an organization havingm individual agents (the agents) and one central agent or agency (the coordinator), and the problem of allocating a fixed supply ofn commodities among the agents. The coordinator wishes to distribute the commodities in such a way as to maximize an objective function whose arguments are functions known (implicitly) to the individual agents, but not to the coordinator. The more information the coordinator obtains about the individual agents' functions, the better the allocation decision he or she can make; however, gaining such information is costly, so that the coordinator must balance the potential gain against the cost of acquiring additional information. We find a satisficing solution to this problem which is computable and which terminates in a finite number of steps.We would like to thank Leo Hurwicz, Ken Matheny, Shailendra Mehta, Bill Novshek, Roy Radner, Stan Reiter, Vernon Smith, Mark Walker, and, especially, John Ledyard and Tom Marschak, for helpful comments and suggestions. We must, of course, however reluctantly, accept responsibility for any remaining defects.     

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.     

Biological Adaptation in Human Societies: a ‘Basic Needs’ Approach

The groundzero premise (so to speak) of the biological sciences is that survival and reproduction is the basic, continuing, inescapable problem for all living organisms; life is at bottom a survival enterprise. It follows that survival is the paradigmatic problem for human societies as well; it is a prerequisite for any other, more exalted objectives. Although the term adaptation is also familiar to social scientists, until recently it has been used only selectively, and often very imprecisely. Here a more rigorous and systematic approach to the concept of adaptation is proposed in terms of basic needs. The concept of basic human needs has a venerable history – tracing back at least to Plato and Aristotle. Yet the development of a formal theory of basic needs has lagged far behind. The reason is that the concept of objective, measurable needs is inconsistent with the theoretical assumptions that have dominated economic and social theory for most of this century, namely, valuerelativism and cultural determinism. Nevertheless, there have been a number of efforts over the past 30 years to develop more universalistic criteria for basic needs, both for use in monitoring social wellbeing (social indicators) and for public policy formulation. Here I will advance a strictly biological approach to perationalizing the concept of basic needs. It is argued that much of our economic and social life (and the motivations behind our revealed preferences and subjective utility assessments), not to mention the actions of modern governments, are either directly or indirectly related to the meeting of our basic survival needs. Furthermore, these needs can be specified to a first approximation and supported empirically to varying degrees, with the obvious caveat that there are major individual and contextual variations in their application. Equally important, complex human societies generate an array of instrumental needs which, as the term implies, serve as intermediaries between our primary needs and the specific economic, cultural and political contexts within which these needs must be satisfied. An explicit framework of Survival Indicators, including a profile of Personal Fitness and an aggregate index of Population Fitness, is briefly elucidated. Finally, it is suggested that a basic needs paradigm could provide an analytical tool (a biologic) for examining more closely the relationship between our social, economic and political behaviors and institutions and their survival consequences, as well as providing a predictive tool of some value.     

On the theory of cost sharing

This paper investigates efficiency and equitability issues given a cost sharing method in an economy with a public commodity. We study the concept of a -cost share equilibrium and examine the set of all equilibrium allocations. Finally, we devise a mechanism to implement -cost share equilibria as strong equilibria of an associated non-cooperative game.This paper was written while Shlomo Weber was visiting the University of Bonn. Financial support from theSonderforschungsbereich 303 is gratefully acknowledged. We also would like to thank Dieter Bös for valuable comments.     

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.     

