Pareto improving price regulation when the asset market is incomplete

Summary. Incomplete asset markets cause competitive equilibria to be constrained suboptimal and provides scope for Pareto improving interventions. In this paper, we examine how intervention in prices in asset or spot commodity markets serves this purpose. We show that, if fix-price equilibria behave sufficiently regularly near Walrasian equilibria, Pareto improving price regulation is generically possible. An advantage of price regulation, contrasted with interventions in individuals asset portfolios, is that it operates anonymously, on market variables.Received: 12 August 2002, Revised: 10 July 2003, JEL Classification Numbers: D45, D52, D60.Earlier and longer versions were circulated as Discussion Paper No. 9841 (June, 1998), CORE, Université Catholique de Louvain, and Working Paper No. 01-31 (2001), Department of Economics, Brown University.The research of Herings was made possible by a fellowship of the Royal Netherlands Academy of Arts and Sciences and a grant of the Netherlands Organization for Scientific Research (NWO); while this paper was being written, he enjoyed the generous hospitality of the Cowles Foundation.John Geanakoplos and Hamid Sabourian asked questions that clarified a number of points in earlier drafts of the paper. An anonymous referee made comments that were insightful and helpful.     

On the backward-forward procedure

It is shown that backward-forward procedure which selects solutions in dynamic models with rational expectations may fail to give a solution when the lags are of order two.     

Universal Service: An economic perspective

This paper discusses some important issues that feed the debate on the notion of Universal Service, namely, its definition, justification, cost and financing, within a unified economic framework. In view of the diversity of both the historical and forward looking situations under which the implementation of universal service is envisioned, we provide a systematic analysis of the economic trade-offs associated with various scenarios. We also draw on some actual universal service experiences that have reached some appreciable level of maturity, most notably in telecommunications and postal services, to illustrate and sometimes fine tune some of our arguments.     

The equivalence of the Dekel–Fudenberg iterative procedure and weakly perfect rationalizability

Summary. Two approaches have been proposed in the literature to refine the rationalizability solution concept: either assuming that a player believes that with small probability her opponents choose strategies that are irrational, or assuming that their is a small amount of payoff uncertainty. We show that both approaches lead to the same refinement if strategy perturbations are made according to the concept of weakly perfect rationalizability, and if there is payoff uncertainty as in Dekel and Fudenberg [J. of Econ. Theory 52 (1990), 243–267]. For both cases, the strategies that survive are obtained by starting with one round of elimination of weakly dominated strategies followed by many rounds of elimination of strictly dominated strategies. Received: 10 December 1998; revised version: 26 April 1999     

Two simple proofs of the feasibility of the linear tracing procedure

Summary. Theories of equilibrium selection in non-cooperative games, as well as the notion of risk dominance, depend heavily on the so-called linear tracing procedure. This is the first paper to give direct, simple proofs of the feasibility of the linear tracing procedure. The first proof utilizes a result that is related to Kakutani's fixed point theorem and that is an extension of Browder's fixed point theorem. The second proof shows that it is even possible to avoid the use of correspondences. Received: June 8, 1998; revised version: November 8, 1998     

General equilibrium and the new neoclassical synthesis

We present a general equilibrium model of the new neoclassical synthesis that has the same level of generality as the Arrow–Debreu model. This involves a stochastic multi-period economy with a monetary sector and sticky commodity prices. We formulate the notion of a sticky price equilibrium where all agents form rational expectations on prices for commodities and assets, interest rates, and rationing. We present a general result showing that monetary policy imposes no restrictions whatsoever on nominal equilibrium price levels and that the set of sticky price equilibria has a dimension equal to the number of terminal date-events. Stickiness of prices implies that this indeterminacy is real.     

On the robustness of strategy proof mechanisms

Following the Gibbard-Satterthwaite impossibility theorem, the incentives literature has explored restrictions on the domains of unknown characteristics which enable the implementation of some social choice rules by dominant strategy incentive compatible mechanisms. This paper makes precise the intuitive idea that, even when restrictions on preferences take the extreme form of finite- dimensional parametrizations, implementable social choice rules display a lack of robustness and in a sense made explicit are rare.     

Information and the Production of Management in a Theory of the Firm

Abstract

I show that the three main contributions to the theory of the business of the last century – those of Cobb and Douglas (1928 Cobb, Charles W., and Paul H. Douglas. 1928. “A Theory of Production.” American Economic Review 18 (Supplement): 139–165. [Google Scholar]), Coase (1937 Coase, Ronald. 1937. “The Nature of the Firm.” Economica 4 (16): 386–405.[Crossref] , [Google Scholar]), and Lucas (1978 Lucas Jr, Robert E. 1978. “On the Size Distribution of Business Firms.” Bell Journal of Economics 9 (3): 508–523.[Crossref] , [Google Scholar]) – are actually complementary and can be fitted into a general model of the firm size choice as the solution to a problem of optimal allocation of decision making in the economy. Decisions require information, and the availability and cost of information drives the optimization of firm size by the relevant decision makers - managers and entrepreneurs - pursuing the maximization of profits. Trends in firm size, and their reversals, are shown to depend on the aggregate information/output ratio.