The Arrow-Debreu model: How math can hide a fatal conceptual error

I argue that math, like love, can cover a multitude of sins, and I use the neoclassical object of adoration, the Arrow-Debreu model, as the case in point. It is commonplace that the Arrow-Debreu (AD) model of general equilibrium does not describe the real world, but it is equally commonplace to accept it as representing the pure logic of the competitive capitalist economy in an idealized world free of transactions costs. I show that the AD model fails even as an idealized model; it actually mistakes the logic of pure capitalism. Unlike McKenzie’s model of idealized general equilibrium under constant returns to scale, Arrow and Debreu claim to have shown the existence of competitive equilibrium under decreasing returns to scale and positive pure profits. The AD model (again unlike the McKinzie model) needs to assign the profits to individuals and this is done using the notion of “ownership of the production set.” But this notion suffers from a fatal ambiguity. If Arrow and Debreu interpret it to mean “ownership of a corporation” then a simple argument in the form “labor can hire capital or capital can hire labor” defeats the alleged necessity of assigning residual claimancy to the corporation. A given corporation may or may not end up exploiting a set of production opportunities (represented by a production set) depending on whether it hires in labor and undertakes production or hires out its capital to others (all by assumption at the parametrically given prices). In the latter case, residual claimancy is elsewhere. There is no such property right as “ownership of a production set” in a private property market economy. The legal party which purchases or already owns all the inputs used up in production has the defensible legal claim on the outputs: there is no need to also “purchase the production set.” At any set of prices that allow positive pure profits, anyone in the idealized AD model could bid up the price of the inputs and thus try to reap a smaller but still positive profit. Therefore,pace Arrow and Debreu, there could be no equilibrium with positive pure profits. In the Appendix, the property rights fallacy that afflicts the AD model is shown to also afflict orthodox capital theory and corporate finance theory.     

Estimating market power using a composed error model

We present a maximum likelihood based composed error model to estimate market powers of firms. In our model, the stochastic part of the supply relation includes two random components: the conventional two‐sided error term and a random term, which is capturing firm‐specific conducts. Moreover, we provide a generalization of scaled Stevenson stochastic frontier model in the context of doubly truncated normal distributions. We estimate the market powers of Chicago based airlines as an empirical example that is showing the applicability of our estimation procedure.     

The searchers,II: How consumers can find cost-effective,quality health care

The original "Searchers" article appeared in the March 2000 issue of Employee Benefits Journal. It described the use of a patient satisfaction survey at Southwest Texas State University (SWT) to assist employees at the annual open enrollment period to better select their managed care organization (MCO). This article revisits that process, but further describes the subsequent publication of a recommended list of preferred physicians and the use of the peer review to report consumer concerns about the performance of individual physicians.     

Pollution and life expectancy: How environmental policy can promote growth

This article investigates the influence of environmental policy (EP) on growth in an AK-type growth model, when finite lifetime is introduced and the link between pollution and life expectancy (through the detrimental impact of pollution on health) is taken into account.Using an overlapping generations model à la Blanchard [Blanchard, O. (1985). Debt, deficits and finite horizon. Journal of Political Economy, 93:223-247], we demonstrate that finite lifetime introduces a “generational turnover effect” which modifies the influence of the EP on growth. Thus, when lifetime is finite and independent from pollution, we show that the “generational turnover effect” limits the detrimental impact of the EP on growth, if agents smooth their consumption over time. When pollution negatively influences life expectancy through health, we demonstrate that the “generational turnover effect” is magnified and that the EP and growth have an inverted U-shaped relationship in the steady-state. In this case, we show that the environmental policy is more likely to promote growth (i.e. it stimulates growth for a wider range of environmental taxes) when the impact of pollution on health is important and/or public expenditures in health are low. Finally, using numerical simulations, we find that for the value of parameters that we have chosen, the EP will be more likely to promote growth when agents smooth consumption over time.     

Encompassing and rational expectations: How sequential corroboration can imply refutation

Even though pieces of empirical evidence individually may corroborate an economic theory, their joint existence may refute that same theory. Testing of rational expectations models provides a concrete illustration of this principle. Surprisingly, empirical refutation of a rational expectations model may occur without having to estimate that model, and the refutation may be for a large class of expectations-based models and not just for a particular model specification. Narrow money demand in the United Kingdom illustrates such refutation. The general proposition concerning corroboration and refutation strongly favors the building of empirical models that are consistent with all available evidence. First version received: July 1994/final version received: July 1997     

Ready to reform: How popular initiatives can be successful

We study whether the number of signatures collected to qualify a popular initiative affects the probability of reforming the status quo. The initiative process is modeled as a sequential game under uncertainty: petitioners make an entry decision and collect signatures to qualify the initiative. Politicians decide about a political compromise – a counter proposal – after which petitioners have the option to withdraw the initiative before the vote. In equilibrium, politicians infer the initiative's popularity from the number of signatures and collection time. The more the initiative is perceived as a threat to the status quo, the more likely politicians come up with a counter proposal. Under certain conditions, petitioners have the incentive to collect more signatures than required for qualification to demonstrate high success probability.We test model predictions using the data set of all Swiss constitutional initiatives at the federal level between 1891 and 2010. Overall, we find supporting evidence for the model mechanisms. Fast signature collection is associated with a higher probability of reform. The effect is mediated through a higher probability of provoking a counter proposal. Ultimately, counter proposals are key to amending the status quo. Restricting the signature collection time reduces the informative mechanism of the signature collection process considerably.     

