Welfare Properties Research Articles

Exchange Rate Volatility in an Equilibrium Asset Pricing Model

This paper analyzes a stochastic model of exchange rate determination with unrestricted access to capital and currency markets. It is shown that the only restriction imposed by the model on the equilibrium exchange rate is that it satisfy a martingale property. This implies that, for a given real equilibrium allocation (which is optimal), the model can display varying amounts of exchange rate volatility, and that volatility is unrelated to the welfare properties of the equilibrium allocation. Whether or not volatility is excessive therefore depends on which equilibrium is chosen as the basis for comparison. Copyright 1990 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

DYNAMIC MONOPOLIST'S BEHAVIOUR AND CONSUMER LEARNING*

ABSTRACTThis paper studies the features and the welfare properties of the equilibrium in a monopoly model with asymmetric information: consumers can only learn the quality of the good through experience. Because of word‐of‐mouth communication, cumulated sales help the process of product diffusion. It is proved that usually the profit‐maximizing price policy entails a low introductory price, that is gradually increased over time. Output decreases over time, so that, in order to accelerate the process of information diffusion, the monopolist is induced to produce more than he would with perfect information. For the same reason, the quality level could also be above its full information level. Thus, consumers might even benefit from their own lack of information, becauses this induces the monopolist to offer a larger output, possibly of a better quality.

Quality Ladders in the Theory of Growth

We develop a model of repeated product improvements in a continuum of sectors. Each product follows a stochastic progression up a quality ladder. Progress is not uniform across sectors, so an equilibrium distribution of qualities evolves over time. But the rate of aggregate growth is constant. The growth rate responds to profit incentives in the R&D sector. We explore the welfare properties of our model. Then we relate our approach to an alternative one that views product innovation as a process of generating an ever-expanding range of horizontally differentiated products. Finally, we apply the model to issues of resource accumulation and international trade.

A THEORY OF OLIGOPOLISTIC COMPETITION *

Contestability has shown how free entry can extend the efficient pricing result of perfect competition to oligopoly (and monopoly) markets. This paper adds another welfare result: production in competitive oligopoly markets will occur at minimum average cost. This comes from a model that is competitive because of free entry and oligopolistic because the decisionmakers take explicit account not only of the possible responses of rivals, but also of the uncertainty created by not being able to predict what those responses might be. This leads to a long-run oligopolisticly competitive equilibrium with the welfare properties of perfect competition. Copyright 1989 by Blackwell Publishers Ltd and The Victoria University of Manchester

Intergenerational Altruism, Dynastic Equilibria and Social Welfare

The purpose of this paper is to explore the welfare properties of dynastic equilibria. There are three central findings. First, under relatively weak conditions, welfare optima cannot be implemented as dynastic equilibria with positive levels of transfers. Second, intergenerational altruism ordinarily renders the objectives of social planners dynamically inconsistent, thereby making implementation of welfare optima problematic. Third, if a planner successfully resolves dynamic inconsistency by committing himself to respect the preferences of deceased generations, and if there are a sufficient number of prior generations, then in a specific set of cases dynastic equilibria are approximately welfare optimal.

Is Equilibrium Indexation Efficient?

This paper investigates the welfare properties of equilibrium indexation in a decentralized economy. If indexation is costless, so all firms index, then the equilibrium degree of indexation is efficient. But if indexation is costly and this leads some firms not to index, equilibrium indexation is inefficient because indexation has externalities for nonindexed firms. Firms choose too little indexation if labor demand is more responsive to movements in real money than to movements in real wages. The results do not depend on the relative importance of real and nominal shocks.

The Equilibrium and Optimal Timing of Price Changes

This paper studies the welfare properties of the equilibrium timing of price changes. Staggered price setting has the advantage that it permits rapid adjustment to firm-specific shocks, but the disadvantages that it causes unwanted fluctuations in relative prices and that, by creating price level inertia, it can increase aggregate fluctuations. Because each firm ignores its contribution to these problems, staggering can be a stable equilibrium even if it is highly inefficient. In addition, there can be multiple equilibria in the timing of prices changes; indeed, whenever there is an inefficient staggered equilibrium, there is also an efficient equilibrium with synchronized price setting.

Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets

The authors examine how market structure affects credit allocation under universal risk neutrality and asymmetric information about borrowers. They consider both monopolistic and perf ectly-competitive banks and examine the role of collateral in each ca se. When a bank is a monopolist on the loan side, they find collatera l is never used and asymmetric information results in reduced bank le nding. Under perfect competition, collateral has a useful sorting rol e. Moreover, rationing is possible even with collateral availability and perfectly-elastic deposit supply. In this setting, the authors sh ow co-signers are valuable. Social welfare properties of the monopoly and competitive equilibria are also compared. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

The New Keynesian Microfoundations

This article surveys some recent efforts at deriving the standard Keynesian effects of money on output from models in which individual agents maximize their welfare. While other models with continua of equilibria are considered, most attention is spent on models with costs of changing prices. Models of the latter type also turn out to have multiple equilibria because, when a firm increases its price, it creates an incentive for its competitors to raise their own. These multiplicities are discussed in both two-period and infinite-horizon models. The multiplicities affect both the qualitative features of the equilibria and their welfare properties. I also analyze the extent to which small costs of changing prices can generate large (or costly from a welfare viewpoint) business cycles. Aggregate data and data on individual prices are used to discuss the empirical strengths and weaknesses of existing models.

Capital Accumulation and Annuities in an Adverse Selection Economy

Previous articleNext article No AccessCapital Accumulation and Annuities in an Adverse Selection EconomyMartin S. Eichenbaum, and Dan PeledMartin S. Eichenbaum Search for more articles by this author , and Dan Peled Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Journal of Political Economy Volume 95, Number 2Apr., 1987 Article DOIhttps://doi.org/10.1086/261458 Views: 8Total views on this site Citations: 19Citations are reported from Crossref Copyright 1987 The University of ChicagoPDF download Crossref reports the following articles citing this article:Francesco Menoncin, Sergio Vergalli Optimal stopping time, consumption, labour, and portfolio decision for a pension scheme, Journal of Economics 132, no.11 (Jul 2020): 67–98.https://doi.org/10.1007/s00712-020-00710-yStephane Verani, Pei Cheng Yu What's Wrong with Annuity Markets?, SSRN Electronic Journal (Jan 2020).https://doi.org/10.2139/ssrn.3672376Mariacristina De Nardi, Giulio Fella Saving and wealth inequality, Review of Economic Dynamics 26 (Oct 2017): 280–300.https://doi.org/10.1016/j.red.2017.06.002Toan Phan Information, insurance and the sustainability of sovereign debt, Review of Economic Dynamics 22 (Oct 2016): 93–108.https://doi.org/10.1016/j.red.2016.06.006Roozbeh Hosseini Adverse Selection in the Annuity Market and the Role for Social Security, Journal of Political Economy 123, no.44 (Oct 2015): 941–984.https://doi.org/10.1086/681593Toan Phan Information, Insurance and the Sustainability of Sovereign Debt, SSRN Electronic Journal (Jan 2015).https://doi.org/10.2139/ssrn.2603721Mariacristina De Nardi Quantitative Models of Wealth Inequality, SSRN Electronic Journal (Jan 2015).https://doi.org/10.2139/ssrn.2749267Ben J. Heijdra, Laurie S. M. Reijnders Economic Growth and Longevity Risk with Adverse Selection, De Economist 161, no.11 (Oct 2012): 69–97.https://doi.org/10.1007/s10645-012-9199-4Petra Steinorth The demand for enhanced annuities, Journal of Public Economics 96, no.11-1211-12 (Dec 2012): 973–980.https://doi.org/10.1016/j.jpubeco.2012.07.007Ben J. Heijdra, Laurie S.M. Reijnders Economic Growth and Longevity Risk with Adverse Selection, SSRN Electronic Journal (Jan 2010).https://doi.org/10.2139/ssrn.1578297Amy Finkelstein, James Poterba, Casey Rothschild Redistribution by insurance market regulation: Analyzing a ban on gender-based retirement annuities, Journal of Financial Economics 91, no.11 (Jan 2009): 38–58.https://doi.org/10.1016/j.jfineco.2007.12.006Petra Schumacher Enhanced Annuities – Produktinnovation als Lösungsstrategie für das Annuity Puzzle?, Zeitschrift für die gesamte Versicherungswissenschaft 97, no.S1S1 (Oct 2008): 71–89.https://doi.org/10.1007/s12297-008-0036-4Marco Cagetti, Mariacristina De Nardi WEALTH INEQUALITY: DATA AND MODELS, Macroeconomic Dynamics 12, no.S2S2 (May 2008).https://doi.org/10.1017/S1365100507070150Oded Palmon, Avia Spivak Adverse selection and the market for annuities, The Geneva Risk and Insurance Review 32, no.11 (Jul 2007): 37–59.https://doi.org/10.1007/s10713-007-0002-4Marco Cagetti, Mariacristina De Nardi Wealth Inequality: Data and Models, SSRN Electronic Journal (Jan 2005).https://doi.org/10.2139/ssrn.838325Hugo Benitez-Silva The Annuity Puzzle Revisited, SSRN Electronic Journal (Jan 2003).https://doi.org/10.2139/ssrn.1091504Bertrand Villeneuve Life Insurance, (Jan 2000): 901–931.https://doi.org/10.1007/978-94-010-0642-2_27Oliver Fabel Disability insurance in an optimal pension scheme, Journal of Economics Zeitschrift f�r National�konomie 62, no.22 (Jun 1995): 157–183.https://doi.org/10.1007/BF01226008James B. Davies, Peter Kuhn Social security, longevity, and moral hazard, Journal of Public Economics 49, no.11 (Oct 1992): 91–106.https://doi.org/10.1016/0047-2727(92)90065-N

