Showing papers in "Quarterly Journal of Economics in 1985"
TL;DR: In this article, it is shown that the ideal central bank should place a large, but finite, weight on inflation, and a new framework for choosing among alternative intermediate monetary targets is proposed.
Abstract: Society can sometimes make itself better off by appointing a central banker who does not share the social objective function, but instead places "too large" a weight on inflation-rate stabilization relative to employment stabilization. Although having such an agent head the central bank reduces the time-consistent rate of inflation, it suboptimally raises the variance of employment when supply shocks are large. Using an envelope theorem, we show that the ideal agent places a large, but finite, weight on inflation. The analysis also provides a new framework for choosing among alternative intermediate monetary targets. I. INTRODUCTION It is now widely recognized that even if a country has a perfectly benevolent central bank (one that attempts to maximize the social welfare function), it may suffer from having an inflation rate which is systematically too high.' Suppose, for example, that a distortion (such as income taxation) causes the market rate of employment to be suboptimal. Then inflation can arise because wage setters rationally fear that the central bank will try to take advantage of short-term nominal rigidities to raise employment systematically. Only by setting high rates of wage inflation can wage setters discourage the central bank from trying to reduce the real wage below their target level. This paper considers some institutional responses to the timeconsistency problem described above. In particular, we examine the practice of appointing "conservatives" to head the central bank, or of giving the central bank concrete incentives to achieve an intermediate monetary target. Our analysis of intermediate monetary targeting is quite different from conventional analyses in which the central bank is rigidly constrained to follow a particular feedback rule. Indeed, an important conclusion is that it is not generally optimal to legally constrain the central bank to hit its intermediate target (or follow its rule) exactly, or to choose
3,437 citations
TL;DR: In this article, the authors show that sticky prices can be both privately efficient and socially inefficient, and that these "menu" costs are small and therefore, generally perceived as providing only a weak foundation for these fixed-price models.
Abstract: I. INTRODUCTION The conflict between modern neoclassical and traditional Keynesian theories of the business cycle centers upon the pricing mechanism.' In neoclassical models, prices are fully flexible. They represent the continuous optimization of economic agents and the continuous intersection of supply and demand. In Keynesian models, prices are often assumed to be sticky. They do not necessarily equilibrate all markets at all times. One of the reasons for the resurgence of the equilibrium approach to macroeconomics has been the absence of a theoretical underpinning for this Keynesian price stickiness. This note shows that sticky prices can be both privately efficient and socially inefficient. The business cycle results from the suboptimal adjustment of prices in response to a demand shock. To the extent that policy can stabilize aggregate demand, it can mitigate the social loss due to this suboptimal adjustment. In some Keynesian models, prices are simply exogenously fixed.2 In others, agents must set their prices in advance of the transaction date.' The act of altering a posted price is certainly costly. These costs include such items as printing new catalogs and informing salesmen of the new price. Yet these "menu" costs are small and, therefore, generally perceived as providing only a weak foundation for these fixed-price models. However, this inference is flawed. Small menu costs can cause large welfare losses. The claim that price adjustment costs are small does not rebut the claim that they are central to understanding economic fluctuations.
982 citations
TL;DR: In this paper, the authors consider a market in which one firm is the current incumbent, while the remaining firms are challengers, and derive the equivalent of the Schumpeterian process of creative destruction.
Abstract: The theoretical literature on innovation has been concerned with a single innovation produced by a number of identical agents. By contrast, we consider a market in which one firm is the current incumbent, while the remaining firms are challengers. Moreover, we consider a sequence of innovations, so that success does not imply that the successful firm reaps monopoly profits forever after, but only until the next, better innovation is developed. We begin with a fully optimizing behavioral model and derive the equivalent of the Schumpeterian “process of creative destruction.” That is, a firm enjoys temporary monopoly power but is soon overthrown by a more inventive challenger.
The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process…The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates [Schumpeter, 1942, pp. 82–83].
787 citations
TL;DR: In this paper, the authors present a model in which insignificantly suboptimal behavior causes aggregate demand shocks to have significant real effects and show that significant changes in business activity can be generated by anticipated money supply changes provided that some agents are willing to engage in nonmaximizing behavior which results in small losses.
