money taxes and efficiency when sunspots matter abstract this paper examines the impact monetary redistribution policies have on the amount of sunspot induced volatility in an economy a dynamic model of segmented asset markets is presented in which the tax transfer policy determines in a continuous way the influence sunspots can have on the general price level and on consumption if the policy leads to a transfer of resources across segmentation lines there exist equilibria in which sunspots affect consumption the primary result is that there is an efficiency cost of taxation larger transfers lead to larger fluctuations in consumption the paper also shows that in many cases improvements in asset markets that decrease consumption volatility simultaneously increase price level volatility journal of economic literature classification numbers d84 e31 e44 h21

on the indeterminacy of capital accumulation paths abstract in neoclassical optimal growth models the stability of the accumulation paths depends on the discount parameter we prove that for discount factors small enough the policy function which describes an optimal path can be of any type the result is achieved using the notion of concavity we adopt a constructive approach given any twice differentiable map we show how to construct an optimal growth problem which produces that map as the optimal policy function a consequence is that chaos can appear in these models we also provide bounds on the values of the discount parameter for which indeterminacy is possible

on conservation of renewable resources with stock dependent return and nonconcave production textabstractthis paper analyzes conservation and extinction of renewable resources when the production function is nonconcave and the return function depends on consumption and the resource stock the paper focuses on the efficiency of global conservation a safe standard of conservation and extinction which outcome obtains depends on the marginal rate of substitution between investment and the stock in addition to the discount factor and the marginal productivity of the resource conservation may be efficient even if the discounted intrinsic growth rate of the resource is less than 1 journal of economic literature classification numbers d90 q20

wealth inequality preference heterogeneity and macroeconomic volatility in two sector economies we explore the link between wealth inequality preference heterogeneity and macroeconomic volatility in a two sector neoclassical growth model first we prove that if agents have homogeneous preferences when the absolute risk tolerance is a strictly convex concave function sufficiently high low levels of wealth inequality may lead to endogenous fluctuations in the neighborhood of the steady state second we consider the effects of preference heterogeneity when agents are homogeneous with respect to their wealth we show that when the utility function belongs to the hara class sufficiently high levels of preference heterogeneity may lead to endogenous fluctuations in the neighborhood of the steady state if the elasticity of intertemporal substitution in consumption is greater than one

tariffs with private information and reputation abstract several tariff games are examined in which the home country has private information about whether its government is a low or high tariff type if the foreign government is uncertain about this type in a one shot game its nash equilibrium tariff will be lower higher than if it knew the home government were a low high tariff type in two multistage games misleading behavior by the home government is an equilibrium strategy for sufficiently high discount factors whether or not uncertainty is persistent is important for welfare results tariff rules do not necessarily dominate discretionary policy in these models

incentive compatible trade policies a two country trade model with production uncertainty is considered if complete contingent markets do not exist it is desirable for governments to adopt some trade policies to share the production risk a full information policy involves incomes transfers across countries which can be achieved by equal import tariffs and export subsidies with incomplete information we consider incentive compatible trade policies which are designed to be truth revealing while partially sharing the production risk in this case the tariff in one country may differ from the export subsidy abroad

discounting and long run behavior global bifurcation analysis of a family of dynamical systems abstract this paper is concerned with the relationship between the discount rate and the nature of long run behavior in dynamic optimization models the theory is developed under two conditions the first is history independence which rules out multiple limit sets the second is a condition that avoids the reversion to a stable steady state as the discount factor is lowered once cycles have emerged these conditions appear to be the minimal restrictions that would allow analysis by a bifurcation diagram the results are illustrated by two well known examples in this literature due to sutherland and weitzman samuelson journal of economic literature classification numbers c61 d90 041

on characterizing optimal competitive programs in terms of decentralizable conditions the paper considers a multisector model of intertemporal allocation with a primary factor of production and the overtaking criterion of optimality the optimal program is characterized in terms of i period by period conditions on intertemporal profit and utility maximization relative to a system of competitive prices and ii non positivity of appropriately computed values of differences of stocks from the golden rule stock the last condition replaces the usual transversality condition of malinvaud and throws new light on the possibility of dencentralization in an infinite horizon economy