Price rigidity and market-clearing: a conceptual clarification

This article tests the view (derived from Hicks and Patinkin)that non-market clearance may be caused by slow adjustment (‘processrigidity’). There are models where market-rationing ispresent and derives from some form of rigidity, but this rigiditycannot be considered as process rigidity. It is similarly possibleto accommodate the idea of process rigidity within the Marshallianresearch programme. What is missing is that market-rationingmight be its corollary. The reason such a causal link is oftenbelieved to exist lies in a generic use of the concept of rigidity,used to designate alternative and incompatible phenomena: ‘exogenousend-state rigidity’ and ‘equilibrium end-state rigidity’,as well as process rigidity. It is true that these first twoforms of rigidity create market rationing. The belief that slowadjustment also generates market rationing results from theunwarranted extension to process rigidity of conclusions whichare only valid for the first two.     

The predictive value of subjective labour supply data: A partial-adjustment model with measurement error

This paper tests the predictive value of subjective labour supply data for adjustments in working hours over time. The idea is that if subjective labour supply data help to predict working hours, the subjective data must contain at least some information on individual labour supply preferences. In this paper, I formulate a partial-adjustment model that allows for measurement error in the observed variables. Applying estimation methods that are developed for dynamic panel data models, I find evidence for a predictive power of subjective labour supply data concerning desired working hours in the German Socio-Economic Panel 1988–1995.I wish to thank John Haisken-DeNew, Astrid Kunze, Markus Pannenberg, Winfried Pohlmeier, Frank Windmeijer, Rainer Winkelmann, my former colleagues at IZA and two anonymous referees for their valuable comments. The author gratefully acknowledges DIW for providing the data.First version received: December 2001/Final version received: December 2003     

An improved generalized moments estimator for a spatial moving average error model

Following Arnold and Wied (2010), we suggest an improved generalized moments estimator for the spatial moving average error model which takes explicitly into account that the moment conditions are based on OLS residuals rather than the true disturbances.     

How quorum rules distort referendum outcomes: Evidence from a pivotal voter model

In many jurisdictions, whether referendum results are binding depends on legally defined quorum requirements. We use a pivotal voter model to examine the consequences of such requirements. We find that, although quorum rules differ in consequences, a status quo bias that is usually attributed need not be present and that quorum rules may work against the status quo. The rules can also both favor minorities and reduce voter turnout. Because quorum rules can create situations in which the secrecy of the vote is compromised, the door is opened to undemocratic forms of social and political pressure.     

The validity of the ELG hypothesis in the MENA region: cointegration and error correction model analysis

The export-led growth (ELG) hypothesis is examined for nine Middle East and North Africa (MENA) countries in three-variable vector autoregressive and error correction models. When considering total exports, the results reject the ELG hypothesis in almost all of these countries. When only manufactured exports are examined, no support is found for ELG in countries with relatively low shares of manufactured exports in total merchandise exports but strong support in countries with relatively high shares. These findings suggest that promoting exports may contribute to economic growth only after a certain threshold of manufactured exports has been reached.     

The Iowa model: a proposed model for nursing administration

The purpose of the Iowa Model is to serve both as a heuristic device and as a framework for articulating knowledge for nursing administration research, practice, and education. The model delineates two domains of knowledge (systems and outcomes), each with three levels (patient aggregates, the organization, and the health care system). Concepts useful for knowledge development are identified for each level. Practice, research, and curricular applications of the model are made.     

私人利益取向的群体行动何以可能

本文尝试根据引发因素和目标指向的不同对群体行动做了一个简单的四分法,归结起来可以看成两大类:一是共同利益取向的群体行动,二是私人利益取向的群体行动。前者已有很多学者做过研究,本文着重通过对个案的分析探讨后者的发生机制。认为怨恨的生产和对怨恨的解释、其他途径的不可行或想象的不可行、有成功的先例等几个因素可以解释为什么采取群体行动,而强关系的介入使得私人利益(微观)和群体行动(中观)连接起来,群体行动成为可能。结构的(关系的、网络的)视角或许是分析私人利益取向的群体行动的一个有解释力的尝试。     

How economic growth becomes a cost: The scarcity multiplier

Competent macro-allocation of natural capital would allow micro-allocation by economics to be fully useful and may help prevent the latter being confused with the former. This macro-allocation requires social choice, so to see whether it is likely to be competent the effectiveness of democratic politics is investigated. Dysfunction is predicted because democratic institutions produce elements of irresponsibility and ignorance. These permit inflation of want by supply (IWS), a positive feedback in which wants are increased by their supply, provoking more supply, hence more want. Four IWS systems combine under common conditions to indefinitely escalate the scarcity of natural capital, a crucial failure of macro-allocation. This ‘scarcity multiplier' causes apparently rational attempts to satisfy a few wants to exacerbate many, increasing dissatisfaction. Institutions for deliberative public participation may enable democracies to recognize and control IWS. Unless this is done the scarcity multiplier may make cost-benefit analysis misleading: it may make the costs of development projects exceed their benefits in proportion to their financial success.