Abstract: This paper presents a model in which insignificantly suboptimal behavior causes aggregate demand shocks to have significant real effects. The individual loss to agents with inertial price-wage behavior is second-order in terms of the parameter describing the shock, while the effect on real economic variables is first-order. Thus, significant changes in business activity can be generated by anticipated money supply changes provided that some agents are willing to engage in nonmaximizing behavior which results in small losses.
702 citations
TL;DR: This article investigated the extent to which equilibrium and disequilibrium explanations can account for unemployment rate differentials between cities and showed that shocks that disturb the steady-state relationship among the unemployment rates of metropolitan areas tend to be eliminated by mobility within a single year.
Abstract: This paper investigates the extent to which equilibrium and disequilibrium explanations can account for unemployment rate differentials between cities. It shows that shocks that disturb the steady-state relationship among the unemployment rates of metropolitan areas tend to be eliminated by mobility within a single year. It also shows that high unemployment areas tend to be those with attractive climates and amenities, high wages, and high unemployment insurance. It argues that the main effect of government programs that create jobs in high unemployment areas will be to lure additional job seekers to those areas.
300 citations
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TL;DR: In this article, a model is developed to illustrate Hyman Minsky's financial crisis theories, where the level of wealth in the economy is determined mac-roeconomically, with the value of firms' assets responding to the state of confidence as reflected by discounted quasi rents on capital.
Abstract: A model is developed to illustrate Hyman Minsky's financial crisis theories. A key assumption is that the level of wealth in the economy is determined mac-roeconomically, with the value of firms' assets responding to the state of confidence as reflected by discounted quasi rents on capital. The second assumption is that there is high substitutability between liabilities of firms and money in the public's portfolio. A downward shift in anticipated profits leads wealth to contract and the public to shift portfolio preferences toward money. Interest rates rise, leading to further dampening of expected profits, and a debt-deflation crisis can occur.
265 citations
TL;DR: The authors analyzed responses to a questionnaire designed to elicit subjective expectations and probabilities of survival and found that people do extrapolate past improvements in longevity when they determine their subjective horizons and they are fully aware of levels of and movements within todays life tables.
Abstract: This study analyzes responses to a questionnaire designed to elicit subjective expectations and probabilities of survival. People do extrapolate past improvements in longevity when they determine their subjective horizons and they are fully aware of levels of and movements within todays life tables. The subjective distribution has greater variance than its actuarial counterpart; and the subjective variance decreases with age. The implications of these findings for optimal Social Security for the construction of annuities for the analysis of savings behavior and for evaluating lifetime earnings are discussed. The data were collected in the United States from a sample of 411 white male economists and a sample of 363 white males in a midwestern SMSA. (EXCERPT)
262 citations
TL;DR: This article examined the effect of liquidity constraints on consumption expenditures using a single-year cross-section data set and found that the gap between desired consumption and measured consumption is most evident for young households.
Abstract: This paper examines the effect of liquidity constraints on consumption expenditures using a single-year cross-section data set. A reduced-form equation for consumption is estimated on high-saving households by the Tobit procedure to account for the selectivity bias. Since high-saving households are not likely to be liquidity constrained, the estimated equation is an appropriate description of how desired consumption that would be forthcoming without liquidity constraints is related to the variables available in the cross-section data. When the reduced-form equation is used to predict desired consumption, the gap between desired consumption and measured consumption is most evident for young households.
257 citations
TL;DR: In this article, the authors used data from Indian rural household survey to test the hypothesis that the coexistence in traditional rural societies of extended intergenerational families infrequent land sales and high reliance on family members as farm laborers is the result of the economic advantages which accrue from the knowledge gained by farming a particular ploy of land over a long period of time.