The Stabilizing and Welfare Properties of Futures Markets: A Simulation Approach

The Stabilizing and Welfare Properties of Futures Markets: A Simulation Approach

Large-Market Cournot Equilibria in Labour-Managed Economies

A basic point in the theory of labour-managed market economies is the fundamental role of free entry in order to achieve efficiency (see Dreze, 1974; Greenberg, 1979; Ichiishi, 1977; Meade, 1972, 1979; Vanek, 1970). But modelling a framework of firm selection process can be undertaken with different approaches. Dreze, Meade and Vanek, for example, consider a perfectly competitive process; Greenberg and Ichiishi build models of coalition formation in the spirit of core theory. In the present study we take the other classical way, the Cournot oligopoly theory. In order to capture the effect of increasing competition in the Cournot oligopoly, two kinds of models have long been traditionally elaborated. In the first, the effects of an exogenously increasing number of active firms facing a given demand function are examined (see Okugushi, 1976; Ruffin, 197 1; Seade, 1980). In the second, initiated by Shubik (1959), the number of active firms and the size of the market are simultaneously increased at the same rate. In this case, what is sought is to isolate some sort of pure effect of an increasing number of competitors, and not the combined result of a greater number of firms facing a constant market. But in the two kinds of approaches the number of active firms are not explained by the theory. What is missing is consideration of the role of potential competitors. Recently Novshek (1980) proposed to give the same status to potential competitors and active firms, i.e. to consider that the potential competitors have a Cournot-type behaviour. Hence the very fact that they are not active comes from optimizing behaviour, in the same way as, for active firms, a positive production level comes from maximizing behaviour. A potential competitor taking the production of the active firms as given and maximizing his objective function remains potential only because he does not find it attractive to produce. Hence we get a unified theory which explains the number of active firms. For the case of U-shaped average cost firms, Novshek (1980) has shown that, in sufficiently large markets, first, such a free-entry Cournot equilibrium exists and, second, it is approximately a perfectly competitive equilibrium state. In this paper we study the welfare properties of free entry Cournot equilibria in labour-managed economies.' We adopt Novshek's notion of free entry which is more appealing than the classical zero profit constraint.2 A recent paper by Hill and Waterson (1983) shows that, with the zero profit definition of free entry, and strong assumptions of decreasing marginal labour productivity, uniqueness and stability of equilibria, Cournot equilibria are asymptotically efficient and furthermore have the same number of active firms in both the labour-managed and entrepreneurial frameworks. Under much weaker assumptions the graphical analysis of this paper shows that asymptotic

