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I have studied economics for more than 50 years and have always considered myself an econometrician in the original sense of econometrics, as “The use of mathematical and statistical methods to quantify the laws of economics.” Over this time, I have, inter alia, estimated huge numbers of demand equations for the purpose of acquiring estimates of price and income elasticities, played around with nonleast-squares methods of estimation, puzzled over what capital is and how money comes into being, and thought long and hard about how one might ground the theory of consumer choice in the neurosciences.

The parametric approach to applied demand analysis involves postulating parametric forms for the utility function and then fitting the resulting demand functions to a finite number of observations on consumer behavior. As we argued earlier, this approach will be satisfactory only when the postulated parametric forms are good approximations to the generating demand functions. Our approach in this chapter addresses the question of how to derive a set of demand functions for monetary assets from a framework in which the representative asset holder maximizes the monetary services utility function f(x), subj ect to the budget constraint. We will state the problem first and then show why and how duality theory might be employed explicitly in the rationalization of estimable demand functions.

The paper presents a study of transport in urban areas served by a public transport system, as well as by private vehicles on which road pricing is imposed. It is supposed that the road pricing fare, the ticket price and the frequency of the lines of public transport are established by the Public Administration in such a way that the surplus of users of both the transport modes is maximised, under the conditions that the system is in equilibrium, the budget constraint of the company managing public transport is satisfied, and the private transport demand does not exceed a given threshold for environmental reasons. The theoretical model that has been devised leads to a problem of nonlinear programming, with an equilibrium constraint formulated as a fixed point problem. From an application of the model to an urban area it emerges that, if the proceeds of road pricing are used for financing public transport, the results of road pricing essentially depend on the proportion of demand that is captive to public transport, and on the level of congestion existing on the urban road network before the imposition of road pricing.

The existence of an equilibrium in an extended Walrasian economic model of exchange is confirmed constructively by an iterative scheme. In this scheme, truncated variational inequality problems are solved in which the agents’ budget constraints are relaxed by a penalty representation. Epi-convergence arguments are employed to show that, in the limit, a virtual equilibrium is obtained, if not actually a classical equilibrium. A number of technical hurdles are, in this way, surmounted.

It is likely that, at the end of their restructuring process, the postmodern military organizations of the future will resemble what in the HRM literature are known as networks of organized anarchies, i.e., organizations with permeable boundaries and flat hierarchies given to decentralized decision making (hence a reduction of the size of headquarters) and with a greater capacity to tolerate ambiguity. Finally, as far as European armed forces are concerned, the restructuring process must go hand in hand, if these organizations want to be more efficient, with a greater integration and cooperation of armed forces at the European level. Only greater integration and cooperation will make possible a greater degree of task specialization among European armed forces and therefore allow to solve the present ajustment problems given the present and future budgetary constraints facing all European governments.

All companies that engage in new product development (NPD) face the important problem of selecting a project portfolio. A statement by the head of the R&D division of AstraZeneca, a big pharmaceutical company, illustrates that portfolio selection under budget constraints is difficult: “AstraZeneca has to rein in some of its most promising drug candidates due to the lack of resources to develop them simultaneously” (Financial Times, 16 October 2000). Choosing the NPD portfolio practically determines the firm’s strategy for the medium-term future, and is the responsibility of the senior managers of the firm (Roussel et al. 1991, Cooper et al. 1998).

The Walrasian model of general equilibrium of prices, production and exchange is today formulated in the concept of equilibrium of a so-called private ownership economy. In the classical model, only a finite number of commodities are exchanged, produced or consumed. Taking prices as given, finitely many consumers (who are endowed with initial holdings of the different commodities and who collect given shares of the profits from production), consume the commodities available on the market by optimizing their preferences among all possible consumption plans which satisfy their resulting budget constraint. Finitely many producers, who also take prices as given, maximize their profit on their individual set of possible production plans. They produce the commodities which satisfy consumers’ demand in competition with the initial resources not used by production. Market clearing determines equilibrium prices and the quantities actually consumed and produced at a state of equilibrium.

Telecommunications operators worldwide are facing the challenge of deploying UMTS. These networks have to meet consumers’ expectations, tight budget constraints and governmental regulations. The careful dimensioning of the radio access infrastructure plays an essential role in achieving these goals.

One of the most important pre-conditions for the sustained expansion of the SME sector in South-East Europe is to have in place a set of cost-effective, accountable and transparent local financial institutions, instruments and credit markets, which together constitute a healthy local financial system (EBRD, 1999; World Bank, 1999; 2000). This is certainly not an easy task. The difficult conditions prevailing in the region — economic collapse, lack of resources, persistent inter-ethnic antipathy, isolation, rising inequality and poverty, endemic criminality — continue to frustrate financial sector reform. Moreover, the inheritance of past financial sector malpractice continues to weigh heavily on the latest generation of policy-makers, who are attempting to upgrade the efficiency of a range of financial institutions long used to an environment of “soft budget constraints”. Also proving to be a barrier to progress are the many elite groups that emerged and benefited handsomely from political connections and financial sector irregularities under communism and during the first post-communist governments. These groups are quite determined, and sometimes very violently inclined (for example, in Albania), to hold on to the power and wealth that they have unjustly accumulated.