Abstract: Data from Indian rural household survey was used to test th hypothesis that the coexistence in traditional rural societies of extended intergenerational families infrequent land sales and high reliance on family members as farm laborers is the result of the economic advantages which accrue from the knowledge gained by farming a particular ploy of land over a long period of time. The land specific experience of elderly members of a intergenerational household who farmed the land as a child and then as an adult are expecially critical in adverse weather years. Most previous investigators attributed the existence of multigenerational households the use of family members rather than hired laboreds and the infrequency of land sales to deficiencies in the market i.e. labor market imperfections and an absence of capital insurance and asset markets. In the present investigations these same characteristics are viewed as having an economic advantages. A model for estimating the contribution of the experience of the elderly household members to agricultural profits was developed and applied to data from a 3-year panel study of 2900 Indian rural farm households. The data was collected between 1968-71 by the National Council of Applied Economic Research. The survey collected information on farm profits farm inputs demographic characteristics and the effects of weather conditions on profits. A major limitation of the study was a lack of information on the duration of land ownership. Age of household members was substituted as a proxy for duration of ownership. Findings were consistent withe the hypothesis. In poor agricultural years gross returns for households which contained an elderly household member were greater than the gross returns for comparable households which did not contain an elderly member. The economic advantages of specific knowledge embodied in the experienced elderly farmer were comparable to the economic advantages which accrued to households whose members were more educated. The hypothesis cannot fully explain the existence of intergenerational families since there is a relatively large proportion of such families among nonfarm families in many countries including India. Findings suggest that intergenerational families may provide for more occupational diversity and thereby reduce income risks. The specific experience hypothesis has policy implications. If technological changes are introduced the value of specific experience may be lost and the frequency of intergenerational households may decline. The hypothesis may also explain why farmers are reluctant to agree to land redistribution and consolidation schemes. This reluctance may disappear after sufficient technological change has occurred.
251 citations
TL;DR: The free rider hypothesis has a long history in economic thought as discussed by the authors, and the free rider potential of any group of workers was perceived by J. S. Mill. But it was not until 1965 that an attempt was made to explain why large groups providing collective goods manage to exist despite the free-rider problem.
Abstract: The literature on public good provision by groups has traditionally emphasized the free rider problem. If it is assumed that a group forms to provide, or to lobby for the provision of, a good that is collective to potential members, then the major conceptual problem to the formation of such a group is that individuals can enjoy the benefits of group action without incurring the costs. By doing this, they free ride. In small groups the free rider problem is not generally considered insurmountable. However, the larger the number of potential beneficiaries, the more difficult it is to overcome the free rider problem, due to exclusion and surveillance difficulties, and the less likely is optimal collective good provision, or any collective good provision in the extreme. The free rider hypothesis has a long history in economic thought. As early as 1848, the free rider potential of any group of workers was perceived by J. S. Mill. However, it appears that it was not until 1965 that an attempt was made to explain why large groups providing collective goods manage to exist despite the free rider problem. Olson [1965] proposed the following explanation. If a large group exists, it must have formed either because membership is compulsory or because the group provides private goods and services accessible only to its members, with ancillary provision of the collective good as a "byproduct." The literature that developed from Olson's work has focused primarily on the suboptimal provision of the collective good, the difficulties of getting members to contribute in proportion to the benefits received, and preference revelation incentives. (See for example Groves and Ledyard [1977].) However, there are problems with both of the solutions proposed by Olson to overcome the free rider problem facing large groups. First, if coercion is looked at as a solution to the free rider problem, the question arises as to how the coercion itself is financed [Guttman, 1978]. This is unlikely to be costless. The second problem concerns the "byproduct" solution. Private good pro-
231 citations
TL;DR: The optimal level of social security benefits depends on balancing the protection that these benefits offer to those who lack the foresight to provide for their own old age against the welfare costs of distorting economic behavior as discussed by the authors.
Abstract: The optimal level of social security benefits depends on balancing the protection that these benefits offer to those who lack the foresight to provide for their own old age against the welfare costs of distorting economic behavior. The primary such cost is the distortion in private saving. The present paper derives the level of social security benefits that is optimal in three basic cases. In the first section the paper derives the optimal level of benefits for an economy in which all individuals do not anticipate retirement at all and therefore do no saving. The second and third sections then derive optimal benefits for two different definitions of incomplete myopia.
TL;DR: In this paper, the authors investigated the stability of solutions in the disequilibrium sense of whether, given a small deviation of expectations functions from some rational expectations equilibrium, the system returns to that solution under a natural revision rule.
Abstract: Linear models involving expectations of future endogenous variables generally have multiple rational expectations equilibria. This paper investigates the stability of solutions in the disequilibrium sense of whether, given a small deviation of expectations functions from some rational expectations equilibrium, the system returns to that solution under a natural revision rule. Weak and strong local stability are distinguished. Stability conditions are calculated for a simple general linear model and applied to two macroeconomic examples. In some cases there is a unique stable equilibrium. In other cases a continuum of equilibria forms a weakly but not strongly stable class.
