Pluralism(s) in economics: lessons from complexity and innovation. A review paper

My analysis focuses on two main observations. First, many competing schools of thoughts are currently present in economics with no predominant paradigm. We are experiencing an era of pluralism (Davis J Econ Methodol 14(3):275–290, 2007, Camb J Econ 32:249–366, 2008; Colander 2000; Colander et al. J Polit Econ 16(4):485–499, 2004). The term ‘pluralism’ is extremely interesting since, as I will show, it has different dimensions to it. These offer insights into interpreting the tangled universe of the economics. Second, there is a progressive intertwining of innovation economics with complexity economics, which I argue provides an instance of the above-described shift toward pluralism.     

Definitions of ambiguous events and the smooth ambiguity model

We examine a variety of preference-based definitions of ambiguous events in the context of the smooth ambiguity model. We first consider the definition proposed in Klibanoff et?al. (Econometrica 73(6):1849?C1892, 2005) based on the classic Ellsberg two-urn paradox (Ellsberg Q J Econ 75:643?C669, 1961) and show that it satisfies several desirable properties. We then compare this definition with those of Nehring (Math Soc Sci 38(2):197?C213, 1999), Epstein and Zhang (Econometrica 69:265?C306, 2001), Zhang (Econ Theory 20:159?C181, 2002), and Ghirardato and Marinacci (J Econ Theory 102:251?C289, 2002). Within the smooth ambiguity model, we show that Ghirardato and Marinacci (J Econ Theory 102:251?C289, 2002) would identify the same set of ambiguous and unambiguous events as our definition while Epstein and Zhang (Econometrica 69:265?C306, 2001) and Zhang (Econ Theory 20:159?C181, 2002) would yield a different classification. Moreover, we discuss and formally identify two key sources of the differences compared to Epstein and Zhang (Econometrica 69:265?C306, 2001) and Zhang (Econ Theory 20:159?C181, 2002). The more interesting source is that these two definitions can confound non-constant ambiguity attitude and the ambiguity of an event.     

Competition, knowledge, and local government

This paper applies the insights of Austrian economics to an important issue in local political economy. Basic economic theory holds that greater competition produces superior outcomes in private goods markets. The same should be true in the ??markets?? for the output of local government. Brennan and Buchanan (1977, 1980) show that interjurisdictional competition may serve as a potential restraint on the monopoly powers of local Leviathan and Tiebout (1956) shows that it may help lead to the production of efficient quantities of local public goods. However, other potential virtues of competition in the market for local collective goods have been largely ignored. This paper explores those other virtues as well as the neoclassical theoretical foundations of the Tiebout (1956) model, upon which much of this literature is based. This has public policy implications for local governments, which have taken on increased importance given the recent global movement towards more decentralized government.     

Is per capita real GDP stationary in five southeastern European countries? Fourier unit root test

This study uses the newly developed Fourier unit root test advanced by Enders and Lee (2004, 2009) to investigate the time-series properties of real GDP (Gross Domestic Product) for five Southeastern European countries for the period from 1969 to 2009. The empirical results from several conventional unit root tests indicate that the per capita real GDP for all of the countries studied are non-stationary; however, when Enders and Lee (2004, 2009) Fourier unit root tests are conducted, one rejects the unit root hypothesis of real GDP per capita in all countries under study. These results have important policy implications for these five Southeastern European countries under study.     

On the Stochastic Properties of Carbon Futures Prices

Pricing carbon is a central concern in environmental economics, due to the worldwide importance of emissions trading schemes to regulate pollution. This paper documents the presence of small and large jumps in the stochastic process of the CO $_2$ futures price. The large jumps have a discrete origin, i.e. they can arise from various demand factors or institutional decisions on the tradable permits market. Contrary to the existing literature, we show that the stochastic process of carbon futures prices does not contain a continuous component (Brownian motion). The results are derived by using high-frequency data in the activity signature function framework (Todorov and Tauchen in J Econom 154:125–138, 2010; Todorov and Tauchen in J Bus Econ Stat 29:356–371, 2011). The implication is that the carbon futures price should be modeled as an appropriately sampled, centered Lévy or Poisson process. The pure-jump behavior of the carbon price might be explained by the lower volume of trades on this allowance market (compared to other highly liquid financial markets).     

