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251
goods. The consumer is able to hold his wealth in the form of one or more of M
assets, of which one is riskless. Consumer durables are modelled as being in part
consumption goods, and in part assets.
The prices of goods are assumed independently and nonstationarily distributed, so as to allow for inflation. The real returns on the (M - 1) risky assets are
assumed to be state dependent, and the consumer is assumed to know the probability distribution of the states and also the conditional distributions of returns
given the states.
The consumer enters a period knowing the prices of the goods, and the state,
and he chooses his consumption of each of the goods, and his portfolio decision so
as to maximize his expected utility.
The problem he faces is one of dynamic stochastic programming. By using
particularfunctional forms for the indirect utility function it is possible to solve this
problem by a recursive procedure in order to arrive at optimal expenditure and
investment rules for any period t = 0, . . ., T
After we have determined the expenditure rule, we convert from the indirect
utility function to the expenditure function, and differentiate this with respect to
the price vector to arrive at the demand equation vector for goods and the services
of durables. This has a functional form which corresponds to the expenditure
function.
The demand equations for assets, and the asset component of durables come
directly from the rule for the optimum portfolio composition.
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environments is discussed. The process allows trading, consumption, and production to occur even though equilibrium does not exist, as opposed to the usual
non-tatonnement process in which the only allowable disequilibrium action is
trading. The process is based on the reallocation of resources towards consumers
whose "demand prices," marginal utilities, are high and away from those whose
prices are low. Production is price directed as in the usual competitive market
process.
The environments covered are among those which can be interpreted as
optimal control problems, and the process only requires that each individual know
the current environmental conditions. (E.g., no knowledge of future technology
is necessary.) These environments are split into two classes, pure flow and
stock-flow depending on whether or not stock accumulation (i.e., investment)
is feasible.
Since it is possible for such a process to be Pareto-satisfactory only in
environments whose Pareto-optimal allocations are steady-state solutions and then
only if the initial trading rates are optimal, a slightly less restrictive performance
criterion is proposed. This requires that the process closely track the optimal path
if it starts close to it. It is shown that, in pure flow environments, if the optimal path
is not changing too rapidly then the process satisfies the above criterion. It is also
shown that, in stock-flow environments, the process will not satisfy the criterion.
In fact, there are a large number of processes which cannot track the optimal path
in stock-flow environments. This result is based on the lack of Liapunov stability
of the Euler-Lagrange equations, the first order conditions for optimal control,
and indirectly extends the results of Hahn and Kurz, on the instability of competitive (or equilibrium action) growth paths, to some types of disequilibrium
action processes.
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+ 8KK(ln K)2 +
'ILL
2C(l C)2
?
(InlnIlnA
+ y(IlnIlnC
ELAln L ln A
+ yCAlnClnA
bIK
In I ln K +
ClnKClnCK + 6CLlnCInL=
6IL
ln L +
EKAln K
ln A
ln I ln L
0.
where
I = quantity of investment
C = quantity of consumption
K = quantity of capital
L = quantity of labor
A = productivity index
which under the assumption of profit maximization lead to marginal productivity
conditions of the type
p,I
PKK
alnF
a lnI
-alnF
a ln K
ac + y11In
l n + ycn C+
-(K
bIK
nI +
6CKlnC
inK +
+ eKK in K
bIK
6ILln
+
L+
YIA ln A
EKLlnL+ 8KAInA
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256
+ VIA In p, In A +
P)2
'
ILlnPL
+ (XAlnA
CA InpcInA
KK(ln
PK)2 +
LL (In
PL)2
6CK
in Pc
In PK +
5CL
In Pc In PL
where
PI = price of investment
Pc = price of consumption
PK = price of capital
PL = price of labor.
(2P2
DIn 7t
a In PI
PI, __Dnp
PKK -mInt
a
In PK
cx1 + yII In PI + VIcIn Pc + 6IK In PK + 6IL In PL + VIAIn A
(J3K + 6IK
Equations (1) and (2) form the basis of the empirical analysis. The data used
are the aggregate U.S. annual time series data developed by Christensen and
Jorgenson. Because in the aggregate the prices and quantities of outputs and inputs
influence one another, an econometric model is specified so that appropriate
instrumental variables may be employed to obtain consistent estimates. Various
economic hypotheses such as symmetry and homogeneity as well as hypotheses
on specific functional forms are formulated and tested. It is found that while the
restrictions imposed by economic theory are true, the restrictions imposed by the
specific functional forms are false. This suggests that the "Trans-Log" function
should be employed in the absence of correct a priori information on the specific
functional form.
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257
258
Martos,HungarianAcademyof Sciences
Analyzingthe way an economicsystem(a firmas well as a nationaleconomy)
works,a distinctioncan be madebetweenits autonomousand higherfunctioning.
