sequential bargaining as a noncooperative foundation for walrasian equilibrium allocation are weakly preferred to those obtainable from the initial endowments by means of the given set of net trades these conditions are similar to ones studied by schmeidler and vind 1972 and vind 1978 but here they are thought of as characterizing the set of net trades available in steady state equilibria of market games like those studied by douglas gale 1984 1985 1986a 1986b and 1986c the characterization result is used as a key step in the proof of results like gale s the allocations induced by steady state equilibria are walrasian for the economy given by the constant flow of new agents into the market our approach generalizes the one followed in gale 1986c and allows us to dispense with assumptions made in previous treatments for example gale s 1986a assumption of dispersed characteristics is dropped we also demonstrate that such a result depends on the assumption that agents cannot observe the past behavior of agents with whom they trade

an empirical investigation of the effects of rounding on the spf probabilities of decline and output growth histograms i consider the possibility that respondents to the survey of professional forecasters round their probability forecasts of the event that real output will decline in the future as well as their reported output growth probability distributions i make various plausible assumptions about respondents rounding practices and show how these impinge upon the apparent mismatch between probability forecasts of a decline in output and the probabilities of this event implied by the annual output growth histograms i find that rounding accounts for about a quarter of the inconsistent pairs of forecasts

is neoclassical microeconomics formally valid an approach based on an analogy with equilibrium thermodynamics abstract the relation between thermodynamics and economics is a paramount issue in ecological economics two different levels can be distinguished when discussing it formal and substantive at the formal level a mathematical framework is used to describe both thermodynamic and economic systems at the substantive level thermodynamic laws are applied to economic processes in ecological economics there is a widespread claim that neoclassical economics has the same mathematical formulation as classical mechanics and is therefore fundamentally flawed because 1 utility does not obey a conservation law as energy does 2 an equilibrium theory cannot be used to study irreversible processes here we show that neoclassical economics is based on a wrong formulation of classical mechanics being in fact formally analogous to equilibrium thermodynamics the similarity between both formalisms namely that they are both cases of constrained optimisation is easily perceived when thermodynamics is looked upon using the tisza callen axiomatisation in this paper we take the formal analogy between equilibrium thermodynamics and economic systems far enough to answer the formal criticisms proving that the formalism of neoclassical economics has irreversibility embedded in it however the formal similarity between equilibrium thermodynamics and neoclassical microeconomics does not mean that economic models are in accordance with mass energy and entropy balance equations in fact neoclassical theory suffers from flaws in the substantive integration with thermodynamic laws as has already been fully demonstrated by valuable work done by ecological economists in this field

classical thermodynamics and economic general equilibrium theory abstract a long history of analogy making between neoclassical economics and physical thermodynamics has unfortunately served to obscure two important relations between the two fields their definitions of equilibria stem from essentially the same three axioms for the mathematical representations of systems while the classes of transformation each has chosen to emphasize and their responses to the problem of path dependence have led them to very different interpretations of duality in those representations despite these conventional differences we show that economies in which all agents have preferences quasi linear in some good have a trading constraint structure isomorphic to the structure of physical systems with classical thermodynamic equations of state exact equivalents of thermodynamic potentials including entropy can be constructed and function as the economic counterparts to free energies quasi linear economies are the most general in which the walrasian idea of price formation as an analog of force balance can be realized more general economic models raise the same methodological problems as more complex physical models that exhibit path dependence we show how the degree of aggregatability of an economic model corresponds to which properties of equilibria retain path independence and to the extent to which a social welfare function exists a new contour money metric utility defines the maximal generalization of social welfare functions in arbitrary economies but depends on the endowments and composition of the economy in non quasi linear cases and is limited to one dimensional contours of equilibria in non aggregatable cases the differences between economic and thermodynamic methodology lies in the economic focus on the irreversible movement from initial disequilibrium endowments to equilibrium through voluntary trade in contrast to the thermodynamic recognition that only reversible transformations lead to measurement of system structure the consequences of respecting reversibility for economic method are sketched and alternative interpretations of the walrasian notion of wealth preservation are presented

decentralized trading strategic behaviour and the walrasian outcome for a market with a finite number of agents pairwise matching and bargaining it is shown that even when the market is frictionless the equilibrium is not necessarily competitive it depends on the amount of information agents use if their behaviour is conditioned only on the sets of agents present and the time the competitive solution is the unique subgame perfect equilibrium if agents have full information and condition their behaviour on some of it there are also noncompetitive equilibria in which behaviour depends on specific information such as the identity of the trading partner and past events

dynamic processes of social and economic interactions on the persistence of inefficiencies an economy with a finite number of agents and a finite number of states is considered an exogenous institutional rule prescribes which moves from one state to another are feasible to each coalition at each time an agent is called to act with some exogenous probability and he chooses a coalition a feasible new state to move the economy to and side payments between the agents in the coalition the setup can be applied to various dynamic processes of social and economic interactions such as legislative bargaining coalition formation or exchange economies whenever agents are unable to write long term contracts but are otherwise unconstrained both in their ability to write arbitrary spot contracts and in their ability to collude there can be long run inefficiencies with cycles or inefficient steady states however when agents are sufficiently patient the initial state from which the process starts plays no role in the long run moreover when there exists an efficient state that is free of negat

agent based computational transaction cost economics this article explores the use of agent based computational economics ace for modelling the development of transactions between firms transaction cost economics neglects learning and the development of trust ignores the complexity of multiple agents and assumes rather than investigates the efficiency of outcomes efficiency here refers to minimum cost or maximum profit we model how co operation and trust emerge and shift adaptively as relations evolve in a context of multiple interacting agents this may open up a new area of application for the ace methodology a simulation model is developed in which agents make and break transaction relations on the basis of preferences based on trust and potential profit profit is a function of product differentiation specificity of assets economy of scale and learning by doing in ongoing relations agents adapt their trust in a partner as a function of his loyalty exhibited by his continuation of a relation they also adapt the weight they attach to trust on the basis of realized profit the model enables an assessment of the efficiency of outcomes relative to the optimum as a function of trust and market conditions we conduct a few experiments to illustrate this application of ace

