Selected Works of Joseph E. Stiglitz: Volume I: Information and Economic Analysis PDF
Preview Selected Works of Joseph E. Stiglitz: Volume I: Information and Economic Analysis
SELECTED WORKS OF JOSEPH E. STIGLITZ This page intentionally left blank .......................................................................................................................... SELECTED WORKS OF JOSEPH E. STIGLITZ volume i : information and economic analysis .......................................................................................................................... JOSEPH E. STIGLITZ 1 3 GreatClarendonStreet,Oxfordox26dp OxfordUniversityPressisadepartmentoftheUniversityofOxford. ItfurtherstheUniversity’sobjectiveofexcellenceinresearch,scholarship, andeducationbypublishingworldwidein OxfordNewYork AucklandCapeTownDaresSalaamHongKongKarachi KualaLumpurMadridMelbourneMexicoCityNairobi NewDelhiShanghaiTaipeiToronto Withofficesin ArgentinaAustriaBrazilChileCzechRepublicFranceGreece GuatemalaHungaryItalyJapanPolandPortugalSingapore SouthKoreaSwitzerlandThailandTurkeyUkraineVietnam OxfordisaregisteredtrademarkofOxfordUniversityPress intheUKandincertainothercountries PublishedintheUnitedStates byOxfordUniversityPressInc.,NewYork ©JosephE.Stiglitz2009 Themoralrightsoftheauthorshavebeenasserted DatabaserightOxfordUniversityPress(maker) Firstpublished2009 Allrightsreserved.Nopartofthispublicationmaybereproduced, storedinaretrievalsystem,ortransmitted,inanyformorbyanymeans, withoutthepriorpermissioninwritingofOxfordUniversityPress, orasexpresslypermittedbylaw,orundertermsagreedwiththeappropriate reprographicsrightsorganization.Enquiriesconcerningreproduction outsidethescopeoftheaboveshouldbesenttotheRightsDepartment, OxfordUniversityPress,attheaddressabove Youmustnotcirculatethisbookinanyotherbindingorcover andyoumustimposethesameconditiononanyacquirer BritishLibraryCataloguinginPublicationData Dataavailable LibraryofCongressCataloginginPublicationData Dataavailable TypesetbySPIPublisherServices,Pondicherry,India PrintedinGreatBritain onacid-freepaperby AntonyRoweLtd. ISBN 978–0–19–953370–1 13579108642 ontents C ..................................... PrefacetoTheSelectedWorksofJosephE.Stiglitz ix Acknowledgements lxii IntroductiontoVolumeI 1 PART I. PERSPECTIVES ON INFORMATION ANALYSIS 1. InformationandEconomicAnalysis 29 2. InformationandtheChangeintheParadigminEconomics 53 PART IIA. THE GENERAL THEORY OF SCREENING IntroductiontoPartIIA 97 3. TheTheoryof“Screening,”Education,andtheDistribution ofIncome 99 4. AModelofEmploymentOutcomesIllustratingtheEffect oftheStructureofInformationontheLevelandDistribution ofIncome,withMichaelRothschild 122 PART IIB. THEORY OF SELF-SELECTION IntroductiontoPartIIB 129 5. EquilibriuminCompetitiveInsuranceMarkets:AnEssayonthe EconomicsofImperfectInformation,withMichaelRothschild 141 6. CompetitionandInsuranceTwentyYearsLater,with MichaelRothschild 160 7. Monopoly,Non-LinearPricingandImperfectInformation:The InsuranceMarket 168 vi selectedworksofjosephe. stiglitzvoli 8. PricesandQueuesasScreeningDevicesinCompetitiveMarkets 193 9. SortingOuttheDifferencesBetweenScreeningand SignalingModels,withAndrewWeiss 223 PART IIC. THEORY OF ADVERSE SELECTION, EFFICIENCY WAGES, AND CREDIT RATIONING IntroductiontoPartIIC 259 10. CreditRationinginMarketswithImperfectInformation, withAndrewWeiss 262 11. EquilibriumUnemploymentasaWorkerDisciplineDevice, withCarlShapiro 287 12. TheCausesandConsequencesoftheDependenceof QualityonPrice 304 PART III. THEORY OF INCENTIVES AND ECONOMIC ORGANIZATION IntroductiontoPartIII 355 13. IncentivesandRiskSharinginSharecropping 361 14. Information,Competition,andMarkets,withBarryNalebuff 400 15. HumanFallibilityandEconomicOrganization,withRaajSah 409 16. TheBasicAnalyticsofMoralHazard,withRichardArnott 417 17. CreditMarketsandtheControlofCapital 