Competitive search markets for durable goods

Summary. This paper considers a dynamic version of Akerlof's (1970) lemons problem where buyers and sellers must engage in search to find a trading partner. We show that if goods are durable, the market itself may provide a natural sorting mechanism. In equilibrium, high-quality goods sell at a higher price than low-quality goods but also circulate longer. This accords with the common wisdom that sellers who want to sell fast may have to accept a lower price. We then compare the equilibrium outcomes under private information with those under complete information. Surprisingly, we find that for a large range of parameter values the quilibrium outcomes under the two information regimes coincide, despite the fact that circulation time is used to achieve separation. Received: August 24, 2000; revised version: October 24, 2000     

The set of sunspot equilibria in economies with incomplete financial markets: variable asset prices

Summary. I consider the set of equilibria of two-period economies with S extrinsic states of nature in the second period and I assets with linearly independent nominal payoffs. Asset prices are variable. If the number of agents is greater than (S-I), the payoff matrix is in general position and S 2I, the set of equilibrium allocations generically (in utility function space) contains a smooth manifold of dimension (S-1). Moreover, the map from states o f nature to equilibrium allocations (restricted to this manifold) is one-to-one at each equilibrium. Received: February 23, 1998; revised version: June 1, 2000     

Strategyproof sharing of submodular costs:budget balance versus efficiency

Summary. A service is produced for a set of agents. The service is binary, each agent either receives service or not, and the total cost of service is a submodular function of the set receiving service. We investigate strategyproof mechanisms that elicit individual willingness to pay, decide who is served, and then share the cost among them. If such a mechanism is budget balanced (covers cost exactly), it cannot be efficient (serve the surplus maximizing set of users) and vice-versa. We characterize the rich family of budget balanced and group strategyproof mechanisms and find that the mechanism associated with the Shapley value cost sharing formula is characterized by the property that its worst welfare loss is minimal. When we require efficiency rather than budget balance – the more common route in the literature – we find that there is a single Clarke-Groves mechanism that satisfies certain reasonable conditions: we call this the marginal cost pricing mechanism. We compare the size of the marginal cost pricing mechanism's worst budget surplus with the worst welfare loss of the Shapley value mechanism. Received: October 26, 1998; revised version: December 3, 1999     

Auctioning divisible goods

Summary. We derive equilibrium bidding strategies in divisible good auctions for asymmetrically informed risk neutral and risk averse bidders when there is random noncompetitive demand. The equilibrium bid schedules contain both strategic considerations and explicit allowances for the winner's curse. When the bidders' information is symmetric, the strategic aspects of bidding imply that there always exist equilibria of a uniform-price auction with lower expected revenue than provided by a discriminatory auction. When bidders are risk averse, there may exist equilibria of the uniform-price auction that provide higher expected revenue than a discriminatory auction. Received: November 4, 1999; revised version: March 9, 2001     

Ranking of information systems in agency models: an integral condition

Summary. We provide a condition for ranking of information systems in agency problems. The condition has a straightforward economic interpretation in terms of the sensitivity of a cumulative distribution with respect to the agent's effort. The criterion is shown to be equivalent to the mean preserving spread condition on the likelihood ratio distributions. Received: November 10, 1999; revised version: February 17, 2000     

Alternating-offer bargaining over menus under incomplete information

Summary. This paper considers bargaining with one-sided private information and alternating offers where an agreement specifies both a transfer and an additional (sorting) variable. Moreover, both sides can propose menus. We show that for a subset of parameters the alternating-offer game has a unique equilibrium where efficient contracts are implemented in the first period. This stands in sharp contrast to the benchmarks of contract theory, where typically only the uninformed side proposes, and bargaining theory, where typically the agreement only specifies a transfer. Received: September 10, 2001; revised version: March 25, 2002 RID="*" ID="*" I benefitted from discussions with Benny Moldovanu, Holger Müller, and Roland Strausz, and from comments made by an anonymous referee.     

