Bilateral trade with apositional traders

We study the standard model of bilateral trade under incomplete information dropping the assumption that traders know on which side of the market they are. We consider two mechanisms that differ only in the number of offers that an agent can submit. These mechanisms are realistic and they are ex post individually rational (i.e. regret free), while the usual mechanisms proposed in the literature satisfy the weaker requirement of interim individual rationality. Properties of the Bayesian equilibria are described for the general case. For the case where valuations are uniformly distributed in the unit square, two types of equilibria are derived for each mechanism and their efficiency properties are analyzed. As expected, the equilibria under the double offer mechanism are less inefficient than those under the single offer mechanism.     

Information-constrained optima with retrading: An externality and its market-based solution

This paper studies the efficiency of competitive equilibria in environments with a moral hazard problem and unobserved states, both with retrading in ex post spot markets. The interaction between private information problems and the possibility of retrade creates an externality, unless preferences have special, restrictive properties. The externality is internalized by allowing agents to contract ex ante on market fundamentals determining the spot price or interest rate, over and above contracting on actions and outputs. Then competitive equilibria are equivalent with the appropriate notion of constrained Pareto optimality. Examples show that it is possible to have multiple market fundamentals or price-islands, created endogenously in equilibrium.     

Rational expectations equilibrium with conditioning on past prices: A mean-variance example

The paper uses an intertemporal mean-variance model of the market for a dividend-paying risky asset to analyse rational expectations equilibria when all agents condition their expectations on past rather than current prices. The main result shows that if the time span between successive market periods is short, the market will approximate full informational efficiency arbitrarily closely, yet the returns to being informed are bounded away from zero. This contrasts with the Grossman-Stiglitz proposition that markets cannot come close to informational efficiency if the acquisition of information is costly.     

A Decentralized Market with Common Values Uncertainty: Non-Steady States

We analyse a market where (i) trade proceeds by random and anonymous pairwise meetings with bargaining; (ii) agents are asymmetrically informed about the value of the traded good; and (iii) no new entrants are allowed once the market is open. We show that information revelation and efficiency never obtain in equilibrium, even as discounting is removed. This holds whether the asymmetry is two-sided or one-sided. In some cases there exist equilibria where a substantial amount goes untraded. This contrasts with the earlier literature, which was based on the steady-state equilibria of a model where agents enter the market every period.     

Multiple equilibria in bargaining models of decentralized trade

Summary A market in which population size is endogenously determined is modeled. Buyers and sellers are randomly matched upon entering the market, whereupon they engage in non-cooperative bilateral bargaining. It is shown that general matching technologies and heterogeneity of buyer or seller populations often result in multiple market equilibria. Up to four equilibria can occur and the equilibria can always be ranked according to population size. Under some conditions all equilibria can also be Pareto ranked. The set of equilibria depends on the relative population sizes of different types of potential entrant, market entry costs, and the degree of differentiation between agents on the same side of the market.This paper evolved from a chapter in my dissertation. I am indebted to Leo Simon for many helpful conversations. Michael Hanemann, Jeff Perloff, Stefan Reichelstein, Jim Vercammen, Brian Wright, and participants in seminars at U.C. Berkeley, the University of Maryland, the University of British Columbia and the Australian National University also provided useful comments. Lastly, I benefited greatly from the thorough comments and corrections provided by an anonymous referee.     

DOUBLE‐SIDED ADVERSE SELECTION IN THE PRODUCT MARKET AND THE ROLE OF THE INSURANCE MARKET*

I investigate the interrelation between a product market and an insurance market when adverse‐selection problems exist both in consumers and in firms. Firms offer warranties for product failures. Consumers may further purchase first‐party insurance for the residual risks of product failures. Given that the insurance market exists, two types of equilibria are possible: (a) Different firm types offer different pooling warranties attracting both good and bad consumer types or (b) good firms attract only bad consumers and bad firms attract both types of consumers. I discuss the existence and the efficiency implication of the insurance market.     

