economic deregulation days of reckoning for microeconomists economic deregulation of american industry is one of the most important experiments in economic policy of our time 1 in 1977 17 percent of u s gnp was produced by fully regulated industries 2 by 1988 following ten years of partial and complete economic deregulation of large parts of the transportation communications energy and financial industries that total had been cut significantly to 6 6 percent of gnp 3 the political forces behind the decision to change the market conditions under which roughly 600 billion of u s output is produced were strong and varied but according to political scientists martha derthick and paul quirk 1985 p 36 deregulation would never have occurred if economists especially microeconomists had not generally supported it through their research 4 in retrospect it is fair to ask were microeconomists able to develop a theoretical and empirical framework to explain regulation and its effects and to form predictions of deregulation s effects were they able to predict the actual effects of deregulation this paper surveys the evidence to address these questions and of

what drives deregulation economics and politics of the relaxation of bank branching restrictions this paper investigates private interest public interest and political institutional theories of regulatory change to analyze state level deregulation of bank branching restrictions using a hazard model we find that interest group factors related to the relative strength of potential winners large banks and small bank dependent firms and losers small banks and the rival insurance firms can explain the timing of branching deregulation across states during the last quarter century the same factors also explain congressional voting on interstate branching deregulation while we find some support for each theory the private interest approach provides the most compelling overall explanation of our results

the social costs and benefits of too big to fail banks a bounding exercise while the policy of too big to fail has received wide attention in the literature there is little agreement regarding economies of scale for financial firms we take the stand that systemic risk increases when the larger players in the financial sector have a larger share of output calculations indicate that the cost to the macro economy due to increased systemic risk is always much larger than the potential benefit due to scale economies when distributional and intergenerational issues are considered the potential benefits to economies of scale are unlikely to ever exceed the potential costs due to increased risk of a banking crisis

consequences of deregulation for commercial banking in recent years many of the restrictions on banking activities adopted following the banking collapse of the 1930s have been eroded by improvements in technology and high interest rates which led to increasing direct competition from unregulated institutions beginning in the 1970s the regulatory agencies state legislatures and the congress have moved to liberalize these restrictions based on research on economies of scale and scope the experience of the conglomerate merger movement of the 1950s and 1960s the observed effects of changes in state laws governing branches and holding companies foreign experience and experience in other industries that underwent deregulation banking deregulation is likely to lead to reductions in the number of banks and increases in their efficiency geographic scope and product diversification such an outcome is consistent with the survival of a large number and variety of financial institutions and need not endanger the safety of the banking system over the past two decades the markets for financial services have provided a fascinating laboratory in which to observe the interplay of market forces political responses to crises and the maneuvering of interested parties in shaping public policy toward an entire industry in the process a regulatory framework put in place a half century ago has been partly dismantled and is likely to be modified further perhaps even more dramatically in the years to come this paper reviews the progress of deregulation to date attempts to discern its implications for the future shape of the financial system in particular commercial banking and poses several questions of public policy

the origins of utility regulation and the theories of regulation debate in this article the author attempts to show that the effort to ascribe regulatory effects to a theory largely deflects attention from the dynamic relationships between the regulator and the regulated firm or industry played out most frequently within a long term relationship closely resembling more familiar forms of long term contracts the focus on regulation by commission is misguided and the differences between regulation by commission and by other regulatory techniques are less important than has been appreciated the author s examination of the history of public utility regulation makes impossible any clear cut distinction between competing public interest and private interest theories

is the glass steagall act justified a study of the u s experience with universal banking before the glass steagall act of 1933 removed commercial banks from the securities underwriting business we evaluate the argument for the separation of commercial and investment banking that conflicts of interest induce commercial banks to fool the public into investing in securities which turn out to be of low quality a comparison of the performance of securities underwritten by commercial and investment banks prior to the act shows no evidence of this instead the public appears to have rationally accounted for the possibility of conflicts of interest and this appears to have constrained the banks to underwrite high quality securities jel g21 g24 n22

