The recent literature on “the reappraisal of Keynes” has viewed Keynesian equilibria as arising when prices are fixed and effective demands and supplies are equilibrated through the adjustment of quantities. One problem with this approach is that it lacks a theory of price determination—in particular, of why prices are fixed. In the present paper, we show that a number of Keynesian features arise in a model in which prices are fully flexible, but where agents have some monopoly power. One advantage of this approach is that it provides a theory of the determination of both prices and quantities.

This paper develops a model of "large group" Chamberlinian monopolistic competition in which (1) there are many firms producing differentiated commodities, (2) each firm is negligible in that it can ignore its impact on, and hence reactions from, other firms; (3) free entry leads to zero profit of operating firms; but (4) each firm faces a downward-sloping demand curve. The existence of a monopolistically competitive equilibrium is established. In a companion paper, more particular questions such as whether the market provides too many or too few products are addressed for a special case of the model.

The Review of Economic Studies has instituted a new series of lectures to be given annually by a "younger" British economist at the Association of University Teachers of Economics Meetings. The choice of lecturer is determined by a panel whose members are currently Professors Hahn, Mirrlees and Nobay. This paper is a revised version of the first lecture in the series. It was presented at the AUTE Meeting held at the University of Surrey in April 1982, and was refereed in the usual way.—MAK.

Journal Article Monopolistic Competition in a Large Economy with Differentiated Commodities Get access Oliver D. Hart Oliver D. Hart Churchill College, Cambridge Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 46, Issue 1, January 1979, Pages 1–30, https://doi.org/10.2307/2297169 Published: 01 January 1979 Article history Received: 01 February 1977 Accepted: 01 December 1977 Published: 01 January 1979

Consider an investor who has a certain amount of wealth to invest in a riskless security and several risky securities. The investor's optimal portfolio will depend on his attitudes towards risk, his wealth and the probability distribution of the security returns. An interesting question to ask is how the investor's optimal portfolio is affected by changes in his wealth, given that all other things remain constant. For example, does the total amount invested in risky securities increase as wealth increases? Does the proportion of wealth invested in risky securities decrease as wealth increases? Questions such as these have been investigated by Arrow [1, Chapter 3] in the case of one riskless security and one risky security. Arrow showed that if the investor's von Neumann-Morgenstern utility function exhibits decreasing absolute risk aversion and increasing relative risk aversion, the amount invested in the risky security is an increasing function of wealth and the proportion of wealth invested in the risky security is a decreasing function of wealth. More recently, Cass and Stiglitz [3] have shown that Arrow's results do not generalize to the case of many risky securities. They give an example where an investor who can purchase one riskless security and two risky securities invests a greater proportion of his wealth in the two risky securities when his wealth increases, even though his utility function exhibits increasing relative risk aversion. Cass and Stiglitz note, however, that Arrow's results do generalize for an important, if highly restrictive, class of utility functions-those for which the mix of risky securities in the investor's optimal portfolio is independent of the investor's wealth for all probability distributions of security returns. Such utility functions are said to possess the separation property. The purpose of this paper is to prove that the separation property is a necessary condition as well as a sufficient condition for the generalization of Arrow's results to the case of many risky securities. We will show that given more than one risky security and a utility function which does not possess the separation property, it is always possible to pick probability distributions for the returns of the risky securities so that the directions of change which Arrow established for the single risky security case are reversed; that is, for some probability distributions of security returns, the total amount invested in risky securities decreases as wealth increases, and for other probability distributions of security returns, the proportion of wealth invested in risky securities increases as wealth increases. In fact, we will show that there always exist probability distributions of security returns such that the amount (proportion of wealth) invested in every risky security decreases (increases) as wealth increases. It should be emphasized, moreover, that this is the case

I. Introduction, 579—II. The model, 581.—III. The linear case, 586.—IV. Proofs, 593—V. Conclusion, 596.

Oliver Hart delivered his Prize Lecture on 8 December 2016 at the Aula Magna, Stockholm University.

In an economy with complete markets, the owners of a firm will unanimously desire the firm to maximize profits if it is a perfect competitor. We generalize this result to an economy with incomplete markets. We show that if competitive conditions prevail-that is, if each firm is negligible relative to the aggregate economy-a firm's shareholders will want the firm to maximize the (net) market value of its shares. This result holds whether or not the so-called spanning condition is satisfied. However, while there may be agreement about what goal the firm should pursue, there may be disagreement among shareholders about how best to pursue this goal.

The formal literature on firm boundaries has assumed that ex post conflicts are resolved through bargaining. In reality, parties often simply exercise their decision rights. We develop a model, based on shading, in which the use of authority has a central role. We consider two firms deciding whether to adopt a common standard. Nonintegrated firms may fail to coordinate if one firm loses. An integrated firm can internalize the externality, but puts insufficient weight on employee benefits. We use our approach to understand why Cisco acquired StrataCom, a provider of new transmission technology. We also analyze delegation.