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”.     

Speculative trade, asset prices and investment levels

Summary. In this paper I consider a dynamically complete market model without intrinsic uncertainty. Agents' beliefs are different, but correct in the limit. Some agents are more patient than others. I show that infinitely often share prices are low and the economy stagnates. Also, infinitely often share prices are high and the economy grows. The changes from growth to stagnation and from stagnation to growth are not caused by exogenous shocks. They are caused by speculative trade among agents with different propensities to save and invest. Received: January 8, 2001; revised version: April 11, 2002 RID="*" ID="*" I thank an anonymous referee for helpful comments. I gratefully acknowledge financial support from the National Science Foundation.     

Evolutionary foundations of aggregate-taking behavior

Summary. I show that aggregate-taking behavior is often evolutionarily stable for finite population in symmetric games in which payoff depends only on own strategy and an aggregate. I provide economic examples exhibiting this phenomenon. Received: August 27, 2001; revised version: January 29, 2002 RID="*" ID="*" The paper has profited from the comments of Maria Montero, Burkhard Hehenkamp, Wolfgang Leininger, and Dave Furth. Financial support from the DFG via Postgraduate Programme at the University of Dortmund and via SFB 504 at the University of Mannheim is acknowledged. RID="*" ID="*" Present address: University of Mannheim, SFB 504, L 13, 15, 68131 Mannheim, Germany (e-mail: possajen@sfb504.uni-mannheim.de)     

Endogenous market segmentation with heterogeneous agents

Summary. An explanation is provided for the evolution of segmented marketplaces in a pairwise exchange economy. Large traders operating in a pairwise exchange market prefer to meet other similar traders, because this enables them to trade their endowments in a smaller number of encounters. Large and small traders, however, cannot be distinguished a priori, and the existence of the small traders imposes a negative externality on the large traders. We show that, under conditions which are not very restrictive, establishing a separate market (perhaps with an entry fee) designated for the large traders induces the two types of traders to segment themselves. However, this segmentation is not necessarily welfare improving. Received: January 12, 2001; revised version: July 17, 2002 RID="*" ID="*" I wish to thank the participants in the Friday Theory Workshop at the University of Sydney, and the participants at the 17th Australian Theory Workshop at the University of Melbourne for comments and discussion. John Hillas and Stephen King pointed out an omission in an earlier version, and Catherine de Fontenay and Hodaka Morita made extensive comments on earlier drafts. This work was initiated while I was a short-term visitor at the University of Southern California.     

Why is there money? Endogenous derivation of `money' as the most liquid asset: a class of examples

Summary. The monetary character of trade, use of a common medium of exchange, is shown to be an outcome of an economic general equilibrium. Monetary structure can be derived from price theory in a modified Arrow-Debreu model. Two constructs are added: transaction costs and market segmentation in trading posts (with a separate budget constraint at each transaction). Commodity money arises endogenously as the most liquid (lowest transaction cost) asset. Government-issued fiat money has a positive equilibrium value from its acceptability for tax payments. Scale economies in transaction cost account for uniqueness of the (fiat or commodity) money in equilibrium. Received: February 15, 2002; revised version: August 12, 2002 RID="*" ID="*" This paper has benefited from seminars and colleagues' helpful remarks at the University of California - Santa Barbara, University of California - San Diego, NSF-NBER Conference on General Equilibrium Theory at Purdue University, Society for the Advancement of Behavioral Economics at San Diego State University, Econometric Society at the University of Wisconsin - Madison, SITE at Stanford University-2001, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Minneapolis, Midwest Economic Theory Conference at the University of Illinois - Urbana Champaign, University of Iowa, Southern California Economic Theory Conference at UC - Santa Barbara, Midwest Macroeconomics Conference at University of Iowa, University of California - Berkeley, European Workshop on General Equilibrium Theory at University of Paris I, Society for Economic Dynamics at San Jose Costa Rica, World Congress of the Econometric Society at University of Washington, Cowles Foundation at Yale University. It is a pleasure to acknowledge comments of Henning Bohn, Harold Cole, James Hamilton, Mukul Majumdar, Harry Markowitz, Chris Phelan, Meenakshi Rajeev, Wendy Shaffer, Bruce Smith, and Max Stinchcombe.     

