Knowledge that Transforms

We present a general model for the optimal consumption of a nonrenewable resource under two kinds of uncertainties. One source of uncertainty is in the resource discovery process and the other is in the economic environment that affects resource supply and demand conditions, such as exhaustion and development of a substitute. The problem is formulated as one of optimally controlling a storage process with Markov additive discoveries. The optimal value of the resource stock is characterized as the solution of a functional equation and the existence of an optimal consumption policy is established. It is shown that, in a given environment, the optimal consumption rate is increasing and the resource price is decreasing in the level of proven reserves. A counterexample is provided to show that better environments may in fact mean higher prices and lower consumption rates. Finally, a variety of examples is given to illustrate the scope and applicability of the general model.

Thomas Muench, Mark Walker; Are Groves-Ledyard Equilibria Attainable?, The Review of Economic Studies, Volume 50, Issue 2, 1 April 1983, Pages 393–396, htt

A monopolist may earn greater profits by setting a nonuniform price schedule (one in which the price varies with the quantity purchased) than by charging a uniform price. In general, the profit maximizing non-uniform price schedule and the welfare maximizing schedule do not coincide. Thus, there may be scope for improving market performance through regulation. The paper considers a regulator who has limited information and authority. The issues addressed centre around the question of whether the level of total market output can be taken as a measure of market performance. Conditions under which welfare is a monotonic function of the level of total output are derived. 1.

Although there has been much argument over the impact of variable inflation rates upon economic performance, there has been surprisingly little attempt to define the term "variability of inflation" carefully or to test proposed hypotheses connecting variability and the level of inflation. Precise definitions are given in the paper and a model is constructed showing that the level/variability hypothesis may be formulated in terms of the presence of heteroscedasticity in a regression model. This theoretical model is used to criticize existing studies, while an empirical study with Australian data illustrates the application of the approach.

Earlier work on aggregate production functions with capital-embodied technology showed that, when firms employ more than one capital type, conditions for partial capital ("equipment") aggregation and for total capital aggregation differ. This paper studies simultaneously existing partial and total aggregates. Existence of a total and one partial aggregate implies existence of the complementary partial aggregate. However, simultaneous existence requires each firm's production function to be strongly separable in its capital subaggregates. The use of subaggregates like "equipment" and "plant" together with an aggregate "capital" thus implies that "plant" and "equipment" are perfect substitutes and is highly questionable.

The hypothesis of non-jointness in input quantities (separate production functions) is well-known, and it plays an important role in many areas of economics. In this paper we define three additional forms of non-jointness which have received little or no attention in the literature, and which might be relevant for the firm as well as for the representation of the aggregate technology. We characterize all forms of non-jointness in terms of variable profit and joint cost functions. This yields a number of restrictions which are all testable empirically.

This paper presents a simple, multistage model of bargaining wherein a seller makes an offer that can be either accepted or refused.If rejected, the process continues.How the seller's ability to make commitments affects bargaining outcomes is analysed by comparing the commitment equilibria to those arising when commitment is impossible.The effects of increasing uncertainty about preferences and varying the length of the bargaining horizon are analysed.The ways in which the bargaining environment can be changed to improve outcomes are discussed.

This paper investigates a representative landlord's profit-maximization problem in a stationary economy. The landlord must decide on the quality of his housing units at the time of construction, maintenance expenditure over the life of the building, and the time of demolition or rehabilitation. The analysis can be applied to other problems with similar economic structure, notably equipment and durable good maintenance, overhaul and replacement.

In a perfectly competitive general equilibrium model with many periods, incomplete markets, and trading through time, we show: (a) current net market value maximization is unanimously favoured by shareholders as the objective of the firm (b) this corresponds to maximizing a relatively simple present discounted value formula (c) the formula is used to derive an Arrow-lind-type result on the absence of a risk premium in the discount factors for valuing investments whose risk is uncorrelated with social risk (d) competitive stock markets are constrained Pareto optimal in the sense of Diamond. Suppose that a perfectly competitive firm wishes to determine its intertemporal produc-tion-and-investment plan in accordance with its shareholders ' interests. Will it be able to satisfy this desideratum? And if so, what course should it pursue? In a general equilibrium model with many periods, uncertainty, incomplete markets, and trading through time, we show that 1. All initial shareholders of a perfectly competitive firm will wish that firm to choose a production-and-investment plan that maximizes its current net market value

This paper considers the wide class of problems in which a searcher can choose his sample size and whether or not to stop search at each of a sequence of decision points. Sequential search problems are the special cases in which the sample size chosen at each decision point is unity. Several properties of the optimal sample size sequence are established, with particular attention being paid to the effects of recall, decision horizons and fallback utilities. These properties yield necessary and sufficient conditions for the optimality of sequential search strategies within the class of problems considered. 1.