Competitive behavior in market games: Evidence and theory

We explore whether competitive outcomes arise in an experimental implementation of a market game, introduced by Shubik (1973) [21]. Market games obtain Pareto inferior (strict) Nash equilibria, in which some or possibly all markets are closed. We find that subjects do not coordinate on autarkic Nash equilibria, but favor more efficient Nash equilibria in which all markets are open. As the number of subjects participating in the market game increases, the Nash equilibrium they achieve approximates the associated competitive equilibrium of the underlying economy. Motivated by these findings, we provide a theoretical argument for why evolutionary forces can lead to competitive outcomes in market games.     

Rationalizable expectations and sunspot equilibria in an overlapping-generations economy

There are two theories for the treatment of market uncertainty: rationalizable expectations and sunspot equilibria. This paper shows how the game-theoretic solution concept of rationalizable expectations can be applied to an overlapping-generations exchange economy. Some general properties of these equilibria are discussed. It is shown that rationalizable-expectations equilibria are the predictions yielded by considering sunspot equilibria in which probability beliefs may differ across individuals. This result allows for a new interpretation of sunspot equilibria and helps to understand their relevance.     

A three way equivalence

In view of the well known core equivalence results in atomless economies, coincidence of market game equilibrium allocations with competitive allocations is tantamount to a three way equivalence between market game mechanisms, competitive equilibria and the core. Based on this idea we study equilibrium refinements of market games, which allow us to use the core equivalence machinery in order to provide an exact market game characterization of competitive equilibria.     

Millian Efficiency with Endogenous Fertility

Should governments implement policies that affect fertility decisions on efficiency grounds? What is the correct notion of efficiency to use? To address these issues, this paper develops an extension of the notion of Pareto efficiency, referred to as Millian efficiency , to evaluate symmetric allocations in an overlapping generations setting with endogenous fertility. This extension is based on preferences of those agents who are actually alive, and exclusively allows for welfare comparisons of symmetric allocations. First, we provide necessary and sufficient conditions to determine whether an allocation is Millian efficient or not, and we show that the sufficient conditions for dynamic efficiency offered by Cass (1972) and Balasko and Shell (1980) cannot be directly applied when fertility decisions are endogenous. Second, we characterize Millian efficient allocations as the equilibria of a decentralized price mechanism, and we present a sufficient condition for dynamic efficiency that uses the sequence of prices associated to such decentralized equilibria. Finally, we analyse how intergenerational policies should be designed to restore efficiency and achieve net welfare gains in two different settings in which markets yield inefficient allocations: dynamic inefficiencies and financial market incompleteness regarding human capital. In the former, a pay-as-you-go social security system eliminates dynamic inefficiencies, provided pensions are explicitly linked with fertility decisions. In the latter, a specific link between social security and public education becomes a necessary condition for Millian efficiency.     

Bilateral oligopoly and quantity competition

Bilateral oligopoly is a market game with two commodities, allowing strategic behavior on both sides of the market. When the number of buyers is large, bilateral oligopoly approximates a game of quantity competition played by sellers. We present examples which show that this is not typically a Cournot game. Rather, we introduce an alternative game of quantity competition (the market share game) and, appealing to results in the literature on contests, show that this yields the same equilibria as the many-buyer limit of bilateral oligopoly, under standard assumptions on costs and preferences. We also show that the market share and Cournot games have the same equilibria if and only if the price elasticity of the latter is one and investigate the differences in equilibria otherwise. These results lead to necessary and sufficient conditions for the Cournot game to be a good approximation to bilateral oligopoly with many buyers and to an ordering of total output when they are not satisfied.     

Correlated equilibrium and sunspot equilibrium

Summary We show by an example that the sunspot equilibria of a competitive economy are not equivalent to the correlated equilibria if sunspots generate transfers between (extrinsic) states of nature (through a contingent commodities market). Nevertheless, we prove that the sunspot equilibrium allocations of a standard overlapping generations economy coincide with the (strategic form) correlated equilibrium allocations of a natural market game mimicking the economy.     

