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.

The Measurement of Real Value Added

Abstract: Publisher Summary The concept of value added has played an essential role in both private and national income accounting as a device for allocating the origins of income to the various points in the productive sector of the economy at which primary factors are brought to bear on the creation of the total value of final products. It provides an accounting that exactly exhausts total product. It is, however, a monetary magnitude and as such subject to all the vicissitudes that have made economists engage in the unavailing search for an invariable standard of value. To assess more deeply the relative merits of alternative measures of real value added, it is necessary to ask what its economic meaning is. This chapter discusses the most natural meaning of real value added that arises from the estimation of production functions. The output of any commodity is determined by the inputs of a number of commodities of which some are primary factors and others are produced goods, which is refer to as materials. The attribution of a special role to primary factors, capital and labor, and the construction of an aggregate for them can be justified only for the usual reasons, that is, their use in production is separable from that of the materials.

Handbook of Mathematical Economics

Abstract: Uncertainty. Incomplete markets (M. Magill, W. Shafer). The theory of value in security markets (D. Duffie). Sunspot equilibria in sequential markets models (P.A. Chiappori, R. Guesnerie). Utility theory with uncertainty (E. Karni, D. Schmeidler). Infinite Economies. Equilibrium theory in infinite dimensional spaces (A. Mas-Colell, W.R. Zame). Overlapping generations (J. Geanakoplos, H. Polemarchakis). Non-Convexity and Imperfect Competition. Equilibrium analysis with non-convex technologies (D. Brown). Monopolistic competition (J.-P. Benassy). Computation and Mathematical Methods. Computation and multiplicity of equilibria (T. Kehoe). Nonstandard analysis with applications to economics (B. Anderson). Nonlinear dynamical systems: Instability and chaos in economics (W.A. Brock, W.D. Dechert).

The Potentials and Limits of the Market in Resource Allocation

Abstract: The prestige status of the purest of pure economic theory has never been higher; and yet there is now, as there has always been, a pervasive scepticism about the descriptive power and normative utility of Walrasian or other varieties of the theory of general competitive equilibrium.1 The mutual adjustment of prices and quantities represented by the neoclassical model is an important aspect of economic reality worthy of the serious analysis that has been bestowed on it; and certain dramatic historical episodes suggest that an economic mechanism exists that is capable of adaptation to radical shifts in demand and supply conditions.

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.