involuntary unemployment and implicit contracts this paper provides an explanation of involuntary umemployment arising as a consequence of asymmetric information between firms and workers involuntary unemployment is defined as a situation where ex post gains to trade exist a model of labor contracts is developed where the allocations are not ex post optimal it is shown that inferiority of leisure is a necessary and sufficient condition for the existence of involuntary unemployment

wage employment contracts this paper studies the efficient agreements about the dependence of workers earnings on employment when the employment level is controlled by firms the firms superior information about profitability conditions is responsible for this form of contract governance under plausible assumptions such agreements will cause employment to diverge from efficiency as a byproduct of their attempt to mitigate risk it is shown that if leisure is a normal good and firms are risk neutral employment is always above the efficient level such a one period implicit contracting model cannot therefore be used to explain unemployment as a rational byproduct of risk sharing between workers and a risk neutral firm under conditions of asymmetric information

optimal income taxation with adverse selection in the labour market this article studies optimal linear and non linear redistributive income taxation when there is adverse selection in the labour market unlike in standard taxation models firms do not know workers abilities and competitively screen them through non linear compensation contracts unobservable to the government in a miyazaki wilson spence equilibrium adverse selection leads to different optimal tax formulas than in the standard mirrlees 1971 model because of the use of work hours as a screening tool by firms which for higher talent workers results in a rat race and for lower talent workers in informational rents and cross subsidies the most surprising result is that if the government has sufficiently strong redistributive goals welfare is higher when there is adverse selection than when there is not policies that endogenously affect adverse selection are discussed the model has practical implications for the interpretation estimation and use of taxable income elasticities which are central to optimal tax design

incomplete mechanisms and efficient allocation in labour markets efficiency is analyzed in a walrasian model of labour markets with adverse selection workers are distinguished by productivity and preferences firms are distinguished by productivity and ability to distinguish workers an equilibrium is defined to be constrained efficient if it cannot be dominated by an incomplete mechanism im the set of equilibria turns out to have an interesting structure within the class of strongly monotonic economies there exists at least one efficient equilibrium under slightly stronger conditions an equilibrium is dominated by an im only if it can be dominated by another equilibrium that is equilibria are pareto ranked

international migration and real wages is there any neo classical ambiguity abstract recent research has shown that while labor emigration increases the nominal wage rate the impact on the real wage rate remains quite ambiguous the present paper reexamines the issue under the standard two factor two commodity international trade model normally employed for this purpose the principal finding of this paper is that once the problem is correctly formulated and analyzed introducing utility maximizing consumers no such ambiguity exists indeed labor emigration always leads to an increase in the welfare real wage of labor in the source country

default and aggregate income abstract this paper studies how default varies with aggregate income we analyze a model in which optimal contracts enable risk sharing of privately observed idiosyncratic income by allowing for default default provisions allow agents with low idiosyncratic income realizations to repay less and thus provide insurance default penalties ensure that only these agents default we show that default can occur under the optimal contract and that default provisions vary with aggregate income we provide conditions such that both the amount of default and default penalties vary countercyclically with aggregate income and show that the default rate can be discontinuous

note on international differences in service prices and some related empirical phenomena abstract this paper provides an alternative explanation of some important stylized facts of development including the phenomenon of international differences in service prices in terms of differences in factor endowments between countries in so doing this paper advances a general equilibrium model of a small open economy which features non traded goods as well as demand factors thereby incorporating important economic aspects which were neglected by many others an interesting finding which emerges from this exercise is that many puzzles in development can be explained simply in terms of differences in factor endowments between countries

information constrained optima with retrading an externality and its market based solution this paper studies the efficiency of competitive equilibria in environments with a moral hazard problem and unobserved states both with retrading in ex post spot markets the interaction between private information problems and the possibility of retrade creates an externality unless preferences have special restrictive properties the externality is internalized by allowing agents to contract ex ante on market fundamentals determining the spot price or interest rate over and above contracting on actions and outputs then competitive equilibria are equivalent with the appropriate notion of constrained pareto optimality examples show that it is possible to have multiple market fundamentals or price islands created endogenously in equilibrium

efficiency and adverse selection abstract ex ante and interim constrained efficiency of market equilibria with adverse selection is studied with a continuum of qualities allocations which are attainable i e feasible incentive compatible and individually rational are convex combinations of one step allocations named for the fact that an agent s consumption is a single stepped function of quality this makes possible a simple geometric treatment of efficiency competitive equilibrium is efficient if the distribution of quality is not too convex wilson s bell j econ 11 1980 108 130 buyer s equilibrium is generically unique and efficient an efficient wilson s seller s equilibrium always exists

