Showing papers by "Kenneth J. Arrow published in 1986"

Social Choice Theory

Abstract: Logician: OK, I will give it a try. Suppose you have three voters 1, 2, 3 and three states x, y, z that represent the things they want to achieve in casting their votes. The states could represent preferences for which game to play: hide-and-seek, kick-the-can or I-spy. Or they could represent the range of choice of candidates for leader of the nation. It does not really matter. Suppose each voter has a ranking of the states. We do not allow ties, so there are six possible rankings:

Rationality of Self and Others in an Economic System

Abstract: In this paper, I want to disentangle some of the senses in which the hypothesis of rationality is used in economic theory. In particular, I want to stress that rationality is not a property of the individual alone, although it is usually presented that way. Rather, it gathers not only its force but also its very meaning from the social context in which it is embedded. It is most plausible under very ideal conditions. When these conditions cease to hold, the rationality assumptions become strained and possibly even self-contradictory. They certainly imply an ability at information processing and calculation that is far beyond the feasible and that cannot well be justified as the result of learning and adaptation. Let me dismiss a point of view that is perhaps not always articulated but seems implicit in many writings. It seems to be asserted that a theory of the economy must be based on rationality, as a matter of principle. Otherwise, there can be no theory. This position has even been maintained by some who accept that economic behavior is not completely rational. John Stuart Mill (1909, bk. 2, ch. 4) argued that custom, not competition, governs much of the economic world. But he adds that the only possible theory is that Standard economic doctrine makes assumptions of rationality that have very strong implications for the complexity of individuals' decision processes. The most complete assumptions of competitive general equilibrium theory require that all future and contingent prices exist and be known. In fact, of course, not all these markets exist. The incompleteness of markets has several side consequences for rationality. For one thing, each decision maker has to have a model that predicts the future spot prices. This is an informational burden of an entirely different magnitude than simply optimizing at known prices. It involves all the complexity of rational analysis of data and contradicts the much-praised informational economy of the price system. It is also the case that equilibria become much less well defined. Similar problems occur with imperfect competition. * This research was supported by the Office of Naval Research grant ONR-N00014-79-C-0685 at the Center for Research in Organizational Efficiency, Institute for Mathematical Studies in the Social Sciences, Stanford University, Stanford, California.

Social Choice and Multicriterion Decision-Making

Abstract: This study comes to grips with the industrial outranking problem, one of the major outstanding problems of current operations research and managerial decision-making. The problem, simply stated, is this: given a large but finite set of criteria, and a large but finite number of alternatives, how can the criteria be ranked in priority order, and how should the alternatives be ranked from best to worst consistent with the ordering of criteria that may be conflicting or incommensurable? There have been many proposed solutions to the problem. Numerous empirical recipes—among them the majority method—have been submitted, based in large part on the subjective judgments and biases of various observers. The authors argue that the axiomatic formulation offers the surest path to a solution that is as objective as possible, minimally distorted by the unwitting imposition of personal values. They then develop a system of consistent and appealing axioms, confront the paradoxes that put axiomatic systems in general at risk, and demonstrate the applicability of their system to realistic industrial outranking problems. Even within the axiomatic framework, however, some leeway remains for subjective choice and conscious value decisions. One ad hoc criterion of choice the authors selected was that their method should be neither so flexible and open that personal biases might easily slip in, nor so artificially rigid that the play of intuition and creativity was systematically excluded. The book also takes a hard look at the theoretical and practical defects of the majority method, the favored proposed solution, and at such associated issues as committee decision techniques, strategic majority voting; and restriction conditions.