Modelling exchange of probabilistic opinions

Summary. This paper studies how communication or exchange of opinions influences correlation of beliefs. The paper focuses on a situation in which agents communicate with each other infinitely many times without observing data. It is an extension to the ‘Expert Problem’ in Bayesian theory, where the informational flow is asymmetric. Moreover, this paper generalizes the existing literature of communication that employs the common prior assumption (CPA) by allowing for heterogeneous beliefs. Some basic convergence results are shown in contrast with the results obtained under the CPA. Furthermore, several economic implications of the basic results are provided. Received: August 27, 2001; revised version: April 16, 2002 RID="*" ID="*" The results presented in this paper are taken from my Ph.D. thesis at Stanford University. I gratefully acknowledge the inspiration obtained from innumerable discussions with Mordecai Kurz about this subject. Also, I appreciate comments from Kenneth J. Arrow, Peter J. Hammond, Maurizio Motolese, Carsten K. Nielsen, Ho-Mou Wu and the anonymous referee.     

Probability of survival in a random exchange economy with dependent agents

Summary. In this paper I analyze the general equilibrium in a random Walrasian economy. Dependence among agents is introduced in the form of dependency neighborhoods. Under the uncertainty, an agent may fail to survive due to a meager endowment in a particular state (direct effect), as well as due to unfavorable equilibrium price system at which the value of the endowment falls short of the minimum needed for survival (indirect terms-of-trade effect). To illustrate the main result I compute the stochastic limit of equilibrium price and probability of survival of an agent in a large Cobb-Douglas economy. Received June 7, 2001; revised version: January 7, 2002 RID="*" ID="*" I would like to thank Mukul Majumdar and Thomas DiCiccio for helpful discussion and an anonymous referee for valuable comments and suggestions.     

Indeterminacy of equilibrium in stochastic OLG models

Summary. This paper studies the equilibria of a stochastic OLG exchange economies consisting of identical agents living for two periods, and having the opportunity to trade a single infinitely-lived asset in constant supply. The agents have uncertain endowments and the stochastic process determining the endowments is Markovian. For such economies, the literature has focused on studying strongly stationary equilibria in which quantities and prices are functions of the exogenous states of nature which describe the uncertainty: such equilibria are generalizations of deterministic steady states, and this paper investigates if they have the same special status as asymptotic limits of other equilibrium paths. The difficulty in extending the analysis of equilibria beyond the class of strongly stationary equilibria comes from the presence of indeterminacy: we propose a procedure for overcoming this difficulty which can be decomposed into two steps. First backward induction arguments are used to restrict the domain of possible prices; then if some indeterminacy is left, expectation functions are introduced to make the forward equilibrium equations determinate. The properties of the resulting trajectories, in particular their asymptotic properties, can then be studied. For the class of models that we study this procedure provides a justification for focusing on strongly stationary equilibria. For the model with positive dividends (equity or land) the justification is complete, since we show that the strongly stationary equilibrium is the unique equilibrium. For the model with zero dividends (money) there is a continuum of self-fulfilling expectation functions resulting in a continuum of equilibrium paths starting from any admissible initial condition: under conditions given in the paper, these equilibrium paths converge almost surely to one of the strongly stationary equilibria-either autarchy or the stochastic analogue of the Golden Rule. Received: November 19, 2001; revised version: March 22, 2002 RID="*" ID="*" We are grateful for the stimulating environment and research support provided by the Cowles Foundation at Yale University during the Fall 2000 when this paper was first conceived. We are also grateful to the participants of the SITE Workshop at Stanford University and the Incomplete Markets Workshop at SUNY Stony Brook during the summer 2001 for helpful discussions. Correspondence to: M. Magill     

