Firms' market behavior under imperfect information and economic natural selection

The economic natural selection argument claims superior survival performance for profit-maximizing firms. This assertion is investigated in a factorial simulation study assuming imperfect information. Three alternative models of firms' behavior are tested with respect to their ability to adapt to the observed realizations of non-stationary demand processes. Findings show that, in such a scenario, it is the difference in implicit learning and adaption capabilities rather than that in motivation or goals which affects survivability. Consequently, differential bankruptcy and disengagement rates vary with the peculiarities of the market environment. The tested assertion cannot generally be confirmed.     

Bilateral monopoly with imperfect information

The problem at stake in this paper is the determination of the price and the quantity transacted in a bilateral monopoly with imperfect information. A simple characterization of incentive compatible contracts is given that significantly generalizes a previous one, due to Green and Honkapohja. This allows an easy study of two interesting families of such contracts and their institutional counterpart: namely, cost-plus contracts and contracts with quantity rationing.     

Technical change and employment under imperfect competition with perfect and imperfect information

We consider the implications of process innovation for the aggregate level of employment of assuming that not all firms adopt new technologies simultaneously and that non-innovators adopt (temporarily)disequilibrium strategies (due to imperfect information about the introduction of the new technology). Two alternative scenarios are explored. In one, consumers' demands arise from symmetric homothetic preferences, and in the other from asymmetric (Hotelling-type) preferences. We find that there may be a reduction in employment in the transition to the new equilibrium under both types of preferences even if there is no decrease (or an increase) in the new (long-run) equilibrium level of employment. The conditions under which this will occur are however different for the alternative preference structures. Further, the latter are shown to have different implications for theequilibrium effects of process innovation.     

Reputation and imperfect information

A common observation in the informal literature of economics (and elsewhere) is that is multistage “games,” players may seek early in the game to acquire a reputation for being “tough” or “benevolent” or something else. But this phenomenon is not observed in some formal game-theoretic analyses of finite games, such as Selten's finitely repeated chain-store game or in the finitely repeated prisoners' dilemma. We reexamine Selten's model, adding to it a “small” amount of imperfect (or incomplete) information about players' payoffs, and we find that this addition is sufficient to give rise to the “reputation effect” that one intuitively expects.     

Cutting the cake with a stranger: Egoism and altruism with imperfect information

This paper investigates the classic divide-and-choose scheme and applies it to a situation in which agents can be either egoists or altruists. Egoism and altruism are defined by looking at the agents' choices as their pieces of cake are permuted. If the divider is informed about the chooser's social attitude, the resulting allocation is fair, but egoists and altruists receive unequal treatment from the application of the rule. With imperfect information about the chooser's social attitude, division is more equal. The results show that, unless the cake is already cut equally, the smaller share increases as the divider's risk aversion increases and as the subjective probability that the chooser is an egoist comes closer to one-half.     

Price and quantity adjustments in the Austrian labour market

Austria is among the very few countries in the European Union which have managed to maintain comparatively low unemployment rates and high employment rates. This study looks at the price and quantity adjustment mechanisms in the Austrian labour market which may have contributed to this favourable outcome. After reviewing briefly the basic theoretical reasoning an empirical investigation is began into gross flow dynamics in the labour market and the cyclical volatility of employment and unemployment in Austria. In international comparison Austrian unemployment is very stable over the business cycle. This is due mainly to the high sensitivity of the labour force on cyclical conditions and, partly, also on the relatively weak responsiveness of employment to cyclical fluctuations in output, the latter being possibly attributable to the high degree of real wage flexibility in Austria. The study proceeds to show that the long-run elasticity of wages with respect to unemployment is indeed quite high in Austria. However, evidence was also found for outsider effects in the Austrian wage setting process. Relative wage structures, on the other hand, appear to be rather rigid.     

Labour demand under VES production and imperfect output market conditions: The U.K. manufacturing experience

A labour demand schedule is derived under VES production and imperfect production market conditions. Tests on UK manufacturing data suggest the importance of current output and to a lesser extent labour cost and the effects of adjustment costs on the employment decision. Substitution possibilities, dependent on the ratio of labour to capital's share generally lie between zero and unity.     

Large market games with demand uncertainty

We consider a market game with a continuum of consumers, where the measure of each type is stochastic. Nature selects the set of active consumers, who make bids and offers on ?−1 spot market trading posts. Existence of type-symmetric Nash equilibrium is proven. When facing price uncertainty, best responses are unique, and a Nash equilibrium to the sell-all game is typically not a Nash equilibrium to the original game. Under plausible circumstances, consumers strictly prefer to be on one side of the market.     

