applied general equilibrium models of taxation and international trade an introduction and survey we wish to acknowledge the help of three referees and of john pencavel on several earlier drafts as well as the assistance of the modelers whose work is referred to in the paper they corrected our lack of understanding of their work and provided many other helpful comments excellent research and bibliographical assistance have been provided by debbie fretz radwan shaban and janet stotsky helpful comments have been made by charles ballard michael boskin lans bovenberg sylvester damus harvey galper glenn harrison gordon lenjosek jack mutti serena ng t n srinivasan charles stuart and eric toder the authors also acknowledgefinancial support from the national bureau of economic research the national science foundation international business machines and the social sciences and humanities research council ottawa canada

an experimental investigation of the patterns of international trade this study is the first attempt to create and study a laboratory economy with some of the prominent features of an international economic system the concept of multiple countries in which each country has its own technology preferences and resource endowments is introduced and operationalized the questions posed in the study are related to the law of comparative advantage factor price equalization terms of trade efficiency in production and exchange as guided by multiple and interacting markets and the effects of tariffs on international transactions the study builds on previous work in the experimental study of general equilibrium phenomena

new results on precautionary saving under two risks this paper identifies a new sufficient condition for a prudent agent to have positive precautionary saving in the presence of labor income and interest rate risks of any size we also provide three economic interpretations for this condition focusing respectively on the marginal effect of saving on total income variance on the sign of the covariance between total income and the return of saving and on the effect of saving on the utility premium

a note on third degree price discrimination in intermediate good markets this note studies third degree price discrimination in intermediate good markets i show that whether a more efficient downstream firm is charged a higher or lower price than a less efficient firm depends on the shape of the demand function different from the case in which final market demand is linear the usual assumption in the literature constant elasticity demand for example results in a more efficient firm s receiving a discount

the welfare effects of third degree price discrimination in the author examines third degree price discrimination by an upstream monopolist in an intermediate good market discrimination is motivated by the fact that downstream firms differ in their abilities to integrate backward into supply of the input the author shows that under reasonable specifications of equilibrium price discrimination leads to all buyers facing higher input prices in other cases discrimination raises some prices and lowers others the author derives conditions under which discrimination lowers welfare by reducing total output and shows that in some markets discrimination will raise welfare by preventing socially inefficient backward integration copyright 1987 by american economic association

an experimental examination of general equilibrium tax incidence abstract tax incidence is examined in an experimental general equilibrium production micro economy consistent with predictions the imposition of a tax on corporate capital resulted in a flow of capital out of the corporate sector decreased corporate usage of capital relative to labor and tax shifting through decreases in the relative prices of capital and non corporate output although capital owners were able to shift some of the tax burden the corporate tax resulted in a 35 drop in capital owner s share of payoffs implications for policy are discussed

on the utility premium of friedman and savage we re examine the utility premium of friedman savage friedman milton and savage leonard j the utility analysis of choices involving risk journal of political economy 56 1948 pp 279 304 this measure is useful in understanding risky choices for instance its reaction to an increased wealth equates to a precautionary demand for saving we also analyze its two components c 2009 published by elsevier b v

putting risk in its proper place this paper examines preferences toward particular classes of lottery pairs we show how such concepts as prudence and temperance can be fully characterized by a preference relation over these lotteries if preferences are defined in an expected utility framework with differentiable utility the direction of preference for a particular class of lottery pairs is equivalent to signing the nth derivative of the utility function what makes our characterization appealing is its simplicity which seems particularly amenable to experimentation

monopoly price discrimination and demand curvature this paper presents a general analysis of the eects of monopolistic third degree price discrimination on welfare and output when all markets are served su cient conditions involving straightforward comparisons of the curvatures of the direct and inverse demand functions in the dierent mar kets are presented for discrimination to have negative or positive eects on

a contextual uncertainty condition for behavior under risk suppose that your choice between uncertain financial prospects is made more difficult by two independent contextual uncertainties concerning the size of your existing wealth one contextual uncertainty has a greater spread than the other if you could resolve one of these contextual uncertainties before making your choice would you rather it be the larger or the smaller in this paper we explore the intuitive notion that it ought to be more advantageous to resolve larger rather than smaller contextual uncertainties the utility function for wealth uw aw be cwa b c 0 is the only utility function that satisfies this condition and that is also increasing and risk averse at all wealth levels

price discrimination and social welfare studies the effect of price discrimination on social welfare using methods from duality theory features of the reservation model presented quasi linear utility and consumers surplus upper and lower bounds on welfare change bounds on welfare change with optimal price discrimination from ebsco