a note on international migration non traded goods and economic welfare in the source country abstract this note extends the work of rivera batiz to the case where capital is collectively owned and the decision to emigrate entails both a withdrawal of labor services from the source country and the surrender of the ownership of capital in this framework which seems to have wide real world relevance for socialist labor managed and peasant economies it is found that emigration helps increase the welfare of the non migrant this result which seems quite robust to its specifications is exactly the opposite of that of rivera batiz and points to the need for great caution in drawing policy conclusions with regard to issues pertaining to emigration

agricultural markets as relative performance evaluation relative performance schemes such as tournaments are commonly used in markets for a variety of livestock and processing commodities while explicit versions of these schemes are rarely used in markets for fresh fruits and vegetables and specialty grains we show how contracts for these latter commodities do in fact provide relative performance incentives albeit indirectly via a payment mechanism that depends on market prices in such contracts compensation is often an increasing function of revenue this implements a relative performance scheme by making each grower s payment an increasing function of his own output but a decreasing function of other s output in an important 1982 article holmstr om models the problem facing a group of agents each of whom produces an observable quantity of some good by taking an unobservable action a rather robust conclusion from this line of inquiry is that when the production of one agent is not independent of the production of another then the compensation awarded to the first agent should depend not only on his own production but also on the output of others in particular if agents production is positively correlated because of some common shock for example then an agent s compensation should be larger when other agents output is smaller a phenomenon which holmstr om terms relative performance evaluation relative performance evaluation ought to be particularly important for agricultural producers and the various intermediaries who purchase their output these producers face considerable common risk from aggregate production shocks and so one would expect that relative performance evaluation could improve efficiency in fact certain types of agricultural intermediaries do use explicit relative performance schemes as predicted by

on competing mechanisms under exclusive competition abstract we study games in which several principals design mechanisms in the presence of privately informed agents competition is exclusive each type of each agent can participate with at most one principal and meaningfully communicate only with him exclusive competition is at the center stage of recent analyses of markets with private information economic models of exclusive competition restrict principals to use standard direct mechanisms which induce truthful revelation of agents exogenous private information this paper investigates the rationale for this restriction we provide two results first we construct an economic example showing that direct mechanisms fail to completely characterize equilibrium outcomes even if we restrict to pure strategy equilibria second we show that truth telling strongly robust equilibrium outcomes survive against principals unilateral deviations toward arbitrary mechanisms

matching markets with adverse selection abstract this paper considers a market with adverse selection in the spirit of rothschild and stiglitz quart j econ 90 1976 629 the major departure from existing approaches is that we model a decentralized market that is open ended and constantly refilled by new participants e g by new workers and firms in the case of a labor market the major novelty of this approach is that the distribution of types in the market becomes an endogenous variable which is jointly determined with equilibrium contracts as frictions become small we show that the least cost separating contracts are always supported as an equilibrium outcome regardless of the distribution of types among entrants moreover we derive conditions under which this outcome is also unique

dynamic financial constraints distinguishing mechanism design from exogenously incomplete regimes we formulate and solve a range of dynamic models of constrained credit insurance that allow for moral hazard and limited commitment we compare them to full insurance and exogenously incomplete financial regimes autarky saving only borrowing and lending in a single asset we develop computational methods based on mechanism design linear programming and maximum likelihood to estimate compare and statistically test these alternative dynamic models with financial information constraints our methods can use both cross sectional and panel data and allow for measurement error and unobserved heterogeneity we estimate the models using data on thai households running small businesses from two separate samples we find that in the rural sample the exogenously incomplete saving only and borrowing regimes provide the best fit using data on consumption business assets investment and income family and other networks help consumption smoothing there as in a moral hazard constrained regime in contrast in urban areas we find mechanism design financial information regimes that are decidedly less constrained with the moral hazard model fitting best combined business and consumption data we perform numerous robustness checks in both the thai data and in monte carlo simulations and compare our maximum likelihood criterion with results from other metrics and data not used in the estimation a prototypical counterfactual policy evaluation exercise using the estimation results is also featured

on the failure of core convergence in economies with asymmetric information in interim economies with asymmetric information we show that the coarse core of wilson 1978 does not converge to price equilibrium allocations as the economy is replicated this failure of core convergence is a basic consequence of asymmetric information and extends to any reasonable notion of either interim core or price equilibrium

