Markets, Information and Uncertainty: Essays in Economic Theory in Honor of Kenneth J. Arrow PDF
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Markets, information, and uncertainty Essays in economic theory in honor of Kenneth Arrow 1 Markets, information, and uncertainty is a collection of essays by leading theorists offering powerful new insights on the role of uncertainty and information in today's market. This book features Kenneth Arrow on information and the organization of industry, Roy Radner on new tech nologies, Graciela Chichilnisky and Frank Hahn on human-induced uncertainty, Geoffrey Heal and Walter Heller on the creation of new markets, and Edmund Phelps on unemployment, among topics investi gated by other eminent practitioners. It is an authoritative collection offering imaginative and fresh approaches to economic theory. Graciela Chichilnisky holds the UNESCO Chair of Mathematics and Economics at Columbia University and is Director of Columbia's 1995 Program on Information and Resources. In she was awarded the 1994--5 Lief Johansen award from the University of Oslo and was the Salimbeni Professor at the University of Siena. Professor Chichilnisky is recognized as one of the world's leading applied and theoretical scien tists, having originated the concept of "basic needs," which is widely used 150 in economic development and was explicitly adopted by nations in 21 1992 the UN Agenda at the Earth Summit. She has served as advisor to organizations including the Organization of Economics Cooperation and Development, the United Nations, and the Organization of Petroleum Exporting Countries (OPEC), in the areas of international economics and environmental policy. Professor Chichilnisky is a member of the board of directors of the Natural Resources Defense Council and 160 is the author of eight books and some scientific articles. Kenneth J. Arrow Markets, information, and uncertainty Essays in economic theory in honor of Kenneth Arrow J. Edited by GRACIELA CHICHILNISKY Columbia University .....� .: . CAMBRIDGE .. ;:; UNIVERSITY PRESS CAMBRIDGE UNIVERSITY PRESS Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, Sao Paulo, Delhi Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521553551 © Graciela Chichilnisky 1999 This publication is in copyright. Subject to statutory exception and to the provisions ofrelevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 1999 This digitally printed version 2008 A catalogue record for this publication is available from the British Library Library of Congress Cataloguing in Publication data Markets, information, and uncertainty: essays in economic theory in honor of Kenneth J. Arrow I edited by Graciela Chichilnisky. p. cm. Includes index. ISBN 0-521-55355-5 1. Economics. 2. Arrow, Kenneth Joseph, 1921-. I. Arrow, Kenneth Joseph, 1921-. II. Chichilnisky, Graciela. HB71.M29 1999 97-25548 330 -dc21 CIP ISBN 978-0-521-55355-1 hardback ISBN 978-0-521-08288-4 paperback Contents Preface Page vii List of contributors ix Section I. Information and markets Introduction 3 Graciela Chichilnisky 1. 19 Information and the organization of industry Kenneth Arrow J. 2. 26 Equilibrium in an economy with information goods Vladimir Danilov, Gleb A. Koshevoy, and I. Alexandr Sotskov I. Section II. Uncertainty and finance 45 3. The formulation of uncertainty: Prices and states Jacques Dreze H. 67 4. A remark on incomplete market equilibrium Frank Hahn 5. Existence and optimality of a general equilibrium with 72 endogenous uncertainty Graciela Chichilnisky 6. Market equilibrium with endogenous price 97 uncertainty and options Peter Huang and Ho-Mou Wu H. 7. 120 Catastrophe futures: Financial markets for unknown risks Graciela Chichilnisky and Geoffrey Heal v v1 Contents Section III. Market externalities and justice 8. Moral hazard and independent income in a modern intertemporal-equilibrium model of involuntary unemployment and mandatory retirement 143 Edmund S. Phelps 9. On the optimal schedule for introducing a new technology, when there is learning by doing 165 B. Linhart and Roy Radner P 191 10. Price and market share dynamics in network industries Geoffrey Heal 11. Exchange in a network of trading posts 216 Ross M. Starr and Maxwell B. Stinchcombe 12. Equilibrium market formation causes missing markets 235 Walter Heller P 13. Toward a general theory of social overhead capital 253 Hirofumi Uzawa 14. On population externalities and the social rate of discount 305 David A. Starrett 15. Trade and Welfare 322 Tito Cordelia, Enrico Minelli, and Heracles Polemarchakis 16. History as a widespread externality in some Arrow-Debreu market games 328 Peter Hammond 1 17. Redistribution by a representative democracy and distributive justice under uncertainty 362 Peter Coughlin Author index 377 Subject index 380 Preface This book emerged from the celebration of Kenneth Arrow's 70th birthday at a workshop entitled "Columbia Celebrates Arrow's Contributions" in October 1991. This took place at Columbia University, where he studied between 1941 and 1950, and obtained his PhD degree under the supervision of