collusion and price rigidity we consider an in nitely repeated bertrand game in which prices are publicly observed and each rm receives a privately observed i i d cost shock in each period we focus on symmetric perfect public equilibria sppe wherein any punishments are borne equally by all rms we identify a tradeoff that is associated with collusive pricing schemes in which the price to be charged by each rm is strictly increasing in its cost level such fully sorting schemes offer efficiency bene ts as they ensure that the lowest cost rm makes the current sale but they also imply an informational cost distorted pricing and or equilibrium path price wars since a higher cost rm must be deterred from mimicking a lower cost rm by charging a lower price a rigid pricing scheme where a rm s collusive price is independent of its current cost position sacri ces efficiency bene ts but also diminishes the informational cost for a wide range of settings the optimal symmetric collusive scheme requires i the absence of equilibrium path price wars and ii a rigid price if rms are sufficiently impatient however the rigid pricing scheme cannot be enforced and the collusive price of lower cost rms may be distorted downward in order to diminish the incentive to cheat when the model is modi ed to include i i d public demand shocks the downward pricing distortion that accompanies a rm s lower cost realization may occur only when current demand is high

a complete characterization of optimal growth paths in an aggregated model with a non concave production function the convexity of technology has played a crucial role in economic analyses of optimal one sector growth problems for example two of the key results on the traditional model of ramsey 1928 that have relied on the convexity of the technology are that optimal intertemporal growth involves moving monotonically towards a unique steady state as in cass 1965 koopmans 1965 and that the value function is a concave differentiable function of the initial capital stock as in benveniste and scheinkman 1979

optimal intertemporal allocation mechanisms and decentralization of decisions abstract problems of achieving an efficient or optimal allocation of resources through a system of decentralized decision making when the planning horizon is unbounded and the number of agents is infinite have been repeatedly raised but have not been explored in a formal manner the objective of this paper is to suggest some points of departure for a systematic investigation of such questions the main analytical results indicate the impossibility of attaining optimality through intertemporally decentralized mechanisms

on the role of retaliation in trade agreements this paper analyzes the role of retaliation in trade agreements it shows that in the presence of private information retaliation can always be used to increase the welfare derived from such agreements by the participating governments in particular it is shown that retaliation is a necessary feature of any efficient equilibrium we argue that retaliation would not be necessary if governments could resort to international transfers or export subsidies to compensate for terms of trade externalities within the current world trading system though in which transfers are seldom observed whereas export subsidies are prohibited the use of the remaining trade instruments in a retaliatory fashion might be optimal the model is used to interpret the retaliatory use of antidumping observed in the last decades and the proliferation of these measures relative to other trade remedies

a theory of managed trade this paper proposes a theory that predicts low levels of protection during periods of normal trade volume coupled with episodes of special protection when trade volumes surge this dynamic pattern of protection emerges from a model in which countries choose levels of protection in a repeated game facing volatile trade swings high trade volume leads to a greater incentive to defect unilaterally from cooperative tariff levels therefore as the volume of trade expands the level of protection must rise in a cooperative equilibrium to mitigate the rising trade volume and hold the incentive to defect in check copyright 1990 by american economic association

does hidden information make trade liberalization more fragile this paper focuses on the impact of hidden information on strategic interaction in the context of trade agreements in the presence of informational asymmetry it is possible that a tradeoff between liberalization and sustainability of cooperation emerges it is shown that it may be optimal to agree on a degree of liberalization associated with a strictly positive ex ante probability of deviation occurring in that case cooperation will break down in finite time and the optimal degree of liberalization cannot be applied indefinitely ce memoire etudie l impact de l information cachee sur l interaction strategique dans le contexte des accords de commerce quand il y a asymetrie de l information il est possible qu emerge une relation d equivalence entre la liberalisation et la viabilite de la cooperation on montre qu il peut etre optimal de s entendre sur un degre de liberalisation associea une probabilite ex ante strictement positive qu une deviation va se produire dans ce cas la cooperation va s effriter dans une periode finie et le degre optimal de liberalisation ne tient pas indefiniment

politically realistic objective functions and trade policy profs and tariffs abstract this paper demonstrates a mathematical correspondence between the deus ex machina tariff formation approach and political economy approach the correspondence implies that the tariff chosen by lobbying influenced policy makers will be equivalent to a tariff chosen by a deus ex machina government that gives too much weight to profits this result allows many political economy issues to be addressed in the simple framework of a deus ex machina government which faces a politically realistic objective function prof

