Keynes, population, and equity prices

Keynes in 1937 examined the phenomenon of the Great Depression from a longrun perspective in contradiction to the "General Theory," where the focus was on the shortrun. "Some Economic Consequences of a Declining Population," Keynes' article, reveals the context in which the "General Theory" was written. In the "General Theory," the focus is on short-term fluctuations, i.e., business cycles, but Keynes fails to provide any theoretical explanation as to why the depression of the 1930s was so severe and intractable. In the 1937 article, the depression is seen as the result of the combined effects of a decline in longrun growth due to population growth decline and a shortrun cyclical decline, together producing severe economic consequences. What is important for the purposes of this discussion is the implication, within the context of the 1937 article, that not only was the stock market crash of 1929 related to population change (with its accompanying collapse in expectations) but that, in general, changes in the rate of growth of population are accompanied by stock price movements in the same direction. The remainder of the discussion is devoted to a simple empirical test of this relationship. The data used are population size (POP), defined as the total residential population in the US from 1870-1979, and the Standard and Poor 500 Stock index (SP) for the corresponding 109-year period. In addition, a 3rd series was constructed, a price deflated Standard and Poor index (RSP) with a base period of 1870, to account for possible inflationary distortion of the index. The empirical results do not invalidate the hypothesis that population growth rates affect equity markets. In fact, there seems to be strong evidence that they are related in a manner suggestive of Keynes' intutition, namely, that the stock market crash of 1929 was due to factors more fundamental than those often perceived from a shortrun perspective. According to Keynes (1937), population is the most important determinant of longrun movements in real per capita income (given the state of technology, the real rate of interest, the age structure of the population, and the size share of income). So the focus is on population and its effects on economic growth. Due to the fact that the stock market presumably discounts longrun economic conditions as reflected in equity prices, it would seem that if Keynes were correct in his theoretical speculations, longterm equity price movements should relate to population change. In this sense, the paper may be regarded as an empirical test of a proposition of Keynes. More generally, the paper is suggestive in several ways. The relationship between business cycles and stock market cycles has been understood to the point of being rather obvious, but the effects of population on both has been less clear. It does appear on the basis of the evidence presented that the malaise of the stock market during the past 16 years, especially in real terms, may be due to factors more fundamental than those often perceived.     

The random utility model with an infinite choice space

Summary This essay presents a measure-theoretic version of the random utility model with no substantive restrictions upon the choice space. The analysis is based upon DeFinetti's Coherency Axiom, which characterizes a set function as a finitely additive probability measure. The central result is the equivalence of the random utility maximization hypothesis and the coherency of the choice probabilities over all allowable constraint sets.The author expresses gratitude to the participants in the 1990 U.C. Irvine summer workshop in measurement theory, where the germ of the idea for this paper was born, and to Kurt Helmes for invaluable discussion.     

Evolution and utilitarianism: Social contract III

The paper takes the simplest possible bargaining game as a paradigm for the coordination problem—i.e. the problem of selecting an equilibrium when many are available. The aim is to explore the circumstances under which evolution will lead to a utilitarian conclusion.     

Technical progress,population growth and intergenerational equity in a model with many exhaustible and renewable resources

A condition ensuring intergenerational equity is derived using a neoclassical model of many exhaustible and renewable resources involving technical progress and population growth.     

Monetary equilibria over an infinite horizon

Summary. Money provides liquidity services through a cash-in-advance constraint. The exchange of commodities and assets extends over an infinite horizon under uncertainty and a sequentially complete asset market. Monetary policy sets the path of rates of interest and accommodates the demand for balances through open market operations or loans. A public authority, which, most pertinently, inherits a strictly positive public debt, raises revenue from taxes and seignorage, and it distributes possible budget surpluses to individuals through transfers. Competitive equilibria exist, under mild solvency conditions. But, for a fixed path of rates of interest, there is a non-trivial multiplicity of equilibrium paths of prices of commodities. Determinacy requires that, subject to no-arbitrage and in addition to rates of interest, the prices of state-contingent revenues be somehow determined.Received: 16 April 2003, Revised: 16 January 2004, JEL Classification Numbers: D50, E40, E50.We are grateful to Pietro Reichlin, Rabah Amir, Tomoyuki Nakajima, Armando Dominioni and Leo Ferraris for helpful discussions and their reading of preliminary drafts. The usual disclaimer applies. An earlier version was circulated as [4].     

Equally-distributed equivalent utility,ex post egalitarianism and utilitarianism

We provide an axiomatization of expected equally-distributed equivalent-utility social welfare functions in the context of Harsanyi?s impartial observer theorem. For this family of social welfare functions, we show what additional axiom is necessary and sufficient for the observer to exhibit aversion to ex post inequality. We also relate this axiomatization to our axiomatization in a companion paper of generalized utilitarian social welfare functions. Given certain richness assumptions, the only social welfare functions that belong to both families are the utilitarian.     

