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There are two ways in which the quantity of money may be included in a general equilibrium system: as a datum, whose value is fixed exogenously, or as an unknown, whose value is determined by the equilibrium system itself. Let them be called active money and passive money, respectively. Current monetary theory uses the first approach. The Ricardo-Walras-Keynes tradition in general equilibrium models is clearly of the active-money variety. This is also true of the more contemporary versions, such as Patinkin's well-known system (1965).[1] Apart from the main stream of thought, however, a number of analyses exist which imply passive money. The gold--standard model, as it is usually expounded, belongs to this class. The price of gold in terms of money is given, while the stock of money is endogenously determined by the set of equilibrium conditions. The form in which the quantity of money adapts to its equilibrium level differs according to the institutional mechanism: Convergence is assured through monetization and demonetization of gold in the pure gold-currency system, and through convertibiliy of notes into gold and vice versa in the gold-standard system with paper money. In either case, the money supply is allowed to conform to its equilibrium volume. This kind of monetary system, in which the money price of a certain product or commodity is a datum and the quantity of money a dependent magnitude, may be denoted in general as a commodity standard. Today the chief motivation for passive-money hypotheses stems from inflation theory. The labor standard underlies nearly all cost-inflation models. Structural inflation analyses, on the other hand, presuppose the existence of some commodity standard; they view the main strand of causation as framing from the price level to the quantity of money, rather than in the opposite way.[2] Occasionally credit-standard arguments are combined with cost- or structural-inflation theses.[3] Thus the assumption of passive mon... [ABSTRACT FROM AUTHOR]

A central statement of the theory of natural trading partners is that preferential trading with regional trading partners is less likely to be trade diverting and therefore geographically proximate partners are to be considered “natural” partners for preferential arrangements. This paper examines this question empirically. The analytical framework involves a general equilibrium model of preferential trade and an econometric model with tight links to this theory. This framework is used to implement tests of the natural trading partners hypothesis using U.S. trade data for the years 1964–95: Welfare changes that would result from preferential tariff reductions by the United States against various trading partners are first estimated, and correlations with bilateral “distance” measures (with and without controls for income levels) are then examined. Since the argument for “natural” trading partners is based on the greater likelihood of geographically proximate countries to be more significant trading partners, correlations between the welfare change estimates and bilateral trade volume are examined as well. Both geographic proximity and trade volume are found to have no effect. Thus this paper is unable to find any support for the natural trading partners theory in U.S. data. [ABSTRACT FROM AUTHOR]

This paper presents a sorting model of education in with individuals are tested in school. By assuming that higher-ability individuals are more likely to succeed on a given test one can construct a sorting model of education that does not hinge on the more able having lower nonpecuniary costs of schooling. Nash equilibria always exist in this model (even with a continuum of types of individuals); however, some are "unreasonable." To eliminate these unreasonable Nash equilibria, more restrictive definitions of equilibrium are proposed. I also show that when schooling affects productivity--and therefore a worker's probability of passing the test--a sorting equilibrium may be characterized by too little investment in education. This paper extends the important work of Spence (1974), Stiglitz (1975), and Riley (1979a, 1979b) on sorting theories of education by modeling the educational choices of individuals in game-theoretic terms and making two assumptions: (1) individuals are not perfectly informed about their own productivity, and (2) individuals are tested upon their completion of schooling. I also combine the sorting and human capital analyses by allowing education to increase productivity and show that if education increases the productivity of workers as well as enabling the more able workers to sort themselves, these sorting effects may lead to underinvestment in education. This result contradicts the main normative result of screening models of education: If skills are hierarchical, so that if Joe is more productive than Jim at any job he is more productive at all jobs, there is overinvestment in schooling as workers use education to signal their abilities. Although in a pure sorting model education always leads to overinvestment in education while human capital models lead to optimal investment, when both effects are modeled there may be too little investment in education. This result holds even if the more able learn faster in school. [ABSTRACT FROM AUTHOR]

In this paper, we investigate whether or not rational expectations equilibria are immune to influence from extrinsic uncertainty. That is, Can self-fulfilling prophecies have a real impact? Or, in short, Do sunspots[1] matter?[2] We consider a simple exchange economy with a finite time horizon, two commodities, two states of nature, and a finite number of consumers. In Section II, consumers are introduced. They are assumed to have von Neumann-Morgenstern utility functions and commodity endowments which are independent of the state of nature. Since uncertainty does not then have any effect on the fundamentals of the economy, it is purely extrinsic uncertainty; we refer to it simply as sunspot activity. Throughout most of the paper, we adopt a very strong version of the rational expectations hypothesis: Consumers share the same beliefs about sunspot activity. This allows the interpretation that subjective probabilities are equal to objective probabilities. The usual extensions of general equilibrium theory fail to represent an essential and significant aspect of actual intertemporal economics: The trading process must take place in time. Individuals may be able to make complicated trades involving future deliveries contingent upon the revealed state of nature, but these trades must be struck when each of the parties is alive. Markets in all commodities may be complete, but consumers are restricted from participating in markets which meet (say) before they are born. Section IV defines and analyzes market equilibrium. This section might appear to be our mathematical ghetto. Indeed, there is a good deal of notation (which is the only way we know to make these ideas precise!), but the arguments themselves are not very complicated. Equilibrium in the economy with securities and commodities markets is shown to be equivalent to equilibrium in an economy with contingent-claims markets. (This equivalence is the one established by Arrow [1964].) The latter formulation... [ABSTRACT FROM AUTHOR]