a necessary condition for decentralization and an application to intertemporal allocation abstract a necessary condition for realization by a decentralized finite dimensional mechanism is proved the concepts of the realization of a time sequence of allocations by a decentralized temporal process and by the particular more realistic class of decentralized evolutionary temporal processes are defined the above condition shows that the optimal allocation in a simple model for intertemporal production and consumption can be realized by a decentralized temporal process but not by a decentralized evolutionary process which uses either a finite number of verification conditions or a finite dimensional message space

the folk theorem with imperfect public information the authors study repeated games in which players observe a public outcome that imperfectly signals the actions played they provide conditions guaranteeing that any feasible individually rational payoff vector of the stage game can arise as a perfect equilibrium of the repeated game with sufficiently little discounting the central condition requires that there exist action profiles with the property that for any two players no two deviations one by either player give rise to the same probability distribution over public outcomes the results apply to principal agent partnership oligopoly and mechanism design models and to one shot games with transferable utilities copyright 1994 by the econometric society

gatt a cooperative equilibrium in a noncooperative trading regime abstract as global tariff rates have fallen the use of nontariff barriers to trade have become more prevalent one incentive for a country to depart from free trade is to levy the optimal tariff in order to maximize domestic welfare the gatt was designed to maintain free trade through a system of managed retaliation as is well known in a game theoretic trade model of tariffs with no uncertainty free trade is an equilibrium outcome however with the introduction of uncertainty and asymmetric information it is shown that the equilibrium outcome s has each country imposing nontariff barriers to trade

unions taxes and the structure of multinational enterprises abstract this note analyzes how a firm s relationship with unions or tax authorities influences its basic structure in particular it is shown that the prospect of capture by unions or tax authorities of part of the rents associated with the firm s investments leads it to open more plants than is technologically efficient thus unions and taxes are an independent reason for a firm s expansion nationally and for foreign direct investment

characterization of intertemporal optimality in terms of decentralizable conditions the discounted case abstract the paper studies the problem of characterizing the optimality of competitive programs in terms of decentralizable conditions we show that when future utilities are discounted and the optimal stationary stock is proportionately expansible then optimality of competitive programs can be characterized by the condition that the scalar product of the difference of prices and quantities between those of the given competitive program and those of the optimal stationary program be non positive period by period

huggett economies with multiple stationary equilibria abstract i obtain a closed form solution to a huggett economy with constant absolute risk aversion cara utility when the vector of individual state variables follows a var 1 process with an arbitrary shock distribution the stationary equilibrium is unique if the income process is ar 1 but not necessarily so otherwise with gaussian shocks i provide general sufficient conditions for the existence of at least three equilibria when the income process is either arma 1 1 ar 2 or has a persistent transitory pt representation with negatively correlated shocks the possibility of multiple equilibria calls for caution in comparative statics exercises and policy analyses using heterogeneous agent models as an illustration i provide an example in which the welfare implication of changing the income risk goes in opposite directions depending on the choice of equilibrium

on the minimum rate of impatience for complicated optimal growth paths the occurrence of complex dynamics in economic models has received wide attention by the economic profession during the last decade see boldrin and woodford 1990 for a recent survey one of the most interesting and surprising results obtained so far is the indeterminacy theorem of boldrin and montrucchio 1986b which implies that virtually every dynamical behavior is fully compatible with the standard assumptions of decreasing returns competitive markets and perfect foresight deneckere and pelikan 1986 have used a related approach to derive similar results for the special case of one dimensional dynamics whereas the analysis in boldrin and montrucchio 1986b and deneckere and pelikan 1986 is restricted to optimal growth models formulated in discrete time an analogous result holds also for the continuous time case see montrucchio 1988 and sorger 1990 all of these indeterminacy theorems have been proved by a constructive approach which requires a sufficiently high rate of impatience on the side of the decision maker in particular to construct optimal growth models exhibiting some well known chaotic maps like the logistic map or the henon map as optimal policy functions one needs time preference rates of more than 400

