Showing papers in "Economic Theory in 1999"
TL;DR: A mechanism that is both efficient and incentive compatible in the Bayesian-Nash sense is shown to be payoff-equivalent to a Groves mechanism at the point in time when each agent has just acquired his private information as mentioned in this paper.
Abstract: A mechanism that is both efficient and incentive compatible in the Bayesian-Nash sense is shown to be payoff-equivalent to a Groves mechanism at the point in time when each agent has just acquired his private information. This equivalence result simplifies the question of whether or not an efficient, Bayesian incentive compatible mechanism can satisfy other desired objectives, for the search for an appropriate mechanism can be restricted to the family of Groves mechanisms. The method is used to extend the result of Myerson and Satterthwaite on the inefficiency of bilateral bargaining to a multilateral setting.
192 citations
TL;DR: In this article, the effects of transaction costs on asset prices were studied in an overlapping generations economy with two riskless assets. And they showed that agents buy the liquid asset for short-term investment and the illiquid asset for longterm investment.
Abstract: In this article we study the effects of transaction costs on asset prices. We assume an overlapping generations economy with two riskless assets. The first asset is liquid while the second asset carries proportional transaction costs. We show that agents buy the liquid asset for short-term investment and the illiquid asset for long-term investment. When transaction costs increase, the price of the liquid asset increases. The price of the illiquid asset decreases if the asset is in small supply, but may increase if the supply is large. These results have implications for the effects of transaction taxes and commission deregulation.
176 citations
TL;DR: This article developed a formal model of scientific theory choice which incorporates social factors, and found that the influence of social factors on scientific progress is more complex than previously thought, and that the patterns of theory choice predicted by the model seem consistent with historical episodes of theory change.
Abstract: Since the work of Thomas Kuhn, the role of social factors in the scientific enterprise has been a major concern in the philosophy and history of science. In particular, conformity effects among scientists have been used to question whether science naturally progresses over time. Using neoclassical economic reasoning, this paper develops a formal model of scientific theory choice which incorporates social factors. Our results demonstrate that the influence of social factors on scientific progress is more complex than previously thought. The patterns of theory choice predicted by the model seem consistent with historical episodes of theory change.
99 citations
TL;DR: In this paper, the possibility of nonlinear dynamics in a simple overlapping generations model with the environment was studied and it was shown that cyclically or chaotically fluctuating equilibria are more likely to exist; moreover, under a specific condition, a complicated topological structure might emerge.
Abstract: This paper studies the possibility of nonlinear dynamics in a simple overlapping generations model with the environment – the John-Pecchenino (1994) model. We show that if people's concerns towards greener preferences and the maintenance efficiency relative to degradation are not sufficiently high, cyclically or chaotically fluctuating equilibria are more likely to exist; moreover, under a specific condition, a complicated topological structure might emerge. Our short-run analysis complements John and Pecchenino's long-run analysis and our findings suggest that the associated transition towards an environmentally sustainable state is not trivial.
79 citations
TL;DR: In this paper, a generalized form of additive decomposability is defined for within-group and between-group inequality terms using a generalized mean in place of the arithmetic mean, which is based on a minimal form of the transfer principle.
Abstract: This paper presents and characterizes a two-parameter class of inequality measures that contains the generalized entropy measures, the variance of logarithms, the path independent measures of Foster and Shneyerov (1999) and several new classes of measures. The key axiom is a generalized form of additive decomposability which defines the within-group and between-group inequality terms using a generalized mean in place of the arithmetic mean. Our characterization result is proved without invoking any regularity assumption (such as continuity) on the functional form of the inequality measure; instead, it relies on a minimal form of the transfer principle – or consistency with the Lorenz criterion – over two-person distributions.
74 citations
TL;DR: This paper has proved that under a Vickrey auction there is a unique critical number for each pair of objects such that when the number of bidders is fewer than that critical number the seller strictly prefers a bundled sale and when there are more bidder the seller prefers unbundled sales.
Abstract: Auctioneers often face the decision of whether to bundle two or more different objects before selling them. Under a Vickrey auction (or any other revenue equivalent auction form) there is a unique critical number for each pair of objects such that when the number of bidders is fewer than that critical number the seller strictly prefers a bundled sale and when there are more bidders the seller prefers unbundled sales. This property holds even when the valuations for the objects are correlated for a given bidder. The results have been proved using a mathematical technique of quantiles that can be extremely useful for similar analysis.
73 citations
TL;DR: In this article, the existence and implications of competitive equilibria when two firms offer the same electronic goods under different pricing policies are investigated and two models are examined when firms' marginal costs are negligible and they can revise prices periodically.