Demand reduction and preemptive bidding in multi-unit license auctions

Multi-unit ascending auctions allow for equilibria in which bidders strategically reduce their demand and split the market at low prices. At the same time, they allow for preemptive bidding by incumbent bidders in a coordinated attempt to exclude entrants from the market. We consider an environment where both demand reduction and preemptive bidding are supported as equilibrium phenomena of the ascending auction. In a series of experiments, we compare its performance to that of the discriminatory auction. Strategic demand reduction is quite prevalent in the ascending auction even when entry imposes a (large) negative externality on incumbents. As a result, the ascending auction performs worse than the discriminatory auction both in terms of revenue and efficiency, while entrants’ chances are similar across the two formats.     

Cycles and multiple equilibria in the market for durable lemons

Summary. The paper investigates the nature of market failure in a dynamic version of Akerlof (1970) where identical cohorts of a durable good enter the market over time. In the dynamic model, equilibria with qualitatively different properties emerge. Typically, in equilibria of the dynamic model, sellers with higher quality wait in order to sell and wait more than sellers of lower quality. The main result is that for any distribution of quality there exist an infinite number of cyclical equilibria where all goods are traded within a certain number of periods after entering the market. Received: December 21, 2000; revised version: September 5, 2001     

Equity market and foreign capital

Abstract .  I present a model that demonstrates that the market mechanism is not always effective in stabilizing an open equity market. Foreign capital inflows create multiple equilibria in the equity market, which may simultaneously trigger a currency crisis as well as an equity market crash even if the equity market is well developed.     

Efficiency in an Economy with Fixed Costs

It is by now well known that in an economy with increasing returns, first-best efficiency may be impossible to attain through an equilibrium concept based on market prices, even if firms are regulated to follow marginal cost pricing. We examine the efficiency issue in a special but important class of economies in which the only source of nonconvexities is the presence of fixed costs. Even in this context, it is possible that none of the equilibria based on marginal cost pricing are efficient (unless additional, strong assumptions are made). We argue that available results on the existence of an efficient two-part tariff equilibrium rely on very strong assumptions, and we provide a positive result using a weak surplus condition. Our approach can also be used to establish the existence of an efficient marginal cost pricing equilibrium with endogenously chosen lump-sum taxes if the initial endowment is efficient in the economy without the production technology.     

On Stackelberg competition in strategic multilateral exchange

In this paper, we consider a strategic equilibrium concept which extends Stackelberg competition to cover a general equilibrium framework. From the benchmark of strategic market games proposed by Sahi and Yao (1989), we define the notion of Stackelberg equilibrium. This concept captures strategic interactions in interrelated markets on which a finite number of leaders and followers compete on quantities. Within the framework of an example, convergence and welfare are studied. More specifically, we analyze convergence toward the competitive equilibrium and make welfare comparisons with other strategic equilibria.     

Macroeconomic coordination failure under oligempory

Summary. Each sector of a multi-sector overlapping generations model is an oligempory with a given number of firms, oligopsonists in the sectoral (spatially differentiated) labour market and oligopolists in the sectoral (homogeneous) output market. When there is aggregate unemployment, and a firm raises wages beyond the local full employment level acquiring labour from neighbours, sectoral output supply becomes constant and the firm faces a flat output demand curve under constant returns to labour (upward sloping under decreasing returns). Multiple temporary equilibria and Pareto-ranked steady-state equilibria emerge; the associated sunspot equilibria exhibit counter-cyclical markups, inter alia. Received: February 28, 2000; revised version: March 16, 2001     

Non-Walrasian equilibria and the law of one price

We present a market game which features multiple posts for each commodity. We use this framework to illustrate the idea that in non-Walrasian markets, where individual activities influence market clearing prices, there are equilibria where commodities are exchanged simultaneously in two posts at different prices, thus defying the ‘law of one price’. Such equilibria are compatible with an apparent arbitrage possibility, which dissipates whenever individuals try to take advantage of it.