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We analyze a model in which there is socially inefficient competition among people. In this model, self-enforcing social norms can potentially control the inefficient competition. However, the inefficient behavior often cannot be suppressed in equilibrium among those with the lowest income due to the ineffectiveness of sanctions against those in the society with the least to lose. We demonstrate that in such cases, it may be possible for society to be divided into distinct classes, with inefficient behavior suppressed in the upper classes but not in the lower. Download Paper
Vector Auto Regression (VAR) models are used to trace the dynamic linkages across daily returns of national stock market indices of Latin America, and among the Latin American and major world stock market indicies. The Latin American indices include: Argentina, Brazil, Chile, and Mexico. The majorworld stock market indices include: the US; the world excluding the US; United Kingdom; Japan; Germany; France; and Canada. Although most of the impulse responses die out very quickly, it is still possible to trace the dynamic linkages among markets. The dynamic linkages among the Latin American markets and among the Latin American and major world stock markets are found to be relatively small. The conclusion is that although markets are efficient and cleared out in a few trading days, there are dynamic linkages that can be explored and exploited to the benefit of the diversified international investor. Download Paper
We study community enforcement in a private information, random match- ing setting, where buyers privately "network" for information and sellers have a short term incentive to supply low quality. We also show that high quality can be sold in a sequential equilibrium with population M even when each buyer periodically interacts with only N*(M) players where 0 < lim M->infinite (N^*2)/M < infinite: We show that when networking is costly and M is large, low quality is supplied with positive probability in any Nash equilibrium. For this case, we characterize conditions for a sequential equilibrium in which both high and low quality are supplied. Download Paper
In the present paper a pure exchange, general equilibrium model is considered and the equilibrium set is studied. It is shown for all total endowments and an open and dense set of preferences that if there are l >= 2 commodities and m >= 2 consumers then there exists a set of distributions of endowments with nonempty interior such that the associated economies have at least l - 1 + min{l,m} equilibria for l + min{l,m} even and at least l - 2 + min{l,m} equilibria for l + min{l,m} odd. Download Paper
In a model of exchange with price-taking individuals, the existence of non-trivial underemployment equilibria with walrasian prices is proved for a generic set of economies. The likelihood of the occurrence of these equilibria is higher the farther the economy is from a Pareto optimal initial allocation, and the larger the economy is, when considering log-linear preferences. Moreover, these equilibria can be interpreted as the result of some self-fulfilling beliefs. We show how markets are vulnerable to psychological effects translating aggregate signals into bad expectations, which are nonetheless rational in the sense of being confirmed in equilibrium. The possibility of distortions in market allocations is essentially derived from: 1) myopic individual behavior preventing sufficient ex- perimentation; 2) the timing of "production" decisions; 3) the absence of certain financial contracts; 4) the fear of government restrictions on supply. Download Paper
Policy persistence refers to the tendency of the political process to maintain policies once they have been introduced. This paper develops a theory of policy persistence based on the idea that policies create incentives for beneficiaries to take actions which increase their willingness to pay for these policies in the future. The theory is used to show that policy persistence may lead to "political failure", in the sense that policy sequences arising in political equilibrium can be Pareto dominated. In addition, the theory is used to provide an explanation as to why \policy conditionality" may have permanent effects. Download Paper
A number of papers have shown that a strict Nash equilibrium action profile of a game may never be played if there is a small amount of incomplete information (see, for example, Carlsson and van Damme (1993a)). We present a general approach to analyzing the robustness of equilibria to a small amount of incomplete information. A Nash equilibrium of a complete information game is said to be robust to incomplete information if every incomplete information game with payoffs almost always given by the complete information game has an equilibrium which generates behavior close to the Nash equilibrium. We show that an open set of games has no robust equilibrium and examine why we get such different results from the refinements literature. We show that if a game has a unique correlated equilibrium, it is robust. Finally, a natural many-player many-action generalization of risk dominance is shown to be a sufficient condition for robustness. Download Paper
