Parallel search for the best alternative

I wish to thank Ken Burdett, James Foster, Dale Mortensen and Kevin Roberts for many helpful suggestions. Thanks are also due to the comments of the participants at seminars at University of Minnesota, Michigan State University, Northwestern University, University of Pittsburgh, and those at the Midwestern Math Economics Conference (1989) and Econometric Society Summer Meetings (1990). Research supported by NSF Grant SES-8708325.     

Patent Policy in an Endogenous Growth Model

We investigate how the patent policy affects economic growth and social welfare based on an endogenous growth model with R&D activities. We show that the patent length that maximizes the social welfare is finite. Moreover, by introducing compulsory licensing, we also show that the patent length that maximizes the social welfare is not infinite even if the royalty rate can be controlled. Received June 29, 2001; revised version received February 5, 2002 Published online: February 17, 2003 We wish to thank two anonymous referees for their constructive comments. We also thank Akira Yakita for his helpful comments.     

FISCAL POLICY IN AN ENDOGENOUS GROWTH MODEL WITH PUBLIC CAPITAL AND POLLUTION

This paper studies the growth and welfare effects of fiscal policy in an endogenous growth model with public capital and environmental pollution. I assume that pollution is due to aggregate production, and that it does not have a direct effect on production but only reduces household utility. I study the growth effects of fiscal policy for the model on the balanced growth path, taking transition dynamics into account. I then analyse the welfare effects of fiscal policy along the balanced growth path. Finally, I show how the fiscal parameters must be set so that the competitive economy replicates the social optimum.     

Market crashes,speculation and learning in financial markets

A natural conjecture is that if agents’ beliefs are almost correct then equilibrium prices should be close to rational expectations prices. Sandroni (J Econ Theory 82:1–18, 1998) gives a counterexample in an economy with sunspots and complete markets. We extend Sandroni’s result by showing that the conjecture is generically true for economies with complete markets. We consider a standard General Equilibrium model with large but finite horizon and complete markets. We show that, for almost every such economy, if conditional beliefs eventually become correct along a path of events then equilibrium prices of assets traded along this path converge to rational expectations equilibria in the sup-norm. Moreover, we establish that, generically, there exist along any such path local diffeomorphisms between individual beliefs and equilibrium prices. I would like to thank C. Ewerhart and A. Kirman for their comments, as well as the seminar participants at the University of Minho, the General Equilibrium Workshop 2005 in Zurich, and the 15th Asian General Equilibrium Conference 2007 in Singapore. An anonymous referee also provided very valuable comments.     

Tariff reforms with rigid wages

This paper analyses the effects of tariff reforms on welfare and market access in a competitive small open economy, which is characterised by involuntary unemployment due to non-market clearing wages that are fixed either in terms of the numeraire or in real terms. We show that recent tariff-reform results can be extended to integrated reforms of tariffs and the wage rate, and that the inherent tension between reforms that increase welfare and market access carries over. We also derive welfare increasing tariff-reform strategies that keep the wage rate constant and show that this tension may be attenuated. We thank Peter Neary, an anonymous referee, as well as participants at the GEP Conference on New Directions in Trade Theory and at the ETSG Annual Conference in Athens for helpful comments. We acknowledge gratefully financial support from the Leverhulme Trust under Programme Grant F114/BF.     

Interregional Trade Linkages and the Commercial Role: The Spanish Case

The development of a national or regional economy depends on its own actions as much as on those of its commercial partners. Trade transmits economic events from one economy to another. The type and the degree of interdependence between territories—regions or countries—determines the consequences of external actions in a region. Multipliers translate the effects of a change in one variable on the others. Using an input–output scheme to express interregional commercial flows, some coefficients are developed to classify and identify the role that each region plays in interregional trade. An empirical application of the methodology on Spanish Comunidades Autonomas is presented. A preliminary version of this paper was presented at the Fifty-Eight International Atlantic Economic Conference, Chicago, October 7–10, 2004. The authors greatly appreciate the comments and suggestions from the participants at the meeting. The authors also wish to thank an anonymous referee and editor for their constructive suggestions and comments. This research was partially supported by the DGI project SEJ2004-07924/ECON.     