Bargaining over productivity and wages when technical change is induced: implications for growth, distribution, and employment

I study a model of growth and income distribution in which workers and firms bargain à la Nash (Econometrica 18(2):155–162, 1950) over wages and productivity gains, taking into account the trade-offs faced by firms in choosing factor-augmenting technologies. The aggregate environment resulting from self-interested, objective function-maximizing decision rules on wages, productivity gains, savings and investment, is described by a two-dimensional dynamical system in the employment rate and output/capital ratio. The economy converges cyclically to a long-run equilibrium involving a Harrod-neutral profile of technical change, a constant rate of employment of labor, and constant input shares. The type of oscillations predicted by the model is qualitatively consistent with the available data on the United States (1963–2003), replicates the dynamics found in earlier models of growth cycles such as Goodwin (A growth cycle, in C.H. Feinstein (ed). Socialism, Capitalism and Economic Growth. Cambridge University Press, Cambridge 1967. Cambridge University Press, Cambridge, 1967); Shah and Desai (Econ J 91:1006–1010, 1981); van der Ploeg (J Macroecon 9:1–12, 1987); Flaschel (J Econ: Zeitschrift für Nationalökonomie 44:63–69, 1984) and Sportelli (J Econ: Zeitschrift für Nationalökonomie 61(1):35–64, 1995), and can be verified numerically in simulations. Institutional change, as captured by variations in workers’ bargaining power, has a positive effect on the long-run rate of growth of output per worker but a negative effect on long-run employment. Economic policy can also affect the growth and distribution pattern through changes in the unemployment compensation, which also have a positive long-run impact on labor productivity growth but a negative long-run impact on employment. In both cases, employment can overshoot its new equilibrium value along the transitional dynamics.     

Inequality aversion and separability in social risk evaluation

This paper examines how to satisfy “independence of the utilities of the dead” (Blackorby et al. in Econometrica 63:1303–1320, 1995; Bommier and Zuber in Soc Choice Welf 31:415–434, 2008) in the class of “expected equally distributed equivalent” social orderings (Fleurbaey in J Polit Econ 118:649–680, 2010) and inquires into the possibility to keep some aversion to inequality in this context. It is shown that the social welfare function must either be utilitarian or take a special multiplicative form. The multiplicative form is compatible with any degree of inequality aversion, but only under some constraints on the range of individual utilities.     

Endogenous population with human and physical capital accumulation

This paper proposes an economic growth model with population growth and physical and human capital accumulation. The physical capital accumulation is built on the Solow growth model (Solow in Q J Econ 70:65–94, 1956). The education and human capital accumulation is influenced by the Uzawa–Lucas model (Uzawa in Int Econ Rev 6:18–31, 1965; Lucas in J Monet Econ 22:3–42, 1988). The population dynamics are influenced by the Haavelmo population model (Haavelmo in a study in the theory of economic evolution. Haavelmo, Amsterdam, 1954) and the Barro–Becker fertility choice model (Barro and Becker in Econometrica 57:481–501, 1989). We synthesize these dynamic forces in a compact framework, applying an alternative utility function proposed by Zhang (Econ Lett 42:105–110, 1993). The model describes a dynamic interdependence between population change, wealth accumulation, human capital accumulation, and division of labor. We simulate the model to demonstrate the existence of equilibrium points and to plot the motion of the dynamic system. We also examine the effects of changes in the propensity to have children, the mortality rate parameter, the propensity to receive education, the human capital utilization efficiency, and the mortality rate elasticity of human capital upon dynamic paths of the system.     

More equal but not so fair: an analysis of Brazilian income distribution from 1995 to 2009

This study measures unfair inequality in Brazil between 1995 and 2009. To achieve that, we used the statistical tool developed by Almås et al. (J Public Econ 95:488–499, 2011) and the concept of “responsibility-sensitive” fairness proposed by Bossert (Math Soc Sci 29:1–17, 1995), Konow (J Econ Behav Organ 31(1):13–35, 1996) and Cappelen and Tungodden (Fairness and the proportionality principle, Discussion paper SAM 31/2007. Norwegian School of Economics and Business Administration, 2007). The results indicate that the fairness level in Brazil remained unchanged throughout the analyzed period.     

