Knowledge that Transforms

In a public good environment with positively correlated types, we characterize optimal mechanisms when agents have private information and can enter collusive agreements. First, we prove a weak-collusion-proof principle according to which there is no restriction for the principal in offering weak-collusion-proof mechanisms. Second, with this principle, we characterize the set of allocations that satisfy individual and coalitional incentive constraints. The optimal weakly collusion-proof mechanism calls for distortions away from first-best efficiency obtained without collusion. Allowing collusion restores continuity between the correlated and the uncorrelated environments. When the correlation becomes almost perfect, first-best efficiency is approached. Finally, the optimal collusion-proof mechanism is strongly ratifiable.

This paper studies the extent to which qualitative features of Walrasian equilibria are refutable given a nite data set. In particular, we consider the hypothesis that the observed data are Walrasian equilibria in which each price vector is locally stable under t^atonnement. Our main result shows that a nite set of observations of prices, individual incomes and aggregate consumption vectors is rationalizable in an economy with smooth characteristics if and only if it is rationalizable in an economy in which each observed price vector is locally unique and stable under t^atonnement. Moreover, the equilibrium correspondence is locally monotone in a neighborhood of each observed equilibrium in these economies. Thus the hypotheses that equilibria are locally stable under t^atonnement, equilibrium prices are locally unique and equilibrium comparative statics are locally monotone are not refutable with a nite data set. 1

The supply and price of skilled labor relative to unskilled labor have changed dramatically over the postwar period. The relative quantity of skilled labor has increased substantially, and the skill premium, which is the wage of skilled labor relative to that of unskilled labor, has grown significantly since 1980. Many studies have found that accounting for the increase in the skill premium on the basis of observable variables is difficult and have concluded implicitly that latent skill-biased technological change must be the main factor responsible. This paper examines that view systematically. We develop a framework that provides a simple, explicit economic mechanism for understanding skill-biased technological change in terms of observable variables, and we use the framework to evaluate the fraction of variation in the skill premium that can be accounted for by changes in observed factor quantities. We find that with capital-skill complementarity, changes in observed inputs alone can account for most of the variations in the skill premium over the last 30 years.