In an Arrow-Debreu exchange economy with identical agents except for their initial endowment, we examine how wealth inequality affects the equilibrium level of the equity premium and the risk-free rate. We first show that wealth inequality raises the equity premium if and only if the inverse of absolute risk aversion is concave in wealth. We then show that the equilibrium risk-free rate is reduced by wealth inequality if the inverse of the coefficient of absolute prudence is concave. We also prove that the combination of a small uninsurable background risk with wealth inequality biases asset pricing towards a larger equity premium and a smaller risk-free rate.

Investment is characterized by costly reversibility when a firm can purchase capital at a given price and sell capital at a lower price. We solve for the optimal investment of a firm that faces costly reversibility under uncertainty and we extend the Jorgensonian concept of the user cost of capital to this case. We define and calculate cU and cL as the user costs of capital associated with the purchase and sale of capital, respectively. Optimality requires the firm to purchase and sell capital as needed to keep the marginal revenue product of capital in the closed interval [cL, cU). This prescription encompasses the case of irreversible investment as well as the standard neoclassical case of costlessly reversible investment.

This paper studies a dynamic insurance problem with bilateral asymmetric information and balanced budgets. There are two infinitely-lived agents in our model, both risk averse, and each has an i.i.d. random endowment stream which is unobservable to the other. In each period, each agent must have a non-negative consumption and together they must consume the entire aggregate endowment. Dynamic incentive compatibility in the Nash sense is defined. We give sufficient and necessary conditions for the existence of a constrained efficient contract. We show that a constrained efficient contract can be characterized in a Bellman equation. We demonstrate that the long-run distribution of expected utilities of each agent is not degenerate. We also develop an algorithm for computing the efficient contract and, in a numerical example, we find that the consumption processes of the agents form stationary Markov chains.

Credit contracts play a direct role in pooling risk between households in northern Nigeria. Repayments owed by borrowers depend on realizations of random shocks by both borrowers and lenders. The paper develops two models of state-contingent loans. The first is a competitive equilibrium in perfectly enforceable contracts. The second permits imperfect information and equilibrium default. Estimates of both models indicate that quantitatively important state-contingent payments are embedded in these loan transactions but that a fully efficient risk-pooling equilibrium is not achieved. The research is based on a year-long survey in Zaria, Nigeria, conducted by the author.

Existing conditions for gainful trade under conditions of variable returns to scale are merely sufficient. Basing ourselves on the possible non-uniqueness of the production equilibrium under variable returns, we develop a globally valid necessary and sufficient condition for gainful trade. In particular, it is shown that trade may be gainful without changes in product prices, even if trade results in a loss of productivity.

We present some examples of Nash equilibria that are independent of the distribution of some parameter across the economic agents and describe a general theorem that characterizes this phenomenon.

Gordon C. Winston, Thomas O. McCoy; Investment and the Optimal Idleness of Capital12, The Review of Economic Studies, Volume 41, Issue 3, 1 July 1974, Page

Journal Article The Stability of the “Morishima System” Get access Charles Kennedy Charles Kennedy University of Kent at Canterbury Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 37, Issue 2, April 1970, Pages 173–175, https://doi.org/10.2307/2296410 Published: 01 April 1970 Article history Received: 01 December 1968 Accepted: 01 March 1969 Published: 01 April 1970

D. Calvin Gogerty, Gordon C. Winston; Patinkin, Perfect Competition, and Unemployment Disequilibria*, The Review of Economic Studies, Volume 31, Issue 2, 1 Apri