Knowledge that Transforms

This paper generalizes the Global Correspondence Principle by extending, in two major ways, Paul Samuelson's 1971 analysis of the exchange rate response to an international purchasing-power transfer. We analyze the price effect of a shift in any parameter, not necessarily a transfer. We then explore the resulting adjustments in any nonprice variable such as welfare. As our analysis shows, the direction of these adjustments depends neither on whether they are small or large nor on whether equilibrium is locally stable or unstable.

This paper developes a theory of the international trade pattern in risky assets by applying the law of comparative advantage to asset trade. According to this law there is a tendency for a country to import assets that have relatively high autarky prices. The Autarky price of an asset is high if the autarky real interest rate is low, or if the asset's autarky risk measure (the product of the risk premium and the asset price) is low. It is examined how autarky interest rates and risk measures are affected by international differences in (i) stochastic properties of output/endowments, (ii) the rate of time preference, (iii) the degree of risk aversion, and (iv) subjective beliefs, and how such differences predict overall capital account deficits or surpluses as well as the composition of the capital account into trade in arbitrary risky assets and the special cases of sure indexed bonds, stocks (claims to output), and Arrow-Debreu securities.

It is by now well known that the sort of difference equations that characterize the equilibrium conditions of an infinite horizon competitive economy may have solutions in which the endogenous variables fluctuate in response to "sunspot" variables, that is, to random events that in fact have nothing to do with economic "fundamentals," and so do not directly affect the equilibrium conditions. It is possible to view such "sunspot equilibria" as a representation of an actual phenomenon economic fluctuations not caused by exogenous shocks to fundamentals, but rather by revisions of agents' expectations in response to some event, which revised expectations become self-fulfilling. Early discussions of such solutions sometimes suggested that a more rigorous derivation of the requirements for equilibrium might yield additional restrictions that would eliminate the sunspot solutions from the set of true equilibria. The demonstration by Karl Shell (1977), David Cass (1981), and Costas Azariadis (1981) that sunspot equilibria can exist in a rigorously formulated intertemporal equilibrium model, namely the overlapping generations model of Samuelson, has shown that this is not always the case. Nevertheless, many economists remain skeptical about the reasonableness of the sunspot hypothesis as a possible explanation of actual economic fluctuations, and for quite general reasons, independent of judgments about the empirical plausibility of any particular models. I discuss here three such general reasons for skepticism.

This paper presents a new solution to the time-consistency problem that appears capable of enforcing ex ante policy in a variety of settings in which other enforcement mechanisms do not work. The solution involves formulating a social contract, institution, or agreement that specifies the optimal ex ante policy. The social contract is effectively sold by succesive old generations to successive young generations, who pay for the social contract through the payment of taxes. Both old and young generations have an economic incentive to fulfill the social contract. For the old generation, breaking the social contract makes the social contract valueless, and the generation suffers a capital loss by not being able to sell it. For the young generation the economic advantage of purchasing the existing social contract exceeds its price as well as the economic gain from setting up the a new social contract.

Stiglitz and Weiss reply regarding credit rationing in markets with imperfect information.

The strategic incentives, with respect to the choice of price policy in spatial competition, are analyzed in a duopoly model. Price discrimination emerges as the unique equilibriu m outcome in games with either simultaneous choice of policy and pric e or sequential choice where firms may commit first to uniform mill p ricing before the actual market stage. Nevertheless, profits may be h igher with uniform pricing. The authors' models are applied to analyz e some common business practices that arise in geographical pricing, like the basing point system, and in the pricing of varieties or opti ons from a base product in a product-differentiation context. Copyright 1988 by American Economic Association.

The authors study international trade between the North and the South where the industrial sector produces goods of different quality. The North exports high-quality products, the South low-quality products. Faster population growth in the South changes the spectrum of products exported by every country, and so does faster technical progress in the southern industrial sector. The latter leads also to the introduction of new high-quality products and the abandonment of old low-quality products. In all cases, there is a product cycle; the North abandons the production of its lowest-quality products which are subsequently produced in the South. Copyright 1987 by American Economic Association.

This paper examines the dynamic impact of government purchases in a simple general equilibrium model with both durable and non-durable consumer goods as well as productive capital. The model generates perhaps surprising results. In particular, increases in government purchases are shown to cause reductions in real interest rates. The model thus provides a possible explanation for the observed behavior of real interest rates around wars.

This paper examines the effect of federal deductibility of state and local taxes on the fiscal behavior of state and local governments. The primary finding is that deductibility affects the way that state-local governments finance their spending as well as the overall level of spending.

The traditional model for assessing the effects of treble damage pena lties on price fixing is reexamined and shown to yield surprising res ults. Unless the probability of detection is extremely sensitive to the price charged, increasing the damage multiple will affect neither market efficiency nor expected distribution, and will raise the mark et price. Copyright 1987 by University of Chicago Press.