Hiroaki Hayakawa

Consumer Interdependence via Reference Groups

In solving choice problems under bounded rationality, one relies on “heuristics” provided by social interdependence. Such “heuristics” consist in taking a particular social group as a reference group and in emulating its life-style by acquiring an associated cluster of complementary wants. A preference map generated by this reference-group-taking behavior exhibits smooth indifference curves which are convex to the origin with a “relevant range” over which the marginal rate of substitution is positive and diminishing. However, its implications on consumer choice and welfare economics are significantly different from those of traditional theory.

Bounded Rationality, Social and Cultural Norms, and Interdependence via Reference Groups

This chapter presents an axiomatic theory of preference orderings similar in abstraction to the standard preference model, but developed for the analysis of bounded rationality where social norms and reference groups serve as sources of low-cost heuristics that can absorb costly deliberation and other limits to rationality. A two-step choice process is proposed, in which physical wants are satisfied sequentially with social want reducing choice indeterminacy. Social want is captured by emulation–avoidance of reference groups, and the serviceabilities of a commodity bundle to it are imputed. The resulting norm-guided behavior is rationalizable in the traditional sense.

A dynamic generalization of the tobin model

Abstract The paper studies the stability and the non-neutrality of money issues of the neoclassical monetary growth theory when the liquidity preference function and the price dynamics equation are generalized in the Tobin model. Our generalization introduces Tobins real purchasing power into the liquidity preference function, thereby allowing real balance flows to exert direct income effects. Such effects allow a number of separate cases in the price dynamics behavior, some of which lead to results that differ from the neoclassical propositions. Thus, these propositions are sensitive to the choice of a particular proxy measure of the transactions motives of the demand for money.

Real purchasing power in the neoclassical monetary growth model

Abstract In the one sector neoclassical monetary growth model, the balanced growth path under perfect foresight is a saddle point. The paper demonstrates that this instability problem can be resolved by entering real purchasing power into the liquidity preference function as well as into the consumption function. This process allows an additional mechanism based on income effects in money demand by which a change in real balances can influence the growth path. Stability now depends critically on the size of such income effects given wealth effects from money demand. If stability is restored, the nature of the traditional non-neutrality of money must be qualified.

Does fiscal policy really matter in the context of variable prices

Abstract Blinder and Solows crowding-out analysis is extended by allowing wealth effects of debt accumulation on both aggregate demand and aggregate supply. Two questions are reexamined; (1) the compatibility relationship between the long-run stability and the sign of the instantaneous money and bond multipliers, and (2) the long-run relative expansionary effect of bond financing. Without capital accumulation, real crowding-out may become compatible with stability under both money and bond financing, while nominal crowding-out is not. Normally, this is also true with capital accumulation. Furthermore, bond financing is not necessarily more expansionary than money financing in either real or nominal terms.

Intertemporal optimization and neutrality of money in growth models

Abstract This paper examines the question of the non-neutrality of money in normative monetary growth models, in which the desired paths of consumption and asset accumulation are derived from intertemporal optimization considerations. With the inflation rate determined from the requirement that the ex ante excess flow demand for goods be closed partially or completely by the price adjustment, it is shown that the neutrality of money in such models is invariant to the differences between the neoclassical and the Keynes-Wicksellian market structures.

Rationality of liquidity preferences and the neoclassical monetary growth model

Abstract In the neoclassical monetary growth literature, the rationality condition in the sense of freedom from money illusion is imposed on the demand for nominal balances by assuming that this demand is homogenous of degree one in nominal income and nominal wealth. We argue that the price level should enter into this demand as a separate argument, and that the rationality condition should require that the demand be homogenous of degree one in nominal income, nominal wealth, and the price level. Then, the symmetry issue of the real purchasing power is consequential to the structure of the neoclassical monetary growth model.

The Invisible Hand of Rent Seeking: Capitalism, Democracy, and the Budget Deficits

Historically, social and economic grievances resulted in sociopolitical instability, which served as a medium of institutional changes in the evolution of Western Europe toward a more inclusive regime. In todays democratic capitalism, however, a great many interest groups have burgeoned and acquired political power to seek their own interest at the expense of the welfare of the general public. Interest groups thrive on a tacit agreement with those members of the political body whose primary interest lies in their own aggrandizement. Such agreement inevitably leads to excessive claims on public resources, interferes with the market system by perpetuating rent in many sectors of the economy, erodes the moral values of trust and respect, and causes moral hazard among the legislators by undermining budgetary discipline. Moreover, the inevitable friction among the legislators often results in gridlock in public decision making. The democratic capitalism thus is losing on both ends: the market efficiency and political efficacy, with reduced prospect of economic growth. This paper attempts to explain these phenomena as a strategic equilibrium of the major players in the politico-economic arena.

Consistency of flow equilibrium specification of asset market with transactions theory of demand for money

Abstract The balance sheet identity, as a limiting form of the discrete time household budget constraint, fails to support the IS-LM model. A flow equilibrium model based on conservation principles is consistent with the transactions theory of the money demand.

Preference ordering under a pigovian emulative system

More than two decades ago Kenneth Arrow sharpened the theory o f social choice by distinguishing between individual tastes and values [2, p. 18]. In principle, he pointed out that the preference ordering by values of the individual, being inclusive o f all his desires, is primarily relevant for social choice and for the achievement o f a social maximum. Along with Arrow, and in an invidious system, it may also be argued that the preference ordering based on social values of emulat ion is primarily determinate for the choice and the satisfaction of the individual. The effects of social values of emulation, or, more generally, effects of interdependence or externalities, on the preference ordering and on the demand of an individual have been well explored in the literature [18, 14, 8, 13, 5~ 10, 17, 11,9 , 3, 6, 7]. Previously, however, such effects have been treated almost always as giving rise to a nonfunctional component o f demand. What has not been treated in greater depth is the question: what happens if social values of emulat ion completely dominate the preference ordering of the individual? The objective of this paper is four-fold. First, we shall give a more precise meaning to social values of emulation, and thus identify reference-group-taking as the mechanism by which distinction is sought (Section I). Second, we present a static model of the preference ordering according to social values of emulat ion (Section II). Third, we introduce a particular way of looking at dynamic changes of an individual s preferences in the context of the emulative system (Section III). Fourth , we discuss some implications of this model upon the theory of consumer choice and on welfare economics (Section IV).