Knowledge that Transforms

The author considers a leader-follower game with output quantities as strategies, so as to demonstrate the reduced advantages of the Stackleberg leader in a stochastic environment with private information. At the equilibrium, the strategy of the leader reveals to the follower information about the demand. In an attempt to signal low demand, the leader contracts his output. Nevertheless, unless the leader's information is infinitely noisy, the follower can always correctly infer his signal. The author finds a wide range of parameter values over which the follower is better-off compared to the leader.

Within a slightly modified version of Hotelling's model we reconsider the claim that the threat of entry induces existing firms to produce a larger number of products than they would otherwise. We show that entry deterrence, although optimal, need not be achieved through product proliferation. In some cases the incumbent monopolist resorts to an entry-deterring strategy based on location choice rather than product proliferation. We also show that in some cases the number of products chosen by the incumbent facing the threat of entry is strictly greater than the minimum number required to deter entry.

Optimal penal codes are constructed for a class of infinity-repeated games with discounting. These games can be interpreted as Bertrand oligopoly games with capacity constraints. No particular rationing rule is adopted; weak restrictions are imposed on the firms' sales functions instead. Models adopting the commonly used rationing rules are special cases of the general framework studied here. It is found that firms can be driven to their security levels by credible punishments.

We examine a common practice used within previous studies of laboratory markets, testing equilibrium models using some data from markets that have not reached an equilibrium. We examine the effect of this practice when it is applied to some laboratory markets where an appreciable number of them eventually satisfied an operational definition of an equilibrium. Our data suggest that, for our markets, significantly different equilibrium test results would be obtained when using all data available in market periods analysed in previous studies rather than using only equilibrium data. For our markets, choices made in disequilibrium are quite different from those in equilibrium.

This paper demonstrates, using the Reflection Principle, the existence and uniqueness of the solution to the classic Solow equation under continuous time uncertainty for the class of strictly concave production functions which are continuously differentiable on the nonnegative real numbers. This class contains all CES functions with elasticity of substitution less than unity. A steady state distribution also exists for this class of production functions which have a bounded slope at the origin. A condition on the drift-variance ratio of the stochastic differential equation alone, independent of technology and the savings ratio, is found to be necessary for the existence of a steady state.

This paper explores the role of testing in models of asymmetric information. We demonstrate conditions under which testing for underlying characteristics can overcome adverse selection problems and lead to a full-information competitive equilibrium. This paper provides a more general statement of Mirrlees result on the optimal use of infinite fines. Where testing cannot fully resolve the problems associated with asymmetric information, we outline the source of the difficulties. Our results, developed in the context of a labour market, can be directly extended to other environments. In problems with asymmetric information, testing to discover an agent's chosen action or underlying characteristics may significantly reduce the cost of moral hazard and adverse selection.

Most results in what can be termed the comparative statics of risk aversion are obtained when there is only one source of uncertainty. The primary example (which originally motivated the definition of risk aversion) is that more risk averse people are willing to pay a higher premium for insuring against risk. It is known that the results do not generally carry over when there is another source of uncertainty. The paper develops conditions under which comparative statics results are robust against the introduction of additional sources of uncertainty.

The authors analyze a dynamic North-South model of innovation, technology transfer, and trade. Northern firms conduct R&D using labor, which has alternative uses producing in the R&D sector or a nontraded good sector. Since technology trans fer prevents the North from fully appropriating benefits of R&D, the optimal rate of innovation for either profit-maximizing firms or a ut ility-maximizing northern planner is less than globally optimal. An i nceased transfer rate intensifies competition of lower wage southern workers with northern workers in production, so profit-maximizing Nor thern firms reallocate labor toward R&D.

This paper examines testing for AR(1) disturbances against MA(1) disturbances in the linear regression model. A Monte Carlo experiment compares the small-sample properties of the Cox test, some linearized Cox tests, and an approximate point optimal test, as well as a Lagrange multiplier test of AR (1) disturbances against ARM A (1,1) disturbances. The main findings are that the true sizes of the asymptotic non-nested tests can differ considerably from their nominal sizes, the Lagrange multiplier test's sizes are reasonably accurate and the point optimal test is generally more powerful than the other tests when appropriate critical values are used. When sizes are controlled at an arbitrary value of the AR (1) parameter, the relative power of the Cox test is increased substantially.

This paper analyses a bargaining model with incomplete information in which the time between offers is an endogenous strategic variable. We find equilibria involving a delay to agreement that is due to the use of strategic time delay by bargainers to signal their relative strength. Under some specifications of the parameters, delay is present in the unique sequential equilibrium whose beliefs satisfy one intuitive restriction. This delay does not vanish as the minimal time between offers becomes small.