Knowledge that Transforms

Contrary to the belief that capital over-accumulation is impossible in an economy with land—i.e. a non-reproducible factor of production, this paper shows that the possibility of dynamic inefficiency depends on the income share of land, and examines the historical tendencies of the income share of land in the U.S.

The Lucas Critique of Econometric Policy Evaluation argues that the parameters of econometric models are subject to theoretical cross-equation restrictions which follow from the fact that the endogenous variables of the models are chosen optimally by forward-looking agents. In this paper I argue that these facts alone are insufficient to generate such restrictions. I present an example of a model in which there exist multiple stationary rational expectations equilibria one of which is supported by a process-invariant forecast rule. Immunity to the Lucas Critique is proposed as a selection criterion in models with multiple equilibria.

Identification conditions for binary choice errors-in-variables models are explored. Conditions for the consistency and asymptotic normality of the maximum likelihood estimators of binary choice models with unbounded explanatory variables are given. Two- or three-step estimators to simplify computation are also suggested.

Charles Bean, Mathias Dewatripont, John Moore; Special Issue: The Econometrics of Financial Markets, The Review of Economic Studies, Volume 58, Issue 3, 1

Standard axiomatizations of expected-utility theory envision an agent with fixed probability assessments who can be observed to choose actions from varying opportunity sets (for instance, pairs of lotteries). These axiomatizations also envision that the agent's preferences among these actions depend on the state of nature only through clearly defined and observable consequences. This viewpoint may be unnecessarily restrictive as a basis for applying and evaluating the theory. We study instead the pattern of choices from a fixed set of actions as probability assessments change. Convexity and integrability conditions characterize maximization of expected state-dependent utility.

Barnett (1979a, 1981) Theil's extending (1971) work, aggregates differential demand equations in absolute (undeflated) prices. This paper extends further these results by deriving aggregate (macro) demand equations in relative prices under stated assumptions. These equations are analogous to the individual consumer's (micro) demand equations and the properties of the microcoefricients carry over.

OPTIMAL LEARNING BY EXPERIMENTATIONThis paper analyses the dynamic decision problem of an agent who is initially uncertain as to the true shape of his payoff function, but who obtains information aboutit over time by observing the outcome of his past decisions.In the long run, the action is a short run optimum given the beliefs, but may not be an optimum for the true payoff function.We derive conditions under which the limit action is optimal for the true payoff function and establish the robustness of the results.Finally we study the adjustment process in an example where such complete learning does not achieve in the long run.

Friedman's (1960) proposal to pay interest on (required) reserves is considered in a setting that eliminates the indeterminacy of steady-state equilibrium discussed by Sargent and Wallace (1985). In an overlapping-generations model where the real rate of interest is technologically determined, the payment of interest on reserves results in a determinate, Pareto optimal steady-state equilibrium. However, interest payments on reserves reduce the steady-state welfare of all young agents and, for many economies, result in the existence of stationary sunspot equilibria. This is the case even if such equilibria cannot exist when reserves do not earn interest.

This paper investigates the structures of strategy-proof mechanisms in general models of economies with pure public goods. Under the assumptions that the set of allocations is a subset of some finite-dimensional Euclidean space and that the admissible preferencees are continuous and convex, I establish that any strategy-proof mechanism is dictatorial whenever the decision problem is of more than one dimension. Furthermore, I establish a similar result when preference relations also satisfy the additional assumption of monotonicity. These results properly extend the Gibbard-Satterthwaite theorem to economies with pure public goods.

International differences in the cost of production of a key intermediate product can mean that a domestic firm is dependent on supplies from a foreign vertically integrated firm. This paper considers the incentives for the foreign firm and foreign country to supply the domestic firm when the firms compete in a Cournot or Bertrand market for the final product. The vertical supply decision is significantly affected by domestic supply conditions for the input and a domestic tariff on final product imports. Optimal policy by the exporting country may require a tax on both exports, or a subsidy on both exports.