Two general algorithms based on opportunity costs are given for approximating a revenue-maximizing set of bids an auctioneer should accept, in a combinatorial auction in which each bidder offers a price for some subset of the available goods and the auctioneer can only accept non-intersecting bids. Since this problem is difficult even to approximate in general, the algorithms are most useful when the bids are restricted to be connected node subsets of an underlying object graph that represents which objects are relevant to each other. The approximation ratios of the algorithms depend on structural properties of this graph and are small constants for many interesting families of object graphs. The running times of the algorithms are linear in the size of the bid graph, which describes the conflicts between bids. Extensions of the algorithms allow for efficient processing of additional constraints, such as budget constraints that associate bids with particular bidders and limit how many bids from a particular bidder can be accepted.

In Chapter 8 we have shown that equilibrium allocations in economies with complete (financial) markets are Pareto optimal . It is also well-known that with incomplete markets, equilibrium allocations typically are not Pareto optimal, as [67] first suggested and as we show for the cases of numeraire, nominal and real assets, and restricted participation in Section 2 1. The above result is relatively intuitive: while in the incomplete market framework households face multiple budget constraints, Pareto optimality presumes a planner who has access to the missing markets and therefore has a higher freedom in reallocating goods. It is then quite natural to investigate if equilibria are at least some sort of second best or, as many authors say, if they are constrained optimal. In other words, we want to compare equilibria with allocations that can be implemented by a planner who is constrained to use only existing assets. More precisely, we want to define what the planner may or may not do consistently with presence of incomplete markets and then compare equilibria without and with planner intervention. If equilibria of the latter type are Pareto superior to equilibria of the former type, then we say that equilibria are constrained suboptimal with respect to the chosen type of planner intervention. In that case, we also say that the planner can Pareto improve upon the competitive equilibria. As we are going to show in Section 6, typically in the space of economies the planner can Pareto improve using “few” taxes and subsidies. The intuition for that result is as follows. Even that limited good reallocations have

The paper presents an extended version of the standard textbook problem of consumer choice. As usual, agents have to decide about their desired quantities of various consumption goods, at the same time taking into account their limited budget. Prices of the goods are not fixed but arise from a Walrasian interaction of total demand and a stylized supply function for each of the goods. After showing that this type of model cannot be solved analytically, three different types of evolutionary algorithms are set up to answer the question whether agents’ behavior according to the rules of these algorithms can solve the problem of extended consumer choice. There are two important answers to this question: a) The quality of the results learned crucially depends on the elasticity of supply, which in turn is shown to be a measure of the degree of state dependency of the economic problem. b) Statistical tests suggest that for the agents in the model it is relatively easy to adhere to the budget constraint, but that it is relatively difficult to reach an optimum with marginal utility per Dollar being equal for each good.

In Chapter 3 we analyzed a number of examples of perfect foresight cycles in overlapping generations models. An important feature of these perfect foresight cycles is that they are equilibrium phenomena: markets clear in every period, agents maximize their utility given their perceived budget constraints and these perceptions are correct in the sense that agents’ expectations with regard to prices equal the realized values of these prices. Especially the assumption of perfect foresight may not be so innocuous as it seems at first sight. It implies that agents have a correctly specifies model of the economy and are able to compute correct expectations using this model. To see that it really requires unbounded rationality note that an agent with perfect foresight or rational expectations approach have led an increasing number of people to study models of learning ( for nice reviews on bounded rationality see Sargent (1993, 1998)).

There has been much attention on the long-run effects of economic activities on the world environment. Although consumption is usually regarded as a measure of private benefit and enhances welfare, some of consumption may adversely affect the quality of environment, resulting in reducing welfare. In the analysis of environmental problems it is important to note that some dirty consumption may accumulate pollution, hurting environmental quality, while voluntary improvement of environmental quality could be employed. It is hence important to explore the implication of abatement behavior. The purpose of this paper is to investigate how the disexternality effects of polluting consumption will affect economic welfare and growth and then to investigate the normative role of Pigovian consumption taxes to internalize these effects.1

Before the story of the soft budget constraint can be told, the analytical framework that gives structure to this story must be established. The soft budget constraint is our central metaphor. Institutions form another, which is almost as crucial. We shall define the soft budget constraint as an institution and thereafter use a third metaphor — an invisible-hand explanation — to tell the story of the emergence, persistence and logic of the soft budget constraint.

The prevalence of the soft budget constraint within the socialist system in Tanzania was not the result of a conspiracy. It was the outcome of an invisible hand. Spontaneous self-reinforcing mechanisms accounted for the prevalence and reproduction of the soft budget constraint, without this being intended by anyone. By ‘taking care’ of the parastatal financing gaps that it contributed to creating, the soft budget constraint made the problems reach the macro-economic level.

