Knowledge that Transforms

A given set of agents jointly own and operate a decreasing returns to scale technology (with a single input and a single output). They all contribute some input and receive some of the output. What first best allocation is equitable? We discuss three allocation mechanisms. The Equal Benefits solution gives every agent the same benefit, computed at the supporting price. The Equal Returns solution equalizes returns (output shares/input contributions) across agents. The Constant Returns Equivalent solution gives every agent his indirect utility level at some common price of output relative to input. A lower and an upper bound on individual welfares play a key role in these axiomatic characterization results. Copyright 1990 by The Review of Economic Studies Limited.

It is useful to have bounds on expected utility in situations in which the relevant distribution is skewed. This paper assumes that the third moment of the distribution is known and uses knowledge of the first three moments to derive upper and lower Tchebycheff bounds. Copyright 1990 by The Review of Economic Studies Limited.

This paper discusses why redundant skilled workers may be reluctant to accept interim unskilled jobs. If skilled work is more satisfying or less arduous for highly productive workers, then such workers invest more in moving quickly between skilled jobs. Thus, high productivity workers tend to search on-the-job, and if unemployed will specialise in job search, rather than take an interim position. If individual differences in productivity are known to the worker but not the potential employer, then search strategy may be used as a productivity signal, with more than the efficient proportion of workers searching on-the-job and too few accepting interim unskilled jobs. Optimal policy requires a subsidy on interim unskilled jobs.

The sovereign-debt literature has often implicitly assumed that all the power in the bargaining game between debtor and creditor lies with the latter. This paper explores that assumption by analyzing three game-theoretic models of debt renegotiations. In two of the models, both of which are built on the traditional one-sector growth model, all the subgame-perfect equilibria have an extreme form in which the game's surplus is captured by the creditor. The third game has many subgame-perfect equilibria that do not have this feature, however. The roles of various assumptions in all three games are examined.

This paper describes a simple framework for evaluating the allocative performance of economies characterized by trading frictions and unemployment. This framework integrates the normative results of earlier Diamond-Mortensen-Pissarides bilateral matching-bargaining models of trade coordination and price-setting, and consists of a set of general conditions for constrained Pareto efficient resource allocation that are applicable to conventional natural rate models. To illustrate, several conventional models of the labour market are reformulated as matching-bargaining problems and analyzed using this framework.

The failure of the asset market to be complete causes serial dependence in output and prices, which is suboptimal. We consider an economy with white noise shocks. When the asset market is complete, an optimal, competitive allocation inherits this strong stationarity. When the asset market is only sequentially complete, prices and output necessarily display serial dependence at equilibrium. The further incompleteness of a monetary economy explains co-movements in real and nominal variables.

This paper investigates the relationship between uncertainty and delay of agreement in the one-sided offer bargaining model with two-sided uncertainty where the seller makes offers. We construct a weak stationary equilibrium in which different types of the seller charge different prices in every period. We completely characterize the separating equilibrium by three regularity conditions, and show that the time interval between offers converges to zero, the seller's initial price offer in a separating equilibrium converges with probability 1 to the lowest valuation of the buyer if and only if the gain from trading is common knowledge.

In the mean-variance CAPM without a riskless asset, the possibility of satiation sometimes leads to non-existence of general equilibrium. Moreover, because portfolio preferences are not necessarily monotone, equilibrium asset prices, when they exist, may be negative or zero. To demonstrate the possibility of non-existence, and to develop an intuitive understanding of when and why equilibrium does or does not exist, this paper fully investigates the special case of utility functions linear in mean and variance and partially extends the results to the general case.

This paper analyzes a multiperiod version of the Spence Job Market Signalling Model in which workers cannot commit to an education choice and firms make wage offers at any point in time. The dynamic competition combined with the incomplete information yield a multiplicity of sequential equilibria, including ones that sustain implicit collusion, even though the length of the game is finite. Emphasis is placed on equilibria that satisfy the “independence of never weak best response” criterion of Kohlberg and Mertens (1986). It is shown that in the limit, as the time between offers tends to zero, any such equilibrium results (in expectation) in the unique stable outcome of the static Spence model.

This article offers a new method of solution for linear difference equations with Rational Expectations. We provide a description of the complete set of solutions which is shown to depend on arbitrary martingales. We thus avoid the use of "differences of martingales" as introduced by Gourieroux, Broze, Szafarz, while describing the general solution as a dynamic equation with lower order. At the same time we provide a simple algorithm, based on polynomial divisions, to calculate some basic solutions, namely all ARMA solutions.