It has often been argued that prices are sticky in the United States. However, the empirical papers that have claimed to support this view have not reflected any formal behavioral theory. This paper presents a theory that justifies price stickiness, namely, that firms, fearing to upset their customers, attribute a cost to price changes. The rational expectations equilibrium of an economy with many such firms is presented, estimated with postwar U.S. data, and tested against alternative hypotheses. The results largely support the model. Furthermore, the hypothesis that prices are not sticky is rejected by U.S. data. It is often argued that prices are sticky in the United States. In particular, various empirical papers have claimed to provide evidence that supports this view. However, these empirical papers have suffered from one major common flaw. None of them estimated equations that represented a formal theory. Therefore their results are very hard to interpret.[1] In general these studies have assumed that prices adjust at a constant rate to their desired value. This paper presents evidence related to a specific model of sticky prices. In this model, prices are sticky because firms face a subjective cost to changing their prices. They are sticky in the sense that they are closer to those prices which prevailed the period before than they would be if no agent's decisions at t depended on prices at t - 1. The model incorporates a number of specific assumptions about the functional forms of the demand functions, production functions, etc. It therefore significantly reduces the set of outcomes that do not contradict it. [ABSTRACT FROM AUTHOR]

This paper develops an equilibrium model of the determination of exchange rates and prices of goods. Changes in relative prices of goods, due to supply or demand shifts, induce changes in exchange rates and deviations from purchasing power parity. These changes may create a correlation between the exchange rate and the terms of trade, but this correlation cannot be exploited by the government to affect the terms of trade by foreign exchange market operations. [ABSTRACT FROM AUTHOR]

This paper derives a model of international capital flows from a portfolio equilibrium model of an open economy under fixed exchange rates. Our approach is a synthesis of the stock equilibrium approach to capital flows developed by Branson (1968)[1] and the monetary approach to balance-of-payments theory as developed for example in Mundell (1968) and Johnson (1971, 1972). [2] Capital flows are viewed basically as the mechanism by which a domestic excess demand for money is removed, and consequently the key explanatory variables in our model are changes in domestic income, the current-account balance, changes in domestic monetary instrument, and changes in foreign interest rates, since these will all affect either the demand for or supply of money. Our approach avoids the problem of simultaneous equations bias that occurs when domestic interest rates are treated as being exogenously determined--a bias that would appear to be a serious problem in previous studies. We have used quarterly data to estimate the capital-flow equations derived from the model for four countries: Germany, Australia, Netherlands, and Italy, and we find strong evidence in support of our view of the determinants of capital flows. For policy purposes the approach developed in this paper is most useful, since our reduced-form equations contain the instruments of monetary policy as explanatory variables, thereby facilitating prediction of the effect of changes in monetary policy on capital flows. In particular, we are able to obtain estimates of the extent to which monetary policy actions are by induced. capjta`.fio.ws. We find that the offset coefficient ranges from 43 to 80 percent and is the highest for Germany. We also find that, for all the four countries, private capital flows finance, to a large extent, deficits or surplus current account, the offset coefficient on the current account ranging from 0.63 to close to one. The justification for including the current account in our ... [ABSTRACT FROM AUTHOR]

This paper examines the nature of equilibrium in a market where there is no central clearing house to match sellers with buyers. In this setting inventories (or capacity) and stockouts are substitutes for a central market. The model has numerous empirical implications which are discussed in Section X. Specifically, the model helps to explain how multiple prices can exist in a modified competitive equilibrium and how entrepreneurs might use vertical integration and various marketing devices as substitutes for a central market. The last section of the paper examines how the equilibrium is affected by the amount of information that is known by consumers and sellers. [ABSTRACT FROM AUTHOR]

This paper studies oligopoly firms' dynamic pricing strategies in a gasoline market before and after the introduction of a unique law that constrains firms to set price simultaneously and only once per day. The observed gasoline pricing behavior, both before and under the law, is well captured by the Edgeworth price cycle equilibrium in the Maskin and Tirole dynamic oligopoly model. My results highlight the importance of price commitment in tacit collusion. I also find evidence that the price leadership outcome under the law is better predicted by mixed strategies play than by alternative hypotheses. [ABSTRACT FROM AUTHOR]

