Endogenous Public Policy and Long-Run Growth

. We study the determinants of voting outcomes on the provision of public consumption through marginal income taxes in the context of the simple linear growth model. We focus on how the dynamic politicoeconomic equilibrium maps the economic fundamentals to policies and long-run growth. We find that in a deterministic growth environment voters internalize, although imperfectly, the deadweight losses of taxation and vote for lower taxes when the productivity of capital is higher. Therefore, the politicoeconomic channel reinforces the positive role of productivity for growth. In a stochastic environment, we find that if business cycles are driven by productivity shocks in the endogenous growth framework, equilibrium policies imply that taxes should fall in high growth periods and rise in low-growth periods. In line with existing evidence, our model predicts procyclical public consumption and countercyclical public consumption GDP shares.voting, second-best taxation, endogenous growth

Lattice-Theoretic Foundations of the Consumer's Problem.

This paper provides an introduction to and discussion of the application of lattice-theoretic methods to classic problems in consumer theory. General characterizations of income effects with two goods, and with an arbitrary number of goods, as well as examples of comparative statics over densities and consumer types are also presented.consumer's problem; income effects; lattice programming; super-extremal

The Simple Analytics of Price Signaling Quality

We present a diagrammatic and step-by-step analysis of price signaling quality. Because quality is a continuum on the real positive line, out-of-equilibrium beliefs need not be specified, i.e., every positive price is a positive outcome in equilibrium. We first study the behavior of the monopoly when price conveys information about quality. We then show the effect of information flows on welfare, i.e., profit and consumer surplus.Asymmetric information, learning, monopoly, quality, signaling

Firms, Shareholders, and Financial Markets

We study the influence of the financial market on the decisions of firms in the real market. To that end, we present a model in which the shareholders portfolio selection of assets and the decisions of the publicly-traded firms are integrated through the market process. Financial access alters the objective function of the firms, and the market interaction of shareholders substantially influences firms behavior in the real sector. After characterizing the unique equilibrium, we show that the financial sector integrates the preferences of all shareholders into the decisions for production and ownership structure. The participation from investors in the financial market also limits the firms’ ability to manipulate real prices, i.e., there is a loss of market power in the real sector. Note that, while the loss of market power changes expected profits, it is not detrimental to shareholders since the expected return of equity share depends on the variance (and not the mean) of profits. Indeed, any change in expected profits is absorbed by the financial price. We also show that financial access increases production, thereby altering the distribution of profits. In particular, financial access induces firms to take on more risk. Finally, financial access makes the relationship between risk-aversion and risk-taking ambiguous. For example, it is possible that an increase in risk-aversion leads to more risk-taking, i.e., the variance of real profits increases.Financial sector, Firm behavior, Market power, Monopoly, Perfect competition, Publicly-traded firm, Shareholder behavior, Risk aversion, Risk taking

The Effects of Market Structure on Industry Growth

We study the behavior of firms in an imperfectly competitive environment in which firms influence the evolution of the stock of capital equipment. Our model enables us, using analytical characterizations, to show the effect of key ingredients of dynamic competition on firm strategies and industry dynamics in addition to the usual static interaction. These effects are the static market externality (implicit in the static Cournot Equilibrium) as well as the dynamic market externality due to the effect on the market outputs of a capital stock and a dynamic externality that stems from the competition between firms for the capital stock. These strategic elements justify our conclusions, based on the study of four market structures, for the link between industrial organization and industry growth.Cournot competition, oligopolistic non-cooperative dynamic games

On Risk Aversion, Classical Demand Theory, and KM Preferences

Building on Kihlstrom and Mirman (1974)’s formulation of risk aversion in the case of multidimensional utility functions, we study the effect of risk aversion on optimal behavior in a general consumer’s maximization problem under uncertainty. We completely characterize the relationship between changes in risk aversion and classical demand theory. We show that the effect of risk aversion on optimal behavior depends on the income and substitution effects. Moreover, the effect of risk aversion is determined not by the riskiness of the risky good, but rather the riskiness of the utility gamble associated with each decision.Classical Demand Theory, Consumer Choice, Income and Substition Effects, Risk Aversion

The Effects of Market Structure on Industry Growth: Rivalrous Non-excludable Capital

We analyze imperfect competition in dynamic environments where firms use rivalrous but nonexcludable industry-specific capital that is provided exogenously. Capital depreciation depends on utilization, so firms influence the evolution of the capital equipment through more or less intensive supply in the final-goods market. Strategic incentives stem from, (i) a dynamic externality, arising due to the non-excludability of the capital stock, leading firms to compete for its use (rivalry), and, (ii) a market externality, leading to the classic Cournot-type supply competition. Comparing alternative market structures, we isolate the effect of these externalities on strategies and industry growth.

R&D Investment, Market Structure, and Industry Growth

We study how alternative market structures influence market supply and R&D investment decisions of firms operating in dynamic imperfectly competitive environments. Firms can reduce their future production cost through R&D investment today, which is the engine of endogenous industry growth. Our framework enables us to identify key strategic ingredients in firms dynamic competitive behavior through analytical characterizations. These ingredients are a static market externality, stemming from the standard oligopolistic Cournot competition, a dynamic externality that arises due to knowledge spillovers, and a dynamic market externality that comes from the interaction of knowledge spillovers with future market oligopolistic competition that firms internalize while making decisions. We isolate the impact of each strategic ingredient by comparing four alternative market structures.R&D investment, Cournot competition, oligopolistic non-cooperative dynamic games

Information in Cournot: Signaling with Incomplete Control

We embed signaling in the classical Cournot model in which several firms sell a homogeneous good. The quality is known to all the firms, but only to some buyers. The quantity-setting firms can manipulate the price to signal quality. Because there is only one price in a market for a homogeneous good, each firm incompletely controls the price-signal through the quantity decision. We characterize the unique signaling Cournot equilibrium in which the price signals quality to the uninformed buyers. We then compare the signaling Cournot equilibrium with the full-information Cournot equilibrium. Signaling is shown to increase the equilibrium price. Moreover, under certain conditions regarding the composition of buyers, the number of firms, and the distribution of costs across firms, the effects of signalling and market externality cancel each other. In other words, the profits under signaling Cournot equal the profits of a cartel in a full-information environment.Cournot, Homogeneous good, Learning, Quality, Signaling.

Financial Intermediation and Entry-Deterrence: A survey

In this paper, we summarize the findings of a series of our papers on the relationship between financial contracting and the game of entry-deterrence in a dynamic context.The incumbent has private information about its cost and enters into an agency relationship with a lender in each of the two periods. We examine the effect of this agency relationship on the probability of entry and limit pricing on the one hand and the effect of the game of entry-deterrence on the form of the financial contract on the other. The three papers make different assumptions about the uncertainty of demand and the informational structure.