Showing papers in "Economic Theory in 1995"
TL;DR: The authors developed an applied general equilibrium model to examine the optimal social security replacement rate and the welfare benefits associated with it and found that an unfunded social security system may well enhance economic welfare.
Abstract: We develop an applied general equilibrium model to examine the optimal social security replacement rate and the welfare benefits associated with it. Our setup consists of overlapping generations of 65-period lived individuals facing mortality risk and individual income risk. Private credit markets, including markets for private annuities, are closed by assumption. Unlike previous analyses, we find that an unfunded social security system may well enhance economic welfare. In our benchmark economy, the optimal social security replacement rate is 30%, and an empirically more plausible replacement rate of 60% raises welfare compared with an economy with no social security system.
442 citations
TL;DR: In this paper, the existence of pure strategy Nash equilibria in price competition in a homogeneous product market when costs are strictly convex is analyzed and it is shown that if output is demand determined such equilibrium always exists.
Abstract: The paper analyses the existence of pure strategy Nash equilibrium in price competition (or Bertrand equilibrium) in a homogeneous product market when costs are strictly convex and proves that if output is demand determined such equilibrium always exists. This paper also characterises such equilibria and shows that if firms are identical such equilibria are necessarily non-unique. However for firms with asymmetric costs it can be unique or non-unique.
228 citations
TL;DR: In this paper, the elasticity of substitution between market and home consumption goods is estimated for single males, single females, and married couples, and the results indicate a high enough substitution elasticity that including home production will make a significant difference in applied general equilibrium theory.
Abstract: Dynamic general equilibrium models that include explicit household production sectors provide a useful framework within which to analyze a variety of macroeconomic issues. However, some implications of these models depend critically on parameters, including the elasticity of substitution between market and home consumption goods, about which there is little information in the literature. Using the PSID, we estimate these parameters for single males, single females, and married couples. At least for single females and married couples, the results indicate a high enough substitution elasticity that including home production will make a significant difference in applied general equilibrium theory.
190 citations
TL;DR: In this paper, the authors examine strategic information transmission in an experiment where Senders are privately informed about a state and send messages to Receivers, who choose actions resulting in payoffs to Senders and Receivers.
Abstract: We examine strategic information transmission in an experiment. Senders are privately informed about a state. They send messages to Receivers, who choose actions resulting in payoffs to Senders and Receivers. The payoffs depend on the action and the state. We vary the degree to which the Receivers' and the Senders' preferences diverge. We examine the relationship between the Senders' messages and the true state as well as that between actions and the true state and contrast the ability of different equilibrium message sets to explain the data. When preferences are closely aligned Senders disclose more. We assess two comparative statics: (i) as preferences diverge, state and action are less frequently matched, and (ii) messages tend to become less informative as preferences diverge. The first result is weakly confirmed for adjacent treatments but is considerably stronger when non-adjacent treatments are compared. We find that as preferences diverge messages become less informative. While the ex-ante Pareto-optimal Bayesian Nash Equilibrium does not explain our conditions, the equilibrium message sets supported by the data are similar to the ex-ante Pareto Optimal message sets.
159 citations
TL;DR: In this paper, the authors study the quantitative implications of nominal wage contracts for business cycle fluctuations using a model economy based on the neoclassical growth model supplemented by the assumption that cash is needed to purchase goods.
Abstract: In this paper we study the quantitative implications of nominal wage contracts for business cycle fluctuations. We address this issue using a model economy based on the neoclassical growth model supplemented by the assumption that cash is needed to purchase goods. We consider a variation of the standard recursive competitive equilibrium concept that is intended to capture the important features of wage contracting. We use this equilibrium construct to address three issues. First, we consider whether monetary shocks, propagated by nominal contracts, constitute a viable alternative to technology shocks as a source of aggregate fluctuations. Our results suggest that, while monetary shocks and nominal rigidities succeed in causing output volatility of the required magnitude, the resulting data have properties that are inconsistent with several key features of U.S. data. Second, we consider how the behavior of the economy varies with contract length. We find that the volatility induced by both monetary and technology shocks increases sharply with contract length. Finally we consider how much rigidity would be necessary to match the volatility of U.S. output. We find that only a very small amount of rigidity would be necessary to cause output volatility of the magnitude observed.
150 citations
TL;DR: In this article, a static applied general equilibrium model was used to analyze the impact on the Spanish economy of the 1986 fiscal reform, which accompanied Spain's entry into the European Community.
