History : Sunk Cost, or Widespread Externality?

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.

Walras-Lindahl-Wicksell: What equilibrium concept for public goods provision ? I - The convex case

Despite the large number of its references, this paper is less a survey than a systematic exposition, in an unifying framework and assuming convexity as well on the consumption side as on the production side, of the different equilibrium concepts elaborated for studying provision of public goods. As weak as possible conditions for their existence and their optimality properties are proposed. The general conclusion is that the drawbacks of the different equilibrium concepts lead to founding public economic policy either on direct Pareto improving government interventions or on state enforcement of decentralized mechanisms.Private provision equilibrium ; Lindahl-Foley equilibrium ; public competitive equilibrium ; abstract economies ; equilibrium existence ; welfare theorems ; core

On the Welfare Consequences of Political Activity

When economic actors are also allowed to become politically active, perhaps to influence a government price policy, they face decision problems with essentially simultaneous political and economic features. If, in addition, two groups struggle to pull the administered price level in opposite directions, an important strategic component is introduced. On two levels, then, such situations depart from the competitive economy framework of Arrow and Debreu. The model of this paper is designed to reconcile the general equilibrium model with politically active interest groups. This model is then used to assess the welfare consequences of such lobbying activity. We find that very often a lobbying program with price distortions is not the best means for regulating these economies. However, there may be cases in which no alternative policy could achieve the outcome resulting from the lobbying program. Keywords: Political economy, lobbying behavior, rent-seeking, distortionary policy.Political economy, lobbying behavior, rent-seeking, distortionary policy., Political Economy,

Welfare Theory: History and Modern Results

This paper contains a fairly brief, but self-contained, version of the history of welfare economics, as well as the more modern welfare results. We introduce public goods and asymmetric information, and we hint at some of the modern mechanism design results. The paper also contains a section on welfare measures in a dynamic economy.Welfare Theory;

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

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

Local Priority Mechanisms

We introduce a novel family of mechanisms for constrained allocation problems which we call local priority mechanisms. These mechanisms are parameterized by a function which assigns a set of agents -- the local compromisers -- to every infeasible allocation. The mechanism then greedily attempts to match agents with their top choices. Whenever it reaches an infeasible allocation, the local compromisers move to their next favorite alternative. Local priority mechanisms exist for any constraint so this provides a method of constructing new designs for any constrained allocation problem. We give axioms which characterize local priority mechanisms. Since constrained object allocation includes many canonical problems as special constraints, we apply this characterization to show that several well-known mechanisms, including deferred acceptance for school choice, top trading cycles for house allocation, and serial dictatorship can be understood as instances of local priority mechanisms. Other mechanisms, including the Boston mechanism, are not local priority mechanisms. We give necessary and sufficient conditions which characterize the local priority mechanisms that are group strategy-proof. As an application, we construct novel mechanisms for a natural variation of the house allocation problem where no existing class of mechanisms besides serial dictatorship would be applicable

The optimal degree of discretion in monetary policy

How much discretion should the monetary authority have in setting its policy? This question is analyzed in an economy with an agreed-upon social welfare function that depends on the randomly fluctuating state of the economy. The monetary authority has private information about that state. In the model, well-designed rules trade off society’s desire to give the monetary authority discretion to react to its private information against society’s need to guard against the time inconsistency problem arising from the temptation to stimulate the economy with unexpected inflation. Although this dynamic mechanism design problem seems complex, society can implement the optimal policy simply by legislating an inflation cap that specifies the highest allowable inflation rate. The more severe the time inconsistency problem, the more tightly the cap constrains policy and the smaller is the degree of discretion. As this problem becomes sufficiently severe, the optimal degree of discretion is none. JEL Classification: E5, E6, E52, E58, E61inflation caps, inflation targets, optimal monetary policy, Rules vs discretion, time inconsistency

Bilevel Optimization for On-Demand Multimodal Transit Systems

This study explores the design of an On-Demand Multimodal Transit System (ODMTS) that includes segmented mode switching models that decide whether potential riders adopt the new ODMTS or stay with their personal vehicles. It is motivated by the desire of transit agencies to design their network by taking into account both existing and latent demand, as quality of service improves. The paper presents a bilevel optimization where the leader problem designs the network and each rider has a follower problem to decide her best route through the ODMTS. The bilevel model is solved by a decomposition algorithm that combines traditional Benders cuts with combinatorial cuts to ensure the consistency of mode choices by the leader and follower problems. The approach is evaluated on a case study using historical data from Ann Arbor, Michigan, and a user choice model based on the income levels of the potential transit riders