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Determinacy of equilibria in dynamic models with finitely many consumers
We consider a production economy with a finite number of heterogeneous, infinitely lived consumers. We show that, if the economy is smooth enough, equilibria are locally unique for almost all endowments. We do so by converting the infinite-dimensional fixed point problem stated in terms of prices and commodities into a finite-dimensional Negishi problem involving individual weights in a social value function. By adding artificial fixed factors to utility and production functions, we can write the equilibrium conditions equating spending and income for each consumer entirely in terms of ...
Working Paper
Debt constrained asset markets
We develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature. If an agent defaults on a contract, he can be excluded from future contingent claims markets trading and can have his assets seized. He cannot be excluded from spot markets trading, however, and he has some private endowments that cannot be seized. All information is publicly held and common knowledge, and there is a complete set of contingent claims markets. Since there is complete information, an agent cannot enter ...
Working Paper
The optimum quantity of money revisited
This paper uses a simple general equilibrium model in which agents use money holdings to self insure to address the classic question: What is the optimal rate of change of the money supply? The standard answer to this question, provided by Friedman, Bewley, Townsend, and others, is that this rate is negative. Because any revenues from seignorage in our model are redistributed in lump-sum form to agents and this redistribution improves insurance possibilities, we find that the optimal rate is sometimes positive. We also discuss the measurement of welfare gains or losses from inflation and ...
Working Paper
On characterizing equilibria of economies with externalities and taxes as solutions to optimization problems
We characterize equilibria of general equilibrium models with externalities and taxes as solutions to optimization problems. This characterization is similar to Negishi?s characterization of equilibria of economies without externalities or taxes as solutions to social planning problems. It is often useful for computing equilibria or deriving their properties. Frequently, however, finding the optimization problem that a particular equilibrium solves is difficult. This is especially true in economies with multiple equilibria. In a dynamic economy with externalities or taxes there may be a ...
Report
Growth cycles and market crashes
Market booms are often followed by dramatic falls. To explain this requires an asymmetry in the underlying shocks. A straightforward model of technological progress generates asymmetries that are also the source of growth cycles. Assuming a representative consumer, we show that the stock market generally rises, punctuated by occasional dramatic falls. With high risk aversion, bad news causes dramatic increases in prices. Bad news does not correspond to a contraction of existing production possibilities, but to a slowdown in their rate of expansion. This economy provides a model of endogenous ...
Report
Rent-seeking and innovation
Innovations and their adoption are the keys to growth and development. Innovations are less socially useful, but more profitable for the innovator, when they are adopted slowly and the innovator remains a monopolist. For this reason, rent-seeking, both public and private, plays an important role in determining the social usefulness of innovations. This paper examines the political economy of intellectual property, analyzing the trade-off between private and public rent-seeking. While it is true in principle that public rent-seeking may be a substitute for private rent-seeking, it is not true ...
Report
The economics of ideas and intellectual property
Innovation and the adoption of new ideas are fundamental to economic progress. Here we examine the underlying economics of the market for ideas. From a positive perspective, we examine how such markets function with and without government intervention. From a normative perspective, we examine the pitfalls of existing institutions, and how they might be improved. We highlight recent research by ourselves and others challenging the notion that government awards of monopoly through patents and copyright are ?the way? to provide appropriate incentives for innovation.
Report
Monopoly and the incentive to innovate when adoption involves switchover disruptions
When considering the incentive of a monopolist to adopt an innovation, the textbook model assumes that it can instantaneously and seamlessly introduce the new technology. In fact, firms often face major problems in integrating new technologies. In some cases, firms have to (temporarily) produce at levels substantially below capacity upon adoption. We call such phenomena switchover disruptions, and present extensive evidence on them. If firms face switchover disruptions, then they may temporarily lose some unit sales upon adoption. If the firm loses unit sales, then a cost of adoption is the ...
Report
Intellectual property and market size
Intellectual property protection involves a trade-off between the undesirability of monopoly and the desirable encouragement of creation and innovation. As the scale of the market increases, due either to economic and population growth or to the expansion of trade through treaties such as the World Trade Organization, this trade-off changes. We show that, generally speaking, the socially optimal amount of protection decreases as the scale of the market increases. We also provide simple empirical estimates of how much it should decrease.
Report
Factor saving innovation
We study a simple model of factor saving technological innovation in a concave framework. Capital can be used either to reproduce itself or, at additional cost, to produce a higher quality of capital that requires less labor input. If higher quality capital can be produced quickly, we get a model of exogenous balanced growth as a special case. If, however, higher quality capital can be produced slowly, we get a model of endogenous growth in which the growth rate of the economy and the rate of adoption of new technologies are determined by preferences, technology, and initial conditions. ...