On Price Caps Under Uncertainty

This paper shows how standard arguments supporting the imposition of price caps break down in the presence of demand uncertainty. In particular, though in the deterministic case the introduction or lowering of a price cap (above marginal cost) results in increased production, increased total welfare, decreased prices, and increased consumer welfare, we show that all of the above comparative statics predictions fail for generic uncertain demand functions. For example, for price caps sufficiently close to marginal cost, a decrease in the price cap always leads to a decrease in production and total welfare under certain mild conditions. Under stronger regularity assumptions, all of the monotone comparative statics predictions from the deterministic case also do not hold for a generic uncertain demand if we restrict attention to price caps in an arbitrary fixed interval (as long as the price caps are binding for some values in that interval).     

Taxation under oligopoly in a general equilibrium setting

Taxation under oligopoly is analyzed in a general equilibrium setting where the firms are large relative to the size of the economy and maximize the utility of their shareholders. Assuming that preferences are either identical and homothetic or identical and quasi‐linear, then the oligopoly model is an aggregative game, which greatly simplifies the comparative statics for the effects of taxation. This novel analysis of taxation leads to a number of counterintuitive results that challenge conventional wisdom in microeconomics. A lump‐sum tax may increase the price of the oligopolistic good and decrease welfare whereas a profits tax may decrease the price of the oligopolistic good and increase welfare. A profits tax is shown to be superior to a lump‐sum tax. Furthermore, in line with conventional wisdom, total tax revenue is always higher with an ad valorem tax than with a specific tax that leads to the same price for the oligopolistic good.     

Commodity money in the presence of goods of heterogeneous quality

Summary The aim of this paper is to demonstrate that uncertainty about the quality of a particular commodity does not necessarily exclude it from emerging as commodity money. This is shown in the context of the model of a simple economy with specialized agents and decentralized trade described in Kiyotaki and Wright (1989). In order to derive this result, considerations about marketability of the different goods are taken into account.I wish to thank Pierre de Trenqualye for many helpful conversations and ideas. For their comments and suggestions I am also very grateful to G. de Fraja and P. J. Simmons. Special thanks are due to Randall Wright for his kind advice. The usual disclaimer applies. Financial support was provided by CIRIT (Generalitat de Catalunya, Spain).     

Characterizing solutions of supermodular games; intuitive comparative statics,and unique equilibria

Summary We present a technique for locating both an upper and a lower bound on equilibrium points of supermodular games by looking only at the first derivatives of the payoff functions at points of disequilibrium. This technique is useful for characterizing equilibria of games when the closed form solution is difficult to calculate, for performing comparative statics analysis, and for determining the uniqueness of equilibria.I would like to thank David Easley, James Friedman, Ken Kasa, Rich McLean and Michael Waldman for their helpful comments.     

Price setting and the steady-state effects of inflation

This paper examines how price setting plays a key role in explaining the steady-state effects of inflation in a monopolistic competition economy with transactions-facilitating money. Three pricing variants (optimal prices, indexed prices, and unchanged prices) are introduced through a generalization of the Calvo-type setting that allows price indexation. We found that in an economy with less indexed prices, the steady-state negative impact of inflation on output is higher. Regarding welfare analysis, our results support a long-run monetary policy aimed at price stability with a close-to-zero inflation target. This finding is robust to any price setting scenario.JEL Classification: E13, E31, E50The writing of this paper commenced during the time I spent on the Research Visitors Programme 2001 of the European Central Bank and an earlier version of the paper became ECB Working Paper No. 140. I would like to thank Bennett T. McCallum, Frank Smets, and Oscar Bajo-Rubio for their valuable comments and suggestions, and the Ministerio de Ciencia y Tecnología of Spain for its financial support (Research Project 2002/00954).     

