Knowledge that Transforms

We analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo. Nash equilibria in trading strategies are characterized. Certain goods emerge endogenously as media of exchange, or commodity money, depending both on their intrinsic properties and on extrinsic beliefs. There are also equilibria with genuine fiat currency circulating as the general medium of exchange. We find that equilibria are not generally Pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare. Velocity, acceptability, and liquidity are discussed.

We study the convergence of recursive least-squares learning schemes in economic environments in which there is private information. The presence of private information leads to the presence of hidden state variables from the viewpoint of particular agents. By applying theorems of Ljung, we extend some of our earlier results to characterize conditions under which a system governed by least-squares learning will eventually converge to a rational expectations equilibrium. We apply insights from the learning results to formulate and compute the equilibrium of a version of Townsend's model.

A concept of demographic separability is proposed that formalizes the notion that there are groups of goods (adult goods) that have little or no relationship to specific classes of household demographics (the numbers or ages of children).That there exist adult goods demographically separable from children is a necessary but not sufficient condition for the validity of Rothbarth's method for measuring child costs. We propose two different methods for testing demographic separability and present results from a 1981 survey of Spain. The econometric evidence is in fair agreement with the theoretical presuppositions.

Is the capital function distinct from the entrepreneurial function in modern economies? Or does a person have to be wealthy before he or she can start a business? Knight and Schumpeter held different views on the answer to this question. Our empirical findings side with Knight: Liquidity constraints bind, and a would-be entrepreneur must bear most of the risk inherent in his venture. The reasoning is roughly this: The data show that wealthier people are more inclined to become entrepreneurs. In principle, this could be so because the wealthy tend to make better entrepreneurs, but the data reject this explanation. Instead, the data point to liquidity constraints: capital is essential for starting a business, and liquidity constraints tend to exclude those with insufficient funds at their disposal.

We examine an exchange economy with two agents: one risk neutral with a certain endowment and a second risk averse with a random endowment. The realization of the endowment is public but can be falsified by the second agent at a cost. For a broad class of falsification cost functions the optimal no-falsification contract is noncontingent on a left-hand interval and strictly increasing with a slope strictly less than one on a right-hand interval. Under a mild further restriction, optimal no-falsification contracts are, in addition, piece-wise linear. Optimal contracts may in general require falsifying the state, but for a set of the highest endowment realizations there is no falsification. We find simple conditions under which the optimal contract is a no-falsification contract. The model has applications that include financial, insurance, and employment contracts and tax policy.

In raising revenues, governments of poor countries affect farm gate prices for export crops. Because agriculture is dispersed, interventions have spatial effects, leading to an integrated analysis of taxation, marketing, and transportation. Policies to be used singly or together include land, export, and transportation taxes/subsidies and variants of state marketing, in which only government procures crops. An export tax and a transport subsidy may be optimal. With state marketing, important aspects of buying depots are numbers, locations, spatial pattern of prices paid, and movement of output toward or away from the ultimate market. These policies also affect transport investment strategies.

By applying the standard tools of microeconomic analysis, I argue that democratic markets work as well as economic markets. In particular, I show that previous work has greatly exaggerated the existence of principal-agent and informational problems in electoral markets and has drawn incorrect conclusions.

We modify R. A. Fisher's model by incorporating measures of the environment that may be correlated across kin groups. We estimate a model of schooling attainment using data on eight kin groups and find a large contribution of genetic endowments to the variance in schooling though certain aspects of the environment matter.

In the past, empirical research on charitable contributions has focused on two issues: estimating the income and price elasticities of contributions and estimating the extent to which government funding crowded out private contributions. The two fundamental problems in all these studies are the differences in the underlying conceptual models and the use of imperfect data for empirical analysis. This paper addresses both of these problems.

This paper explores Rosenstein-Rodan's idea that simultaneous industrialization of many sectors of the economy can be profitable for them all even when no sector can break even industrializing alone. We analyze this idea in the context of an imperfectly competitive economy with aggregate demand spillovers and interpret the big push into industrialization as a move from a bad to a good equilibrium. We present three mechanisms for generating a big push and discuss their relevance for less developed countries.