Abstract: In 1985–86 the authors were members of a team that constructed a static applied general equilibrium model that was used to analyze the impact on the Spanish economy of the 1986 fiscal reform, which accompanied Spain's entry into the European Community. This paper compares the results obtained to recently published data for 1985–87; we find that the model performed well in predicting the changes in relative prices and resource allocation that actually occurred, particularly if we incorporate exogenous shocks that affected the Spanish economy in 1986. We also analyze the sensitivity of the results to alternative specifications of the labor market and macroeconomic closure rules; we find that the central results are robust.
128 citations
TL;DR: In this paper, the authors derive necessary and sufficient conditions for a set of bidding strategies to be a symmetric monotone Bayes-Nash equilibrium to a uniform price sealed bid auction using the first rejected bid pricing rule.
Abstract: Summary. In many existing markets demanders wish to buy more than one unit from a group of identical units of a commodity. Often, the units are sold simultaneously by auction. The vast majority of literature pertaining to the economics of auctions, however, considers environments in which demanders buy at most one object. In this paper we derive necessary and sufficient conditions for a set of bidding strategies to be a symmetric monotone Bayes-Nash equilibrium to a uniform price sealed bid auction using the "first rejected bid pricing rule" in an independent private values environment with two-unit demands. In any symmetric monotone BayesNash equilibrium, all bidders submit one bid equal to their higher valuation and one bid lower than their lower valuation. We characterize the equilibrium and derive the exact amount of underrevelation in the lower bid.
122 citations
TL;DR: In this paper, the extent of delay in a dynamic, N-person, coordination game is studied, and it is shown that delay is a robust phenomenon, in the sense that well-behaved equilibria exhibit infinite delay for sufficiently large values of N.
Abstract: Gains from coordination provide incentives for delay. In this paper, the extent of delay is studied in a dynamic,N-person, coordination game. There is no social gain from delay, so an equilibrium with delay is always inefficient. For fixedN, there is no coordination failure when the period length is short: all equilibrium outcomes converge to the Pareto efficient outcome as the period length converges to zero. On the other hand, holding period length fixed, there exist equilibria in which delay is proportional toN, for arbitrarily large values ofN. In addition, it can be shown that the possibility of delay depends on the “timing” of strategic complementarities. However, under certain conditions, delay is shown to be a robust phenomenon, in the sense that “well-behaved” equilibria exhibit infinite delay forN sufficiently large.
97 citations
TL;DR: In this article, the problem of fairly allocating an infinitely divisible commodity among agents with single-peaked preferences is considered and it is shown that there is essentially only one selection from the envy-free and efficient solution satisfying this property.
Abstract: We consider the problem of fairly allocating an infinitely divisible commodity among agents with single-peaked preferences. First, we examine the implications of the requirement that a change in the population affect all agents that are present before and after the change in the same direction. We show that this requirement is met by no selection from the no-envy solution. In the face of this impossibility, we limit our attention to changes that are not so “disruptive”, in the following sense: if initially there is not enough to bring all agents to their satiation points, then this still is the case after the change, and if initially there is so much that agents have to be brought beyond their satiation points, then again, this remains the case. The requirement is that such changes affect all agents that are present before and after the change in the same direction. Our main result is that there is essentially only one selection from the envy-free and efficient solution satisfying this property. It is the solution known as the “uniform” rule.
96 citations
TL;DR: In this article, necessary and sufficient conditions for the set of solutions to an optimization problem to be nondecreasing in a weak sense still strong enough to guarantee the existence of an increasing selection, and thus strong sufficient to guarantee monotonicity when the solution is unique.
Abstract: This paper develops necessary and sufficient conditions for the set of solutions to an optimization problem to be nondecreasing in a weak sense still strong enough to guarantee the existence of an increasing selection, and thus strong enough to guarantee monotonicity when the solution is unique, as well as necessary and sufficient conditions for the set of optimizers to be nondecreasing in a strong sense which is strong enough to rule out the possibility of a decreasing selection. These necessary and sufficient conditions are variations of quasisupermodularity and the single crossing property introduced in Milgrom-Shannon [13]. Moreover, to determine when an objective function satisfies these conditions, this paper develops several characterizations of quasisupermodularity and the single crossing property and their variants, both in terms of differential conditions and in terms of restrictions on the structure of the level sets of these functions. Several examples are given to choice theory under loss aversion and to an auction problem.
91 citations
TL;DR: In this paper, a real business cycle economy is studied in which some capital is idle each period and the fraction of capital left idle varies in response to technology shocks, and it is shown that incorporating idle resources, something regularly observed in actual economies, significantly affects the cyclical properties of the model and hence changes our views about the importance of technology shocks for aggregate fluctuations.
