Volume 17, Issue 2 -

It is well-known that in the monetary OLG models, a deviation from the Friedman rule can improve welfare because it generates intergenerational wealth transfers; however, the rule becomes optimal if the age-specific lump-sum tax policy is available. We revisit the issue using a microfounded model of money with centralized and decentralized markets. The individuals live for two periods. The young individuals work, receive wage income and hold money and capital in the centralized market. They also trade goods in the decentralized markets either as a buyer or a seller. Only money is accepted as a means of payment in the decentralized markets. The old individuals consume all their wealth in the centralized market. The quantity in the decentralized market negatively depends on the seller’s wealth, because the marginal utility of consumption in the centralized market is diminishing, but the buyer takes it as exogenous. Therefore, the equilibrium wealth exceeds the socially optimal level under the Friedman rule. A positive nominal interest rate makes money holdings costly, reduces wealth and improves welfare, even if the government optimally uses the age-specific tax.

We develop a model in which unemployed workers can pass along unwanted job information to other unemployed friends within social networks. Compared with the case in the absence of social networks, we first show in an economy where networks are equal in size that unemployment rate is lower. In terms of social welfare, social planner prefers workers becoming more selective than the decentralized equilibrium. When social networks differ in size, increasing the size difference is beneficial for unemployed workers with large networks but detrimental to those with small networks; in addition, the unemployment rate decreases with the size difference. However, because of the dilution effect, as the proportion of unemployed workers with large networks increases, it eventually results in losses for all unemployed workers, and the unemployment rate may follow a non-monotonic pattern.

Conventional economic theory assumes a Walrasian pricing mechanism that is known to pose theoretical difficulties. Less well-known is that conventional price theory conflicts with empirical studies of price-setting in industrial firms. Post-Keynesian theory, which assumes mark-up pricing on normal costs and infrequent price changes, is consistent with observation, and we show in this paper that post-Keynesian pricing, unlike conventional pricing, features stable dynamics. We focus on the short run, because post-Keynesian theory posits complex and historically-contingent long-term price dynamics. Specifically, we show that under very general conditions, prices converge to a unique equilibrium price vector.

Various well known agreement theorems show that if players have common knowledge of actions and a “veto" action is available to every player, then they cannot agree to forgo a Pareto optimal outcome simply because of private information in settings with unique equilibrium. We establish a nonspeculation theorem which is more general than previous results and is applicable to political and economic situations that generate multiple equilibria. We demonstrate an application of our result to the problem of designing an independent committee free of private persuasion.

As the cost of financial information dissemination continues to decline, investors, firms, and regulators are gradually adopting the principle of fair disclosure, which requires no preferential public disclosure. We use a simple model to examine the impact of this change on information acquisition with two alternative assumptions: (1) Investors have symmetric awareness about the underlying uncertainties, or (2) this awareness is asymmetric among them. Under the first assumption, the change reduces information asymmetry among investors and induces acquisition of high-quality information. Under the second assumption, however, the reduction of information asymmetry may be limited, and information acquisition is either reduced or less efficient. Specifically, investors with high awareness may either acquire high-quality information at a higher cost or not acquire it; investors with low awareness only acquire low-quality information. The loss in overall information quality is greater when awareness asymmetry is moderate than when it is high or low; this causes information asymmetry between the insiders and outside investors as a whole. These results offer explanations for intriguing empirical findings regarding the effect of a recent accounting regulation (Regulation Fair Disclosure).

It is known that if the number of entering firms is endogenous (free entry markets), privatization is not necessarily welfare neutral in mixed oligopolies under a uniform production subsidy policy. We revisit this problem by considering another policy tool, the output floor regulation. We investigate three free entry models with different time structures, a Cournot and two Stackelberg models. We find that neutrality is restored in free entry markets under the optimal output floor regulation, regardless of the time structure.

Forward induction, as defined by Govindan and Wilson (2009. “On Forward Induction.” Econometrica 77:1–28), places a local dominance condition on off-equilibrium beliefs that restricts relevant strategy profiles for an equilibrium outcome to be infinitely more likely than profiles that include irrelevant strategies. Meanwhile, it places no global dominance restrictions and thus leaves open the possibility that a dominated strategy is deemed more likely than strategies dominating it. This paper defines strong forward induction , which improves upon forward induction. We also develop a solution concept called strong forward induction equilibrium that is obtained from iterative application of the strong forward induction criterion.

This paper discusses an alternative explanation for the empirical findings contradicting the positive relationship between risk (variance) and reward (expected return). We show that these contradicting results might be due to the false definition of risk-perception, which we correct by introducing Expected Downside Risk (EDR). The EDR parameter, similar to the Expected Shortfall or Conditional Value-at-Risk, measures the tail risk, however, fits and better explains the utility perception of investors. Our results indicate that when using the EDR as risk measure, both the positive and negative relationship between expected return and risk can be derived under standard conditions (e. g. expected utility theory and positive risk-aversion). Therefore, no alternative psychological explanation or additional boundary condition on utility theory is required to explain the phenomenon. Furthermore, we show empirically that it is a more precise linear predictor of expected return than volatility, both for individual assets and portfolios.

We consider two-sided many-to-one matching markets where hospitals have responsive preferences. In this context, we study the preference revelation game induced by the student-proposing deferred acceptance mechanism. We show that acyclicity of the hospitals’ preference profile (Romero-Medina and Triossi 2013a. “Acyclicity and Singleton Cores in Matching Markets.” Economics Letters 118 (1):237–9) is a necessary and sufficient condition to ensure that the outcome of every Nash equilibrium in which each hospital plays a dropping strategy is stable.

We study multidimensional inequality on integers. In such a setting, a Lorenz-like preorder and a suitably adapted version of the Muirhead-Pigou-Dalton transfers are defined, and a counterpart of some classic results on inequality measurement is established in this multivariate setting.