A bargaining model in general equilibrium

The goal of the paper is to present a simple model of rational endogenous household formation in a general equilibrium framework in which Pareto optimality at the economy level is not necessarily obtained. The simplest example of household formation is the case in which pairs of individuals engage themselves in a bargaining process on the division of some wealth: if an agreement on the distribution is (not) reached, we can say that the household is (not) formed. The vast majority of existing bargaining models predicts agreements on an efficient outcome. A seminal paper by Crawford (Econometrica 50:607–637, 1982) describes a very simple game with incomplete information in which, even with rational agents, disagreement causes welfare losses. We embed that model in a general equilibrium framework and present some results on equilibria both in the bargaining game and the associated exchange economy. Crawford’s results support Schelling’s intuition on the reasons of disagreement: it may arise if players’ commitments are reversible. Crawford shows that high probabilities of reversibility tend to favor the bargaining impasse, in fact with low probability. We prove that even if those probabilities are arbitrarily close to zero, disagreement is an equilibrium outcome, with high probability. That conclusion seems to be an even stronger support to Schelling’s original viewpoint. In the exchange economy model with that noncooperative bargaining game as a first stage, we present significant examples of economies for which equilibria exist. Because of disagreement, Pareto suboptimal exchange economy equilibria exist for all elements in the utility function and endowment spaces and they may coexist with Pareto optimal equilibria even at the same competitive prices.     

Income Inequality in OECD Countries: Data and Explanations

There is much disagreement about both the facts and the explanationsof income inequality. Even if we confine attention to OECD countries,we find people arguing that there has been a great U-turn, withinequality rising sharply after its post war fall, and otherswho believe that the speed of change is glacial. In order toevaluate the historical record, we need data for a long runof years. The present paper reviews evidence about coveringthe period 1945–2001 for nine OECD countries. It is widelybelieved that rising inequality is attributable to technologicalchange and to globalisation. The second part of the paper arguesthat these are only part of a complex story. Household incomesdepend on public policy and on sources of income apart fromwork. What is happening at the top of the distribution may needto be explained quite differently. (JEL H0, E6)     

Bottleneck co-ownership as a regulatory alternative

This paper proposes a regulatory mechanism for vertically related industries in which the upstream “bottleneck” segment faces significant returns to scale while other (downstream) segments may be more competitive. In the proposed mechanism, the ownership of the upstream firm is allocated to downstream firms in proportion to their shares of input purchases. This mechanism, while preserving downstream competition, partially internalizes the benefits of exploiting economies of scale resulting from an increase in downstream output. We show that this mechanism is more efficient than a disintegrated market structure in which the upstream natural monopoly bottleneck sets a price equal to average cost.     

The Role of Absolute Continuity in “Merging of Opinions” and “Rational Learning”

D. Blackwell and L. Dubins (1962, Ann. Math. Statist.38, 882–886) showed that opinions merge when priors are absolutely continuous. E. Kalai and E. Lehrer (1993, Econometrica61, 1019–1045) use this result to show that players in a repeated game eventually play like a Nash equilibrium. We provide an alternative proof of merging of opinions that clarifies the role of absolute continuity while casting doubt on the relevance of the result. Persistent disagreement, the opposite of merging, allows the construction of a sequence of mutually favorable “bets.” By a law of large numbers, both agents are certain they will win these bets on average. This certain disagreement violates absolute continuity. Journal of Economic Literature Classification Numbers: C11, C69, C72, D83.     

Scoring rules: an alternative parameterization

This note presents an alternative parameterization of any scoring rule that satisfies the score-expansion property. This parameterization is based on the vector that specifies, for every number of alternatives k, k ≥ 3, the minimal size of a coalition that can veto an alternative which is preferred by everybody outside the coalition. Our result sheds new light on the commonly used plurality and Borda rules, as well as the inverse plurality rule and any “vote for t alternatives rule”.     

The process and a simple logic of ‘meso’. Emergence and the co-evolution of institutions and group size

‘Summing-up’ aggregation of micro decisions contrasts with structural emergence in complex systems and evolutionary processes. This paper deals with institutional emergence in the ‘evolution of cooperation’ framework and focuses on its size dimension. It is argued that some ‘meso’ (rather than ‘macro’) level is the proper level of cultural emergence and reproduction. Also Schumpeterian economists have discussed institutions as ‘meso’ phenomena recently, and Schelling, Axelrod, Arthur, Lindgren, and others have dealt with ‘critical masses’ of coordinated agents and emergent segregations. However, emergent group size has rarely been explicitly explored so far. In an evolutionary and game-theoretic frame, ‘meso’ is explained in terms of a sustainably cooperating group smaller than the whole population. Mechanisms such as some monitoring, memory, reputation, and active partner selection loosen the total connectivity of the static and deterministic ‘single-shot’ logic and thus allow for emergent ‘meso’ platforms, while expectations ‘to meet again’ remain sufficiently high. Applications of ‘meso-nomia’ include the deep structure of ‘general trust’ and macro-performance in ‘smaller’ and ‘well networked’ countries which helps to explain persistent ‘varieties of capitalism’.     

