Research Database

This thesis consists of a series of essays on the theory of exchange under uncertainty. The first essay examines the welfare implications of futures markets in the context of complete markets for contingent claims. It is shown that in a C-good, S-state world the equilibrium allocations resulting from the operation of pre-state noncontingent futures markets and post-state spot markets may be Pareto optimal. This proposition turns on the fact that a futures contract can be interpreted as a security whose state-specific return is the post-state spot price. If the matrix of spot prices has rank S, then, with futures and spot markets, agents can achieve the same allocations over states as with complete markets for contingent claims.

This paper studies the relationship between the existence and optimality of a monetary steady-state and the nonoptimality of nonmonetary steady-states. We construct a sequence of stationary overlapping generations economies with longer and longer lived generations in which all agents maximize a discounted sum of utilities with a common discount rate. Under some assumptions the following result is established: If the discount rate is greater (less) than the population growth rate, then eventually every nonmonetary steady-state is optimal (non-optimal) and a monetary steady-state does not exist (exists and is optimal).

The qualitative dynamics of a discrete time version of a deterministic, continuous time, nonlinear macro model formulated by Haavelmo are fully characterized. The methods of symbolic dynamics and ergodic theory are shown to provide a simple, effective means of analyzing the behavior of the resulting one-parameter family of first-order, deterministic, nonlinear difference equations. A complex periodic and random "aperiodic" orbit structure dependent on a key structural parameter is present, which contrasts with the total absence of such complexity in Haavelmo's continuous time version. Several implications for dynamic economic modelling are discussed.

This study estimates the effects of allowing bank holding companies (BHCs) to enter several lines of financial business not now permitted. A simulation technique is used to estimate the risk and return of hypothetical financial corporations after merger between a BHC and a large firm in each of these industries: securities, real estate, life insurance, property and casualty insurance, and insurance agencies. The study concludes that a merger between a BHC and a life insurance company may decrease the probability of bankruptcy for the merged firm relative to the BHC alone. This result does not hold true, however, for BHC mergers with firms in the other industries. In particular, BHC mergers with securities or real estate firms are found to increase the probability of bankruptcy.

In this paper, we build a model of the transition following large-scale economic reforms that predicts both a substantial drop in output and a prolonged pause in physical investment as the initial phase of the optimal transition following the reform. We model reform as a change in policy which induces agents to close existing enterprises using old technologies of production and to open up new enterprises adopting new technologies of production. The central idea of our paper is that it is costly to close old enterprises and open new enterprises because, in doing so, information capital built up about old enterprises is lost and time must pass before information capital about new enterprises can be acquired. Thus, an acceleration of the pace of industry evolution leads in the short run to a net loss of information capital, a drop in productivity, a recession, and a fall in physical investment. We calibrate our model of industry evolution, information capital, and transition to match micro data on industry evolution in the United States and macro data from the United States, Japan, and the former communist countries of Europe. We find that the loss of information capital that accompanies a major acceleration in the pace of industry evolution in an economy leads initially to a decade of recession and a five year pause in physical investment before the benefits of reform are realized.

We analyze the secular decline in interstate migration in the United States between 1991 and 2011. Gross flows of people across states are about 10 times larger than net flows, yet have declined by around 50 percent over the past 20 years. We argue that the fall in migration is due to a decline in the geographic specificity of returns to occupations, together with an increase in workers’ ability to learn about other locations before moving there, through information technology and inexpensive travel. These explanations find support in micro data on the distribution of earnings and occupations across space and on rates of repeat migration. Other explanations, including compositional changes, regional changes, and the rise in real incomes, do not fit the data. We develop a model to formalize the geographic-specificity and information mechanisms and show that a calibrated version is consistent with cross-sectional and time-series patterns of migration, occupations, and incomes. Our mechanisms can explain at least one-third and possibly all of the decline in gross migration since 1991.

This study describes recent attempts to solve what Lucas has called the "problem of economic development"—the problem of accounting for the great disparity in per-capita output across countries. The study examines a number of economic development theories, including the neoclassical theory of growth, which relies on cross-country differences in physical capital per person to explain the disparity, and newer theories, which stress cross-country differences in human capital, or education. It is argued that these models cannot account for observed per-capita output diversity. More promising theories are those that stress differences in incentives for entrepreneurs to create businesses (i.e., business capital) and adopt new technologies.

Both Chile and Mexico experienced severe economic crises in the early 1980s, yet Chile recovered much faster than Mexico. This study analyzes four possible explanations for this difference and rules out three, explanations based on money supply expansion, real wage and real exchange rate declines, and foreign debt overhangs. The fourth explanation is based on government policy reforms in the two countries. Using growth accounting and a calibrated growth model, the study determines that the only policy reforms promising as explanations are those that primarily affect total factor productivity, or how inputs are used, not the inputs themselves. Interpreting historical evidence with economic theory, the study concludes that the crucial difference between Chile and Mexico in the 1980s and 1990s is earlier government policy reforms in Chile, particularly reforms in policies affecting the banking system and bankruptcy procedures.

The existence of fixed points for monotone maps on spaces of measures is established. The case of monotone Markov processes is analyzed and a uniqueness and global stability condition is developed. A comparative statics result is presented and the problem of approximation to the invariant distribution is discussed. The conditions of the theorems are verified for the cases of Optimal Stochastic Growth and Industry Equilibrium.

Most economic activity occurs in cities. This creates a tension between local increasing returns, implied by the existence of cities, and aggregate constant returns, implied by balanced growth. To address this tension, we develop a theory of economic growth in an urban environment. We show how the urban structure is the margin that eliminates local increasing returns to yield constant returns to scale in the aggregate, thereby implying a city size distribution that is well described by a power distribution with coefficient one: Zipf’s Law. Under strong assumptions our theory produces Zipf’s Law exactly. More generally, it produces the systematic deviations from Zipf’s Law observed in the data, namely, the underrepresentation of small cities and the absence of very large ones. In these cases, the model identifies the standard deviation of industry productivity shocks as the key element determining dispersion in the city size distribution. We present evidence that the dispersion of city sizes is consistent with the dispersion of productivity shocks in the data.

In this paper we analyze the rate of convergence to a balanced path in a class of endogenous growth models with physical and human capital. We show that such rate depends locally on the technological parameters of the model, but does not depend on those parameters related to preferences. This result stands in sharp contrast with that of the one-sector neoclassical growth model, where both preferences and technologies determine the speed of convergence to a steady-state growth path.