Obsolescence of Durable Goods and Optimal Consumption

We study a model with a durable good subject to abrupt, periodic obsolescence, and characterize the optimal purchasing policy. Consumers optimally synchronize new purchases with the arrival of new durable models. Hence, some agents use a "flexible" optimal replacement rule that switches between two adjacent replacement frequencies at irregular intervals. These agents react to wealth shocks by changing the timing of future purchases. The model has distinct comparative statics on obsolescence and durability and can explain how durables with high depreciation rates may have more volatile expenditure. The model also predicts how demand fluctuations respond to a change in product variety. These predictions match the observed changes in volatility of the US auto sales after the introduction of smaller foreign cars in the 1970sOptimal consumption, durable goods, volatility

Aspirational Bargaining

This paper offers a noncooperative behaviourally-founded solution of the complete information bargaining problem where two impatient individuals wish to divide a unit pie. We formulate the game in continuous time, with unrestricted timing and content of offers. Reprising experimental work from 1960, we introduce and explore aspirational equilibrium -- a Markovian refinement of subgame perfection where behaviour is governed by aspiration values (expected payoffs). The analysis is tractable, and generates many intuitive aspects of bargaining absent from the standard temporal monopoly paradigm: wars of attrition explains delay; serious offers are concessions; offers may be turned down, strictly disappointing the proposers, or accepted, strictly helping the proposer. In particular, an endogenous `proposee' advantage arises, as opposed to the hard-wired proposer standard advantage. We find that discounted aspiration values form a martingale, and thereby compute bounds on the expected bargaining duration from observed offers. We also deduce some simple implications about consecutive offers, and relate delay times, offers, and acceptance rates. Finally, we draw into question a traditional comparative static: Ceteris paribus, more impatient players can expect more of the pie.subgame perfect equilibrium, aspiration, extensive form

Sequential equilibria in a Ramsey tax model

This paper presents a full characterization of the equilibrium value set of a Ramsey tax model. More generally, it develops a dynamic programming method for a class of policy games between the government and a continuum of consumers. By selectively incorporating Euler conditions into a strategic dynamic programming framework, we wed two technologies that are usually considered competing alternatives, resulting in a dramatic simplification of the problem.Macroeconomics ; Taxation

Time Consistent Taxation by a Government with Redistributive Goals

In a dynamic economy whose government is interested in both equity and efficiency, time consistency problems arise even if the government has access to nondistortionary tax instruments. Moral hazard in production leads to a nondegenerate distribution of income, which the government would like to "flatten" ex post. Self-enforcing social agreements can mitigate the tendency toward excessive redistribution. We investigate the nature of the distortions caused by the time consistency problem, and show that in the constrained-optimal equilibrium, usually a linear tax schedule is imposed. This remains true if renegotiation of the social agreement is possible.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/100989/1/ECON430.pd

Technology (and policy) shocks in models of endogenous growth

Our objective is to understand how fundamental uncertainty can affect the long-run growth rate and what factors determine the nature of the relationship. Qualitatively, we show that the relationship between volatility in fundamentals and policies and mean growth can be either positive or negative. We identify the curvature of the utility function as a key parameter that determines the sign of the relationship. Quantitatively, we find that when we move from a world of perfect certainty to one with uncertainty that resembles the average uncertainty in a large sample of countries, growth rates increase, but not enough to account for the large differences in mean growth rates observed in the data. However, we find that differences in the curvature of preferences have substantial effects on the estimated variability of stationary objects like the consumption/output ratio and hours worked.Business cycles - Econometric models ; Economic development

Technology (and Policy) Shocks in Models of Endogenous Growth

Is there a trade-off between fluctuations and growth? The empirical evidence is mixed, with some studies (Kormendi and Meguire (1985)) finding a positive relationship, while others (Ramey and Ramey (1995)) finding the a negative one. Our objective in this paper is to understand how fundamental uncertainty can affect the long run growth rate, and what are the factors that determine the nature (positive or negative) of the relationship. Qualitatively, we show that the relationship between volatility in fundamentals and policies and mean growth can be either positive or negative. We identify the curvature of the utility function as a key parameter that determines the sign of the relationship. Quantitatively, we find that when we move from a world of perfect certainty to one with uncertainty that resembles the average uncertainty in a large sample of countries, growth rates increase somewhere between 0.17% and 0.80%, with 0.20% being a reasonable' estimate. Even though these are nontrivial changes, they are not large enough be themselves to account for the large differences in mean growth rates observed in the data. However, we find that differences in the curvature of preferences have very substantial effects on the estimated variability of stationary objects like the consumption/output ratio and hours worked. For this reason, we expect that the models considered in this paper will provide the basis of sharp estimates of the curvature parameter.

The Interaction of Implicit and Explicit Contracts in Repeated Agenc

Traditional agency theory assumes that the principal has no more information about the agent’s actions than the enforcement authorities have. This is unrealistic in many settings, and in repeated models, additional information possessed by the principal changes the nature of the problem. Such information can be used in implicit, self-enforcing contracts between principal and agent, that supplement the usual explicit contracts. This paper studies the way in which the two kinds of contracts are combined in constrained efficient equilibria of the agency supergame. The agent’s compensation is comprised of both guaranteed payments and voluntary bonuses from the principal. We give a simple characterization of the composition of remuneration in the optimal dynamic scheme

Multidimensional Mechanism Design for Auctions with Externalities

This paper studies the model of auctions with externalities, and while doing so develops techniques that we believe will be valuable in the understandign of other mechanisms design problems.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/100795/1/ECON256.pd