Knowledge that Transforms

In this note, we present a strategy which relies on multi-period contracts and on a self-selection mechanism which induces the insured to announce his true risk in the first period, thus eliminating inefficiency due to adverse selection.

This paper develops a model in which a firm writes labour contracts with workers and debt contracts with creditors. Firms have more information than do the owners of the factors of production and they are also subject to limited liability. We show that if the limited liability constraint is binding then the employment level is inefficient relative to a situation of symmetric information. The firm is then embedded into a partial equilibrium model in which the real rate of interest is exogenously determined. We show that increases in the real rate of interest increase the inefficiency of the optimal employment contract and lead to layoffs in more states of nature than would occur at lower real interest rates. 1.

We examine the dynamic path of an economy after a change in regime, when neither the policy to be followed nor the reactions of the public are known. The model is an application of Kreps and Wilson's reputation model to Barro and Gordon's macroeconomic policy game. Equilibrium is defined to be the dynamically consistent solution to a game between the government and the private sector. It involves mixed strategies and Bayesian learning by both sides until the uncertainty about government and public behaviour is resolved. The absence of complete credibility of government policy and intransigence of private sector wage demands increase the output loss of disinflation. The analysis also sheds light on the strategic nature of economic policymaking and the role of information in macroeconomics.

The general question of forest management can be stated as follows. Suppose the planner of a piece of forest land obtains utility in any time period from the timber content of trees harvested in that period. If the planner wishes to maximize the discounted sum of such utilities starting from any initial forest, what pattern of planting and harvesting trees should it follow? This paper provides a systematic analysis to answer the above question. In particular, the optimal solution is related to the Faustmann periodic solution and the sustained yield solution, which are prominent in the forestry literature.

This paper develops a model of "large group" Chamberlinian monopolistic competition in which (1) there are many firms producing differentiated commodities, (2) each firm is negligible in that it can ignore its impact on, and hence reactions from, other firms; (3) free entry leads to zero profit of operating firms; but (4) each firm faces a downward-sloping demand curve. The existence of a monopolistically competitive equilibrium is established. In a companion paper, more particular questions such as whether the market provides too many or too few products are addressed for a special case of the model.

We present some examples of Nash equilibria that are independent of the distribution of some parameter across the economic agents and describe a general theorem that characterizes this phenomenon.

Equilibrium price distributions (for a homogeneous product) consistent with individual incentives are investigated. They arise in informationally imperfect markets in which the only primitive datum is the distribution of search costs. It is shown that single, multi- and continuous price distributions are all viable long-run phenomena depending on the nature of search costs. A method for computing equilibrium price distributions is also provided.

This paper examines the role of industry capacity in enforcing collusion in the context of repeated games. For a fixed capacity per firm it is shown that changes in the number of firms have a non-monotone effect on the best enforceable cartel price. This is due to the fact that while an additional firm lowers the share that each of the other firms enjoys at the collusive price it also increases the losses to each firm should the cartel fail.

This paper considers markets in which consumers are imperfectly informed about both product prices and quality levels offered by firms. We characterize necessary and sufficient conditions for existence of the various equilibrium configurations of price and quality that can arise in two paradigm cases; when all consumers prefer higher quality and when all consumers prefer lower quality. Our results suggest that firms will exploit imperfect information by charging noncompetitive prices as well as by offering other than ideal quality in the former case, but only by changing noncompetitive prices in the latter case.

This paper derives the limit distribution of the test statistics for the error components model proposed by Breusch and Pagan under the assumption of non-normal disturbances and under a sequence of local alternatives, and shows that the Breusch-Pagan tests are robust to non-normal disturbances. The paper also points out that the Breusch-Pagan tests do not make full use of the information provided by the one-sided alternative. And it proposes a one-sided alternative test for the case where time effects are absent from the model. The newly proposed test dominates the Breusch-Pagan test in the above case.