comparative statics of changes in risk on monotonically and partially responsive kinked payoffs abstract this paper derives two sets of necessary and sufficient conditions on the comparative statics of changes in risk under kinked payoff functions that are monotonically responsive and partially responsive to the realization of risk respectively the former case includes the newsboy problem with backorder the latter case includes the newsboy problem without backorder and under some restrictions also includes the optimal deductible insurance problem some relatively non restrictive conditions derived from the necessary and sufficient conditions reveal that the three problems can be quite different even though they are often viewed in the literature as being congruous these conditions lead to simple predictions of the direction of change in any risk averse agent s optimal choice upon a change in risk without assuming specific functional forms for the utility function

effects of site specific management on the application of agricultural inputs site specific management of inputs in agricultural production is receiving increased attention because of new technologies and concerns about excessive input use this paper provides a microeconomic analysis of its implications it shows that profit decreases with an increase in the variability of input requirements but that input and production effects can be quite complicated

understanding the shift from micro to macro prudential thinking a discursive network analysis macro prudential thinking and its emphasis on endogenously created systemic risks marginal in the banking regulation discourse until the mid 2000s has become central post crisis this paper analyzes this intellectual shift by using discourse and citation network analysis of the most cited scholarly works on banking regulation and systemic risk from 1985 to 2014 and six in depth interviews with central scholars it demonstrates that the predominance of formalism particularly partial equilibrium analysis in studies on banking regulation pre crisis impeded economists engagement with the endogenous sources of systemic risks discussed in the systemic risk sample these studies excluded observed phenomena that could not be accommodated in mathematical models largely ignoring contributions based on historical and practitioners styles of reasoning post crisis while informal analyses gain prominence in studies on banking regulation attempts to conceptualize systemic risk as a negative externality indicate the persistence of formalism and equilibrium thinking and its concomitant epistemological limitations that stymie theoretical progress

loss averse preferences and portfolio choices an extension abstract in this paper we generalise existing models of loss averse preferences this extension clarifies the impact of stochastic changes in risk on the optimal degree of risk taking our more general model highlights an intuitive link between the literature on loss averse behaviours and the notions of prudence and temperance recently introduced in the literature we also stress the link between our approach and the use of var and cvar as risk measures

income taxation and the diversity of consumer goods a political economy approach after tax income inequality has risen since the mid 1990s as increases in market income inequality have not been offset by greater fiscal redistribution we argue that the substantial increase in the diversity of consumer goods has mitigated mounting political pressures for redistribution within a probabilistic voting framework we demonstrate that if the share of diversified goods in the consumption bundle increases sufficiently with income then an increase in goods diversity can reduce the political equilibrium tax rate focusing on oecd countries we find empirical support for both the model s micro political foundations and the implied relation between goods diversity and fiscal policy outcomes

the effects of shifts in a return distribution on optimal portfolios when the distribution of the returns of a risky asset undergoes a stochastically dominating shift a risk averse investor may not necessarily increase the investment in that asset this paper provides restrictions on the investor s utility function that are necessary and sufficient for a dominating shift to bring about no decrease in the investment in the respective asset if there are two risky assets in the portfolio these conditions are also necessary if there are n 2 assets and are necessary and sufficient if the utility function exhibits constant absolute risk aversion copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

monotonicity of asset price toward higher changes in risk abstract this note gives the conditions on preferences to guarantee the monotonicity of asset prices when the payoffs of the risky asset change in the sense of the n th stochastic dominance and with an n th degree increase in risk those conditions are expressed in terms of the sign of the successive derivatives of the utility function coupled with the relative risk aversion of higher orders less than their benchmark values

on abel s concept of doubt and pessimism abstract in this paper we characterize subjective probability beliefs leading to a higher equilibrium market price of risk we establish that abel s result on the impact of doubt on the risk premium is not correct in general see abel 2002 an exploration of the effects of pessimism and doubt on asset returns journal of economic dynamics and control 26 1075 1092 we introduce on the set of subjective probability beliefs market price of risk dominance concepts and we relate them to well known dominance concepts used for comparative statics in portfolio choice analysis in particular the necessary first order conditions on subjective probability beliefs in order to increase the market price of risk for all nondecreasing utility functions appear as equivalent to the monotone likelihood ratio property

