This paper studies the stability of competitive equilibria in a model of aggregate employment when the representative agent uses a least-squares forecasting procedure. It is shown that the Pareto inferior low employment steady state is always unstable under least-squares learning, even if it is stable under perfect foresight. The high employment steady state is stable under learning if and only if it is saddle point stable under perfect foresight. This weakens multiple equilibrium theories of coordination failure that purport to explain persistently high unemployment. The Pareto superior high employment steady state will be the focal point of individual forecasting.

Suppose that a seller and a buyer have private valuations for a good, and that their respective utilities from a trading mechanism are given by us and ub. (These utilities are determined by the valuation for the good, by whether a trade occurs, and by the price which is paid.) Consider the problem of maximizing E[λus + (1 − λ)ub] for some weight λ in the unit interval. It is shown in this article that, if λ is sufficiently close to zero or one, then the maximum value of this objective function attainable by a static revelation mechanism can be arbitrarily closely approximated by equilibria of the sequential bargaining games in which only a single player makes offers. That is, the welfare bound implied by the revelation principle is virtually attainable in offer/counteroffer bargaining. The main condition needed for this result is a monotone-hazard-rate assumption about the distribution of types. A class of examples is presented in which the result holds for all λ (i.e. the entire ex ante Pareto frontier).

Infrequency of purchase models are alternatives to those derived from the classical "utility maximization with binding non-negativity constraints" scheme for modelling purchases that occur at random dates. An extension of those models is proposed that takes into account additional information about the exact number of times households purchased during the survey period. Various methods of estimation are described and an empirical illustration is presented with data drawn from the French Food Expenditure Survey (INSEE).

We present a model in which sectoral shocks have aggregate consequences. The model relies on irreversible investment and imperfect information to slow the adjustment of expanding industries. We show that this gradual expansion is sub-optimal.

A dynamic trading problem is examined in which a monopsonistic employer tries to hire workers whose productivities and reservation wages are private information. The employer can only observe an employee's quality indirectly by monitoring a non-verifiable measure of on-the-job performance. The employer makes contract offers which employees can accept or reject. Once a contract has been accepted it is impossible for the employer to exchange messages with individual employees. On the unique stationary equilibrium path for the contracting game, the employer chooses between two mutually exclusive outcomes. In the market outcome, the employer offers long-term contracts and information is conveyed entirely through self-selection and delayed production. In the monitoring outcome, the employer offers short-term contracts, and contract renegotiation is conditioned by an employee's past performance. A simple characterization theorem is provided which illustrates the often surprising effects of improvements in information in this setting. For example, an employer who is initially offering short-term contracts to exploit performance information may stop monitoring and shift to market screening when the monitoring technology becomes more informative.

We develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature. If an agent defaults on a contract, he can be excluded from future contingent claims markets trading and can have his assets seized. He cannot be excluded from spot markets trading, however, and he has some private endowments that cannot be seized. All information is publicly held and common knowledge, and there is a complete set of contingent claims markets. Since there is complete information, an agent cannot enter into a contract in which he would have an incentive to default in some state. In general there is only partial insurance: variations in consumption may be imperfectly correlated across agents; interest rates may be lower than they would be without constraints; and equilibria may be Pareto ranked.

This paper presents a simple general equilibrium model of optimal taxation in which both private agents and the government can default on their debt. As a benchmark we consider Ramsey equilibria in which the government can precommit to its policies at the beginning of time, but in which private agents can default. We then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational. We completely characterize the set of sustainable equilibria. In particular, we show that when there is sufficiently little discounting and government consumption fluctuates enough, the Ramsey allocations and policies (in which the government never defaults) can be supported by a sustainable equilibrium.

This paper characterizes pure-strategy and dominant-strategy Nash equilibrium in non-cooperative games which may have discontinuous and/or non-quasiconcave payoffs. Conditions called diagonal transfer quasiconcavity and uniform transfer quasiconcavity are shown to be necessary and, with conditions called diagonal transfer continuity and transfer upper semicontinuity, sufficient for the existence of pure-strategy and dominant-strategy Nash equilibrium, respectively. The results are used to examine the existence or non-existence of equilibrium in some well-known economic games with discontinuous and/or non-quasiconcave payoffs. For example, we show that the failure of the existence of a pure-strategy Nash equilibrium in the Hotelling model is due to the failure of an aggregator function to be diagonal transfer quasiconcave—not the failure of payoffs to be quasiconcave, as has been elsewhere conjectured.

When firms face menu costs, the relation between their output and money is highly non-linear. At the aggregate level, however, this needs not be so. In this paper we study the dynamic behaviour of a menu-cost economy where firms are heterogeneous in the shocks they perceive, and the demands and adjustment costs they face. In this context we (i) generalize the Caplin and Spulber (1987) steady-state monetary-neutrality result; (ii) show that uniqueness of equilibria depends not only on the degree of strategic complementarities but also on the degree of dispersion of firms' positions in their price-cycle; (iii) characterize the path of output outside the steady state and show that as strategic complementarities become more important, expansions become longer and smoother than contractions; and (iv) show that the potential impact of monetary shocks is an increasing function of the distance of the economy from its steady state, but that an uninformed policy maker will have no effect on output on average.