a standard measure of risk and risk value models in this paper we propose a standard measure of risk that is based on the converted expected utility of normalized lotteries with zero expected values this measure of risk has many desirable properties that characterize the notion of risk it is very general and includes many previously proposed measures of risk as special cases moreover our standard measure of risk provides a preference based and unified method for risk studies since the standard measure of risk is compatible with the measure of expected utility it can be used explicitly or implicitly in an expected utility model under a condition called risk independence a decision could be made by explicitly trading off between risk and value which offers an alternative representation of the expected utility model named the standard risk value model finally we discuss some other applications of the standard measure of risk and extensions of our risk value tradeoff framework for descriptive decision making

the probability premium a graphical representation we illustrate that pratt s probability premium can be given a simple graphical representation allowing a direct comparison to the equivalent but more prevalent concept of risk premium under expected utility we also show that the probability premium s graphical representation under the dual theory mimics that of the risk premium under expected utility

consistency of higher order risk preferences risk aversion a second order risk preference is a time proven concept in economic models of choice under risk more recently the higher order risk preferences of prudence third order and temperance fourth order also have been shown to be quite important while a majority of the population seems to exhibit both risk aversion and these higher order risk preferences a significant minority does not we show how both risk averse and risk loving behaviors might be generated by a simple type of basic lottery preference for either 1 combining good outcomes with bad ones or 2 combining good with good and bad with bad respectively we further show that this dichotomy is fairly robust at explaining higher order risk attitudes in the laboratory in addition to our own experimental evidence we take a second look at the extant laboratory experiments that measure higher order risk preferences and we find a fair amount of support for this dichotomy our own experiment also is the first to look beyond fourth order risk preferences and we examine risk attitudes at even higher orders

differential pricing when costs differ a welfare analysis this article analyzes the welfare effects of monopoly differential pricing in the important but largely neglected case where costs of service differ across consumer groups cost based differential pricing is shown to increase total welfare and consumer welfare relative to uniform pricing for broad classes of demand functions even when total output falls or the output allocation between consumers worsens we discuss why cost based differential pricing tends to be more beneficial for consumers than its demand based counterpart third degree price discrimination we also provide sufficient conditions for welfare improving differential pricing when costs and demands differ across consumer groups

prudence probability premium abstract prudence probability premium is defined in the risk apportionment model eeckhoudt and schlesinger 2006 for an increase in downside risk we show sufficient conditions for comparing the probability premiums between two individuals when the apportioned risk is small and large

the welfare effects of third degree price discrimination in intermediate good markets the case of bargaining this article examines the welfare effects of third degree price discrimination by a monopolist selling to downstream firms with bargaining power one of the downstream firms the chain store can integrate backward at lower cost than rivals bargaining powers also depend on disagreement profits bargaining weights and concession costs if the chain s integration threat is not credible price discrimination reduces the input price charged symmetric downstream firms and often reduces the average input price charged asymmetric downstream firms

the monetary utility premium and interpersonal comparisons the utility premium is generally defined as the pain or reduction in expected utility caused by an nth degree risk increase where n 2 while it is a very useful concept in understanding a decision maker s choice in uncertain situations the utility premium is not interpersonally comparable this note shows that the monetary utility premium the utility premium divided by the expected marginal utility at the random starting wealth is interpersonally comparable and the comparison is characterized by ross more risk aversion of the corresponding degree

precautionary saving a taxonomy of prudence we extend gunning 2010 by analyzing the effect of risk on saving we derive a general prudence index that determines the threshold for the future risk that makes saving increase we relate our results to the utility premium of friedman savage

health and portfolio choices a diffidence approach the effect of health status on portfolio decisions has been extensively studied from an empirical viewpoint in this paper we propose a theoretical model of individuals choice of financial assets under bivariate utility functions depending on wealth and health our approach makes an extensive use of the diffidence theorem we establish the conditions under which the share of wealth held in risky assets falls as 1 individuals health status deteriorates and 2 individuals health status becomes risky these conditions are shown to be related to the behavior of the intensities of correlation aversion and of cross prudence as wealth increases

substituting one risk increase for another a method for measuring risk aversion abstract this paper defines the rate of substitution of one stochastic change to a random variable for another it then focuses on the case where one of these changes is an nth degree risk increase and the other is an mth degree risk increase where n m 1 the paper shows that the rate of substitution for these two risk increases can be used to provide a broader definition and two additional characterizations of the nth degree ross more risk averse partial order the implications for local intensity measures of nth degree risk aversion are also examined the analysis organizes the existing results as well as generates new ones

