Knowledge that Transforms

Cowell has shown that if an inequality measure satisfies (1) additivity, (2) decomposability (among population groups), (3) additivitiy of the group inequality measures, (4) symmetry within groups, and (5) twice differentiability, it can be written as an additive function of group measures belonging to the CES class or of the form ∑i, si, ln si, where si is the i-th person's share. Using a result from the theory of functional equations, I prove that the first two conditions, often imposed for analytical convenience, alone imply Cowell's structure. Symmetry, or other ethical postulates, can then be represented by simple parametric restrictions.

Singularity of the transition matrix in differential equation systems implies indeterminacy of the stationary equilibrium: we show that this indeterminacy is only apparent, and we provide the unique solution. There are many examples of, and good theoretical reasons for, singular transition matrices. The main result is that, when stability conditions arc satisfied, the resulting stationary equilibrium will depend upon the intial conditions and the parameters describing the speed of adjustment.

In the late 1970s, countries in Latin America's Southern Cone initiated attempts to lower domestic inflation rates through the progressive reduction of a preannounced rate of exchange-rate devaluation. The stabilization programs gave rise to massive capital inflows, real exchange-rate appreciation, and current-account deficits. This paper develops a stylized intertemporal framework in which the effects of a credible preannounced disinflation scheme can be studied. It is shown that even when agents have perfect foresight and markets clear continuously, the "capital inflows" phenomenon and the associated real appreciation may result. While unanticipated, permanent inflation changes are neutral in the paper, anticipated inflation is neutral only in exceptional circumstances. A preannounced disinflation operates by altering the path of an expenditure-based real domestic interest rate that depends on expected changes in the prices of liquidity services and nontradable consumption goods.

A procedure of sliding planning is considered in a simple dynamic model of Leontief type. At every step of this procedure, a long-term plan is generated starting from a current state of the economy for a future time interval of a fixed finite length (a “forecast horizon”), but only a decision concerning the first year is implemented. Proceeding from the attained state, the next step is carried out. Matrices of input-output coefficients are assumed to vary within uniform bounds. Provided that the forecast horizon is sufficiently long, the resulting sliding planning path is proved to be in a certain sense approximately optimal.

Dominant strategies seldom exist in non-cooperative games. Moulin's concept of a dominance solvable game generalizes, dominant strategy without dramatic loss in appeal. We consider a class of common-value auctions characterized by the property that the maximum of a collection of informative signals is a sufficient statistic for the entire collection. We demonstrate that this class of second-price auctions is dominance solvable.

Recent work on macroeconomics of price increases of intermediate imports while theoretically rigorous and elegant, is still unable to explain the stylized facts. This paper attempts to remedy the shortcomings of earlier papers by using a two-period model to properly analyse investment and savings behaviour and hence the current account. The model also incorporates disequilibrium in first-period labour and goods markets to compare the response of countries in different disequilibrium regimes to shocks in intermediate input prices.

We prove the existence of general economic equilibrium under uncertainty when agents form econometric models of the relationship among their private information, prices, and the state of the environment. The functional form of each agent's model is specified in advance, with a finite number of parameters to be determined. Agents are then thought of as performing linear least squares estimation of the parameters. Equilibrium requires not only that markets clear, but also that each agent be using the vector of parameter values which, within a compact convex set of parameters, gives the least squares best fit to the data that is generated by the working of the economy when agents adhere to their models.

If stock-outs are ignored and if demand shocks are additive, then optimal behaviour requires that the marginal cost of production (MC) be equated with the expected marginal revenue of increasing expected sales by one unit (EMR). However, with more general demand shocks (and still ignoring stock-outs), the excess of MC over EMR has the same sign as the covariance of the slope of the demand curve and the marginal valuation of inventory. The equality of EMR and MC is also broken by taking account of stock-outs, even if demand shocks are additive. If there is a production lag, then taking account of stock-outs implies that optimal behaviour will be characterized by production smoothing even if the cost of production is linear. Two alternative definitions of production smoothing are presented and optimal behaviour in the presence of stock-outs displays each type of smoothing.

We explore a managerial model of investment behaviour in which an incentive problem arises because one input factor (managerial effort) is not publicly observed. We show that an optimal incentive contract leads to investment levels which are below first-best in low states and that this phenomenon can account for greater cyclical variability in aggregate production and investment. From the perspective of incentive scheme design, a special feature of the model is that screening takes place over two variables (investment and output) rather than one as is customary.

This study builds on recent research giving the notion of capacity utilization clearer economic foundations. In this research optimal output Y* is defined as the minimum point on the firm's short-run average total cost curve, and capacity utilization is then computed as CU=Y/Y*, where Y is actual output. Here I extend these concepts to include adjustment costs due to changes in the stock of capital, and nonstatic expectations of future output demand and input prices. The more general notion of CU is shown to depend on the shadow values of the firm's quasifixed inputs, and is decomposed to isolate the effects of anticipatory expectations. An empirical comparison is then made between traditional indices and alternative economic CU measures, using annual U.S. manufacturing data 1954-80. The calculated indices exhibit plausible patterns, which can be interpreted as the effects of nonstatic expectations and adjustment costs.