The story begins by telling about how the soft budget constraint first emerged within the parastatal sector in Tanzania. It takes off in the late 1960s, when the newly independent East African nation took its first major steps on the road to socialism. Comprehensive ideological, institutional and organisational change initiated a process of gradual creation of a new economic and political system. These developments had tremendous consequences for the parastatal sector, which gained a central position within the system, and for the actors within it. As the system evolved, problems arose that parastatal managers and their counterparts in the state and party bureaucracy had to handle within the new and changing environment. By studying the establishment of the socialist system and the consequences for the parastatal sector during the late 1960s and the 1970s, this chapter examines how the soft budget constraint arose in the process. It characterises the institutional structure and other contextual circumstances under which the actors operated, the problems they faced, the opportunities and constraints for dealing with those and the behavioural outcomes of the incentives thus created. Let us first consider the historical, cultural and ideological setting in which these developments occurred.

The Tanzanian socialist system was plagued by inherent weaknesses. By the end of the 1970s, when the system was firmly established, its performance problems culminated in an acute economic crisis. However, in spite of the crisis, which lasted into the mid-1980s, the system remained remarkably stable throughout the period. As an informal institution, the soft budget constraint was now part of this system. The present chapter studies the development and operation of the soft budget constraint during the economic crisis, and the story continues by describing how and why the soft budget constraint prevailed within the socialist system.

Preface. Part I: Decisions. 1. `Direct' and `Indirect' Duality for Dominance Relations E. Castagnoli, M. Licalzi. 2. Conditional Preferences, Ellsberg Paradoxes and the Sure Thing Principle M. Siniscalchi. Part II: Games. 3. Games with Observable Deviators P. Battigalli. 4. Conjectural Equilibria and Rationalizability in a Game with Incomplete Information P. Battigalli, D. Guaitoli. 5. Lexicographic Rationality Orderings and Iterative Weak Dominance P. Veronesi. Part III: Markets. 6. At the Roots of Indeterminacy A. Bisin. 7. The Information Content of Specialist Pricing: A Dynamic Model S. Brusco. 8. `Laws of Large Numbers' in Continuum Economies F. Corielli. 9. Decentralization, Mobility Costs and the Soft Budget Constraint F. Daveri, F. Panunzi. 10. Equivalence and Duality between the Sets of Pareto-Maximal Allocations and the Sets of Maximal Distributable Surplus Allocations, Including Externalities A. Montesano. 11. Economic Models of Social Learning G. Moscarini, M. Ottaviani. 12. Market Size, the Informational Content of Stock Prices and Risk: A Multiasset Model and Some Evidence M. Pagano. 13. Adoption of Flexible Technologies in an Evolutionary Environment P.L. Sacco, C. Scarpa. Index.

This paper investigates a variety of objectives that are commonly used to motivate government fiscal action. These include, welfare maximization, stabilization and growth maximization. The policies are compared on the basis of their implications for welfare, volatility and growth. We show that stabilization policies can produce welfare levels that are nearly identical to those of welfare maximization policies and that both welfare maximization and stabilization policies yield large welfare gains and modest growth losses relative to growth maximization policies. We also show that there are side issues to stabilization polices. In particular: (1) It is not possible to stabilize all macroeconomic variables simultaneously, even when the number of policy instruments is equal to the number of shocks; (2) stabilizing a particular variable requires increased volatility of some other variable; (3) stabilization requires some flexibility regarding the government’s budget constraint; and, (4) stabilization requires the government to respond in a precise and immediate way to exogenous shocks which hit the economy.

In this paper we study how labor mobility affects the relative desirability of decentralization vs. centralization in addressing soft budget constraint problems. In our framework, the State is in charge of the decision of refinancing a loss-making “strategic” enterprise in a centralized setting. In a decentralized setting, the region where the firm is located takes the decision of whether to continue or stop the activity of the unprofitable firm. However, the possibility of migration of those previously employed in the strategic firm to a neighboring region, shifts part of the burden of the bail—out decision onto the destination region’s shoulders. As a result of labor mobility, the stake of each region in the refinancing process is endogenously determined and depends upon such things as the costs of mobility and the number of job openings in the region of immigration.

A system of equations must satisfy a number of requirements if it is to represent legitimate demand functions. The properties of symmetry and negativity are, for example, required to allow utility maximisation while homogeneity and adding up are needed to satisfy the budget constraint, see Chapter 3 and Deaton and Muellbauer (1980a).

[ I ] Following the work by Barro (1974), which claimed that operative gift- or bequest- motive within each family line neutralizes the intergenerational redistributional effects of social security or government debt, various authors analyzed the household’s gift-bequest behavior in order to examine the validity of Barro’s reasoning [e. g., Carmichael (1982) and Burbidge (1983)], the conditions for operative gift- or bequest-motive [Weil (1987) and Abel (1987)], the optimality property of bequest equilibria [Bernheim ([1989)], and the causes and effects of social security [Laitner (1988) and Hansson and Stuart (1989)].

Suppose, we have to develop a management information system (MIS) for a company, trading and/or manufacturing some kind of goods; and also suppose that there are no budgetary constraints as to computer costs and expenses of systems design and implementation. The creation of such ideal circumstances—even if they are only imaginary — gives us a useful background for discussion on some essential aspects of management and financial accounting. We can disregard conventional ideas about the kind of information that could be generated by an accounting system and we may feel entirely free to choose the information the system should produce.