incomplete markets and volatility abstract this paper shows that the precautionary motive combined with asset incompleteness is a major source of volatility and indeterminacy in financial markets price fluctuations originate from agents efforts to insure themselves through time by borrowing and lending instead of shifting income across states of nature by trading risky assets a high interest rate at a future date reduces the potential for future consumption smoothing via borrowing which leads to a strong precautionary motive and a low interest rate in the current period the negative feedback between future and current rates generates fluctuations this logic is developed in spec a cara normal exchange economy with many periods and endogenous interest rates when there is an intermediate level of market incompleteness and sufficient investor impatience fluctuations in the real interest rate can be large even though the aggregate endowment is constant spec has a unique equilibrium under a finite horizon on the other hand with a finite number of infinitely lived agents there exists a robust continuum of equilibria that are neither bubbles nor sunspots journal of economic literature classification numbers c61 d52 d58 g11 g12

on characterizing optimality of stochastic competitive processes abstract a condition is provided to replace the transversality condition in characterizing the optimality of competitive processes this extends the work of w brock l hurwicz and m majumdar on characterizing optimality of competitive programs in terms of decentralizable conditions and optimal intertemporal allocation mechanisms and decentralization of decisions cornell university working paper nos 333 and 369 1985 on providing an informationally decentralizable condition for characterizing optimality in stochastic infinite horizon models without discounting

tacit collusion under interest rate fluctuations previous literature has shown that demand fluctuations affect the scope for tacit collusion i study whether discount factor fluctuations can have similar effects i find that collusion depends not only on the level of the discount factor but also and more surprisingly on its volatility collusive prices and profits increase with a higher discount factor level but decrease with its volatility these results have important implications for empirical studies of collusive pricing the role that collusive pricing may play in economic cycles and the study of cooperation in repeated games

dynamic tariffs with asymmetric information recent developments in dynamic game theory are applied to determine when two countries can sustain freer trade given that they determine trade policies non cooperatively countries know their own level of protection but not the other country s level of protection using import trigger strategies cooperation in the form of low tariffs can be supported although there are periodic reversionary high tariff episodes however if terms of trade trigger strategies are used cooperation does not occur

decentralization in infinite horizon economies an introduction abstract the paper summarizes some issues involved in developing a theory of decentralized resource allocation mechanism in infinite horizon economies even in a classical environment a competitive mechanism may lead to an inefficient or nonoptimal allocation for an infinite horizon economy it remains however to explore whether the usual price quantity messages can be supplemented to design decentralized mechanisms generating optimal outcomes

optimal cartel equilibria with imperfect monitoring abstract there exist optimal symmetric equilibria in the green porter model 4 8 having an elementary intertemporal structure such an equilibrium is described entirely by two subsets of price space and two quantities the only production levels used by firms in any contingency the central technique employed in the analysis is the reduction of the repeated game to a family of static games

on the existence of a stationary optimal stock for a multi sector economy a primal approach abstract using a purely primal approach we show the existence of a non trivial stationary optimal stock for a multi sector economy our result generalizes earlier work by dropping the productivity assumption and by replacing the continuity hypothesis on the utility function by upper semicontinuity

the impact of trade unions on incentives to deter entry in this article i illustrate the impact of trade unions on strategic product market behavior i discuss entry deterrence through capital durability in a model developed by eaton and lipsey in the presence of unions sunk capital scares away potential entrants but can also raise workers bargaining power firms have thus to trade off these two effects in making their capital decisions i analyze the impact of potential entry and unions on capital durability and welfare and i discuss briefly the influence of unions on strategic product market behavior in general

a unique informationally efficient and decentralized mechanism with fair outcomes it is shown that any informationally decentralized mechanism that realizes fair allocations over the class of classical pure exchange environments has a message space of dimension no smaller than the number of agents times the number of commodities since the equal income walrasian mechanism in which all agents take prices parametrically and maximize utility subject to the average income constraint realizes fair outcomes over the class of classical pure exchange environments and has a message space of that dimension it is informationally efficient further it is shown that it is the unique informationally efficient mechanism realizing fair allocations

