Reputation and imperfect information

A common observation in the informal literature of economics (and elsewhere) is that is multistage “games,” players may seek early in the game to acquire a reputation for being “tough” or “benevolent” or something else. But this phenomenon is not observed in some formal game-theoretic analyses of finite games, such as Selten's finitely repeated chain-store game or in the finitely repeated prisoners' dilemma. We reexamine Selten's model, adding to it a “small” amount of imperfect (or incomplete) information about players' payoffs, and we find that this addition is sufficient to give rise to the “reputation effect” that one intuitively expects.     

On the stability of the cooperative type of organization

The stability of producer cooperatives in market economies is analyzed in a dynamic context. It is shown that, when permitted to hire wage laborers, a producer cooperative, even if its labor productivity is higher than in an otherwise equivalent capitalist firm, is likely to lose its cooperative character because members' personal income will be maximized when “expensive” members are replaced by “inexpensive” wage-laborers. Producer cooperatives will maintain their organizational character best when they operate in a marginal industry where cooperation enhances members' productivity so that their earnings exceed their opportunity wages. In general, competitive markets for membership are not a sufficient condition to prevent the transformation of cooperatives into capitalist firms.     

The so-called “transformation problem” revisited: A comment

This comment shows that Lipietz's Marxist transformation theorem represents but a simple, though useful reinterpretation of obvious mathematical consequences of a standard Sraffa model—by making appropriate use of its known degree of freedom. Labor values are not involved in this new interpretation of conventional prices of production. A proposal is therefore made how their role in Marx's transformation may be investigated further on the basis of Lipietz's theorem and its interpretation of the “value of labor power”.     

Dynamic behavior of a simple neoclassical model with wealth and capital unequal

The paper analyzes the standard one-good neoclassical dynamic model in which wages to consumer-workers are paid in IOU's issued by producers. The wealth of consumers consists of their accumulated IOU's and the model differs from the traditional one in that it is not assumed that consumers' wealth is exactly equal to the value of the capital stock. The dynamic behavior of this model turns out to be quite different from the traditional one, the main result being that, in the absence of “excessive savings” by consumers, the golden rule will always be the unique stable steady state.     

Pseudoplanning

The tactics used by sponsors to manage a planning process is an important cause of plan failure. When the process is manipulated or its management ignored, pseudoplanning results. Several case studies were analyzed to identify types of pseudoplanning. They are called, “What's the problem,” “omnipotent planners,” “transported ideas,” “pooled ignorance,” “do it my way,” “change as given,” “surrender,” “takeover,” “sciencism,” and “empty phases.” Each is described to point out how they led to poor planning practice.     

The value of information in a simple duopoly model

This paper is concerned with the evaluation of information in a duopoly model in which the cost functions are subject to uncertainty. It explores how changes in information about the costs available to either firm affects the welfare of both firms along with the welfare of consumers. By comparing the ten possible types of information structures, it is shown that information may be detrimental, that improved information for one firm may or may not benefit the other firm and/or the consumer, and that it may be more desirable for a firm to gather information about the rival's cost rather than its own. All of these “irregular” results depend on the values of the variances of the costs and their correlation coefficient.     

Adam Smith's Entwurf eines politokonomischen systems

There are two core elements in Smith's draft of a politico-economic system, an individual-social orientated and a society-state orientated one. Economic actions and institutions have to bring both centres together so as to perform their main functions. Coming to self-autonomy, liberty and justice would be final goals of the Smithian “system of natural liberty”, for which Smith is famous. But he did not simply trust in self-fulfilling Natural Law. The “system of natural liberty” means a faculty, by which the society could develop, if the individual initiated actions might play their leading roles due to an ethical consensus in society, and if the state would be quite aware of his ordo-political task as a constructive matter. Smith gives no recipes. The generations have to find those for themselves. Thus, Smith cannot be called a determinist, but rather an evolutionist.The most exiting results can be found in a fundamental search for Smith as a master of politico-economical methods. The learned prejudice that the “grand classic” was somewhat eclectic and contradictious is to be forgotton. The master's “faults” might be analyzed as a genuine heterogeneous ones, essential for a realistic and pragmatic political economy. This would provide an urgent and modern message.     

