Knowledge that Transforms

Our purpose in this note is to revisit the popular monopolistic-competition model of Avinash K. Dixit and Joseph E. Stiglitz ( 1977) and to stress the fact that the variant of this model used in the recent macroeconomic literature is significantly different from the original. In particular, by taking n as the number of active monopolists, the recent discussion of Dixit and Stiglitz (1993) and Xiaokai Yang and Ben J. Heijdra (1993) about the the advantages of neglecting terms of the order 1/n in the computed elasticities, is significantly affected by the choice of the variant of the model. The basic presented in Section I, has been used from the start by Dixit and Stiglitz to study optimum product diversity. It is a simple general equilibrium model with n monopolistic goods and a numeraire good, which can be interpreted as labor (or leisure) time or as the aggregation of all the other goods in the economy. The variant of the analyzed in Section II, was independently developed by several authors for different simple applications in macroeconomics.1 It is an model, that includes an additional good, interpreted as labor time but not taken as the numeraire. More importantly, the enlarged model does not lead to a general equilibrium analysis until the wage rate, taken as given in a first step, is adjusted competitively or strategically. It is for the basic model that Yang and Heijdra (1993) (YH) give an alternative computation method taking into account the priceindex effect of individual pricing decisions. This effect had been neglected in the original paper of Dixit and Stiglitz (1977) (DS), who were only concerned with the large n case (ensured by low fixed costs and imperfect substitution between the monopolistic goods). Limiting their model to the special case of a unitary elasticity of substitution between the monopolistic goods and the numeraire good, YH obtain an explicit solution. But YH's solution is still an approximation, because it neglects the indirect effects that feedback has on pricing decisions. We will show that, in the enlarged taking into account this income-feedback effect allows for an explicit solution and simplifies calculations. But in the variant, some meaningful cases are incompatible with free entry and thus prohibit the use of DS's approximation. However, as we conclude in Section III, this is not to say that their approximation should never be used. On the contrary, the approximation hypothesis is a very useful part of Dixit and Stiglitz's contribution.

This paper documents exploratory drilling activity on offshore wildcat oil and gas leases in the Gulf of Mexico sold between 1954 and 1980. The authors calculate the empirical drilling hazard function for cohorts in specific areas. For each year of the lease, they study the determinants of the decision whether to begin exploratory drilling and their relationship to the outcome of any drilling activity. Their results indicate that equilibrium predictions of plausible noncooperative models are reasonably accurate and more descriptive than those of cooperative models of drilling timing. The authors discuss why noncooperative behavior may occur and the potential gains from coordination. Copyright 1996 by American Economic Association.

The double auction trading institution has been highly efficient across diverse marginal-cost market structures, whether human subjects or 'zero-intelligence' robots populated those markets. Accordingly, many researchers suspect that double auction performance transcends market structure and agent strategy. But the authors show that large avoidable costs undermine the efficiency and stability of human subject double auctions and these low human efficiencies are simultaneously well above zero-intelligence efficiencies. Their results dramatically illustrate the potential havoc wrought by highly competitive institutions when they must cope with nonconvex technologies. Copyright 1996 by American Economic Association.

It is routine for growth economists to appeal to the British industrial revolution as motivation for their papers. This overview draws implications from this important experience for how economists think about growth, empirical growth economics, and policy based on recent historical research. The update it provides may also help to improve the plausibility of future economic interpretations of early industrialization. Technological change is, of course, central to the years 1760-1830, a period to which Thomas Ashton (1948) attached the label first industrial revolution. Thus, it is not surprising that new growth models of the endogenous-innovation variety are much more helpful for the analysis of this period than those that envisage endogenous growth without explicit reference to total-factor-productivity (TFP) growth (Crafts, 1995). It follows that it is important to consider Britain's social capability for growth (i.e., the impact of institutions and policy choices on TFP growth), rather than simply focusing on investment in human and physical capital.