Knowledge that Transforms

This paper investigates the design of trade policies in an uncertain world. Governments in each of two countries select between direct quantity controls and subsidies in an attempt to shift profits in favour of domestic, imperfectly competitive firms. The equilibrium of this bilateral policy game depends critically on the variability of the environment. In a world of certainty, both governments would choose to regulate the behaviour of their firms through direct quantity controls. With a sufficient amount of uncertainty, both governments regulate their firms through subsidies. This result reflects an important tradeoff between the strategic advantages of direct quantity controls and flexibility gained by the use of subsidies

In many cases, heterogeneous prices occur in price-taking environments. In empirical work, an aggregate price index is often created from such prices and used to explain aggregate supply and derived demands. We show that consistent aggregation places strong restrictions on functional forms which may be used to describe behaviour. Unlike the case of aggregation of consumer income (but similar to the case of aggregation of wages), these functional forms are inconsistent with standard microtheory.

This paper deals with a simple game of litigation and settlement with incomplete information. Parties are assumed to have the choice between settling their dispute out of court and resorting to costly litigation. The set of sequential equilibria is characterized and conditions are given under which an efficient equilibrium does exist. Efficient equilibria, however, will be ruled out by various tests of refinement. A comparative statics analysis is carried out with respect to the quality of private information that parties are assumed to receive before any moves have to be made. Copyright 1989 by The Review of Economic Studies Limited.

There has been a great deal of research in recent years investigating the question of whether or not there exist institutions (game forms) for which the set of equilibria will coincide with the set of Walrasian equilibria. In this paper we show the existence of a game form that is feasible, both for equilibrium and disequilibrium strategies, continuous, and for which the set of Nash equilibria coincides with the set of (constrained) Walrasian equilibria for all pure exchange economies. The game form allows agents to behave strategically both with respect to their preferences and their initial endowments.

A trader who privately knows his preferences may misrepresent them in order to influence the market price. This strategic behaviour may prevent realization of all gains from trade. In this paper, trade in a simple market with an explicit rule for price formation is modelled as a Bayesian game. We show that the difference between a trader's bid and his reservation value is maximally O(1/m) where m is the number of traders on each side of the market. Competitive pressure as m increases thus quickly overcomes the inefficiency private information causes and forces the market towards an efficient allocation.

Analyzing the optimal bidding behaviour in ascending-bid auctions and second-price sealed-bid auctions with independent private values, we show that expected utility maximizing behaviour is equivalent to: (a) dynamically consistent bidding in ascending-bid auctions; (b) the equivalence of the optimal bids in ascending-bid auctions and in second-price sealed-bid auctions; (c) bidding the value of the object in second-price sealed-bid auctions. In addition, the optimal bid in ascending-bid auctions equals the value of the object if and only if the bidder's preferences on lotteries are both quasi-concave and quasi-convex.

A restriction on a semiparametric or nonparametric econometric time series model determines the value of a finite-dimensional functional τ of an infinite-dimensional nuisance function. The estimate of τ and its estimated covariance matrix use nonparametric probability and spectral density estimation. A consequent test of the restriction is given approximate large sample justification under absolute regularity on the time series and other conditions. The methodology relates closely to recent proposals of Powell, Stock, Stoker and Robinson in cross-sectional applications, but serial dependence generally affects the test statistic's form, as well as statistical theory.

In a monetary model, it is shown that if there is a unique Pareto inefficient barter equilibrium, then a monetary equilibrium exists when traders are sufficiently patient. 1.

Thin equity markets cannot accommodate temporary bulges of buy or sell orders without large price movements. The resulting volatility can induce risk-averse transactors who face transaction costs to desert these markets. Thus thinness and the related price volatility may become joint self-perpetuating features of an equity market, irrespective of the volatility of asset fundamentals. If, however, appropriate incentive schemes are adopted to encourage entry by additional investors, this vicious circle can be broken, eventually shifting the market to a self-sustaining, superior equilibrium characterized by a higher number of transactors, lower price volatility and larger supply of the asset.

This paper presents a simple counterexample to the belief that policy cooperation among benevolent governments is desirable. It also explains circumstances under which such counter-examples are possible and relates them to the literature on time inconsistency. Since the work of Hamada (1976), investigating the effects of increasing policy cooperation among countries has been a major topic in international economics. A standard conclusion of this work is that increasing policy cooperation among countries is desirable. In a seminal paper, Rogoff (1985) has challenged this view. Using a simple monetary model, Rogoff shows that cooperation among policy makers can lead to a lower level of welfare than noncooperation does. Rogoff's result has caused much consternation among those who advocate policy cooperation, and his work has been criticized along several dimensions. For example, some authors, including Canzoneri and Henderson (1988), have noted that a key assump-tion in Rogoff's model is that the objective function of each country's policy maker does not coincide with the objective function of its residents. Indeed, if in his model policy makers maximize the welfare of their country's residents, the counterexample is overturned