Abstract: We investigate the existence and implications of competitive equilibria when two firms offer the same electronic goods under different pricing policies. One charges a fixed subscription fee per period; the other charges on a per-use basis. Two models are examined when firms' marginal costs are negligible and they can revise prices periodically. Both show that competition often leads to ruinous price wars in the absence of collusion. However, stable pricing equilibria exist in special cases. The findings are robust even when customers are willing to pay a fixed-subscription premium.
64 citations
TL;DR: The Arrow-Debreu competitive equilibrium existence theorem has been shown to be incomparable in both computability-bounded rationality and computational economics as discussed by the authors, and a computable analogue of a characterization of excess demand functions has been proposed.
Abstract: We provide a “computable counterexample” to the Arrow-Debreu competitive equilibrium existence theorem [2]. In particular, we find an exchange economy in which all components are (Turing) computable, but in which no competitive equilibrium is computable. This result can be interpreted as an impossibility result in both computability-bounded rationality (cf. Binmore [5], Richter and Wong [35]) and computational economics (cf. Scarf [39]). To prove the theorem, we establish a “computable counterexample” to Brouwer's Fixed Point Theorem (similar to Orevkov [32]) and a computable analogue of a characterization of excess demand functions (cf. Mas-Colell [26], Geanakoplos [16], Wong [50]).
56 citations
TL;DR: In this article, the authors study a model where capacity installation by an incumbent firm serves to deter others from entering the industry and argue that uncertainty about demand or costs forces the incumbent to choose a higher capacity level than it would under certainty.
Abstract: We study a model where capacity installation by an incumbent firm serves to deter others from entering the industry. We argue that uncertainty about demand or costs forces the incumbent to choose a higher capacity level than it would under certainty. This higher level diminishes the attractiveness of deterrence (Proposition 1) and, therefore, the range of parameter values for which deterrence occurs (Proposition 2).
55 citations
TL;DR: In this article, the authors study a multiple unit auction where symmetric risk-neutral bidders choose prices and quantities endogenously, and characterize quantity-symmetric and strictly monotone-increasing price equilibria for discriminatory and competitive auctions.
Abstract: I study a multiple unit auction where symmetric risk-neutral bidders choose prices and quantities endogenously. In the model, bidders (a) may place non-linear valuations on the auctioned units, and (b) bid for several units at the same price (“lumpy” bids). I characterize quantity-symmetric and strictly monotone-increasing price equilibria for discriminatory and competitive auctions, and show that (i) if quantity strategy profiles are equal across auctions revenue- equivalence holds, (ii) expected revenue is higher if bidders bid for the entire supply rather than for shares of it, and (iii) equilibrium allocations may fail to be Pareto-optimal.
53 citations
TL;DR: In this article, the authors explore the use of a computation procuring clock auction to induce human agents to approximate the solutions to discrete constrained optimization problems, and show that the auction is effective and robust in eliciting and processing suggestions for improved schedules.
Abstract: Several `smart market' mechanisms have recently appeared in the literature. These mechanisms combine a computer network that collects bids from agents with a central computer that selects a schedule of bids to fill based upon maximization of revenue or trading surplus. Potential problems exist when this optimization involves combinatorial difficulty sufficient to overwhelm the central computer. This paper explores the use of a computation procuring clock auction to induce human agents to approximate the solutions to discrete constrained optimization problems. Economic and computational properties of the auction are studied through a series of laboratory experiments. The experiments are designed around a potential application of the auction as a secondary institution that approximates the solution to difficult computational problems that occur within the primary `smart market', and show that the auction is effective and robust in eliciting and processing suggestions for improved schedules.
TL;DR: In this article, the authors propose a definition of the objective of a firm, called maximization of shareholders' real wealth, which takes shareholders' demand explicitly into account, and prove the existence of a Nash equilibrium in which each firm maximizes the real wealth of its shareholders.
Abstract: General equilibrium models of oligopolistic competition give rise to relative prices only without determining the price level. It is well known that the choice of a numeraire or, more generally, of a normalization rule converting relative prices into absolute prices entails drastic consequences for the resulting set of Nash equilibria when firms are assumed to maximize profits. This is due to the fact that changing the price normalization amounts to altering the objective functions of the firms. Clearly, the objective of a firm must not be based on price normalization rules void of any economic content. In this paper we propose a definition of the objective of a firm, called maximization of shareholders' real wealth, which takes shareholders' demand explicitly into account. This objective depends on relative prices only. Real wealth maxima are shown to exist under certain conditions. Moreover, we consider an oligopolistic market and prove the existence of a Nash equilibrium in which each firm maximizes the real wealth of its shareholders.