Equilibria and Pareto optima of markets with adverse selection

Summary This paper examines the efficiency properties of competitive equilibrium in an economy with adverse selection. The agents (firms and households) in this economy exchange contracts, which specify all the relevant aspects of their interaction. Markets are assumed to be complete, in the sense that all possible contracts can, in principle, be traded. Since prices are specified as part of the contract, they cannot be used as free parameters to equate supply and demand in the market for the contract. Instead, equilibrium is achieved by adjusting the probability of trade. If the contract space is sufficiently rich, it can be shown that rationing will not be observed in equilibrium. A further refinement of equilibrium is proposed, restricting agents' beliefs about contracts that are not traded in equilibrium. Incentive-efficient and constrained incentive-efficient allocations are defined to be solutions to appropriately specified mechanism design problems. Constrained incentive efficiency is an artificial construction, obtained by adding the constraint that all contracts yield the same rate of return to firms. Using this notion, analogues of the fundamental theorems of welfare economics can be proved: all refined equilibria are constrained incentive-efficient and all constrained incentive-efficient allocations satisfying some additional conditions can be decentralized as refined equilibria. A constrained incentive-efficient equilibrium is typically not incentive-efficient, however. The source of the inefficiency is the equilibrium condition that forces all firms to earn the same rate of return on each contract.Notation ={ ₁,..., _k } set of outcomes - : ₊ generic contract or lottery - A = () ; - A_o A{, where denotes the null contract or no trade - S={1,...,¦S¦} set of seller types - L(s) number of type-s sellers - M number of buyers - u: × S seller's utility function, which can be extended toA× S by puttingu(, s) ; - v. × S buyer's utility function, which can be extended toA × S by puttingv(, s) ; - f:A ₀ ×S ₊ allocation of sellers - g:A ₀ ×S ₊ allocation of buyers - A ₊ sellers' trading function - :A ×S ₊ buyers' trading function This paper has had a long gestation period, during which I have been influenced by helpful conversations with many persons, by their work, or both. Among those who deserve special mention are Martin Hellwig, Roger Myerson, Edward Prescott, Robert Townsend and Yves Younés. Earlier versions were presented to the NBER/CEME Conference on Decentralization at the University of Toronto and the NBER Conference on General Equilibrium at Brown University. I would like to thank John Geanakoplos, Walter Heller, Andreu Mas Colell, Michael Peters, Michel Poitevin, Lloyd Shapley, John Wooders, Nicholas Yannelis and an anonymous referee for their helpful comments and especially Robert Rosenthal for his careful reading of two drafts. The financial support of the National Science Foundation under Grant No. 912202 is gratefully acknowledged.     

Some notes on trichotomous choice discrete valuation

For some respondents, the bid offered by the dichotomous choice format used in the discrete choice technique can in fact be the true optimum. In this case the correct answer is neither yes or no, but indifferent. We shall show results from a trichotomous choice format and analyse whether it produces welfare measures with narrower confidence intervals than the dichotomous technique. Another well known problem in contingent valuation (CV) studies is that the volume of the good to be purchased from hypothetical markets is not, in many cases, defined in precise terms. We show how the trichotomous choice technique can be used to test for possible vagueness in the volume of the project to be valued.     

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.     

Regulatory incentive policies and abuse

We examine the incentives for abuse under rate-of-return (ROR) and incremental surplus subsidy (ISS) regulation. Abuse consists of expenditures by the regulated firm that provide private benefits, but do not reduce production costs. We show that ISS regulation provides efficient incentives for owners of the regulated firm to limit abuse by subordinates. We also prove that abuse by owners of the firm will generally be greater (smaller) under ROR regulation than under ISS regulation when consumer demand for the regulated product is inelastic (elastic). Furthermore, we show that to limit abuse and improve welfare under ROR regulation, it can be advantageous to ignore available information about consumer demand.     

Markets with infinitely many commodities and a continuum of agents with non-convex preferences

Summary Contrary to the finite dimensional set-up, the hypothesis of an atomless measure space of traders does not entail convexity of aggregate demand sets if there are infinitely many commodities. In this paper an assumption is introduced which sharpens the non-atomicity hypothesis by requiring that there are many agents of every type. When this condition holds, aggregate demand in an infinite dimensional setting becomes convex even if individual preferences are non-convex. This result is applied to prove the existence of competitive equilibria in such a context.Thanks to E. Dierker, K. Milford, M. Nermuth, C. Puppe, and N. Yannelis for comments and suggestions.     

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.     

Price rigidities and institutional variations in markets with posted prices

Summary An exchange economy with price rigidities and rationing is considered. The rationing systems allowed are very general. Several characterizations of the set of constrained equilibria are given, and new equilibrium existence results are provided. More specifically, well-known properties like the existence of equilibria without rationing of the numeraire commodity, and the existence of supply and demand constrained equilibria without rationing on the market of at least one commodity follow as special cases from the theorems proved. Finally it is shown that the equilibrium correspondence is upper semi-continuous, while it is continuous on a residual set of points. In order to prove these results a new continuity result for the budget correspondence is given.The author would like to thank Dolf Talman, Gerard van der Laan, Jan van Geldrop, and an anonymous referee for their valuable comments on previous drafts of this paper. The author is financially supported by the Cooperation Centre Tilburg and Eindhoven Universities, The Netherlands. This research is part of the VF-program Competition and Cooperation.     

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.