Core Retionalizability in Two-Agent Exchange Economies.

We provide a characterization of selection correspondences in two-person exchange economies that can be core rationalized in the sense that there exists a preference profile with some standard properties that generates the observed choices as the set of core elements of the economy for any given initial endowment vector. The approach followed in this paper deviates from the standard rational choice model in that a rationalization in terms of a profile of individual orderings rather than in terms of a single individual or social preference relation is analyzed.

Vertical R&D Sprillovers, Cooperation, Market Structure, and Innovation.

This paper studies vertical R&D spillovers between upstream and downstream firms. The model incorporates two vertically related industries, with horizontal spillovers within each industry and vertical spillovers between the two industries. Four types of R&D cooperation are studied : no cooperation, horizontal cooperation, vertical cooperation, and simultaneous horizontal and vertical cooperation. Vertical spillovers always increase R&D and welfare, while horizontal spillovers may increase or decrease them. The comparison of cooperative settings in terms of R&D shows that no setting uniformly dominates the others. Which type of cooperation yields more R&D depends on horizontal and vertical spillovers, and market structure. The ranking of cooperative structures hinges on the signs and magnitudes of three competitive externalities (vertical, horizontal, and diagonal) which capture the effect of the R&D of a firm on the profits of other firms. One of the basic results of the strategic investment literature is that cooperation between competitors increases (decreases) R&D when horizontal spillovers are high (low); the model shows that this result does not necessarily hold when vertical spillovers and vertical cooperation are taken into account. The paper proposes a theory of innovation and market structure, showing that the relation between innovation and competition depends on horizontal spillovers, vertical spillovers, and cooperative settings. The private incentives for R&D cooperation are addressed. It is found that buyers and sellers have divergent interests regarding the choice of cooperative settings and that spillovers increase the likelihood of the emergence of cooperation in a decentralized equilibrium.

Non-Deteriorating Choice

We analyze an alternative to the standard rationalizability requirement for observed choices by considering non-deteriorating selections. A selection function is a generalization of a choice function where selected alternatives may depend on a reference (or status quo) alternative in addition to the set of feasible options. A selection function is non-deteriorating if there exists an ordering over the universal set of alternatives such that the selected alternatives are at least as good as the reference option. We characterize non-deteriorating selection functions in an abstract framework and in an economic environment.

Ranking Sets of Objects

We provide a survey of the literature on ranking sets of objects. The interpretations of those set rankings include those employed in the theory of choice under complete uncertainty, rankings of opportunity sets, set rankings that appear in matching theory, and the structure of assembly preferences. The survey is prepared for the Handbook of Utility Theory, vol. 2, edited by Salvador Barberà, Peter Hammond, and Christian Seidl, to be published by Kluwer Academic Publishers. The chapter number is provisional.

What Is a Commody? Two Axiomatic Anwers

We identify conditions under which preferences over sets of consumption opportunities can be reduced to preferences over bundles of \"commodities\". We distinguish ordinal bundles, whose coordinates are defined up to monotone transformations, from cardinal bundles, whose coordinates are defined up to positive linear transformations only.

Rationalizability of Choice Functions on General Domains without Full Transitivity

The rationalizability of a choice function by means of a transitive relation has been analyzed thoroughly in the literature. However, not much seems to be known when transitivity is weakened to quasi-transitivity or acyclicity. We describe the logical relationships between the different notions of rationalizability involving, for example, the transitivity, quasi-transitivity, or acyclicity of the rationalizing relation. Furthermore, we discuss sufficient conditions and necessary conditions for rational choice on arbitrary domains. Transitive, quasi-transitive, and acyclical rationalizability are fully characterized for domains that contain all singletons and all two-element subsets of the universal set.

In Defense of Welfarism

This paper characterizes welfarist social evaluation in a multi-profile setting where, in addition to multiple utility profiles, it is assumed that there are several profiles of non-welfare information. We prove new versions of the welfarism theorems in this alternative framework, and we illustrate that a very plausible and weak anonymity property is sufficient to generate anonymous social-evaluation orderings.

Arrow's Theorem in Spatial Environments

In spatial environments, we consider social welfare functions satisfying Arrow's requirements. i.e., weak Pareto and independence of irrelevant alternatives. When the policy space os a one-dimensional continuum, such a welfare function is determined by a collection of 2n strictly quasi-concave preferences and a tie-breaking rule. As a corrollary, we obtain that when the number of voters is odd, simple majority voting is transitive if and only if each voter's preference is strictly quasi-concave. When the policy space is multi-dimensional, we establish Arrow's impossibility theorem. Among others, we show that weak Pareto, independence of irrelevant alternatives, and non-dictatorship are inconsistent if the set of alternatives has a non-empty interior and it is compact and convex.

Efficient and Non-Deteriorating Choice

We analyze collective choice procedures with respect to their rationalizability by means of profiles of individual preference orderings. A selection function is a generalization of a choice function where selected alternatives may depend on a reference (or status quo) alternative in addition to the set of feasible options. Given the number of agents n, a selection function satisfies efficient and non-deteriorating n-rationalizability if there exists a profile of n orderings on the universal set of alternatives such that the selected alternatives are (i) efficient for that profile, and (ii) at least as good as the reference option according to each individual preference. We analyze efficient and non-deteriorating collective choice in a general abstract framework and provide a characterization result given a universal set domain.