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     

Core concepts in economies where information is almost complete

Summary. The paper analyzes the properties of cores with differential information, as economies converge to complete information. Two core concepts are investigated: the private core, in which agents' net trades are measurable with respect to agents' private information, and the incentive compatible core, in which coalitions of agents are restricted to incentive compatible allocations. Received: March 15, 2000; revised version: August 24, 2000     

Non-myopic learning in differential information economies: the core

Summary. We study the process of learning in a differential information economy, with a continuum of states of nature that follow a Markov process. The economy extends over an infinite number of periods and we assume that the agents behave non-myopically, i.e., they discount the future. We adopt a new equilibrium concept, the non-myopic core. A realized agreement in each period generates information that changes the underlying structure in the economy. The results we obtain serve as an extension to the results in Koutsougeras and Yannelis (1999) in a setting where agents behave non-myopically. In particular, we examine the following two questions: 1) If we have a sequence of allocations that are in an approximate non-myopic core (we allow for bounded rationality), is it possible to find a subsequence that converges to a non-myopic core allocation in a limit full information economy? 2) Given a non-myopic core allocation in a limit full information economy can we find a sequence of approximate non-myopic core allocations that converges to that allocation? Received: May 25, 1999; revised version: August 9, 1999     

Generic inefficiency of equilibria in the general equilibrium model with incomplete asset markets and infinite time

Summary. We consider a Lucas asset-pricing model with heterogeneous agents, exogenous labor income, and a finite number of exogenous shocks. Although agents are infinitely lived, endowments and dividends are time-invariant functions of the exogenous shock alone and are thus restricted to lie in a finite-dimensional space; genericity analysis can be conducted on sets of zero Lebesgue measure. When financial markets are incomplete, that is, there are fewer financial securities than shocks, we show that generically in individual endowments all competitive equilibria are Pareto inefficient. Received: November 22, 1999; revised version: March 4, 2002 RID="*" ID="*" We are grateful to an anonymous referee for very insightful comments on earlier drafts.     

Quasi-fundamental exchange rate variation

Summary. This paper uses a general equilibrium model to study the determination of the exchange rate in an economy with fundamental uncertainty. The model has steady state equilibria in which the exchange rate is constant. These equilibria may coexist with “quasi-fundamental” equilibria – nonstationary equilibria in which the exchange rate displays stochastic fluctuations that are correlated with the fluctuations in fundamental random variables. The quasi-fundamental equilibria are Pareto dominated by the corresponding constant-exchange-rate steady states. They also converge to these steady states, inevitably or with positive probability. Received: October 2, 1999; revised version: March 26, 2002 RID="*" ID="*" This paper began as a joint project with Alex Mourmouras, who has made many helpful comments and suggestions but is not responsible for any errors or deficiencies. In addition, I thank an anonymous referee for helpful comments.     

Winner-take-all price competition

Summary. We analyze an oligopoly model of homogeneous product price competition that allows for discontinuities in demand and/or costs. Conditions under which only zero profit equilibrium outcomes obtain in such settings are provided. We then illustrate through a series of examples that the conditions provided are “tight” in the sense that their relaxation leads to positive profit outcomes. Received: April 7, 2000; revised version: September 14, 2000     

Product diffusion and pricing with market frictions

Summary. We study pricing and product diffusion in a dynamic general equilibrium framework with product market frictions. Ongoing R&D activity leads, with an endogenously determined probability, to continual improvements in product quality. We characterize the steady-state equilibrium with endogenous product diffusion in which a number of different goods co-exist on the quality ladder. We show that the severity of the economy's market frictions is a crucial determinant of the pricing structure, the product diffusion pattern, the level of R&D investment, the rate of endogenous growth, the length of Schumpeterian product cycles and the possibility of multiple growth paths. Eliminating market frictions leads to a degenerate product ladder of precisely one step, containing only the most recent product, as in the monopolistic competition literature. Received: August 16, 1999; revised version: March 6, 2001     

Strategic pricing of equity issues

Summary. Consider a general equilibrium model where agents may behave strategically. Specifically, suppose some firm issues new shares. If the primary market price is controlled by the issuing institution and investors' expectations on future equity prices are constant in their share purchases, the share price on the primary market cannot exceed the secondary market share price. In certain cases this may imply strict underpricing of newly issued shares. If investors perceive an influence on future share prices overpriced issues may occur in equilibrium. This provides an example of strategic price manipulation in general equilibrium models with sequential markets. Received: March 14, 2000; revised version: May 15, 2001     

Profitability of price and quantity strategies in a duopoly with vertical product differentiation

Using a model according to Mussa and Rosen (1978) and Bonanno and Haworth (1998) we consider a sub-game perfect equilibrium of a two-stage game in a duopolistic industry in which the products of the firms are vertically differentiated. In the industry, there are a high quality firm and a low quality firm. In the first stage of the game, the firms choose their strategic variables, price or quantity. In the second stage, they determine the levels of their strategic variables. We will show that, under an assumption about distribution of consumers' preference, we obtain the result that is similar to Singh and Vives (1984)' proposition (their Proposition 3) in the case of substitutes with nonlinear demand functions. That is, in the first stage of the game, a quantity strategy dominates a price strategy for both firms. Received: April 23, 1999; revised version: May 31, 2000     

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.