quality undersupply and oversupply abstract i analyze a market in which a price taking buyer buys a variable quality good from a population of sellers contrasting the case where quality is a seller s private information to that where it is public information average quality traded under private information can be either higher quality oversupply or lower quality undersupply than under public information depending on sellers preferences we are likely to see quality undersupply if i sellers preferences exhibit substitutability between the variable quality good and the numeraire good and or ii sellers view the numeraire good as a luxury good relative to the variable quality good reverse arguments hold for quality oversupply

distinguishing limited liability from moral hazard in a model of entrepreneurship we present and estimate a model in which the choice between entrepreneurship and wage work may be influenced by financial market imperfections the model allows for limited liability moral hazard and a combination of both constraints the paper uses structural techniques to estimate the model and identify the source of financial market imperfections using data from rural and semiurban households in thailand structural nonparametric and reduced form estimates provide independent evidence that the dominant source of credit market imperfections is moral hazard we reject the hypothesis that limited liability alone can explain the data

harmful competition in insurance markets there is a general presumption that competition is a good thing in this paper we show that competition in the insurance markets can be bad and that adverse selection is in general worse under competition than under monopoly the reason is that monopoly can exploit its market power to relax incentive constraints by cross subsidization between different risk types cream skimming behavior on the contrary prevents competitive firms from using implicit transfers in effect monopoly is shown to provide better coverage to those buying insurance but at the cost of limiting participation to insurance performing simulation for different distributions of risk we find that monopoly in general performs much better than competition in terms of the realization of the gains from trade across all traders in equilibrium

comment on bertrand and walras equilibria under moral hazard after completing the first version of this comment september 2003 we became aware of a paper rustichini and siconolfi 2003 in which a point similar to ours is made we wish to thank the editor robert shimer and two anonymous referees for very helpful comments financial support from the ministry for university and research project 2005135328 002 and the school for advanced studies in venice to gottardi and fundacio n ramo n areces and spanish direccio n general de ciencia y tecnologi a projects sej2004 07861 and hi2001 0039 and ramo n y cajal program to jerez is gratefully acknowledged

monopoly provision of product quality with uninformed buyers abstract this essay is concerned with a monopolist s incentives to provide high quality goods when some of its customers cannot observe quality prior to purchase we show that if all buyers have the same tastes for quality the monopolist will not try to take advantage of the poorly informed when tastes differ however some quality randomization may become profitable as a means to loosen binding self selection constraints the profitability of randomization is shown to depend upon the relative degrees of risk aversion of the buyers and on the convexity of the firm s cost of quality function we view our results as pointing to some potential benefits from imperfect quality control

a model of real national price levels this paper is concerned with the price level in the sense used in a recent paper by kravis and lipsey entitled toward an explanation of national price levels 15 the price level of a particular country relative to the base country is defined as the ratio of the purchasingpower parity ppp to the exchange rate it has become generally recognized that the ppp need not equal the exchange rate even in long run free trade equilibrium and the explanation of the discrepancy is a natural subject of scientific interest there is a voluminous literature on temporary deviations of ppp from the exchange rate that are explained in terms of monetary disturbances and random shocks there is a much smaller literature on long run or structural factors that explain why ppp does not coincide with the exchange rate the present paper falls in the second category we shall assume the economy is in monetary and balance of payments equilibrium the term price level as used in kravis and lipsey 15 may be confusing because that term usually refers to the price of goods in terms of money the term real price level seems more appropriate in that the concept refers to a ratio of two prices the real price level is what the tourist has in mind when he goes to a poor country and remarks my but prices are low here a major feature of the existing literature on long run or structural explanations of the real price level is the emphasis on the distinction between tradables and nontradables it is typically assumed that the law of one price holds for tradables but not for nontradables which are dominated by services the productivity differential model as stated by balassa 2 for example assumes that international differences in labor productivity are greater in commodities tradables than in services it follows that services will be relatively cheap in poor low productivity countries and that consequently the real price level relative to a base country will rise with per capita income recently bhagwati 5 has shown that the low relative price of services in poor countries can be explained by a capital labor model without recourse to the assumption that production functions differ internationally in bhagwati s model rich countries export capital intensive commodities and poor countries export labor intensive commodities but even though commodity prices are equalized through trade complete specialization prevents factor prices from being equalized since services are assumed to be labor intensive relative to any commodity they are cheaper in poor countries than in rich countries

the availability doctrine abstract this paper develops a general equilibrium model in which monetary disturbances have effects reminiscent of roosa s classic description of the availability doctrine the model is a marriage of the modern credit rationing literature and the recent sluggish cash flow models of monetary transmission both elements are crucial the credit rationing aspect leads to a focus upon the quantity or availability of credit however the rationing model in and of itself is a real model and there is no reason for fluctuations in the nominal quantity of fiat money to have any effect on the availability of real credit this is where the sluggish cash flow assumption enters into the analysis under this assumption changes in the nominal supply of fiat money do affect the real supply of credit because a subset of the economy absorbs a disproportionate share of the monetary injection