Abstract: A real business cycle economy is studied in which some capital is idle each period and the fraction of capital left idle varies in response to technology shocks. Previous equilibrium business cycle models have the characteristic that the entire stock of capital is used for production in each period. Our objective is to determine whether incorporating idle resources, something regularly observed in actual economies, significantly affects the cyclical properties of the model and hence changes our views about the importance of technology shocks for aggregate fluctuations. In our analysis we do not assume an aggregate production function, but instead model production as taking place at individual plants that are subject to idiosyncratic technology shocks. Each period the plant manager must choose whether to operate the plant or to let the plant remain idle. We find that the cyclical properties of this model are surprisingly similar to those of a standard real business cycle economy. One difference is that the model displays variation in factor shares while the standard models does not.
TL;DR: In this paper, the authors consider anonymous sequential games with aggregate uncertainty and prove existence of equilibrium when there is a general state space representing aggregate uncertainty, and provide Markov representations of the equilibria.
Abstract: In this paper we consider Anonymous Sequential Games with Aggregate Uncertainty. We prove existence of equilibrium when there is a general state space representing aggregate uncertainty. When the economy is stationary and the underlying process governing aggregate uncertainty Markov, we provide Markov representations of the equilibria.
TL;DR: In this article, a condition of limited arbitrage is defined on the endowments and preferences of the traders in an Arrow-Debreu economy, which is related to but nonetheless different from the no-arbitrage condition used in finance.
Abstract: A condition oflimited arbitrage is defined on the endowments and the preferences of the traders in an Arrow-Debreu economy. Theorem 1 establishes thatlimited arbitrage is necessary and sufficient for the existence of a competitive equilibrium in markets with or without short sales. Limited arbitrage bounds utility arbitrages, the diversity of the traders in the economy, and the gains from trade which they can afford from initial endowments (Proposition 2); it is related to but nonetheless different from the no-arbitrage condition used in finance. Theorem 2 establishes that an Arrow — Debreu economy has a competitive equilibrium if and only if every one of its subeconomies withN + 1 traders does, whereN is the number of commodities. Limited arbitrage has been shown elsewhere to be equivalent to the existence of the core [16], to the contractibility of spaces of preferences and to the existence of continuous anonymous social choice rules which respect unanimity [10], [14], [15], [16].
TL;DR: In this article, the authors introduce a notion that reflects the depth of knowledge in an information system and use it to bound the effect of higher order uncertainty in certain problems, such as finite horizon rational expectations.
Abstract: A number of recent papers have highlighted the importance of uncertainty about others' information in models of asymmetric information. We introduce a notion that reflects the depth of knowledge in an information system. We show how the depth of knowledge can be used to bound the effect of higher order uncertainty in certain problems. We further provide bounds on the size of bubbles in finite horizon rational expectations models where the bounds depend on the depth of knowledge.
TL;DR: In this paper, the authors studied equilibrium unemployment in a search model where the government both provided liberal unemployment insurance and taxes labor at high progressive tax rates and showed how progressive income taxation can counteract a high unemployment rate under generous unemployment insurance.
Abstract: This paper studies equilibrium unemployment in a search model where the government both provides liberal unemployment insurance and taxes labor at high progressive tax rates. It is shown how progressive income taxation can counteract a high unemployment rate under generous unemployment insurance. In particular, high marginal taxes reduce workers' incentives to switch jobs in response to changing economic opportunities. This lower labor mobility reduces unemployment but at the cost of a less efficient labor allocation.
TL;DR: In this article, the authors warn model builders and users that considerable caution is needed in interpreting the results and in deriving strong policy conclusion from these models: it is shown that in this generation of applied general equilibrium models, nonuniqueness of equilibria is not a theoretical curiosum, but a potentially serious problem.
Abstract: Since the publication of Harris (1984), applied general equilibrium models with imperfect competition and economies of scale have been extensively used for analyzing international trade and development policy issues. Their attractiveness comes from their offering a natural framework for testing the empirical relevance of numerous propositions from the industrial organization and new trade theoretical literature. Their role in the recent debates on the North American Free Trade Agreement demonstrates their potential importance in policy analysis. This paper warns model builders and users that considerable caution is however needed in interpreting the results and in deriving strong policy conclusion from these models: it is shown that in this generation of applied general equilibrium models, nonuniqueness of equilibria is not a theoretical curiosum, but a potentially serious problem. Disregarding this may lead to dramatically wrong policy appraisals.
