Sunspots,indeterminacy and Pareto inefficiency in economies with incomplete markets

Summary. We consider two periods economies with both intrinsic and extrinsic uncertainty. Asset markets are incomplete in the certainty economy. If assets are nominal, there are enough commodities and the number of agents is greater than two and smaller than the total number of states of nature tomorrow (minus one), then a sunspot-invariant equilibrium is generically Pareto dominated by some sunspot equilibria. When assets are real, and there are enough commodities, if there are sunspot equilibria, there are sunspot equilibria Pareto dominating sunspot-invariant equilibria under the same restriction on the number of agents (and stronger restrictions on the number of commodities).Received: 20 October 2003, Revised: 1 April 2004, JEL Classification Numbers: D52.I wish to thank Paolo Siconolfi for helpful suggestions and comments. I aknowledge the financial support of M.I.U.R. and the kind hospitality of C.C.D.R. in Summer 2003.     

Competition in telecommunication networks with call externalities

This paper describes a model involving two interconnected networks offering different degrees of quality. In these networks, there are call externalities enabling consumers to assess the quality of the calls they send and receive. Networks compete in two-part tariffs. Our aim is to show that the “profit neutrality” result no longer applies due to network asymmetry and call externalities. In the case of non reciprocal access charges, call externalities generate private incentives enabling each competitor to charge low access prices. This reduces the risk of tacit collusion as competitors are free to negotiate their access charges.      

Existence and local indeterminacy of periodic equilibrium paths in infinite horizon models with external effects

Summary. It is expected that every periodic equilibrium path may exist even under standard assumptions such as low discounting and the concavity of utility functions in infinite horizon models with external effects. Nevertheless, until now no such example has been presented. In this note we will first construct a bounded growth model that has an external effect and every periodic equilibrium path under any discount factor. Next we will study the conditions under which periodic equilibrium paths have a local indeterminacy. Received: December 23, 1998; revised version: April 19, 1999     

Endogenous wage bargaining institutions in oligopolistic sectors

Summary. This paper explores the endogenous emergence of wage bargaining institutions in a union-oligopoly framework. Technological asymmetries among firms are shown to be the driving force for the emergence of alternative wage bargaining centralization structures that are observable in real life. As wage deals at the sector-level obtain the consensus of all unions and the efficient firms, a regulator has an incentive to authorize those deals by activating/establishing a Minimum Sectoral Wage Institution(MSWI). If productivity differences are high enough, wage setting above the established wage floor may subsequently occur in efficient firms. Otherwise, a completely centralized wage bargaining structure emerges and the sector-level wage deal is simply confirmed as the firms wage rate. If, however, productivity asymmetries are rather insignificant, firms and unions have conflicting interests and a completely decentralized wage bargaining regime prevails in equilibrium.Received: 17 December 2001, Revised: 9 June 2003, JEL Classification Numbers: J50, J31, L13.Correspondence to: Emmanuel PetrakisParticular appreciation is expressed to an anonymous referee who has greatly helped us to improve our work upon an earlier draft of this paper. We also wish to thank T. Kollinzas, J. Padilla, H. Bester, J. Sakovics, K. Uwe-Kühn, J. J. Dolado, J. L. Ferreira, A. Matsui and C. Martinelli for their helpful comments and suggestions.     

Convergence speed and preference externalities in a one-sector model with elastic labor supply

In a one-sector model with elastic labor supply where consumption and leisure externalities are incorporated, we examine the impact of preference externalities on convergence speed.     

Equilibrium dynamics in discrete-time endogenous growth models with social constant returns

The existing literature establishes possibilities of local determinacy and dynamic indeterminacy in continuous-time two-sector models of endogenous growth with social constant returns. The necessary and sufficient condition for local determinacy is that the factor intensity rankings of the two sectors are consistent in the private/physical and social/value sense. The necessary and sufficient condition for dynamic indeterminacy is that the final (consumable) good sector is human (pure) capital intensive in the private sense but physical (consumable) capital intensive in the social sense. This paper re-examines the dynamic properties in a discrete-time endogenous growth framework and finds that conventional propositions obtained in continuous time need not be valid. It is shown that the established necessary and sufficient conditions on factor intensity rankings for local determinacy and dynamic indeterminacy are neither sufficient nor necessary, as the magnitudes of time preference and capital depreciation rates both play essential roles. We have benefitted from discussion with Robert Becker, Eric Bond, Michael Kaganovich, Karl Shell and participants of the Midwest Macroeconomic Conference in Chicago and the Midwest Economic Theory and International Trade Meetings at Indiana University. The fourth author acknowledges financial support from the Institute of Economics and Business Administration of Kobe University and the Institute of Economic Research of Kyoto University to enable this international collaboration.     