Consistent Rationalizability

Consistency of a binary relation requires any preference cycle to involve indifference only. As shown by Suzumura (1976b), consistency is necessary and sufficient for the existence of an ordering extension of a relation. Because of this important role of consistency, it is of interest to examine the rationalizability of choice functions by means of consistent relations. We describe the logical relationships between the different notions of rationalizability obtained if reflexivity or completeness are added to consistency, both for greatest-element rationalizability and for maximal-element rationalizability. All but one notion of consistent rationalizability are characterized for general domains, and all of them are characterized for domains that contain all two-element subsets of the universal set.

Candidate Stability and Nonbinary Social Choice

A desirable property of a voting procedure is that it be immune to the strategic withdrawal of a candidate for election. Dutta, Jackson, and Le Breton (Econometrica, 2001) have established a number of theorems that demonstrate that this condition is incompatible with some other desirable properties of voting procedures. This article shows that Grether and Plott's nonbinary generalization of Arrow's Theorem can be used to provide simple proofs of two of these impossibility theorems.

Reported Job Satisfaction : What Does It Mean?

By reporting his satisfaction with his job or any other experience, an individual does not communicate the number of utils that he feels. Instead, he expresses his posterior preference over available alternatives conditional on acquired knowledge of the past. This new interpretation of reported job satisfaction restores the power of microeconomic theory without denying the essential role of discrepancies between one’s situation and available opportunities. Posterior human wealth discrepancies are found to be the best predictor of reported job satisfaction. Static models of relative utility and other subjective well-being assumptions are all unambiguously rejected by the data, as well as an \"economic\" model in which job satisfaction is a measure of posterior human wealth. The \"posterior choice\" model readily explains why so many people usually report themselves as happy or satisfied, why both younger and older age groups are insensitive to current earning discrepancies, and why the past weighs more heavily than the present and the future.

Credibility and Signaling in Disinflation- a Cross Country Examination

This paper develops a model of money demand where the opportunity cost of holding money is subject to regime changes. The regimes are fully characterized by the mean and variance of inflation and are assumed to be the result of alternative government policies. Agents are unable to directly observe whether government actions are indeed consistent with the inflation rate targeted as part of a stabilization program but can construct probability inferences on the basis of available observations of inflation and money growth. Government announcements are assumed to provide agents with additional, possibly truthful information regarding the regime. This specification is estimated and tested using data from the Israeli and Argentine high inflation periods. Results indicate the successful stabilization program implemented in Israel in July 1985 was more credible than either the earlier Israeli attempt in November 1984 or the Argentine programs. Government’s signaling might substantially simplify the inference problem and increase the speed of learning on the part of the agents. However, under certain conditions, it might increase the volatility of inflation. After the introduction of an inflation stabilization plan, the welfare gains from a temporary increase in real balances might be high enough to induce agents to raise their real balances in the short-term, even if they are uncertain about the nature of government policy and the eventual outcome of the stabilization attempt. Statistically, the model restrictions cannot be rejected at the 1% significance level.

How do Young People Choose College Majors?

Previous studies on the determinants of the choice of college major have assumed a constant probability of success across majors or a constant earnings stream across majors. Our model disregards these two restrictive assumptions in computing an expected earnings variable to explain the probability that a student will choose a specific major among four choices of concentrations. The construction of an expected earnings variable requires information on the student s perceived probability of success, the predicted earnings of graduates in all majors and the student s expected earnings if he (she) fails to complete a college program. Using data from the National Longitudinal Survey of Youth, we evaluate the chances of success in all majors for all the individuals in the sample. Second, the individuals' predicted earnings of graduates in all majors are obtained using Rumberger and Thomas's (1993) regression estimates from a 1987 Survey of Recent College Graduates. Third, we obtain idiosyncratic estimates of earnings alternative of not attending college or by dropping out with a condition derived from our college major decision-making model applied to our sample of college students. Finally, with a mixed multinominal logit model, we explain the individuals' choice of a major. The results of the paper show that the expected earnings variable is essential in the choice of a college major. There are, however, significant differences in the impact of expected earnings by gender and race.

Political Influence, Economic Interests and Endogenous Tax Structure in a Computable Equilibrium Framework: with Applicatioon to the United States, 1973 and 1983

A full understanding of public affairs requires the ability to distinguish between the policies that voters would like the government to adopt, and the influence that different voters or group of voters actually exert in the democratic process. We consider the properties of a computable equilibrium model of a competitive political economy in which the economic interests of groups of voters and their effective influence on equilibrium policy outcomes can be explicitly distinguished and computed. The model incorporates an amended version of the GEMTAP tax model, and is calibrated to data for the United States for 1973 and 1983. Emphasis is placed on how the aggregation of GEMTAP households into groups within which economic and political behaviour is assumed homogeneous affects the numerical representation of interests and influence for representative members of each group. Experiments with the model suggest that the changes in both interests and influence are important parts of the story behind the evolution of U.S. tax policy in the decade after 1973.