Strategy-proof and individually rational social choice functions for public good economies

Summary We consider the problem of choosing an allocation in an economy in which there are one private good and one public good. Our purpose is to identify the class of procedures of choosing an allocation which satisfy strategy-proofness, individual rationality, no exploitation and non-bossiness. Any such procedure is a scheme of semi-convex cost sharing determined by the minimum demand principle.I wish to thank Professors Salvador Barbera, Matthew Jackson, Herve Moulin and William Thomson for their helpful suggestions and two anonymous referees for their detailed comments. Conversations with Professors Hideo Konishi, Shinji Oseto Ken-ichi Shimomura and Stephen Ching were helpful. This work is supported by the Japan Economic Research Foundation and Research Grants PB89-0294 and PB89-0075 from the Direcion General de Investigacion Cientifica y Tecnica, Spanish Ministry of Education.     

Anonymous sequential games: Existence and characterization of equilibria

Summary In this paper we consider Anonymous Sequential Games with Aggregate Uncertainty. We prove existence of equilibrium when there is a general state space representing aggregate uncertainty. When the economy is stationary and the underlying process governing aggregate uncertainty Markov, we provide Markov representations of the equilibria.Table of notation Agents' characteristics space ( ) - A Action space of each agent (aA) - Y Y = x A - Aggregate distribution on agents' characteristics - (X) Space of probability measures onX - C(X) Space of continuous functions onX - _X Family of Borel sets ofX - State space of aggregate uncertainty ( ) - x _t=1 aggregate uncertainty for the infinite game - = (₁,₂,...,_t,...) - ^{t t} (₁, ₂,..., _t) - L₁(^t,C ×A),v _t Normed space of measurable functions from ^t toC( x A) - 8o(^t,( x A)) Space of measurable functions from ^tto( x A) - X^t X^t= x _s=1 ^t X - _X ^t Borel field onX ^t - v Distribution on - v_t Marginal distribution of v on ^t - v(^t)((¦^t)) Conditional distribution on given ^t - v^t(^s)(v_t(¦^s)) Conditional distribution on ^t given ^s (wheres) - _t Periodt distributional strategy - Distributional strategy for all periods =(₁,₂,...,_t,...) - _t Transition process for agents' types - ( _t,^t,y)(P _t+1(, _t , ^t ,y)) Transition function associated with _t - u _t Utility function - V _t (, a, , ^t) Value function for each collection (, a, , ^t ) - W _t (, , ^t ) Value function given optimal action a - C() Consistency correspondence. Distributions consistent with and characteristics transition functions - B() Best response correspondence (which also satisfy consistency) - E Set of equilibrium distributional strategies - x _t=1 ( ^t , (x A)) - S Expanded state space for Markov construction - (, a, ) Value function for Markov construction - P( _t ^* , _t y)(P(, _t ^* , _t , _y )) Invariant characteristics transition function for Markov game We wish to acknowledge very helpful conversations with C. d'Aspremont, B. Lipman, A. McLennan and J-F. Mertens. The financial support of the SSHRCC and the ARC at Queen's University is gratefully acknowledged. This paper was begun while the first author visited CORE. The financial support of CORE and the excellent research environment is gratefully acknowledged. The usual disclaimer applies.     

The overprovision anomaly of private public good supply

It is well known that private provision of a public good may lead to a higher supply than that in some Pareto optimal allocation. The traditional view attributes this overprovision anomaly to a specific kind of preferences. The present paper, however, shows that preferences do not play a decisive role. Assuming normality, overprovision will occur only if the distribution of income is extremely skewed and Pareto optimal allocations are not within the set of cost-share equilibria.     

Klassische Nationalökonomie gestern und heute

Ohne ZusammenfassungDieser Artikel ist dieungekürzte Fassung des Beitrages Klassische Nationalökonomie des Verfassers zum Staatslexikon (Band IV).     