comparative higher order risk aversion and higher order prudence abstract in this paper we define the n th degree utility premium as the pain associated with facing the passage from a more favorable risk to a less favorable risk where the risk increase is specified by the notion of more n th degree risk we further define the n th degree prudence utility premium as the increase in pain when the individual suffers a sure loss we show that the n th degree utility premium normalized by the n 1 th derivative of the utility function evaluated at the initial wealth can explain comparative risk aversion of higher orders on the other hand the n th degree prudence utility premium normalized by the n th derivative of the utility function evaluated at the initial wealth can explain comparative prudence of higher orders

input price discrimination when buyers operate in multiple markets this paper revisits third degree price discrimination when input buyers serve multiple product markets such circumstances are prevalent since buyers often use the same input to produce different outputs and even homogenous outputs are routinely sold through different locations the typical view is that price discrimination stifles efficiency and welfare by resulting in price concessions to less efficient firms when buyers serve multiple markets price discrimination leads to price breaks for firms in markets with lower demand when lower demand markets also have less competition price discrimination can provide welfare gains by shifting output to less competitive markets

price discrimination in input markets quantity discounts and private information we consider a monopolistic supplier s optimal choice of wholesale tariffs when downstream firms are privately informed about their retail costs under discriminatory pricing downstream firms that differ in their ex ante distribution of retail costs are offered different tariffs under uniform pricing the same wholesale tariff is offered to all downstream firms in contrast to the extant literature on price discrimination with nonlinear wholesale tariffs we find that banning discriminatory wholesale contracts often improves welfare this also holds if the manufacturer is not an unconstrained monopolist moreover uniform pricing increases downstream investments in cost reduction in the long run

timing of investments and third degree price discrimination in intermediate good markets abstract this paper studies the discriminatory pricing of an intermediate good and compares two models with a different timing of investments undertaken by the downstream firms before or after the upstream monopolist sets the input prices when the more efficient downstream firm is charged a higher price than the less efficient firm in the first model in the second model when investments are made after input prices are set it may be charged a lower price due to the additional indirect effect of input prices on derived demands via the change of investment incentives it is illustrated that with linear market demand and quadratic investment cost whether a lower or higher price is charged to the more efficient firm depends on the ratio of the linear and quadratic coefficients in the cost function

price discrimination in input markets we analyze the short and long run implications of third degree price discrimination in input markets in contrast to the extant literature which typically assumes that the supplier is an unconstrained monopolist in our model input prices are constrained by the threat of demand side substitution in our model the more efficient buyer receives a discount a ban on price discrimination thus benefits smaller but hurts more efficient larger firms it also stifles incentives to invest and innovate with linear demand a ban on price discrimination benefits consumers in the short run but reduces consumer surplus in the long run which is once again the opposite of what is found without the threat of demand side substitution

third degree price discrimination and consumer surplus this paper considers the effects of monopoly third degree price discrimination on aggregate consumer surplus discrimination is likely to reduce surplus relative to that obtained with a uniform price but surplus can rise under reasonable conditions if the ratio of the pass through coefficient to the price elasticity at the uniform price is higher in the market with the higher price elasticity then surplus is larger with discrimination for a large set of demand functions the relatively high pass through coefficient implies a large price reduction in this market with logit demand functions surplus is higher with discrimination if pass through is above 0 5

the utility premium of friedman and savage comparative risk aversion and comparative prudence we show that the utility premium of friedman and savage can be used to explain comparative risk aversion and comparative prudence more precisely we show that the greater the risk aversion measure the greater a risk s utility premium normalized by the marginal utility and that the greater the prudence measure the greater the utility premium for disaggregating a certain loss of wealth and a zero mean risk normalized by the utility function s second derivative