organizations in economic analysis three economic environments are reviewed and in each organizations play an essential role for an adverse selection insurance economy we find that when mutual insurance arrangements are permitted an equilibrium necessarily exists and is optimal this example and the two others illustrate the problems that may result from imposing organizational structure on an environment rather than permitting the structure to be determined endogenously les organisations dans l analyse economique les auteurs examinent trois sortes d environnement economique dans chacun des cas les organisations jouent un role fondamental dans le cas d une economie avec assurance et selection adverse les auteurs suggerent que quand des arrangements d assurance mutuelle sont permis un equilibre existe necessairement et est optimal cet environnement ainsi que les deux autres etudies par les auteurs illustre les problemes qui peuvent resulter quand on impose une structure organisationnelle sur un environnement plutot que de permettre a la structure organisationnelle d emerger de fakon endogene

a theoretical explanation of some stylized facts of economic growth this paper presents a three good two country general equilibrium model that is consistent with several stylized facts of economic growth the three goods are manufactures agriculture and services manufactures are subject to economies of scale the model predicts that services a nontraded good must be more expensive in the country with higher per capita income it also shows that as per capita income increases we should expect the productivity in commodities relative to services to rise the model is able to generate many other stylized facts of economic growth

why are services cheaper in the poor countries in their important work on international comparisons of national incomes and of comparative price structure kravis heston and summers i982 p 8 have noted that services are much cheaper in the relative price structure of a typical poor country than in that of a rich country this phenonomen has been documented now fairly systematically by the data gathered under their guiding hand of the united nations international comparison icp which covers 34 countries table i reproduced from their work i982 and fig i based on rows 3 and ii 13 indeed show this tendencyfor the relationship between relative service prices and real per capita gdp in this kravis heston summers 34 country 6 group sample the tendency is strongly evident except for the intermediate groups iii and iv

the effects of moral hazard on asset prices when financial markets are complete abstract this paper discusses the implications for prices and quantities of an alternative trading arrangement in kahn s 1990 economic environment with moral hazard unlike kahn s model of asset trade my model does not impose any unmotivated restrictions on short sales instead it features complete markets and publicly observable asset transactions like kahn s model my model implies that allocations are constrained pareto optimal however the implications of my model for asset prices are considerably different in particular when all agents have log utility asset prices satisfy an aggregation theorem also unlike kahn s model the model in this paper does worse than the standard representative agent model in terms of explaining the equity premium

stock returns and inflation in a principal agent economy abstract we study a monetary system in which final goods sell on spot markets while labor and dividends sell through contracts firms and workers confuse absolute and relative price changes a positive price level shock makes sellers think they are producing better goods than they really are they split this apparent windfall with workers who get a higher real wage hence unexpected inflation shifts real income from firms the principals to workers the agents and thereby lowers stock returns a predictable money supply rulestrictlypareto dominates random money supply rules journal of economic literatureclassification numbers e43 e51

the democratization of credit and the rise in consumer bankruptcies financial innovations are a common explanation for the rise in credit card debt and bankruptcies to evaluate this story we develop a simple model that incorporates two key frictions asymmetric information about borrowers risk of default and a fixed cost of developing each contract lenders offer innovations that ameliorate asymmetric information or reduce this fixed cost have large extensive margin effects via the entry of new lending contracts targeted at riskier borrowers this results in more defaults and borrowing and increased dispersion of interest rates using the survey of consumer finances and federal reserve board interest rate data we find evidence supporting these predictions specifically the dispersion of credit card interest rates nearly tripled while the new cardholders of the late 1980s and 1990s had riskier observable characteristics than existing cardholders our calculation suggest these new cardholders accounted for over 25 of the rise in bank credit card debt and delinquencies between 1989 and 1998

sectoral shocks learning and aggregate fluctuations we present a model in which sectoral shocks have aggregate consequences the model relies on irreversible investment and imperfect information to slow the adjustment of expanding industries we show that this gradual expansion is sub optimal

