Knowledge that Transforms

A fixprice, non-Walrasian temporary equilibrium that coexists with the Walrasian equilibrium at Walrasian temporary equilibrium prices has been called "unsatisfactory" by F. Hahn (1977). If consumers live and work for two periods, expectations of future unemployment easily (in particular with normal goods) generate unsatisfactory Keynesian unemployment equilibria if these expectations reflect serial correlation in unemployment. Assuming that the choice of temporary equilibrium (Walrasian or Keynesian) is governed by an extraneous, "serially correlated" random variable (sunspots), a long-run equilibrium of an overlapping generations model is presented that has persistent Walrasian prices, rational expectations, and intermittent phases of Keynesian unemployment and Walrasian full employment. Copyright 1992 by The Review of Economic Studies Limited.

This paper analyzes duopolistic price-leadership games in which firms have capacity constraints. We provide a complete characterization of price leader equilibria under quite general assumptions on demand and for arbitrary capacities. We show that when capacities are in the range where the simultaneous-move price-setting game (with efficiently rationed demand) yields a mixed-strategy solution the large firm is indifferent between being a leader, a follower, or moving simultaneously. The small firm, while indifferent between being a leader and moving simultaneously, strictly prefers to be a follower. This motivates the discussion of games of timing with ex-post inflexible prices in which the large firm becomes an endogenously determined price leader. We thus provide a game-theoretic model of dominant-firm price leadership.

Ed Green's name was inadvertently added to the list of organizers of the Santander workshop in the October issue of 1991. The correct list is Ramon Caminal, Joan Maria Esteban, Teresa Garcia-Milà, Ramón Marimón and Andreu Mas-Colell.

When economic theory suggests a log-linear specification for individual agents, e.g., Cobb-Douglas production, it is common to estimate the same log-linear model with aggregate data, invoking a representative agent assumption and thereby assuming away aggregation errors. This paper gives necessary and sufficient restrictions on the distribution of agents in an economy for log-linear agent models to aggregate into log-linear macro models, and discusses the aggregation bias resulting from violation of these restrictions. Theorems, tests, economic rationales, and empirical results are given. Included are connections to random walks and to cointegration. Analogous results for log-level models are derived.

This paper extends the Cass criterion for production efficiency to include uncertainty and uses it to show that a stock market equilibrium in an overlapping-generations model with production uncertainty is efficient. It also develops a no-bubbles asset-pricing formula. Results are compared with Brock's (1982) infinite-lived consumer model and it is shown that the stock market equilibrium in the overlapping-generations model has precisely the same asset valuation as Brock's infinitely-lived agent model.

This paper considers a general version of the hold-up problem where n agents first make relation-specific investments and then must agree on some collective action. It is shown that first-best solutions exist under a variety of different assumptions about the nature of information asymmetries.

In this paper we consider a hierarchical model of spatial electoral competition with two dominant players (incumbents) and one entrant. The incumbents engage in a non-cooperative game against each other and act as Stackelberg leaders with respect to a vote-maximizing entrant. We prove that the equilibrium of this game, called a hierarchical equilibrium, exists and is unique for an arbitrary single-peaked distribution of voters' ideal points. Moreover, we fully characterize the set of equilibrium strategies and show its equivalence to the set of strategies generated by a perfect-foresight equilibrium.

This paper develops an explanation of why bargainers often terminate negotiations in disagreement in spite of positive expected gains from continued negotiation. The key to the analysis is a model which embeds bargaining activity within a market. Agents are continually faced with the choice between continuing to bargain with an existing partner or searching for a new partner. Bargainers may then terminate negotiations without an agreement, in spite of positive expected gains from continued bargaining, because seeking a new bargaining partner promises a higher return.

This paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers, each of whom is subject to private, idiosyncratic taste shocks. We propose a recursive method for finding feasible allocations that are incentivecompatible and that are Pareto optimal within this set. The method is applied to several parametric examples. We find that in an efficient allocation the degree of inequality continually increases, with a diminishing fraction of the population receiving an increasing fraction of the resources. We discuss the extent to which these allocations can be decentralized via market arrangements.