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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.

Suggested Citation

  • Hammond, Peter J., 2007. "History : Sunk Cost, or Widespread Externality?," The Warwick Economics Research Paper Series (TWERPS) 808, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:808
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_808.pdf
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    References listed on IDEAS

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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, vol. 115(2), 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.

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    More about this item

    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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