The risk-free rate in heterogeneous-agent, incomplete-insurance economies

Includes bibliographical references (p. 16-18)

"Market Processes and Thwarting Systems"

This paper suggests that there are two longstanding views on business cycles and economic dynamics: One emphasizes endogenous stability plus exogenous disturbances, while the other focuses on endogenous instability plus institutional 'containing' or "thwarting" mechanisms. The latter tradition regards business cycles and economic instability as the natural and inherent consequence of self-interest-motivated behavior in complex economies with sophisticated financial institutions. In fact, it is the interaction between the system's endoge-nous dynamics and the effects of institutions and interventions which, if "apt," constrains the outcomes of capitalist market processes to acceptable outcomes. The endogenous instability view of the economy, in which institutional structures and interventions stabilize the fragile, essentially refutes Lucas: He asserts that the economy is a mechanism that transforms exogenous shocks (either random or unanticipated policy interventions) into business cycles, thus generating a growth equilibrium. Recent history has illustrated the flaws of laissez-faire theory as the postwar capitalist economies that have enjoyed consistently high levels of growth are big government interventionist economies. The challenge for the future is recognizing that market processes are deficient not only in their ability to maintain aggregate demand, but also as devices for assuring productive investment and a tolerable distribution of income.

Sounding the Alarm on Inflation Indexing and Strict Inflation Targeting

Unanticipated inflation or deflation causes one party of a nominal contract to gain at the expense of the other party, an effect absent in macroeconomic models with one representative consumer or with consumers having identical consumption. In this paper's general dynamic and stochastic equilibrium model, diverse consumers maximize risk-averse utility and rent labor and land to profit-maximizing firms. Both inflation indexing and strict inflation targeting are Pareto inefficient. When Pareto sharing of changes of aggregate supply is proportional, nominal contracts under perfect nominal income targeting are Pareto efficient, while quasi-real contracts are Pareto efficient regardless.inflation indexing, inflation targeting, quasi-real indexing, nominal income targeting

Perfect Competition

In his 1987 entry on ‘Perfect Competition’ in The New Palgrave, the author reviewed the question of the perfectness of perfect competition, and gave four alternative formalisations rooted in the so-called Arrow-Debreu-Mckenzie model. That entry is now updated for the second edition to include work done on the subject during the last twenty years. A fresh assessment of this literature is offered, one that emphasises the independence assumption whereby individual agents are not related except through the price system. And it highlights a ‘linguistic turn’ whereby Hayek’s two fundamental papers on ‘division of knowledge’ are seen to have devastating consequences for this research programme.Allocation of Resources; Perfect Competition; Exchange Economy

Perfect Competition

In his 1987 entry on ‘Perfect Competition’ in The New Palgrave, the author reviewed the question of the perfectness of perfect competition, and gave four alternative formalisations rooted in the so-called Arrow-Debreu-Mckenzie model. That entry is now updated for the second edition to include work done on the subject during the last twenty years. A fresh assessment of this literature is offered, one that emphasises the independence assumption whereby individual agents are not related except through the price system. And it highlights a ‘linguistic turn’ whereby Hayek’s two fundamental papers on ‘division of knowledge’ are seen to have devastating consequences for this research programmeAllocation of Resources, Perfect Competition, Exchange Economy

Multiuser Diversity Gain in Cognitive Networks

Dynamic allocation of resources to the \emph{best} link in large multiuser networks offers considerable improvement in spectral efficiency. This gain, often referred to as \emph{multiuser diversity gain}, can be cast as double-logarithmic growth of the network throughput with the number of users. In this paper we consider large cognitive networks granted concurrent spectrum access with license-holding users. The primary network affords to share its under-utilized spectrum bands with the secondary users. We assess the optimal multiuser diversity gain in the cognitive networks by quantifying how the sum-rate throughput of the network scales with the number of secondary users. For this purpose we look at the optimal pairing of spectrum bands and secondary users, which is supervised by a central entity fully aware of the instantaneous channel conditions, and show that the throughput of the cognitive network scales double-logarithmically with the number of secondary users ($N$) and linearly with the number of available spectrum bands ($M$), i.e., $M\log\log N$. We then propose a \emph{distributed} spectrum allocation scheme, which does not necessitate a central controller or any information exchange between different secondary users and still obeys the optimal throughput scaling law. This scheme requires that \emph{some} secondary transmitter-receiver pairs exchange $\log M$ information bits among themselves. We also show that the aggregate amount of information exchange between secondary transmitter-receiver pairs is {\em asymptotically} equal to $M\log M$. Finally, we show that our distributed scheme guarantees fairness among the secondary users, meaning that they are equally likely to get access to an available spectrum band.Comment: 32 pages, 3 figures, to appear in the IEEE/ACM Transactions on Networkin