third degree price discrimination in input markets output and welfare if price discrimination is realized the economy shifts from one equilibrium to another it clearly involves welfare effects the price discriminator clearly gains some consumers may also gain from the price cut but others may lose faced with higher prices etc traditionally the change in social welfare is known to be closely related to the change in total output in the case of third degree price discrimination it is well known that an increase in total output is a necessary condition for welfare improvement richard schmalensee 1981 proves this fact in a model in which the monopolist with constant marginal cost can perfectly separate markets further hal r varian 1985 extends this result to the case of interdependent markets permnitting increasing marginal cost of the monopolist and finally the assumption of nondecreasing marginal cost is eliminated by marius schwartz 1990 roughly speaking this proposition says that if there is a welfare gain from price discrimination there has to be some gain to offset the distortion involved on the other hand the vast majority of legal and other policy disputes over the price discrimination concern input markets not final good markets thus it seems important to investigate the situation in which a discriminating monopolist is not a final good supplier but an input supplier and the buyers of the input are downstream producers of a final good as is assumed in this paper if the downstream firms have different technologies their input demand functions will be different and thus the monopolist has an incentive to price discriminate in this scenario michael l katz 1987 and patrick degraba 1990 study the effect of inputmarket price discrimination and show that price discrimination always lowers welfare because it involves the distortion that a lower cost downstream firm is assigned a higher price unfortunately in their simple settings on the technology of downstream industry price discrimination can never change total output of the input or of the final good 1 thus we must say that welfare effect of input market price discrimination remains open to question if it has some effect on total output in particular we are curious as to whether we can obtain some close relationship between the changes in welfare and total output as we have obtained in the final good market settings with this motivation we will construct a model which involves change in total output of the final good in the next section the model and assumptions are provided in section ii after we extend the result of katz 1987 and degraba 1990 we find a relationship between the changes in welfare and total output strikingly it states that an increase in the total output of the final good is a sufficient condition for welfare deterioration this result contrasts with that obtained by schmalensee 1981 varian 1985 and schwartz 1990 from usual models of price discrimination in a final good market section iii concludes the analysis

input market price discrimination and the choice of technology recent concerns over the effects of the robinson patman act and so called priceprotection policies such as most favoredcustomer clauses mfc s 2 on market performance have given economists new reasons to examine the welfare effects of third degree price discrimination in order to assess these effects correctly it is imperative that one understand how price discrimination influences market behavior joan robinson s 1933 work launched the formal inquiry into the welfare effects of third degree price discrimination building on the intuition presented by arthur pigou 1932 she showed that if a monopolist faces two independent linear demand curves the use of price discrimination will not affect industry output but will reduce welfare richard schmalensee 1981 extends these results to nonlinear demand curves and shows that an increase in total industry output is a necessary condition for price discrimination to be welfare improving hal varian 1985 broadens these results by deriving upper and lower bounds on the welfare change due to the use of price discrimination he shows that these results can be applied to markets in which there are nonzero cross price effects all of this work examines how the ability of a monopolist to price discriminate will affect the market outcome when all other characteristics of the market are treated as exogenous recently two lines of research have extended this inquiry beyond the case of a monopolist in a market with exogenously fixed parameters the first line considers the case of oligopoly the work of charles holt and david scheffman 1985 and thomas cooper 1986 has shown that restrictions on price discrimination imposed by the use of mfc s can facilitate collusion between oligopolists attempting to restrict output this implies that third degree price discrimination can be welfare improving the second line of research shows that price discrimination by a firm can affect nonprice decisions made by other market participants thus affecting the market outcome michael katz 1987 presents a model in which a large firm s ability to vertically integrate backward into the production of an input allows it to obtain a lower per unit price from the supplier of the input than can be obtained by smaller firms without this ability he shows that third degree price discrimination reduces welfare unless it prevents inefficient backward integration degraba 1987 shows that the use or nonuse of price discrimination by a national firm can affect nonprice decisions made by local firms that compete with the national firm in this situation third degree price discrimination is welfare reducing because it induces local firms to produce a product that is overly differentiated from the product of the national firm in all of the work cited above price discrimination is important when sellers set prices in separate markets or charge different prices to different customers in the same market the following analysis which can be considered a contribution to the second line of research suggests that price discrimination can be important even when a seller faces a single market in which all customers are identical the intuition behind this result is that nonprice decisions made by downstream producers such as the choice of technology can be affected by the use or johnson graduate school of management cornell university ithaca ny 14853 i thank robert frank robert smiley richard thaler and the participants of the jgsm applied microeconomics workshop for their helpful comments see william baldwin 1987 pp 438 40 for a good summary of the debate 2see john kwoka and lawrence white 1989 pp 196 7

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

changes in risk and the demand for saving abstract how does risk affect saving empirical work typically examines the effects of detectible differences in risk within the data how these differences affect saving in theoretical models depends on the metric one uses for risk for labor income risk second degree increases in risk require prudence to induce increased saving demand however prudence is not necessary for first degree risk increases and not sufficient for higher degree risk increases for increases in interest rate risk a precautionary effect and a substitution effect need to be compared this paper provides necessary and sufficient conditions on preferences for an n th degree change in risk to increase saving