do you trust your insurer ambiguity about contract nonperformance and optimal insurance demand abstract we study optimal insurance demand for a risk and ambiguity averse consumer under ambiguity about contract nonperformance ambiguity aversion lowers optimal insurance demand and the consumer s degree of ambiguity aversion is negatively associated with the optimal level of coverage a more pessimistic belief and greater ambiguity may increase or decrease the optimal demand for insurance and we determine sufficient conditions for a negative effect we also discuss wealth effects and evaluate the robustness of our results by considering several alternative models of ambiguity aversion our findings show how ambiguity about contract nonperformance can undermine the functioning of insurance markets making it a concern for regulators caution is required though because demand reactions are only imperfectly informative about the welfare effects of ambiguity about contract nonperformance

law and economics at chicago it is a double honor to have been invited to deliver the simons lecture on the occasion of the celebration of the centennial of the university of chicago although at my age a century seems a rather short period we all know that the university of chicago has not suffered from the usual human limitations it emerged from the ground fully grown it had neither an infancy nor an adolescence and wasted no time in working its way to the top it started at the top economics at the university of chicago was no exception the first head of the economics department j l laughlin himself a redoubtable authority on money set about recruiting a formidable faculty including thorstein veblen when i went as a student to the london school of economics in 1929 some thirty seven years after the formation of the university of chicago its economics department was recognized to be one of the most powerful in the world foremost in our minds at the time mainly as a result of the teaching of lionel robbins was frank knight he was regarded at the london school of economics as one of the greatest of economists and his book risk uncertainty and profit was closely studied by all serious students of economics there then there was jacob viner an economic theorist of great ability and erudition whose work put him in the top rank of economists another member of the faculty was henry schultz one of the pioneers of econometrics whose empirical work on the derivation of statistical demand schedules was regarded as a major contribution to economics finally there was paul douglas a strange man who thought it more important and interesting to be a united states senator than a professor at the university of chicago his empirical work on wages and

risk and the value of bt corn a conceptual model is developed to evaluate the effect of bt corn on risk results highlight the importance of distinguishing between marginal and aggregate risk effects and demonstrate that the effect of bt corn on risk depends crucially on the price paid for the technology empirical results show that depending on the price bt corn can be marginally risk increasing or decreasing and can either increase or decrease corn acreage also depending on the price bt corn can provide a risk benefit to farmers even when bt corn is risk increasing bt corn is genetically engineered to produce a protein found in the soil bacterium bacillus thuringiensis bt the protein is toxic to lepidopterous insects such as the european

economic behavior under temporal uncertainty a considerable amount of research has focused on the effects of uncertainty on economic behavior in the absence of complete risk markets private risk bearing is widely believed to influence economic decisions arrow 1 sandmo 23 chavas 4 dalal 6 and others have investigated the role of uncertainty in resource allocation for example sandmo 23 has proposed a theory of the firm under risk he showed how risk and risk aversion can have a negative effect on production decisions

empirical models of the exchange rate separating the wheat from the chaff various popular exchange rate models a standard monetary model a portfolio balance model and sticky price models are estimated and evaluated using u s canadian data for the 1970s nonnested hypothesis tests demonstrate that none are correctly specified the data suggest 1 the exchange rate persistence observed is not fully explained by any of the models 2 the small durbin watson statistics indicate longer lags are required 3 the current account is a useful explanatory variable 4 the portfolio balance model fits the data well but has potentially serious problems measuring the stock of foreign assets this abstract was borrowed from another version of this item

behavior of the firm under regulatory constraint a recent article by akira takayama discusses an earlier paper by harvey averch and leland l johnson on fair rate of return regulation of public utilities although takayama p 255 agrees with averch and johnson s general conclusions that a firm will tend to increase its investment with the introduction of an active constraint on its rate of return he criticizes the a j argument as being confusing ambiguous and in error takayama then attempts a clarification and presents a new formulation which leads to the a j result quoted above this comment will discuss several of takayama s criticisms in addition to showing that the so called a j effect cannot be derived from the basic assumptions made by both averch and johnson and takayama 1 we will show that the very assumptions used to prove the a j effect by defining the region of x require an assumption that the a j effect exists in the first place

