Agreeing on generalized Darwinism: a response to Geoffrey Hodgson and Thorbj?rn Knudsen

I thank Geoffrey Hodgson and Thorbj?rn Knudsen for their thought-provoking response to my latest generalization of Darwinism, and welcome their proposal to cooperate, after many years of our independent searches. I agree with them that our searches contain more similarities than both they and I had previously seen, but consider our remaining differences—especially in the terms employed and in the definitions of the terms we both employ, including “information,” “instructions,” “programs,” and “Lamarckism”—more important than they do. Their response also exaggerates or distorts some of my arguments. All this needs to be clarified before our cooperation can start.     

EDGAR on the internet: The welfare effects of wider information distribution in an experimental market for risky assets

Policies such as the SEC’s Fair Disclosure Rule, and technologies such as SEC EDGAR, aim to disseminate corporate disclosures to a wider audience of investors in risky assets. In this study, we adopt an experimental approach to measure whether this wider disclosure is beneficial to these investors. Price-clearing equilibrium models based on utility maximization and non-revealing and fully-revealing prices predict that in a pure exchange economy, an arbitrary trader would prefer that no investors are informed rather than all are informed; non-revealing theory further predicts that an arbitrary trader would prefer a situation in which all traders are informed rather than half the traders are informed. These predictions can be summarized as “None > All > Half”. A laboratory study was conducted to test these predictions. Where previous studies have largely focused on information dissemination and its effects on equilibrium price and insider profits, we focus instead on traders’ expected utility, as measured by their preferences for markets in which none, half, or all traders are informed. Our experimental result contradicts the prediction and indicates “Half > None > All”, i.e. subjects favor a situation where a random half is informed. The implication is that in addition to testing predictions of price equilibrium, experiments should also be used to verify analytical welfare predictions of expected utility under different policy choices. JEL Classification D82, D53, G14, L86 This work was largely completed while this author was at The Hong Kong University of Science and Technology.     

Economic policy making in evolutionary perspective

Economic policy making is discussed from three different angles: the political economy of actual policy making (“what policy does do”), the analysis of policy instruments for given ends (“what policy could do”), and the debate on policy goals and their legitimization (“what policy ought to do”). Center stage in the evolutionary perspective is new, positive and normative knowledge which is unfolding during the policy making process and in its aftermath. It is argued that this implies regularities and constraints which extend and modify the comparative-static interpretations of public choice theory, economic policy making theory, and social philosophy. RID="*" ID="*" The author should like to thank three anonymous referees of this journal and the editor for helpful comments on an earlier version of the paper.     

The evolution of portfolio rules and the capital asset pricing model

The aim of this paper is to test the performance of capital asset pricing model (CAPM) in an evolutionary framework. We model an economy where a heterogeneous population of long-lived agents invest their wealth according to different portfolio rules, and prove that traders who either “believe” in CAPM and use it as a rule of thumb, or are endowed with genuine mean-variance preferences, under some very weak conditions, vanish in the long run.We show that a sufficient condition to drive CAPM or mean-variance traders’ wealth shares to zero is that an investor endowed with a logarithmic utility function enters the market.     

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     

Inefficient Markov perfect equilibria in multilateral bargaining

We study a complete-information alternating-offer bargaining game in which one “active” player bargains with each of a number of other “passive” players one at a time. In contrast to most existing models, the order of reaching agreements is endogenously determined, hence the active player can “play off” some passive players against others by m oving back and forth bargaining with the passive players. We show that this model has a finite number of Markov Perfect Equilibria, some of which exhibiting wasteful delays. Moreover, the maximum number of delay periods that can be supported in Markov Perfect Equilibria increases in the order of the square of the number of players. We also show that these results are robust to a relaxing of the Markov requirements and to more general surplus functions. Received: November 19, 2001; revised version: August 20, 2002 RID="*" ID="*"This paper grew out of my dissertation submitted to Stanford University. I am deeply indebted to my advisor, Paul Milgrom, for his insights and guidance. I would also like to thank Douglas Bernheim, Sushil Bikhchandani, Harold Demsetz, Bryan Ellickson, Avner Greif, Peter Hammond, David Levine, Bentley Macleod, Joe Ostroy, John Pencavel, Jean-Laurent Rosenthal, David Starrett, Robert Wilson, Bill Zame and especially John Riley and Jeff Zwiebel for their helpful comments. I am grateful to an anonymous referee for extremely constructive suggestions.     

