GROWTH AND BUBBLES WITH CONSUMPTION EXTERNALITIES*

This paper explores the role of consumption externalities in an overlapping generations economy with capital accumulation. If consumers in each generation are concerned with other agents’ consumption behaviours, there exist intergenerational as well as intragenerational consumption externalities. It is the presence of intergenreational consumption externalities that may produce fundamental effects both on equilibrium dynamics and on steady‐state characterization of the economy. This paper demonstrates this fact in the context of a simple model of endogenously growing, overlapping‐generations economy with or without asset bubbles.     

THE EXISTENCE OF EQUILIBRIUM IN A DIFFERENTIATED DUOPOLY WITH NETWORK EXTERNALITIES*

The existence of a pure‐strategy subgame‐perfect equilibrium in qualities and prices is investigated in a duopoly model of vertical differentiation where quality improvements require a quadratic variable cost and network externalities operate. We show that there exists a parameter region where the incentive to predate at the quality stage prevents firms from reaching a pure‐strategy non‐cooperative equilibrium with prices above marginal costs. If network externalities are sufficiently large, a Bertrand equilibrium with zero profits may arise, although the amount of product differentiation is strictly positive.     

CONSUMPTION AND LEISURE EXTERNALITIES, ECONOMIC GROWTH AND EQUILIBRIUM EFFICIENCY

This paper analyzes the effects of consumption and leisure externalities on growth and welfare in a two‐sector endogenous growth model with human capital accumulation. Both types of externalities are shown to affect the long‐run equilibrium and optimal growth rates in a rather different way. The relationship between the steady state of the market and the centrally planned economy is also analyzed. The optimal growth path can be decentralized by resorting to consumption or labor income taxation, whereas capital income should be untaxed. Numerical simulations suggest that growth and welfare effects of mild consumption and leisure externalities may be quantitatively important.     

WELFARE IMPLICATIONS OF THE INTERACTION BETWEEN HABITS AND CONSUMPTION EXTERNALITIES*

We analyze the welfare properties of the equilibrium path of a growth model where both habits and consumption externalities affect the utility of consumers. Our analysis highlights the crucial role played by complementarities between externalities and habits in order to generate an inefficient dynamic equilibrium. In particular, we show that the competitive equilibrium is inefficient when consumption externalities and habit‐adjusted consumption are not perfect substitutes.     

CAPACITY EXPANSION IN MARKETS WITH INTER‐TEMPORAL CONSUMPTION EXTERNALITIES

This paper analyses market capacity expansion in the presence of inter‐temporal consumption externalities such as consumer learning, networks and bandwagon effects. An externality leads to an endogenous shift of market demand that responds to past market capacity. Whereas market capacity grows in waves, its magnitude depends on the degree of market concentration. The competitive environment contributes to S‐shaped time patterns of market capacity expansion. On the other hand, using a low introductory price, a monopolist plans an initially larger amount of market cultivation than a competitive market capacity expansion.     

GENERAL EQUILIBRIUM ANALYSIS OF OVERLAPPING GENERATIONS WITH HETEROGENEOUS TIME PREFERENCES

The overlapping generations model presented herein requires incorporation of exactly three periods in which one lives, but makes intertemporal decision‐making twice, neither once nor three times. Single decision‐making at the outset, none thereafter, ignores the fact that one makes decisions every day anew as long as tomorrow exists. Incorporating such observations most simply requires decisions to be made at the first period and the second, but not at the third or last period. Our model reveals how the Mabiki (infanticides) and the Narayama (elderlycides) can occur simultaneously. We also find conditions under which child‐indulgence and parental overprotection called sunekajiri might be reckoned a virtue.     