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

stochastic pollution permits and merger incentives pollution permit regulations introduce nonlinearities into the objective function of a polluting firm we develop a microeconomic model to show the effects these nonlinearities might have upon firm decisions when emissions are stochastic under perfect competition the fraction of planned pollution covered by permits is shown to be separable from planned production we also demonstrate that permit management incentives may motivate a merger of otherwise independent firms incentives to petition for bubble coverage are also considered the model is studied under risk neutrality and risk aversion imperfectly competitive situations in the output and permit markets are also analyzed

the influence of the economic approaches to regulation on banking regulations a short history of banking regulations this article highlights the theoretical foundations of the regulations at work in the banking sector and examines their responsibility in the onset of the 2007 2008 financial crisis drawing a parallel between the main changes in banking regulations since the 1960s and the evolutions in the economic analyses of regulation over the same period it shows that the shift from the public interest theory of regulation that prevailed until the late 1960s towards the private interest theory of regulation accounts for the substitution of micro prudential regulations for macro prudential ones and explains a paradigmatic change in the conception of the regulatory instruments of the banking authorities it also shows that although the outcome of several factors the 2007 2008 crisis was also a consequence of the fact that the economic analysis of banking regulations supported micro prudential regulations that fail to take the global features and impact of banking activities into account and have proved unable to recommend effective solutions in a context of crisis

portfolio choice under noisy asset returns abstract the lack of a clear effect of increases in risk upon the demand for risky assets has led to many restrictions on the types of risk increases and or on consumer preferences in order to obtain unambiguous comparative statics this paper examines the particularly simple yet overlooked case of white noise added to the return distribution it is shown that kimball s standard risk aversion is sufficient for noise to lead to reduced demand for risky assets

comparative statics under uncertainty for a class of economic agents abstract this paper explores trade offs between assumptions on risk preferences ordinal preferences under certainty and cumulative distribution function cdf changes of an exogenous random variable needed for determinate comparative statics results specifically we ask absent restrictions on risk preferences what cdf changes lead all agents whose choice under certainty is monotonic in the exogenous variable to increase their choice variable under uncertainty we find that the desired class of changes are those satisfying monotone likelihood ratio mlr dominance we also note that mlr improvements are behaviorally identical to decreased risk aversion a result that illuminates the relationship between changes in risk and risk aversion journal of economic literature classification number d81

defining bad news changes in return distributions that decrease risky asset demand we provide a random variable characterization of the necessary and sufficient conditions for a shift of the distribution of rate of return on the risky asset in the two asset portfolio problem to reduce demand for all strictly risk averse expected utility maximizing investors we also provide random variable characterizations of the shifts that reduce both demand and expected utility for all strictly risk averse investors

stochastic dominance and expected utility survey and analysis while stochastic dominance has been employed in various forms as early as 1932 it has only been since 1969 1970 that the notion has been developed and extensively employed in the area of economics finance agriculture statistics marketing and operations research in this survey the first second and third order stochastic dominance rules are discussed with an emphasis on the development in the area since the 1980s

a synthesis of keynesian monetary and portfolio approaches to flexible exchange rates the purpose of this paper is to extend our earlier systhesis of monetary and keynesian approaches to balance of payments theory under fixed exchange rates to the analysis of flexible exchange rates

income and substitution effects for mean preserving spreads a sandmo has ascribed the indeterminancy of the comparative static result for a mean preserving spread to the presence of both an income and a substitution effect in this note the compensation method needed to isolate the substitution effect identified by sandmo is made precise the compensation method is derived from a model that is sufficiently general to include many important applications of the theory of uncertainty the method is used to identify the substitution effect in sandmo s model of the competitive firm under output price uncertainty copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the impact of prudence on optimal prevention revisited this paper re examines the link between absolute prudence and self protection activities we show that the level of efiort chosen by an agent with positive and decreasing absolute prudence is larger than the optimal efiort chosen by a risk neutral agent if the degree of absolute prudence is less than a threshold that is utility independent and empirically veriflable we explain this threshold by a trade ofi between the variation of the variance and the level of the third moment of the loss distribution we also discuss our result in terms of skewness our contribution extends the model of eeckhoudt and gollier 2005