Socially Subjective Equilibrium in Strategic Form Games

This study provides a new framework and a new equilibrium concept, which are able to describe the situation where people have various images of the society and have various solution concepts for social outcomes, and where people accept the social outcomes. In socially subjective equilibrium, people have a coherence of their own norms in two senses. One is the consistency of the norm itself. Imagined outcomes should satisfy a certain (subjective) solution concept. The other is the consistency between the imagined outcomes and realized one. These are the main features of our equilibrium concept. This paper forms a part of my doctoral thesis, which is titled “On socially subjective equilibrium”. The first person I would like to thank is my direct supervisor Professor Ken Urai (Osaka University). I obtained a basic idea of the main concept of my doctoral thesis, that is, the solution concept scheme, from Professor Urai. I am grateful to Professor Hiroaki Nagatani (Osaka University) and Professor Ken-Ichi Shimomura (Kobe University), who monitored my works and took efforts in providing me with valuable comments on earlier versions of my thesis. I also obtained a fruitful advice from Professor Kenichi Amaya (Kobe University). Lastly, I specially thank to Kozo Shiraishi (Osaka University).     

Firm reputation with hidden information

Summary. An adverse selection model of firm reputation is developed in which short-lived clients purchase services from firms operated by overlapping generations of agents. A firm's only asset is its name, or reputation, and trade of names is not observed by clients. As a result, names are traded in all equilibria regardless of the economy's horizon The general equilibrium analysis links the value of a name to the market for services. This causes a non-monotonicity that precludes higher types from sorting themselves through the market for names, and leads to “sensible” dynamics: reputations, and name prices, increase after success and decrease after failure. Received: July 31, 2001; revised version: December 20, 2001 RID="*" ID="*" I thank Jon Levin, Eric Maskin and Drew Fudenberg for valuable discussions, and Heski Bar-Isaac for comments on an earlier draft. Financial support from the National Science Foundation (NSF grants SBR-9818981 and SES-0079876) is gratefully acknowledged. This paper replaces an older (and incomplete) working paper titled “Reputation with Hidden Information”.     

Winners, Losers, and the Nuclear-Waste Dilemma

This paper explores how property-right assignment affects social efficiency when a public program has both “public good” and “public bad” components. We show that when willingness to accept a public bad exceeds the willingness to pay, the net benefit is unambiguously lower when the property right supports the status quo institutional structure. Thus, Kaldor–Hicks efficiency tests tend to favor public programs and mitigation over the status quo even when mitigation negatively affects another group. To illustrate the result, we develop social-cost estimates for moving nuclear waste from current temporary-storage facilities to a permanent central repository at Yucca Mountain, NV, USA. For a representative city with a population of 226,195, the present value of the external cost of shipping waste is $1.42 billion when those living near temporary nuclear-waste storage facilities are assigned the property right to “health and safety.” That number swells to $5.95 billion when those living near the transport route are assigned the property right. Thus, property-right assignment affects the efficient level of nuclear-waste, and thus nuclear energy, produced.     

Institutional framing and perceptions of fairness

This paper's goal is to construct a positive theory of economic fairness. Using the theoretical schema developed by Hurwicz and others, the paper makes precise the notions of an “institution,” “fairness fraiming,” and “institutional framing.” Four fairness propositions yield an important corollary: the economic environment, the operative institution and history give meaning to the often used FORMAL PRINCIPLE OF DISTRIBUTIVE JUSTICE (“equals should be treated equally, and unequals unequellay, in proportion to relevant similarities and differences”). We support these four propositions and corollary by an analysis of laboratory, survey, and anecdotal evidence. Finally we describe a number of areas for future research. The authors would like to thank Allen Buchanan, James Buchanan, Joel Feinberg, Elizabeth Hoffman, David Schmitz, Linda Schnabel Stizer, Vernon Smith, Richard Wagner, the participants in the Aspen Institute's Conference on “Local Justice and Fair Allocation”, the members of the Industrial Organization Workshop of the Department of Economics at the University of Arizona, and panel participants at the Public Choice Society Meeting for their help and comments at various stages of this paper's preparation. Responsibility for errors is the authors' alone.     

