Showing papers in "Econometrica in 1968"

The theory of syndicates

Abstract: WE SHALL DEFINE a syndicate to be a group of individual decision makers who must make a common decision under uncertainty, and who, as a result, will receive jointly a payoff to be shared among them. Our concern is to analyze the decision process of a syndicate when the members have diverse risk tolerances and/or diverse probability assessments of the uncertain events affecting the payoff. Of particular interest is the possiblity of constructing a surrogate "group utility function" and a surrogate "group probability assessment." Such constructions potentially have a role in the theory of finance; e.g., for determining the forms of organizational charters and financial instruments, as well as the modes of delegating the group decision process to professional managers. The present treatment, however, is confined to tractable features embodying only a small measure of the complexity of practical situations. Of comparable importance are the ramifications for welfare theory; in particular, we shall be able to specify conditions under which Pareto optimal behavior by the group satisfies the Savage axioms [15] foy consistent decision making under uncertainty, and to isolate the inconsistent characteristics in the contrary case. Arrow's original treatise [1] has been the source of most of the work on group decision theory. Marschak [13], Radner [17], and Bower [6] have considered the case of a team, in which there is a joint utility function for the members. Harsanyi [9] and Theil [16] have considered the criterion that the group decisions satisfy the Von Neumann-Morgenstern axioms, and others. Madansky [12] has imposed the "external Bayes axiom" in the case of a common utility function but differing probability assessments among the members. Christenson [7] has constructed an axiomatic system for the case of an investment banking syndicate that is a special case of the present study, except for certain institutional factors. Borch [3, 4, 5]

Competitive equilibrium under uncertainty.

Abstract: This paper extends the general equilibrium analysis of the previous reading by examining the states of nature that particular individuals are capable of distinguishing Equilibrium is examined under the condition that individuals engage in no trades that would involve delivery or receipt of goods based on distinctions that the individual is unable to make The alternative extreme would permit two persons to trade provided one of them is able to distinguish states of nature This would entail a great degree of trust and would ignore the communication costs when one party has to inform the other that his actions are now expected In practice some institutions do rely on trust (together with some policing of honesty) One thinks of public accountants scrutinizing the records of corporations as a check that the managers do provide to owners the correct portion of profits Many circumstances involve agency relations where an individual hires another to make decisions for him These too rely on trust, which is not included in the model Thus the model represents one extreme of possible extensions of the model from Chapter 11

Optimal "induced" technical change'

Abstract: In this paper an attempt is made to give precise expression to the conditions under which a profit maximizing firm with fixed research budget will choose each type of technical change (i.e., "neutral" and "nonneutral"). It was found that the optimal choice depends on the initial technology, relative factor prices, and relative costs of acquiring different types of technical change. The preferred technical change need not be exclusively of one sort (e.g., "neutral" chanige). Once "neutral" technical change becomes optimal, however, it remains so until there is a change in relative factor prices. On the other hand, adoption of a "biased" technical change may eventually cause "neutral" advance to become desired even in the absence of relative factor price changes. Examination of the firm's decision criterion under the assumption that it is a monopsonistic buyer of factors of production, discloses that under identical initial conditions (i.e., relative factor prices and relative costs of alternative forms of technical change) the firm will prefer more "biased" technical change relative to the situation in which it purchases factors competitively. In particular, the firm will, under these conditions, seek those "biased" technical changes which economize on the factor whose elasticity of supply is relatively smaller. Finally, it was also discovered that, contrary to previous suppositions, changes in the elasticity of substitution do affect the optimal capital-labor ratio for each factor price combination in all cases but one.

Tarification des Services a Qualite Variable--Application aux Peages de Circulation

Abstract: La distinction classique entre biens individualisables et biens collectifs ne tient pas compte des biens et services, tels que la circulation automobile, dont la quantite est individualisable mais dont la qualit& a un caractere collectif et d&pend du niveau de la demande en raison d'effets externes. On etudie dans ce papier comment les conditions classiques de l1'quilibre &conomique sont a modifier pour introduire cette categorie de biens et quelles doivent etre leurs regles de tarification. Les resultats theoriques obtenus sont ensuite appliques au cas de la circulation automobile.