ECONOMIC FLUCTUATIONS WITH INTERACTIVE AGENTS: DYNAMIC AND STOCHASTIC EXTERNALITIES*

This paper proposes a general modelling framework for macroeconomic dynamic behaviour of a large collection of interacting agents, and illustrates the procedure for a simple case of agents having the same binary decision set. Evolution over time of the fractions of agents using the same technology is modelled as a birth-and-death stochastic process with endogenized transition rates, and its master equation (Chapman-Kolmogorov backward equation) is expanded into power series in the total number of agents in the model. The first term of the expansion is the aggregate (macroeconomic) dynamic model. Stochastic dynamics of the proportions of agents using the same technology can exhibit multiple equilibria; this paper discusses an example with one locally unstable and two locally stable equilibria, with some simulation computer runs. There are two results of broad implication. One is the demonstration that stochastic dynamics allocates positive probabilities to all locally stable equilibria. Stochastic dynamics thus stands in sharp contrast to deterministic dynamics. In the latter, history (initial conditions) and expectations (often exogenously introduced discontinuous changes in trajectories) uniquely select the basin of attraction in which trajectories are eventually located. The second is the illustration of the usefulness of jump Markov processes in general, and birth-and-death processes in particular in economic modelling. Among several results specific to these processes, we show that the mean first passage time from one locally stable equilibrium to another is proportional to the exponential function of the height of the potential barrier separating the two basins of attraction of these two locally stable equilibria.     

UNIQUENESS AND INDETERMINACY OF THE EQUILIBRIUM GROWTH PATH IN THE UZAWA‐LUCAS MODEL WITH SECTOR SPECIFIC EXTERNALITIES*

We introduce sector specific external effects of human capital on production in an otherwise Uzawa‐Lucas model of endogenous growth; and show that the problem of indeterminacy of the competitive equilibrium growth path does not exist even if the production function satisfies the increasing returns to scale at the social level.     

UNEMPLOYMENT IN AN EQUILIBRIUM MODEL WITH BARGAINING*

This paper develops a model which embeds the Nash-equilibrium version of McDonald and Solow's (1981) wage-bargaining model into an otherwise standard static equilibrium macro model. Equilibrium unemployment is possible. Real shocks to demand result in pro-cyclical employment and anti-cyclical real wage movements while money shocks are neutral. This is in some contrast to the results obtained by McDonald and Solow.     

A MARKET WITH A SOCIAL CONSUMPTION EXTERNALITY*

We model a spatial market in which the utility of each consumer is affected by the consumers who buy precisely the same product. The marginal contribution of consumers x's purchase on consumer y depends on |x–y|, which declines as |x–y| increases. Such modelling of preferences fits goods that signal a consumer's place in society—clothing styles, automobiles and jewellry are examples. For 2n + 1 firms we find the unique symmetric equilibrium and derive comparative statics on the optimal number of firms, the largest number of firms the market can support, and the behaviour of profits per firm as n increases.     

DUALITY WITH SECTOR‐SPECIFIC EXTERNALITIES UNDER SOCIAL CONSTANT RETURNS*

We develop dual approaches to quantity and price relationships of production in a general multisectoral model with sector‐specific externalities. The production of each good exhibits socially constant returns to scale but privately decreasing returns. We find that the Stolper‐Samuelson theorem holds for factor intensity ranking from the social perspective and that the Rybczynski theorem holds for factor intensity ranking from the private perspective. The price‐output dual fails to hold in general. Moreover, we re‐establish the Heckscher‐Ohlin theorem in the two‐sector case, as well as the factor endowment–factor price and price‐output comparative statics in the high‐dimension case under proper conditions.     

WELFARE‐MAXIMISING PRICING IN A MACROECONOMIC MODEL WITH IMPERFECT COMPETITION AND CONSUMPTION EXTERNALITIES

This paper develops a simple macroeconomic model with imperfect competition and consumption externalities, and uses it to examine whether the marginal cost pricing rule in the partial equilibrium framework can apply to the general equilibrium framework. It is shown that, for welfare to be maximised, average revenue should be set equal to marginal cost if consumption externalities are either absent or positive. However, for welfare to be maximised, average revenue should be set higher than marginal cost in the presence of negative consumption externalities.     

COLLUSIVE EQUILIBRIUM IN COURNOT OLIGOPOLIES WITH UNKNOWN COSTS*

The article studies collusive equilibria in an infinitely repeated Cournot oligopoly with unknown costs. I look at collusive pooled Perfect Bayesian equilibria and separating equilibria either with signaling or with communication. In the separating equilibria with signaling the firms play the strictly separating Bayesian Nash equilibrium in period 1 and produce the optimal incentive compatible collusive quantity vector from period 2 onwards. In the separating equilibrium with communication the optimal incentive compatible quantity vector is produced from period 1 onwards. Among these, the optimal separating equilibrium with communication gives the highest expected discounted joint profits.     

