Rational expectations in microeconomic models: An overview

This paper is an expository introduction to several topics of current research in the general equilibrium theory of rational expectations. More specifically, we discuss the existence of exact and approximate rational expectations equilibria, the implementation of equilibria, the behavior of learning and smoothing processes by which traders construct expectations from repeated observations of the market, and the lagged use of the information revealed by prices in an intertemporal sequence of markets. The purpose of this discussion is to introduce papers on these topics appearing in the Journal of Economic Theory Symposium on Rational Expectations in Microeconomic Models.     

Monitoring the mean and the variance of a stationary process

We deal with the problem of how deviations in the mean or the variance of a time series can be detected. Several simultaneous control charts are introduced which are based on EWMA (exponentially weighted moving average) statistics for the mean and the empirical variance. The combined X − S² EWMA chart is extended to time series. Further simultaneous charts are considered. The comparision of these schemes shows that the residual attempt must be favored if a variance change is present.     

Strategic restraint in contests

Economic policy is modelled as the outcome of a (political) game between two interest groups. The possible ex-post (realized) outcomes in the game correspond to the proposed policies. In the literature policy proposals are exogenous. We extend such games by allowing the endogenous determination of the proposed policies. In a first stage the groups decide which policy to lobby for and then, in a second stage, engage in a contest over the proposed policies. Our main result is that competition over endogenously determined policies induces strategic restraint that reduces polarization and, in turn, wasteful lobbying activities.     

Public Stackelberg Leadership in a Mixed Oligopoly with Foreign Firms

This is the first paper to consider a mixed oligopoly in which a public Stackelberg leader competes with both domestic and foreign private firms. The welfare maximising leader is shown to always produce less than under previous Cournot conjectures. Introducing leadership also alters previous public pricing rules resulting in prices that may be either greater than or less than marginal cost depending on the relative number of domestic firms. Furthermore, entry of a foreign firm will increase welfare only when the relative number of domestic firms is small, but that share is shown to be larger than has been indicated without leadership. Unlike previous models, the influence on public profit of a foreign acquisition is ambiguous and is related to the relative number of domestic firms. Finally, the consequences of privatisation are shown, for the first time, to depend on the relative number of domestic firms.     

Bargaining with the Devil

ABSTRACT . “Bargaining with the Devil: Commentary on the Ostroms’‘Quest for Meaning in Public Choice’” provides a commentary on Elinor Ostrom and Vincent Ostrom's paper, “The Quest for Meaning in Public Choice.” This discussion focuses on the challenging tension that exists between social scientific knowledge and social practices. It suggests that historical agents may have solved the dilemma of cooperation prior to rational choice theorists’ invention of the public goods problem.     

Explicit filters and supply chain design

Due to the complexity of present day supply chains it is important to select the simplest supply chain scheduling decision support system (DSS) which will determine and place orders satisfactorily. We propose to use a generic design framework, termed the explicit filter methodology, to achieve this objective. In doing so we compare the explicit filter approach to the implicit filter approach utilised in previous OR research the latter focusing on minimising a cost function. Although the eventual results may well be similar with both approaches it is much clearer to the designer, both why and how, an ordering system will reduce the Bullwhip effect via the explicit filter approach. The “explicit filter” approach produces a range of DSS designs corresponding to best practice. These may be “mixed and matched” to generate a number of competitive delivery pipelines to suit the specific business scenario.     

Strategy-proofness in many-to-one matching problems

We search forstrategy-proof solutions in the context of (many-to-one) matching problems (Gale and Shapley, 1962). In this model, whenever the firms can hire as many workers as they want (the capacities are unlimited) the stable set is a singleton. There exists aPareto efficient, individually rational, andstrategy-proof matching rule if and only if the capacities are unlimited. Furthermore, whenever the capacities unlimited, the matching rule which selects the unique stable matching is the only matching rule that isPareto efficient, individually rational, andstrategy-proof.     

Are serial Condorcet rules strategy-proof?

Abstract. This paper explores the extent to which majority rule is invulnerable to manipulation by individuals and coalitions, even when majority rule is used to select more than one alternative. The resulting rule may or may not be strategy-proof, depending on the size of the coalitions that can form, and on the nature of the individual preferences over sets of alternatives. No individual can manipulate with respect to a wide family of preferences over sets. The only restriction on the domain of true and revealed individual preferences is that the selection rule is always well defined. Received: 1 November 1999 / Accepted: 7 May 2001 We thank two anonymous referees for suggestions that have significantly improved the paper. We are also grateful to l'Université de Caen for sponsoring a Workshop on Social Choice Theory, where a first draft of this paper was presented in May, 1999, and to the workshop participants for helpful observations. Work on the final version of the paper was done while one of the authors was a guest of the Project on Intergenerational Equity supported by the Ministry of Education, Science, and Technology of Japan. We are grateful to the Ministry and to the project leader, Professor Kotaro Suzumura, for their support.     

Productivity differences in multiple output industries: An empirical application to electricity distribution

Given that electricity distribution is undertaken via a network, it is expected that costs of production are affected both by the nature of the network and the volume of physical output distributed via the network. This two-dimensional concept of firm size, that is involving network size (number of customers) and the level of physical output (kWh), also corresponds to the distinction between productivity measures of returns to density and returns to scale.This approach has been used to specify a restricted multioutput cost function and to estimate this function for the Norwegian electricity distribution industry through the use of a flexible functional form (translog). The results indicate that no economies of scale are present in the industry even for small plants when measured correctly, but that economics of density are present.