This paper studies the question of the stability over time of the so-called "structural parameters" of dynamic stochastic general equilibrium (DSGE) models. To answer this question, we estimate a medium-scale DSGE model with real and nominal rigidities, using U.S. data. In our model, we allow for parameter drifting and rational expectations of the agents with respect to this drift. We document that there is strong evidence that parameters change within our sample. We illustrate variations in the parameters describing the monetary policy reaction function and in the parameters characterizing the pricing behavior of firms and households. Moreover, we show how the movements in the pricing parameters are correlated with inflation. Thus, our results cast doubts on the empirical relevance of Calvo models. [ABSTRACT FROM AUTHOR]

This paper endogenizes the market structure of an economy with heterogeneous agents who want to form bilateral matches in the presence of search frictions and when utility is nontransferable. There exist infinitely many marketplaces, and each agent chooses which marketplace to be in: agents get to choose not only whom to match with but also whom they meet with. Perfect segmentation is obtained in equilibrium, where agents match with the first person they meet. All equilibria have the same matching pattern. Although perfect assortative matching is not obtained in equilibrium, the degree of assortativeness is greater than in standard models. [ABSTRACT FROM AUTHOR]

This paper analyzes Markov equilibria in a model of strategic lending in which (i) agents cannot commit to long-term contracts, (ii) contracts are incomplete, and (iii) incumbent lenders can coordinate their actions. Default cycles occur endogenously over time along every equilibrium path. After a sequence of bad shocks, the borrower in a competitive market accumulates debt so large that the incumbent lenders exercise monopoly power. Even though the incumbents could maintain this power forever, they find it profitable to let the borrower regain access to the competitive market after a sequence of good shocks. Equilibria are computed numerically, and their attributes are qualitatively consistent with numerous known empirical facts on sovereign lending. In addition, the model predicts that a borrower who accumulates debt overhang will regain access to the competitive credit market only after good shocks. This prediction is shown to be consistent with data on emerging market economies. [ABSTRACT FROM AUTHOR]

This paper compares the predictions for the market value of firms from the Gordon growth model with those from a dynamic general-equilibrium model. The predictions for movements in the market value of firms following shifts in preferences, growth prospects, and risk are quantitatively and qualitatively different across the models. While previous research illustrated how a drop in the required return or an increase in the growth rate of the economy can explain the run-up in equity values in the 1990s in the Gordon growth model, the general-equilibrium model suggests that such results are misleading. [ABSTRACT FROM AUTHOR]

Reputational career concerns provide incentives for short-lived agents to work hard, but it is well known that these incentives disappear as an agent reaches retirement. This paper investigates the effects of a market for firm reputations on the life cycle incentives of firm owners to exert effort. A dynamic general equilibrium model with moral hazard and adverse selection generates two main results. First, incentives of young and old agents are quantitatively equal, implying that incentives are “ageless” with a market for reputations. Second, good reputations cannot act as effective sorting devices: in equilibrium, more able agents cannot outbid lesser ones in the market for good reputations. In addition, welfare analysis shows that social surplus can fall if clients observe trade in firm reputations. [ABSTRACT FROM AUTHOR]

Once the zero bound on nominal interest rates is taken into account, Taylor-type interest rate feedback rules give rise to unintended self-fulfilling decelerating inflation paths and aggregate fluctuations driven by arbitrary revisions in expectations. These undesirable equilibria exhibit the essential features of liquidity traps since monetary policy is ineffective in bringing about the government's goals regarding the stability of output and prices. This paper proposes several fiscal and monetary policies that preserve the appealing features of Taylor rules, such as local uniqueness of equilibrium near the inflation target, and at the same time rule out the deflationary expectations that can lead an economy into a liquidity trap. [ABSTRACT FROM AUTHOR]

This paper studies premarital parental investments in children's wealth, where spousal wealth is a public good in marriage. By investing in their children's wealth, parents increase the wealth of their children and the quality of the spouses that their children can marry. In large marriage markets, the hedonic return to investment internalizes all the external benefits of premarital investment in wealth so that the competitive equilibrium is efficient. Marriage market competition also increases investments in small marriage markets relative to no competition, but equilibrium investments are not efficient. [ABSTRACT FROM AUTHOR]

Equilibrium is analyzed for a simple barter model with identical risk-neutral agents where trade is coordinated by a stochastic matching process. It is shown that there are multiple steady-state rational expectations equilibria, with all non--corner solution equilibria inefficient. This implies that an economy with this type of trade friction does not have a unique natural rate of unemployment. Using a barter model with identical, risk-neutral individuals where trade is coordinated by a stochastic matching process, this paper examines rational expectations steady-state equilibria. The model is shown to have two properties: multiple steady-state equilibria and local inefficiency of all non--corner solution equilibria. The source of local inefficiency is a trading externality, while the source of multiple equilibria is the positive feedback working through this externality. The externality comes from the plausible assumption that an increase in the number of potential trading panners makes trade easier. The positive feedback is that easier trade, in turn. makes production more profitable. [ABSTRACT FROM AUTHOR]