Does the invisible hand hold or lead? Market adjustment in an entrepreneurial economy

Adam Smith's “invisible hand” is one of the best-known phrases in economics, but its meaning is somewhat ambiguous. The invisible hand might be viewed as holding the economy close to equilibrium, yet Smith actually says that individuals are led by an invisible hand. Entrepreneurial forces lead an economy along a path that generates economic progress, and that path is determined by the disruptive forces of entrepreneurship. Rather than viewing an economy as tending toward an equilibrium, it is more accurate to view an economy as characterized by continuing progress, led by the invisible hand of entrepreneurial activity. JEL Code B53, D21, E32, O31     

From Keynes to Hayek: The marvel of thriving macroeconomies

Inherent ignorance of and uncertainties about the future may translate into doubts about the overall viability of market mechanisms. However, these doubts are quelled by a broad empirical observation: market economies thrive. Hayek sometimes abstracted from such ignorance and uncertainties in order to identify the market mechanisms that are essential to thriving economies. His often-overlooked “interest-rate brake,” for instance, keeps the rate of implementation of new technologies in line with peoples willingness to save. A careful reading of macroeconomic history suggests that artificial booms often ride piggyback on genuine booms. During a period of technological breakthroughs, the central bank's adherence to the Real Bills Doctrine overrides the interest-rate brake and engenders an unsustainable boom. JEL Code B22, E30, E50     

Coevolution of human speech and trade

We propose a paleoeconomic coevolutionary explanation for the origin of speech in modern humans. The coevolutionary process, in which trade facilitates speech and speech facilitates trade, gives rise to multiple stable trajectories. While a ‘trade-speech’ equilibrium is not an inevitable outcome for modern humans, we find it is a relatively likely scenario given our species evolved in Africa under climatic conditions supporting relatively high population densities. The origin of human speech is not independent of economic institutions—the economics of early human trade can provide additional insight to help explain the physiological emergence of human speech.      

Convergent cultural evolution and multilevel selection: Reply to comments on Janet Landa’s ‘The bioeconomics of homogenous middleman groups as adaptive units: Theory and empirical evidence viewed from a group selection framework’

The comments on Janet Landa’s (J Bioecon 10(3):259–278, 2008) target article provide a fascinating snapshot of how multilevel selection theory is perceived across several disciplines. When we focus on the zone of agreement among the commentators, Landa’s article provides an important example of convergent cultural evolution. When we focus on the zone of disagreement, we find a snapshot of the current status of the group selection controversy that goes beyond narrow scientific issues and requires a ‘truth and reconciliation’ process to resolve, as discussed in my series of blogs titled “Truth and Reconciliation for Group Selection” (Wilson , 2009) and briefly summarized here.      

Are we nice(r) to nice(r) people?—An experimental analysis

We experimentally investigate whether individuals can reliably detect cooperators (the nice(r) people) in an anonymous decision environment involving “connected games.” Participants can condition their choices in an asymmetric prisoners’ dilemma and a trust game on past individual (their partner’s donation share to a self-selected charity) and social (whether their partner belongs to a group with high or low average donations) information. Thus, the two measures of niceness are the individual donation share in the donation task, and the cooperativeness of one’s choice in the two games. We find that high donors achieve a higher-than-average expected payoff by cooperating predominantly with other high donors. Group affiliation proved to be irrelevant. Electronic Supplementary Material Supplementary material is available in the online version of this article at . JEL Classification C91, C72, D3     

Misperceiving the value of information in predicting the performance of others

Economic models typically allow for “free disposal” or “reversibility” of information, which implies non-negative value. Building on previous research on the “curse of knowledge” we explore situations where this might not be so. In three experiments, we document situations in which participants place positive value on information in attempting to predict the performance of uninformed others, even when acquiring that information diminishes their earnings. In the first experiment, a majority of participants choose to hire informed—rather than uninformed—agents, leading to lower earnings. In the second experiment, a significant number of participants pay for information—the solution to a puzzle—that hurts their ability to predict how many others will solve the puzzle. In the third experiment, we find that the effect is reduced with experience and feedback on the actual performance to be predicted. We discuss implications of our results for the role of information and informed decision making in economic situations. Electronic Supplementary Material Supplementary material is available in the online version of this article at http://dx.doi.org/10.1007/s10683-006-9128-y. JEL Classification C91, D83     

Experimental internet auctions with random information retrieval

We run an experiment where 97 subjects could retrieve records of completed past auctions before placing their bids in current one-bid, two-bid, and auction-selection games. Each subject was asked to participate in 3 current auctions; but could retrieve up to 60 records of completed (past) auctions. The results reveal a positive relation between the payoffs earned by the subjects and their history-inspection effort. Subjects act as if responding to the average bidding-ratios of the winners in the samples that they have retrieved. They apply intuitive signal-dependent stopping rules like “sample until observing a winner-value close to my won” or “find a close winner-value and try one more history” when sampling the databases. History-inspection directs bidders with relatively high private-valuations to moderate bidding which increases their realized payoffs. (JEL C9 D4 D8) Electronic Supplementary Material Supplementary material is available in the online version of this article at . JEL Classification C93, D44, D83     