Equilibria and Pareto optima of markets with adverse selection

Summary This paper examines the efficiency properties of competitive equilibrium in an economy with adverse selection. The agents (firms and households) in this economy exchange contracts, which specify all the relevant aspects of their interaction. Markets are assumed to be complete, in the sense that all possible contracts can, in principle, be traded. Since prices are specified as part of the contract, they cannot be used as free parameters to equate supply and demand in the market for the contract. Instead, equilibrium is achieved by adjusting the probability of trade. If the contract space is sufficiently rich, it can be shown that rationing will not be observed in equilibrium. A further refinement of equilibrium is proposed, restricting agents' beliefs about contracts that are not traded in equilibrium. Incentive-efficient and constrained incentive-efficient allocations are defined to be solutions to appropriately specified mechanism design problems. Constrained incentive efficiency is an artificial construction, obtained by adding the constraint that all contracts yield the same rate of return to firms. Using this notion, analogues of the fundamental theorems of welfare economics can be proved: all refined equilibria are constrained incentive-efficient and all constrained incentive-efficient allocations satisfying some additional conditions can be decentralized as refined equilibria. A constrained incentive-efficient equilibrium is typically not incentive-efficient, however. The source of the inefficiency is the equilibrium condition that forces all firms to earn the same rate of return on each contract.Notation ={ ₁,..., _k } set of outcomes - : ₊ generic contract or lottery - A = () ; - A_o A{, where denotes the null contract or no trade - S={1,...,¦S¦} set of seller types - L(s) number of type-s sellers - M number of buyers - u: × S seller's utility function, which can be extended toA× S by puttingu(, s) ; - v. × S buyer's utility function, which can be extended toA × S by puttingv(, s) ; - f:A ₀ ×S ₊ allocation of sellers - g:A ₀ ×S ₊ allocation of buyers - A ₊ sellers' trading function - :A ×S ₊ buyers' trading function This paper has had a long gestation period, during which I have been influenced by helpful conversations with many persons, by their work, or both. Among those who deserve special mention are Martin Hellwig, Roger Myerson, Edward Prescott, Robert Townsend and Yves Younés. Earlier versions were presented to the NBER/CEME Conference on Decentralization at the University of Toronto and the NBER Conference on General Equilibrium at Brown University. I would like to thank John Geanakoplos, Walter Heller, Andreu Mas Colell, Michael Peters, Michel Poitevin, Lloyd Shapley, John Wooders, Nicholas Yannelis and an anonymous referee for their helpful comments and especially Robert Rosenthal for his careful reading of two drafts. The financial support of the National Science Foundation under Grant No. 912202 is gratefully acknowledged.     

Market games with differential information and infinite dimensional commodity spaces: The core

Summary We provide an alternative proof of the existence of core allocations in exchange economies with differential information and infinite dimensional commodity spaces. We also identify a critical feature of information sharing rules that ensures nonemptiness of the core. In essence, the only condition we require on the sharing rules is that profitable insider trading be prohibited. In the absence of insider trading, balancedness is guaranteed and core nonemptiness follows.I thank Dan Arce, Erik Balder, Myrna Wooders, and Nicholas Yannelis for helpful comments. This paper is a greatly revised version of my paper entitled. A Variational Problem Arising in Market Games with Differential Information, written in August of 1991.     

Public-Choice Analysis of a New International Organization: The International Sea-Bed Authority

The usefulness of the public-choice approach for a better understanding of international organizations can be demonstrated by applying it to the analysis of the structure and functions of a new international organization, the International Sea-Bed Authority, established in 1994, after two decades of negotiations under the auspices of the United Nations, with the aim to control the oceans' mineral resources beyond the limits of national jurisdictions (which have been proclaimed by the U.N. Assembly common heritage of mankind). First, the reasons for establishing this organization, whose basis is the common heritage of mankind nature of ocean resources, are examined under two aspects: 1) definition and protection of property rights; 2) environmental control of sea-bed mining activities. Secondly, the organization's decisionmaking system is presented, including such features as the assembly, council with chamber voting, finance committee with decision by consensus, features that balance the voting power of members and protect those countries that bear the financial responsibility for the budget. Finally, some comments are offered about more general aspects of the theory of international organizations: the bureaucracy (and diplomacy) of these organizations as well as the interdependence among international organizations, which opens the way to forms of international logrolling and makes it advisable for countries not to exit from these organizations, even when they have no primary interest in them.     

Entropic irreversibility and uncontrolled technological change in economy and environment

A joint production model representing Spaceship Earth is used to explore at a conceptual level, implications of natural resource depletion and economic waste production for economy-environment change. Ecological change is considered as uncontrolled technological innovation, partially induced through disposal of unwanted surpluses (by-products and wastes from economic activity). These surpluses may accumulate as wastelands, or (more likely) contribute to uncontrolled ecological change. Technologically stationary economy-environment steady-state solutions are contrasted with instability and forced change where either the technologies or the patterns of resource allocation in economic and environmental processes are incompatible with a steady state.Thanks to Charles Perrings, Louis Arnoux, and three anonymous referees. Responsbility for any errors or obscurities in argument is mine alone.     

