History: Sunk Cost, or Widespread Externality?

Peter Hammond

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: In an intertemporal Arrow-Debreu 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 their 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” a widespread externality. A two-period model is used to investigate the constrained efficiency properties of different kinds of equilibrium. Possibilities for remedial policy are also discussed.

Pages: 24 pages
Date: 2007
New Economics Papers: this item is included in nep-dge
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Journal Article: History: Sunk Cost, or Widespread Externality? (2007)
Working Paper: History: Sunk Cost, or Widespread Externality? (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:808

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