informing consumers about their own preferences we analyze a model of monopolistic price discrimination where only some consumers are originally sufficiently informed about their preferences e g about their future demand for a utility such as electricity or telecommunication when more consumers become informed we show that this benefits also those consumers who remain uninformed as it reduces the firm s incentives to extract information rent by reducing the costs of information acquisition or forcing firms to supply consumers with the respective information about past usage policy can further improve welfare as contracts become more efficient the last observation stands in contrast to earlier findings by cremer and khalil american economic review 1992 where all consumers are uninformed

can uncertainty alleviate the commons problem global commons problems such as climate change are often affected by severe uncertainty the paper examines the effect of uncertainty on pollution emissions and welfare in a strategic context we find that emissions are always lower under uncertainty than under certainty reflecting risk reducing considerations we show that uncertainty can have a net positive impact on the welfare of risk averse polluters we extend the analysis to increases in risk increases in risk aversion and to risk heterogeneity jel d81 c72 q54 h23

the effect on optimal portfolios of changing the return to a risky asset the case of dependent risky returns when the return to a risky asset is altered an investor s optimal portfolio is likely to change in working out the details of these changes for expected utility maximizing investors previous research has focused on portfolios composed of one risky and one riskless asset or two independent risky assets this research considers portfolios where the risky returns can be stochastically dependent existing comparative static theorems are extended to the case of dependent risky returns with the independence assumption replaced by weaker restrictions an investor s optimal portfolio is likely to change when the return to a risky asset is altered in working out the details of these changes for expected utility maximizing investors most research has focused on portfolios composed of one risky and one riskless asset recently hadar and seo 1990 extend and generalize this literature by considering portfolios containing more than one risky asset they assume however that the risky returns are independently distributed this research focuses on removing this independence restriction allowing the risky returns to be stochastically dependents two implications of hadar and seo s independence restriction play an important role in their analysis first independence allows one risky return to be altered without changing the marginal or the conditional cumulative distribution functions cdf for the others hadar and seo make this their ceteris paribus assumption second when the return to a risky asset is independent of other risky returns the marginal and each of the conditional cdfs for that return can be changed in exactly the same way hadar and seo assume this when they require the risky returns to be independent both before and after one return is altered an assumption replacing each of these implications of independence is needed in

demand for risky financial assets a portfolio analysis abstract demand for risky financial assets takes place in portfolio settings the common stochastic orders applied in economics fail to rank demand for assets in such situations even for risk averse investors therefore the evaluation of the relative desirability of risky financial assets requires the establishment of new orders we prove that if returns on risky assets are ordered by the monotone likelihood ratio order then dominating assets will be more desired by all investors with nondecreasing utility functions

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

some results on comparative statics under uncertainty this paper presents results on comparative statics for a class of decision problems under uncertainty necessary and sufficient conditions are derived for parameter changes and stochastically dominant shifts in the return in the two asset portfolio problem these results give conditions for the demand for money to be inversely related to the rate of interest further applications include the qualitive behavior of aggregate savings under uncertainty and the production decision of a firm facing price uncertainty copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

capital mobility and exchange rate overshooting abstract this paper examines the relation between the degree of capital mobility and the exchange rate overshooting phenomenon in a framework that employs a stock formulation of the capital account the results are compared with those emerging from the corresponding flow formulation and it is shown that the stock formulation modifies the quantitative but not qualitative implications of the model

covered interest parity uncovered interest parity and exchange rate dynamics a number of macroeconomic models of open economies under flexible exchange rate assume a strong version of perfect capital mobility which implies that currency speculation commands no risk premium if this assumption is dropped a number of important results no longer obtain first the exchange rate and interest rate cannot be in steady state unless both the government deficit and current account equal zero not simply their sum as would otherwise be the case second even in steady state the domestic interest rate can deviate from the foreign interest rate by an amount which de ends upon relative domestic asset supplies finally introducing risk aversion on the part of speculators can reduce the response on impact of the exchange rate to changes in domestic asset supplies in this sense rational speculators if they are less risk averse than other agents can destabilize exchange markets this abstract was borrowed from another version of this item

