Constrained efficient provision of an excludable public good is studied in a model where preferences are private information. The provision level is asymptotically deterministic, making it possible to approximate the optimal mechanism with a mechanism that provides a fixed quantity of the good and charges fixed user fees for access. In general, the fixed fees involve third degree price discrimination, but, if identity is uninformative about preferences, the analysis provides a justification for average cost pricing.
Being able to limit a public goods' consumption does not make it a turn-blue private good. For what, after all, are the true marginal costs of having one extra family tune in on the program. They are literally zero. Why then limit any family which would receive positive pleasure from tuning in on the program from doing so? [Samuelson [24], pp 335].
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A simple, essentially neoclassical, general equilibrium model of trade between identical countries is developed. The only departure from neoclassical theory is that firms are only able to observe human capital investments with noise, which creates an informational externality. Due to the interaction between the informational externality and general equilibrium effects, equilibria arise where countries specialize as rich, high-tech countries and poor low-tech countries respectively, also when there is a unique autharky equilibrium. There are potential efficiency gains from specialization. Protectionism may make the poor country better off, but it is possible that the efficiency gains are large enough to make the specialization equilibrium better than autharky also for the poor country.
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We consider a general equilibrium model with endogenous human capital formation in which ex ante identical groups may be treated differently in equilibrium due to informational externalities. Unlike earlier models of statistical discrimination, group inequalities may arise even if the corresponding model with a single group has a unique equilibrium. The dominant group gains from discrimination, rationalizing why a majority may be reluctant to eliminate discrimination. The model is also consistent with "reverse discrimination" as a remedy against discrimination since it may require to decrease the welfare of the dominant group to achieve parity.
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in pdf.
We model externality abatement as an implementation problem.
A social planner would like to ensure efficient behavior among a
group of agents whose actions are sources of externalities. However,
the planner has limited information about the agents' preferences,
and he is unable to distinguish individual agents except through their
action choices. We prove that if a concavity condition on aggregate
payoffs is satisfied, the planner can guarantee that efficient behavior
is globally stable under a wide range of behavior adjustment processes
by administering a variable pricing scheme. Through a series of
applications, we show that the concavity condition is naturally
satisfied in settings involving negative externalities. We conclude by contrasting the performance of the pricing mechanism with that of a mechanism based on direct revelation and forcing contracts.
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We study the implementation of efficient behavior in settings with
externalities. A planner would like to ensure that a group of agents
make socially optimal choices, but he only has limited information about
the agents' preferences, and can only distinguish individual agents by
the actions they choose. We describe the agents' behavior using a
stochastic evolutionary model, assuming that their choice probabilities
are given by the logit choice rule. We prove that there is a simple
price scheme with the following property: regardless of the realization
of preferences, a group of agents subjected to the price scheme will spend
the vast majority of time in the long run behaving efficiently. The price
scheme defines a game which may possess multiple equilibria, but we are
able to obtain a unique and efficient selection from this set because of
the stochastic nature of the agents' choice rule.
JEL Classification Numbers: C72, C73, D62, D82
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Electricity was born at the dawn of the last century. Households were inundated with a flood of new consumer durable goods. What was the impact of this consumer durable goods revolution? It is argued here that the consumer goods revolution liberated women from the home. To analyze this hypothesis, a Beckerian model of household production is developed. Households must decide whether to adopt the new technologies or not, and whether a married woman should work. Can such a model explain the rise in married female labor-force participation that occurred in the last century? Yes.
Keywords: The second industrial revolution, technology adoption, household production theory, female labor-force participation.
Subject area: Macroeconomics.
Journal of Economic Literature classification numbers E1, J2, N1.
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Between 1800 and 1940 the U.S. went through a dramatic demographic transition. In 1800 the average woman had 7 children, and 94 percent of the population lived in rural areas. By 1940 the average woman birthed just 2 kids, and only 43 percent of populace lived in the country. The question is: What accounted for this shift in the demographic landscape? The answer given here is that technological progress in agriculture and manufacturing explains these facts.
Keywords: fertility; technological progress, agriculture, manufacturing
JEL Classification Nos: E1, J1, O3.