TL;DR: In this article, the authors considered an oligopolistic industry composed of two groups (or populations) of firms, the low cost firms and the high cost firms, and studied the finite population evolutionarily stable strategy defined by Schaffer (1988), and the long run equilibrium in the stochastic evolutionary dynamics based on imitation and experimentation of strategies by firms in each group.
Abstract: Consider an oligopolistic industry composed of two groups (or populations) of firms, the low cost firms and the high cost firms. The firms produce a homogeneous good. I study the finite population evolutionarily stable strategy defined by Schaffer (1988), and the long run equilibrium in the stochastic evolutionary dynamics based on imitation and experimentation of strategies by firms in each group. I will show the following results. 1) The finite population evolutionarily stable strategy (ESS) output is equal to the competitive (or Walrasian) output in each group of the firms. 2) Under the assumption that the marginal cost is increasing, the ESS state is the long run equilibrium in the stochastic evolutionary dynamics in the limit as the output grid step, which will be defined in the paper, approaches to zero.
TL;DR: In this article, the authors combine properties of the geometry of voting developed by Saari with a analytic-geometric technique created by Schlafli to determine the likelihood that a three candidate election can cause these potentially dubious outcomes.
Abstract: A disturbing phenomenon in voting, which causes most of the problems as well as the interest in the field, is that election outcomes (for fixed preferences) can change with the way the ballots are tallied. This causes difficulties because with each possible choice, some set of voters can be dubious about whether it is the “correct” one. But, how likely are these settings allowing multiple election outcomes? By combining properties of the geometry of voting developed by Saari with a analytic-geometric technique created by Schlafli, we determine the likelihood that a three candidate election can cause these potentially dubious outcomes.
TL;DR: In this paper, the authors considered optimal insurance schemes in a principal-agent multi-dimensional environment in which two types of risk averse agents differ in both risk and attitude to risk.
Abstract: This paper considers optimal insurance schemes in a principal-agent multi-dimensional environment in which two types of risk averse agents differ in both risk and attitude to risk. Risk corresponds to any pair of distribution functions (not necessarily ordered by any of the usual dominance relations) and attitudes to risk are represented by any pair of non-decreasing and concave utility functions (not necessarily ordered by risk aversion). Results obtained in one-dimensional models that considered these effects separately and under more restricted conditions, are preserved in the more general set-up, but some of the questions we study can only be posed in the more general framework. The main results obtained for optimal insurance schemes are:
TL;DR: Cai et al. as mentioned in this paper proposed a new equilibrium concept, cautious equilibrium, that generalizes Nash equilibrium in terms of preferences in two-player strategic games, where players do not necessarily know the rationality of opponents, but they view rationality as infinitely more likely than irrationality.
Abstract: In a Nash equilibrium, players' rationality is mutual knowledge. However, both intuition and experimental evidence suggest that players do not know for sure the rationality of opponents. This paper proposes a new equilibrium concept, cautious equilibrium, that generalizes Nash equilibrium in terms of preferences in two person strategic games. In a cautious equilibrium, players do not necessarily know the rationality of opponents, but they view rationality as infinitely more likely than irrationality. For suitable models of preference, cautious equilibrium predicts that a player might take a “cautious” strategy that is not a best response in any Nash equilibrium.
TL;DR: In this paper, the authors studied the effects of uncertain lifetime on capital accumulation and growth and also the sensitivity of those effects to the existence of a perfect annuities market, and showed that if individuals face a positive probability of surviving in every period, they may be willing to save at any age.
Abstract: This paper studies the effects of uncertain lifetime on capital accumulation and growth and also the sensitivity of those effects to the existence of a perfect annuities market. The model is an overlapping generations model with uncertain lifetimes. The technology is convex and such that the marginal product of capital is bounded away from zero. A contribution of this paper is to show that the existence of accidental bequests may lead the economy to an equilibrium that exhibits asymptotic growth, which is impossible in an economy with a perfect annuities market or with certain lifetimes. This paper also shows that if individuals face a positive probability of surviving in every period, they may be willing to save at any age. This effect of uncertain lifetime on savings may also lead the economy to an equilibrium exhibiting asymptotic growth even if there exists a perfect annuities market.
TL;DR: In this article, it was shown that at any single-good incomplete markets economy, it is possible to find an asset which when introduced makes every agent better-off than the existing equilibrium.