Floating exchange rates versus a monetary union under rational beliefs: the role of endogenous uncertainty

Using the concept of ex-post optimality, we compare different exchange rate regimes, including floating exchange rates and fixed exchange rates with a Monetary Union in a two country OLG model with stochastic endowments. The emphasis of this comparison is on the welfare consequences of agents having incorrect beliefs. We do not assume that agents can hold any beliefs, but rather that their beliefs are rational that is consistent with the observed empirical behavior of the economy. We study a large set of possible policies, but two of them have our particular interest. The first policy implies devaluations in reaction to a negative shock, while the other implies a fixed exchange rate. These policies have very different consequences. The first will for generic beliefs not result in an ex-post optimal allocation. The other policy is on the other hand always feasible and results in an ex-post optimal allocation. When the two countries form a Monetary Union, the ex-post optimal allocation is also achieved. The meaning of “endogenous uncertainty” as an institutionally induced uncertainty is illustrated. Received: September 1, 2001; revised version: 24 June 2002 RID="*" ID="*" I would like to thank Horace W. Brock, Gianluca Cassese, Paula Orlando, Ho-Mou Wu as well as seminar participants at Copenhagen Business School, ESEM98, Keio University, Kyoto University, Osaka University, SITE (Stanford) and University of Copenhagen for many useful comments on the paper. I am also grateful to Mark J. Garmaise, Takako Fujiwara-Greve, and an anonymous referee for many helpful suggestions for improving the paper. Without the many discussions about Rational Beliefs and related issues I have had with Mordecai Kurz over the years, the research presented here would not have been possible. Financial support from The Carlsberg Foundation, Danish Social Research Council, University of Copenhagen and SITE is gratefully acknowledged.     

Delegation and polarization of platforms in political competition

Summary. We consider a model of political competition among two ideological parties who are uncertain about the distribution of voters. The distinguishing feature of the model is that parties can delegate electoral decisions to candidates by nomination. It is shown that if the credible platform commitments of the candidates is feasible, then at least one of the parties nominates in equilibrium to a candidate who has an ideology that is more radical than the delegating party's ideology. In a variety of circumstances, this, in turn, yields a polarization of equilibrium policy choices of the candidates. It is thus argued formally here that strategic nomination of the candidates may well be one of the major reasons behind the well documented observation that the platforms associated with the political parties in two-party democracies are often surprisingly polarized. Received: January 10, 2002; revised version: May 8, 2002 RID="*" ID="*" We thank Alberto Alesina, Levent Ko?kesen, Antonio Merlo, Ronny Razin, Vijay Krishna, Alessandro Lizzeri, and seminar participants at Alicante, Columbia, Copenhagen, and NYU for helpful comments. We also thank an anonymous referee for its useful suggestions. A good fraction of this research was conducted while Ok was a visitor in the Department of Economics at University of Alicante; he thanks for the kind hospitality of this institution. We gratefully acknowledge the financial support from the Spanish Ministry of Education through grant CICYT BEC2001-0535 (Faulí-Oller) and BEC2001-0980 (Ortu?o-Ortín). Correspondence to:I. Ortu?o-Ortin     

Environmental tax policy in a model of growth cycles

Summary. The purpose of this paper is to consider environmental taxation which would control emissions of firms in a model of growth cycles. In the model presented below, the economy may experience two phases of growth and environmental quality: “the no-innovation growth regime” and “the innovation-led growth regime”. Aggregate capital and environmental quality remain constant in the no-innovation growth regime, while they perpetually increase in the innovation-led growth regime. The paper shows that the tax plays a key role in determining whether the economy stably converges to one of the two regimes or fluctuates permanently between them. It also shows that there is a critical level of the tax and that the economy obtains higher growth rates of capital and environmental quality by raising (or reducing) the tax if the initial tax is below (or above) the critical level. Received: April 2, 2001; revised version: March 21, 2002 RID="*" ID="*" This research reported here was conducted within the research project “Project on Intergenerational Equity” at Institute of Economic Research, Hitotsubashi University. I am deeply grateful to an anonymous referee for his or her insightful comments, which greatly improved the paper. I also thank Hiroshi Honda, Yasuo Maeda, Yuji Nakayama, and participants in workshops at Hitotsubashi University, Kyoto University, Nagoya University, Osaka University, University of Tsukuba, Yokohama National University, and University of Tokyo for their valuable comments and suggestions. Any remaining errors are mine.     

