A general revealed preference theorem for stochastic demand behavior

Summary. We present a general revealed preference theorem concerning stochastic choice behavior by consumers. We show that, when the consumer spends her entire wealth, the Weak Axiom of Stochastic Revealed Preference due to Bandyopadhyay, Dasgupta, and Pattanaik (1999) is equivalent to a restriction on stochastic demand behavior that we call stochastic substitutability. We also show that the relationship between the Weak Axiom of Revealed Preference and Samuelson's inequality in the deterministic theory, and the main result of Bandyopadhyay, Dasgupta, and Pattanaik (1999) are both special cases of our result.Received: 10 September 2001, Revised: 4 April 2003, JEL Classification Numbers: D11. Correspondence to: Prasanta K. PattanaikOur greatest debt is to the referee of this paper, who made numerous helpful suggestions. We thank Robin Cubitt, Kunal Sengupta and seminar audiences at Jawaharlal Nehru University, Indian Statistical Institute, University of East Anglia, Universidad Carlos III, University of Essex and University of Montreal for their helpful comments. Prasanta K. Pattanaik acknowledges his intellectual debt to Salvador Barbera, Tapas Majumdar and Amartya Sen.     

The economic agent as rule maker and rule user: <Emphasis Type="BoldItalic">Homo Sapiens Oeconomicus</Emphasis>

The paper discusses the micro foundations of evolutionary economics, introducing a unified concept of the economic agent as a rule maker and rule user. Based on recent findings of the neuronal, cognitive and behavioral sciences, Homo Sapiens Oeconomicus emerges as an alternative to Homo Oeconomicus. A taxonomy of rules distinguishing between cognitive, behavioral and blueprint rules and a set of theoretical propositions related to the structure and evolution of those rules are suggested.JEL Classification: A 12, B 41, B 52, B 53, D 00, D 64, D 80, D 83, E 11, L20The present paper had its origin in a research project on The Interdisciplinary Foundations of Economic Decision Making supported by the Swiss National Science Foundation during 1978-1980. The core of that work was a brain model whose architecture also serves as a corner stone for this paper. Since then there have been substantial developments in the respective areas; some of the major findings of the more recent research in the neuronal, cognitive and related sciences are discussed and integrated into the present paper. - I gratefully acknowledge insightful comments and criticisms from Georg D. Blind. Some ideas were discussed during my tenure as a Visiting Professor in the Department of Economics at the University of Queensland, in fall 2003, and I wish to record my appreciation of the hospitality during that visit. Particular thanks for the inspiring discussions go to Peter Earl, John Foster, and, as always, Jason Potts. Special thanks are due to Juli Lessmann and Charles R. McCann for their thoughtful corrections of my English prose and their editorial help. The usual disclaimer applies.     

A monetary vector error correction model of the Euro area and implications for monetary policy

In this paper, a vector error correction model for Euro area money, prices, output, long-term interest rate and short-term interest rate with three identified cointegration relations is specified. It is shown that Euro area money and prices can be considered as variables that are integrated of order two or I(2), that is, they have to be differenced twice to become stationary. Accordingly, the relation between money, prices and other macroeconomic variables is analyzed in an econometric framework which is suited for the analysis of I(2)-variables. Monetary policy implications are derived from the estimated system.First revision received: May 2002/Final revision received: May 2003I thank Helmut Lütkepohl, Jürgen Wolters, and two anonymous referees for helpful comments. Financial support from the Deutsche Forschungsgemeinschaft (SFB 373) is gratefully acknowledged.     

Stochastic Choice and the Allocation of Cognitive Effort

Data from a risky choice experiment are used to estimate a fully parametric stochastic model of risky choice. As is usual with such analyses, Expected Utility Theory is rejected in favour of a form of Rank Dependent Theory. Then an estimate of the risk aversion parameter is deduced for each subject, and this is used to construct a measure of the “closeness to indifference' of each subject in each choice problem. This measure is then used as an explanatory variable in a random effects model of decision time, with other explanatory variables being the complexity of the problem, the financial incentives, and the amount of experience accumulated at the time of performing the task. The most interesting finding is that significantly more effort is allocated to problems in which subjects are close to indifference. This presents us with another reason (in addition to statistical information considerations) why such tasks should play a prominent role in experiments. JEL Classification: C23, C91, D81     

