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On the Robustness of Laissez-Faire

  • Narayana Kocherlakota
  • Christopher Phelan

This paper considers a model economy in which agents are privately informed about their type: their endowments of various goods and their preferences over these goods. While preference orderings over observable choices are allowed to be correlated with an agent's private type, we assume that the planner/government is both uncertain about the nature of this joint distribution and unable to choose among multiple equilibria of any given social mechanism. We model the planner/government as having a maxmin objective in the face of this uncertainty. Our main theorem is as follows: Once we allow for this kind of uncertainty and assume no wealth effects in preferences, the uniquely optimal social contract is laissez-faire, in which agents trade in unfettered markets with no government intervention of any kind.

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File URL: http://www.econ.umn.edu/~nkocher/laissezfaire.pdf
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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 843644000000000165.

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Date of creation: 22 Jul 2007
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Handle: RePEc:cla:levrem:843644000000000165
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  1. Kim-Sau Chung & Jeffrey C. Ely, 2003. "Foundations of Dominant Strategy Mechanisms," Discussion Papers 1372, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Christopher Phelan & Marco Bassetto, 2005. "Tax Riots," 2005 Meeting Papers 433, Society for Economic Dynamics.
  3. Cole, Harold L & Kocherlakota, Narayana R, 2001. "Efficient Allocations with Hidden Income and Hidden Storage," Review of Economic Studies, Wiley Blackwell, vol. 68(3), pages 523-42, July.
  4. Allen, Franklin, 1985. "Repeated principal-agent relationships with lending and borrowing," Economics Letters, Elsevier, vol. 17(1-2), pages 27-31.
  5. Townsend, Robert M, 1982. "Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1166-86, December.
  6. Jackson, Matthew O, 1991. "Bayesian Implementation," Econometrica, Econometric Society, vol. 59(2), pages 461-77, March.
  7. Andrew Atkeson & Robert E Lucas, 2010. "On Efficient Distribution with Private Information," Levine's Working Paper Archive 2179, David K. Levine.
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