Price dynamics in overlapping generations environments

Summary This work examines the existence, uniqueness and computation of competitive equilibria in a class of overlapping generations environments. This set of environments represents a broad generalization of the overlapping generations model considered by Aliprantis and Plott [1]. Two types of results are presented in this paper. First, some general characteristics of perfect foresight competitive equilibrium price paths are developed for economies with finite or countably infinite time horizons and agents with finite lifetimes. The results establish the conditions leading to locally monotonic and locally stable equilibrium prices given arbitrarily many exogenous parameter shifts. Second, these results are strengthened when consideration is focused on a single parametric shift in a finite economy. Existence of a unique equilibrium price path is established. A simple set of rules are given to facilitate computation of this price path for any given shift.The authors wish to express their thanks to Donald Brown, Diego Moreno, Charles Plott, Vernon Smith, and Mark Walker for their comments and suggestions regarding this research.     

Two polar cases of dynamic stability: voluntary exchange and income redistribution

Summary. It is known that when voluntary exchange is permitted at disequilibrium, dynamic stability may fail because of lack of liquidity. In this paper it is shown that when the economy runs out of liquidity dynamic stability can still be restored by means of a planning procedure of redistributing personal incomes.Received: 30 May 2003, Revised: 20 January 2005, JEL Classification Numbers: D01, D50.I wish to thank a referee for helpful comments.     

On justifying a minimum welfare state

Since anarchy is not viable, limited government is the best that the realistic libertarian can hope for. But limited government will itself always be threatened by an inherent tendency to transgress its limits. In modern western societies the regulatory and redistributive welfare state is the major threat to a constitution of liberty. However, a “minimum welfare state” which redistributes personal income among its citizens may comply with the same principles of individual liberty and the rule of law that are embodied in the protective state. Since any state, including the minimal state, necessarily incorporates regulation and redistribution and thus is a welfare state of sorts the non-anarchist liberal should turn against welfare state privileges rather than against redistribution and regulation per se. He may even have good reason to go beyond the minimal state to found a “minimum welfare state” if this is instrumental in securing liberty under the rule of law. I am grateful to the Center for the Study of Public Choice, George Mason University for hospitality both during the period in which this paper was written and on other occasions. I am deeply indebted to the people at the Center for their criticisms and comments. As far as this paper is concerned Geoffrey Brennan's and Richard Wagner's comments were particularly helpful. I should also like to acknowledge helpful oral comments from Kevin Mulligan and Philip van Parijs, who of course is much more of an expert on demogrant schemes than I am. I also wish to thank two anonymous referees for their valuable suggestions. The general caveat applies.     

Are the antiglobalists right? Gains-from-trade without a Walrasian auctioneer

We show that the “fear” of globalisation can be rationalised by economic theory in the standard AD/AS equilibrium model, if we substitute the coordinational role of the Auctioneer by an implementation device based on learning (Guesnerie in Am Econ Rev 82, 1254–1278, 1992). When endowing producers with a learning ability to forecast market prices, individual profit-maximizing production decisions become interdependent in a strategic sense (strategic substitutes). Performing basic comparative statics exercises, we show that “competitiveness” matters in a precise sense: as foreign producers gain access to the home market, home producers’ ability to forecast market prices is undermined, so being their ability to forecast the profit consequences of their production decisions. A standard open economy exercise shows that the efficiency gains triggered by increased competition have to be traded-off against higher uncertainty (a lower likelihood to coordinate upon the welfare enhancing free-trade equilibrium). We interpret it as a new rationale for the existence of barriers to trade targeting coordination, rather than protecting mere inefficient sectors or industries (political economy driven). Finally, we show that classical measures evaluating ex-ante the desirability of economic integration (net welfare gains) do not always advice free trade. I wish to specially thank Roger Guesnerie, Thierry Verdier and an anonymous referee for their helpful suggestions. Comments by Facundo Albornoz, Pol Antràs, Gregory Corcos, Maurice Kugler, Robin Mason, Victor Norman, Emmanuel Ornelas and Susanna Thede are sincerely acknowledged. Audiences at the U. of Alicante, U. Autonoma de Barcelona, ETSG 2005 (Dublin), FGV-EPGE (RJ, Brazil), LACEA 2005 (Paris), the Miwest Trade Meeting at Minneapolis 2007, the Norwegian School of Economics (NHH), SBE 2005 (Natal, Brazil), U. of Southampton and T2M 2005 are acknowledged. The contents constitute chapter 4 of my PSE-EHESS PhD thesis, extended while I visited the NYU Economics department, sponsored by A. Bisin. Financial support from the Bank of Spain and CNRS is sincerely acknowledged.     