explanations of the inconsistencies in survey respondents forecasts a comparison of the point forecasts and the probability distributions of inflation and output growth made by individual respondents to the us survey of professional forecasters indicates that the two sets of forecasts are sometimes inconsistent we evaluate a number of possible explanations and find that not all forecasters update their histogram forecasts as new information arrives this is supported by the finding that the point forecasts are more accurate than the histograms in terms of first moment prediction c 2009 elsevier b v all rights reserved

fairness price stickiness and history dependence in decentralized trade this chapter investigates the implications that social preferences have for the stationary strategic equilibrium of such a decentralized market agents are supposed to be averse to unfairly unfavorable as well as unfairly favorable deals in the spirit of fehr and schmidt 1999 but we stay rather close to standard individualistic preferences the negative weights on advantageous and disadvantageous deviations from what is considered as the fair benchmark are such that utility remains strictly increasing in own surplus share and in contrast to the original fehr schmidt model the fair split need not automatically be a 50 50 division any price between sellers cost and buyers willingness to pay may be the one which for whatever reasons is agents reference point in a given market this makes it possible to consider a more flexible notion of fairness than is usually done it is in line with cognitive dissonance theory from psychology and the noteworthy experiments of binmore et al 1991 1993 where subjects who were triggered to play different bargaining equilibria ended up considering very different surplus distributions as fair

arbitrage and the flattening effect of large numbers abstract in a model of an exchange economy with a continuum of individuals we show that competitive equilibrium can be regarded as resulting from the elimination of arbitrage opportunities generically the elimination of such opportunities results in a phenomenon we call the flattening effect of large numbers the flattening effect provides a precise meaning to the statement that under perfect competition individuals cannot influence prices they face perfectly elastic demands and supplies the attractive geometry associated with arbitrage and the flattening effect is highlighted in several figures we also link the demonstration of equilibrium through arbitrage with the logic of marginalism journal of economic literature classification number d51

bargaining and value we present and analyze a model of noncooperative bargaining among n participants applied to situations describable as games in coalitional form this leads to a unified solution theory for such games that has as special cases the shapley value in the transferable utility tu case the nash bargaining solution in the pure bargaining case and the recently introduced maschler owen consistent value in the general nontransferable utility ntu case moreover we show that any variation in a certain class of our bargaining procedure which generates the shapley value in the tu setup must yield the consistent value in the general ntu setup

on the reswitching property of r d existing theoretical models of research and development r d treat r d as a single economic activity once r d terminates the only way for the activity to resume is by assuming some exogenous changes in the basic parameters of the model e g the distribution of technological advances in contrast this paper treats r d as two unique but dependent economic activities a sequential r d search model is developed to establish three fundamental results first reswitching of r d is endogenized success in development may bring research back as the next optimal choice of action it is shown that the reswitching phenomenon of the dynamic process of r d is a result of optimal decision making second when the economic returns based on existing production technology are low compared to what is potentially feasible the immediate returns to development are high thus development is preferable to research as the level of economic returns increases due to development success the likelihood of further developmen

bargaining and markets complexity and the competitive outcome abstract rubinstein and wolinsky rev econ stud 57 1990 63 78 consider a simple decentralised market game in which agents meet randomly or voluntarily and bargain over the terms of trade they show that any individually rational price can be sustained as a sequential equilibrium even though the model has a unique competitive outcome here i consider rubinstein and wolinsky s model and show that if complexity costs of implementing strategies enter players preferences together with the standard payoff in the game then every equilibrium is stationary markov and induces the unique competitive price thus i demonstrate that aversion to complexity may provide a justification for the competitive outcome

a game theoretic view of the fiscal theory of the price level the goal of this paper is to probe the validity of the fiscal theory of the price level by modelling explicitly the market structure in which households and the government make their decisions i describe the economy as a game and i am thus able to state precisely the consequences of actions that are out of the equilibrium path i show that there exist government strategies that lead to a version of the fiscal theory in which the price level is determined by fiscal variables alone these strategies are however more complex than the simple budgetary rules usually associated with the fiscal theory and the government budget constraint cannot be merely viewed as an equilibrium condition

competitive behavior in market games evidence and theory we explore whether competitive outcomes arise in an experimental implementation of a market game introduced by shubik 1972 market games obtain pareto inferior strict nash equilibria in which some markets are closed we find that subjects do not coordinate on autarkic nash equilibria but favor more efficient nash equilibria in which all markets are open as the number of subjects participating in the market game increases the nash equilibrium they achieve approximates the associated walrasian equilibrium of the underlying economy motivated by these findings we investigate theoretically whether evolutionary forces lead to walrasian outcomes in market games we introduce a strong version of evolutionary stable strategies sess f orfinite populations our concept requires stability against deviations by coalitions of agents a small coalition of trading agents is sufficient for pareto improving trade to be generated in addition provided that agents lack market power nash equilibria corresponding to approximate competitive outcomes constitute the only approximate sess

dynamic matching and bargaining games a general approach this paper presents a new characterization result for competitive allocations in quasilinear economies this result is informed by the analysis of non cooperative dynamic search and bargaining games such games provide models of decentralized markets with trading frictions a central objective of this literature is to investigate how equilibrium outcomes depend on the level of the frictions in particular does the trading outcome become walrasian when frictions become small existing specifications of such games provide divergent answers the characterization result is used to investigate what causes these differences and to generalize insights from the analysis of specific search and bargaining games