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This paper discusses dynamic evolutionary multi-agent systems, as introduced in Brock and Hommes (1997). In particular, the heterogeneous agent dynamic asset pricing model of Brock and Hommes (1998) is extended by introducing derivative securities by means of price contingent contracts. Numerical simulations suggest that in a boundedly rational heterogeneous evolutionary world futures markets may be destabilizing.
Keywords: heterogeneous beliefs, bounded rationality, arrow securities, evolutionary dynamics
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This paper provides a model of individual decisionmaking in the presence of neighborhood effects. By neighborhood effects, we refer to interdependencies between individual decisions and the decisions and characteristics of others within a common neighborhood. As such, neighborhood effects are forms of social interactions; in fact the terms would seem to be interchangeable in many contexts.
Within economics, there has developed an increasing recognition that neighborhood effects play a possibly major role in explaining a range of individual behaviors; rich empirical and theoretical literatures have developed. A failing of much of this work is the absence of strong connections between theory and empirics. This paper addresses this limitation by providing a model of multinomial choice with neighborhood effects. The model represents a generalization of the binary choice model of William Brock and Steven Durlauf (2001a,b). The model is econometrically implementable and so has the potential of allowing for structural estimation of neighborhood effects.
Section I outlines a basic choice model with neighborhood effects. Section II specializes the structure using a multinomial logit framework. Section III considers econometric implementation. Section IV discusses some limitations of the framework and proposes some research directions. Proofs of all theorems may be found in Brock and Durlauf (2001c).
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We examine contemporaneous perfect epsilon-equilibria, in which a player's actions after every history, evaluated at the point of deviation from the equilibrium, must be within epsilon of a best response. This concept implies, but is stronger than, Radner's ex ante perfect epsilon-equilibrium. A strategy profile is a contemporaneous perfect epsilon-equilibrium of a game if it is a subgame perfect equilibrium in a perturbed game with nearly the same payoffs, with the converse holding for pure equilibria.
Keywords: Epsilon equilibrium, ex ante payoff, multistage game, subgame perfect equilibrium.
JEL classification numbers: C70, C72, C73.
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Theories of focal points typically assume that games have inherent labelings or "frames" and then construct models of how players perceive and exploit these frames to identify focal equilibria. This paper asks instead how evolutionary considerations determine which aspects of a frame are likely to be monitored by the players. Efficient monitoring turns out to be an unlikely outcome.
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This paper describes the relationship between two different binary choice social interaction models. The Brock and Durlauf (2001) model is essentially a static Nash equilibrium model with random utility preferences. In the Blume (forthcoming) model is a population game model similar to Blume (1993), Kandori, Mailath, and Rob (1993) and Young (1993). We show that the equilibria of the Brock-Durlauf model are steady states of a differential equation which is a deterministic approximation of the sample-path behavior of Blume's model. Moreover, the limit distribution of this model clusters around a subset of the steady states when the population is large.
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No Abstract
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We calculate phosphorus (P) loadings for a potentially eutrophic lake that optimize the expected discounted net benefits. The benefits accrue to agricultural interests from activities that result in loading and costs accrue to other interests from the resulting deterioration of water quality. We extend earlier results in Carpenter, Ludwig and Brock (1999) to account for dependence of P recycling upon the concentration of P in sediments.
We find a strong interaction between economic and ecological parameters in determining the policy: the economic discount rate determines whether the time horizon is long or short, and this in turn strongly influences the magnitude of the optimal loadings. Simple policies that neglect dynamics of P in the sediments are inadequate unless the time horizon is short and the dynamics are slow. A stochastic model is essential if there are substantial random fluctuations in loadings. Similarly, uncertainty in the determination of the critical P density that triggers recycling cannot be neglected. Our results may be interpreted as a quantitative precautionary principle that takes account of both economic and ecological aspects of the problem. Our results may also be used to illustrate ideas such as sustainable development, natural capital, and income.
Keywords: phosphorus recycling, optimal phosphorus loading, precautionary principle, slow dynamics, uncertainty and fluctuations, wealth and sustainability.
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This paper explores the theoretical implications for Schmookler's (1966) argument that a key determinant of technological change is the usefulness of new technologies. There is both historical and empirical support for his argument. The analysis implies that on-going growth depends delicately on a tension between uses for solutions to technological problems and the allocation of resources toward pursuing those solutions. Even alongside an endogenously increasing number of problems pursued, increasing research labor need not increase technology growth or per capita income growth. The results provide reconciliation of stylized facts regarding technological change and growth in the US and Western Europe.