tariffs transfers and the real exchange rate the deviation of exchange rates from purchasing power parities ppp s has recently become the subject of theoretical and empirical attention the massive body of data collected and presented by the international comparisons project icp under the direction of kravis heston and summers khs 9 11 has permitted new empirical investigation of an old topic and has stimulated the construction of theoretical models to account for observed patterns in the icp project and the related literature the focus is on the ratio of the exchange rate to the ppp the concept of this ratio is closely related to the concept of the real exchange rate which is defined as the actual exchange rate multiplied by the ratio of an index of foreign prices to an index of domestic prices the term real exchange rate a term widely employed in both economics journals and in the financial press is frequently used to describe changes over time in a particular country and its calculation requires only time totime changes in exchange rates and price indexes the ratio of the exchange rate to the ppp on the other hand refers to a comparison of the levels of the exchange rate and the ppp at a moment in time and its calculation requires the availability of a ppp survey of the kind performed by the icp the purpose of the present paper is to analyze the effects of tariffs and transfers on the real exchange rate of a small country in this theoretical endeavor we shall hold constant the prices in foreign countries in this context it can easily be seen that the real exchange rate and the ratio of the exchange rate to the ppp are identical concepts provided that the expenditure weights used in the index of domestic prices are the same as those used in the calculation of the ppp

a dual characterization of incentive efficiency we show that incentive efficient allocations in economies with adverse selection and moral hazard problems can be determined as optimal solutions to a linear programming problem and we use duality theory to obtain a complete characterization of the optima our dual analysis identifies welfare effects associated with the incentives of the agents to truthfully reveal their private information because these welfare effects may generate non convexities incentive efficient allocations may involve randomization other properties of incentive efficient allocations are also derived

opportunity and social mobility the fact that the children of rich parents have better economic prospects than the children of poor parents unequal opportunity is generally thought to be one of the weak points of modem capitalist societies the ability of the descendants of poor families to eventually become rich and the descendants of rich families to eventually become poor social mobility is commonly considered to be one of the strong points of these societies here i argue that both of these characteristics are in fact necessary implications of an efficient societal arrangement when incentives to work hard must be provided i argue this point using a generational version of the model of phelan and townsend 1991 an infinitely repeated general equilibrium economy with incentive constraints in my model each household s stochastic output is a function of its level of effort since effort is assumed to be costly and privately observed households can shirk higher than minimal effort levels must be induced by making a household s present or future consumption dependent on the household s observed output history a large literature considers models similar to this including green 1987 atkeson and lucas 1992 phelan 1994 1995 wang 1995 hopenhayn and nicolini 1997 khan and ravikumar 2002 the main difference between the economies in that literature and here is that here instead of a household consisting of a single infinitely lived individual a household consists of a sequence of altruistically linked individuals a familial dynasty each of whom lives for one period this difference affects the appropriate societal ranking of allocations when households consist of a single infinitely lived individual allocations can be ranked according to their implied distributions of ex ante lifetime utilities if one allocation delivers a distribution of ex ante utilities dominated by another allocation then the first allocation is inefficient however if a household consists of a sequence of altruistically linked individuals then the appropriate ranking of allocations is no longer obvious how those in the first generation rank allocations will in general differ from how their descendants rank allocations this paper addresses this conflict between generations by ranking allocations according to a rawlsian veil of ignorance criterion rawls 1971 that is here society seeks to maximize the expected dynastic utility utility including altruism toward descendants of an individual who does not know into which generation he will be born and the identity or output levels of his ancestors 1 i argue that this corresponds to a societal ranking which does

a formalisation and test of the factor productivity explanation of international differences in service prices this paper extends and integrates previous models of the determinants of international differences in the prices of services relative to tradable commodities the authors provide a model capable of identifying the effects of differences in total factor productivity on service price differences separately from the effects of factor endowment differences they propose a method for measuring these factor productivity difference effects and apply this to a sample of sixty countries in 1980 the authors results provide support both for the endowment difference and productivity difference explanations suggesting that in this context at least the two hypotheses are complements rather than competitors copyright 1996 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

incentives and aggregate shocks this paper presents an incentive based theory of the dynamics of the distribution of consumption in the presence of aggregate shocks the paper builds on the models concerning the distribution of income or consumption and incentive problems of green 1987 thomas and worrall 1991 phelan and townsend 1991 and atkeson and lucas 1992 by incorporating aggregate production shocks the model allows an examination of the interactions between individual and aggregate consumption series given incomplete insurance further the methodology outlined allows the incorporation of incentive considerations to macroeconomic environments similar to rogerson 1988 and hansen 1985