Industry dynamics: Foundations for models with an infinite number of firms

This paper explores the connection between three important threads of economic research offering different approaches to studying the dynamics of an industry with heterogeneous firms. Finite models of the form pioneered by Ericson and Pakes (1995) capture the dynamics of a finite number of heterogeneous firms as they compete in an industry, and are typically analyzed using the concept of Markov perfect equilibrium (MPE). Infinite models of the form pioneered by Hopenhayn (1992), on the other hand, consider an infinite number of infinitesimal firms, and are typically analyzed using the concept of stationary equilibrium (SE). A third approach uses oblivious equilibrium (OE), which maintains the simplifying benefits of an infinite model but within the more realistic setting of a finite model. The paper relates these three approaches. The main result of the paper provides conditions under which SE of infinite models approximate MPE of finite models arbitrarily well in asymptotically large markets. Our conditions require that the distribution of firm states in SE obeys a certain “light-tail” condition. In a second set of results, we show that the set of OE of a finite model approaches the set of SE of the infinite model in large markets under a similar light-tail condition.     

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.     

在市场与公正之间 经济学家姚洋专访

在前去拜访姚洋的路上,我不停地提醒司机注意时间,以免延误接下来的会见.但是很不幸,我们的车一次又一次被拥挤的车流堵在了路口.对于生活在城市里的人来说,这样的情形实属司空见惯.中国经济在过去十多年的发展,不仅极大地丰富了人们的物质生活,让城市变得繁华,同时也带来了包括堵车在内的诸多问题.     

John Stuart Mill's utilitarianism and the social ethics of sustainable development

This paper considers the writings of John Stuart Mill in political philosophy and political economy as a prototype for ideals of a 'sustainable development' grounded in a norm of justice and social solidarity. Mill's conception of a just 'stationary state* of society is examined alongside his attempts to reconcile precepts of non-interference (individual freedom) and private property, with the constraints and obligations of social, economic, and ecological coexistence. It is shown that notwithstanding vaccillations, Mill ends up espousing an ethical norm of reciprocity and solidarity that is quite different from the premise of self-interest axiomatized in most economic models of competitive market economies. These intuitions about a duty of care complementary to the non-interference principle, when systematized, are shown to find a new contemporary application to questions of economic justice and environmental sustainability.     

Economic efficiency and shadow prices in an infinite horizon model: Reply

Journal of Economics -     

Balance and discontinuities in infinite games with type-dependent strategies

Under study are games in which players receive private signals and then simultaneously choose actions from compact sets. Payoffs are measurable in signals and jointly continuous in actions. Stinchcombe (2011) [19] proves the existence of correlated equilibria for this class of games. This paper is a study of the information structures for these games, the discontinuous expected utility functions they give rise to, and the notion of a balanced approximation to an infinite game with discontinuous payoffs.     

Social security and intergenerational equity

This paper considers the implications of social security for intergenerational equity. It shows that a balanced-budget unfunded system can be optimal even in a dynamically efficient economy without uncertainty and externalities. The relevant criteria for the optimality of the public transfer program are equity among generations and time consistency. The scheme can survive adverse shocks if the well-being of the elderly at each point in time is sufficiently valued.     

Economics,environment and equity

Although allocation of scarce resources among alternative uses to satisfy unlimited human wants in the positivist framework (a la Lionel Robbins)has been a focus of economists for a long time, awareness of resource scarcity in the ecological sense and discussion of the relevant issues in the context of distributive justice, as well as intergenerational equity, are of more recent vintage. A perspective encompassing judicious use of natural resources inevitably leads to a discussion which includes ecological, economic and ethical dimensions. This essay examines the contributions included in a recent book.     

Altruism, equity, and reciprocity in a gift-exchange experiment: an encompassing approach

Considerable experimental evidence suggests that non-pecuniary motives must be addressed when modeling behavior in economic contexts. Recent theories of non-pecuniary motives can be classified as altruism-, equity-, or reciprocity-based. We outline the qualitative differences in prediction these alternative explanations yield in a gift-exchange game. We estimate and compare leading approaches in these categories, using experimental data. We then offer a flexible approach that nests the above three approaches, thereby allowing for nested hypothesis testing and for determining the relative strength of each of the competing theories. In addition, the encompassing approach provides a functional form for utility in different settings without the restrictive nature of the approaches nested within it. Using this flexible form for nested tests, we find that intentional reciprocity, distributive concerns, and altruistic considerations all play a significant role in players' decisions.     

Correlated equilibrium existence for infinite games with type-dependent strategies

Under study are games in which players receive private signals and then simultaneously choose actions from compact sets. Payoffs are measurable in signals and jointly continuous in actions. This paper gives a counter-example to the main step in Cotter?s [K. Cotter, Correlated equilibrium in games with type-dependent strategies, J. Econ. Theory 54 (1991) 48-69] argument for correlated equilibrium existence for this class of games, and supplies an alternative proof.     

Human capital and the private equity premium

When capital market is imperfect, an entrepreneur has to invest substantial personal funds to start a firm and has to bear large firm-specific risk. Furthermore, if a typical entrepreneur is risk averse, private equity should earn a premium for idiosyncratic risk. In this paper I explore the interaction of human capital with the decision to become an entrepreneur. I calibrate a model of entrepreneurial choice to illustrate a significant attenuating effect of human capital on the premium for firm-specific risk. When an entrepreneur can quit the business and work for hire, the firm-specific risk premium is order of magnitude lower than without this option. While an entrepreneur puts at risk a substantial fraction of financial wealth, she does not commit all human capital to the current business. At stake is only the labor income forgone while managing the firm and the rest of human capital is unaffected by the business risk. Empirical evidence suggests that private equity does not earn any significant premium over publicly traded equity. The model with human capital is consistent with this observation, assuming typical entrepreneur forgoes a small expected return (1.5%) in lieu of intangible benefits of entrepreneurship.