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History : sunk cost or widespread externality? : second Arcelli lecture at the University of Piacenza, April 2007

By Peter J. Hammond


In an intertemporal Arrow-Debreu economy with a continuum of agents, suppose that the auctioneer sets prices while the government institutes optimal lump-sum transfers period by period. An earlier paper showed how subgame imperfections arise because agents understand how their current decisions such as those determining investment will influence future lump-sum transfers. This observation undermines the second efficiency theorem of welfare economics and makes "history" a widespread externality. A two-period model is used to investigate the constrained efficiency properties of different kinds of equilibrium. Possibilities for remedial policy are also discussed

Topics: HB
Publisher: University of Warwick, Department of Economics
OAI identifier:

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