Temporal risk and the nature of induced preferences

It has been known since the work of H. Markowitz (“Portfolio Selection: Efficient Diversification of Investments,” Yale Univ. Press, 1959) and J. Mossin (Amer. Econ. Rev.59 (1969), 172–174) that even an individual whose underlying preferences satisfy the von Neumann-Morgenstern axioms will not choose over delayed (i.e., “temporal”) risky prospects in a manner which can be modelled as expected utility maximizing. Since most economically important instances of risk taking (insurance, real investment, agriculture, career training) involve delayed as opposed to immediately resolved risk, the standard use of expected utility theory to model such decisions must be questioned. In this paper the technique of “generalized expected utility analysis” (M. J. Machina, Econometrica50 (1982), 277–323) and the theory of support functions (R. T. Rockafellar, “Convex Analysis,” Princeton Univ. Press, 1970) are applied to exactly model and hence determine the nature of preferences over temporal risky prospects.     

On the informational efficiency of the competitive resource allocation process

The purpose of this paper is to formalize the competitive process as a parametric process, and then prove the minimality of its message space among the message spaces for a broad class of parametric processes that includes the class of processes considered by Hurwicz (in “Studies in Resource Allocation Processes” (K. J. Arrow and L. Hurwicz, Eds.), pp. 413–423, Cambridge Univ. Press, Cambridge, 1977), Mount and Reiter (J. Econ. Theory6 (1974), 161–192), and Osana (J. Econ. Theory17 (1978), 66–78). The proof of this result turns crucially on the “asymmetry property” (which is stronger than the well-known “uniqueness property” of Hurwicz) and on an injectiveness lemma which is applicable to parametric processes.     

Liquidity preference,loanable funds,and exchange-rate and interest-rate dynamics

This paper studies the implications of the distinction between the liquidity-preference and loanable-funds theories of interest for exchange-rate and interest-rate dynamics in the context of a model similar to ones analyzed by Dornbusch (1976) and Frenkel and Rodriguez (1982). With focus on the overshooting phenomenon, the short-run behavior of the exchange rate and the interest rate, relative to their long-run values, is studied with respect to a monetary shock. It is shown that the two theories may imply substantially different impact-effects on endogenous variables and that the adjustment paths of these variables will vary between the two theories.     

IS-LM stability and economic policy effectiveness: A note

Accepting the findings of Weber (1970) and Yarrow (1975), Cebula finds that conventional fiscal policy has its usual positive effect on the level of income while monetary policy has a negative impact. This paper shows that if a budget constraint of the specific, simplified form G ? T = ΔM is added to the model, the results differ from Cebula's.     

Super-modularity: Applications to convex games and to the greedy algorithm for LP

L. S. Shapley (Internat. J. Game Theory1 (1971), 11–26) showed that if a game is convex, then all the marginal worth vectors are members of the core. J. Edmonds (in “Combinatorial Structures and Their Applications” (R. Guy et al., Eds.), pp. 69–87, Gordon & Breach, New York, 1970) considered a class of linear programming problems for which the greedy algorithm works. The present paper unifies these studies, and establishes the converse of each theorem.     

Adjustment time and economic growth revisited

Since the theory of the adjustment time in a neoclassical growth model was first published close to two decades ago [Sato Sato, February 1963, Sato, June 1964], there have appeared a number of interesting articles dealing with different aspects of adjustment time and economic growth. The purpose of this note is to verify the original conclusions in the framework of variable elasticity of substitutions (VES) production functions. All of the other assumptions are preserved. The results indicate that the original assertion concerning the length of time needed for 90 percent of the adjustment applies to a non-Cobb-Douglas production function as well. “Vicinity” (90%) of the new equilibrium can be reached only after a sufficiently long period of time—approximately 100 years on the average. Furthermore, the pattern of adjustment for this model is very similar to that of the original model.     

Aggregation and the existence of a social utility function

In a well-known paper Gorman (Econometrica21 (1953)) established that the necessary and sufficient condition for the existence of an aggregate, or social, utility function, independent of the distribution of income, is that all individuals' income consumption paths be parallel straight lines. Recently Chipman (J. Econ. Theory8 (1974)), building on the paper of Hurwicz and Uzawa (in “Preference Utility and Demand”) has shown that if the distribution of income is proportional and individual preferences are homothetic, aggregate consumption behavior obeys the necessary integrability conditions. It is shown here that the consistency of aggregate behavior can be derived from more general conditions than the ones used by Chipman and Gorman. Examples of demand systems from which aggregate behavior implies a social utility function are provided. It is then shown that if individual demand functions are linear in income—a form employed by both Gorman and Chipman—it is not necessary that the distribution of income be fixed.     

Testing of the rational expectations and structural neutrality hypotheses

In this paper we examine the tests of the new classical rational expectations and structural neutrality hypotheses undertaken by Leiderman (1980) using a model of money growth and unemployment for the United States developed by Barro (1977). Employing the data used in the studies by Barro and Leiderman we are able to construct an alternative model of money growth and unemployment against which the Barro-Leiderman model is rejected along with the joint hypothesis of rational expectations and structural neutrality.     