Social Choice and Multicriterion Decision-Making

Abstract: This study comes to grips with the industrial outranking problem, one of the major outstanding problems of current operations research and managerial decision-making.The problem, simply stated, is this: given a large but finite set of criteria, and a large but finite number of alternatives, how can the criteria be ranked in priority order, and how should the alternatives be ranked from best to worst consistent with the ordering of criteria that may be conflicting or incommensurable?There have been many proposed solutions to the problem. Numerous empirical recipes - among them the majority method - have been submitted, based in large part on the subjective judgments and biases of various observers.The authors argue that the axiomatic formulation offers the surest path to a solution that is as objective as possible, minimally distorted by the unwitting imposition of personal values. They then develop a system of consistent and appealing axioms, confront the paradoxes that put axiomatic systems in general at risk, and demonstrate the applicability of their system to realistic industrial outranking problems.Even within the axiomatic framework, however, some leeway remains for subjective choice and conscious value decisions. One ad hoc criterion of choice the authors selected was that their method should be neither so flexible and open that personal biases might easily slip in, nor so artificially rigid that the play of intuition and creativity was systematically excluded.The book also takes a hard look at the theoretical and practical defects of the majority method, the favored proposed solution, and at such associated issues as committee decision techniques, strategic majority voting; and restriction conditions.Kenneth A. Arrow, who was awarded the Nobel Memorial Prize in Economics in 1972, is Joan Kenny Professor of Economics and Professor of Operations Research at Stanford University. Herve Raynaud is Professor, University of Grenoble, France.

Chapter 23 Agency and the market

Abstract: Publisher Summary A very widespread economic situation is that of the relation between a principal and an agent. Even in ordinary and in legal discourse, the principal–agent relation is significant in scope and economic magnitude. The chapter discusses that the common element is the presence of two individuals. One is to choose an action among a number of alternative possibilities. The action affects the welfare of the other, the principal, as well as that of the agent's self. The principal, at least in the simplest cases, has the additional function of prescribing payoff rules—that is, of determining in advance of the choice of action, a rule that obliges him or her as to what fee to pay as a function of his or her observations on the results of the action. The problem acquires interest only when there is uncertainty at some point, and, in particular, when the information available to the two participants is unequal. In technical language, the outcome is a random variable whose distribution depends on the action taken. The principal–agent theory is in the standard economic tradition. Both principal and agent are assumed to be making their decisions optimally in view of their constraints. Intended transactions are realized. The function of this theory has the dual aspect usual in economic theory; it can be interpreted both normatively and descriptively. It can also be interpreted as an attempt to explain observed phenomena in the empirical economic world, particularly exchange relations that are observed but not explained by more standard economic theory.

Uncertainty, information, and communication

Abstract: Part I. Uncertainty: 1. Negotiation in games: a theoretical overview Roger B. Myerson 2. Repeated moral hazard with low discount rates Roy Radner 3. Existence, regularity, and constrained suboptimality of competitive allocations when the asset market is incomplete John D. Geanakoplos and Heraklis M. Polemarchakis 4. Asset pricing theories Michael Rothschild 5. Independence versus dominance in personal probability axioms Thomas Marschak 6. Univariate and multivariate comparisons of risk aversion: a new approach Menahem E. Yaari Part II. Information, Communication and Organisation: 7. The cost of communication in economic organisation: II Hajime Oniki 8. Assembling efficient organisations? W. M. Gorman 9. Optimal Bayesian mechanisms Eric S. Maskin 10. Incentive theory with data compression Jerry R. Green and Jean-Jacques Laffont 11. Alternative limited communication systems: centralisation versus interchange of information Jerry R. Green and Jean-Jacques Laffont.

Social choice and public decision making

Abstract: Part I. Social Choice: 1. Consequentialist social norms for public decisions Peter J. Hammond 2. Information and invariance in normative choice Amartya Sen 3. Utilitarian morality in a world of very half-hearted altruists John C. Harsanyi 4. On the implementation of social choice rules in irrational societies Leonid Hurwicz 5. Walrasian social choice: some simple axiomatic approaches Louis Gevers Part II. Decision Making in the Public Sector: 6. Testing for optimality in the absence of convexity Herbert E. Scarf 7. Toward a theory of planning Michael D. Intriligator and Eytan Sheshinski 8. On the social risk premium David A. Starrett 9. A problem of financial market equilibrium when the timing of tax payments is indeterminate David F. Bradford 10. The shadow price of capital: implications for the opportunity cost of public programs, the burden of the debt, and tax reform Robert C. Lind.