TL;DR: A brief critical history of applied general equilibrium analysis is presented and the contributions of eight other papers in this issue are summarized.
Abstract: The use of general equilibrium models in applied research imposes a discipline in which model structures can easily be compared and contrasted and model results can be interpreted using a well understood and rigorously developed theoretical framework. These features allow researchers to compare results across modeling efforts and to build on the experience of others in deriving results and formulating questions. This paper first presents a brief critical history of applied general equilibrium analysis. It then summarizes the contributions of eight other papers in this issue.
TL;DR: In this paper, the authors show that the sunspot equilibria of a competitive economy are not equivalent to the correlated equilibrium if sunspots generate transfers between (extrinsic) states of nature (through a contingent commodities market).
Abstract: We show by an example that the sunspot equilibria of a competitive economy are not equivalent to the correlated equilibria if sunspots generate transfers between (extrinsic) states of nature (through a contingent commodities market). Nevertheless, we prove that the sunspot equilibrium allocations of a standard overlapping generations economy coincide with the (strategic form) correlated equilibrium allocations of a natural market game mimicking the economy.
TL;DR: In this paper, a general result on continuous linear representability of binary relations on topological vector spaces is presented, and applications of this result include individual decision making under uncertainty, i.e. expected utility theory and collective decision making, in particular, utilitaristic social welfare functions.
Abstract: A very general result on continuous linear representability of binary relations on topological vector spaces is presented. Applications of this result include individual decision making under uncertainty, i.e. expected utility theory and collective decision making, in particular, utilitaristic social welfare functions.
TL;DR: In this paper, the problem of reallocating the total initial endowments of an infinitely divisible commodity among agents with single-peaked preferences is considered, and a uniform reallocation rule is proposed which satisfies many appealing properties, describing the effect of population and endowment variations on the outcome.
Abstract: Summary. We consider the problem of reallocating the total initial endowments of an infinitely divisible commodity among agents with single-peaked preferences. With the uniform reallocation rule we propose a solution which satisfies many appealing properties, describing the eect of population and endowment variations on the outcome. The central properties which are studied in this context are population monotonicity, bilateral consistency, (endowment) monotonicity and (endowment) strategy-proofness. Furthermore, the uniform reallocation rule is Pareto optimal and satisfies several equity conditions, e.g., equal-treatment and envy-freeness. We study the trade-o between properties concerning variation and properties concerning equity. Furthermore, we provide several characterizations of the uniform reallocation rule based on these properties.
TL;DR: In this paper, a general way to incorporate private ownership production economies into the implementation of the Walrasian correspondence is presented. But the authors focus on the case of endowments, preferences, and production possibility sets.
Abstract: This paper provides a general way to incorporate private ownership production economies into the implementation of the Walrasian correspondence. We present two mechanisms, both of which permit agents to behave strategically with respect to their initial endowments, preferences, and production possibility sets. The first mechanism deals with the case of endowment destruction, the second deals with the case of endowment withholding. We show that each mechanism Nash implements the Walrasian correspondence. In addition, both mechanisms are individually feasible, balanced, continuous and only require the transmission of prices and quantities of goods as messages.
TL;DR: This paper showed that lottery equilibria do not always exist for economies with finitely many consumers, unless consumptions are bounded or if lotteries are based upon a common "sunspot device" as defined by Shell [mimeo, 1977] and Cass and Shell [J. Econ. Rev.
Abstract: In economies with indivisible commodities, consumers tend to prefer lotteries in commodities. A potential mechanism for satisying these preferences is unrestricted purchasing and selling of lotteries in decentralized markets, as suggested in Prescott and Townsend [Int. Econ. Rev.25, 1–20]. However, this paper shows in several examples that such lottery equilibria do not always exist for economies with finitely many consumers. Other conditions are needed. In the examples, equilibrium and the associated welfare gains are realized if consumptions are bounded or if lotteries are based upon a common “sunspot device” as defined by Shell [mimeo, 1977] and Cass and Shell [J. Pol. Econ.91, 193–227]. The paper shows that any lottery equilibrium is either a Walrasian equilibrium or a sunspot equilibrium, but there are Walrasian and sunspot equilibria that are not lottery equilibria.
TL;DR: In this article, the authors develop a framework for designing and evaluating the complexity of mechanisms that allocate resources in a distributed setting to agents or processors with bounded computational ability, and describe several mechanisms and describe the construction of efficient price based mechanisms, which exploit the decentralized aspects of the problem.
