Knowledge that Transforms

This paper presents a model of finitely lived rational agents in which unanticipated innovations in the stock of fiat money affect real variables. An unanticipated inflation reduces the real value of the nominally denominated national debt, thereby reducing the crowding-out of capital and/or the tax burden. Both effects stimulate increased investment in capital, which leads to an increase in real output and wages in the following periods. In contrast with price-surprise models, these real effects occur even if the monetary innovation is instantly and perfectly observed by agents.

Observed preference reversal (PR) cannot be adequately explained by violations of independence, the reduction axiom, or transitivity. The primary cause of PR is the failure of procedure invariance, especially the overpricing of low-probability high-payoff bets. This result violates regret theory and generalized (nonindependent) utility models. PR and a new reversal involving time preferences are explained by scale compatibility, which implies that payoffs are weighted more heavily in pricing than in choice.

This paper examines the effects of the Federal Trade Commission's Advertising Substantiation Program, developed in the early 1970s. This program coupled changes in the legal definition of deception with more vigorous FTC enforcement. We analyze changes in advertising intensity, media choice, media wealth, and the progress of new entrants. The evidence suggests that adoption of substantiation requirements increased the credibility of advertising.

Bidder coalitions at English auctions frequently distribute collusive gains among members via a secondary auction or "knockout." When coalition members are sufficiently heterogeneous, nested coalition structures are observed in which a knockout is conducted at each level of nesting. The nested knockout's characteristics are investigated. Within many settings we find that the expected payments to coalition members via the nested knockout equal the Shapley value. Incentive compatibility problems of the nested knockout are also analyzed.