TL;DR: In this article, the permanent income hypothesis with durability of commodities is tested on a panel of about 2,000 Japanese households for several commodity groups and the main empirical results are (i) the durability of commodity usually classified as services is substantial, (ii) the hypothesis applies to about 85 percent of the population consisting of wage earners, and (iii) income changes explain only a small fraction of the movements in expenditure.
Abstract: The permanent income hypothesis with durability of commodities is tested on a panel of about 2,000 Japanese households for several commodity groups. Under static expectations about real interest rates and for some class of utility functions, consumption, which is a distributed lag function of current and past expenditure, follows a martingale. Main empirical results are (i) the durability of commodities usually classified as services is substantial, (ii) the hypothesis applies to about 85 percent of the population consisting of wage earners, and (iii) income changes explain only a small fraction of the movements in expenditure.
TL;DR: In this article, the authors show that when uncertainty is taken into account explicitly, taxation of corporate income can leave corporate investment incentives, and individual savings incentives, basically unaffected, in spite of the sizable tax revenues collected.
Abstract: This paper shows that when uncertainty is taken into account explicitly, taxation of corporate income can leave corporate investment incentives, and individual savings incentives, basically unaffected, in spite of the sizable tax revenues collected. In some plausible situations, such taxes can increase efficiency. The explanation for these surprising results is that the government, by taxing capital income, absorbs a certain fraction of both the expected return and the uncertainty in the return. While investors as a result receive a lower expected return, they also bear less risk when they invest, and these two effects are largely offsetting.
TL;DR: In this paper, the authors examine the effect of learning curve spillovers on market structure and performance and derive a simple characterization of the "true" marginal cost for a broad class of learning curves, and use calculated examples to show that spillovers substantially undercut the barriers to entry erected by proprietary learning.
Abstract: This paper examines the effect of learning curve spillovers on market structure and performance. We derive a simple characterization of the "true" marginal cost for a broad class of learning curves, and use calculated examples to show that spillovers substantially undercut the barriers to entry erected by proprietary learning. Unlike the case of cost-reducing research and development, spillovers also tend to improve market performance; the increased efficiency of the industrywide reduction process typically outweighs the decrease in firms' incentives to reduce costs by expanding output.
TL;DR: In this paper, the authors show that there are cases where what appears to be a prisoners' dilemma in fact leads to cooperative behavior, and that the discipline of continuous dealings takes care of the matter.
Abstract: In ordinary life we engage in many transactions with other people in which there is potential profit for both parties from some kind of cheating. Normally, we do not see much of this cheating. I have no doubt that the merchant will put in the package the merchandise which I buy, or which I ordered, even though if he put in something else cheaper it is quite dubious that I would be able to win a lawsuit. On my part, if I decide I did not like the product and returned it with the remark that it was defective, having first damaged it so that it is indeed defective, I could get a gain. Neither I nor the merchant worries particularly about this kind of behavior, although the merchant worries more than I do for reasons that will become plain below. If we worried about it, we would both take precautions, with the result that socially we would be worse off by the cost of these precautions. We have here what appears to be a prisoners' dilemma matrix, but the two parties are behaving cooperatively. What Adam Smith called "the discipline of continuous dealings" takes care of the matter. The point of this article is to work out Adam Smith's insight in the terminology of a modern game theory. We shall see that Smith was right, and there are some cases, indeed practically very important cases, where what appears to be a prisoners' dilemma in fact leads to cooperative behavior. Consider the prisoners' dilemma game shown in Figure I. It is orthodox that if A and B are playing a single turn of this particular game, they will end up in the lower right-hand corner with a net loss of one dollar each. If we go from a single game to a long series of games played by the same players, however, there is no agreed-upon solution.' Experimental evidence seems to indicate that the players play a mixed strategy with some cooperative plays and some noncooperative plays, and the mixture can be modified by changing the payoffs.2 All of these situations are simplifications of the real world, and it is a point of this article to suggest that if we make the game more like many real world
TL;DR: This paper analyzed the impact of business cycle fluctuations on a labor market segmented into a unionized primary sector and a "competitive" secondary sector and found that either permanent or temporary changes in real aggregate demand are shown to widen the intersectoral wage differential in recession and, under reasonable specifications of key parameters, to cause greater fluctuations of primary-sector employment than secondary sector employment.