Harold Hotelling and Albert Hart. The papers presented at that workshop to a most enthusiastic audience were special. It was a heartwarming event. It was later suggested that those papers, and those of other authors closely related to Ken Arrow, be compiled in a volume in his honor to memorialize this happy occasion. Uncharacteristically for such a volume, the book starts with a paper by Arrow himself, which he presented at the Columbia workshop. His piece on information and uncertainty reflects upon the future of industrial societies in a most original and thoughtprovoking manner. Each subse quent author reflects on an aspect of the uncertainty-information axis, which, as argued below, is a representation of a tug-of-war between the individual, whose life is short and whose capacities to predict are limited, and society, which exists in a more atemporal world. Many thanks are owed to the authors who kindly helped with the process of producing this book, and to close associates and colleagues at Columbia who provided invaluable support: Drs. Yun Lin and Yuqing Zhao, Geoffrey Heal, Bruce Greenwald, Ned Phelps, David Krantz and Duncan Foley; also to colleagues at Stanford University where some of the work was completed: Paul Milgrom, David Starrett, and Paul Ehrlich, and to my daughter Natasha Chichilnisky-Heal, and Kim Stack and Grace Fernandez of the Program on Information and Resources PIR at Columbia. Thanks also to Scott Parris and Louise Calabro of ( ) Cambridge University Press who provided continued support, and Shirley Kessel who kindly compiled the indexes. The UNESCO Chair at Columbia University offered research facilities to PIR for producing this book, supported warmly by UNESCO Director General Federico Mayor and by Drs. Jorge Werthein and Pierre Lasserre of UNESCO, by Jonathan Cole, Provost of Columbia University, and by Vice Provosts Michael Crow and Peter Eisenberger. Many thanks are owed to them all. Research support from the U.S. National Science Foundation and the vii viii Preface Sloan Foundation to Columbia University were very valuable in com pleting this book. In the process of putting this book together I learned a great deal from the authors. I found all the chapters interesting and at times challenging. Some are pathbreaking. It is my pleasure to offer this book in honor of the man who inspired them. Graciela Chichilnisky, New York, July 1998 Contributors Kenneth Arrow Vladimir I. Danilov J. Joan Kenney Professor of Professor, Central Institute of Economics, Emeritus Economics and Mathematics and Professor of Operations Russian Academy of Sciences Research Krasikova 32 Moscow 117418 Department of Economics Russia Stanford University Jacques Dreze Stanford, CA 94305-6072 Professor, CORE USA Universite Catolique de Louvain 34 Voie du Roman Pays Graciela Chichilnisky B-1348 Louvain la Neuve, UNESCO Professor in Belgium Mathematics and Economics Director, Program on Information Frank Hahn and Resources Professor, Faculty of Political Columbia University Economy 405 Low Memorial Library University of Siena New York, NY 10027 53100 Siena USA Italy Peter Hammond Tito Cordelia Professor, Department of Professor, CORE Economics Universite Catolique de Louvain Stanford University 34 Voie du Roman Pays Stanford, CA 94305 B-1348 Louvain la Neuve USA Belgium Geoffrey Heal Peter Coughlin Garrett Professor of Public Policy Professor, Department of and Corporate Responsibility Economics Columbia University University of Maryland Graduate School of Business College Park, MD 20742 New York, NY 10027 USA USA IX Contributors x Walter Heller Heracles Polemarchakis P. Professor, Department of Professor, CORE Economics Universite Catolique de Louvain University of California at San 34 Voie du Roman Pays Diego B-1348 Louvain la Neuve 9500 Gilman Drive Belgium La Jolla, CA 92093-0508 USA Roy Radner Professor, Stern School of Peter H. Huang Business Professor of Law New York University University of Pennsylvania 4th Street Law School 44 W. New York, NY 10012 3400 Chesnut Street USA Philadelphia, PA 19104 USA Alexandr I. Sotskov USA Gleb Koshevoy Professor, Central Institute of Professor, Central Institute of Economics and Mathematics Economics and Mathematics Russian Academy of Sciences Russian Academy of Sciences Krasikova 32 Moscow 117418 Krasikova 32 Moscow 117418 Russia Russia Ross M. Starr B. Linhart P. Professor, Department of Information Sciences Center Economics AT&T Lab-Research University of California at San Florham Park, NJ 07932 Diego USA 9500 Gilman Drive, Dept. 0508 Enrico Minelli La Jolla, CA 92093-0508 Professor, CORE USA Universite Catolique de Louvain David A. Starrett 34 Voie du Roman Pays Professor, Department of B-1348 Louvain la Neuve Economics Building #235 Belgium Stanford University Edmund S. Phelps Stanford, CA 94305 Professor, Department of USA Economics Columbia University Maxwell B. Stinchcombe 1004 International Affairs Professor, Department of Building Economics Mail Code 3308 University of Texas, Austin New York, NY 10027 Austin, TX 78712 USA USA
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