efficient competitive equilibria with adverse selection do walrasian markets function orderly in the presence of adverse selection in particular is their outcome efficient when exclusive contracts are enforceable this paper addresses these questions in the context of a rothschild stiglitz insurance economy we identify an externality associated with the presence of adverse selection as a special form of consumption externality consequently we show that competitive equilibria always exist but are not typically incentive efficient however as markets for pollution rights can internalize environmental externalities markets for consumption rights can be designed to internalize the consumption externality due to adverse selection with such markets competitive equilibria exist and incentive constrained versions of the first and second welfare theorems hold

on modelling the natural rate of unemployment with indivisible labour this analysis investigates modelling the natural rate of unemployment in settings where labour s utilization has some lumpy aspect to it specifically the introduction of various nonconvexities into tastes and technology lead to unemploy ment in general equilibrium equilibria can emerge where 1 those currently unemployed have higher probabilities of being unemployed in the future than those currently employed 2 some agents are jobless while others work overtime and 3 seniority rules seemingly arise whereby old workers cannot be laid off so long as either new workers are being hired or some workers are doing overtime the relative welfare levels of employed and unemployed agents are analysed

estimating a dynamic adverse selection model labour force experience and the changing gender earnings gap 1968 1997 this paper addresses two questions what accounts for the gender gap in labour market outcomes what are the driving forces behind the changes in the gender labour market outcomes over the period 1968 1997 it formulates a dynamic general equilibrium model of labour supply occupational sorting and human capital accumulation in which gender discrimination and an earnings gap arise endogenously it uses this model to quantify the driving forces behind the decline in the gender earnings gap and the increase in female labour force participation the proportion of women working in professional occupations and hours worked it finds that labour market experience is the most important factor explaining the gender earnings gap in addition statistical discrimination accounts for a large fraction of the observed gender earnings gap and its decline it also finds that a large increase in aggregate productivity in professional occupations plays a major role in the increase in female labourforce participation number of hours worked and the proportion of females working in professional occupations although of less importance demographic changes account for a substantial part of the increase in female labour force participation and hours worked whereas home production technology shocks do not

moral hazard and nonexclusive contracts we study equilibria for economies with hidden action in environments in which the agents contractual relationships with competing financial intermediaries cannot be monitored or are not contractible upon we fully characterize equilibrium allocations and contracts for such economies as well as discuss their welfare properties depending on the parameters of the economy either the optimal action choice is not sustained in equilibrium or if it is agents necessarily enter into multiple contractual relationships and intermediaries make positive profits even under free entry conditions the main features and implications of these environments are consistent with several stylized facts of markets for unsecured loans

power fluctuations and political economy we study constrained pareto e cient allocations in a dynamic production economy where the group that holds political power decides the allocation of resources for high discount factors the economy converges to a rst best allocation where labor supply decisions are not distorted for low discount factors distortions do not disappear and uctuate over time most importantly the set of sustainable rst best allocations is larger when there is less persistence in the identity of the party in power because this encourages political compromise this result contradicts the common presumption that there will be fewer distortions when there is a stable ruling group

incentive efficient price systems in large insurance economies with adverse selection we decentralize incentive efficient allocations in large adverse selection economies by introducing a competitive market for mechanisms that is for menus of contracts facing a budget constraint informed individuals purchase lottery tickets to enter mechanisms whereas firms sell tickets and supply slots at mechanisms at given prices beyond optimization market clearing and rational expectations an equilibrium requires that firms cannot favorably change or cut prices an equilibrium exists and is incentive efficient an equilibrium can be computed as the solution to a programming problem that selects the incentive efficient outcome preferred by the highest type within an appropriately defined set for two types economies this is the only equilibrium outcome

banks as coordinators of economic growth and stability microfoundation for macroeconomy with externality abstract competition among banks promotes growth and stability for an economy with production externality following arrow and debreu 1954 6 i formulate a standard growth model with externality a two period version of romer 1986 39 as a game among consumers firms and intermediaries the walrasian equilibrium with an auctioneer does not achieve the social optimum without an auctioneer or intermediaries i show that no nash equilibrium exists with several banks strategically intermediating capital a nash equilibrium emerges with a realistic institution i e an interbank market with a negotiation process in the loan market the equilibrium outcome is uniquely determined and socially optimal

perfect competition in asymmetric information economies compatibility of efficiency and incentives the idea of perfect competition for an economy with asymmetric information is formalized via an idiosyncratic signal process in which the private signals of almost every individual agent can influence only a negligible group of agents and the individual agents relevant signals are essentially pairwise independent conditioned on the true states of nature thus there is no incentive for an individual agent to manipulate her private information the existence of incentive compatible ex post walrasian allocations is shown for such a perfectly competitive asymmetric information economy with or without common values consequently the conflict between incentive compatibility and pareto eciency is resolved exactly and its asymptotic version is derived for a sequence of large but finite private information economies