JEL Classifications: O31, O40
Keywords: Technological Change, Growth, Schmookler
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Why do charities often begin new fund drives by announcing a large contribution by a single wealthy donor? This paper explores the possibility that such "leadership giving" provides a signal to all other givers that the charity is of high quality. The dilemma is that if the lead giver can deceive others to believe the charity is of higher quality than it truly is, then these followers will make larger contributions, which will benefit the leader. Hence, the leader must give an unusually large amount to convey a credible signal of the quality. This sets up a war-of-attrition game for who will pay the cost to signal the quality. Since the wealthy have to lowest opportunity cost of providing the signal, they, in equilibrium, move first to provide the signal of quality with exceptionally large gifts.
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This paper develops a framework to describe how the existence of technological spillovers leads to a distribution of technology clusters. Marshallian spillovers in this paper are assumed to be due to interaction of labor. The dynamics of cluster size, composition, and technology accumulation are characterized.
JEL Classifications: D39, O31
Keywords: Technological change, spillovers, coalitions, inequality
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Laboratory researchers in economics assiduously protect the confidentiality of subjects. Why? Presumably because they fear that the social consequences of identifying subjects and their choices would significantly alter the economic incentives of the game. But these may be the same social effects that institutions, like charitable fund-raising, are manipulating to help overcome free riding and to promote economic efficiency. We present an experiment that unmasks subjects in a systematic and controlled way. We show that, as intuition suggests, identifying subjects has significant effects. Surprisingly, we found that two supplemental conditions meant to mimic common fund-raising practices actually had the most dramatic influences on behavior.
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We present an experiment that attempts to separate the two commonplace explanations for behavior in ultimatum games–subjects' concern for fairness versus the failure of subgame perfection as an equilibrium refinement. We employ a tournament structure of the bargaining interaction to eliminate the potential for fairness to influence behavior. Comparing the results of the tournament game with two control treatments affords us a clean test of subgame perfection as well as a measure fairness-induced play. We find after 10 iterations of play that about half of all non-subgame-perfect demands are due to fairness, and the rest to imperfect learning. However, as suggested by models of learning, we also confirm that the ultimatum game presents an especially difficult environment for learning subgame perfection.
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No abstract.
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This essay analyzes and interprets changes in commercial banking in the United States in the years since the Second World War. It argues that the banking system effectively recovered from the trauma of the Great Depression and the war around 1955. From that year banks have struggled mightily with other intermediaries, financial market innovations, and regulations. The discussion proceeds chronologically; a summary section compares banks in the last decade with their counterparts in the 1920s and evaluates the changing risks and returns that clients of banks have experienced in this half century. It concludes that banks have been increasingly discarding their traditional mode of financing loans and investments with deposits they collect and becoming brokers who originate loans and then use securitization to lodge them with other investors who are likely to be less informed and correspondingly more vulnerable to losses.
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A community's culture is defined by the preferences and equilibrium behaviors of its members. Contacts among communities alter their cultures through two mechanisms: behavioral adaptations motivated by coordination and preference changes shaped by socialization and the need for self-consistency. The paper analyzes a model of cultural integration in which preferences and behaviors vary continuously, and it describes a broad set of conditions under which the end result is cultural homogenization. Limiting outcomes are independent of the conformity pressures within the constituent cultures. The analysis suggests that efforts to keep existing cultures unchanged are in direct conflict with policies that facilitate social integration.
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Hart and Mas-Colell (2001) introduce a class of regret-based decision rules that generate consistent behavior in repeated games. We consider the performance of this class of decision rules in an evolutionary model, calling the corresponding class of evolutionary dynamics potential dynamics. We establish that rest points of potential dynamics and Nash equilibria coincide, and that these dynamics satisfy an appealing payoff monotonicity property. We show that the dynamics lead to Nash equilibrium play in potential games. We then introduce a new class of games called stable games, a class which includes games with an interior ESS, zero sum games, and concave potential games as special cases. We find that potential dynamics also converge to Nash equilibria in stable games, and use these dynamics to prove that every stable game admits a unique component of Nash equilibria.
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