Technical change and employment under imperfect competition with perfect and imperfect information

We consider the implications of process innovation for the aggregate level of employment of assuming that not all firms adopt new technologies simultaneously and that non-innovators adopt (temporarily)disequilibrium strategies (due to imperfect information about the introduction of the new technology). Two alternative scenarios are explored. In one, consumers' demands arise from symmetric homothetic preferences, and in the other from asymmetric (Hotelling-type) preferences. We find that there may be a reduction in employment in the transition to the new equilibrium under both types of preferences even if there is no decrease (or an increase) in the new (long-run) equilibrium level of employment. The conditions under which this will occur are however different for the alternative preference structures. Further, the latter are shown to have different implications for theequilibrium effects of process innovation.     

Maximizing votes under imperfect information

This paper presents an alternative, sympathy voting, to the usual public choice approaches. It deals with voters whose decision depends both on an economic component and a sympathy component. The politician is perfectly informed of the economic component, but not of the sympathy component. The paper compares vote maximization under sympathy voting to the maximization of votes which come from pure homines oeconomici. Sympathy voting is defined in such a way that pure economic voting is its limiting case. The latter property can be used to apply the classical Lagrangean technique to maximizing votes under economic voting. The approach is applied to two typical examples of political choice: the property tax/local public expenditure decision, and public pricing of local public utilities.     

Ricardian equivalence under imperfect information

In the US, aggregate private consumption changes are excessively sensitive not only to current and lagged changes in income, but also to current and lagged changes in government expenditures. I give a new theoretical interpretation to this observation. I show that this excess sensitivity arises when consumers take into account the link between taxes and government expenditures (i.e. when they are Ricardian), but lack exact information on the aggregate economy. While the model provides a simultaneous explanation for both types of excess sensitivity, the strong restrictions that it imposes on the data are not supported by the results of econometric estimation.     

Electoral competition under imperfect information

Summary. This paper considers electoral competition between two office-motivated parties and one voter, in the presence of two alternative policies and under imperfect information. The theory of refinements of Nash equilibrium predicts the outcome of this three-player game: both parties faithfully use their information and try to find the best policy for the voter. We discuss the meaning of this model for Politics and prove that the same result holds for any number of voters, provided that parties are expected plurality maximizers and that voters satisfy a version of the sincere voting assumption adapted to this strategic setting.Received: 12 December 2001, Revised: 16 June 2003JEL Classification Numbers: C72, D72, D82.Correspondence to: Jean-François LaslierThanks to Gabrielle Demange, Françoise Forges, Roger Guesnerie, Jean-Fran çois Mertens, Thomas Palfrey, Sylvain Sorin and other participants in workshops and conferences in Caen, Paris, Caltech and Yale. Thanks also to two anonymous referees and to Paul Heidues and Johan Lagerlöf for their comments. This work was originated when K. Van der Straeten was at THEMA (Université de Cergy-Pontoise) and DELTA.     

Bilateral monopoly with imperfect information

The problem at stake in this paper is the determination of the price and the quantity transacted in a bilateral monopoly with imperfect information. A simple characterization of incentive compatible contracts is given that significantly generalizes a previous one, due to Green and Honkapohja. This allows an easy study of two interesting families of such contracts and their institutional counterpart: namely, cost-plus contracts and contracts with quantity rationing.     

Rationing rule, imperfect information and equilibrium

Summary. The impact of imperfect information on the price setting behaviour of firms is analysed. Specifically, consumers support an information cost to become informed about prices. Firms are endowed with U-shaped average cost curves. If a firm does not supply more than its competitive supply as determined by its marginal cost schedule, then we show that the existence of a pure strategy equilibrium is conditional on the rationing rule employed. If uninformed consumers are served first then the monopoly price is the sole equilibrium whenever consumers' information costs are high enough. Otherwise, a pure strategy equilibrium fails to exist contrary to the results of Salop and Stiglitz (1977) or Braverman (1980) who implicitly suppose that firms supply all the demand at a given price. Received: May 17, 1999; revised version: September 15, 2000     

Environmental risk and welfare valuation under imperfect information

Consumers are often uninformed, or unsure, about the ambient level of environmental risk. An optimal policy must jointly determine efficient levels of self-protection, information provision, and public risk mitigation efforts. Unfortunately, conventional welfare measures are not amenable to welfare analysis in the presence of imperfect information. We develop a theoretical welfare measure, called quasi-compensating variation, that is a natural extension of compensating variation (CV). We show that this welfare measure offers not only a money metric of the “value of information,” but also a means to appropriately evaluate the welfare effects of various policies when consumers are imperfectly informed about ambient risk. This welfare measure allows us to obtain a number of results that the traditional CV measure fails to offer. In particular, we show that the consumer’s willingness to pay for a (small) environmental risk reduction is higher for those who underestimate ambient risk than for those who overestimate or are perfectly informed if the marginal return to self-protection increases with ambient risk.     