This paper estimates a general equilibrium model of suppressed inflation using quarterly U.S. data for the sample period 1942:IV-48:II. It finds that the price level was reduced by at least 30.4 percent and that this suppression of inflation reduced employment by at least 11.7 percent and output by at least 7.1 percent. It also finds that monetary policy could have been equally successful in combating inflation but would not have had the side effect of reducing employment and output. In this paper, I look at the effects of price controls during World War II. I find that general price controls worked in the sense that the price level and the inflation rate were substantially lower than they would have been in the absence of price controls. General price controls, however, failed to work in the sense of maintaining a high level of employment and output. I find that a tight monetary policy could have been equally successful in preventing inflation and that such a monetary policy would have resulted in at least 11.7 percent more employment and 7.1 percent more output.[1] Therefore, even if one could solve all the problems of administering general price controls, they would be no bargain. [ABSTRACT FROM AUTHOR]

The Tiebout literature is incomplete, this paper argues, because it has not fully accounted for the capitalization of local fiscal variables into house values. The paper explains why capitalization arises, why it persists in long-run equilibrium, how it affects both residential location and the outcome of local voting, and why it interferes with the efficiency of a system of local governments. The analysis, which is based on the main Tiebout assumptions plus a property tax, combines a model of household bids in a housing market with a median-voter model of local public service determination. Other authors confuse the analysis of the demand for housing by assuming that households vote for services and bid for housing at the same time. These problems are recognized in the literature, and several recent articles, including ones by Sonstelie and Portney (1978) and Rose-Ackerman (1979), struggle with them. But none of these articles combines models of the housing market and of the voting process with a complete analysis of capitalization. This paper is an attempt to fill that gap. [ABSTRACT FROM AUTHOR]

This paper shows that, in the absence of a complete set of risk markets, prices provide incorrect signals for guiding production decisions. Even if all individuals have rational expectations concerning the distribution of prices which will prevail on the market next period, the market allocation is, in general, not a constrained Pareto optimum. Essentially the only conditions under which, for all technologies, the market equilibrium is a constrained Pareto optimum are those in which risk markets are redundant. We derive the necessary and sufficient conditions for redundancy of risk markets, which turn out to be extremely restrictive. There is another way of looking at these results which may prove instructive. In a world of complete markets, insurance markets allocate risk, and goods markets allocate goods; but in the absence of insurance markets, the remaining goods markets have to serve both functions. For example, if the source of the variability lies on the supply side, and if demand is not too inelastic, the negative correlation between price and output means that the output market transfers some of the risk facing producers to consumers, and producers' income variability will be less than their output variability. In a rational expectations equilibrium, each farmer correctly forecasts the distribution of prices and chooses the level and riskiness of output to maximize his expected utility. Together, these output decisions generate a distribution of total supply which in turn generates the price distribution. No one farmer can influence the price distribution, but each one is affected by it, and, collectively, their actions reproduce it. The price distribution is, therefore, a public good, or collective consumption good, and its form affects the level and distribution of income risk. However, we already know that the competitive market will, in general, fail to induce the optimum level of supply of public goods, so it should come as no surprise that t... [ABSTRACT FROM AUTHOR]

This paper develops a general model of multimarket disequilibrium and uses it to explain the disequilibrium behavior of prices and interest. Section I summarizes the conventional distinctions between the dynamic loanable-funds and liquidity-preference theories of interest and between the dynamic quantity and expenditure theories of prices. Sections II and III develop the concepts of notional demand and gradual market clearing, which are essential in the conventional analysis. The next three sections develop a choice-theoretic theory of effective demands, starting in Section IV with a generalization of Clower's dual-decision hypothesis to a multimarket context. Section V analyzes the determination of quantity constraints on individual transactions implied by market disequilibriums. Section VI deals with aggregation of the individual effective-demands functions. Finally, Section VII shows how the aggregate effective demands determine the dynamic behavior of the interest rate and price level, and Section VIII shows that the traditional dynamic theories mentioned above are all special cases of the more general effective-demands theory. A priori, the dynamic loanable-funds, liquidity-preference, quantity, and expenditure theories all turn out to be consistent with the structure of exchange in a monetary economy. Which better approximates reality depends upon choice-theoretic behavioral parameters which determine the pattern of response to the constraints imposed by market disequilibriums. [ABSTRACT FROM AUTHOR]