portfolio choices and asset prices the comparative statics of ambiguity aversion we investigate the comparative statics of more ambiguity aversion as defined by klibanoff marinacci and mukerji 2005 in the context of the static two asset portfolio problem it is not true in general that more ambiguity aversion reduces the demand for the uncertain asset we exhibit some sufficient conditions to guarantee that ceteris paribus an increase in ambiguity aversion reduces the demand for the ambiguous asset and raises the equity premium for example this is the case when the set of plausible distributions of returns can be ranked according to the monotone likelihood ratio order we also show how ambiguity aversion distorts the price kernel in the alternative portfolio problem with complete markets for contingent claims

asset proportions in optimal portfolios the paper is concerned with conditions under which the proportion of a given asset in the optimal portfolio of a risk averse agent is at least as large as some given proportion the paper provides a condition that is necessary and sufficient for such a result to hold the analysis is then confined to portfolios in which the distributions of assets differ by either a first degree stochastic dominance shift or by a mean preserving shift examples are provided to show that under some conditions a risk averter may invest a smaller proportion of his wealth in the dominating asset than in the dominated asset the paper then provides conditions that are necessary and sufficient for a risk averter to invest more in the dominating asset the question of whether risk averse agents should or should not choose diversified portfolios as opposed to specialized ones has been analysed quite extensively in the literature examples of such works are samuelson 1967 brumelle 1974 hadar and russell 1974 russell and seo 1979 hadar and seo 1980 and macminn 1984 what has not been examined at all except for very special cases is the question of the optimal proportions of the various assets in a diversified portfolio in this paper we present conditions which imply that the optimal amount invested in a particular asset is at least as large as some given proportion of the available fund in the case of two asset portfolios one may especially want to know which of the two assets represents more than half the investible fund indeed we find it convenient to start the analysis with the two asset case while the extension to n asset protfolios is essentially straightfoward it is presented in a subsequent section focusing first on the two asset case will make it easier for the reader to see the main logical steps in the proofs of the theorems some of our analysis is facilitated by the use of a particular subset of risk averters this subset has the property that if its members behave in a particular way then all risk averters behave in that way we refer to such a subset as a representative set of all risk averters 2 the usefulness of the representative set derives from the fact that its members have utility functions of a very simple form consisting of two linear pieces and its applicability to the problems on hand derives from the fact that any concave function can be approximated by a linear combination of members of the representative set in the next section we present some formal results demonstrating the equivalence of unanimity among members of the representative set and unanimity among all risk averters in certain types of choice situations these theorems are then used in section 3 in which we present the results about optimal asset proportions

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

information and the equity premium we determine how better information aects the average equity premium in a standard representative agent exchange economy perfect information obviously eliminates the equity premium and we show that a particular kind of information about the level of future consumption always lowers the average equity premium surprisingly information must sometimes raise the average equity premium no matter what the preferences of the representative agent information purely about the volatility either of consumption or the marginal utility of consumption raises the equity premium for a wide class of preferences moreover information can raise the average equity premium by an arbitrarily large percentage while still matching important magnitudes such as average growth and the risk free rate we consider two dierent economies a two period economy with arbitrary preferences for the representative agent and an infinite horizon economy with standard additive separable ces utility with independent growth rates through time

exchange rate dynamics under gradual portfolio and commodity price adjustment abstract this paper studies exchange rate dynamics within the context of a model that allows for gradual portfolio and commodity price adjustment the model encompasses as a special limiting case the orthodox portfolio balance model wherein portfolio adjustment is instantaneous the focus of the paper is on the process of adjustment to a once and for all open market operation under a bond financed government budget deficit the generalized portfolio balance model which we formulate generates a varied menu of adjustment paths for the exchange rate and the aggregate price level which are more successful than the orthodox instantaneous portfolio equilibrium models in accomodating the divergent experiences of various countries