deep impact geo simulations as a policy toolkit for natural disasters adverse post natural disaster outcomes in low income regions like elevated internal migration levels and low consumption levels are the result of market failures poor mechanisms for stabilizing income and missing insurance markets which force the affected population to respond and adapt to the shock they face in a spatial environment with multiple locations with independent but inter connected markets these transitions quickly become complex and highly non linear due to the feedback loops between the micro individual level decisions and the meso location wise market decisions to capture these continuously evolving micro meso interactions this paper presents a spatially explicit bottom up agent based model to analyze natural disaster like shocks to low income regions the aim of the model is to temporally and spatially track how population distributions income and consumption levels evolve in order to identify low income workers that are food insecure the model is applied to the 2005 earthquake in northern pakistan which faced catastrophic losses and high levels of displacement in a short time span and with market disruptions resulted in high levels of food insecurity the model is calibrated to pre crisis trends and shocked using distance based output and labor loss functions to replicate the earthquake impact model results show how various factors like existing income and saving levels distance from the fault line and connectivity to other locations can give insights into the spatial and temporal emergence of vulnerabilities the simulation framework presented here leaps beyond existing modeling efforts which usually deals with macro long term loss estimates and allows policy makers to come up with informed short term policies in an environment where data is non existent policy response is time dependent and resources are limited

forecast encompassing tests and probability forecasts we consider tests of forecast encompassing for probability forecasts for both quadratic and logarithmic scoring rules we propose test statistics for the null of forecast encompassing present the limiting distributions of the test statistics and investigate the impact of estimating the forecasting models parameters on these distributions the small sample performance is investigated in terms of small numbers of forecasts and model estimation sample sizes we show the usefulness of the tests for the evaluation of recession probability forecasts from logit models with different leading indicators as explanatory variables and for evaluating survey based probability forecasts copyright c 2010 john wiley sons ltd

sorting and decentralized price competition we investigate the role of search frictions in markets with price competition and how it leads to sorting of heterogeneous agents there are two aspects of value creation the match value when two agents actually trade and the probability of trading governed by the search technology we show that positive assortative matching obtains when complementarities in the former outweigh complementarities in the latter this happens if and only if the match value function is root supermodular that is its nth root is supermodular where n reflects the elasticity of substitution of the search technology this condition is weaker than the condition required for positive assortative matching in markets with random search

the role of networks in antitrust investigations antitrust investigations typically focus on the competitive pressures coming from within the defined markets of interest however competitive pressures can also come from other markets even when individually these markets place only weak constraints on one another collectively they may matter a networks approach to modelling competition permits a systemic view of competition that can sometimes paint a more accurate picture we demonstrate this through some simple examples and show more generally how tools from the networks literature can be applied to capture competition across a system of interrelated markets as a leading example we consider antitrust investigations into supermarkets where local geographic markets have been used as the basis of investigation

bargaining in dynamic markets abstract we study non stationary markets in which traders are randomly matched to bargain over the price of a heterogeneous good or the terms of a partnership the economy consists of a continuum of players drawn from a finite set of types players exogenously enter the market over time and exit upon trading at every date matching probabilities for each pair of types are determined by the endogenous distribution of trader types in the market the balance of bargaining power at any stage depends on variations in potential gains from trade the inflows of new traders the structure of agreements at future dates and the induced frequency of trading opportunities we establish that an equilibrium always exists moreover all equilibria that lead to the same evolution of the economy are payoff equivalent however we show that multiple self fulfilling expectations about the trajectory of the economy generating distinct equilibrium dynamics and payoffs may coexist

a model of random matching and price formation abstract we study a model where buyers and sellers meet randomly the meeting probabilities are endogenous and are derived from the basics of the model the agents can decide to either search or wait and the searchers are distributed on the waiters prices are determined by bargaining if exactly two agents are matched if more than one agent of one type are matched with an agent of another type an auction ensues there exist at most three equilibria and when the numbers of buyers and sellers differ greatly one can argue that the equilibrium where the agents on the short side wait is the plausible one we also study the relation of the model to the walrasian markets as well as to random matching models with bargaining only or auction only

the rate of convergence to perfect competition of matching and bargaining mechanisms abstract we study the steady state of a market with incoming cohorts of buyers and sellers who are matched pairwise and bargain under private information a friction parameter is the length of the time period until the next meeting we provide a necessary and sufficient condition for the convergence of mechanism outcomes to perfect competition at the linear rate in which is shown to be the fastest possible among all bargaining mechanisms the condition requires that buyers and sellers always retain some bargaining power the bargaining mechanisms that satisfy this condition are called nonvanishing bargaining power nbp mechanisms simple random proposer take it or leave it protocols are nbp while k double auctions k da are not we find that k das have equilibria that converge to perfect competition at a linear rate converge at a slower rate or even do not converge at all

dynamic matching two sided incomplete information and participation costs existence and convergence to perfect competition consider a decentralized dynamic market with an infinite horizon and participation costs in which both buyers and sellers have private information concerning their values for the indivisible traded good time is discrete each period has length and each unit of time continuums of new buyers and sellers consider entry traders whose expected utility is negative choose not to enter within a period each buyer is matched anonymously with a seller and each seller is matched with zero one or more buyers every seller runs a first price auction with a reservation price and if trade occurs both the seller and the winning buyer exit the market with their realized utility traders who fail to trade continue in the market to be rematched we characterize the steady state equilibria that are perfect bayesian we show that as converges to zero equilibrium prices at which trades occur converge to the walrasian price and the realized allocations converge to the competitive allocation we also show the existence of equilibria for sufficiently small provided the discount rate is small relative to the participation