Endogenous timing in the switching of technology with Marshallian externalities

We analyze endogenous timing in the switching of technology. Each user chooses when to purchase a new product which embodies new technologies characterized by Marshallian externalities. The technological switch occurs when a large number of users purchase new products. Under complete information, multiple market equilibria exist, and one of the equilibria in which technological switching occurs is efficient. However, if we introduce even a small amount of uncertainty, the switch is delayed in the unique equilibrium under perfect competition, resulting in a loss of social welfare. The market power of a monopolistic supplier of new products alleviates this inefficiency.     

Optimal fiscal policy in the Uzawa-Lucas model with externalities

Summary. This paper devises a fiscal policy by means of which the first-best optimum equilibrium is attained as a market equilibrium in the Uzawa-Lucas model when average human capital has an external effect on productivity. The optimal policy requires the use of a subsidy to investment in human capital which can be financed by a tax on labor income. Lump-sum taxation is not required to balance the government budget either in the steady state or in the transitional phase. Physical capital income should not be taxed. Alternatively, the optimal growth path can be attained by means of a subsidy to human capital. Received: March 21, 2002; revised version: September 4, 2002 RID="*" ID="*" Financial support from the Spanish Ministry of Science and Technology through PNICDYIT grant SEC2002-03663 is gratefully acknowledged.     

Decentralizing Edgeworth equilibria in economies with many commodities

Summary. This paper proves core-equivalence theorems for exchange economies without ordered preferences, defined on locally convex Riesz commodity spaces such that the price space is a lattice. Properness assumptions are borrowed from some recent equilibrium existence results. Received: January 15, 1998; revised version: August 19, 1998     

Equilibria in infinite-dimensional production economies with convexified coalitions

Summary. This paper deals with a private ownership production economy assuming that the commodity space is infinite-dimensional. It is first showed that the fuzzy core allocations, a concept that goes back to J.-P. Aubin, are in a one-to-one correspondence with certain core allocations of a continuum economy suitably defined. This result is obtained under convexity of preferences and production sets and separability of the commodity space. In the case of nonconvex preferences and production sets, the set of fuzzy coalitions can be enlarged in order to obtain that every allocation of the core accordingly defined is supported by a non zero price. The proof of the equivalence result when the positive cone of the commodity space has the empty interior, is obtained under assumptions of properness for preferences relations and production sets. Received: July 9, 1998; revised version: December 6, 1999     

Balancedness and the core in economies with asymmetric information

Summary. A condition is given that is equivalent to balancedness of all NTU-games derived from an exchange economy with asymmetric information when endowments are variable. The condition is applicable to the ex-ante model with expected utilities, but also to the more general model of Arrow-Radner type economies without subjective probabilities. Differences in the interpretation of measurability assumptions between these two models are discussed, and another model with information consistent utility functions is developed in which the result would also hold. Received: December 12, 2001; revised version: November 1, 2002 RID="*" ID="*"I thank two anonymous referees whose comments led to an improvement of the paper.     

Core rationalizability in two-agent exchange economies

Summary. We provide a characterization of selection correspondences in two-person exchange economies that can be core rationalized in the sense that there exists a preference profile with some standard properties that generates the observed choices as the set of core elements of the economy for any given endowment vector. The approach followed in this paper deviates from the standard rational choice model in that a rationalization in terms of a profile of individual orderings rather than in terms of a single individual or social preference relation is analyzed. Received: April 20, 2000; revised version: September 25, 2001     

The set of sunspot equilibria in economies with incomplete financial markets: variable asset prices

Summary. I consider the set of equilibria of two-period economies with S extrinsic states of nature in the second period and I assets with linearly independent nominal payoffs. Asset prices are variable. If the number of agents is greater than (S-I), the payoff matrix is in general position and S 2I, the set of equilibrium allocations generically (in utility function space) contains a smooth manifold of dimension (S-1). Moreover, the map from states o f nature to equilibrium allocations (restricted to this manifold) is one-to-one at each equilibrium. Received: February 23, 1998; revised version: June 1, 2000     