Supportability and anonymous equity

W. W. Sharkey and L. G. Telser (J. Econom. Theory18 (1978), 23–37) feel that invulnerability of a natural monopoly to the threat of competitive entry is well reflected in the concept of supportability. G. R. Faulhaber and S. B. Levinson (Amer. Econom. Rev.71 (1981), 1083–1091) point out that supportability is necessary for the achievability of anonymous equity, i.e., absence of consumer subsidies in public enterprise pricing. This paper reconciles supportability with market clearance and shows that supportability is sufficient for the achievability of anonymous equity.     

The nonneutrality of money and employment rates: Tobin and taxation effects

This paper demonstrates sufficient conditions for a system of income taxation to create a negative relationship between the steady-state rates of fully anticipated inflation and employment. The model examined is an extension of the one developed by Fischer (1979) to demonstrate the nonneutrality of money in an economy where inflation is accurately anticipated in the long-run equilibrium.     

Stability of nonlinear homogeneous difference equations

A class of nonlinear homogeneous difference equations is considered in which each coefficient is a homogeneous function of variables. A sufficient condition of relative stability is presented using a nonlinear generalization of the Perron-Frobenius theorem due to Morishima (“Equilibrium, Stability and Growth,” Oxford Univ. Press, Oxford, 1964).     

Essential aggregation procedures on restricted domains of preferences

The restricted domains of individuals' preferences that permit the construction of Arrow social welfare functions and nonmanipulable voting procedures in which each of n voters has some power are characterized. In this context a domain is the Cartesian product of n sets of strict preference orderings. Variants of this result are obtained under the additional requirement of neutrality and in the case when alternatives are vectors whose ith components affect only the ith voter. Kalai and Muller's analogous result (J. Econ. Theory16 (1977), 457–469) concerning nondictatorial procedures is discussed and proved as a corollary to the main theorem.     

The ministry, plan changes, and the ratchet in planning

Do Soviet planners employ the ratchet, that is, do they increase targets in response to higher performance, as is generally accepted, or has David Granick (J. Comp. Econ., Sept. 1980, pp. 255–273) proved statistically that they do not? This paper tries to show that accepted views of planning behavior are well founded. The evidence comes from two sources: East German data show that targets are adjusted ex post, partly in response to performance; Soviet sources, presumed by Granick to prove the absence of a ratchet, are shown to prove its existence.     

A cubic estimte of the term structure of interest rates for a money demand function

Heller and Khan (1979) estimate the term structure of interest rates by a quadratic equation in order to employ the estimated parameters of the term structure in a demand-for-money function. An important improvement of their estimates can be made by specifying a cubic rather than a quadratic equation in order to estimate “humped” term structures. Furthermore, the ordinal numbering of the maturities must be changed to the actual length of the maturity of each security to avoid estimation error.     

Nash equilibrium search for the best alternative

In a recent paper, Weitzman (Econometrica47 (1979) 641–654) described a policy of “optimal search for the best alternative.” The present paper is concerned with the development and characterization of a policy of “Nash equilibrium search for the best alternative.” Specifically, it is shown that, under certain monotonicity assumptions, and under the assumption that firms have incomplete information regarding the results of rivals' search behavior, a Nash equilibrium search policy exists and has the same form as Weitzman's optimal search policy.     

Real-sector parameter instability and the optimal choice of monetary policy

In this paper we consider the effects of uncertainty upon the optimum choice of monetary policy instrument. Specifically we extend the work of Poole (1970), and others, to allow for the existence of multiplicative as well as additive stochastic coefficients in the structural equations of the standard IS-LM macroeconomic model. We demonstrate that the commonly accepted notion that money-stock control is superior to interest-rate control when the IS schedule is stochastic is not always valid.     

IS-LM stability and economic policy effectiveness: Further observations

Professor Wang (1980) has usefully extended my original model by introducing an explicit government budget constraint. However, the form of that budget constraint is very restrictive and limited. In this note, an alternative budget constraint to Wang's is developed. This permits the model and policy analysis to be significantly extended and generalized.     

Demand for international money 1962–1977

It has previously been shown that there is a well established pattern of substitution between external holdings of major currencies [Chrystal (1977)]. The present paper extends the earlier results through a period of major perturbations in the international monetary system. Such substitutions continue to be well defined, though the present results indicate the presence of dynamic instability in the system as specified.     

Direct and indirect requirements: A correct economic interpretation of the Hawkins-Simon conditions

This paper proposes a correct economic interpretation of the Hawkins-Simon conditions of macroeconomic stability. First, it indicates a misinterpretation of the conditions by Dorfman, Samuelson, and Solow (1958) for the two-sector case. Then, it investigates a probable source of their misinterpretation, i.e., the confusion between the direct and indirect input requirements to support a unit of final demand, and the direct and indirect input requirements to produce a unit of gross output. Finally, a generalized economic interpretation of the conditions for the general case is developed.     

Product differentiation,prices, and market structure

We examine the effect of cost reductions and advertising on equilibrium prices and the equilibrium market shares. Our equilibrium has the following characteristics; the aggregate demand is the integral of individual demand over consumers, goods are differentiated in the sense of Novshek and Sonnenschein (1979), production functions are constant returns to scale.Cost reductions of a firm, which are due to R&D activity of the firm, lead to declines of equilibrium prices. Advertising of a firm, which is supposed to influence consumers' preferences in favor of the firm, cannot necessarily cause equilibrium prices to go up; one firm can raise its prices, but the other cannot. Contrary to our intuition, cost reductions cannot always enable a firm to capture a larger share.