Convention, Social Order, and the Two Coordinations

The word coordination has two meanings, and thesemeanings are often conflated. One meaning, associated with ThomasSchelling, is seen in situations like choosing whether to driveon the left or the right; the drivers must coordinate to eachother's behavior. The other meaning, associated with FriedrichHayek, means that a concatenation of activities is arranged soas to produce good results. Along with the Schelling sense ofcoordination comes the notion of convention, such as drivingon the right. Some conventions are consciously designed; othersemerge without design (or are emergent). Along with the Hayeksense of coordination comes the notion of social order. Somesocial orders, such as the skeleton of activities within thefirm or within the hypothetical socialist economy, are consciouslyplanned. Other social orders, such as the catallaxy of the freesociety, function without central planning (or are spontaneous).Distinguishing between the two coordinations (and, in parallelfashion, between convention and social order) clarifies thinkingand resolves some confusions that have arisen in discussionsof coordination and spontaneous order. The key distinctionsare discussed in the context of the thought of, on the one hand,Menger, Schelling, David Lewis, and the recent path-dependencetheorists, and, on the other hand, Smith, Hayek, Polanyi, Coase,and the modern Austrian economists. The paper concludes witha typology that encompasses the several distinctions.     

“Buy Domestic” Campaigns and Optimal Tariffs

This paper attempts to analyze the strategic use of optimal tariffs and to examine the effects of national bias on the optimal trade policy and social welfare in a two-country, two-good, price competition model derived from Neven et al. (1991). The major findings are as follows. (1) If all consumers prefer the domestic good, then buy domestic campaigns will decrease the prohibitive tariff rate and increase local welfare. (2) If at least some consumers prefer the foreign good, but not to a great extent, then buy domestic campaigns will not change the optimal tariff rate, but may improve local welfare. (3) When all consumers greatly prefer the foreign good, then promotion of buy domestic decreases the optimal tariff rate, but it cannot improve social welfare. With this framework, we also prove that buy domestic campaigns serve as a substitute for tariffs with respect to a strategic trade policy.     

Hot vs. Cold: Sequential Responses and Preference Stability in Experimental Games

In experiments with two-person sequential games we analyze whether responses to favorable and unfavorable actions depend on the elicitation procedure. In our hot treatment the second player responds to the first player's observed action while in our cold treatment we follow the strategy method and have the second player decide on a contingent action for each and every possible first player move, without first observing this move. Our analysis centers on the degree to which subjects deviate from the maximization of their pecuniary rewards, as a response to others' actions. Our results show no difference in behavior between the two treatments. We also find evidence of the stability of subjects' preferences with respect to their behavior over time and to the consistency of their choices as first and second mover.     

Der ökonomische Teil der malthusischen Bevölkerungslehre

Ohne ZusammenfassungDie im Text in Klammern beigefügten Zahlen bezeichnen den Band und die Seite der sechsten, zweibändigen Auflage des Malthusischen Bevölkerungswerkes (Essay on the principle of population) vom Jahre 1826, der letzten, vom Verfasser selbst besorgten Auflage.     

From “tax state” to “debt state”

The paper is motivated by Joseph A. Schumpeter's The Crisis of the Tax State. It inquires whether the buildup of government debt in peacetimeprosperity is a threat to the stability, existence or creation of viable tax states. The paper begins by setting out Schumpeter's conception of the tax state and the nature of recent political-economic events which have reinvigorated the concept. Next the paper sets out some simple debt dynamics and sketches a debt-induced business cycle arising from heavy reliance on debt finance in peacetimeprosperity. Finally, the paper assesses threats to the tax state in light of recent work on path dependence and positive feedback. An attempt is made to throw some light on whether the plethora of new, and often small, states spawned by the demise of communism can be viable tax states.Essay on Government, the Tax State and Economic Dynamics submitted to the Third Schumpeter Prize Competition.     

Individual Decision Making in a Negative Externality Experiment

The experimental treatments analysed in this paper are simple in that there is a unique Nash equilibrium resulting in each player having a dominant strategy. However, the data show quite clearly that subjects do not always choose this strategy. In fact, when this dominant strategy is not a focal outcome it does not even describe the average decision adequately. It is shown that average individual decisions are best described by a decision error model based on a censored distribution as opposed to the truncated regression model which is typically used in similar studies. Moreover it is shown that in the treatments where the dominant strategy is not focal dynamics are important with average subject decisions initially corresponding to the focal outcome and then adjusting towards the Nash prediction. Overall, 66.7% of subjects are consistent with Payoff Maximization, 27.8% are consistent with an alternate preference maximization and 5.6% are random.     

The Coming Slavery: The Determinism of Herbert Spencer

Herbert Spencer (1820–1930) believed that Victorian Britain was moving toward a society of total regimentation (slavery). This movement was part of a cosmic process of evolution and dissolution. While the long-run (but not ultimate) destination of society was a higher form of social organization based on voluntary and complex interpersonal relationships, the immediate tendency was retrograde—a movement away from the liberation of mankind from the bondage of previous eras. This Article explores (1) the reasons for the retrograde movement, (2) its inevitability, and (3) the role of ideas in the process. The general conclusion is that in an effort to explain the general movement of social institutions and practices, Spencer develops a mechanical and deterministic approach which undermines his ability to pass normative judgements on changes in society.     