The international diversification puzzle is the fact that country portfolios are on average biased toward domestic assets, while one-good international macro models with nondiversifiable labor income risk predict the opposite pattern of diversification. This paper embeds a portfolio choice decision in a two-good international business cycle model and provides a closed-form solution for equilibrium country portfolios. Equilibrium portfolios are biased toward domestic assets because endogenous international relative price fluctuations make domestic assets a good hedge against labor income risk. Evidence from developed economies in recent years is qualitatively and quantitatively consistent with the mechanisms highlighted by the theory. [ABSTRACT FROM AUTHOR]

It is folklore among monetary theorists that, under laissez faire, without ad hoc assumptions that favor money over bonds, there do not exist equilibria in which government-issued fiat money coexists with nominal default-free, interest-bearing government bonds with similar physical characteristics. This proposition is the basis for the strongest version of the rate-of-return-dominance puzzle. In this paper I show that if—as has been the case throughout monetary history—the physical object used as fiat money is heterogeneous in an extraneous attribute, then there exist equilibria in which money coexists with interest-bearing bonds. [ABSTRACT FROM AUTHOR]

This paper proposes a new mechanism for combinatorial assignment--for example, assigning schedules of courses to students--based on an approximation to competitive equilibrium from equal incomes (CEEI) in which incomes are unequal but arbitrarily close together. The main technical result is an existence theorem for approximate CEEI. The mechanism is approximately efficient, satisfies two new criteria of outcome fairness, and is strategy proof in large markets. Its performance is explored on real data, and it is compared to alternatives from theory and practice: all other known mechanisms are either unfair ex post or manipulable even in large markets, and most are both manipulable and unfair. [ABSTRACT FROM AUTHOR]

This paper presents an equilibrium labor search model in which workers can simultaneously apply to multiple firms to increase their search intensity. They observe firms' wage postings before choosing where to apply. Owing to coordination frictions, a firm may not receive any applications; otherwise it is able to hire unless all its applicants have better offers. It is shown that the equilibrium converges to the efficient Walrasian outcome as application costs vanish. Even for nonnegligible application costs, the entry of firms, the search intensity, and the number of ?lled vacancies are constrained efficient. Wage dispersion is essential for constrained efficiency. [ABSTRACT FROM AUTHOR]

This paper studies the role of endogenous producer entry and product creation for monetary policy analysis and business cycle dynamics in a general equilibrium model with imperfect price adjustment. Optimal monetary policy stabilizes product prices, but lets the consumer price index vary to accommodate changes in the number of available products. The free-entry condition links the price of equity (the value of products) with marginal cost and markups and hence with inflation dynamics. No-arbitrage between bonds and equity links the expected return on shares, and thus the financing of product creation, with the return on bonds, affected by monetary policy via interest rate setting. This new channel of monetary policy transmission through asset prices restores the Taylor Principle in the presence of capital accumulation (in the form of new production lines) and forward-looking interest rate setting, unlike in models with traditional physical capital. We also study the implications of endogenous variety for the New Keynesian Phillips curve and business cycle dynamics more generally, and we document the effects of technology, deregulation, and monetary policy shocks, as well as the second moment properties of our model, by means of numerical examples. [ABSTRACT FROM AUTHOR]

The article refers to "Aggregate Implications of Credit Market Imperfections," which is by Kiminori Matsuyama and is in this issue. Topics include: research on financial market imperfections and aggregate economic activity; economic models that consider agency theory and borrowing constraints; the statistical significance and reliability of prediction models; an extension of the Matsuyama model that includes noncontingent debt and a steady-state framework for quantitative analysis of credit market frictions; and an explanation of equilibrium equations in a frictionless financial model with infinitely lived agents.

Credit market imperfections provide the key to understanding many important issues in business cycles, growth and development, and international economics. Recent progress in these areas, however, has left in its wake a bewildering array of individual models with seemingly conflicting results. This paper offers a road map. Using the same single model of credit market imperfections throughout, it brings together a diverse set of results within a unified framework. In so doing, it aims to draw a coherent picture, so that one is able to see close connections between these results, thereby showing how a wide range of aggregate phenomena may be attributed to the common cause. They include, among other things, endogenous investment-specific technical changes, development traps, leapfrogging, persistent recessions, recurring boom-and-bust cycles, reverse international capital flows, the rise and fall of inequality across nations, and the patterns of international trade. The framework is also used to investigate some equilibrium and distributional impacts of improving the efficiency of credit markets. One recurring finding is that the properties of equilibrium often respond nonmonotonically to parameter changes, which suggests some cautions for studying aggregate implications of credit market imperfections within a narrow class or a particular family of models. [ABSTRACT FROM AUTHOR]

This paper introduces signaling in a global game so as to examine the informational role of policy in coordination environments such as currency crises and bank runs. While exogenous asymmetric information has been shown to select a unique equilibrium, we show that the endogenous information generated by policy interventions leads to multiple equilibria. The policy maker is thus trapped into a position in which self-fulfilling expectations dictate not only the coordination outcome but also the optimal policy. This result does not rely on the freedom to choose out-of-equilibrium beliefs, nor on the policy being a public signal; it may obtain even if the policy is observed with idiosyncratic noise. [ABSTRACT FROM AUTHOR]

