Edward J. Green

Implementing efficient allocations in a model of financial intermediation

In a finite-trader version of the Diamond-Dybvig (1983) model, the symmetric, ex-ante efficient allocation is implementable by a direct mechanism (i.e., each trader announces the type of his own ex-post preference) in which truthful revelation is the strictly dominant strategy for each trader. When the model is modified by formalizing the sequential-service constraint (cf. Wallace, 1988), the truth-telling equilibrium implements the symmetric, ex-ante efficient allocation with respect to iterated elimination of strictly dominated strategies.

Continuum and Finite-Player Noncooperative Models of Competition

The anonymous interaction of large numbers of economic agents is a kind of noncooperative situation which is markedly different from small-numbers strategic conflict. The mathematical model of a nonatomic game, or a game with a continuum of players, has been introduced as a model for these many-agent situations on the basis that its equilibria should closely approximate those of games with large finite numbers of players. This paper contains a precise definition of what it means for a nonatomic game to be the limit of a sequence of finite-player games, and a theorem which states when the limit of equilibria of finite-player games will be an equilibrium of the nonatomic limit game. This is analogous to theorems prompted by Edgeworths conjecture in core theory. It is derived from a general set of sufficient conditions for the graph of a noncooperative equilibrium correspondence to be closed.

Dynamic Monetary Equilibrium in a Random Matching Economy

This article concerns an infinite horizon economy where trade must occur pairwise, using a double auction mechanism, and where fiat money overcomes lack of double coincidence of wants. Traders are anonymous and lack market power. Goods are divisible and perishable, and are consumed at every date. Preferences are defined by utility-stream overtaking. Money is divisible and not subject to inventory constraints. The evolution of individual and economywide money holdings distributions is characterized. There is a welfare-ordered continuum of single price equilibria, reflecting indeterminacy of the price level rather than of relative prices.

Money as a Mechanism in a Bewley Economy

We study what features an economic environment might possess, such that it would be Pareto efficient for the exchange of goods in that environment to be conducted on spot markets where those goods trade for money. We prove a conjecture that is essentially due to Bewley [1980, 1983]. Monetary spot trading is nearly efficient when there is only a single perishable good (or a composite commodity) at each date and state of the world; random shocks are idiosyncratic, privately observed, and temporary; markets are competitive; and the agents are very patient. This result is a fairly close analogue, for trade using outside, fiat money, of a recent characterization by Levine and Zame [2002] of environments in which spot trade using inside money, in the form of one-period debt payable in a commodity, is nearly Pareto efficient. We also study a example where expansionary monetary mechanism Pareto dominates laissez-faire or contractionary monetary mechanism in an environment with impatient agents.

Contracts, Constraints and Consumption

The paper compares implications of three kinds of models of households’ consumption behavior: the basic permanent-income model, several models of liquidity-constrained households, and a model of an informationally-constrained efficient contract. These models are distinguished in terms of implications regarding the present discounted values of net trades to households at various levels of temporary income, and the households’ marginal rates of substitution. Martingale consumption is studied as an approximation to the predicted consumption process of the efficient-contract model.

A Revealed Preference Theory for Expected Utility

Standard axiomatizations of expected-utility theory envision an agent with fixed probability assessments who can be observed to choose actions from varying opportunity sets (for instance, pairs of lotteries). These axiomatizations also envision that the agents preferences among these actions depend on the state of nature only through clearly defined and observable consequences. This viewpoint may be unnecessarily restrictive as a basis for applying and evaluating the theory. We study instead the pattern of choices from a fixed set of actions as probability assessments change. Convexity and integrability conditions characterize maximization of expected state-dependent utility.

A Review of Interest and Prices: Foundations of a Theory of Monetary Policy by Michael Woodford

This is a review article of Interests and Prices: Foundations of a Theory of Monetary Policy (Princeton University Press 2003) by Michael Woodford.

Incentive efficient risk sharing in a settlement mechanism

The purpose of this paper is to address a question concerning risk management in continuing, multi-party, contractual, clearing and settlement arrangements through which large-value payments are typically made. We are particularly interested in the issues of incentive compatibility when a third party possesses a private information concerning the riskiness of transfers being made. If a third party possesses private information that would be of value in determining how best to settle a payment, how does the exposure of that party to the settlement risk affect the quality of information that the party chooses to provide? In this paper, we address this question by analyzing a specific class of parametric environments of a schematic, formal, model of a settlement arrangement or a payment network.

Bayes contingent plans

Abstract An intuitively natural consistency condition for contingent plans is necessary and sufficient for a contingent plan to be rationalized by maximization of conditional expected utility. One alternative theory of choice under uncertainty, the weighted-utility theory developed by Chew (1983) does not entail that contingent plans will generally satisfy this condition. Another alternative theory, the minimax theory as formulated by Savage (1972), does entail the consistency condition (at least for singleton-valued plans).

Classical statistics as a theory of incentives

Abstract The use of likelihood-ratio contracts in principal-agent situations is common. They are known to be optimal for the principal in complete-information situations, although they do not take explicit account of the strategic interaction between principal and agent. This paper extends the comparison between Bayesian-Nash equilibrium and likelihood-ratio contracts to incomplete-information environments. It is shown that likelihood-ratio contracts may be equilibrium contracts when the principal is ignorant of the agents costs, but that they typically are not when the agent has private information about the effects of his action.