Knowledge that Transforms

The author considers a class of models that generalizes the popular mixed proportional hazard model for duration data: the generalized accelerated failure-time model. He shows that the generalized accelerated failure-time model is nonparametrically identified (up to a normalization). He then reconsiders the nonparametric identification of the mixed proportional hazard model. He shows that the class of mixed proportional hazard models is not closed under normalization. This implies that a finite mean of the mixing distribution is a necessary condition for (nonparametric) identification of the mixed proportional hazard model. It is impossible to test this hypothesis without imposing arbitrary restrictions on the base-line hazard and/or the regression function. Copyright 1990 by The Review of Economic Studies Limited.

The partial equilibrium literature on two-part tariffs suggests that if a commodity is produced under increasing returns, efficiency can be achieved through marginal cost pricing and a suitable choice of "entry fees" (fixed charge) that may vary from consumer to consumer. The author shows this partial equilibrium intuition cannot be extended beyond some special cases. Even with a consumer-specific fixed charge, it is possible that none of the equilibria yield Pareto efficiency. Furthermore, it may be impossible to achieve Pareto efficiency through any specification of taxes that are levied solely to cover losses. Copyright 1990 by The Review of Economic Studies Limited.

This paper introduces the concept of biconvergence, which is a weak and intuitive topological assumption on the utility function and the production function together. Concerning recursive utility, the author shows that, given biconvergence, the utility function is the unique admissible solution to Koopman's equation. Concerning dynamic programming, he shows that, given biconvergence, the true value function exists, it is the unique admissible solution to Bellman's equation, and it may be calculated numerically as the limit of successive approximations. Finally, he develops an overly strong sufficient condition for biconvergence that substantially weakens the Lipschitz condition used by contraction-mapping techniques. Copyright 1990 by The Review of Economic Studies Limited.

For a market with a finite number of agents, pairwise matching and bargaining, it is shown that, even when the market is frictionless, the equilibrium is not necessarily competitive. It depends on the amount of information agents use. If their behaviour is conditioned only on the sets of agents present and the time, the competitive solution is the unique subgame perfect equilibrium. If agents have full information and condition their behaviour on some of it, there are also noncompetitive equilibria in which behaviour depends on specific information such as the identity of the trading partner and past events.

This paper examines the desirability of allowing a monopolist to determine the market price. The author finds that none of the regulatory mechanisms previously discussed in the "price versus quantities" literature strictly dominates unregulated, monopoly price-setting. Furthermore, despite suggestions by others, price-setting by a regulated monopolist whose profits coincide with society's net benefits is not always the most desirable means of control. Quantity-setting by such a monopolist may instead be the preferred choice. Combining both into one incentive-compatible mechanism provides the best regulatory scheme and one in which the regulator need not be informed about costs. Copyright 1990 by The Review of Economic Studies Limited.

Budget deficits implying an unbounded present value of government debt are infeasible and, hence, induce expectations of a future policy change. The authors study how expectations of a policy switch, whose timing or mix between expenditure cuts, tax increases, or increases in money growth rates may be uncertain, affect economic dynamics before the switch takes place. They are especially concerned with the correlation between changes in the deficit and inflation. Of particular interest is their finding that timing uncertainty may induce fluctuations in the rate of inflation that seem to be unrelated to the budget deficit, at a time when the budget deficit is responsible for inflation. Copyright 1990 by The Review of Economic Studies Limited.

We introduce a distinction between a firm and its network of workers. In a competitive world, if networks are easily lured away, the workers must receive the entire value of their contribution to the firm. How then can service firms have equity value? A model is analysed in which workers are paid less as a group than their value, even in a competitive world. The workers are assumed to have a nonwage benefit for working at the current firm; this benefit is privately known. These privately known benefits make it impossible for the workers to agree on a division of their value should they leave the existing firm for a new enterprise. The result is that the workers may receive a total compensation that is less than their contribution to the firm.

Rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks. And, by themselves, small frictions in nominal adjustment, such as costs of changing prices, create only small non-neutralities. But this paper shows that substantial nominal rigidity can arise from a combination of real rigidities and small nominal frictions. The paper shows the connection between real and nominal rigidity given the presence of nominal frictions both in general and for two specific sources of real rigidity, one arising from goods market imperfections and the other from labour market imperfections.

A dynamic trading game is examined in which two uninformed buyers engage in Bertrand-like competition to attempt to purchase a single object of uncertain quality from an informed seller. It is shown that there exists a unique perfect sequential equilibrium. The game is compared to an analogous bargaining game in which a single uninformed buyer makes offers to a single seller. Despite the fact that in the equilibrium of the competitive game, buyers compete away their surplus, it is shown that sellers can often gain a higher ex ante surplus in the bargaining game.

In this paper two results are presented. Both refer to the impossibility theorem of Polemarchakis (1983). The Slutsky matrix of intratemporal and intertemporal substitution effects, associated with the individual short-run demand functions, is not arbitrary but symmetric if expectations are (strongly) Roy-consistent (and if the short-run marginal utility of income is continuously differentiable). The same matrix is symmetric and negative semi-definite under strong Royconsistency and a restriction on the expected second-order variation of future real income. These two results suppose a preliminary axiomatization of expectation functions. Weak and strong Roy-consistency are defined within this axiomatization.