Understanding economic change: the impact of emotion

In this paper we aim to conceptualize the involvement of emotion in the processes of institutional emergence and change. The starting point of our proposal is the theory of change that has been developed by Douglass North since the 1990s and has recently culminated in the publication of “Understanding the process of economic change” (2005). We agree with North in considering change as an endogenous process which starts in the individual mind through a modification of mental models and beliefs. However, notwithstanding the value that North attributes to the cognitive components of change, his approach assigns no specific role to emotion. Based on recent findings on emotions and their contribution to the process of thought, we will suggest how North’s approach may be extended in order to explore some basic mechanisms of the interaction between institutions and feelings.     

Initial offers and outcomes in wage bargaining: who wins?

The initial works council’s wage claim, and the initial firm’s (counter)offer, as well as the fraction of the disputed wages the works council is able to capture conditional on initial disagreement, are analyzed using Spanish data on wage settlements. After a given initial wage claim, the rules of the system force the firm either to accept it or to make a counteroffer prior to a fixed and short deadline. In this context, signaling models predict that the wage claim should try to screen the firm’s level of profitability, while the (most likely forced) offer is expected to reveal little information. Both hypotheses are tested and neither one is rejected. The analysis of the fraction of the disputed wages the workers get after initial disagreement, as well as the length of the negotiation period, provide further evidence in favor of signaling models, since we find they are related to both observed and private information. Moreover, conditional on covariates, for a number of sectors, we cannot reject that the parties “split the difference” between both initial offers. This solution coincides with Rubinstein’s (Econometrica 50:97–109, 1982) wage, the solution for the complete information game.     

Converting social conflict: Focal points and the evolution of cooperation

We examine the ability of focal points to transform situations of potential conflict into situations of cooperation. In performing this function, focal points convert “worst-case scenarios” into “better-case scenarios,” which are easier for political economic systems to handle. Focal points thus contribute to the ability of political economies to perform well in the face of less than ideal conditions, enhancing systemic robustness. JEL Code P0     

Corrigendum to “On randomized matching mechanisms” [Economic Theory 8(1996)377–381]

Ma (in Econ. Theory 8, 377–381, 1996) studied the random order mechanism, a matching mechanism suggested by Roth and Vande Vate (Econometrica 58, 1475–1480, 1990) for marriage markets. By means of an example he showed that the random order mechanism does not always reach all stable matchings. Although Ma's (1996) result is true, we show that the probability distribution he presented – and therefore the proof of his Claim 2 – is not correct. The mistake in the calculations by Ma (1996) is due to the fact that even though the example looks very symmetric, some of the calculations are not as “symmetric.” We thank two anonymous referees for their helpful comments. B. Klaus’s and F. Klijn’s research was supported by Ramón y Cajal contracts of the Spanish Ministerio de Ciencia y Tecnología. The work of the authors was also partially supported through the Spanish Plan Nacional I+D+I (BEC2002-02130 and SEJ2005-01690) and the Generalitat de Catalunya (SGR2005-00626 and the Barcelona Economics Program of CREA).     

Rent Protection as a Barrier to Innovation and Growth

We build a model of R&D-based growth in which the discovery of higher-quality products is governed by sequential stochastic innovation contests. We term the costly attempts of incumbent firms to safeguard the monopoly rents from their past innovations rent-protecting activities. Our analysis (1) offers a novel explanation of the observation that the difficulty of conducting R&D has been increasing over time, (2) establishes the emergence of endogenous scale-invariant long-run innovation and growth, and (3) identifies a new structural barrier to innovation and growth. We also show that long-run growth depends positively on proportional R&D subsidies, the population growth rate, and the size of innovations, but negatively on the market interest rate and the effectiveness of rent-protecting activities. An unpublished version of this paper was circulated earlier under the title “Innovation and Rent Protection in the Theory of Schumpeterian Growth.” We thank an anonymous referee and seminar participants in several venues for useful comments and suggestions.     

Information Disclosure as Environmental Regulation: A Theoretical Analysis

Governments around the world are beginning to embrace a new form of environmental regulation – mandatory disclosure of information. While information disclosure programs appear to have an impact on subsequent firm behavior – often resulting in lower levels of pollution – little is known about the costs and benefits of these programs and whether or not they enhance social welfare. This paper presents a simple bargaining model where mandatory information disclosure is used to overcome a lack of information on the part of the public. We characterize the conditions under which information disclosure will lead to a reduction in emissions, and ultimately, the conditions under which it will enhance social welfare. Several extensions of the model are briefly explored, including the effect of two sources of pollution – only one of which is subject to information disclosure. This paper was prepared while V. Santhakumar was a Visiting Scholar at the Vanderbilt Center for Environmental Management Studies, Vanderbilt University.