On the quantitative significance of imperfect information

Economic models of markets with imperfect information have increasingly involved high degrees of theoretical sophistication. So far there has been no movement beyond qualitative prediction. This paper attempts to make quantitative assessments of the new features arising from imperfect information following on recent work by Braverman (1980) and Braverman and Dixit (1981). The information structure of these models is based on non-sequential search, where consumers enter the market only once. It is of interest to question under what circumstances single price equilibria will exist under different assumptions about the distribution of search costs. Therefore for particular families of demand, cost and information conditions, the possibilities of competitive, monopolistic and two price equilibria are examined and their relative likelihoods assessed.     

Domestic distortions,imperfect information and the brain drain

An earlier paper by Bhagwati and Hamada (1974) presented a theoretical analysis of the brain drain in the context of wage rigidity and unemployment. This paper extends the analysis by modifying the model to incorporate the phenomena of overqualification, internal diffusion of labor from urban to rural areas and imperfect information about the quality of labor. The welfare effect of the brain drain in the presence of these phenomena is analyzed.     

Firms' market behavior under imperfect information and economic natural selection

The economic natural selection argument claims superior survival performance for profit-maximizing firms. This assertion is investigated in a factorial simulation study assuming imperfect information. Three alternative models of firms' behavior are tested with respect to their ability to adapt to the observed realizations of non-stationary demand processes. Findings show that, in such a scenario, it is the difference in implicit learning and adaption capabilities rather than that in motivation or goals which affects survivability. Consequently, differential bankruptcy and disengagement rates vary with the peculiarities of the market environment. The tested assertion cannot generally be confirmed.     

Standards vs. labels with imperfect competition and asymmetric information

I demonstrate that providing information about product quality is not necessarily the best way to address asymmetric information problems when markets are imperfectly competitive. In a vertical differentiation model I show that a Minimum Quality Standard, which retains asymmetric information, generates more welfare than a label, which provides full information.     

An experimental test of observational learning under imperfect information

Summary. Nearly all observational learning models assume that individuals can observe all the decisions that have previously been made. In reality, such perfect information is rarely available. To explore the difference between observational learning under perfect and imperfect information, this paper takes an experimental look at a situation in which individuals learn by observing the behavior of their immediate predecessors. Our experimental design uses the procedures of Çelen and Kariv [9] and is based on the theory of Çelen and Kariv [10]. We find that imitation is much less frequent when subjects have imperfect information, even less frequent than the theory predicts. Further, while we find strong evidence that under perfect information a form of generalized Bayesian behavior adequately explains behavior in the laboratory, under imperfect information behavior is not consistent even with this generalization of Bayesian behavior.Received: 29 January 2002, Revised: 12 May 2004, JEL Classification Numbers: C92, D8. Correspondence to: Boaçhan ÇelenWe completed most of this paper when we were both graduate students at New York University. This research was supported by the Center for Experimental Social Sciences (C.E.S.S.) and the C.V. Starr Center for Applied Economics at New York University. We are grateful to Andrew Schotter for his guidance and to an anonymous referee for his comments. We benefited from the expositional suggestions of William Baumol. We also acknowledge helpful discussions of Colin Camerer, Liran Einav, Xavier Gabaix, Douglas Gale, Charles Holt, David Laibson, and Matthew Rabin. We also benefited from suggestions by the participants of the 2002 International ESA Meeting and seminars at several universities.     

Casting light on energy efficiency: evidence on consumer inattention and imperfect information

We investigate consumer inattention and imperfect information regarding the financial benefits of energy-efficient lighting using a randomized controlled trial with 1084 observations. Results suggest that subjects generally know about cost savings of light-emitting diode (LED) bulbs – the central lighting technology of the future – but largely underestimate the magnitude of these savings. As a result, stated willingness-to-pay for an LED bulb increases on average by 2.53€ through the provision of information on expected lifetime costs. Additional evidence hints at further consumer confusion about attribute differences between lighting technologies.     

Cutting the cake with a stranger: Egoism and altruism with imperfect information

This paper investigates the classic divide-and-choose scheme and applies it to a situation in which agents can be either egoists or altruists. Egoism and altruism are defined by looking at the agents' choices as their pieces of cake are permuted. If the divider is informed about the chooser's social attitude, the resulting allocation is fair, but egoists and altruists receive unequal treatment from the application of the rule. With imperfect information about the chooser's social attitude, division is more equal. The results show that, unless the cake is already cut equally, the smaller share increases as the divider's risk aversion increases and as the subjective probability that the chooser is an egoist comes closer to one-half.     

Credit rationing as a (temporary) suboptimal equilibrium with imperfect information

Jaffee and Russell (1976) characterized partial rationing as a contract rate and contract size below those of the no-rationing equilibrium. Their non-price rationing here obtains as a suboptimal equilibrium for a risk-averse rate-setting intermediary with marginal increasing cost and a monopolistically competitive loan demand. The temporary (dis)equilibrium corresponds to a dominated strategy, and the wider class of models of which J-R's solution is but a singular case is touched upon.