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History : Sunk Cost, or Widespread Externality?

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  • Hammond, Peter J.

    (Department of Economics, University of Warwick)

Abstract

In an intertemporal Arrow-Debreu economy with a continuum of agents, suppose that the auctioneer sets prices while the government institutes optimal lump-sum transfers period by period. An earlier paper showed how subgame imperfections arise because agents understand how their current decisions such as those determining investment will influence future lump-sum transfers. This observation undermines the second efficiency theorem of welfare economics and makes “history” a widespread externality. A two-period model is used to investigate the constrained efficiency properties of different kinds of equilibrium. Possibilities for remedial policy are also discussed.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_808.pdf
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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 808.

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Length: 24 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:wrk:warwec:808

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References

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  1. Reinhard Selten, 1973. "A Simple Model of Imperfect Competition, where 4 are Few and 6 are Many," Working Papers 008, Bielefeld University, Center for Mathematical Economics.
  2. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Tesfatsion, Leigh S., 1986. "Time Inconsistency of Benevolent Government Economies," Staff General Research Papers 11206, Iowa State University, Department of Economics.
  4. P.J. Hammond, 2007. "History: Sunk Cost, or Widespread Externality?," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 115(2), pages 161-185.
  5. Rogers, Carol Ann, 1986. "The effect of distributive goals on the time inconsistency of optimal taxes," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 251-269, March.
  6. Staiger, Robert W & Tabellini, Guido, 1987. "Discretionary Trade Policy and Excessive Protection," American Economic Review, American Economic Association, vol. 77(5), pages 823-37, December.
  7. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
  8. Rogers, Carol Ann, 1987. "Expenditure taxes, income taxes, and time-inconsistency," Journal of Public Economics, Elsevier, vol. 32(2), pages 215-230, March.
  9. Kaneko, Mamoru & Wooders, Myrna Holtz, 1986. "The core of a game with a continuum of players and finite coalitions: The model and some results," Mathematical Social Sciences, Elsevier, vol. 12(2), pages 105-137, October.
  10. Kotlikoff, Laurence J & Persson, Torsten & Svensson, Lars E O, 1988. "Social Contracts as Assets: A Possible Solution to the Time-Consistency Problem," American Economic Review, American Economic Association, vol. 78(4), pages 662-77, September.
  11. Hammond, Peter J. & Kaneko, Mamoru & Wooders, Myrna Holtz, 1989. "Continuum economies with finite coalitions: Core, equilibria, and widespread externalities," Journal of Economic Theory, Elsevier, vol. 49(1), pages 113-134, October.
  12. Kenneth L. Judd, 1984. "The Welfare Cost of Factor Taxation in a Perfect Foresight Model," Discussion Papers 643, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. V.V. Chari, 1988. "Time consistency and optimal policy design," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 17-31.
  14. Fischer, Stanley, 1980. "Dynamic inconsistency, cooperation and the benevolent dissembling government," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 93-107, May.
  15. Karp, Larry & Newbery, David M G, 1989. "Intertemporal Consistency Issues in Depletable Resources," CEPR Discussion Papers 346, C.E.P.R. Discussion Papers.
  16. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  17. Rogers, Carol Ann, 1991. "A simple model of endogenous tax reform," Journal of Public Economics, Elsevier, vol. 46(1), pages 91-111, October.
  18. Willmann, Gerald, 2004. "Pareto gains from trade: a dynamic counterexample," Economics Letters, Elsevier, vol. 83(2), pages 199-204, May.
  19. Kaneko, Mamoru & Wooders, Myrna Holtz, 1989. "The core of a continuum economy with widespread externalities and finite coalitions: From finite to continuum economies," Journal of Economic Theory, Elsevier, vol. 49(1), pages 135-168, October.
  20. Hammond, Peter J., 2007. "Competitive Market Mechanisms as Social Choice Procedures," The Warwick Economics Research Paper Series (TWERPS) 804, University of Warwick, Department of Economics.
  21. Bergstrom, T, 1971. "On the Existence and Optimality of Competitive Equilibrium for a Slave Economy," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 23-36, January.
  22. Maskin, Eric S & Newbery, David M, 1990. "Disadvantageous Oil Tariffs and Dynamic Consistency," American Economic Review, American Economic Association, vol. 80(1), pages 143-56, March.
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Cited by:
  1. Peter J. Hammond, . "On f-Core Equivalence with General Widespread Externalities," Working Papers 95004, Stanford University, Department of Economics.
  2. Peter J. Hammond, . "Multilaterally Strategy-Proof Mechanisms in Random Aumann--Hildenbrand Macroeconomies," Working Papers 97022, Stanford University, Department of Economics.
  3. Hammond, Peter J., 2007. "History : Sunk Cost, or Widespread Externality?," The Warwick Economics Research Paper Series (TWERPS) 808, University of Warwick, Department of Economics.

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