This bears analogy to the working of the autonomousand the higher nervous
systemin living organisms,hence the terminologyadapted.The main featuresof
the autonomousfunctioningof the economic system are:
1. The simplicity of the informationrequiredfor making decisions. The
relativeunimportanceof price-typeinformation.
2. The simple behavioralrules which rely mostly on habits. This excludes
fundamentalchangesin technologyas well as majorinvestmentdecisions,which
are controlledby the highercontrol system.Anotherpoint of view is a problem
of restriction:the autonomousfunctioningaimsonly at the survivalof the system,
which may include a stationaryextension,in an essentiallyunchangedenvironment.Any other,morecomplexgoals appearin the highercontrolsystem.
The autonomousfunctioningof differentsystemsseems to be very similar,
whilethe higherfunctioningis fairlydiversifiedowingto political,social,historical
and otherconditions.It seemsto be hardto separatethe effectsof the autonomous
functioningin as much as they are always mixed up with the effects of higher
functioningin any moderneconomy.No empiricalevidenceas to the viabilityof
a pureautonomouseconomycan be given.Wemustrestrictourselvesto theoretical
reasoningvia simplifiedformal models.
As a firstapproximationof the problema simplemodelfor the Leontief-type
economy will be demonstrated.Simple behavioral rules are applied, where
relativechangesin productionand purchasequantitiesdependonly on changes
in producers'and consumers'own stocks, sales and consumptionquantities,
whilepricesplay no role. The analysisof the modelsprovesthat suchan economy
can surviveeven if minorouterdisturbancesoccur.
The conclusion which can be drawn is that informationabout stocks may
play a considerablepart in the control of any economic system, a much more
importantrole than is usuallyacknowledgedin the literature.
J. Burgermeister,Universityof Bonn
The paper suggestsa solution for finite non-cooperativetwo-persongames
with incompleteinformation.Eitherplayerbelongsto a finitenumberof "types"
which differ by their payoffs. Each player knows his own type but has only a
subjectiveprobabilitydistributionon the types of his opponent.These subjective
probabilitydistributionsare knownto both players.It will be shownin the paper
that each player has a uniquely determinedoptimal counterstrategyto each
strategyof his opponent.If thereis to be an optimalstrategyfor eachplayer,these
strategiesmustbe optimalagainsteachother;thatmeanstheymustbe equilibrium
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259
260
INPUT-OUTPUT ANALYSIS I
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The perversity of the real world is attributed to markets being out of equilibrium
and to locational monopolies and the like which make economically different
goods out of what laymen regard as identical products. This paper argues that
it is not necessary to resort to such explanations. Rather, variable and varying
prices are to be expected in a world where consumers have limited facilities for
acquiring, storing and acting on information. Furthermore, it is doubtful that
the mere existence of large numbers of competing sellers will prevent the exploitation of limitations of consumers' ability to do comparative shopping.
Analysis of a model which incorporates these features of consumer behavior
reveals that in such a world equilibrium, in the conventional sense of constant
prices, may not exist if sellers compete with one another. For, in this model,
prices must be equilibrium points of a non-cooperative game which may have no
pure strategy equilibrium. When static equilibrium prices exist, this model gives
us some reason to doubt that perfect competition will protect the imperfect
consumer. In some cases this price may be calculated as a function of the number
of sellers in the market. Although the equilibrium price falls as the number of
competitors increases, it does not approach the competitive price as the number
of stores becomes infinite.
This paper builds on the work of Selten, Stigler, and Telser.
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264
University
The paper discussesa model in which tastes depend on past consumption.
If a long rundemandfunctioncan be defined,the questionariseshow to interpret
the "preferencestructure"correspondingto the long run demand function. A
theoremis proved which links the long run "preferencestructure"to the actual
shortrun preferences.The theoremis appliedto problemsof welfareeconomics.
It is shownthat policyconclusionsdifferfromsome of those derivedin traditional
welfareeconomics.
An Exploration in the Theory of Optimum Income Taxation, Part I, J. A. Mirrlees,
NuffieldCollege, Oxford
In a world with one commodityand labour,the populationof consumersis
supposedto have a diversityof skills. If a man works for a proportiony of the
availableworking-time,he providesan amountof usefullabourny to the economy.
The distributionof n in the populationis known, as are the productionfunction
for the economy, and the preferencesof consumers(which are identicalto one
another).Use of an incometax in the economyenablesthe Stateto imposea fixed
relationshipbetweenny and x, the man'sconsumption.The problemis to find a
consumptionfunctionx = c(ny) that will maximizea given valuationfunction,
whichis supposedto take the form of an integralof the utilitylevelsof individual
consumers.
Equationscharacterizingthe optimumconsumptionfunctionare obtained.
A rigorousproof of the generaltheoremwill be providedin Part II of the paper,
but the main lines of the argument,which employs variationalmethods, are
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INPUT-OUTPUT ANALYSIS II
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