The effects of the take-option in dictator-game experiments: a comment on Engel’s (2011) meta-study

In this paper, we report a replication of Engel’s (Exp. Econ. 14(4):583–610, 2011) meta-study of dictator game experiments. We find Engel’s meta-study of dictator game experiments to be robust, with one important exception: the coding of the take-option (List in J. Polit. Econ. 115(3):482–493, 2007; Bardsley in Exp. Econ. 11(2):122–133, 2008; Cappelen et al. in Econ. Lett. 118(2):280–283, 2013). While Engel reports this as having no statistically significant effect, in our replications, we find an economically and statistically significant negative effect on giving in line with the relevant literature.     

A subjectivist’s solution to the limits of public choice

In light of Wittman (1995) and Caplan (2007) this paper contends that the rational-choice approach to political science (“Public Choice theory”) has reached a dead end. By critiquing their treatment of rationality, knowledge assumptions, and views of the democratic process, an alternative is presented based on the core insight of the “Epistemic Primacy Thesis”. This subjectivist approach to political economy is introduced in light of an existing debate between the compatibility (or otherwise) of Austrian economics and Public Choice theory.     

The visible hand: finger ratio (2D:4D) and competitive bidding

In an experiment using two-bidder first-price sealed bid auctions with symmetric independent private values and 400 subjects, we scan also the right hand of each subject. We study how the ratio of the length of the index and ring fingers (2D:4D) of the right hand, a measure of prenatal hormone exposure, is correlated with bidding behavior and total profits. 2D:4D has been reported to predict competitiveness in sports competition (Manning and Taylor in Evol. Hum. Behav. 22:61–69, 2001, and H?nekopp et al. in Horm. Behav. 49:545–549, 2006), risk aversion in lottery tasks (Dreber and Hoffman in Portfolio selection in utero. Stockholm School of Economics, 2007; Garbarino et al. in J. Risk Uncertain. 42:1–26, 2011), and the average profitability of high-frequency traders in financial markets (Coates et al. in Proc. Natl. Acad. Sci. 106:623–628, 2009). We do not find any significant correlation between 2D:4D on either bidding or profits. However, there might be racial differences in the correlation between 2D:4D and bidding and profits.     

Dominance testing for ‘pro-poor’ growth with an application to European growth

This article introduces statistical testing procedures to evaluate ??pro-poor?? growth. Our measure of ??pro-poorness?? follows Kakwani (J Quant Econ 16(1):67?C80, 2000), Kakwani and Pernia (Asian Dev Rev 18(1):1?C16, 2000), and Son (Econ Lett 82:307?C314, 2004), who decompose the generalized Lorenz ordinates into a growth effect and an inequality effect. We derive an asymptotic distribution-free covariance matrix for the decomposed generalized Lorenz curves. Using this decomposition (and our standard errors), we test for pro-poor dominance in the growth process. We illustrate our test for the pro-poor dominance by evaluating the degree of pro-poor growth in five European countries.     

The Austrian theory of the firm: Retrospect and prospect

Using as a focusing device the famous arguments of Coase (Economica 4(16), 386–405 1937) and Hayek (The American Economic Review 35(4): 519–530 1945), I sketch in bold strokes what an Austrian theory of the firm would look like. Such a theory would pay serious attention to issues of knowledge, uncertainty, change, and complementarity. I describe a literature in which much of this theory has already been constructed; make connections to closely related literatures in economics and management; and suggest directions for future development.     

Institutional stickiness of democracy in post-communist states: Can prevailing culture explain it?

Structural explanation of political development offers a finite set of factors that cause democracy to consolidate or not (Acemoglu and Robinson 2006). This approach is, however, insufficient to explain political development of post-communist countries because it ignores a role of social arrangements in democratic consolidation. The field of comparative political economy is becoming more acceptable to the idea that social institutions have significant impact on political development (Boettke et al. Review of Austrian Economics 18(3–4): 281–304, 2005). Using transitional experience of post-communist countries, I demonstrate that institutional stickiness of democracy depends on a combination of causal factors, including underlying political culture (Boettke et al. American Journal of Sociology and Economics 67(2), 2008; Pejovich The Review of Austrian Economics 16(4):347–361, 2003).     

