Overlapping generations models with or without production or a portfolio demand for money display a fundamental indeterminacy. Expectations matter; and they are not, in the short run, constrained by the hypotheses of agent optimization, rational expectations, and market clearing. No short run policy analysis is possible without some explicit understanding of how agents expect the economy to respond to the policy. In this framework of perfect foresight and market clearing prices, it is possible to make Keynesian assumptions about the rigidity of money wages and the exogeneity of “animal spirits” of investors, to use the standard IS-LM apparatus, and to derive Keynesian conclusions about the short run effectiveness of policy. Alternatively, starting from difference but no less rational expectations, one can derive the “new classical” neutrality propositions.
JEL Classification: 023, 021
Keywords: Overlapping generations, Perfect foresight, Short run policy effectiveness
This study is an effort to give a simple measure of the local size of the equilibrium set of OLG economies in which there may be more than one good and more than one consumer per period, and in which the generations may differ across time.
Our purpose in this paper is to investigate the economics of managerial organizations by focusing on the decision problem of management. Ours is a “team theory” analysis, that is, it ignores the problem of conflicting objectives among managers and focuses instead on the problem of coordinating the decisions of several imperfectly informed actors. However, unlike classical team theory, we concentrate on the choice by managers of what to know, as well as what to do, and we allow the possibility that bounded rationality limits the managers’ ability to understand subtle messages.
Our purpose in this paper is to investigate the economics of managerial organizations by focusing on the decision problem of management. Ours is a “team theory” analysis, that is, it ignores the problem of conflicting objectives among managers and focuses instead on the problem of coordinating the decisions of several imperfectly informed actors. However, unlike classical team theory, we concentrate on the choice by managers of what to know, as well as what to do, and we allow the possibility that bounded rationality limits the managers’ ability to understand subtle messages.
Let assets be denominated in an a priori specified numeraire.
Whether or not the asset is complete, a competitive equilibrium exists as long as arbitrage is possible when assets are free. Generically, the set of competitive equilibria is finite, and the equilibrium prices and allocations in the commodity spot markets are uniquely determined by the asset allocation in a neighborhood of a competitive equilibrium.
If the asset market is incomplete, a competitive equilibrium allocation is generically constrained suboptimal: there exists an arbitrarily small reallocation of the existing assets, which leads to a Pareto improvement in welfare when prices and allocations in the commodity spot market adjust to maintain equilibrium.
Let assets be denominated in an a priori specified numeraire.
Whether or not the asset is complete, a competitive equilibrium exists as long as arbitrage is possible when assets are free. Generically, the set of competitive equilibria is finite, and the equilibrium prices and allocations in the commodity spot markets are uniquely determined by the asset allocation in a neighborhood of a competitive equilibrium.
If the asset market is incomplete, a competitive equilibrium allocation is generically constrained suboptimal: there exists an arbitrarily small reallocation of the existing assets, which leads to a Pareto improvement in welfare when prices and allocations in the commodity spot market adjust to maintain equilibrium.
The purpose of this paper, which takes up after D. Cass (1984a, 1984b) is to find the degree of real indeterminacy inherent in models with purely financial assets. We solve the problem for the case where there are enough traders (precisely, the number of traders is larger than the number of bonds) and the asset returns structure is in general position. We find that if the number of bonds is non-zero and fewer than the number of states then, generically, the number of dimensions of real indeterminacy is S-1, one less than the number of states. There is something of a surprise in the above result, namely the dimension of real indeterminacy does not depend on the number of bonds (except in the two limit cases). Indeed one initial conjecture was S-B. This points to an intriguing qualitative discontinuity at the complete market configuration. If markets are financially complete then the model is determinate. Let just one bond be missing and the model become highly indeterminate. Thus, in this sense, the complete markets hypothesis lacks robustness.
The purpose of this paper, which takes up after D. Cass (1984a, 1984b) is to find the degree of real indeterminacy inherent in models with purely financial assets. We solve the problem for the case where there are enough traders (precisely, the number of traders is larger than the number of bonds) and the asset returns structure is in general position. We find that if the number of bonds is non-zero and fewer than the number of states then, generically, the number of dimensions of real indeterminacy is S-1, one less than the number of states. There is something of a surprise in the above result, namely the dimension of real indeterminacy does not depend on the number of bonds (except in the two limit cases). Indeed one initial conjecture was S-B. This points to an intriguing qualitative discontinuity at the complete market configuration. If markets are financially complete then the model is determinate. Let just one bond be missing and the model become highly indeterminate. Thus, in this sense, the complete markets hypothesis lacks robustness.
JEL Classification: 313
Keywords: Incomplete financial markets, Real indeterminacy, Complete markets hypothesis
Actions a firm takes in one market may affect its profitability in other markets, beyond any joint economies or diseconomies in production. The reason is that an action in one market, by changing marginal costs in a second market, may change competitors’ strategies in that second market. We show how to calculate the strategic consequences in market 2, of a change in conditions in market 1 or of a firm’s action in market 1. Qualitatively, the same results hold for both simultaneous markets and sequential markets: whether a more aggressive (i.e., lower price or higher quantity) strategy in the first market provides strategic costs or benefits depends on (a) whether competitors’ products are strategic substitutes or strategic complements. The latter distinction is determined by whether more aggressive play by one firm in a market raises or lowers competing firms’ marginal profitabilities in that market. We discuss applications to how firms select “portfolios” of businesses in which to compete, to rational retaliation as a barrier to entry, to international trade, and to the learning curve.
Both strategic substitutes competition and strategic complements competition are compatible with either quantity competition or price competition. For example, strategic complements competition arises from price competition with linear demand and from quantity competition with constant elasticity demand.
The distinction between strategic substitutes and strategic complements is also important in other areas of industrial organization. For example, we show that with strategic complements competition firms will strategically underinvest in fixed costs. This contrasts with earlier studies which, focusing on the total profits of potential entrants rather than the marginal profits of established competitors, invariably emphasized the use of excess capacity.