uncertain lifetimes and the welfare enhancing properties of annuity markets and social security this paper explores the implications of social security programs and annuity markets through which agents who are characterized by different distributions of length of lifetime share deathrelated risks when annuity markets operate a non discriminatory social security program affects only the intragenerational allocation of resources in the absence of private information regarding individual survival probabilities such a program will lead to a non optimal intragenerational allocation of resources however the presence of adverse selection considerations gives rise to a pareto improving role for a mandatory non discriminatory social security program

adverse selection aggregate uncertainty and the role for mutual insurance companies a model of insurance markets analogous to that of rothschild and stiglitz 1976 is considered with the additional feature that risk neutral insurers face aggregate undiversifiable risk in the presence of adverse selection and aggregate uncertainty and under a simple nondegeneracy condition on loss probabilities the authors show that any equilibrium has the feature that some agents purchase participating policies from mutual insurers while others purchase nonparticipating policies and hence do not share risk with their insurer specifically agents with low loss probabilities signal their type by sharing aggregate risks with their insurer some empirical support for this prediction is provided copyright 1990 by the university of chicago

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

optimal indirect and capital taxation we consider an environment in which agents skills are private information and follow arbitrary stochastic processes we prove that it is typically pareto optimal for an individual s marginal benefit of investing in capital to exceed his marginal cost of doing so this wedge is consistent with a positive tax on capital income we also prove that it is pareto optimal for the marginal rate of substitution between any two consumption goods to equal the marginal rate of transformation this lack of a wedge is consistent with uniform taxation of consumption goods within a period

the business es of the chinese state the state industrial sector is the achilles heel of china s otherwise remarkable economic performance over the past two decades most other countries in transition from socialism have transformed soes into commercial entities through systematic market driven restructuring and privatisation to become more efficient and competitive in china a series of innovative if often administrative insitutional reforms since 1978 have begun to achieve the chinese authorities goal of separating governemtn from business but the chinese state still maintains ownership of key enterprises and government agencies carry out shareholder functions typically performed by private owners in a market economy although privatisation and restructuring of soes is occurring it mostly pertains to small and medium sized firms for the principal businesses by contrast the creation of large state enterprise groups and holding companies and experiments in other forms of state asset management have become the main form of restructuring today china s soes still account for more than one quarter of national production two thirds of total assets more than half of urban employment and almost three quarters of investment while direct budgetary subsidies have declined explicit and implicit subsidies are still making their way to prop up loss making soes through the financial system and other routes at the same time soes are still producing non marketable products resulting in a sizeable inventory overhang these inefficiencies and distortions represent a drain on the country s resources and thus present a challenge to the chinese leadership for reform this paper sheds light on these challenges by analysing the incentives and constraints on china s soe reform programme four critical aspects of the reforms are highlighted and evaluated against the backdrop of international experience clarification of property rights establishment of large group holding companies and other new organisational structures improved corporate governance incentives and implementation of international financial accounting and auditing practices the paper concludes with policy recommendations

financial structure and aggregate economic activity an overview this paper surveys literature that explores the possible links between the financial system and aggregate economic behavior the survey is in two parts the first reviews the traditional work and the second discusses new research copyright 1988 by ohio state university press

perfect competition in markets with adverse selection this paper proposes a perfectly competitive model of a market with adverse selection prices are determined by zero profit conditions and the set of traded contracts is determined by free entry crucially for applications contract characteristics are endogenously determined consumers may have multiple dimensions of private information and an equilibrium always exists equilibrium corresponds to the limit of a differentiated products bertrand game we apply the model to establish theoretical results on the equilibrium effects of mandates mandates can increase efficiency but have unintended consequences with adverse selection an insurance mandate reduces the price of low coverage policies which necessarily has indirect effects such as increasing adverse selection on the intensive margin and causing some consumers to purchase less coverage

on generalizing the economic analysis of international migration a note the author critically examines an article by kar yui wong concerning two important well known propositions on international factor movements namely first finite international factor movements are beneficial to the nationals of the destination country but detrimental to those who are left behind in the source country and second marginal movements do not have such welfare implications the present paper by utilizing the indirect trade utility function derives results in a manner that is both direct and at once intuitively transparent