Monopolistic Two-Part Pricing Arrangements

This article is mainly concerned with Walter Oi's Disneyland problem: pricing a fixed input (admission to the park or Polaroid cameras) and a variable input (individual rides or Polaroid film) to maximize profit, though profit-constrained welfare maximization is also treated. The structure of demand in such situations is fully described when customers are either households or competitive firms. The implications of customer diversity and other market attributes for optimal policies are presented. The welfare properties of single-price and two-part tariff monopoly equilibria are compared, and potential welfare gains from tying contracts are discussed.

Efficiency with Uncertain Supply

As Oliver Hart (1975) has forcefully shown, economies with incomplete markets can have surprising welfare properties. These examples, or counter-examples, bring out the need for further analysis of public policies in the presence of uncertainty and incomplete markets. Various policies are examined here in simple models with two goods, two types of agents, and two states of nature. The basic model has an ex ante decision by suppliers, made with rational expectations, followed by a competitive exchange economy after the state of nature is known. The paper analyses the changes in expected utilities of demanders and suppliers from small changes in the ex ante decision away from the competitive equilibrium. Such changes generally have the potential of increasing the sum of expected utilities and can result in a Pareto improvement. The paper focuses on distinguishing between situations where the gain comes from stabilizing output across states of nature and those where the gain comes from destabilizing. Then two policies are examined which work on the ex post market-use of taxes and subsidies to stabilize suppliers' incomes and use of government demand policy to maximize social welfare.

A General Equilibrium Approach to Marxian Economics

In the first part of the paper, a model is proposed which places the Marxian and Sraffian conceptions of a capitalist economy in a general equilibrium framework. A central concern of these writers is that the economy be reproducible; this is incorporated formally into the equilibrium definition. Capitalists maximize profits subject to a capital constraint and workers are paid a subsistence wage. Equilibrium existence theorems are proved. In the second part, the welfare properties of the equilibria are examined-which, in the Marxian tradition, involve the notion of exploitation. It is shown that the possibility of exploitation is necessary and sufficient for all equilibria to sustain positive profits, if a certain technological condition holds. Finally, the notion of a subsistence bundle is dispensed with, and a Marxian determination of workers' consumption is proposed. In addition to placing the formal Marxian model into a general equilibrium context, the specification of production here is more general than the usual Leontief or von Neumann technologies: production sets are assumed to be only convex.

Monopolistic Competition with Outside Goods

The Chamberlinian monopolistically competitive equilibrium has been explored and extended in a number of recent papers. These analyses have paid only cursory attention to the existence of an industry outside the Chamberlinian group. In this article I analyze a model of spatial competition in which a second commodity is explicitly treated. In this two-industry economy, a zero-profit equilibrium with symmetrically located firms may exhibit rather strange properties. First, demand curves are kinked, although firms make Nash conjectures. If equilibrium lies at the kink, the effects of parameter changes are perverse. In the short run, prices are rigid in the face of small cost changes. In the long run, increases in costs lower equilibrium prices. Increases in market size raise prices. The welfare properties are also perverse at a kinked equilibrium.

A model of insurance markets with incomplete information

The paper investigates how a competitive market would allocate insurance policies if firms were not able to determine the riskiness of individual consumers. It is demonstrated that if all firms have static expectations with regard to the policy offers of other firms, no stationary equilibrium may exist. A second equilibrium concept is then introduced which incorporates a different expectation rule. Each firm assumes that any policy will be immediately withdrawn which becomes unprofitable after that firm makes its own policy offer. This equilibrium is shown to exist and some of its welfare properties are investigated.