This paper considers the costs of reducing consumption of a good by making its production illegal and punishing apprehended illegal producers. We use illegal drugs as a prominent example. We show that the more inelastic either demand for or supply of a good is, the greater the increase in social cost from further reducing its production by greater enforcement efforts. So optimal public expenditures on apprehension and conviction of illegal suppliers depend not only on the difference between the social and private values from consumption but also on these elasticities. When demand and supply are not too elastic, it does not pay to enforce any prohibition unless the social value is negative. We also show that a monetary tax could cause a greater reduction in output and increase in price than optimal enforcement against the same good would if it were illegal, even though some producers may go underground to avoid a monetary tax. When enforcement is costly, excise taxes and quantity restrictions are not equivalent. [ABSTRACT FROM AUTHOR]

Numerous design and repair services are nonstandard and have to be tailored to the needs of the individual buyers. Prospective sellers have to make preliminary efforts in order to come up with a plan, and buyers often consult a number of sellers before making a purchase. The literature on procurement studies such situations for the case of a large buyer who can commit to a procurement mechanism. The present paper considers the case of a small buyer who cannot commit to a mechanism. It develops a simple sequential procurement model and investigates its equilibria and welfare optima. The main qualitative conclusion concerns the inherent inefficiency of the equilibria. The price competition results in too low consultation fees, which induce overly intense search by buyers, which in turn erodes sellers' effort incentives. [ABSTRACT FROM AUTHOR]

Motivated by the behavior of asset prices, trading volume, and price volatility during episodes of asset price bubbles, we present a continuous-time equilibrium model in which overconfidence generates disagreements among agents regarding asset fundamentals. With short-sale constraints, an asset buyer acquires an option to sell the asset to other agents when those agents have more optimistic beliefs. As in a paper by Harrison and Kreps, agents pay prices that exceed their own valuation of future dividends because they believe that in the future they will find a buyer willing to pay even more. This causes a significant bubble component in asset prices even when small differences of beliefs are sufficient to generate a trade. In equilibrium, bubbles are accompanied by large trading volume and high price volatility. Our analysis shows that while Tobin's tax can substantially reduce speculative trading when transaction costs are small, it has only a limited impact on the size of the bubble or on price volatility. [ABSTRACT FROM AUTHOR]

This paper develops a dynamic model with transaction costs to determine the equilibrium resale pattern in a market for a durable good. The key result is that the probability of resale is nonmonotonic in the age of the good. Trade volume is relatively low in the very beginning and in the middle of a good's life. This result helps explain observed variations of resale rates across vintages for the U.S. market of used cars. [ABSTRACT FROM AUTHOR]

This paper develops a dynamic general equilibrium model of an agricultural economy in which poor farmers borrow from rich farmers. Because output is stochastic (we allow for idiosyncratic and aggregate shocks), there may be default ex post. We compare equilibria with and without political intervention. Intervention takes the form of a moratorium and is decided by voting. When bad economic shocks are highly likely, state-contingent debt moratoria always improve ex post efficiency and may also improve ex ante efficiency. Moreover, the threat of moratoria enhances efficiency. When adverse macro shocks are unlikely, state-contingent moratoria always improve ex ante welfare by completing incomplete debt contracts. [ABSTRACT FROM AUTHOR]

This paper develops a general equilibrium model with putty-clay technology, investment irreversibility, and variable capacity utilization. Low short-run capital-labor substitutability induces the putty-clay effect of a tight link between changes in capacity and movements in employment and output. Permanent shocks to technology, or factor prices generate a hump-shaped response of hours, persistence in output growth, and positive comovement in the forecastable components of output and hours. Capacity constraints result in asymmetric responses to large shocks with recessions deeper than expansions. Estimation of a two-sector model supports a significant role for putty-clay capital in explaining business cycle and medium-run dynamics. [ABSTRACT FROM AUTHOR]

This paper provides a theoretical explanation for the persistent use of alphabetical name orderings on academic papers in economics. In a context in which market participants are interested in evaluating the relative individual contribution of authors, it is an equilibrium for papers to use alphabetical ordering. Moreover, it is never an equilibrium for authors always to be listed in order of relative contribution. In fact, we show via an example that the alphabetical name ordering norm may be the unique equilibrium, although multiple equilibria are also possible. Finally, we characterize the welfare properties of the noncooperative equilibrium and show it to produce research of lower quality than is optimal and than would be achieved if coauthors were forced to use name ordering to signal relative contribution. [ABSTRACT FROM AUTHOR]

