Optimality and Natural Selection in Markets

Evolutionary arguments are often used to justify the fundamental behavioral postulates of competive equilibrium. Economists such as Milton Friedman have argued that natural selection favors profit maximizing firms over firms engaging in other behaviors. Consequently, producer efficiency, and therefore Pareto efficiency, are justified on evolutionary grounds. We examine these claims in an evolutionary general equilibrium model. If the economic environment were held constant, profitable firms would grow and unprofitable firms would shrink. In the general equilibrium model, prices change as factor demands and output supply evolves. Without capital markets, when firms can grow only through retained earnings, our model verifies Friedman's claim that natural selection favors profit maximization. But we show through examples that this does not imply that equilibrium allocations converge over time to efficient allocations. Consequently, Koopmans critique of Friedman is correct. When capital markets are added, and firms grow by attracting investment, Friedman's claim may fail. In either model the long-run outcomes of evolutionary market models are not well described by conventional General Equilibrium analysis with profit maximizing firms.evolution, natural selection, equilibrium, incomplete markets

The Economic Effects of Direct Democracy – A First Global Assessment

This is the first study that assesses the economic effects of direct democratic institutions on a cross country basis. Its results are based on up to six new measures produced to reflect the legislative basis for using direct democratic institutions as well as their factual use. In addition, a more general overall indicator is used. On the basis of these two different data sets only some of the results of the former intra-country studies are confirmed. An analysis based on the more general democracy index for 87 countries shows that a higher degree of direct democracy leads to lower budget deficits and higher government effectiveness. The effects on government expenditure, corruption and productivity have the expected signs but do not reach conventional levels of significance. A more fine grained analysis for a cross section of 88 countries based on the second data set shows that institutional detail matters a great deal. In particular, the mere possibility of drawing on direct-democratic institutions is often not sufficient to induce significant effects whereas the frequency of their factual use has a number of substantive effects on economic variables.direct democracy, economic effects of constitutions, positive constitutional economics

Stigma and Social Control

Social interactions provide a set of incentives for regulating individual behavior. Chief among these is stigma, the status loss and discrimination that results from the display of stigmatized attributes or behaviors. The stigmatization of behavior is the enforcement mechanism behind social norms. This paper models the incentive effects of stigmatization in the context of undertaking criminal acts. Stigma is a flow cost of uncertain duration which varies negatively with the number of stigmatized individuals. Criminal opportunities arrive randomly and an equilibrium model describes the conditions under which each individual chooses the behavior that, if detected, is stigmatized. The comparative static analysis of stigma costs differs from that of conventional penalties. One surprising result with important policy implications is that stigma costs of long duration will lead to increased crime rates.Crime, Stigma, Social norms

Lexiocographic Refinements of Nash Equilibrium

The fundamental idea of game theory is that each player in the game acts in his own best interests, given the actions of the other players. Nash equilibrium makes this idea precise by defining each player's best interests as the maximization of his expected utility, where the expectation is taken with respect to the (mixed) strategies played by the other players. New equilibrium concepts and refinements of old equilibrium concepts should adhere to this fundamental idea of self-interested action. This is to say, they must be justified in decision-theoretic terms. A notion of "self-interest" must be defined by specifying the preferences of the players, and equilibrium must be defined with respect to these preferences. This paper characterizes preferences that justify perfect and proper equilibrium as the outcome of rational, self-interested behavior.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/100637/1/ECON113.pd

Constructive Decision Theory

Contemporary approaches to decision making describe a decision problem by sets of states and outcomes, and a rich set of acts: functions from states to outcomes over which the decision maker (DM) has preferences. Real problems do not come so equipped. It is often unclear what the state and outcome spaces would be. We present an alternative foundation for decision making, in which the primitive objects of choice are syntactic programs. We show that if the DM's preference relation on objects of choice satisfies appropriate axioms, then we can find states, outcomes, and an embedding of the programs into Savage acts such that preferences can be represented by EU in the Savage framework. A modeler can test for SEU behavior without having access to the subjective states and outcomes. We illustrate the power of our approach by showing that it can represent DMs who are subject to framing effects.Decision theory, subjective expected utility, behavioral anomalies

Implementation of Walrasian Expectations Equilibria

In an exchange economy with differentially informed traders, Non-exclusivity of information (NEI) is the condition that each trader's private information be perfectly predictable by an outside observer who has observed the private information of all other traders. NEI is one of a set of conditions which, taken together, are sufficient for the implementability of fully revealing expectations equilibria. Here we show that this condition is in fact necessary for the weak implementation of a much broader class of Walrasian equilibria, herein called expectations equilibria.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/100640/1/ECON116.pd

Poverty traps in Markov models of the evolution of wealth

Poverty trap models are dynamical systems with more than one attractor. Similar dynamical systems arise in optimal growth and macroeconomic models. These systems are often studied empirically by ad hoc methods relying on intuition from deterministic systems, such as looking for multiple peaks in the stationary distribution of states. We develop Markov wealth processes in which parents' investments in children stochastically determine children's wealth, and consequently their own investment choices. We show that, relative to a zero-shock process, some of the multiple attractors are less fragile than are others, and that their presence dominates the stationary behavior of the wealth distribution. Typically, mass accumulates around attractors. An only slightly stochastically perturbed deterministic system will have an invariant distribution which puts close to probability 1 on a single steady state rather than having significant mass distributed among several attractors. We also examine how policy effects the shape of the invariant distribution

New techniques for the study of stochastic equilibrium processes

This paper develops the notion of transition correspondences; the set-valued analog of transition probabilities. A generalization of the Feller property for transition probabilities is shown to imply the existence of a selection from the transition correspondence having a stationary equilibrium. These techniques are applied to the existence problem for Markov temporary equilibrium processes in place of assumptions about the existence of continuous selections from the equilibrium price correspondence.Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/24087/1/0000343.pd

A Public School Financing System Which Relies Heavily on Local Property Taxes and Causes Substantial Disparities among Individual School Districts in the Amount of Revenue Available Per Pupil for the District\u27s Educational Grants Invidiously Discriminates against the Poor and Violates the Equal Protection Clause of the Fourteenth Amendment.

Abstract Forthcoming