Bankruptcy Reform in Russia: The Case for Creditor Rights in Russia

Russia at the dawn of the 21st century is experiencing a collapsing economy. In a world where healthy economies create and maintain capital, it is critically important that all efforts be made to assure all creditors and especially private direct investors that in the event of debtor-insolvency their business interests are protected. The role of bankruptcy law under a regime of what I call creditor rights is limited. The court system can be used to avoid a creditors's race to grab assets. Whenever the going concern value of a firm is greater than the sum of the assets sold separately a case can be made for a bankruptcy procedure as a way of protecting creditor rights. This paper examines the historical origins of the creditor rights tradition and advocates such a regime for modern Russia. This paper holds that especially with respect to Russia, we would do well to heed John Stuart Mill's advice and support reforms that favor creditors and protect the value of their rights. Those insolvent firms owned and managed by political oligarchs should be cut down, dismembered, and the assets they command transferred to new and more imaginative and solvent groups of managers.     

The Regulation of Private Schools Serving Low-Income Families in Andhra Pradesh,India

This paper sets out some findings of a research project carried out in private unaided schools in low-income areas of Hyderabad, India. The part of the research project documented here was designed to examine the question: Is the regulatory regime conducive to entrepreneurial action and market discovery with particular reference to the low-income schools in Hyderabad. This paper is narrowly focused, setting out the results of pattern matching empirical data with the Austrian economic concepts of entrepreneurship, rivalry, and market discovery. The research discovered that two regulatory regimes exist, one that is set out on paper in the Education Acts and associated rules, and another that operates in practice. That is, there is a combination of regulations on paper and regulations existing in an extra-legal sector. Generally it was found that the regulations in practice are consistent with market principles. Conversely the regulations set out on paper are not conducive to entrepreneurial innovation and market discovery. Recommendations for potential policy initiatives include the possibility of legitimising the extra-legal sector by introducing self-regulation possibly via self-evaluation systems for the private unaided schools.     

Does Increased Extraction of Natural Gas Reduce Carbon Emissions?

Without an international climate agreement, extraction of more natural gas could reduce emissions of CO₂ as more clean natural gas may drive out dirty coal and oil. Using a computable equilibrium model for the Western European electricity and natural gas markets, we examine whether increased extraction of natural gas in Norway reduces global emissions of CO₂. We find that both in the short run and in the long run total emissions are reduced if the additional quantity of natural gas is used in gas power production in Norway. If instead the additional quantity is exported directly, total emissions increase both in the short run and in the long run. However, if modest CO₂-taxes are imposed, increased extraction of natural gas will reduce CO₂ emissions also when the additional natural gas is exported directed.earlier version of this paper was presented at the 25th Annual IAEE International Conference in Aberdeen June 2002.     

Transactions Costs in Tradable Permit Markets: An Experimental Study of Pollution Market Designs

Regulators' choices of market rules and permit allocations influence tradable emission permit programs. This paper uses laboratory experiments to study how transaction costs interact with permit allocations to determine the cost-effectiveness of emissions abatement. With positive transaction costs, in theory the initial distribution of permits can affect both abatement costs and equity. Consistent with theory, we find that with declining marginal transaction costs prices deviate less from the efficient level if the misallocation of the initial permit distribution is greater, and the deviation from efficient prices does not vary with the initial permit endowment when marginal transaction costs are constant.     

Alternative Modelle und Hypothesen der Konsum- und Sparentscheidung(1)

Summary For the analysis of the allocation of personal disposable income to the different consumption goods and savings, an indirect-addilog-expenditure-system (IAES) has been constructed. Compared to the linear-expenditure-system (LES) the IAES to far more flexible and is not based upon the idea of minimum-consumption- or minimum-saving-quotas. On the other hand, marginal income shares are not fixed parameters. The IAES allows the derivation of a systematic savings- and consumption-function and supplies consistent income elasticities. But it will be shown that consistent demand systems are only restrictively able to consider all major determinants of the decision-problem consumption or saving. The derived system does not only neglect the effects of wealth on consumption and savings but also the results of real income fluctuations due to the business cycle. Also phenomena like unemployment and uncertainties regarding estimates of the future or inflation are neglected. With the help of an adjustment-procedure a part of these disadvantages has been eliminated. The adjustment with regard to the entire private consumption and savings supplied income elasticities which lead to an almost constant consumption- and savings-share in the period under investigation.