History as a Widespread Externality: Constrained Efficiency and Remedial Policy
نویسنده
چکیده
In the Arrow-Debreu model of an intertemporal economy with a continuum of agents, suppose that the auctioneer sets prices while the government institutes optimal lump-sum transfers period by period. An earlier paper showed how subgame imperfections arise because agents understand how current decisions such as those determining investment will influence future lump-sum transfers. This observation undermines the second efficiency theorem of welfare economics and makes “history” become a widespread externality. A two-period model is used to show that the standard efficiency theorems are only true for a much weaker concept of efficiency. Possibilities for remedial policy are also discussed.
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History as a Widespread Externality in Some Arrow-Debreu Market Games
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