Knowledge that Transforms

The vulnerability to manipulate behaviour of resource allocation mechanisms is evaluated by determining the Nash equilibria of associated manipulation games. Under manipulation, all monotonic correspondences are essentially equivalent to the Walrasian correspondence. For most non-monotonic correspondences of interest, the initial position appears at equilibrium to be efficient.

When government liabilities (including money) are held in private portfolios only as stores of value and do not provide additional services (such as liquidity), real variables are not affected by changes in the money supply due to the government's trading in real assets (open market operations). This neutrality of monetary policy fails if the government either trades in nominal assets, or it distributes subsidies and levies taxes.

Monetary policy is analysed within a model that appeals to legal restrictions on private intermediation to explain the coexistence of currency and interest-bearing default-free bonds. The interaction between such legal restrictions and monetary policy is illustrated in a version of the overlapping generations model. The model shows that legal restrictions and the use of both currency and bonds permit the government to levy a nonlinear inflation tax and that such a tax may be better in terms of the Pareto criterion than a linear inflation tax.

This is a revised version of the second Review of Economic Studies Lecture presented in April 1983 at the joint meeting of the Association of University Teachers of Economics and the Royal Economic Society held in Oxford. The choice of lecturer is made by a panel whose members are currently Professors Hahn, Mirrlees and Nobay, and the paper was refereed in the usual way. GEM

We consider optimal nonuniform pricing schedules, where the price depends upon the amount purchased. Such schedules are regularly used by public utilities and other services. Welfare-optimal nonuniform prices are related to the theory of optimal uniform prices developed by Ramsey. We characterize situations in which upward or downward discontinuities in pricing schedules are optimal. Our results are applicable to a number of related problems, including optimal taxation, insurance, and incentives.

The paper develops a model of monopolistic competition in which the satisfaction levels consumers get from products are independently and identically distributed. Potential substitution among products then generates demand curves through the mechanism of order statistics. The value of extra variety can be calculated directly. Pareto, lognormal and beta distributions are investigated using numerical integration. Some but not all cases support the argument that the optimal number of firms exceeds the equilibrium number.

A social choice procedure is developed for selecting an alternative from a finite set on the basis of paired-comparison voting. Ballot data are used to construct a lottery on the alternatives that is socially as preferred as every other lottery. The constructed lottery is then used to select a winner. An axiomatization of social preferences among lotteries that justifies the procedure is included. The procedure will always select a consensus majority alternative when one exists, and it will never select an alternative that is Pareto dominated by another alternative.

Economists have traditionally viewed the allocation of workers among jobs through the concept of comparative advantage. This paper investigates hierarchical production models which display an absence of comparative advantage, in order to demonstrate that for hierarchical production there is a second allocating factor which plays an important role. Two results are found. First, the allocation of workers among jobs tends to match high ability workers with positions which value ability highly. Second, despite the fact that the models display an absence of comparative advantage, i.e. the standard theoretical explanation for why wage distributions might be skewed, the models' wage distributions are skewed to the right relative to the underlying ability distributions.

Recent developments in the economics of information emphasize the informational content of prices. We examine the degree to which prices convey information on product quality to uninformed agents. Under perfect competition, we show that a rational expectations equilibrium may not exist. When an equilibrium does exist, the information on quality conveyed by prices depends on the shape of the average cost curves and the relative numbers of informed and uniformed agents.

In this paper we present and estimate an adjustment cost model of industry employment which takes explicit account of both expectations and aggregation over different labour types. The resulting model is subject to a large number of tests and is a highly robust representation of the data. Finally forecasts are produced for manufacturing employment up to 1990.