A Note on Houthakker's Aggregate Production Function in a Multifirm Industry

Abstract: ONE OF THE common problems facing an economist dealing with production functions is the problem of aggregation of factors. In a rather neglected paper, Houthakker advances an ingenious approach for explaining the possibility of finding a neoclassical production function for an industry even when production within each of the firms (or "cells")3 is done according to a fixed coefficients production function. These fixed proportions vary in a regular way from one cell to another so that the overall input-output relationship takes the form of a regular neoclassical production function. As Solow notices in a survey article on production functions4 this paper has been forgotten and not followed in any direction. In this note we try to reverse Houthakker's procedure and to show how each neoclassical production function implies some density function or distribution function over the cells. We here do it for CES production functions, but it will be obvious that the same method applies to any production function. Following Houthakker we normalize the cells so that each of them is capable of producing one unit of output. Each cell has a requirement, say t, of the variable factor and this requirement varies from one cell to another. If the wage rate in terms of output produced is p then all the cells with tp < 1 will produce a unit of output, all others will be idle. Assume that we are given a density function of the various cells by g(t). Output produced will then be Q = f Pg(t)dt and the input used A f f'IP tg(t)dt. By eliminating i/p one gets a relationship between Q and A. In this way Houthakker has shown that a Pareto distribution implies a CobbDouglas production function. Notice that the relationship between Q and A the cumulated product and factor used-is the familiar Lorenz curve. Assume that the overall relationship between output and the variable factor follows a CES production function with elasticity of substitution (a) smaller than 1;

New income inequality measures as efficient tools for causal analysis and planning

Abstract: A new system of inequality indicators is introduced in the paper. It has been elaborated for measuring income inequalities, but can serve as inequality measures for other phenomena as well. The new indicators not only measure the degree of the inequality but are also suitable for measuring its economic motivation. Properties of the new measures, including large sample properties of their estimators, are discussed. The case of the lognormal distribution is of special interest. ONE OF THE methodological problems that have recently arisen in planning consists in forecasting the personal income distribution of the population for some future period. To tackle this problem an experimental simulation model has been worked out by the authors at the Hungarian Planning Office [5,6]. The chief aim of this model is to trace, on a sample of households selected at random, the influence of certain economic and demographic phenomena on the income distribution of the population living on wages and salaries. This study deals not with the special problems of these model procedures, e.g. the follow up of changes in wages and salaries, family allowances, pensions, employment, and demographic variables, etc. (being consistent with the plans of national economy). Instead we wish to give some information about our tools of measurement for analyzing the degree and the causes of the inequalities of factual and simulated income distributions. In other words, in connection with this simulation experiment we needed measures which, besides indicating the effect of the various plan variants on income inequality, provided us the opportunity for analyzing the extent to which certain factors, meaningful and important from the economic and planning points of view, contributed to the inequality. As far as we know, none of the various known measures of inequality was used for this latter purpose.

Restricted bargaining for organizations with multiple objectives

Abstract: In this paper we show that a bargaining game will yield a negotiated solution with certain reasonable properties if the rules of the game are appropriately restricted. The basic idea is to provide an incentive for all the group components to engage in a process of concessions until the point where some agreement is reached. The incentive consists of the threat of a preannounced "imposed" solution which will be enforced if no settlement can be reached. ORGANIZATIONAL DECISION MAKING is characterized by a multiplicity of partially conflicting objectives, all of which are desirable to some extent. Although the presence of multiple goal structures has been recognized for a long time in economic theory, the assumption of a unique goal of profit maximization has been made in nearly every analytical study of firm behavior, except in a few recent contributions.2 There are many reasons for this apparent lack of interest in the problem of multiple objectives and the failure to introduce them explicitly in models of firm behavior, though most of these are probably related to the difficulty of handling such objectives in a satisfactory way. For instance, a group utility-if one exists-will generally fail to be a scalar function; more often it will be a multidimensional function.3 Furthermore, one must face the problem of aggregating the preferences of individual group members into a "group ordering" which satisfies certain reasonable requirements.4 Several approaches have been developed to deal with the problem of resource allocation under multiple objectives; however, none are really satisfactory. Such

Household demand for financial assets

Abstract: This paper investigates the household demand for four financial assets: marketable bonds, time and savings deposits at commercial banks, life insurance reserves, and savings accounts at other financial institutions-credit unions, savings and loan associations, and mutual savings banks. The focus of the analysis is on the substitution relationships among liquid assets, and between these assets and marketable securities. The explanatory variables used in the study are: income, wealth, and the yields on various assets included in household portfolios.