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History : Sunk Cost, or Widespread Externality?

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Author Info
Hammond, Peter J. (Department of Economics, University of Warwick)

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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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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
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Handle: RePEc:wrk:warwec:808

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  13. 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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