History: Sunk Cost, or Widespread Externality?

Peter Hammond

Rivista Internazionale di Scienze Sociali, 2007, vol. 115, issue 2, 161-185

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.

Keywords: intertemporal economy; sequence economy; welfare theorems; widespread externality; rules versus discretion; policy feedback (search for similar items in EconPapers)
JEL-codes: C72 D62 D99 H21 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (3)

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Working Paper: History: Sunk Cost, or Widespread Externality? (2007)
Working Paper: History: Sunk Cost, or Widespread Externality? (2007)
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