We consider a version of Kiyotaki and Wright's monetary search model in which agents can hold arbitrary amounts of divisible money. A continuum of stationary equilibriums, indexed by the aggregate real-money stock, exist with all trading occurring at a single price. There is always a maximum level of the real money stock consistent with existence of such an equilibrium. In the limit as trading becomes faster relative to discounting, any real money stock becomes feasible in such an equilibrium. In contrast to the original Kiyotaki-Wright model, higher equilibrium real money stocks unambiguously correspond to higher welfare. Download Paper
This paper shows that Nash equilibria of a local-interaction game are equivalent to correlated equilibria of the underlying game. Download Paper
It is well known from the Folk Theorem that infinitely repeated games admit a multitude of equilibria. This paper demonstrates that in some types of games, the Folk Theorem form of multiplicity is an artifact of the standard representation which assumes perfect synchronization in the timing of actions between the players. We define here a more general family of repeated settings called renewal games. Specifically, a renewal game is a setting in which a stage game is repeated in continuous time, and at certain stochastic points in time determined by an arbitrary renewal process some set of players may be called upon to make a move. A stationary, ergodic Markov process determines who moves at each decision node. We restrict attention in this paper to a natural subclass of renewal games called asynchronously repeated games, in which no two individuals can change their actions simultaneously. Special cases include the alternating move game, and the Poisson revision game. In the latter, each player adjusts his action independently at Poisson distributed times. Our main result concerns asynchronously repeated games of pure coordination (where the pay­ offs of all players in the stage game are identical up to an affine transformation): given € > 0, if players are sufficiently patient then every Perfect equilibrium payoff comes within € of the Pareto dominant payoff. We also show that the "Folk wisdom" in the standard model that repetition always expands (weakly) the set of equilibrium payoffs is not true generally in asynchronously repeated games. Download Paper
We develop a simple model that captures a concern for relative standing. The concern for relative standing is instrumental in the sense that individ­ uals do not get utility directly from their relative standing, but rather, the concern is induced because relative standing affects consumption of stan­ dard commodities. We investigate the consequences of a concern for relative wealth in models in which individuals are making labor-leisure choice deci­ sions. Among the results, we show how individuals' decisions are affected by the aggregate income distribution and how the concern for relative wealth can generate behavior that can be interpreted as conspicuous consumption when wealth is not directly observable. Download Paper
As traders learn about the true distribution of some asset's dividends, a speculative premium occurs as each trader anticipates the possibility of re-selling the asset to another trader before complete learning has occurred. Reasonable ignorance priors lead to large bubbles during the learning process. This phenomenon explains a paradox concerning the pricing of initial public offerings. The result casts light on the significance of the common prior assumption in economic models. Download Paper
This paper established the generic existence of sunspot equilibria in a standard two period exchange economy with real assets. We show that for a generic choice of utility functions and endowments, there exists an open set of real asset structures whose payoffs are independent of sunspots such that the economy with this asset structure has a regular sunspot equilibrium. This results also clarifies the relationship between equilibrium multiplicity and existence of sunspot equilibria. Our technique is very general and can be applied to other frameworks as the overlapping generations model with sunspots. Download Paper
This paper studies the robustness of a competitive equilibrium against sunspots, or endogenous uncertainty. It is shown that an equilibrium is robust if and only if it is sequentially regular. Download Paper
This paper studies the efficiency of policy choice in representative democ- racies. It extends the model of democratic policy making developed in our earlier paper (Besley and Coate (1995)) to a simple dynamic environment. Equilibrium policy choices are shown to be efficient in the sense that in each period, conditional on future policies being selected through the democratic process, there exists no alternative current policy choices which can raise the expected utilities of all citizens. However, policies which would be declared efficient by standard economic criteria are not necessarily adopted in political equilibrium. The paper argues that these divergencies are legitimately viewed as "political failures". Download Paper