Endogenous market segmentation with heterogeneous agents

Summary. An explanation is provided for the evolution of segmented marketplaces in a pairwise exchange economy. Large traders operating in a pairwise exchange market prefer to meet other similar traders, because this enables them to trade their endowments in a smaller number of encounters. Large and small traders, however, cannot be distinguished a priori, and the existence of the small traders imposes a negative externality on the large traders. We show that, under conditions which are not very restrictive, establishing a separate market (perhaps with an entry fee) designated for the large traders induces the two types of traders to segment themselves. However, this segmentation is not necessarily welfare improving. Received: January 12, 2001; revised version: July 17, 2002 RID="*" ID="*" I wish to thank the participants in the Friday Theory Workshop at the University of Sydney, and the participants at the 17th Australian Theory Workshop at the University of Melbourne for comments and discussion. John Hillas and Stephen King pointed out an omission in an earlier version, and Catherine de Fontenay and Hodaka Morita made extensive comments on earlier drafts. This work was initiated while I was a short-term visitor at the University of Southern California.     

Endogenous technological change with leisure-dependent utility

Summary. This paper investigates the effect of introducing leisure-dependent utility into two models of endogenous technological change. Due to the flexibility in the labour supply the dynamics of the models change significantly. It is shown that if agents attach enough value to leisure in comparison to consumption two balanced growth paths may exist. This implies that economies with the same preferences and the same technology may experience different long-run growth rates. Received: October 17, 1997; revised version: January 6, 1999     

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     

Core concepts in economies where information is almost complete

Summary. The paper analyzes the properties of cores with differential information, as economies converge to complete information. Two core concepts are investigated: the private core, in which agents' net trades are measurable with respect to agents' private information, and the incentive compatible core, in which coalitions of agents are restricted to incentive compatible allocations. Received: March 15, 2000; revised version: August 24, 2000     

Monopolistic security design in finance economies

Summary. The purpose of this paper is to analyze endogenous asset innovation by an entrepreneurial exchange owner in a general equilibrium model of incomplete security markets with financial transaction fees. A monopolistic market maker has the technology to introduce a new option into the economy and charge investors proportional transaction fees if they trade on the exchange. The market maker's objective is to choose the security and transaction fee that maximize revenues when opening the exchange. A computational analysis of this problem is necessary since there are no interesting models with closed-form solutions. We compute the price and welfare effects of the option introduction. Received: March 14, 2000; revised version: December 12, 2000     

Domestic financial market frictions,unrestricted international capital flows,and crises in small open economies

Summary. We present an example of a small open economy where small increases in the world interest rate may induce a sharp decline in output and a precipitous depreciation of the exchange rate. Due to a costly state verification problem in domestic credit markets, combined with unrestricted international capital flows, our economy generates two long-run equilibria, one with low GDP and a relatively depreciated real exchange rate (RER), and one with high GDP and a relatively appreciated RER. The first is always a saddle, while the second may be a sink or a source, depending on the level of the world interest rate. A crisis is identified with the economy switching from an equilibrium path approaching the high-output steady state to the saddlepath approaching the low-output steady state. In Mexicos recent history, periods of growth associated with appreciation of the RER have alternated with periods of sharp contraction and depreciation of the RER. Our economy displays such behavior in response to changes in the world interest rate.Received: 9 April 2002, Revised: 20 March 2003JEL Classification Numbers: E5, F4.G. Antinolfi, E. Huybens: We thank Steve Fazzari, Tim Kehoe, Todd Keister, Manuel Santos, Karl Shell and especially Bruce Smith for very helpful discussions. Jaime Calleja Alderete, Eduardo Camero Godínez, and Juan Vargas Hernández provided excellent research assistance. All remaining errors are ours. Huybens was an assistant professor in the Centro de Investigación Económica, ITAM, at the time this article was written, and part of this work was completed while Antinolfi was a visiting scholar at the Federal Reserve Bank of St. Louis. The views expressed herein are those of the authors, and do not reflect those of the World Bank or the Federal Reserve Bank of St. Louis. Correspondence to: G. Antinolfi