Knowledge that Transforms

Most of the available results on the existence of marginal cost pricing equilibrium are unsatisfactory in that they make a survival assumption that is stated as a condition on the production equilibria of the economy. The primary objective of this paper is to provide a relatively elementary existence result that replaces such an assumption with one on the primitive data of the economy. The author's main assumption is that no firm faces unbounded increasing returns in the sense that if it uses some input then the rate at which this input can be substituted into an output is finite. Copyright 1992 by The Econometric Society.

An experimental test of some qualitative predictions of the Kreps-Wilson (1982) model of reputation building is conducted in a version of a borrower-lender game first used experimentally by Colin Camerer and Keith Weigelt (1988). A systematic response to changes in the payoff function of borrowers is observed. However, the response is opposite to the direction predicted by the theory. Furthermore, the observed behavior cannot be reconciled with the theory by an appeal to "homemade" priors of the type specified by Camerer and Weigelt. Copyright 1992 by The Econometric Society.

Ariel Rubinstein, Zvi Safra, William Thomson, On the Interpretation of the Nash Bargaining Solution and Its Extension to Non-Expected Utility Preferences, Econometrica, Vol. 60, No. 5 (Sep., 1992), pp. 1171-1186

Orley Ashenfelter, Janet Currie, Henry S. Farber, Matthew Spiegel, An Experimental Comparison of Dispute Rates in Alternative Arbitration Systems, Econometrica, Vol. 60, No. 6 (Nov., 1992), pp. 1407-1433

The existence and stability of invariant distributions for stochastically monotone processes is studied. The Knaster-Tarski fixed point theorem is applied to establish existence of fixed points of mappings on compact sets of measures that are increasing with respect to a stochastic ordering. Global convergence of a monotone Markov process to its unique invariant distribution is established.under an easily verified assumption. Topkis's theory of supermodular functions is applied to stochastic dynamic optimization, providing conditions under which optimal stationary decisions are monotone functions of the state and induce a monotone Markov process. Applications of these results to investment theory, stochastic growth and industry equilibrium dynamics are given. Copyright 1992 by The Econometric Society.

Efficiency bounds for conditional moment restrictions with a nonparametric component are derived. There is a given function of the data (a random sample from a distribution F) and a parameter. The restriction is that a conditional expectation of this function is zero at some point in the parameter space. The parameter has two parts: a finite-dimensional component and a general function evaluated at a subset of the conditioning variables. An example is a regression function that is additive in parametric and nonparametric component, as arises in sample selection models. Copyright 1992 by The Econometric Society.

Predictions of the noisy rational expectations equilibrium (REE) model are found to be relatively accurate for both asset and information markets in the laboratory. When information about an asset's uncertain dividend is sold to a fixed number of highest bidders, prices, allocations, efficiency, and distribution of profit predictions of the full revelation REE model in the asset market dominate the predictions of the Walrasian model; demand for information shifts to the left and its price declines close to zero. When the price of information is fixed at a relatively high level, the number of informed agents and the informativeness of the asset market tends to adjust to permit the informed agents to recover their investment in information.

, Pierre-Yves Geoffard, Roger Guesnerie, Sunspot Fluctuations Around a Steady State: The Case of Multidimensional One-Step Forward Looking Economic Models, Econometrica, Vol. 60, No. 5 (Sep., 1992), pp. 1097-1126

A weakening of D. Kreps and R. Wilson's (1982) notion of sequential rationality is presented. The motivation stems from the difficulty in justifying sequentially rational behavior in subgames reachable only through a violation of sequential rationality. Although the present notion of weak sequential rationality is based upon extensive form considerations, it bears a close relation to R. Selten's (1975) normal form perfect equilibria. Backward induction outcomes can be achieved in generic games of perfect information with additional restrictions on beliefs. An example with imperfect information shows that sequential rationality is not the consequence of equilibrium play and the absence of incredible threats. Copyright 1992 by The Econometric Society.