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.

Pareto Efficiency with Costly Transfers.

Abstract: : The concept of Pareto efficiency, as ordinarily applied, implies that costless redistributive transfers are possible. This paper generalizes the concept to a simple case where transfers of a given good involve losses mesasurable in that good. The Pareto efficiency of a given allocation then depends on the initial distribution endowments. For a given allocation, then, we can ask: (1) whether there exists any endowment allocation for which the given allocation is Pareto efficient; and (2) if there is, what is the class of endowment allocations for which it is efficient. These questions are answered in the paper.

Comment on cooper

Abstract: Richard Cooper has written an excellent survey on the economic implications of climate change, stressing the possibilities and limits of international policy. Author comment here only on one part of the analysis, Cooper's choice of discount rates. Author differ sharply with the basis of the analysis and wish to call attention to the extensive literature, dating back more than 40 years, on the choice of discount rates for public investment, which Cooper has disregarded. Cooper refers to and then dismisses abruptly what may be called the consumption viewpoint. Investment is a sacrifice of consumption, and therefore the rate of return on a new investment should be at least equal to the implicit rate of return on consumption. (In this note, as in Cooper, all rates of return are real, not nominal.) This idea is hardly new; it is Marshall's 'price of waiting'. Bohm-Bawerk famously gave three grounds for the existence of a positive interest rate. First, if consumption is growing over time, the marginal utility of consumption must be falling; therefore, a sacrifice of consumption today must be compensated for by a greater increase in consumption in the future. Second, future consumption is automatically less valuable than the same consumption today, even if their marginal utilities are equal. Third, an increased lag of production behind inputs leads to an increase in production.

Comments of 71 Concerned Economists: Using Procurement Auctions to Allocate Broadband Stimulus Grants

Abstract: The signatories to this document are economists who have studied telecommunications, auctions, and competition policy While we may disagree about the stimulus package, we believe that it is important to implement mechanisms that make stimulus spending as efficient as possible To that end, we have come together to encourage the National Telecommunications Information Agency (NTIA) and Rural Utilities Service (RUS) to adopt auction mechanisms to allocate broadband stimulus grants The broadband stimulus NOI asks which mechanisms NTIA and RUS should use to distribute grants and how those mechanisms address shortcomings in traditional grant and loan programs In this note we explain why procurement auctions are more efficient and more consistent with the stimulus goals of allocating funds quickly than a traditional grant review process We recommend that NTIA/RUS use procurement auctions to distribute at least part of the stimulus funds The American Recovery and Reinvestment Act (ARRA) requires NTIA/RUS to distribute $72 billion in broadband subsidies The broadband component of the Act has dual, and not entirely consistent, objectives of providing immediate economic stimulus and improving broadband service NTIA/RUS faces a formidable challenge in determining how to spend the money quickly and efficiently in ways that meet these goals The traditional grant application process is long, complicated, and involves subjective and arbitrary decisions regarding which projects to fund In other words, requesting and reviewing grant applications is not an effective way to implement the plan Procurement auctions, in contrast, provide a mechanism that can allocate grant money quickly, efficiently, and according to well-defined rules As a result, procurement auctions offer NTIA/RUS the most promising method of maximizing broadband improvement while also creating some level of “temporary, timely, and targeted” stimulus We therefore strongly recommend that NTIA/RUS adopt procurement auctions as its preferred method of distributing grants This memo has three parts First, it explains why the traditional grant application process is unsuitable for this task and why procurement auctions are better suited Second, it sketches out a procurement auction plan This plan is intended to be a starting point from which auction design experts would proceed to build and implement a fully functional auction Finally, we explain that even if policymakers are skeptical of procurement auctions, one could be implemented quickly as part of an initial tranche of stimulus funding in order to test its efficacy relative to traditional approaches This approach would allow NTIA/RUS to quickly expand upon or modify the procurement auction program in subsequent funding rounds

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.