As Oliver Hart (1975) has forcefully shown, economies with incomplete markets can have surprising welfare properties. These examples, or counter-examples, bring out the need for further analysis of public policies in the presence of uncertainty and incomplete markets. Various policies are examined here in simple models with two goods, two types of agents, and two states of nature. The basic model has an ex ante decision by suppliers, made with rational expectations, followed by a competitive exchange economy after the state of nature is known. The paper analyses the changes in expected utilities of demanders and suppliers from small changes in the ex ante decision away from the competitive equilibrium. Such changes generally have the potential of increasing the sum of expected utilities and can result in a Pareto improvement. The paper focuses on distinguishing between situations where the gain comes from stabilizing output across states of nature and those where the gain comes from destabilizing. Then two policies are examined which work on the ex post market-use of taxes and subsidies to stabilize suppliers' incomes and use of government demand policy to maximize social welfare.

Pairwise extension of credit is introduced into the barter-search economy previously analyzed by the author. The penalty for failure to repay a debt is modeled as the end of trading opportunities. Since credit availability makes access to trade more valuable, there may be multiple equilibrium credit limits. Since the credit limit affects the implicit interest rate and the stock of inventories, it is necessary to check the net impact of the credit limit on the incentive to repay. In a calculated example, with lumpy credit availability, multiple equilibria are very common with a greater credit limit associated with a lower implicit interest rate. With smooth credit availability no multiple equilibria were found. Surprisingly, credit can break the no-production equilibrium.

Journal Article Consumer Differences and Prices in a Search Model Get access Peter Diamond Peter Diamond Massachusetts Institute of Technology Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 102, Issue 2, May 1987, Pages 429–436, https://doi.org/10.2307/1885071 Published: 01 May 1987

This paper presents a new approach to organizing universal health insurance. First, the government divides the entire population into many large groups. Then, the government creates a federal health insurance system (HealthFed), modeled on the Federal Reserve System, to fill the role now played by the benefits office of a large firm. The HealthFed would create a short menu of alternatives, solicit bids for insuring the entire group, and price alternatives. There would be redistribution between groups and pricing of alternatives to reflect optimal social insurance principles. There would be no connection between health insurance and employment. Copyright 1992 by The Econometric Society.

Peter A. Diamond delivered his Prize Lecture on 8 December 2010 at Aula Magna, Stockholm University.

This paper examines equilibrium in a market with free entry where consumers search and firms set prices on individual units of the commodity. The prices attached to newly produced goods are continuously adjusted. Prices attached to previously produced goods can only be changed at a cost. Thus inflation reduces the real price of goods in inventory awaiting sale. The presence of previously priced goods lowers the reservation price of customers. Thus, inflation cuts into the market power created by the need to search for the good. Consumer welfare is inverse u-shaped in inflation with a strictly positive optimal inflation rate.

Using a simple search technology and the Nash bargaining solution, the paper derives the steady state equilibrium negotiated wage as a function of the equilibrium unemployment and vacancy rates. For this wage, the lifetime expected present discounted value of earnings of a new worker is compared with the social marginal product of a new worker. These are not generally equal implying inefficient incentives for labour mobility.

Journal Article Technical Change and the Measurement of Capital and Output Get access Peter A. Diamond Peter A. Diamond University of California, Berkeley, California Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 32, Issue 4, October 1965, Pages 289–298, https://doi.org/10.2307/2295836 Published: 01 October 1965