This paper explores the formulation and analysis of linear equilibrium models of investment in which learning is perpetual and informationally decentralized firms need never share the same beliefs concerning time series relevant to their decisions. Recursive, Kalman filtering techniques are shown to be applicable in an illustrative, hierarchical information structure, and a nonlinear technique of undetermined coefficients is shown to be applicable in an illustrative, symmetric information structure in which there is a confounding of laws of motion with forecasting problems. The equilibrium time series of these models can display interesting movement in response to shocks and measurement errors, including persistence, certain cross-correlation properties, and damped oscillations. That is, forecasts errors are serially correlated over decision makers and serially correlated over time in a certain crucial sense. More generally, these models do place restrictions on observed time series and can be fitted to data.

[Informational asymmetries can play a key role in explaining the existence and nature of multiperiod contracts. In an illustrative risk-sharing model even relatively short (two-period) contracts can be mutually beneficial if there is private information, though one-period contracts suffice otherwise. Further, contracts which are Pareto optimal relative to the environment and the information structure are defined and partially characterized. An example illustrates how otherwise inefficient intertemporal tie-ins can be used optimally to mitigate incentive problems. The obvious borrowing-lending schemes are not private-information Pareto optimal; in these, period-by-period actions are not sufficiently constrained. Discounting affects the form of the optimal contract but none of these qualitative conclusions.]

Informational asymmetries can play a key role in explaining the existence and nature of multiperiod contracts. In an illustrative risk-sharing model even relatively short (two-period) contracts can be mutually beneficial if there is private information, though one-period contracts suffice otherwise. Further, contracts which are Pareto optimal relative to the environment and the information structure are defined and partially characterized. An example illustrates how otherwise inefficient intertemporal tie-ins can be used optimally to mitigate incentive problems. The obvious borrowing-lending schemes are not private-information Pareto optimal; in these, period-by-period actions are not sufficiently constrained. Discounting affects the form of the optimal contract but none of these qualitative conclusions.

This paper presents a detailed theoretical derivation and justification for methods used to compute solutions to a multi-period (including infinite-period), continuum-agent, unobservedeffort economy. Actual solutions are displayed illustrating cross-sectional variability in consumption and labour effort in the population at a point in time and variability for a typical individual over time. The optimal tradeoff between insurance and incentives is explored and the issue of excess variability is addressed by consideration of the analogue full-information economy and various restricted-contracting regimes.

[The purpose of this paper is to provide a method for characterizing efficient allocation processes and efficient allocations for a large class of environments in which asymmetric information is an important factor. This method is based on a rigorous application of statistical decision theory and makes explicit both the information available to agents ex ante and the way in which information is transmitted during any multistage allocation process.]

This paper uses a structural model to understand, predict, and evaluate the impact of an exogenous microcredit intervention program, the Thai Million Baht Village Fund program. We model household decisions in the face of borrowing constraints, income uncertainty, and high-yield indivisible investment opportunities. After estimation of parameters using pre-program data, we evaluate the model's ability to predict and interpret the impact of the village fund intervention. Simulations from the model mirror the data in yielding a greater increase in consumption than credit, which is interpreted as evidence of credit constraints. A cost-benefit analysis using the model indicates that some households value the program much more than its per household cost, but overall the program costs 20 percent more than the sum of these benefits.

This paper explores the extent to which standard, general equilibrium analysis of Pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems.Allowing for lotteries, contracts with random components, we first establish that an adverse-selection insurance economy, a moral-hazard insurance economy, a signaling economy, and a private-information labor market economy are all special cases of a simple, general structure.We then show that techniques for characterizing Pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable; allowing for lotteries, we show how to characterize the optimal allocations for the adverse-selection insurance and labor market economies.We then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy-wide resource constraints in a homogeneous way (other kinds of diversity are not critical).For economies with moral hazard which satisfy the homogeneity condition, competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk.The adverse-selection insurance and signaling economies, however, do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system.

Macroeconomic development remains an important policy goal because of its ability to lift entire populations out of poverty. In our review of the literature, we emphasize that the best way to achieve this objective is to embrace a synthesis of methods and ideas, with the science of experiments as a unifying feature. Randomized controlled trials need representative data and structural modeling, and macro models need to be designed and disciplined to the realities and data of developing-country economies. Macroeconomic models have key lessons for gathering and analyzing micro evidence and for moving to an evaluation of macro policy. Resource constraints, heterogeneity, general equilibrium effects, obstacles to trade, dynamics, and returns to scale can all play key roles. A synthesis for macro development is well under way.

We propose a model with local spatial markets and heterogeneous agents to understand and evaluate the geographic expansion of bank branches after banking deregulation in Thailand. The model features heterogeneity in financial frictions across regions, with the costs of accessing credit and deposits depending on the distance from the nearest branch. Disciplined by micro estimates of the effects of branch openings, the model reproduces salient regional and aggregate patterns concerning occupational choice, financial access, and inequality. We apply the model to study two counterfactual financial sector policies in distant markets, one subsidizing branches and the other subsidizing household deposits.

We propose a coherent unified approach to the study of the linkages among economic growth, financial structure, and inequality, bringing together disparate theoretical and empirical literature. That is, we show how to conduct model-based quantitative research on transitional paths. With analytical and numerical methods, we calibrate and make tractable a prototype canonical model and take it to an application, namely, Thailand 1976–1996, an emerging market economy in a phase of economic expansion with uneven financial deepening and increasing inequality. We look at the expected path generated by the model and conduct robustness experiments. Because the actual path of the Thai economy is imagined here to be just one realization of many possible histories of the model economy, we construct a covariance-normalized squared error metric of closeness and find the best-fit simulation. We also construct a confidence region from a set of simulations and formally test the model. We broadly replicate the actual data and identify anomalies.