Abstract: We develop a framework for designing and evaluating the complexity of mechanisms that allocate resources in a distributed setting to agents or processors with bounded computational ability We discuss several mechanisms and describe the construction of efficient price based mechanisms, which exploit the decentralized aspects of the problem These price mechanisms are polynomial in the number of resources, precision of the solution, and the logarithm of the number of agents
TL;DR: In this paper, it was shown that any complete, lower-semicontinuous, and translation-invariant preorder defined on a topological vector space admits a linear and continuous utility representation.
Abstract: We show that any complete, lower-semicontinuous, and translation-invariant preorder defined on a topological vector space admits a linear and continuous utility representation.
TL;DR: This paper examined the welfare effects of international trade in a context of overlapping generations and showed that uncompensated free trade may be Pareto inferior to autarky for a single trading country, but for a small open economy the terms of trade improve or the number of tradable goods increases, or when a customs union is formed.
Abstract: This paper examines the welfare effects of international trade in a context of overlapping generations. It shows that, for a single trading country, uncompensated free trade may be Pareto inferior to autarky. However, for each government there are compensation schemes which guarantee welfare improvements for all local individuals when free trade is allowed, or when for a small open economy the terms of trade improve or the number of tradable goods increases, or when a customs union is formed.
TL;DR: In this article, it was shown that in markets with a continuum of traders and atoms, the set of Cournot-Walras equilibria and the set in general may be disjoint, and that the preferences of the traders are represented by Cobb-Douglas utility functions.
Abstract: In this paper, we show that, in markets with a continuum of traders and atoms, the set of Cournot-Walras equilibria and the set of Cournot equilibria may be disjoint. We show also that, when the preferences of the traders are represented by Cobb-Douglas utility functions, the set of Cournot-Walras equilibria and the set of Cournot equilibria have a nonempty intersection.
TL;DR: In this paper, the authors construct a model of economic growth in which firms adopt more advanced technologies, in order to advance its technology, a firm must make an investment. The size of this investment depends on the size of the technology adoption barriers in the firm's country Assuming a Markov chain for these barriers, they examine the amount of variation and persistence in the chain for which the model matches the observed output disparity across countries and the mobility of nations.
Abstract: We construct a model of economic growth in which firms adopt more advanced technologies. In order to advance its technology, a firm must make an investment. The size of this investment depends on the size of the technology adoption barriers in the firm's country Assuming a Markov chain for these barriers, we examine the amount of variation and persistence in the chain for which the model matches the observed output disparity across countries and the mobility of nations. Our calibration suggests a range for the size of these barriers of a factor five, and the presence of a barrier trap.
TL;DR: In this article, it was shown that for any economy with an arbitrary number of agents, any efficient and individually rational mechanism is not strategy-proof for any economic system satisfying a mild regularity requirement.
Abstract: We provide an elementary proof showing how in economies with an arbitrary number of agents an arbitrary number of public goods and utility functions quasi-linear in money, any efficient and individually rational mechanism is not strategy-proof for any economy satisfying a mild regularity requirement.
TL;DR: In this paper, a necessary condition called condition β was proposed for subgame perfect implementation of Social Choice Sets (SCS) in games of complete information, which is weaker than the Bayesian Monotonicity condition stated in Jackson [1991].
Abstract: We study Social Choice Sets (SCS) implementable as perfect Bayesian equilibria of some incomplete information extensive form game. We provide a necessary condition which we callcondition β. The condition is analogous tocondition C that Moore and Repullo [1988] show to be necessary for subgame perfect implementation in games of complete information, and it is weaker than the Bayesian Monotonicity condition stated in Jackson [1991]. Our first theorem establishes that Incentive Compatibility, Closure and Conditionβ are necessary for implementation.
TL;DR: In this paper, the authors present new results on the local and global convergence property of solutions to an optimization model where the objective function is a discounted sum of stationary one-period utilities.
Abstract: In this paper we present new results on the local and global convergence property of solutions to an optimization model where the objective function is a discounted sum of stationary one-period utilities. The asymptotic local turnpike is given without differentiability assumptions but imposing some mild curvature restrictions on the utility function. This approach allows us to get easy estimates on the range of discount factors and the size of the neighborhood for which the asymptotic property occurs. The paper concludes by providing two global turnpike theorems. The first one is an asymptotic theorem derived from a result similar to Scheinkman's visit lemma. The second one turns out to be a restatement of McKenzie's neighborhood turnpike theorem.