444 18. PeerMonitoringandCreditMarkets 464 PART IV. INFORMATION AND PRICES IntroductiontoPartIV 481 19. InformationandCompetitivePriceSystems, withSanfordGrossman 484 20. BargainsandRipoffs:AModelofMonopolistically CompetitivePriceDispersion,withStevenSalop 493 21. OntheImpossibilityofInformationallyEfficientMarkets, withSanfordGrossman 516 22. ANonconcavityintheValueofInformation,withRoyRadner 537 contents vii PART V. WELFARE ECONOMICS OF INFORMATION IntroductiontoPartV 557 23. ExternalitiesinEconomieswithImperfectInformation andIncompleteMarkets,withBruceGreenwald 559 24. MoralHazardandNonmarketInstitutions:Dysfunctional CrowdingOutorPeerMonitoring?withRichardArnott 589 PART VI. INFORMATION AND MACRO ECONOMICS IntroductiontoPartVI 607 25. InformationalImperfectionsintheCapitalMarket andMacroeconomicFluctuations,withBruceGreenwald andAndrewWeiss 609 26. FinancialMarketImperfectionsandBusinessCycles, withBruceGreenwald 617 Bibliography 649 IndexofNames 689 IndexofSubjects 694 This page intentionally left blank reface to he elected orks of P T S W oseph tiglitz J E. S ......................................................................................................................... These six volumes bring together my major scientific papers in economics, written overthepastalmost40years.Whilethesepapershavespannedawiderangeoftopics and fields, there is a unifying theme behind a large proportion: the standard eco- nomicmodel(theneoclassicalmodel,basedonrational,fullyinformedhouseholds maximizingtheirutilityandrational,fullyinformedfirmsmaximizingtheirmarket valueinteractinginperfectlycompetitivemarkets)isbadlyflawed,sobadlyflawedas to provide little understanding of what actually happens in a market economy and littleguidanceaboutwhatpolicieswillincreaseeconomicefficiencyandsocietalwell being. A large fraction of the papers focus on a particular assumption—that of perfect information,ormoreprecisely,ontheassumptionsthat(a)allindividualshavethe same information; and (b) nothing that occurs within the economy has any effect on the information (beliefs) of market participants. Of course, no economist could seriouslybelieve in either assumption;butthey had been at the center of economic analyses for more than 200 years, taken so much for granted that they were not 1 typically even noted as assumptions. It was not that economists were so foolish as tobelievethattheseassumptionsprovidedanaccuratedescriptionoftheworld;but rather,theydidnothavethetoolswithwhichtheycouldanalyzeamarketeconomy withimperfectinformation—oratleastnotanalyzeitwithanymathematicalrigor. Sotheyformulatedprecisemodelswithperfectinformation—andtheythenmadea leap of faith, that a world in which information was not too imperfect would look not too different from the world of perfect information. The papers presented here show that that faith was misplaced—even a little bit of imperfect information can havelargeconsequences.Indeed,noneofthemostbasicpropositionsofeconomics provedrobust. TherewereotherassumptionsintheneoclassicalframeworkthatIcallintoques- tion in the papers collected here: the existence of a complete set of markets (such that individuals could buy insurance, for instance, against any risk), perfect capital markets(suchthatanyindividualcouldborrowasmuchass/hewantedattherisk- adjusted market rate of interest), perfect competition (such that all firms faced a horizontaldemandcurvefortheirproducts),andafixedtechnology(justasnothing the firm did affected information, so firms could not invest in research that would affecttechnology)wereallassumptionsofthestandardWalrasianmodel.(Thefailure 1 Forinstance,inGerardDebreu’sclassicformulationofthecompetitiveequilibriummodel,helisted tenassumptions.Theinformationassumptionswerenotonthelist(Debreu1959).
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