equilibrium in a market with sequential bargaining this paper considers a market where pairs of agents who are interested in carrying out a transaction are brought together by a stochastic process and upon meeting initiate a bargaining process over the terms of the transaction the basic bargaining problem is treated with the strategic approach the paper derives the steady state equilibrium agreements analyzes their dependence on market conditions such as the relative numbers of agents of different types and discusses their relations with the competitive equilibrium outcome and other results in the search equilibrium literature this paper considers a market that operates in the following way pairs of agents who have mutual interest in carrying out a transaction are brought together by a stochastic process when two agents meet they initiate a bargaining process over the terms of the transaction if two agents reach an agreement a transaction takes place and they leave the market of course the bargaining positions and hence the agreement reached in any particular meeting will be affected by the conditions prevailing in the market these will include the chances that each of the negotiating parties have of meeting other partners in the event that the agreement in the current negotiations is delayed also the expected length of time required to achieve an alternative transaction and the expected behavior of alternative partners the study of such a market mechanism is of interest for two reasons firstly it captures some realistic aspects of the trade in certain specific markets e g asset markets such as housing and some labor markets secondly it contributes to an understanding of the micro mechanisms of price formation and their role in shaping market outcomes in both cases the features studied are largely neglected in the traditional market equilibrium analyses the related literature includes the articles by diamond 4 5 diamond and maskin 6 mortensen 8 9 and zusman and bell 13 these articles consider markets of the type described above in which transactions are concluded at pairwise meetings of agents the major difference between our work and these articles is in the approach to the basic bargaining problem in the cited articles it is assumed that a meeting is concluded with an instantaneous agreement which divides the associated surplus in an arbitrary predetermined way when the surplus is assumed to be divided equally the division rule is in fact nash s axiomatic bargaining solution in contrast the present paper treats the basic bargaining problem with the strategic approach see rubinstein 19 which constitutes an attempt to look into the bargaining black box this approach explicitly models the time dimension of the bargaining process describes in detail the bargaining procedure and justifies the agreement as a perfect equilibrium in

walrasian allocations without price taking behavior abstract consider an exchange economy where agents are arbitragers in that they try to upset allocations imagining plausible beneficial trades with an introspective algorithm each agent constructs an interactive choice set ics i e a set of bundles that he considers achievable through a sequence of plausible trades with other agents we show that walrasian allocations can be characterized as those where each agent chooses optimally from his ics which is always contained in a budget set with differentiability both sets coincide our analysis provides a different behavioral assumption underlying walrasian allocations offers an explanation for the source of competitive prices and connects with the core convergence theorem journal of economic literature classification numbers d00 d51

the extraction of natural resources the role of thermodynamic efficiency abstract the modelling of production in microeconomics has been the subject of heated debate the controversial issues include the substitutability between production inputs the role of time and the economic consequences of irreversibility in the production process a case in point is the use of cobb douglas type production functions which completely ignore the physical process underlying the production of a good we examine these issues in the context of the production of a basic commodity such as copper or aluminium we model the extraction and the refinement of a valuable substance which is mixed with waste material in a way which is fully consistent with the physical constraints of the process the resulting analytical description of production unambiguously reveals that perfect substitutability between production inputs fails if a corrected thermodynamic approach is used we analyze the equilibrium pricing of a commodity extracted in an irreversible way we force consumers to purchase goods using energy as the means of payment and force the firm to account in terms of energy the resulting market provides the firm with a form of reversibility of its use of energy under an energy numeraire energy resources will naturally be used in a more parsimonious way

what s wrong with the fundamental existence and welfare theorems abstract the definition of walrasian competitive equilibrium on which the fundamental existence and welfare theorems rest assumes that all trading in decentralized exchange economies takes place at the final equilibrium prices which further implies that at equilibrium prices the value of each agent s equilibrium commodity bundle is equal to the value of her endowment and equal treatment of agents with the same preferences technology and endowment the logic of the theorems supports the conclusion that in competitive economies prices the allocation of commodities and the distribution of income and material welfare are determined by the preferences technology and endowments of the agents in real world markets however agents can discover equilibrium prices only by making mutually advantageous transactions at disequilibrium prices any sequence of such transactions leads stably to an exchange equilibrium at which the offer prices of all agents are close to each other and which exhausts all private opportunities to realize economic surpluses the exchange equilibrium set however is in general a continuum and the exact equilibrium reached depends on the path of transactions in general exchange equilibria do not treat agents with the same preferences and endowments equally and the exchange equilibrium allocation of commodities does not conserve the values of individual agent endowments existence and stability of exchange equilibrium are transparent consequences of the logic of voluntary exchange but because of transaction path dependence equilibrium prices allocations of commodities and the distribution of wealth and economic welfare are not determined by agents preferences and endowments

rubinstein auctions on competition for bargaining partners abstract this paper analyzes the effect of competition for bargaining partners on the prices that prevail in thin markets as well as how the matches are simultaneously determined three trading processes or bargaining procedures are described in all the variants that we consider except for one case of public offers either there is no pure strategy subgame perfect equilibrium or such equilibria exhibit delay in reaching agreement journal of economic literature classification numbers c72 d43

dynamic monetary equilibrium in a random matching economy this article concerns an infinite horizon economy where trade must occur pairwise using a double auction mechanism and where fiat money overcomes lack of double coincidence of wants traders are anonymous and lack market power goods are divisible and perishable and are consumed at every date preferences are defined by utility stream overtaking money is divisible and not subject to inventory constraints the evolution of individual and economywide money holdings distributions is characterized there is a welfare ordered continuum of single price equilibria reflecting indeterminacy of the price level rather than of relative prices

mechanism design by competing sellers a dynamic model with many sellers and buyers is constructed agents failing to trade may trade in the next period an equilibrium is found where sellers hold identical auctions and buyers randomize over the sellers they visit the distribution of buyer valuations is endogenous an auction with efficient reserve is an optimal mechanism from each seller s point of view in spite of the ability of any seller to alter the distribution of buyer types participating in the seller s mechanism by altering the mechanism copyright 1993 by the econometric society

lack of recall and centralized monetary trade we introduce lack of recall of past transactions as an alternative assumption to anonymity in a model where trade is centralized in environments where there is an intertemporal lack of double coincidence of wants problem and lack ofcommitment lack of recall can give rise to monetary equilibria that dominate nonmonetary outcomes in terms of welfare