Abstract: We show that at any equilibrium of almost every single-good incomplete markets economy, it is possible to find an asset which when introduced makes every agent better-off. Diamond (1967) has shown, however, that such economies are constrained suboptimal, so it is of course impossible to find a new asset which makes all agents worse-off. This contrasts with the case of multiple consumption goods, for which Cass and Citanna (1995) and Elul (1995) demonstrate that equilibrium utilities may be arbitrarily perturbed via financial innovation. Proving our result requires us to exploit not changes in equilibrium prices, but rather the gains to trading the new asset. In particular, we find an asset which when introduced does not change the existing asset prices even though it is traded by every agent – by a revealed preference argument it must therefore make everyone better-off.
TL;DR: In this paper, the authors characterize an individual's choice behavior according to three external references: standard utility maximization, preference optimization, and medium element selection, and establish a common axiomatic structure which allows them to point out congruences and divergences among the different systems considered.
Abstract: In this paper we fully characterize an individual's choice behaviour according to three different so–called external references. The first system which we describe axiomatically is standard utility maximization or preference optimization. The second approach characterizes the choice of the second largest element as an optimal choice, the third system is the choice of a medium element, also as a first best choice. For all three approaches, we have established a common axiomatic structure which allows us to point out rather precisely congruences and divergences among the different systems considered.
TL;DR: In this paper, the authors examine price formation in a simple static model with asymmetric information, an infinite number of risk neutral traders and no noise traders, and re-examine four results associated with rational expectations models relating to the existence of fully revealing equilibrium prices.
Abstract: We examine price formation in a simple static model with asymmetric information, an infinite number of risk neutral traders and no noise traders. Here we re-examine four results associated with rational expectations models relating to the existence of fully revealing equilibrium prices, the advantage of becoming informed, the costly acquisition of information, and the impossibility of having equilibrium prices with higher volatility than the underlying fundamentals.
TL;DR: In this paper, it was shown that when agents have von Neumann-Morgenstern preferences over lotteries, there is an incompatibility between strategy-proofness and efficiency.
Abstract: It has long been known that when agents have von Neumann-Morgenstern preferences over lotteries, there is an incompatibility between strategy-proofness and efficiency (Gibbard, [9]; Hylland, [12]) – a solution satisfying those properties must be dictatorial. We strengthen this result by showing that it follows from the same incompatibility on a series of much smaller domains of preferences. Specifically, we first show the incompatibility to hold on our smallest domain, in which two agents are restricted to have linear preferences over one private good and one public good produced from the private good (Kolm triangle economies). This result then implies the same incompatibility on increasingly larger domains of preferences, ending finally with the class of von Neumann-Morgenstern preferences over lotteries.
TL;DR: In this paper, the authors examined the interrelationship between capital accumulation, fertility, and growth by introducing an endogenous fertility decision into Diamond's (1965) neoclassical growth model, and investigated the potential for cyclical fluctuations in the capital-labor ratio and fertility, as well as for development trap phenomena.
Abstract: This paper examines the interrelationship between capital accumulation, fertility, and growth by introducing an endogenous fertility decision into Diamond's (1965) neoclassical growth model. Under the assumptions that children provide old age support and that individuals incur a variable time cost of raising children, it investigates the potential for cyclical fluctuations in the capital-labor ratio and fertility, as well as for development trap phenomena to be observed. It is shown that when capital and labor are highly substitutable in production, there is a unique steady state equilibrium, and either damped or undamped oscillations in fertility and the capital-labor ratio may occur. However, when the elasticity of substitution between capital and labor is less than one, two steady state equilibria may exist; one with a high capital-labor ratio and a high rate of population growth, and the other with a lower capital-labor ratio as well as a lower population growth rate. The former is a saddle, while the latter may be either a source or a sink. In the latter case development traps are possible.
TL;DR: The authors proved core-equivalence theorems for exchange economies without ordered preferences, defined on locally convex Riesz commodity spaces such that the price space is a lattice.
Abstract: This paper proves core-equivalence theorems for exchange economies without ordered preferences, defined on locally convex Riesz commodity spaces such that the price space is a lattice. Properness assumptions are borrowed from some recent equilibrium existence results.
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TL;DR: In this article, the authors examine a Knightian model of risk using a general equilibrium model of investment and trade, where a population of agents with various preference types can choose between a safe production technology and a risky production technology.