Abstract: This paper analyzes the impact of business cycle fluctuations on a labor market segmented into a unionized primary sector and a "competitive" secondary sector. Either permanent or temporary changes in real aggregate demand are shown to widen the intersectoral wage differential in recession and, under reasonable specifications of key parameters, to cause greater fluctuations of primary-sector employment than secondary-sector employment. This pattern agrees with the stylized facts of the U. S. economy.
TL;DR: In this article, the authors develop and estimate a rational expectations model in which agents look beyond expected starting salaries and take explicit account of future demand conditions, and they compare the dynamic properties of the model with a cobweb specification.
Abstract: Most previous work on occupational choice does not satisfactorily treat the potentially important effects of future demand conditions. In contrast, this paper develops and estimates a rational expectations model in which agents look beyond expected starting salaries and take explicit account of future demand conditions. The empirical results demonstrate that future demand conditions are important determinants of the decision to acquire secondary school certification but are not important for the decision to acquire elementary school certification. The paper concludes with a comparison of the dynamic properties of the rational expectations model and a cobweb specification.
TL;DR: In this article, the behavior of a small open economy facing perfectly elastic supply curves for some of its productive factors is examined, and it is shown that, as more and more factor-price rigidities are imposed on an economy, it comes closer to a state of factor price equalization.
Abstract: This paper examines the behavior of a small open economy facing perfectly elastic supply curves for some of its productive factors. In particular, the paper derives some comparative statics properties of such economies, compares them with the properties of otherwise identical economies in which all factor prices are determined endogenously, and investigates the relationship between factor-price rigidities, factor-price equalization, and the pattern of specialization. Among the new results which are proved, it is shown that, as more and more factor-price rigidities are imposed on an economy, it comes "closer" to a state of factor-price equalization.
TL;DR: In this paper, the uniqueness of equilibria in economies with production has been studied, and it is shown that the only interpretable conditions that imply uniqueness are either that the demand side of an economy behaves like a single consumer or that the supply side is an input-output system.
Abstract: Conditions that guarantee the uniqueness of equilibrium in models of economic competition are crucial to applications of these models in exercises of comparative statics. Until now, most of the attention given to the uniqueness question has been focused on pure exchange economies. In this paper we use a topological index theorem to derive necessary and sufficient conditions for the uniqueness of equilibrium in economies with production. Unfortunately, conditions that imply uniqueness appear to be too restrictive to have much applicability. We argue, for example, that the only economically interpretable restrictions that imply uniqueness are either that the demand side of an economy behaves like a single consumer or that the supply side is an input-output system. Our results suggest a need for reformulation of the comparative statics method.
TL;DR: This paper used data from the annual Work Experience Survey (WES) to construct a new unemployment series based on respondents' recollection of unemployment over the previous year and argued that the ratio of this new series to the official series computed from the monthly Current Population Survey provides an index of the "salience" or painfulness of unemployment.
Abstract: This paper uses data from the annual Work Experience Survey to construct a new unemployment series based on respondents' recollection of unemployment over the previous year. It is argued that the ratio of this new series to the official series computed from the monthly Current Population Survey provides an index of the "salience" or painfulness of unemployment. Over the past two decades this ratio has declined secularly. About 30 percent of this decrease is due to shifts in the composition of unemployment toward demographic groups with low ratios of remembered to currently reported unemployment. The remainder is due to a secular decline in salience for younger and older people.
TL;DR: The authors used a mean-variance optimization on the part of the investor to test the hypothesis that federal bonds are closer substitutes for equity than for money, and found that portfolio effects are close to zero.
Abstract: This paper tests hypotheses regarding the parameters in investors' asset-demand functions. The hypothesis that federal bonds are closer substitutes for equity than for money implies "portfolio crowding out" by federal borrowing. Regression studies of asset-demand functions have needed to impose prior beliefs to obtain precise and plausible estimates for the parameters. This paper uses a MLE technique that dominates regression in that it makes full use of the constraint that the parameters are not determined arbitrarily but rather are determined by mean-variance optimization on the part of the investor. The striking conclusion is that portfolio effects are close to zero.
TL;DR: The authors developed a method for inferring from observations on a group's collective expenditure whether a cooperative or competitive resource allocation process, or some mixture of the two, has occurred, which is applicable to a variety of situations from small collectives such as the family or groupings of nations collaborating in security or trade alliances, to collectives with large numbers.