Exchange-rate adjustments in small market and centrally planned economies

In a centrally planned economy (CPE) that has eliminated detailed central planning of output and foreign trade and introduced some domestic price flexibility and organic linkages to world-market prices, the exchange rate can take on more than an accounting function. This paper contrasts the effects of exchange-rate adjustment in such a “modified” CPE (or MCPE) with those in a market economy. There are a number of reasons why MCPE authorities might eschew devaluation as a policy instrument, despite the possibility that it would be more effective in some cases in improving the trade balance than in a market economy.     

Pay discrimination and imperfect competition in the labor market

Recent work has shown the prevalence of monopsony power in labor markets characterized by low pay. Monopsony has long been offered as a potential explanation of labor market discrimination. Yet, in the case of gender discrimination, most studies suggest that female labor supply is more elastic than that of males which, in a standard monopsony model, would imply higher pay for females. In the current paper we develop a theoretical framework capable of reconciling these empirical phenomena. We also attempt to explain: (i) the puzzle regarding the apparent trade-off between profits and discrimination in the standard neoclassical treatment of discrimination associated with the work of Becker (1957) and Arrow (1973) and (ii) the apparently paradoxical increase in female relative employment at a time of a significant rise in the relative price of female labor.     

Fiscal adjustments,labour market flexibility and unemployment

Using a panel of 17 countries for 1978–2009, we find that tax-driven consolidations increase unemployment by 0.25 percentage points. Labour market flexibility mitigates this: a one-point rise in the flexibility index reduces youth (long-term) unemployment by 0.6–0.7 (1.8–2.2) percentage points.     

A model of housing and credit cycles with imperfect market knowledge

The paper presents a model of housing and credit cycles featuring distorted beliefs and comovement and mutual reinforcement between house price expectations and price developments via credit expansion/contraction. Positive (negative) development in house prices fuels optimism (pessimism) and credit expansion (contraction), which in turn boost (dampen) housing demand and house prices and reinforce agents׳ optimism (pessimism). Bayesian learning about house prices can endogenously generate self-reinforcing booms and busts in house prices and significantly strengthen the role of collateral constraints in aggregate fluctuations. The model can quantitatively account for the 2001–2008 U.S. boom-bust cycle in house prices and associated household debt and consumption dynamics. It also demonstrates that allowing for imperfect knowledge of agents, a higher leveraged economy is more prone to self-reinforcing fluctuations.     

Adverse selection and imperfect monitoring in a labour market: Some game-theoretic remarks

Zusammenfassung In einer früheren Arbeit hat der Autor gezeigt, daß eine Erweiterung des Effizienzlohnmodells mit adverser Selektion um unvollkommene und kostspielige Leistungskontrolle die Möglichkeit von Lohnrigiditäten und unfreiwilliger Arbeitslosigkeit nicht beseitigt. Allerdings muß ein Nash-Gleichgewicht nicht existieren, und das Riley-Gleichgewicht ist nicht eindeutig. Daher wird der Ansatz als dreistufiges Spiel neu modelliert und gezeigt, daß Nash-Gleichgewichte stets existieren und von diesen jenes mit Einheitslohn und (möglicher) unfreiwilliger Arbeitslosigkeit das plausibelste ist.

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An earlier version of this paper was presented at the annual meeting of the Austrian Economic Association 1985. The author wishes to thank M. Hellwig for stimulating discussions as well as H. Duda, M. Nermuth, and K. Podczeck for helpful comments on an earlier draft. They are not, of course, to be held responsible for the shortcomings of this paper.     

Credit rationing as a (temporary) suboptimal equilibrium with imperfect information

Jaffee and Russell (1976) characterized partial rationing as a contract rate and contract size below those of the no-rationing equilibrium. Their non-price rationing here obtains as a suboptimal equilibrium for a risk-averse rate-setting intermediary with marginal increasing cost and a monopolistically competitive loan demand. The temporary (dis)equilibrium corresponds to a dominated strategy, and the wider class of models of which J-R's solution is but a singular case is touched upon.     

Standards vs. labels with imperfect competition and asymmetric information

I demonstrate that providing information about product quality is not necessarily the best way to address asymmetric information problems when markets are imperfectly competitive. In a vertical differentiation model I show that a Minimum Quality Standard, which retains asymmetric information, generates more welfare than a label, which provides full information.     

Rationing rule, imperfect information and equilibrium

Summary. The impact of imperfect information on the price setting behaviour of firms is analysed. Specifically, consumers support an information cost to become informed about prices. Firms are endowed with U-shaped average cost curves. If a firm does not supply more than its competitive supply as determined by its marginal cost schedule, then we show that the existence of a pure strategy equilibrium is conditional on the rationing rule employed. If uninformed consumers are served first then the monopoly price is the sole equilibrium whenever consumers' information costs are high enough. Otherwise, a pure strategy equilibrium fails to exist contrary to the results of Salop and Stiglitz (1977) or Braverman (1980) who implicitly suppose that firms supply all the demand at a given price. Received: May 17, 1999; revised version: September 15, 2000