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Duality and arbitrage with transactions costs: theory and applications
Recent advances in duality theory have made it easier to discover relationships between asset prices and the portfolio choices based on them. But this approach to arbitrage-free securities markets has yet to be extended and applied to economies with transactions costs. This paper does so, within the context of a general state-preference model of securities markets. Several applications are developed to illustrate the nature of the theory and its potential to resolve a host of issues surrounding the effects of transactions costs on securities markets.
Report
Time consistency of optimal plans: an elementary primer
Time consistent optimal plans are defined within the context of a simple, discrete time optimal control framework. Three possible sources of inconsistency are identified and discussed with reference to the literature.
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Another note on deadweight loss
Our defense of these postulates is two-fold. First we compare them with existing alternative theories. Second, we provide an illustrative model which : (a) is consistent with the postulates, (b) implies rate-of-return dominance under suitable legal restrictions, and (c) addresses monetary policy questions with standard welfare economics and, in particular, rationalizes in terms of price discrimination a debt management policy that ?tailors debt issues to the needs of the market.?
Report
Parametric properties of tax effort revenue sharing
Some Revenue Sharing programs, including the Federal government?s General Revenue Sharing program, reward higher tax effort with larger aid payments. A natural, game-theoretic generalization of the standard consumer demand based theory of grants-in-aid is used to examine the impacts such tax effort provisions have on the recipient government?s tax effort, spending levels, and welfare. Nonlinear simulation is used to provide rough quantitative estimates of the impacts General Revenue Sharing had in 1972.
Report
Variable rate subsidies: the inefficiency of in-kind transfers revisited
The inefficiency of fixed rate consumer price subsidies, relative to cash transfers, is one of the best-known propositions in welfare economics. It has also been used to show that matching grants are a more inefficient intergovernmental aid than are lump sum grants. Furthermore, the cost of fixed rate subsidies cannot be controlled without providing a ?cap? beyond which amount no subsidy is received. This paper reports, both qualitatively and quantitatively, that a broad class of variable rate price subsidies also dominates fixed rate subsidies on both counts. The relative inefficiency of ...
Working Paper
The simple analytics of observed discrimination in credit markets
Controversial econometric studies of mortgage data show that mortgage loan applications by minorities are denied more frequently than are applications by whites with similar observable default risk factors. But recent evidence indicates that minority borrowers also default more frequently than whites with similar observable risk. This paper presents a simple equilibrium model of discriminatory credit rationing and finds parametric restrictions consistent with both these empirical findings. But in this model, proposed anti-discrimination policies have surprising side effects. Thus, policy ...