reinterpreting the kernel the reduced game relevant for the consistency of the prekernel is used to reinterpret this solution concept in a way that makes it independent of interpersonal utility comparisons based on this reinterpretation a non cooperative model is presented that yields in stationary equilibria the prekernel kernel for the class of monotonic transferable utility games next we apply the same non cooperative model to more general coalitional games for pure bargaining problems the model yields the nash solution for general non transferable utility games a natural extension of the prekernel arises thus the prekernel is obtained as the set of payoffs where the relevant bargaining range between every pair of players is split in half journal of economic literatureclassification numbers c71 c72 c78

the strategic analysis of intermediation the importance and the special character of intermediation were recognized as early as in the eighteenth century and have been stressed by many authors afterwards in spite of this long tradition comparatively little work has been done on the details of the economic theory of intermediation instead it was assumed that intermediation can simply be treated like any other economic activity in contrast i will argue that the theory of intermediation requires a specific game theoretic analysis and moreover that many preconceptions that one might have on the basis of standard microeconomic theory are wrong

complexity and competition extensive form market games typically have a large number of noncompetitive equilibria in this paper we argue that the complexity of noncompetitive behavior provides a justification for competitive equilibrium in the sense that if rational agents have an aversion to complexity at the margin then maximizing behavior will result in simple behavioral rules and hence in a competitive outcome for this purpose we use a class of extensive form dynamic matching and bargaining games with a finite number of agents in particular we consider markets with heterogeneous buyers and sellers and deterministic exogenous sequential matching rules although the results can be extended to other matching processes if the complexity costs of implementing strategies enter players preferences lexicographically with the standard payoff then every equilibrium strategy profile induces a competitive outcome

notes on sequence economies transaction costs and uncertainty abstract a sequence economy is an economy with trade at every date and state it is inessential if its equilibria coincide with those of the corresponding arrow debreu economy we examine some of the conditions for essentiality 1 if there are transaction costs then even if all states of nature are spanned by the securities the economy is generically essential 2 in the absence of transaction costs we show by examples that spanning is neither necessary nor suficient for inessentiality the former because some state distinctions may be irrelevant the latter because of possible multiple spot equilibria for a given state 3 we speculate on the possibility that price contingent securities might complete the markets and more generally on the idea of endogenous uncertainty journal of economic literature classification number c62

markov equilibria in dynamic matching and bargaining games abstract rubinstein and wolinsky rev econ stud 57 1990 63 show that a simple homogeneous market with exogenous matching has a continuum of non competitive perfect equilibria however the unique markov perfect equilibrium of this model is competitive by contrast in the more general case of heterogeneous markets even the markov property is not enough to guarantee the perfectly competitive outcome we define a market game that allows for heterogeneous values on both sides of the market and exhibit a number of examples of non competitive markov perfect equilibria with and without discounting unlike the homogeneous case these equilibria allow for inefficient trades and for trade at non uniform prices the non competitive equilibrium may be unique

the dynamics of general equilibrium in walras original description of general equilibrium walras 1954 1874 market clearing was effected by a central authority this authority which has come to be known as the auctioneer remains today because no one has succeeded in producing a plausible decentralised dynamic model of producers and consumers engaged in market interaction in which prices and quantities move towards market clearing levels only under implausible assumptions can the continuous auctioneer dynamic be shown to be stable fisher 1983 and in a discrete model even these assumptions gross substitutability for instance do not preclude instability and chaos in price movements saari 1985 bala and majumdar 1992 1 moreover contemporary analysis of excess demand functions suggests that restrictions on preferences are unlikely to entail the stability of t sonnenschein 1972 1973 debreu 1974 kirman and koch 1986 it has been a half century since debreu 1952 and arrow and debreu 1954 provided a satisfactory analysis of the equilibrium properties market economies yet we know virtually nothing systematic about walrasian dynamics this suggests that we lack understanding of one or more fundamental properties of market exchange this article provides an agent based model of the walrasian economy an agentbased model is a computer simulation of the repeated play of a game in which a large number of agents are endowed with software encoded strategies governing both how they play the game and how they gather information and update their behaviour the disequilibrium behaviour of agents in our agent based models is governed by a replicator dynamic taylor and jonker 1978 in which over time successful agents tend in darwinian fashion to increase in frequency at the expense of unsuccessful agents we describe the process of shifting from lower to higher payoff strategies as imitation

the role of private information in dynamic matching and bargaining can it be good for efficiency abstract we consider a private information replica of the dynamic matching and bargaining model of mortensen and wright 2002 we find that private information typically deters entry but the welfare can actually be higher under private information

resale markets and the assignment of property rights the consumption of an indivisible good causes identity dependent externalities to non consumers we analyse resale markets where the current owner designs the trading procedure but cannot commit to future actions we ask the following questions 1 doer the identity of the initial owner matter for the determination of the final consumer 2 is the outcome always efficient the major conclusion of our paper is that the irrelevance of the initial structure of property rights arises in resale processes even if there are transaction costs that hinder efficiency this result complements the coasian view where the irrelevance of the assignment of property rights is a consequence of efficiency

on the reswitching and convergence properties of research development rivalry under an alternate assumption of the payoff function we analyze lee s dynamic game model of r d rivalry both similarities and differences in the equilibrium results of the model are obtained it is shown that both the reswitching property and the convergence property of r d rivalry are robust under the alternate assumption the reswitching property of r d rivalry states that after gaining a technological edge against a rival a decision maker stops doing r d and he will resume doing r d when his rival succeeds in narrowing the technological gap between the two rivals the convergence property of r d rivalry states that when the technology levels of two rivals differ by a wide margin the one with a lower technology level will be the only one doing r d to narrow the technological gap between the two rivals this formalizes the perception of r d managers that the r d decision of one firm should depend on the r d decision of its rivals for competitive reasons moreover when multiple nash equilibria exist