An open-economy transition model

This paper presents an open-economy general equilibrium model illustrating an economy such as a small eastern European country prior to economic transition. The developed model illustrates some of the inefficiencies inherent in the pre-reform economies, including the price distortions that caused resource wasting queues, as well as government domination of the production process. The model specifically provides a dynamic, analytical framework for considering the impact of government policies in determining the size of the trade balance and pre- and post-reform domestic social welfare.The author sincerely appreciates the comments and suggestions on an earlier version of this paper provided by the participants in the Social Sciences Research Council Workshop on the Economics of Transition to Market Systems in St. Petersburg in July 1995, as well as at the 1996 AEA and CEA meetings. Gerhard Glomm, Michael Alexeev, Joe C. Davis, and Ashok Kotwal had many helpful suggestions. The author also thanks Josh Perryman for research assistance.     

Money,price dispersion and welfare

Summary. We introduce heterogeneous preferences into a tractable model of monetary search to generate price dispersion, and then examine the effects of money growth on price dispersion and welfare. With buyers search intensity fixed, we find that money growth increases the range of (real) prices and lowers welfare as agents shift more of their consumption to less desirable goods. When buyers search intensity is endogenous, multiple equilibria are possible. In the equilibrium with the highest welfare level, money growth reduces welfare and increases the range of prices, while having ambiguous effects on search intensity. However, there can be a welfare-inferior equilibrium in which an increase in money growth increases search intensity, increases welfare, and reduces the range of prices.Received: 25 July 2003, Revised: 12 December 2003JEL Classification Numbers: E31, D60.B. Peterson, S. Shi: We thank Gabriele Camera, Aleksander Berentsen and an anonymous referee for useful suggestions. We have also received valuable comments from the participants of the workshop at Michigan State, the Purdue Conference on Monetary Theory (2003) and the Midwest Macro Meeting (Chicago, 2003). Shi gratefully acknowledges financial support from the Bank of Canada Fellowship and the Social Sciences and Humanities Research Council of Canada. The opinion expressed here is the authors own and does not reflect the view of the Bank of Canada.Correspondence to: S. Shi     

Ramsey pricing and competition: The consequences of myopic regulation

This paper addresses the welfare consequences of applying the Ramsey rule when the regulated firm is not a monopolist in all of its markets. The partially regulated optimum and the outcome of myopic regulation, the Short-Sighted Ramsey Equilibrium (SSRE), are examined in a differentiated duopoly model. In the optimum, the markup of competitive substitute goods is relatively high. In the SSRE, the regulator is likely to set the price of competitive substitute goods lower than optimal, and complementary goods higher than optimal. Strategic reactions by a competitor may reverse the result.I thank Kenneth Train, Michael Crew (the editor), seminar participants at the University of California, Berkeley, and an anonymous referee for comments and suggestions. The usual disclaimer applies.     

Union-oligopoly bargaining and entry deterrence: a reassessment of limit pricing

This paper introduces wage bargaining in the framework of Milgrom and Roberts (Econometrica 50(2):443–459, 1982) where the workers’ reservation wage is the private information parameter critical for entry. We show that entry threat significantly distorts the wage, which in some cases adversely affects the firm’s ability to signal through price. Consequently, the separating equilibrium (in price) does not always exist. If, however, wage agreements are made public, signalling occurs with or without distortions in wage depending on whether the union’s bargaining power is high or low. Pooling equilibrium also exists and it features similar distortions. We also examine which signal, wage or price, generates greater social welfare. We would like to thank two referees for their helpful comments and suggestions. This paper is partially based on a chapter of Pal’s PhD thesis done at Indira Gandhi Institute of Development Research (IGIDR), India. For remaining errors we are solely responsible.     

Commodity Taxation and the Effects of Entry: A Case of Variety Preferences

We study the relationship between commodity taxation and the effect of entry with imperfect competition. We develop a simple general equilibrium model with imperfect competition in which consumers have variety preferences. As a result, we see that introducing specific taxes increases social welfare. Furthermore, we show that the optimal tax rule is contrary to the inverse elasticity rule.Acknowledgement We wish to thank two anonymous referees for their helpful comments.