A Top Dog Tale with Preference Complementarities

The emergence of a winner-take-all (top dog) outcome is generally due to political or institutional constraints or to specific technological features which favour the performance of just one individual. In this paper we provide a different explanation for the occurrence of a top-dog equilibrium in exchange economies. We show that once heterogeneous complementarities (i.e. Scarf’s preferences) are analysed with general endowment distributions, a variety of equilibria different from the well-known symmetric outcome with full utilisation of resources can emerge. Specifically, we show that stable corner equilibria with a winner-take-all (top dog) individual arise that are Pareto optima although the remaining individuals are no better off than with zero consumption and resources can be unused. Because of heterogenous complementarities, market mechanisms are weak and cannot overcome the top dog’s power. Voting mechanisms or taxation policies can reduce the top dog’s privileged position

Evidence and Ideology in Macroeconomics: The Case of Investment Cycles

The paper reports the principal findings of a long term research project on the description and explanation of business cycles. The research strongly confirmed the older view that business cycles have large systematic components that take the form of investment cycles. These quasi-periodic movements can be represented as low order, stochastic, dynamic processes with complex eigenvalues. Specifically, there is a fixed investment cycle of about 8 years and an inventory cycle of about 4 years. Maximum entropy spectral analysis was employed for the description of the cycles and continuous time econometrics for the explanatory models. The central explanatory mechanism is the second order accelerator, which incorporates adjustment costs both in relation to the capital stock and the rate of investment. By means of parametric resonance it was possible to show, both theoretically and empirically how cycles aggregate from the micro to the macro level. The same mathematical tool was also used to explain the international convergence of cycles. I argue that the theory of investment cycles was abandoned for ideological, not for evidential reasons. Methodological issues are also discussed