“Managing” the ultimate resource

Human intelligence is the ultimate resource. Even so, the use of the word “resource” is misleading if it makes people think of managing intelligence as they would manage minerals, trees, or livestock. If the ultimate resource is to benefit humanity, we must recognize that it works effectively only when it is free. Restricting people's freedom in order to “manage” them more “effectively” is a recipe for disaster.     

The college admissions problem is not equivalent to the marriage problem

Two-sided matching markets of the kind known as the “college admissions problem” have been widely thought to be virtually equivalent to the simpler “marriage problem” for which some striking results concerning agents' preferences and incentives have been recently obtained. It is shown here that some of these results do not generalize to the college admissions problem, contrary to a number of assertions in the recent literature. No stable matching procedure exists that makes it a dominant strategy for colleges to reveal their true preferences, and some outcomes may be preferred by all colleges to the college-optimal stable outcome.     

On optimal steady states of n-sector growth models when utility is discounted

This paper contains results on local and global stability of n-sector growth models when utility is discounted mostly for small rates of discount. It is well known that when future utility is not discounted one can prove precise results about optimal steady states (OSS's) under fairly general assumptions. In particular, existence, uniqueness, and turnpike properties have been established by several authors. The counter examples presented by Kurz, Sutherland, and Weitzman, however, show that when utility is discounted, additional assumptions are required to obtain turnpike results. In general, it would be interesting to know how the submanifolds of stability change as δ changes. One hopes that certain conditions on the utility function would be sufficient to “classify” the submanifolds of stability and instability. Such a question is apparently very difficult to answer, but we think that the results obtained here will help in this task.The proof that the turnpike theorem holds for discount factors near one is divided in two parts. First, we prove that optimal paths “visit” neighborhoods of the modified OSS's. Then, we prove that local stability holds for such neighborhoods.In order to show this fact, we must prove that the local “stable manifold” varies continuously with the discount factor. This roundabout method is necessary since our problem is similar to proving uniform continuity with respect to a parameter of solutions of a differential equation in a noncompact interval of time.Other problems analyzed here include uniqueness and continuity of OSS's. We also discuss the relation between the saddle-point property and the local stability of infinite horizon optimal growth paths.     

Keynes's errors in the liquidity preference versus loanable funds controversy

How Keynes could have been so persistently wrong in the liquidity preference versus loanable funds controversy remains a puzzling enigma. This paper attempts to shed some light on this puzzle by tracing the evolution of Keynes's thinking and by looking at some of the policy issues with which he was concerned. In particular, it argues that two errors were inherent in Keynes's reasoning process. As a result, he regarded the two theories as “radically opposed” and thought that the loanable funds theory was a “wrong” theory with misleading policy implications.     

SOCIAL NORMS,LOCAL INTERACTION,AND NEIGHBORHOOD PLANNING*

This article examines optimal social linkage when each individual's repeated interaction with each of his neighbors creates spillovers. Each individual's discount factor is randomly determined. A planner chooses a local interaction network or neighborhood design before the discount factors are realized. Each individual then plays a repeated Prisoner's Dilemma game with his neighbors. A local trigger strategy equilibrium (LTSE) describes an equilibrium in which each individual conditions his cooperation on the cooperation of at least one “acceptable” group of neighbors. Our main results demonstrate a basic trade‐off in the design problem between suboptimal punishment and social conflict. Potentially suboptimal punishment arises in designs with local interactions since in this case monitoring is imperfect. Owing to the heterogeneity of discount factors, however, greater social conflict may arise in more connected networks. When individuals' discount factors are known to the planner, the optimal design exhibits a cooperative “core” and an uncooperative “fringe.”“Uncooperative” (impatient) types are connected to cooperative ones who tolerate their free riding so that social conflict is kept to a minimum. By contrast, when the planner knows only the ex ante distribution over individual discount factors, then in some cases the optimal design partitions individuals into maximally connected cliques (e.g., cul‐de‐sacs), whereas in other cases incomplete graphs with small overlap (e.g., grids) are possible.     

Arab spring protests and women's labor market outcomes: Evidence from the Egyptian revolution

We analyze the effects of the 2011 Egyptian protests on the relative labor market conditions of women using panel data from the Egypt Labor Market Panel Survey (ELMPS). Using unique information from the Statistical Database of the Egyptian Revolution, we geocode each “martyr”, i.e. demonstrators who died during the protests, based on the location of the political incident. We construct our measure of the intensity of the protests – the district-level number of “martyrs” – and rely on a Difference-in-Differences approach. We find that the 2011 protests have reduced intra-household differences in labor force participation by increasing women's employment and unemployment relative to men. Women's employment relative to men increased in both the private and informal sectors. Our estimates suggest how economic uncertainty such as the one associated to the recent protests may undermine the importance of cultural factors and attitudes towards female work. We link these findings to the literature showing how a relevant shock to the labor division between women and men may have long run consequences on the role of women in society.     