A consumer with diminishing marginal utility in consumption, who can search for lower prices, will balance the gains from spreading consumption evenly through time against the bene ̄ts of delaying consumption until lower prices are revealed. Optimal programs of consumption, savings and price are characterized for a general formulation of this problem. Intertempo- ral substitutability is measured by relative-risk aversion. That relative-risk aversion that is small is su±cient for the intuitive solution: As the best current price rises, more search and less consumption is done. The general model is adapted to special cases. Among other things, this shows that lin- ear utility and sequential search implies ex ante calculable reservation prices and consumption only when search stops. However, this characterization is a consequence of the restriction to linear utility. Outside of this context reservation prices and consumption may not be calculable, ex ante. Download Paper
Kalai and Lehrer (93a, b) have shown that if players' beliefs about the future evolution of play is absolutely continuous with respect to play induced by optimal strategies then Bayesian updating eventually leads to Nash equilibrium. In this paper, we present the first set of necessary and su±cient conditions that ensure that Bayesian updating eventually leads to Nash equilibrium. More important, we show that absolute continuity does not rule out any observable behavior that is asymptotically consistent with Nash equilibrium. Download Paper
This paper analyzes the economic consequences of a±rmative action in the presence of statistical discrimination. In the model, workers with di®ering abilities have com- parative advantages in jobs with di®ering complexities. Employers, having a biased belief on the ability of minority workers, require higher credentials when promoting them to more productive jobs, which discourages their human capital investment. When a±rmative action policy is enforced, some under-quali ̄ed minority workers are promoted to di±cult jobs. Those workers, as well as some majority workers who are over-quali ̄ed for, but have to take, easy jobs lose because their comparative advan- tages are not utilized. This ine±ciency due to mismatch is not necessarily outweighed by the long term gain brought about by the policy, if groups di®er substantially in their human capital investment costs. Appropriately reinterpreted, the model explains why drop-out rates and the returns to college education di®er between blacks who attend black and non-black colleges. Download Paper
If players cannot perfectly synchronize their actions in co-ordination games, the efficient equilibrium is never achieved. Download Paper
In a static economy with symmetric information, the informational requirements for competitive equilibrium are very weak: markets clear and each agent is rational. With asymmetric information, the solution concept of competitive equilibrium has been generalized to rational expectations equilibrium. But now common knowledge of market clearing and rationality is required. This paper proves versions of these results in a formal model of knowledge. Download Paper
At a rational expectations equilibrium (REE), individuals are assumed to know the map from states to prices. This hypothesis has two compo- nents, that agents agree (consensus), and that they have point expectations (degeneracy). We consider economies where agents' beliefs are described by a joint distribution on states and prices, and these beliefs are ful ̄lled at equilibrium. Beliefs are self-ful ̄lling if every price in the support of the distribution is an equilibrium price. The corresponding equilibria are Beliefs Equilibria (BE). The further restriction that agents have the same beliefs results in Common Beliefs Equilibria (CBE). We study the relation- ship between BE, CBE, and REE, thus isolating the role of consensus and of degeneracy in achieving rational expectations. Download Paper
This paper develops a new approach to the study of democratic policy making where politicians are selected by the people from those citizens who present themselves as candidates for public office. Participation in the policy making process is, therefore, derived endogenously. The approach has a number of attractive features. First, it is a conceptualization of a pure form of representative democracy in which government is by, as well as of, the people. Second, the model is analytically tractable, being able to handle multidimensional issue and policy spaces very naturally. Third, it provides a vehicle for answering questions about the achievements of representative democracy. We study, in particular, whether representative democracy produces efficient outcomes. Download Paper
This paper analyzes an incomplete financial markets model with price- taking utility-maximizing financial innovators and no-short sales restrictions. It is shown that, given the indeterminacy of the no arbitrage price conjecture of innovators, financial markets can remain incomplete in equilibrium. As a consequence, real indeterminacy of degree at least equal to int (S/2)(S- (S/2)) results, where S is the number of spots in the future. The dimension of innovators’ beliefs giving rise to I newly introduced financial assets is I(S-I), with an equal degree of real indeterminacy. Download Paper