Nonparametric estimation of a dependent competing risks model for unemployment durations

In this paper we simultaneously analyze transitions from unemployment to employment and to nonparticipation. We estimate a dependent competing risks model with nonparametric specifications of the destination-specific duration dependence and unobserved heterogeneity terms, allowing for mutual dependence of the unobserved heterogeneity terms. We use an administrative data set covering all registered French unemployed over the period 1988–1994, stratified by gender type, duration class and exit state. We thank the Editor and three anonymous referees for their useful comments. A preliminary version of this paper was distributed under the title “Individual variation in exit rates from unemployment: a nonparametric multivariate analysis using aggregate data”. The Département de Marché du Travail of the Ministère du Travail, de l’Emploi et de la Formation Professionelle of France kindly provided the data.     

The role of public policy in closing foreign direct investment gaps: an empirical analysis

Using public policy instruments to attract Foreign Direct Investment (FDI) has become standard in most countries, irrespective of their level of development, geographical location or industrial structure. Against this background the paper analyses the suitability of various public policies to attract inward FDI based on a sample of 11 countries and 10 industries from the manufacturing sector over 10 years. For this aim we derive an empirical baseline model of the determinants of inward FDI-stock. From this baseline model FDI-gaps—measured as the difference between the “estimated actual” inward FDI-stock and the “potential” FDI-stock, which could be realized if a certain “best practice policy” were carried out—are derived. Thereby the analysis focuses on business taxation, public research and development expenditures, the information and communication infrastructure endowment, labor costs as well as institutional and skill-related policies. The analysis inter alia reveals the share of each of these location factors in the total industry- and country-level FDI-gap. Moreover, the analysis explores how policy advice depends on the definition of the “best practice policy”.     

Addiction and interaction between alcohol and tobacco consumption

This paper adopts a multi-commodity habit formation model to study whether unhealthy behaviors are related, i.e. whether there are contemporaneous and inter-temporal complementarities between alcohol and tobacco consumptions in Italy. To this aim time series data of per-capita expenditures and prices during the period 1960 to 2002 are used. Own price elasticities are negative and tobacco appears to be more responsive than alcohol demand, although both responses are less than unity. Cross price elasticities are also negative and asymmetric thus suggesting complementarity. A “double dividend” could then be exploited, because public policy needs to tackle the consumption of only one good to control the demand of both. These results show that the optimal strategy for maximizing public revenues would be to raise alcohol taxation more than tobacco taxation. Finally, past consumption of one addictive good does not significantly reinforce current consumption of the other. We thank participants to the Annual Conference of the European Society for Population Economics, Verona June 2006; the 61st European Meeting of the Econometric Society, Vienna August 2006, and participants of the conference “Individual and Collective Choices in Health Protection”, Genoa November 2005 for helpful comments. We would also like to thank, without implicating, Pier Luigi Rizzi and two anonymous referees for helpful comments. Financial support from the University of Siena, PAR grant (Atheneum Research Grant), is gratefully acknowledged.     

Ex ante versus interim rationality and the existence of bubbles

Summary Tirole (1982) is commonly interpreted as proving that bubbles are impossible with finitely many rational traders with common priors. We study a simple variation of his model in which bubbles can occur, even though traders have common priors and common knowledge that the asset has no fundamental value. In equilibrium, agents purchase the asset at successively higher prices until the bubble bursts and no subsequent trade occurs. Each trader's initial wealth determines the last date at which he could possibly trade. The date at which the bubble bursts is a function of these finite truncation dates for the individual traders. Since initial wealth is private information, no trader knows when the bubble will burst. There are two key differences between our model and Tirole's which enable us to construct equilibrium bubbles this way. First, Tirole requires ex ante optimality, while we only require every trader's strategy to be optimal conditional on his information — i.e., interim optimal. As we argue in the text, this would seem to be the relevant definition of optimality. Second, Tirole considers competitive equilibria, while we analyze a simple bargaining game.We thank Abhijit Banerjee, James Dow, Itzhak Gilboa, Debra Holt, Fallaw Sowell, Sanjay Srivastava, Stan Zin, seminar participants at Pennsylvania State University, Indian Statistical Institute at Calcutta, Carnegie Mellon, the University of Rochester, the University of Maryland, the London Business School, the University of British Columbia, and the Sixth World Congress, and Michael Woodford and an anonymous referee for helpful comments. Both authors were at Carnegie Mellon University when this research was begun. The second author also thank the Social Sciences and Humanities Research Council of Canada for financial support.     