The long-run and short-run demand for money: Additional evidence

This paper presents estimates of Chow's money-demand equations using Chow's data. The equations are adjusted for autocorrelation using two autocorrelation transformations, the standard Cochrane-Orcutt transformation that deletes “initial” observations, and one that does not delete these observations. The estimates focus on the question of the asset versus the transactions specifications. The results reaffirm Chow's original conclusion which supported the asset motive and, thereby, reversed nearly all of the findings recently reported by Lieberman (1980). The paper concludes that one should be wary about using the Cochrane-Orcutt transformation, especially when the ratio of the number of deleted observations to total observations is large.     

Managerial risks and rewards in public enterprises

This essay explores a twofold problem: from the standpoint of the community, what is the appropriate attitude for managers of a public enterprise to have toward decisions with uncertain outcomes; and what is implied for the managerial rewards or penalties that are required to induce managers to adopt that attitude. Taking a theorem of Arrow's as a point of departure, the essay argues that managers should be induced to maximize expected benefit. With the aid of “career” and “bonus” functions, implications for managerial rewards and penalties are explored under     

Systems assessment of new technology for decision-making in government and industry. Part I: The model

Since the autumn of 1976, IIASA's Management and Technology Area has been working on the task, “Dynamics and Management of Technological Change.” As an exploratory task, the feasibility of this new field of research in IIASA had to be defined, together with the possibilities for application and international cooperation in the field. In this paper (Part I), Technology is analyzed as (1) a specific system consisting of Hardware, Software, and Orgware; (2) a man-made environment; (3) a holistic object of management and a type of organized activity. The concept of Systems Assessment of New Technology (SANT) is proposed and methods and models of SANT are reviewed. Experiences and case studies will be described in Part II.     

Planning under market socialism when iteration is incomplete

If an iterative planning procedure is cut short due to time shortage, the plan must be set subject to information gaps. But the nature of these gaps depends on which iterative procedure was used. For the case of Lange's model, Weitzman's “prices versus quantities” framework is redeveloped for the particular information gaps then found. With one good, the optimal quantity signal comes from the expected supply-demand intersection, but an optimal price signal lies between this intersection and the price from the last stage of iteration. When there are many goods, however, we cannot be so specific.     

The “second economy” and resource allocation under central planning

A formal model of intermediate product reallocation through Second Economy markets in a centrally planned economy is discussed. The principal result is that there exists an equilibrium allocation determined in these Second Economy markets in spite of fixed official prices and centrally monitored trading at these prices. It is always a constrained Pareto optimum with respect to the initial plan-generated allocation. Hence, Second Economy markets can effectively and “second best” efficiently ration the intermediate-product “sellers' market” of a centrally planned economy.     

Rational demand and expenditures patterns under habit formation

This paper proposes a model in which habit formation is present in a relatively general but tractable way. The consumer's problem is transformed into a sequence of two-period Fisherian problems by introducing a “reduced utility function” to ensure full dynamic rationality of the consumer. By making preferences dependent on past real expenditure levels rather than past consumption bundles, it is possible to characterize the long-run behavior of the consumer. Stability analysis is performed. The cases of “immediate habit formation” and “delayed habit formation” are discussed.     

Money in the pure consumption loan model

The purpose of this paper is to show how modern techniques of Temporary competitive equilibrium analysis can be applied to models of the “pure consumption loan model” type. One considers Samuelson's simplest model where traders live two periods and where money is the only store of value. It is proved that a temporary equilibrium exists if price expectations are sufficiently independent of current prices. A stationary market equilibrium is shown to exist if there is a set of traders (i) whose total resources are greater when they are young than when they are old, (ii) who are indifferent between present and future consumption. It is proved that this existence theorem still holds if the economy is sufficiently “close” to an economy which has this property. A stationary market equilibrium is shown to be Pareto optimal if all traders hold positive cash balances. It may be inefficient if this condition is not satisfied, for some traders may then be willing to borrow, which they cannot do in this model.