decentralized dispersed exchange without an auctioneer abstract we stimulate exchange among geographically dispersed agents who face real costs of communication along with bounds to rationality and calculation exchange is entirely decentralized it is initiated by individual agents who broadcast costly messages indicating their interest in trade it is accomplished by bilateral bargaining between pairs of agents agents use the information gained from previous attempts at local trade to calculate their search strategies for succeeding rounds this decentralized mechanism can achieve a substantial improvement in the allocation of resources and the average welfare of agents in comparison with a randomized initial endowment but in comparison with walrasian equilibrium agents who begin with endowments of equal value end up with substantially unequal wealth although the initial inequality of utility is reduced

computer simulation for supply demand interaction the most basic result in economics is that for perfect competition equilibrium price and quantity are determined by the intersection of aggregate demand and supply curves how this equilibrium is achieved and the adjustment process have received less attention the adjustment process may be based on aggregate demand and supply curves only via the imaginary actions of an auctioneer or a tatonnement process or on modeling of price and excess aggregate demand interaction such models are less plausible because they assume agents have perfect information about a unique price at which all transactions are concluded alternative assumptions necessitate explicit modeling of individual agents and their search behaviour which increases greatly the level of complication of the model though it is possible to deal with such models analytically stigler 1961 rothschild 1973 fisher 1973 mcafee and mcmillan 1988 special assumptions are needed to obtain desired results lesourne 1992 studies many of these models mostly in a descriptive manner in the framework of self organizing systems dynamic models which explicitly include multiple interacting agents contain many details that are difficult to handle without computers computer simulation makes it possible to include almost any assumption about individual agents and their interactions and to find out the consequences of these assumptions on the path toward equilibrium one of the few examples of such simulation is the work by albin and foley 1992 which deals with geographically dispersed agents with costs of communication applications of computer simulation to other areas of economics can be found in forrester 1961 witt 1986 and orcutt 1990 the current paper describes a computer simulation system that has been organized to enable simulation of interaction using a wide range of assumptions regarding agents search and samples so that the consequences

bargaining size and return in venture capital funds abstract the terms of an investment by venture capitalists are the result of cooperative bargaining between the project originators owners or entrepreneurs and the financiers this study examines conditions under which bargains can be consummated the nature of the bargains and the way in which bargains are both influenced by venture fund size and also contribute to a theory of fund size as much as possible the theory of fund size and earnings is related to required rate of return concepts with the objective of explaining relative variations in the value of venture capital funds and of incorporating such investments within the general body of finance theory the most basic form of contract is a simple bilateral bargain between owners and fund managers with the shares of financing and earnings as the bargaining variables agency and other considerations can be factored into the resulting project value to be financed and partitioned an edgeworth box construction is used to establish the efficient pareto optimal set as the contract curve the two endpoints of the contract curve correspond respectively to the monopoly solution where there is one fund and many owners and to the competitive solution the nash bargaining solution of game theory can also be exhibited within this framework although we are careful to remain agnostic about whether or not this constitutes the only or even the best solution a first requirement is that some basis for agreement exists so that mutually beneficial bargains can actually be struck conditions most favorable to existence arise where 1 owners who cannot properly diversify their own investments are more risk averse or else suffer from some other financing impediment or 2 owners are more optimistic than fund managers on the prospects for the project fund size operating via the cost of capital can also affect the existence of solutions given that contracting is mutually beneficial the precise terms depend upon the relative bargaining power of funds versus owners this may depend upon required rates of return it also depends upon market structure the environment may be more conducive to monopoly surplus if search impediments exist for owners as they might for technological projects or if the market is in an early stage of development bargains are often asymmetric wherein the fund derives a higher share of earnings than pro rata with its share of financing fund size and bargaining power are related especially where fund investors or managers rely on the fund for portfolio or internal diversification as opposed to external diversification in which they invest extensively in other assets with internal diversification the fund s cost of capital is size dependent in terms of the number of projects on the books larger funds acquire bargaining power via a lower cost of capital leading to higher rates of actual returns and therefore higher fund value such effects are not present where investors have external diversification because fund returns are generally asymmetric arising from the significant risk of project failures it is sometimes thought that the asymmetry constitutes a factor to be priced as the asymmetry is size dependent this would make the cost of capital size dependent as well however it turns out that the asymmetry is not in fact priced and that standard capm arguments continue to hold thus for external diversification fund size is mainly a matter of economies of scale in administration evaluation and monitoring in all cases fund size can be described in terms of equality at the margin between required and available rates of return and we describe the influences that impinge on both schedules generally speaking the kinds of bargains actually observed as well as the rates of return and variations therein across funds and over time are all consistent with predicted bargaining features they appear also to be consistent with basic finance theory suggesting that special features such as failure to maximize the expected utility of monetary returns are not really needed

subgame perfect implementation this paper examines the use of stage mechanisms in implementation problems and provides a partial characterization of the set of subgam e perfect implementable choice rules it is shown that in many economic environments virtually an y choice rule can be implemented to illustrate the power of this approach the paper discusses a number of models in which it is possible to implement the first best although it wouldn t have been possible to do so without using stage mechanisms the diversity of these models suggests that subgame perfect implementation may find wide application copyright 1988 by the econometric society

walras retrouve decentralized trading mechanisms and the competitive price we extend the standard analysis of decentralized markets to allow for the possibility that traders interact simultaneously with more than one trader on the opposite side of the market in contrast with the literature we reconcile the walrasian equilibrium with the outcome of decentralized strategic trade we show that there exist generic matching technologies that determine local market conditions such that as market frictions vanish the equilibrium price is the one that would result in the static walrasian market our analysis highlights the importance of local market conditions for the determination of equilibrium prices

the complexity of exchange the computational complexity of two classes of market mechanisms is compared first the walrasian interpretation in which prices are centrally computed by an auctioneer recent results on the computational complexity are reviewed the non polynomial complexity of these algorithms makes walrasian general equilibrium an implausible conception second a decentralised picture of market processes is described involving concurrent exchange within transient coalitions of agents these processes feature price dispersion yield allocations that are not in the core modify the distribution of wealth are always stable but path dependent replacing the walrasian framing of markets requires substantial revision of conventional wisdom concerning markets