Consistent strategy-proof assignment by hierarchical exchange

We characterize the family of efficient, consistent, and strategy-proof rules in house allocation problems. These rules follow an endowment inheritance and trade procedure as in Pápai’s hierarchical exchange rules (Pápai in Econometrica 68, 1403–1433, 2000) and closely resemble Ergin’s priority rules (Ergin in Econometrica 70, 2489–2497, 2002). We prove that if there are at least four objects, these are the only rules that are efficient in two-agent problems, $2$ -consistent, and strategy-proof. A corollary is that these three basic properties together imply the full requirements of efficiency, consistency, group strategy-proofness, and reallocation-proofness.     

Niche products, generic products, and consumer search

We endogenize product design in a model of sequential search with random firm-consumer match value à la Wolinsky (Quart J Econ 96:493–511, 1986) and Anderson and Renault (RAND J Econ 30:719–735, 1999). We focus on a product design choice by which a firm can control the dispersion of consumer valuations for its product; we interpret low-dispersion products as “generic” and high-dispersion products as “nichy.” Equilibrium product design depends on a feedback loop: when reservation utility is high (low), the marginal customer’s match improves (worsens) with more nichy products, encouraging high (low) differentiation by firms. In turn, when firms offer more nichy products, this induces more intense search; depending on search costs, this could raise or lower consumers’ reservation utility. Remarkably, when the match distribution satisfies a hazard rate condition, firm and consumer interests align: equilibrium product design always adjusts to the level that maximizes utility. When this condition is not met, either multiple equilibria (one nichy, the other generic) or one asymmetric equilibrium (generic and nichy firms coexist) can arise; we argue that the former is more likely for common specifications of consumer preferences.     

Fictitious students creation incentives in school choice problems

We identify a new channel through which schools can potentially manipulate the well-known student and school-optimal stable mechanisms. We introduce two fictitious students creation manipulation notions where one of them is stronger. While the student and school-optimal stable mechanisms turn out to be weakly fictitious student-proof under acyclic (Ergin in Econometrica 88:485–494, 2002) and essentially homogeneous (Kojima in Games Econ Behav 82:1–14, 2013) priority structures, respectively, they still lack strong fictitious student-proofness. We then compare the mechanisms in terms of their vulnerability to manipulations in the sense of Pathak and Sönmez (Am Econ Rev 103(1):80–106, 2013) and find out that the student-optimal stable mechanism is more manipulable than the school-optimal one. Lastly, in the large market setting of Kojima and Pathak (Am Econ Rev 99(3):608–627, 2009), the student-optimal stable mechanism becomes weakly fictitious student-proof as the market is getting large.     

Convergence in income inequality? evidence from panel unit root tests with structural breaks

This paper empirically tests whether there is evidence of convergence in income inequality, as predicted by several versions of the neoclassical growth model, using a large panel of annual data for the 48 contiguous states in the US over the 1916?C2005 period. By implementing the panel LM unit root test developed by Im et?al. (Oxford Bull Econ Stat 67:393?C419, 2005, Panel LM unit-root tests with trend shifts, Mimeo, 2010) that allows for the presence of structural breaks and heterogeneity in the panel, we find overwhelming evidence in support of convergence in income inequality. In addition, the results are robust to alternative inequality indicators used, different notions of stochastic convergence defined, and additional cross-sectional correlation considered.     

Equilibria in an overlapping generations model with transfer policies and exogenous growth

For an overlapping generations economy with varying life-cycle productivity, non-stationary endowments, continuous time starting at $-\infty $ (hence allowing for full anticipation), constant-returns-to-scale production and ces utility, we fully characterise equilibria where output is higher than investment, which is strictly positive. Net assets (aggregate savings minus the value of the capital stock) are constant in any equilibrium, and, for balanced growth equilibria (bge, defined for an economy with stationary endowments), net assets are non-zero only in the golden rule equilibrium, in accord with Gale (1973). The number of bge is finite. Their parity, however, depends on the life-cycle productivity, in particular, on the relation between the intertemporal elasticity of substitution, the minimal working age and the minimal tax age.