Real exchange rate determination: Empirical observations from East-Asian countries

In this paper the models for the real exchange rate determination are re-examined between Japan and five East-Asian countries. Two important findings are reported. First, the real interest rate-bias model is valid for Korea-, Malaysia-, Indonesia-, and Philippines-Japan, and the productivity-bias model is valid for Indonesia-, and Philippines-Japan: that is, the coefficients of relative variables are stable and statistically significant. Second, there is no evidence that the political risk premium model is valid. First version received: September 2000/Final version received: April 2001 RID="*" ID="*"  This paper was presented at the Tohoku University Economics Conference April 1999. I acknowledge Yoshihiko Tsukuda, Hiroya Akiba, Tadashi Kuriyama, Jiro Akita and Hiroyuki Ozaki for their helpful comments. Also, I am very grateful to two referees of this journal for many valuable comments. The research was supported by the Nomura foundation for Social Science in 2000.     

Sunspot cycles

Summary. This paper shows new properties about the equilibria of a stationary OG economy by establishing a connection between its stationary equilibria and those of a finite economy, with and without extrinsic uncertainty. Specifically, it shows the countability and local uniqueness with respect to the sup metric of the so-called sunspot cycles introduced here, that encompass both the deterministic cycles and the usual finite Markovian stationary sunspot equilibria. These sunspot cycles are, moreover, able to generate, at a lower cost in terms of assumptions than other sunspot equilibria, time series with the recurrent but irregular fluctuations typical of economic time series. Received: July 26, 2001; revised version: March 5, 2002 RID="*" ID="*" I want to thank an anonymous referee for comments that have helped greatly to improve this paper, as well as the comments about its contents received from several audiences in different seminars and conferences (the Economic Theory seminar of the University of Pennsylvania, the 2001 Meeting of the Econometric Society held at New Orleans, the 2000 Econometric Society World Congress, the 2000 Society for Economic Design Conference) and from comments to a previous paper, Dávila [10], specially from Jim Peck at the 1997 Workshop on General Equilibrium held at the University of Venice, that eventually lead to this one.     

Bayesian estimation of social welfare and tax progressivity measures

This paper examines Bayesian methods of examining posterior distributions of inequality, concentration, tax progressivity and social welfare measures. Use is made of an explicit income distribution assumption and two alternative assumptions regarding the distribution of pre-tax mean incomes within each income group. The methods are applied to a simulated distribution of individual incomes and tax payments. It is possible to identify a minimum acceptable number of income classes to be used. The results suggest support for the use of group means in practical applications, particularly where large sample sizes are available. First version received: August 2000/Final version received: July 2001 RID="*" ID="*"  This research was supported by a Melbourne University Faculty of Economics and Commerce Research Grant. We should like to thank Bill Griffiths and two referees for comments on an earlier draft.     

Equilibrium binding agreements under diverse behavioral assumptions

Summary. This paper extends the work of Ray and Vohra [3]. It ascertains which partitions of players will emerge and what actions will these players choose under each partition, when they can sign binding agreements and their actions have externalities. The emphasis, however, is placed on situations with multiple outcomes and how agents behave in the presence of such multiplicity. In particular, a deviating coalition considers all the likely outcomes that may prevail upon its deviation, and selects (if possible) a subset of them. Three augmentations of Ray and Vohra's [3] solution concept are defined, capturing three distinct behavioral assumptions. Efficiency of and the relation between the three notions are discussed. Received: October 9, 2001; revised version: April 22, 2002 RID="*" ID="*" I wish to thank Licun Xue, Joseph Greenberg and the participants of PET 2000 for very helpful suggestions. I am indebted to an anonymous referee for his/her valuable comments. The paper has been previously circulated under the title Binding Agreements.     