government borrowing using bonds with randomly determined returns welfare improving randomization in the context of deficit finance abstract we study the problem of a government that wishes to share optimally the burden of deficit finance among agents with differential access to investment opportunities in the presence of private information it is pareto efficient for the government to borrow in a way that amounts to non linear taxation and it must treat agents with access to the best investment opportunities preferentially to keep them in the bond market in addition with private information about access to assets it is often desirable to randomize extraneously the return on the highest yielding government liabilities the optimal government policy is shown to accord well with historical observations and provides insight into why explicit randomization is not often observed in private contracts

financial repression and the relative price of non traded goods abstract the financial structure of ldcs affects differences in relative prices among nations we show empirically that financial repression depresses the relative price of non traded goods

smoking skydiving and knitting the endogenous categorization of risks in insurance markets with asymmetric information we analyze the efficiency and market equilibirum effects of endogenous categorization where insurance companies classify risks on the basis of insureds voluntary consumption of products that are correlated with underlying loss propersities and we show that the use of such categorization may permit the attainment of first best allocations as competitive nash equilibria the optimal insurance premium involves a trade off between the use of categorization to correct moral hazard externalities generated by the consumption of the product and the use of differential consumption to sort heterogeneous consumers thereby mitigating the social costs of adverse selection the efficiency consequences of taxing or subsidizing aggregate as opposed to individual consumption is also considered

efficiency and equilibrium when preferences are time inconsistent abstract we consider an exchange economy with time inconsistent consumers whose preferences are additively separable if consumers have identical discount factors then allocations that are pareto efficient at the initial date are also renegotiation proof in an economy with a sequence of markets competitive equilibria are pareto efficient in this sense and for generic endowments only if preferences are locally homothetic

unemployment the variability of hours and the persistence of disturbances a private information approach a real business cycle model is developed in which the workforce is heterogeneous workers are privately informed about their own productive abilities it is shown that the presence of private information creates a mechanism for enhancing the variability of hours worked as well as channels of persistence moreover aggregate hours worked can respond strongly to variations in average productivity real wages even though observed responses of hours worked to real wage movements are small for all individuals in the model copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

randomization in optimal income tax schedules abstract the optimal income tax problem is one of many problems in economics for which a randomized allocation may be desirable for a two class economy we characterize optimal random tax schedules and present necessary and sufficient conditions for local randomization either to be pareto improving or to extend the constrained pareto frontier we present another sufficient condition for nonlocal randomization to be pareto improving which need not violate ex post or ex ante horizontal equity lastly an example demonstrates that the gains from randomization may be large

debt constrained asset markets we develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature if an agent defaults on a contract he can be excluded from future contingent claims markets trading and can have his assets seized he cannot be excluded from spot markets trading however and he has some private endowments that cannot be seized all information is publicly held and common knowledge and there is a complete set of contingent claims markets since there is complete information an agent cannot enter into a contract in which he would have an incentive to default in some state in general there is only partial insurance variations in consumption may be imperfectly correlated across agents interest rates may be lower than they would be without constraints and equilibria may be pareto ranked

political economy of mechanisms we study the optimal mirrlees taxation problem in a dynamic economy in contrast to the standard approach where the taxation mechanism is operated by a benevolent planner with full commitment power we focus on economies in which policy decisions are made by self interested politicians who cannot commit to policies the society controls politicians using elections we show that the provision of incentives to politicians can be partly separated from redistribution across agents and that political economy constraints can be modeled as introducing additional aggregate distortions in the dynamic mirrlees problem we provide conditions under which the political economy distortions persist or disappear in the long run if the politicians are as patient as the agents the best sustainable mechanism leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear in contrast when politicians are less patient than the citizens positive aggregate labor and capital taxes remain even asymptotically we conclude by providing a brief comparison of centralized

equilibrium prices when the sunspot variable is continuous we analyze sunspot equilibrium prices in nonconvex economies with perfect markets and a continuous sunspot variable our primary result is that every sunspot equilibrium allocation can be supported by prices that when adjusted for probabilities are constant across states this result extends to the case of a finite number of equally probable states under weak nonsatiation conditions but does not extend to general discrete state spaces we use our primary result to establish the equivalence of the set of sunspot equilibrium allocations based on a continuous sunspot variable and the set of lottery equilibrium allocations

indivisibilities lotteries and monetary exchange we introduce lotteries randomized trading into search theoretic models of money in a model with indivisible goods and fiat money we show goods trade with probability 1 and money trades with probability where 1 iff buyers have sufficient bargaining power with divisible goods a nonrandom quantity q trades with probability 1 and again money trades with probability where 1 iff buyers have sufficient bargaining power moreover q never exceeds the efficient quantity not true without lotteries we consider several extensions designed to get commodities as well as money to trade with probability less than 1 and to illuminate the efficiency role of lotteries