Games of Fair Division

We consider the problem of fairly allocating an indivisible good to one of several agents equally entitled to it when monetary compensations to the others are possible. Our primary normative concept is no-envy. First, we show that there is no non-manipulable selection from the no-envy solution. Then we study the direct revelation games associated with subsolutions of the no-envy solution. The set of equilibrium allocations of any one of them coincides with the set of envy-free allocations for the true preferences. Journal of Economic Literature Classification Numbers: C72, D63, D7l, D82.     

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.     

Consumer Risk‐reduction Behavior and New Product Purchases

Consumers purchase lower quantities of new products compared with those they have purchased in the past. We explain this observation as a result of risk‐averting behavior by utility‐maximizing consumers. If a new product involves a higher degree of risk that quality expectations will not be met compared with an incumbent product, we show that utility will be more concave for the new product. We test this prediction using a multiple‐discrete/continuous extreme value (MDCEV) model of demand. We show that utility is indeed more concave for new products relative to previously purchased products. Copyright © 2017 John Wiley & Sons, Ltd.     

The Quality Ladder and Product Variety: Larger Economies May Not Grow Faster

This paper constructs an endogenous growth model that combines the quality ladder model and the variety expansion model. Firms enter an imitation race. After the imitation process, monopolistic competition prevails and a new innovation race begins. A successful firm, by inventing a higher quality product, can take over the entire market. However, the existence of a variety of products limits the price that the successful firm can charge. We show that the present model exhibits an inverted U-shape relationship between market size and growth rate. Relatively large and small economies grow slowly while medium-sized economies grow rapidly.     

Signal-extracting education in an overlapping generations model

Summary. In order to get good positions in companies, people try to enter highly-ranked universities. However, abilities vary greatly between individuals. High-ability individuals have an incentive to send signals to firms by obtaining a higher level of education in order to distinguish themselves from low-ability individuals. This paper constructs an overlapping generations model in order to examine the macroeconomic consequences of such sorting behavior of individuals. There are two kinds of possible equilibria in our model. In one equilibrium, only the high-ability agent can obtain higher education and thus an elite society emerges. In the other equilibrium, all ability types have the chance to obtain higher education and thus a society with mass higher education emerges. We also discuss the possibility of multiple equilibria of these different steady states and the dynamic change in wage differentials.Received: 9 October 2002, Revised: 15 July 2003, JEL Classification Numbers: D82, J31, O10.The authors acknowledge Osamu Hayashida, Noriyoshi Hemmi, Hideshi Itoh, Michihiro Kandori, Toshihiro Matsumura, Takuya Nakaizumi, Osamu Nishimura, Ryoji Ohdoi, Tadashi Yagi, Noriyuki Yanagawa, and seminar participants at Doshisha University, the University of Tokyo, and Contract Theory Workshop at Kyoto University for helpful comments and suggestions. We would also like to thank an anonymous referee for valuable comments. This paper is part of the academic Project on Intergenerational Equity (PIE), funded by a scientific grant from Japans Ministry of Education, Culture, Sports, Science and Technology (grant number 603).     

Efficiency and Lack of Commitment in an Overlapping Generations Model with Endowment Shocks

This paper considers a pure exchange stochastic overlapping generations model in which, on each date, an economy faces an aggregate endowment shock. On each date, a young agent and an old agent simultaneously decide how much of their respective endowments to transfer to the other agent; however, a young agent cannot make promises about how much he or she will give when old. In this sense, an economy faces a limited commitment constraint. This paper characterizes an efficient intergenerational risk sharing allocation that satisfies a limited commitment constraint, and also studies the role of money and history in a stochastic overlapping generations economy.     

Status-seeking behavior,the evolution of income inequality,and growth

Using an overlapping generations model, this paper investigates the implications of status-seeking behavior, induced by preferences for relative income, for the evolution of income inequality. When average income rises, an individual’s marginal utility of their own income may increase (keeping up with the Joneses, or KUJ), or decrease (running away from the Joneses, or RAJ). It is shown that income inequality is shrinking over time in the KUJ economy, whereas it is expanding in the RAJ economy. We also explore the implications for long-run growth and inequality, in the existence of both KUJ and RAJ agents. I am truly grateful to Koichi Futagami for his encouragement and guidance in writing this paper. I have benefitted from comments by an anonymous referee, Been-Lon Chen, Giacomo Corneo, Akiomi Kitagawa, Kazuo Mino, Kazuhiro Yuki, and seminar participants at Osaka University, the 2006 Japanese Economic Association Autumn Meeting at Osaka City University, the Far Eastern Meeting of Econometric Society 2007 at Taipei, SER Conference 2007 at Singapore, and the European Meeting of Econometric Society 2007 at Budapest. All remaining errors are, of course, my own. The financial support from JSPS Research Fellowships for Young Scientists is greatly acknowledged.     

CAPM and Option Pricing With Elliptically Contoured Distributions

This article offers an alternative proof of the capital asset pricing model (CAPM) when asset returns follow a multivariate elliptical distribution. Empirical studies continue to demonstrate the inappropriateness of the normality assumption for modeling asset returns. The class of elliptically contoured distributions, which includes the more familiar Normal distribution, provides flexibility in modeling the thickness of tails associated with the possibility that asset returns take extreme values with nonnegligible probabilities. As summarized in this article, this class preserves several properties of the Normal distribution. Within this framework, we prove a new version of Stein's lemma for this class of distributions and use this result to derive the CAPM when returns are elliptical. Furthermore, using the probability distortion function approach based on the dual utility theory of choice under uncertainty, we also derive an explicit form solution to call option prices when the underlying is log‐elliptically distributed. The Black–Scholes call option price is a special case of this general result when the underlying is log‐normally distributed.     

The CUSUM of squares test for the stability of regression models with non-stationary regressors

In this paper, we propose a modified CUSUM of squares test in time series regression models with a non-stationary regressor and show that the limiting distribution of this test is the sup of the absolute value of a Brownian bridge.     

Dynamic programming and mean-variance hedging with partial execution risk

In this paper I consider a hedging problem in an illiquid market where there is a risk that the hedger’s order to buy or sell the underlying asset may be executed only partially. In this setting, I find a mean-variance optimal hedging strategy by the dynamic programming method. The solution contains a new endogenous state variable representing the current position in the underlying. The exogenous coefficients in the solution are given by recursive formulas which can be calculated efficiently in Markov models. I illustrate effects of the partial execution risk in several examples.