On the constancy of bribe-proof solutions

Summary. We consider the problem of choosing one point in a set of alternatives when monetary transfers are possible. In this context, Schummer (2000) shows that a social choice function must be a constant function if manipulation through bribes is ruled out. But he requires two kinds of domain-richness conditions. One is either smooth connectedness or the finiteness of the set of alternatives and the other is monotonical closedness. However, dispensing with the former condition, we alternatively prove the same result under a weaker condition than monotonical closedness. Received: April 11, 2000; revised version: February 25, 2002 RID="*" ID="*" This paper received the Osaka University Institute of Social and Economic Research Moriguchi Prize in January 2001. I am grateful to Prof. Ryoichi Nagahisa, Prof. Tatsuyoshi Saijo, Prof. Ken-ichi Shimomura, Prof. Ken Urai, and especially two anonymous referees for their useful and helpful comments and suggestions. I am a Research Fellow of the Japan Society for the Promotion of Science.     

A generalized additive Tobit model

This paper proposes a semi-parametric approach to estimation in Tobit models. A generalized additive Tobit model of residential local long distance (intra-LATA) telephone demand is estimated on a cross-section of residential telephone consumers across twenty-eight states. While past studies of telecommunications demand have used fully parametric models, the model presented here is non-parametric in two dimensions: first no distributional assumption is made for the error distribution, and second, the demand equation is non-parametric with respect to price. We find that the elasticity of demand is substantially lower (in absolute value) that found in previous studies for a 40% cut in tariffs. First version received: July 2000/Final version received: March 2001 RID="*" ID="*"  I thank the referee and Associate Editor for suggestions which improved the paper. The views expressed here are of the author and not Analysis Group | Economics.     

On the geography of conventions

Summary. We study an evolutionary model in which heterogenous boundedly rational agents interact locally in order to play a coordination game. Agents differ in their mobility with mobile agents being able to relocate within a country. We find that mobile agents enjoy a higher payoff and always benefit from increased mobility, while immobile agents benefit from increased mobility at low levels of mobility only. This wedge in payoffs weakly increases as mobility increases. Some extensions are discussed. Received: January 10, 2001; revised version: December 4, 2002 RID="*" ID="*" We thank, without implicating in any way, George Mailath for helpful discussions. Some of the ideas in this paper were developed during the V Conference of the Society for the Advancement of Economic Theory in Ischia, Italy. The NSF provided financial support. Correspondence to: T. Temzelides     

Macro foundations of micro-economics

This paper attempts to circumvent the nonsense of the representative agent which arises in macroeconomics. It recognises that macro data are relevant to agents' decisions, and so excess demands should contain macro variables as arguments. The macro variables I consider are the price index, unemployment and GNP. This paper should be regarded as a tentative beginning to make macroeconomic theory literate. Received: September 19, 2001; revised version: July 24, 2002 RID="*" ID="*"I am delighted to contribute to this Festschrift for Mordecai now that he has reached the appropriate age.     

Speculative securities

Summary. A speculative security is an asset whose payoff depends in part on a random shock uncorrelated with economic fundamentals (a sunspot) about which some traders have superior information. In this paper we show that agents may find it desirable to trade such a security in spite of the fact that it is a poorer hedge against their endowment risks at the time of trade, and has an associated adverse selection cost. In the specific institutional setting of innovation of futures contracts, we show that a futures exchange may not have an incentive to introduce a speculative security even when all traders favor it. Received: July 19, 1998; revised version: August 31, 1998