Nash and Walras equilibrium via Brouwer

Summary. The existence of Nash and Walras equilibrium is proved via Brouwer's Fixed Point Theorem, without recourse to Kakutani's Fixed Point Theorem for correspondences. The domain of the Walras fixed point map is confined to the price simplex, even when there is production and weakly quasi-convex preferences. The key idea is to replace optimization with “satisficing improvement,” i.e., to replace the Maximum Principle with the “Satisficing Principle.” Received: July 9, 2001; revised version: February 25, 2002 RID="*" ID="*" I wish to thank Ken Arrow, Don Brown, and Andreu Mas-Colell for helpful comments. I first thought about using Brouwer's theorem without Kakutani's extension when I heard Herb Scarf's lectures on mathematical economics as an undergraduate in 1974, and then again when I read Tim Kehoe's 1980 Ph.D dissertation under Herb Scarf, but I did not resolve my confusion until I had to discuss Kehoe's presentation at the celebration for Herb Scarf's 65th birthday in September, 1995. RID="*" ID="*"Correspondence to: C. D. Aliprantis     

Evolutionary choice of markets

We consider an economy where a finite set of agents can trade on one of two asset markets. Due to endogenous participation the markets may differ in the liquidity they provide. Traders have idiosyncratic preferences for the markets, e.g.due to differential time preferences for maturity dates of futures contracts. For a broad range of parameters we find that no trade, trade on both markets (individualization) as well as trade on one market only (standardization) is supported by a Nash equilibrium. By contrast, whenever the number of traders becomes large, the evolutionary process selects a unique stochastically stable state which corresponds to the equilibrium with two active markets and coincides with the welfare maximizing market structure. We are grateful to Thorsten Hens, Fernando Vega-Redondo and a referee for valuable comments. We also thank seminar participants at the University of Zurich, the CES research seminar at the University of Munich, the Koc University in Istanbul as well as conference participants at the SAET conference in Ischia, the ESEM in Lausanne and the ESF workshop on Behavioural Models in Economics and Finance in Vienna. A first version of the paper was written while Marc Oliver Bettzüge was visiting the Institute for Empirical Research in Economics at the University of Zurich. Financial Support by the Swiss Banking Institute and by the National Centre of Competence in Research “Financial Valuation and Risk Management” (NCCR FINRISK) is gratefully acknowledged. The NCCR FINRISK is a research program supported by the Swiss National Science Foundation.     

Institutional competition among jurisdictions: An evolutionary approach

The purpose of this paper is to outline an evolutionary approach to the process of competition among institutions. We shall focus, in particular, on two issues: first, the role of the competitive process as a knowledge-creating process; and, second, the issue of what inferences, if any, can be drawn from the nature of this process regarding the desirability of its outcomes. In discussing both issues we will draw a parallel between ordinary market competition and competition in the realm of institutions. Some clarifying comments in order to narrow down what we mean by “evolutionary approach” and “institutional competition” precede the analysis. The authors wish to thank Richard Wagner for helpful criticism.     

Mere quibbles: Bagus and Howden’s critique of the theory of free banking

Despite its title, Philipp Bagus and David Howden’s critique of The Theory of Free Banking does more than merely “quibble” with that book’s arguments; their criticisms of those arguments are such as to suggest that the very foundation upon which my defense of free banking rests is deeply flawed. Here, I defend my work against Bagus and Howden’s criticisms, by showing that they rest upon careless or disingenuous readings of my arguments and a poor grasp of basic monetary economics.     

Bilateral FDI potentials for Austria

Trade economists have for long considered gravity models to estimate unexhausted potentials for bilateral trade. Similar to the discrepancy between “normal” and “actual” bilateral trade, one may ask the question about the difference between “normal” and actual bilateral multinational activity. However, with multinational activity, zero bilateral data and heteroskedasticity are very important, even more so than with trade data. Therefore, this paper suggests using generalized linear rather than log-linear models to specify “normal” FDI and obtain estimates of unexhausted FDI potentials. I use panel data on Austria’s bilateral multinational activity across 25 countries and 7 country-blocs, 4 sectors and 13 years to illustrate the disadvantage of log-linear model estimation at quasi-maximum likelihood estimation.