Research over the past several years has led to the development of models characterizing equilibrium in a system of local jurisdictions. An important insight from these models is that plausible single-crossing assumptions about preferences generate strong predictions about the equilibrium distribution of households across communities. To date, these predictions have not been subjected to formal empirical tests. The purpose of this paper is to provide an integrated approach for testing predictions from this class of models. We first test conditions for locational equilibrium implied by these models. In particular, we test predictions about the distribution of households by income across communities. We then test the models' predictions about the relationships among locational equilibrium conditions, housing markets, and housing prices. By drawing inferences from a structural general equilibrium model, the paper offers a unified treatment of theory and empirical testing. [ABSTRACT FROM AUTHOR]

The article disproves the main conclusions made by Lang, Litzenberger and Madrigal (1992) that empirical results strongly support the noisy rational hypothesis. Lang, et al, used data on volume, prices, and individual traders' forecasts of earnings to test theories of financial market equilibrium under asymmetric information. They also argued that estimation results imply a rejection and the hypothesis of competitive equilibrium with uncertain supply, would also imply a rejection of the noisy rational expectations hypothesis. However, it is concluded in this paper that the estimation results in Lang's paper do not allow to distinguish between the hypothesis mentioned by Lang et al.

These city growth projections are based on models which fail to allow for the potential feedback of various city costs on the rural-urban migration decision. In addition, detailed analyses of Third World cities by urban economists and planners conventionally take in-migration as exogenously given. It is our view that the debate can be better informed by the application of general equilibrium models of Third World development which include some of the potential costs of urbanization—models which at least make an effort to internalize the most important of various alleged costs so that potential "natural limits" to urban growth can be evaluated and the relevance of UN forecasts assessed. Section II illustrates how existing macro models of the Third World are "pro-urban" biased: typically they minimize the potential limits to urban growth and are silent on the issue of overurbanization. Section III lists some key forces which might serve to retard the rate of urbanization. Section IV develops this theme at length by offering some explicit suggestions on how these forces might be introduced into a general equilibrium model of Third World development. Central to this discussion will be potential cost-of-living differentials between urban and rural areas, urban housing availability, the quality of urban public goods, urban land scarcity, modern sector factor requirements and resource "bottlenecks," and the competing demands of "unproductive" urban capital accumulation. While no conclusive results are offered in the present paper, it seems to us timely nevertheless to open the debate on strategies for macromodeling the "limits to urban growth" in Third World economies. [ABSTRACT FROM AUTHOR]

This paper studies the political-economic equilibrium of a two period model with overlapping generations. In each period the policy is chosen under majority rule by the generations currently alive. The paper identifies a "politically viable" set of values for public debt. Any amount of debt within this set is fully repaid in equilibrium, even without commitments. By issuing debt within this set, the first generation redistributes revenue in its favor and away from the second generation. The paper characterizes the determinants of the equilibrium intergenerational redistribution and identifies a difference between debt and social security as instruments of redistribution. [ABSTRACT FROM AUTHOR]

This paper examines the causes of and cures for inefficient equilibrium levels of unemployment in an economy, using a model of matching between unemployed workers and vacant jobs. Inefficiency is defined to occur when an additional worker's contribution to the present value of future production differs from the worker's forgone opportunities outside the labor market. This inefficiency arises from the absence of a market for interviews between unemployed workers and firms with vacancies. When inefficient levels of unemployment arise, market forces may lead firms to change the wages they pay or to charge or pay fees for interviews. But these market forces require substantial information and may not operate. Movement of the economy toward efficient levels of unemployment requires shifts in the I am indebted to Betty Daniel, Oz Shy, and anonymous referees for helpful comments. Remaining errors are my responsibility. [Journal of Political Economy, 1990, vol. 98, no. 2] (C) 1990 by The University of Chicago. All rights reserved. 0022-3808/90/9802-0009501.50 distribution of income between workers and firms, brought about by fees for interviews, wage changes, or taxes and transfers. [ABSTRACT FROM AUTHOR]

Focuses on the factor market search and the structure of the general equilibrium models. Development of a two-sector model on trade coordination; Correlation between the modeling factor market search and the two-sector model of production; Concerns on the behavior of open and closed economies.

The literature evaluating tax changes within an intertemporal general equilibrium framework subdivides into representative agent and overlapping generations formulations. Papers in the former class have developed techniques analogous to those routine for static analyses. I show that the same general approach works for the overlapping generations model. The context is the system from Auerbach and Kotlikoff's Dynamic Fiscal Policy. The proposed methodology allows one to examine stability and determinacy issues for the model, it deals precisely with small policy changes, and it can easily handle bundles of changes. I present comparative static results for comparison with existing work. [ABSTRACT FROM AUTHOR]

The main result of this paper is that the multiple equilibrium problem in mechanism design can be avoided in private-value models if agents do not use weakly dominated strategies in equilibrium. We show that in such settings, any incentive-compatible allocation rule can be made the unique equilibrium outcome to a mechanism. We derive a general necessary condition for unique implementation that implies that the positive result for private-value models applies with considerably less generality to common-value settings. [ABSTRACT FROM AUTHOR]