Human capital,innovation capability and economic growth in Portugal, 1960-2001

In maintaining that the main flaw in empirical studies on economic growth derives from the fact that they employ Solow-style neoclassical growth models, rather than testing actual endogenous growth theory, we examine the human capital-innovation-growth nexus, thus testing new growth theory more directly. We test its insights against the economic evolution of an individual country, Portugal, using time series data from 1960 to 2001. Estimates based on vector autoregressive and cointegration analysis seem to confirm that human capital and indigenous innovation efforts were enormously important to the economic growth process in Portugal during the period of study. In particular, the indirect effect of human capital through innovation, emerges here as being critical, showing that a reasonably high stock of human capital is necessary to enable a country to reap the benefits of its indigenous innovation efforts.Received: November 2003, Accepted: November 2004, JEL Classification: C22, J24, O30, O40 Correspondence to: Aurora A.C. TeixeiraThe authors are grateful to two anonymous referees, Paulo Brito and the participants of the 2003 Portuguese Society for Economics Research (SPiE) in Lisbon, Portugal for helpful comments and suggestions. CEMPRE - Centro de Estudos Macroeconómicos e Previsão - is supported by the Fundação para a Ciência e a Tecnologia, Portugal, through the Programa Operacional Ciência, Tecnologia e Inovação (POCTI) of the Quadro Comunitário de Apoio III, which is financed by FEDER and Portuguese funds.     

Ordinal efficiency and dominated sets of assignments

Using lotteries is a common tool for allocating indivisible goods. Since obtaining preferences over lotteries is often difficult, real-life mechanisms usually rely on ordinal preferences over deterministic outcomes. Bogomolnaia and Moulin (J. Econom. Theory 19 (2002) 623) show that the outcome of an ex post efficient mechanism may be stochastically dominated. They define a random assignment to be ordinally efficient if and only if it is not stochastically dominated. In this paper we investigate the relation between ex post efficiency and ordinal efficiency. We introduce a new notion of domination defined over sets of assignments and show that a lottery induces an ordinally efficient random assignment if and only if each subset of the full support of the lottery is undominated.     

Intra-Jurisdictional Tax Competition

While much has been written about inter-jurisdictional competition for tax revenues, especially concerning the choice between harmonization and competition, the literature has largely ignored intra-jurisdiction issues. The few articles examining this issue focus on how lower level governmental entities react to the tax decisions of a national government. However, in some instances, multiple co-equal taxing authorities might share the same base. These bodies face a dilemma over whether to harmonize their policies or to compete. We present a simple model of revenue maximizing tax authorities and derive the conditions under which harmonization dominates competition.     

An extended Heckscher-Ohlin model with transaction costs and technological comparative advantage

Summary. This paper introduces technological differences and transaction costs into the Heckscher-Ohlin (HO) model and examines the HO theorem, factor price equalization theorem, the Stolper-Samuelson theorem and the Rybczynski theorem. It shows that the HO theorem can be refined, and that the factor price equalisation theorem, the Stolper-Samuelson Theorem and the Rybczynski theorem do not always hold. It also shows that transaction costs play an important role in determining the equilibrium trade pattern.Received: 26 February 2001, Revised: 27 May 2003, JEL Classification Numbers: F10, F11. Correspondence to: Wenli ChengWe are grateful for comments from the anonymous referee, Hugo Sonnenschein, Guangzhen Sun and participants of the seminar on this paper at University of Washington.     

Strategic market games with a finite horizon and incomplete markets

Summary. We study a strategic market game associated to an intertemporal economy with a finite horizon and incomplete markets. We demonstrate that generically, for any finite number of players, every sequentially strictly individually rational and default-free stream of allocations can be approximated by a full subgame-perfect equilibrium. As a consequence, imperfect competition may Pareto-dominate perfect competition when markets are incomplete. Moreover - and this contrasts with the main message conveyed by the market games literature - there exists a large open set of initial endowments for which full subgame-perfect equilibria do not converge to -efficient allocations when the number of players tends to infinity. Finally, strategic speculative bubbles may survive at full subgame-perfect equilibria.Received: 24 January 2002, Revised: 21 February 2003, JEL Classification Numbers: C72, D43, D52. Correspondence to: Gaël GiraudWe thank Tim Van Zandt for his comments.