FOUR CHARACTERIZATIONS OF CONSTRAINED PARETO EFFICIENCY IN CONTINUUM ECONOMIES WITH WIDESPREAD EXTERNALITIES*

In continuum economies, widespread externalities are those over which each individual has negligible control. Nash-Walrasian equilibria with lump-sum transfers are defined, and their existence proved. They are then characterized by the property of “f-constrained Pareto efficiency” for finite coalitions. More general “private good” Nash-Walrasian equilibria are characterized as private-good constrained-Pareto efficient. Introducing complete Pigou taxes or subsidies leads to equilibria that are characterized by constrained efficiency and f-constrained efficiency for given levels of the widespread externalities. But full efficiency requires resolving the public-good problem of determining those aggregate externalities or, equivalently, of setting appropriate Pigou prices.     

ECONOMIES OF SCALE IN HOUSEHOLD CONSUMPTION: WITH APPLICATION TO AUSTRALIA*

This paper presents a general framework for defining the economies of scale in household consumption. It allows commodity specific economies of scale (taking into account the substitution effects). The chief contribution of the paper is to show how one can estimate economies of scale from cross section budget data without price information. The problem of identification that is inherent in these models is overcome by making use of some assumptions about the nature of goods and services employed in the estimation. The methodology developed in the paper is applied to Australian Household Expenditure Survey for 1984 to calculate item wise and overall economies of scale.     

EQUILIBRIUM GROWTH IN A MONETARY ECONOMY WITH TRANSACTIONS COSTS*

The paper describes a dynamic general equilibrium monetary economy with technological primitives that are consistent with the possibility of asymptotic equilibrium growth. The paper focuses on the relationship between equilibrium financing constraints on investment goods, transaction costs and economic growth. A generalized growth condition is derived that involves both monetary growth rates and transaction costs. The condition is used to show that (i) although inflation taxes can potentially exert a negative influence on long-run economic growth, these growth effects cannot in general be arbitrarily large; and (ii) for some monetary growth rates, money is superneutral in contrast to the models of Stockman and Abel. Numerical work indicates that although the welfare and growth effects of decreasing nominal interest rates from a benchmark are large, the costs associated with raising nominal interest rates from benchmark are not.     

FIRMS’ CHARACTERISTIC AND EQUILIBRIUM WITH TRADEABLE PERMITS MARKET*

We study, in a simple model, the partial equilibrium of an industry with n firms endowed by different Cobb‐Douglas technologies which have different pollution effects. The price of input (labour) and the demand curve to the industry are given. Pollution is restricted by a tradeable market of permits in the industry. Each firm is characterised by a parameter combining production efficiency and pollution effect, its e‐characteristic. The equilibrium depends mainly on these e‐characteristics which are linked to the performance of the technologies. In the long run performances are defined per unit of capital. Last, we analyse the consequences of permits’ allocations on the profitability of the firms.     

UNIQUENESS OF EQUILIBRIUM PAYOFFS IN FINITELY REPEATED GAMES WITH IMPERFECT MONITORING*

This paper examines when a finitely repeated game with imperfect monitoring has a unique equilibrium payoff vector. This problem is nontrivial under imperfect monitoring, because uniqueness of equilibrium (outcome) in the stage game does not extend to finitely repeated games. A (correlated) equilibrium is equilibrium minimaxing if any player's equilibrium payoff is her minimax value when the other players choose a correlated action profile from the actions played in the equilibrium. The uniqueness result holds if all stage game correlated equilibria are equilibrium minimaxing and have the same payoffs. The uniqueness result does not hold under weaker conditions.     

TAX COMPETITION IN A SIMPLE MODEL WITH HETEROGENEOUS FIRMS: HOW LARGER MARKETS REDUCE PROFIT TAXES*

We set up a simple two‐country model of tax competition where firms with different productivity decide in which location to produce and sell output. In this model, a unique, asymmetric Nash equilibrium is shown to exist, provided that countries are sufficiently different with respect to their exogenous market size. Sorting of firms occurs in equilibrium, as the smaller country levies the lower tax rate and attracts the low‐cost firms. A simultaneous expansion of both markets that raises the profitability of firms intensifies tax competition and causes both countries to reduce their tax rates, despite higher corporate tax bases.