bilateral trading and incomplete information price convergence in a small market abstract we study a model of decentralised bilateral interactions in a small market where one of the sellers has private information about her value in addition to this seller with private information there are two identical buyers and another seller whose valuation is commonly known to be in between the two possible valuations of the seller with private information we consider an infinite horizon game with simultaneous one sided offers and simultaneous responses we construct one particular pbe of the game and show that as the discount factor goes to 1 prices in all transactions converge to the same value we then show that this is the case with any stationary equilibrium of the game that is the asymptotic outcome is unique across all stationary equilibria

information theoretic approaches in economics economics has seen a recent rise in interest in information theory as an alternative framework to the conventional notion of equilibrium as a fixed state such as walrasian market clearing general equilibrium the information theoretic approach is predicated on the notion of statistical equilibrium se that takes a distribution over all possible states as an equilibrium and therefore predicts the endogenous fluctuations of the system along with its central tendency simultaneously for this reason se approaches can explain the observed data without relying on arbitrary assumptions about random noise and provide useful insights for many interesting economic problems that conventional methods have not been able to satisfactorily deal with in this paper we review the key elements of information theory focusing on the notions and applications of entropy and se in economics particularly paying attention to how entropy concepts open up a new frontline of economic research

a thermodynamic approach to economics abstract the economic theory presented in this paper develops a theme first published by the author in energy economics 1 the concept that economic value is fundamentally equivalent to energy value both at a macro and micro level is investigated in some depth economic equivalents of the first and second laws of thermodynamics are derived and inflation is shown to be equivalent to net cycle entropy gain a simple business cycle is constructed from a number of basic economic processes and a series of efficiency measures are examined including overall efficiency work ratio net work output cycle inflation growth and stock turnover a model of the money system is developed and the effects of monetary policy are examined the difficulties of deriving a standard scale of productive content a necessary part of the valuation of economic goods and services are analysed it is hoped that the paper will open up new avenues for future work particularly of statistical investigations of macro and micro systems

comparing the point predictions and subjective probability distributions of professional forecasters we use data from the survey of professional forecasters spf to compare point predictions of gross domestic product gdp growth and inflation with the subjective probability distributions held by forecasters we find that most spf point predictions are quite close to the central tendencies of forecasters subjective distributions tend to be asymmetric with spf forecasters tending to report point predictions that give a more favorable view of the economy than do their subjective means medians modes

forecast uncertainty ex ante and ex post u s inflation and output growth survey respondents who make point predictions and histogram forecasts of macro variables reveal both how uncertain they believe the future to be ex ante as well as their ex post performance macroeconomic forecasters tend to be overconfident at horizons of a year or more but overestimate i e are underconfident regarding the uncertainty surrounding their predictions at short horizons ex ante uncertainty remains at a high level compared to the ex post measure as the forecast horizon shortens there is little evidence of a link between individuals ex post forecast accuracy and their ex ante subjective assessments

varieties of agents in agent based computational economics a historical and an interdisciplinary perspective in this paper we trace four origins of agent based computational economics ace namely the markets origin the cellular automata origin the tournaments origin and the experiments origin along with this trace we examine how these origins have motivated different concepts and designs of agents in ace which starts from the early work on simple programmed agents randomly behaving agents zero intelligence agents human written programmed agents autonomous agents and empirically calibrated agents and extends to the newly developing cognitive agents psychological agents and culturally sensitive agents the review also shows that the intellectual ideas underlying these varieties of agents cross several disciplines which may be considered as a part of a general attempt to study humans and their behavior with an integrated interdisciplinary foundation

market structure and innovation a survey economics we all recite deals with allocation of limited resources towards satisfaction of unlimited wants resources are typically identified as land labor and capital plus a technology that determines their transformation into consumer goods disparity between the available goods and services and the desired gives rise to scarcity and the question of what how and for whom to produce the focus then shifts to description and evaluation of alternative resource allocation mechanisms for making the choices the pareto criterion by which an allocation of resources is deemed efficient if any reallocation improving the position of some individual worsens the position of others is a commonly employed gauge of a mechanism s performance in the absence of externalities increasing returns to scale and uncertainty a perfectly competitive market system yields a pareto optimal allocation of resources this underlies the view that individual self interest is compatible with society s interest the further conclusion that pareto optimality may not be achieved via the market system in the presence of monopoly elements provides an economic rationale for antitrust laws the objective of a resource allocation mechanism appears to be according to the analysis described above to make the best of available resources the alternative objective of relaxing constraints through expanding the resource base or developing new technology seems to be beyond its scope thus until rather recently technical advance had been regarded in the mainstream of economic theory as unmotivated by the quest for profits and substantially unaffected by resource allocation instead as j schmookler observed technology had been viewed as a parameter like the weather affecting the outcome of resource allocations but itself unaffected by them 84 1965 evidence that technological progress has significantly contributed to growth in productivity together with a substantial increase in research and development activity largely financed by government and carried out by industry see f machlup 51 1962 may have spurred reconsideration of this view once technical advance is regarded as an economic variable it is natural to in

agents come to bits towards a constructive comprehensive taxonomy of economic entities abstract mirowski mirowski p 2007 markets come to bits evolution computation and markomata in economic science journal of economic behavior and organization 63 209 242 argues for a constructive approach to economic modeling centered on markets as evolving computational entities this essay counters that a broader constructive approach to economic modeling can and should be taken the recent advent of powerful computer technologies supporting agent based modeling abm renders feasible the computational study of economies modeled as evolving systems of interacting agents in abm an agent refers broadly to bundled data and behavioral methods representing an entity constituting part of a computationally constructed world examples of possible agent referents include individuals social groupings institutions e g markets biological entities such as crops and physical entities such as transportation networks and weather consequently abm provides tremendous opportunities for economists and other social scientists to tailor the breadth and depth of the entities represented in their models to the application at hand a simple abm of a two sector decentralized market economy is used for concrete illustration

