Kenneth J. Arrow

Bio: Kenneth J. Arrow is an academic researcher from Stanford University. The author has contributed to research in topics: Social choice theory & General equilibrium theory. The author has an hindex of 113, co-authored 411 publications receiving 111221 citations. Previous affiliations of Kenneth J. Arrow include University of California & Princeton University.

Social norms as solutions

Abstract: Climate change, biodiversity loss, antibiotic resistance, and other global challenges pose major collective action problems: A group benefits from a certain action, but no individual has sufficient incentive to act alone. Formal institutions, e.g., laws and treaties, have helped address issues like ozone depletion, lead pollution, and acid rain. However, formal institutions are not always able to enforce collectively desirable outcomes. In such cases, informal institutions, such as social norms, can be important. If conditions are right, policy can support social norm changes, helping address even global problems. To judge when this is realistic, and what role policy can play, we discuss three crucial questions: Is a tipping point likely to exist, such that vicious cycles of socially damaging behavior can potentially be turned into virtuous ones? Can policy create tipping points where none exist? Can policy push the system past the tipping point?

Sustainability and the measurement of wealth

Abstract: We develop and apply a consistent and comprehensive theoretical frame- work for assessing whether economic growth is compatible with sustaining wellbeing over time. Our approach differs from earlier approaches by concentrating on wealth rather than income. Sustainability is demonstrated by showing that a properly defined comprehensive measure of wealth is maintained through time. Our wealth measure is unusually comprehensive, capturing not only reproducible and human capital but also natural capital, health improvements and technological change. We apply the framework to five countries: the United States, China, Brazil, India and Venezuela. We show that the often-neglected contributors to wealth - technological change, natural capital and health capital - fundamentally affect the conclusions one draws about whether given nations are achieving sustainability. Indeed, even countries that display sustainability differ considerably in the kinds of capital that contribute to it.

Handbook of Social Choice and Welfare

Abstract: Social choice theory is concerned with the evaluation of alternative methods of collective decision-making, as well as with the logical foundations of welfare economics. In turn, welfare economics is concerned with the critical scrutiny of the performance of actual and/or imaginary economic systems, as well as with the critique, design and implementation of alternative economic policies. This being the case, it goes without saying that the origin of social choice theory can be traced back all the way to antiquity. Indeed, as soon as multiple individuals are involved in making decisions for their common cause, one or other method of collective decision-making cannot but be invoked. As a reflection of this obvious fact, there are numerous examples in classic writings on the use and usefulness of alternative methods of collective decision-making. Suffice it to quote Aristotle in ancient Greece, and Kautilya in ancient India; they both lived in the fourth century B.C. and explored several possibilities of collective decision-making in their books entitled, respectively, Politics and Economics. 1 Likewise, as soon as any collective body designs and implements an economic mechanism and/or an economic policy, paying proper attention to the costs and benefits accruing to its constituent members, one or other social welfare judgements cannot be avoided. In this sense, Joseph Schumpeter (1954, p.1069) was certainly right when he emphasized “the hallowed antiquity of welfare economics.” He observed that “a large part of the work of Carafa and his successors as well as of the work of the scholastic doctors and their successors was welfare economics. We also know that the welfare point of view was much in evidence in the eighteenth century .... For Bentham and the English utilitarians generally this point of view was, of course, an essential element of their creed. Hence, the positive spirit of Ricardian economics notwithstanding, we find it also in the English ‘classics,’ particularly in J. S. Mill. So far as this goes, modern welfare economists merely revive the Benthamite tradition.” It was

Discounting for Time and Risk in Energy Policy

Abstract: The volume addresses the unresolved issues pertaining to the choice of the discount rate to be used in benefit-cost evaluation of public investments and public policies in a market economy with many distortions. It analyzes the question of risk and discounting in connection with energy policy, and it addresses the issues of whether discounting at a positive rate implies intergenerational inequity and whether the benefit-cost framework is sufficiently robust to be used as the basis for choosing between alternatives that may have far-reaching consequences. It addresses the practical problems associated with trying to estimate the appropriate rate of discount, and evaluates the discounting practices within the electric power industry. Separate abstracts were prepared for chapters 2 and 4-12 selected for the Energy Data Base (EDB) and Energy Abstracts for Policy Analysis (EAPA).

Prospect theory: an analysis of decision under risk

Abstract: This paper presents a critique of expected utility theory as a descriptive model of decision making under risk, and develops an alternative model, called prospect theory. Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. In addition, people generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms. An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains. Decision weights are generally lower than the corresponding probabilities, except in the range of low prob- abilities. Overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling. EXPECTED UTILITY THEORY has dominated the analysis of decision making under risk. It has been generally accepted as a normative model of rational choice (24), and widely applied as a descriptive model of economic behavior, e.g. (15, 4). Thus, it is assumed that all reasonable people would wish to obey the axioms of the theory (47, 36), and that most people actually do, most of the time. The present paper describes several classes of choice problems in which preferences systematically violate the axioms of expected utility theory. In the light of these observations we argue that utility theory, as it is commonly interpreted and applied, is not an adequate descriptive model and we propose an alternative account of choice under risk. 2. CRITIQUE

Absorptive capacity: a new perspective on learning and innovation

Abstract: In this paper, we argue that the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends is critical to its innovative capabilities. We label this capability a firm's absorptive capacity and suggest that it is largely a function of the firm's level of prior related knowledge. The discussion focuses first on the cognitive basis for an individual's absorptive capacity including, in particular, prior related knowledge and diversity of background. We then characterize the factors that influence absorptive capacity at the organizational level, how an organization's absorptive capacity differs from that of its individual members, and the role of diversity of expertise within an organization. We argue that the development of absorptive capacity, and, in turn, innovative performance are history- or path-dependent and argue how lack of investment in an area of expertise early on may foreclose the future development of a technical capability in that area. We formulate a model of firm investment in research and development (R&D), in which R&D contributes to a firm's absorptive capacity, and test predictions relating a firm's investment in R&D to the knowledge underlying technical change within an industry. Discussion focuses on the implications of absorptive capacity for the analysis of other related innovative activities, including basic research, the adoption and diffusion of innovations, and decisions to participate in cooperative R&D ventures. **

Dynamic capabilities and strategic management

Abstract: The dynamic capabilities framework analyzes the sources and methods of wealth creation and capture by private enterprise firms operating in environments of rapid technological change. The competitive advantage of firms is seen as resting on distinctive processes (ways of coordinating and combining), shaped by the firm's (specific) asset positions (such as the firm's portfolio of difftcult-to- trade knowledge assets and complementary assets), and the evolution path(s) it has aflopted or inherited. The importance of path dependencies is amplified where conditions of increasing retums exist. Whether and how a firm's competitive advantage is eroded depends on the stability of market demand, and the ease of replicability (expanding intemally) and imitatability (replication by competitors). If correct, the framework suggests that private wealth creation in regimes of rapid technological change depends in large measure on honing intemal technological, organizational, and managerial processes inside the firm. In short, identifying new opportunities and organizing effectively and efficiently to embrace them are generally more fundamental to private wealth creation than is strategizing, if by strategizing one means engaging in business conduct that keeps competitors off balance, raises rival's costs, and excludes new entrants. © 1997 by John Wiley & Sons, Ltd.