This paper compares monopsonistic and competitive search equilibria. While the competitive equilibrium is efficient, the monopsonistic equilibrium is not: there is too much search, and the employment rate is too low. [ABSTRACT FROM AUTHOR]

This paper presents a fully specified model of long-run growth in which knowledge is assumed to be an input in production that has increasing marginal productivity. It is essentially a competitive equilibrium model with endogenous technological change. In contrast to models based on diminishing returns, growth rates can be increasing over time, the effects of small disturbances can be amplified by the actions of private agents, and large countries may always grow faster than small countries. Long-run evidence is offered in support of the empirical relevance of these possibilities. [ABSTRACT FROM AUTHOR]

A collection of items is to be distributed among several bidders, and each bidder is to receive at most one item. Assuming that the bidders place some monetary value on each of the items, it has been shown that there is a unique vector of equilibrium prices that is optimal, in a suitable sense, for the bidders. In this paper we describe two dynamic auction mechanisms: one achieves this equilibrium and the other approximates it to any desired degree of accuracy. [ABSTRACT FROM AUTHOR]

This paper develops a simple equilibrium model of search unemployment. By this term we mean the unemployment resulting from the rational rejection of available wage offers by unemployed job seekers in favor of further search for more lucrative offers. We focus on the effects of unemployment compensation on the equilibrium rate of search unemployment, both because unemployment compensation is an important policy issue and because the standard analysis of unemployment compensation provides a convenient straw man against which to motivate our approach. In this paper we develop a simple steady-state general equilibrium model with sequential search in which a nondegeneratc wage offer distribution is endogenously determined. The search unemployment associated with the wage offer distribution is a Nash equilibrium outcome in the sense of being generated by the simultaneous optimizing behavior of firms and individuals in the economy. The equilibrium wage offer distribution and hence the equilibrium unemployment rate will vary with the amount of unemployment compensation available. We can therefore carry out a comparative statics analysis of the effects of unemployment compensation taking into account the endogeneity of the wage offer distribution. [ABSTRACT FROM AUTHOR]

Expectations of currency reform are explicitly incorporated into a rational expectations version of the Cagan model of money market equilibrium, where expectations about the timing of reform are derived from a simple government rule for choosing when to reform the currency. The model is estimated for three of the episodes of hyperinflation that Cagan investigated, and the results support the hypothesis that expectations of reform were responsible for the apparent instability of the demand for money during the final months of these hyperinflations. The immediate purpose of the present paper is to establish that expectations of currency reform do help to explain the behavior of real cash balances and inflation during the final months of hyperinflation in Germany and Poland following World War I and in Greece during World War II. In addition, by explicitly incorporating reform expectations in a model of the demand for money, one obtains more precise estimates of the key structural parameter of interest (the semielasticity of the demand for money with respect to the expected rate of inflation) than can be obtained when the observations from the volatile final months of these hyperinflations are omitted. More generally, however, the results in this paper indicate the potential importance of explicitly accounting for the effects of expectations of future policy changes when estimating reduced-form equations that correspond to a theory of economic behavior. Hence, the results support the essential implication of rational (as opposed to adaptive) expectations emphasized by Lucas (1976), that is, that the decision rules of economic agents will not generally be invariant with respect to the policies chosen by the government. [ABSTRACT FROM AUTHOR]

This paper explores a model where private charity and public transfers are determined simultaneously. In political equilibrium, the government "overprovides" public transfers, transferring more to the poor than altruistic taxpayers prefer. At this equilibrium, private charity is zero. Evidence for this result is found by examining various types of data from the 1920s to the present. While private charity currently exceeds $50 billion, very little of it goes to the poor I provide evidence that this phenomenon of zero private charity began, as the model predicts, in the 1930s, the beginning of federal intervention in the charity market. This paper derives a rigorous statement of the crowding-out relationship. Private charity is motivated by altruism. The political process then adjusts the distribution of income in order to maximize the political support received from both rich and poor. This paper integrates two explanations for the level of public transfers-the public good argument and the political power of recipients. One result that emerges is that the political process "overprovides" public transfers in the sense that more resources are transferred to the poor than altruists desire. This implies that private charity is zero. Current data and evidence from the Depression yield support for the crowding-out result.[14] The huge growth m public transfers in the 1930s crowded out private antipoverty efforts and fundamentally changed the nature of private charity. Current data also support this conclusion.[15] As usual, this paper uses a number of simplifying assumptions. Public charity is a perfect substitute for private charity since altruists and recipients only care about the consumption level of recipients. If altruists receive utility from the act of transferring as well, then private charity would still be positive m equilibrium. The analysis also concentrates on homogeneous altruists. A more intensive examination of a world of heterogeneous alt... [ABSTRACT FROM AUTHOR]