Knowledge that Transforms

It is demonstrated that the risk premia on stock in an overlapping generations model with risk-averse agents are bounded above zero.

Product heterogeneity is introduced into the context of spatial price discrimination. Many of the strong properties of the standard homogeneous goods case (which are attained as a limit case here) are shown to be no longer valid. In particular, the social optimum is no longer sustainable as a market equilibrium unless products are either identical or else very different.

A choice function is strictly rational whenever it can be rationalized by a preference relation in a manner such that alternatives in a choice set are strictly preferred to alternatives in the corresponding rejection set. We demonstrate an Extension Theorem which asserts that a preference relation strictly rationalizes the choice function if and only if the choice function satisfies the Weak Axiom of Revealed Preference and the preference relation is an extension of the revealed weak preference relation. Then we consider various applications to rational choice theory.

Arguments in favour of self-enforced bans on advertising by professionals often rely on the stylized fact that advertising can communicate information about price but not about quality. This being the case, it is argued that allowing professionals to advertise runs the risk that firms will compete vigorously over price at the expense of the quality of their product. This paper shows that even if price can communicate no information directly about quality, it can do so indirectly because price will be a signal of quality. Because of this, allowing advertising is shown to improve consumer welfare.

In oligopolistic situations, content protection can have unexpected effects as it changes the nature of interactions between input suppliers. With a duopoly, it does so in a manner that makes the foreign firm wish to match price increases and decreases of the domestic firm. Domestic input suppliers can therefore lose from such policies, even when set at free trade levels. The relation between input demands, the form of protection, and the degree of substitution between inputs is shown to define the effects of content protection and to provide the basis for understanding who might lobby for protection in different environments.

This paper extends the classical test for structural change in linear regression models (see Chow (1960)) to a wide variety of nonlinear models, estimated by a variety of different procedures. Wald, Lagrange multiplier-like, and likelihood ratio-like test statistics are introduced. The results allow for heterogeneity and temporal dependence of the observations. In the process of developing the above tests, the paper also provides a compact presentation of general unifying results for estimation and testing in nonlinear parametric econometric models.

The development of "general purpose" products means that the needs of quite heterogeneous consumers can be sat isfied with the same homogenous product. The private and social incen tives to produce "general purpose" products are studied in this paper within the "circular-road-model" of monopolistic competition. Th e degree of general purposeness of a product is approximated by its p er unit distance transport costs. It is shown that there are strong f orces leading the market to supply products whose transport costs are excessively low.

When buyers' private information about the value of an item for sale is correlated, the seller can increase expected revenue in a sealed bid auction by making the winner's payment a function of information available after the end of the auction. Specifically, revenue can be increased by making the payment a function of all the losing bids. In addition there are gains to making the payment contingent upon some signal of the object's value which becomes public at a later date. That is, there are gains to introducing positive royalty rates.

The paper analyzes contracts as means of strategic commitment, that is, commitment against outside parties to the agreement. It considers the example of an incumbent firm which enters a contractual relationship with its workers in order to deter entry. It assumes away the possibility for the parties to precommit not to make Pareto-improving renegotiations of the agreement once entry has taken place. Under symmetric information, the contract is thus found to be useless for entry deterrence. If the incumbent firm or workers possess some private information, excessive post-entry production levels can however be sustained ex post, since output reductions may not be incentive compatible. While information asymmetries are usually welfare-decreasing when the goal is optimal risk sharing, they can thus be welfare-improving for the contracting parties when commitment against outsiders is the goal of the contract. The role of the renegotiation process as a constraint on sustainable agreements is stressed in the paper, and the general relevance of strategic contractual commitment is discussed.

K. G. Binmore, M. J. Herrero; Matching and Bargaining in Dynamic Markets, The Review of Economic Studies, Volume 55, Issue 1, 1 January 1988, Pages 17–31,