Knowledge that Transforms

This paper examines the impact of placing natural restrictions on the mechanisms considered for implementation problems. It is shown that if all mechanisms are considered and preferences satisfy a basic condition, then any social choice correspondence can be implemented in undominated strategies. An example points out that the strength of this result derives from the use of mechanisms with questionable features. In part of the message space the agent who announces the highest integer is rewarded. This sort of "tail-chasing" construction, common in the constructive proofs of the literature, is used to assure that undesired strategy combinations do not form an equilibrium. If such mechanisms are ruled out, then the social choice correspondences which can be implemented in undominated strategies satisfy an incentive compatibility type condition called strategy-resistence. For social choice functions this is equivalent to strategy-proofness. This contrast suggests that this issue should be examined as it applies to other solution concepts used in implementation theory. The last portion of the paper begins to explore the issue as it relates to Nash implementation and undominated Nash implementation.

The recent literature on endogenous economic growth allows for effects of fiscal policy on long-term growth. If the social rate of return on investment exceeds the private return, then tax policies that encourage investment can raise the growth rate and levels of utility. An excess of the social return over the private return can reflect learning-by-doing with spillover effects, the financing of government consumption purchases with an income tax, and monopoly pricing of new types of capital goods. Tax incentives for investment are not called for if the private rate of return on investment equals the social return. This situation applies in growth models if the accumulation of a broad concept of capital does not entail diminishing returns, or if technological progress appears as an expanding variety of consumer products. In growth models that incorporate public services, the optimal tax policy hinges on the characteristics of the services. If the public services are publicly-provided private goods, which are rival and excludable, or publicly-provided public goods, which are non-rival and non-excludable, then lump-sum taxation is superior to income taxation. Many types of public goods are subject to congestion, and are therefore rival but to some extent non-excludable. In these cases, income taxation works approximately as a user fee and can therefore be superior to lump-sum taxation. In particular, the incentives for investment and growth are too high if taxes are lump sum. We argue that the congestion model applies to a wide array of public expenditures, including transportation facilities, public utilities, courts, and possibly national defence and police.

This paper studies reputation effects in games with a single long-run player whose choice of stage-game strategy is imperfectly observed by his opponents. We obtain lower and upper bounds on the long-run player's payoff in any Nash equilibrium of the game. If the long-run player's stage-game strategy is statistically identified by the observed outcomes, then for generic payoffs the upper and lower bounds both converge, as the discount factor tends to 1, to the long-run player's Stackelberg payoff, which is the most he could obtain by publicly committing himself to any strategy.

This paper provides empirical assessments of the two leading explanations of measured inter-industry wage differentials: (1) true wage differentials exist across industries, and (2) the measured differentials simply reflect unmeasured differences in workers' productive abilities. First, we summarize the existing evidence on the unmeasured-ability explanation. Second, we construct a simple model which shows that if matching is important then endogenous job-change decisions can create important self-selection biases even in first-differenced estimates of industry wage differentials. Third, we analyze a sample that approximates the experiment of exogenous job loss. We find that (i) the wage change experienced by a typical industry switcher closely resembles the difference in the relevant industry differentials estimated in a cross-section, and (ii) pre-displacement industry affiliation plays an important role in post-displacement wage determination.

This paper applies the standard rational expectations competitive storage model to the study of thirteen commodities. It explains the skewness, and the existence of rare but violent explosions in prices, coupled with a high degree of price autocorrelation in more normal times. A central feature of the model is the explicit recognition of the fact that it is impossible for the market as a whole to carry negative inventories, and this introduces an essential non-linearity which carries through into non-linearity of the predicted commodity price series. For most of the thirteen commodity prices, the behaviour of prices from one year to the next conforms to the predictions of the theory about conditional expectations and conditional variances. However, given the non-linearity both of the model and of the actual prices, such conformity is not enough to ensure that the theory yields a complete account of the data. In particular, the analysis does not yield a fully satisfactory explanation for the high autocorrelation observed in the data.