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This paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers, each of whom is subject to private, idiosyncratic taste shocks. We propose a recursive method for finding feasible allocations that are incentivecompatible and that are Pareto optimal within this set. The method is applied to several parametric examples. We find that in an efficient allocation the degree of inequality continually increases, with a diminishing fraction of the population receiving an increasing fraction of the resources. We discuss the extent to which these allocations can be decentralized via market arrangements.

International relative prices across industrialized countries show large and systematic deviations from relative purchasing power parity. We embed a model of imperfect competition and variable markups in a quantitative model of international trade. We find that when our model is parameterized to match salient features of the data on international trade and market structure in the United States, it can reproduce deviations from relative purchasing power parity similar to those observed in the data because firms choose to price-to-market. We then examine how pricing-to-market depends on the presence of international trade costs and various features of market structure.

We study the implications for international relative prices of a simple Ricardian model of international trade with imperfect competition and variable markups, providing a tractable account of firm-level and aggregate prices. We show that both trade costs and imperfect competition with variable markups are needed to account for pricing-to-market at the firm and aggregate levels. We also show that international trade costs are essential, but pricing-to-market is not, to account for a high volatility of tradeable consumer prices relative to the overall CPI-based real-exchange rate.

We examine the quantitative impact of policy-induced changes in firms’ innovative investment on growth in aggregate productivity and output in a model that nests several of the canonical models. We isolate two statistics, the impact elasticity of aggregate productivity growth with respect to aggregate innovative investment and the degree of intertemporal knowledge spillovers in research, that shape the model’s predicted dynamic response to a change in the innovation intensity of the economy. Given measures of these statistics, there is only modest scope for increasing aggregate productivity and output over a 20-year horizon with uniform innovation subsidies to firms’ investments in innovation of a reasonable magnitude, but the welfare gains may be substantial.

We present a general equilibrium model of the decisions of firms to innovate and to engage in international trade. We use the model to analyze the impact of a reduction in international trade costs on firms ’ process and product innovative activity. We first show analytically that if all firms export with equal intensity, then a reduction in international trade costs has no impact at all, in steady-state, on firms ’ investments in process innovation. We then show that if only a subset of firms export, a decline in marginal trade costs raises process innovation in exporting firms relative to that of non-exporting firms. This reallocation of process innovation reinforces existing patterns of comparative advantage, and leads to an amplified response of trade volumes and output over time. In a quantitative version of the model, we show that the increase in process innovation is largely offset by a decline in product innovation. We find that, even if process innovation is very elastic and leads to a large dynamic response of trade, output, consumption, and the firm size distribution, the dynamic welfare gains are very similar to those in a model with inelastic process innovation.

In all markets, firms go through a process of creative destruction: entry, random growth, and exit. In many of these markets there are also regulations that restrict entry, possibly distorting this process. We study the public interest rationale for entry taxes in a general equilibrium model with free entry and exit of firms in which firm dynamics are driven by reputation concerns. In our model firms can produce high-quality output by making a costly but efficient initial unobservable investment. If buyers never learn about this investment, an extreme “lemons problem” develops, no firm invests, and the market shuts down. Learning introduces reputation incentives such that a fraction of entrants do invest. We show that if the market operates with spot prices, entry taxes always enhance the role of reputation to induce investment, improving welfare despite the impact of these taxes on equilibrium prices and total production.

The rate of time preference (RTP) and the intertemporal elasticity of substitution (IES) are two important factors shaping intertemporal consumption decisions. Models in which the RTP and/or the IES differ systematically between rich and poor households have different empirical and policy implications for economic development, growth, and the distribution of income and consumption from those of standard models in which these parameters are constant across households. In this paper, we estimate a model in which both RTP and IES are allowed to differ across rich and poor households using household-level panel data from India. Our empirical results are consistent with the view that the RTP is constant across poor and rich households, but the IES is larger for the rich than it is for the poor.

We examine the responses of prices and inflation to monetary shocks in an inventory-theoretic model of money demand. We show that the price level responds sluggishly to an exogenous increase in the money stock because the dynamics of households' money inventories leads to a partially offsetting endogenous reduction in velocity. We also show that inflation responds sluggishly to an exogenous increase in the nominal interest rate because changes in monetary policy affect the real interest rate. In a quantitative example, we show that this nominal sluggishness is substantial and persistent if inventories in the model are calibrated to match U.S. households' holdings of M2.