a decentralized market with common values uncertainty non steady states we analyse a market where i trade proceeds by random and anonymous pairwise meetings with bargaining ii agents are asymmetrically informed about the value of the traded good and iii no new entrants are allowed once the market is open we show that information revelation and efficiency never obtain in equilibrium even as discounting is removed this holds whether the asymmetry is two sided or one sided in some cases there exist equilibria where a substantial amount goes untraded this contrasts with the earlier literature which was based on the steadystate equilibria of a model where agents enter the market every period

perfectly competitive bilateral exchange without discounting in a random matching economy of traders who maximize cumulative consumption overtaking criterion the stationary markov bayesian perfect equilibrium is studied at such equilibrium two results hold 1 perfect substitutability between current and future consumption implies a no surplus condition and 2 by the no surplus condition there is a nominal price at which all trades must occur these results strengthen the seminal results of ostroy 1973 regarding monetary bilateral exchange in two ways the incentive compatibility of the equilibrium trading pattern is established and a less roundabout trading pattern enhances welfare by enabling consumption to occur more frequently

retrading in market games when agents are not price takers they typically cannot obtain an efficient real location of resources in one round of trade this paper presents a non cooperative model of imperfect competition where agents can retrade allocations consistent with edgeworth s idea of recontracting we show a there are pareto optimal allocations including competitive equilibrium allocations that can be approximated arbitrarily closely when trade is myopic i e when agents play a static nash equilibrium at every round of retrading b any converging sequence of allocations generated by myopic retrading can be supported along some retrade proof subgame perfect equilibrium path when traders anticipate future rounds of trading

information percolation in large markets we introduce a simple model of the percolation of information of common interest through a large market as agents encounter each other over time and reveal information to each other some of which they may have received earlier from other agents we are particularly interested in the evolution over time of the cross sectional distribution in the population of the posterior probability assignments of the various agents we provide a market example based on privately held auctions and obtain a relatively explicit solution for the cross sectional distribution of posterior beliefs at each time our results contribute to the literature on information transmission in markets hayek 1945 argues that markets allow information that is dispersed in a population to be revealed through prices grossman s 1981 notion of a rational expectations equilibrium formalizes this idea in a setting with price taking agents milgrom 1981 pesendorfer and swinkels 1997 and reny and perry 2006 provide strategic foundations for the rational expectations equilibrium concept in centralized markets a number of important markets however are decentralized these include over the counter markets and private auction markets wolinsky 1990 and blouin and serrano 2002 study information transmission in decentralized markets in contrast to these two papers equilibrium behavior in our market example leads to full revelation of information we happily acknowledge conversations with manuel amador frank kelly jeremy stein and pierre olivier weill and research assistance from sergey lobanov rubinstein and wolinsky 1985 and gale 1986a 1986b study decentralized markets without asymmetric information satterthwaite and shneyerov 2003 study decentralized market with private value asymmetric information amador and weill 2006 study a more abstract setting regarding transmission of common and private i nformation

decentralized trading with private information the paper studies how asset prices are determined in a decentralized market with asymmetric information about asset values we consider an economy in which a large number of agents trade two assets in bilateral meetings a fraction of the agents has private information about the asset values we show that over time uninformed agents can elicit information from their trading partners by making small offers this form of experimentation allows the uninformed agents to acquire information as long as there are potential gains from trade in the economy as a consequence the economy converges to a pareto efficient allocation

competitive bargaining equilibrium in a simple exchange economy we propose a bargaining procedure that leads to a walrasian outcome as the agents become increasingly patient the competitive outcome therefore obtains even if agents have market power and are not price takers moreover where in other bargaining protocols the final outcome depends on bargaining power or relative impatience the outcome here is determinate and depends only on preferences and endowments our bargaining procedure involves bargaining over prices and maximum quantity constraints and it guarantees convergence to a walrasian outcome for any standard exchange economy in contrast without quantity constraints we show that equilibrium is generically inefficient

foundation of competitive equilibrium with non transferable utility abstract this paper investigates the dynamic foundation of a competitive equilibrium studying a sequence of random matching models between ex ante heterogeneous buyers and sellers under two sided incomplete information with no entry where each agent is endowed with non transferable utility the economy is populated with two sets of infinitesimal agents buyers and sellers who have private information about their own valuations of the object in each period buyers and sellers in the pool are matched to draw randomly a pair of expected payoffs which will realize if the long term relationship is formed each player decides whether or not to agree to form a long term relationship conditioned on his private information if both parties agree then they leave the pool receiving the expected payoff in each period while the long term relationship continues the existing long term relationship is terminated either by will or by a random shock upon which both parties return to the respective pools of agents we quantify the amount of friction by the time span of each period we demonstrate that as the friction vanishes any sequence of stationary equilibrium outcomes in which trade occurs with a positive probability converges to the competitive equilibrium under a general two sided incomplete information about the private valuation of each agent

matching finding a partner for life or otherwise how do job worker and husband wife relationships form and why do some matched pairs subsequently separate economists and game theorists are in the process of developing and applying an equilibrium explanation of match formation and separation based on the principle of voluntary pairing under competitive conditions the purpose of this paper is to assess the current state of these developments the general existence of patnership structures with the property that no one has an incentive to separate has been established these equilibrium structures maximize aggregate value over the set of all feasible match structures in the transferable utility case according to this pure theory of matching competition for partners can be expected to yield equilibrium match structures that are both stable and socially efficient at least under conditions of frictionless certainty search theoretic models that take account of meeting costs and initial uncertainty about match values have been developed to explain sepa

adaptive consumption behavior abstract in this paper we propose and study a theory of adaptive consumption behavior under income uncertainty and liquidity constraints we assume that consumption is governed by a linear function of wealth whose coefficients are revised each period by a procedure that places few informational or computational demands on the consumer we show that under a variety of settings the procedure converges quickly to a set of coefficients with low welfare cost relative to a fully optimal nonlinear consumption function