stochastic turnpike property and stationary equilibrium abstract i study the stability properties of a stochastic equilibrium growth model with a finite number of infinitely lived consumers the exogenous stochastic environment is represented by a stationary stochastic process that influences preferences technology and primary resources consumers maximize the expected sum of discounted utilities production is intertemporal and primary resources are assumed to be necessary for the production of capital goods by adapting standard assumptions in general equilibrium theory and turnpike theory i show that if consumers have homogeneous discount factors close enough to one the allocation of an interior equilibrium converges to the allocation of a stationary equilibrium with transfer payments this result is used to prove the existence of a stationary equilibrium

an exact discount factor restriction for period three cycles in dynamic optimization models consider a standard aggregative dynamic optimization framework u where is the transition possibility technology set u is a reduced form utility function defined on this set and 0 1 a discount factor can an optimal program in this framework exhibit a period three cycle

repeated games with stochastic discounting this paper provides folk theorems for infinitely repeated games where the discount factor is stochastic when discount factors are independently distributed and the current discount fac tor is unobservable prior to current actions standard trigger strategies support a full folk theorem when the infimum of the mean of the sequence of discount factors is sufficiently close to one when players choose actions in each period after having observed the current discount factor this result breaks down payoffs on the boundary of the set of individually rational payoffs are unobtainable as nash equilibrium average payoffs to the supergame in order to highlight the impact of stochastic discounting on the analysis of supergames we provide the stochastic discounting analogue to friedman s perfect folk theorem this paper examines the implications of stochastic discount factors for nash equilibria in repeated games repeated games have broad applicability in olig opolistic markets where optimizing owners make decisions based on the expected present value of alternative actions in this setting firms can invest one dollar today at the present rate of interest to obtain principal and interest tomorrow thus it is natural to interpret the discount factor as 1 1 r where rt is the real rate of interest between periods t and t 1 the paper is motivated by recent evidence kinal and lahiri 1988 among others that the real rate of interest varies stochastically over time and the fact that the existing literature on repeated games assumes the discount factor to be deterministic our results are also relevant for finitely repeated games where the probability that the game ends owing to bankruptcy say varies stochastically over time our theorem 2 shows that when discount factors are independently dis tributed and the current discount factor is unobservable prior to current actions standard trigger strategies support a full folk theorem when the infi mum of the mean of the sequence of discount factors is sufficiently close to one theorem 3 demonstrates that when players choose actions in each period after having observed the current discount factor this result breaks down pay offs on the boundary of the set of individually rational payoffs are unobtain able as nash equilibrium average payoffs to the supergame the reason is that a sufficiently low realization of the discount factor induces players to behave myopically since in such periods the expected discounted value of sustaining one shot cooperative actions is arbitrarily low in order to highlight the impact of stochastic discounting on the analysis of supergames we provide in theorem 4 the stochastic discounting analogue to friedman s perfect folk theorem the supergame strategies we employ never break down and involve actions correlated with current realizations of the discount rate players revert to a one shot nash equilibrium for low realiza tions of the discount factor and return to one shot collusive behaviour for high realizations

negotiated trade restrictions with private political pressure we consider a home government with political pressure to restrict trade the foreign country is compensated with a portion of the tariff revenues or quota rents but cannot directly observe the political pressure abroad in this setting the two countries negotiate over the volume of trade and transfer of rents depending on the level of political pressure we determine globally optimal incentive compatible trade policies in which the home government has no incentive to overstate or understate the pressure for protection

on impatience economic growth and the environmental kuznets curve a dynamic analysis of resource management the paper presents a dynamic analysis of natural resource management and investigates some key factors that affect optimal management and resource conservation using a recursive specification of time preferences we show how endogenous discounting and impatience can affect the motivation for both capital investments and environmental preservation we examine the relationships between economic growth and environmental quality endogenous discounting provides new insights in the economic dynamics underlying the environmental kuznets curve by treating growth as endogenous we examine how externalities and economic growth interact with each other we investigate how economic development can contribute to an increased demand for environmental preservation as an important new result we also show how poverty can contribute to environmental degradation

intertemporal optimality in a closed linear model of production abstract the paper presents the main results on intertemporal optimality with discounting in a closed linear model of production including the price characterization of optimal programs the existence of a steady state optimal program and a turnpike property of optimal programs from arbitrary initial stocks some of these results are used to provide a characterization of the optimality of competitive programs in terms of a decentralizable condition