Markets, Information and Uncertainty: Essays in Economic Theory in Honor of Kenneth J. Arrow

398 Pages·1999·7.89 MB·English

by  Graciela Chichilnisky

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
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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