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Patterns of Non-exponential Growth of Macroeconomic Models: Two-parameter Poisson-Dirichlet Models

  • Toshihiro Ihori

    (Faculty of Economics, University of Tokyo)

  • Martin McGuire

    (Department of Economics, University of California-Irvine, Irvine)

We investigate the structure of interactions among countries exercising voluntary uncoordinated choice but sharing a common "risk profile" --- a vector comprised of chance of adversity/emergency and magnitude of loss under adversity/emergency. We use the term "emergency costs" to refer to the vector and/or its components. Countries strive to reduce emergency costs (a) by providing mutual self-insurance against loss and (b) mutual self-protection against risk. Because of their common risk profile each country's security spending whether on self-insurance or on self-protection provides a public good (pure or impure) to all in the group --- hence our term "mutual." We show that under expected utility maximization the normality or inferiority of such public goods depends crucially on hitherto unrecognized interactions between preference functions and status quo risks. Moreover we discover that these interactions differ systematically between insurance and protection with important policy implications for comparing the two instruments. Furthermore, we demonstrate that configurations where security is inferior are not at all unlikely. In such case the provision of international public goods can easily face an endogenous obstacle, an "inferior good barrier," under Nash-Cournot behavior and under Leader-Follower behavior with Stackelberg outcomes. (These, however, display novel and desirable properties even when the public good is inferior.) When improvements in risk profile generate not pure public goods, but instead imperfect, ambiguous, or even negative benefits among partners, who is an ally and who an adversary, itself becomes ambiguous. For this configuration where the emergency risk profile differs among allies, we show how spillovers from emergency cost reduction and their effects on welfare will be depend critically on the sign of income effects.

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File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2006/2006cf450.pdf
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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-450.

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Length: 35pages
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:tky:fseres:2006cf450
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  1. Martin McGuire, 2006. "Uncertainty, Risk Aversion, And Optimal Defense Against Interruptions In Supply," Defence and Peace Economics, Taylor & Francis Journals, vol. 17(4), pages 287-309.
  2. Lohse, Tim & Julio R. Robledo & Ulrich Schmidt, 2006. "Self-Insurance and Self-Protection as Public Goods," Hannover Economic Papers (HEP) dp-354, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  3. McGuire, Martin C & Pratt, John & Zeckhauser, Richard, 1991. " Paying to Improve Your Chances: Gambling or Insurance?," Journal of Risk and Uncertainty, Springer, vol. 4(4), pages 329-38, December.
  4. Alberto Alesina & Roberto Perotti, 1995. "Economic Risk and Political Risk in Fiscal Unions," NBER Working Papers 4992, National Bureau of Economic Research, Inc.
  5. Alberto Alesina & Enrico Spolaore, 1995. "On the Number and Size of Nations," NBER Working Papers 5050, National Bureau of Economic Research, Inc.
  6. Cornes, Richard & Sandler, Todd, 1984. "Easy Riders, Joint Production, and Public Goods," Economic Journal, Royal Economic Society, vol. 94(375), pages 580-98, September.
  7. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-48, July-Aug..
  8. Vicary, Simon & Sandler, Todd, 2002. "Weakest-link public goods: Giving in-kind or transferring money," European Economic Review, Elsevier, vol. 46(8), pages 1501-1520, September.
  9. Roger Hartley & Richard Cornes, 2003. "Aggregative Public Good Games," Keele Economics Research Papers KERP 2003/05, Centre for Economic Research, Keele University.
  10. Andreoni, James & McGuire, Martin C., 1993. "Identifying the free riders : A simple algorithm for determining who will contribute to a public good," Journal of Public Economics, Elsevier, vol. 51(3), pages 447-454, July.
  11. TOSHIHIRO IHORI & MARTIN C. McGUIRE, 2007. "Collective Risk Control and Group Security: The Unexpected Consequences of Differential Risk Aversion," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(2), pages 231-263, 04.
  12. Ihori Toshihiro, 1994. "Economic Integration of Countries with International Public Goods," Journal of the Japanese and International Economies, Elsevier, vol. 8(4), pages 530-550, December.
  13. Jack Hirshleifer, 1983. "From weakest-link to best-shot: The voluntary provision of public goods," Public Choice, Springer, vol. 41(3), pages 371-386, January.
  14. Roger Hartley & Richard Cornes, 2000. "Joint Production Games And Share Functions," Keele Department of Economics Discussion Papers (1995-2001) 2000/07, Department of Economics, Keele University.
  15. Vicary, Simon, 1990. "Transfers and the weakest-link : An extension of Hirshleifer's analysis," Journal of Public Economics, Elsevier, vol. 43(3), pages 375-394, December.
  16. Boadway, Robin & Hayashi, Masayoshi, 1999. "Country size and the voluntary provision of international public goods," European Journal of Political Economy, Elsevier, vol. 15(4), pages 619-638, November.
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