Abstract: This paper develops a method for inferring from observations on a group's collective expenditure whether a cooperative or competitive resource allocation process, or some mixture of the two, has occurred. The method will be applicable to a variety of situations from small collectives such as the family or groupings of nations collaborating in security or trade alliances, to collectives with large numbers. This method will be useful for identifying (1) whether observed outcomes have been efficient, (2) whether costs have been shared equitably, (3) what is the form of collaboration or competition, and (4) what is the degree of "publicness" of the collective good.
TL;DR: In this article, the existence of wage premiums based on geographic and industry unemployment differences is examined. But the authors focus on short-run shocks to industries and positive shocks to short-term unemployment risks.
Abstract: This paper tests for the existence of wage premiums based on geographic and industry unemployment differences. These differences are broken down into permanent and transitory components in equations controlling for variation in state generosity of unemployment insurance benefits. Findings indicate that wage premiums arise for long-run unemployment differences, but that negative short-run shocks to industries generate wage cuts, while positive shocks generate wage hikes. Therefore, labor contracts accommodate long-term anticipated unemployment, and entail sharing of short-term unemployment risks.
TL;DR: In this article, the authors consider the welfare effects of a transfer payment in a two-commodity world with two agents (countries), by taking the presence of exogenous and endogenous distortions into account.
Abstract: This paper reconsiders the welfare effects of a transfer payment in a two-commodity world with two agents (countries), by taking the presence of exogenous and endogenous distortions into account. When there is an exogenous tax-cumsubsidy on production, consumption, or trade, the analysis demonstrates that a transfer may paradoxically enrich the donor and immiserize the recipient under certain specific conditions. These welfare paradoxes are also shown to be possible if the transfer endogenously induces "directly unproductive profit-seeking" activity of lobbyists. Concluding remarks emphasize the paper's relevance for policymakers.
TL;DR: In this paper, the authors adopt the CES model of product differentiation for the downstream stage of the industry and show that resale price maintenance is equivalent to forward integration and that both increase profits.
Abstract: In this paper we adopt the CES model of product differentiation for the downstream stage of the industry. With an upstream monopolist we first show that resale price maintenance is equivalent to forward integration and that both increase profits. Then we demonstrate that forward integration by an upstream monopolist will reduce welfare for the industry. Prices fall with forward integration, but the integrating firm contracts the number of downstream subsidiaries so drastically that the reduced diversity more than offsets the gains from lower prices.
TL;DR: This paper examined the response of the term structure of interest rates to weekly money announcements and compared the estimated responses with two competing hypotheses involving the policy anticipations and expected inflation effects and found that both hypotheses are consistent with the responses, but they have sharply different implications about the Federal Reserve's short run monetary policy.
Abstract: This paper examines the response of the term structure of interest rates to weekly money announcements. Estimated responses for both the pre- and post-October 1979 periods are first presented. Then, two competing hypotheses involving the policy anticipations and expected inflation effects are formally specified and compared with the estimated responses. Both hypotheses are found to be consistent with the responses, but they have sharply different implications about the Federal Reserve's short-run monetary policy. By exploiting these different implications, additional empirical results focusing directly on the money stock process support the policy anticipations hypothesis.
TL;DR: In this paper, the implications of the absence of complete annuity markets on the distribution of wealth and welfare of agents whose saving decisions are obtained under uncertainty regarding the length of their life are examined.
Abstract: This paper examines the implications of the absence of complete annuity markets on the distribution of wealth and welfare of agents whose saving decisions are obtained under uncertainty regarding the length of their life. The absence of annuities is shown to yield a unique nondegenerate intragenerational distribution of wealth, which is fully characterized. This characterization is then used to evaluate the Pareto desirability of an annuity system. Alternative welfare criteria that can be used when the proposed change has differential impacts on the initial state of subsequent generations are considered.
TL;DR: In this article, a rational expectations model of a securities market is developed in which one agent, the monopolist, behaves like a Stackelberg leader and other agents behave competitively.
Abstract: A rational expectations model of a securities market is developed in which one agent, the monopolist, behaves like a Stackelberg leader and other agents behave competitively. Two information structures, one in which each agent has identical information and the other in which each agent has independent information are examined. Equilibrium is shown to exist and is characterized in both cases, but monopoly has a significant effect on the equilibrium only in the latter. The optimal strategy of the Stackelberg leader is also studied, and it is shown that he will not randomize his strategy by adding white noise to his demand function, even though this obfuscates the information content of the market price.