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History: Sunk Cost, or Widespread Externality?

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  • P.J. HAMMOND

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.

Suggested Citation

  • 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.
  • Handle: RePEc:vep:journl:y:2007:v:115:i:2:p:161-185
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    References listed on IDEAS

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    1. Karp, Larry & Newbery, David M., 1993. "Intertemporal consistency issues in depletable resources," Handbook of Natural Resource and Energy Economics,in: A. V. Kneese† & J. L. Sweeney (ed.), Handbook of Natural Resource and Energy Economics, edition 1, volume 3, chapter 19, pages 881-931 Elsevier.
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    5. James W. Friedman, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Oxford University Press, vol. 38(1), pages 1-12.
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    8. Judd, Kenneth L, 1987. "The Welfare Cost of Factor Taxation in a Perfect-Foresight Model," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 675-709, August.
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    12. T. Bergstrom, 1971. "On the Existence and Optimality of Competitive Equilibrium for a Slave Economy," Review of Economic Studies, Oxford University Press, vol. 38(1), pages 23-36.
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    17. Tesfatsion, Leigh, 1986. "Time inconsistency of benevolent government economies," Journal of Public Economics, Elsevier, pages 25-52.
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    Citations

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    Cited by:

    1. Peter J. Hammond, "undated". "Multilaterally Strategy-Proof Mechanisms in Random Aumann--Hildenbrand Macroeconomies," Working Papers 97022, Stanford University, Department of Economics.
    2. 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, pages 161-185.
    3. Hammond, Peter J., 1999. "On f-core equivalence with general widespread externalities," Journal of Mathematical Economics, Elsevier, vol. 32(2), pages 177-184, October.

    More about this item

    Keywords

    intertemporal economy; sequence economy; welfare theorems; widespread externality; rules versus discretion; policy feedback;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D99 - Microeconomics - - Micro-Based Behavioral Economics - - - Other
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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