Abstract: I examine a Knightian (1921) model of risk using a general equilibrium model of investment and trade. A population of agents with various preference types can choose between a safe production technology and a risky production technology. In addition, the distribution of types of agents changes through a standard evolutionary dynamic. For a given population distribution, the equilibrium is in general inefficient, however, by allowing the population distribution to change in response to market generated rewards, the population will converge to one where the equilibrium is efficient and where the population as a whole behaves as if all agents were risk neutral.
TL;DR: In this paper, the authors show that when there is incomplete information, such an approach removes an important avenue for information transmission: the bargaining agenda itself, which can be replaced by an issue-by-issue bargaining agenda.
Abstract: While actual bargaining features many issues and decision making on the order in which issues are negotiated and resolved, the typical models of bargaining do not. Instead, they have either a single issue or many issues resolved in some fixed order, typically simultaneously. This paper shows that, when there is incomplete information, such an approach removes an important avenue for information transmission: the bargaining agenda itself. Compared to the standard model, pooling on offers by the informed is reduced and a signaling equilibrium arises when the agenda is determined endogenously. Signaling is carried out by use of an issue-by-issue bargaining agenda.
TL;DR: In this article, the authors provide a framework for establishing the determinacy of equilibria in general equilibrium models with infinitely many commodities and a finite number of consumers and producers, and give sufficient conditions on the excess savings equations characterizing equilibrices under which regular economies are generic.
Abstract: This paper provides a framework for establishing the determinacy of equilibria in general equilibrium models with infinitely many commodities and a finite number of consumers and producers. This paper defines a notion of regular economy for such models and gives sufficient conditions on the excess savings equations characterizing equilibria under which regular economies have a finite number of equilibria, each of which is locally stable with respect to perturbations in exogenous parameters, and under which regular economies are generic. This paper also defines two notions of concavity, called uniform concavity and weighted uniform concavity, which generalize standard finite-dimensional notions of differential concavity to an infinite-dimensional setting by prohibiting goods from becoming perfect substitutes asymptotically. For the case of economies in which there are countably many commodities, such as discrete time models or markets with countably many assets, results in this paper show that equilibria are generically determinate as long as utility functions and production sets are uniformly concave or weighted uniformly concave.
TL;DR: In this article, the authors characterize the class of efficient and coalition strategy-proof allocation functions in a linear production model and identify a unique allocation function which satisfies uniform treatment of uniforms.
Abstract: In a linear production model, we characterize the class of efficient and strategy-proof allocation functions, and the class of efficient and coalition strategy-proof allocation functions In the former class, requiring equal treatment of equals allows us to identify a unique allocation function This function is also the unique member of the latter class which satisfies uniform treatment of uniforms
TL;DR: In this article, the equivalence of Edgeworth production equilibria and pseudo-equilibria in a more general setting was proved by applying a separating hyperplane argument in the space of all allocations.
Abstract: We prove Aliprantis, Brown, and Burkinshaw's (1987) theorem on the equivalence of Edgeworth production equilibria and pseudo-equilibria in a more general setting. We consider production economies with unordered preferences and general consumption sets in a vector lattice commodity space. We adapt the approach of Mas-Colell and Richard (1991) and prove our theorem by applying a separating hyperplane argument in the space of all allocations. We also generalize Podczeck's (1996) important result on the relationship between continuous and discontinuous equilibrium prices to the case of production.
TL;DR: In this paper, the authors study the evolution of cooperation when satisficing players repeatedly play a symmetric two-by-two game of common interest and show that if initial aspiration levels are sufficiently close to the efficient payoff and aspiration adjusts at a sufficiently slow speed then the unique long run state will be the efficient outcome.
Abstract: The paper studies the evolution of cooperation when satisficing players repeatedly play a symmetric two-by-two game of common interest. We show that if initial aspiration levels are sufficiently close to the efficient payoff and aspiration adjusts at a sufficiently slow speed then the unique long run state will be the efficient outcome. In the special case of coordination games, the more tension there is between payoff dominance and risk dominance, the longer it takes for the system to lock into the payoff dominant outcome.
TL;DR: In this article, the determination of ownership of capacity when there are two ex-ante symmetric agents bidding for many units of capacity which are sold sequentially is studied. And it is shown that convexity of payoffs in the final stage of the game is sufficient to ensure monopolization of capacity, but that increasing returns to scale are not sufficient to guarantee monopolization.
Abstract: This paper looks at the determination of ownership of capacity when there are two ex-ante symmetric agents bidding for many units of capacity which are sold sequentially. It is shown that convexity of payoffs in the final stage of the game is sufficient to ensure monopolization of capacity, but that increasing returns to scale are not sufficient to ensure monopolization.