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Economics for an Imperfect World
“Its size and scope make this remarkable volume a fitting tribute to o
m Essays in Honor of Joseph E.Stiglitz
Joe Stiglitz’s remarkable career. Its astounding quality and breadth, and
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amazing list of authors, make it a feast for economic theorists.” s Economics for an Imperfect World edited by Richard Arnott,
Bruce Greenwald,
f
—Alan S. Blinder,Gordon S. Rentschler Memorial Professor of Economics,
o
Ravi Kanbur,
r Essays in Honor of Joseph E. Stiglitz
Princeton University and Barry Nalebuff
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Contributors
Throughout Joseph Stiglitz’s long and distinguished
p
e career in economics, the focus of his work has been
George A. Akerlof Mark Gersovitz Pierre Pestieau r 3on the real world, with all of its imperfections. His 2001
f
Franklin Allen Richard J. Gilbert Pierre Picard e 8 Nobel Prize recognized his pioneering research in
Richard Arnott Jacob Glazer Patrick Rey c edited by Richard Arnott, imperfect information; his work in other areas, including
t
A. B. Atkinson Bruce Greenwald Andrew K. Rose macroeconomics, public economics, and develop-
W Bruce Greenwald,
Kenneth Arrow Geoffrey Heal Thomas Russell menteconomics, has been just as influential.This vol-
Costas Azariadis Karla Hoff Paul A. Samuelson o ume, a collection of essays written to markStiglitz’s
Ravi Kanbur,
Kaushik Basu Dwight Jaffee Raaj Sah r sixtieth birthday, reflects the wide-ranging influence of
l
David L. Bevan Ravi Kanbur Steven Salop d and Barry Nalebuff “Stiglitzian” economics. The many distinguished con-
Robin Boadway Michael L. Katz Robert M. Solow tributors are his teachers, students, andcoauthors;
Margaret Bray Luisa Lambertini Nicholas Stern their participation testifies to the personal and profes-
William Brock Jonathan Levin Anthony J. Venables sional impact of Joseph Stiglitz’s contributions to con-
Partha Dasgupta Richard Levin Kenji Wada temporary economic theory and practice.
Arnott,
Paul A. David Karl-Göran Mäler Jörgen W. Weibull Richard Arnott is Professor of Economics at
Greenwald,
Avinash Dixit Serge Moresi Andrew Weiss Boston College. Bruce Greenwald is Robert Heilbrunn
Kanbur,
Aaron S. Edlin Barry Nalebuff Anastasios Xepapadeas Professor of Finance and Asset Management in the
Joseph Farrell J. Peter Neary Janet L. Yellen and Nalebuff, Finance and Economics Division of Columbia Business
Douglas Gale David M. Newbery editors School. Ravi Kanbur is T. H. Lee Professor of World
Affairs and Professor of Economics at Cornell University.
Barry Nalebuff is Milton Steinbach Professor of Man-
agement at the Yale School of Management.
,!7IA2G2-abcafi!:t;K;k;K;k The MIT Press
Massachusetts Institute of Technology
Cambridge, Massachusetts 02142
http://mitpress.mit.edu
0-262-01205-7
Economics for an
Imperfect World
Economics for an
Imperfect World
Essays in Honor of
Joseph E. Stiglitz
Edited by
Richard Arnott
Bruce Greenwald
Ravi Kanbur
Barry Nalebuff
The MIT Press
Cambridge, Massachusetts
London, England
(2003MassachusettsInstituteofTechnology
All rights reserved. No part of this book may be reproduced in any form by any
electronic or mechanical means (including photocopying, recording, or information
storageandretrieval)withoutpermissioninwritingfromthepublisher.
This book was set in Palatino on 3B2 by Asco Typesetters, Hong Kong, and was
printedandboundintheUnitedStatesofAmerica.
LibraryofCongressCataloging-in-PublicationData
Economicsforanimperfectworld:essaysinhonorofJosephE.Stiglitz/editedby
RichardArnott...[etal.].
p. cm.
Includesbibliographicalreferencesandindex.
ISBN0-262-01205-7(hc.:alk.paper)
1.Informationtheoryineconomics. 2.Rickmanagement. 3.Uncertainty. 4.Multiple
criteriadecisionmaking. I.Stiglitz,JosephE. II.Arnott,Richard.
HB133.E32003
3300.010154—dc21 2003046470
Contents
Introduction 1
1 Joseph E. Stiglitz and Economics for an Imperfect World 3
Richard Arnott, Bruce Greenwald, Ravi Kanbur, and Barry
Nalebuff
I Imperfect Information 9
2 A Small Pearl for Doctor Stiglitz’s Sixtieth Birthday: When Risk
Averters Positively Relish ‘‘Excess Volatility’’ 11
Paul A. Samuelson
3 On the Role of Good Faith in Insurance Contracting 17
Avinash Dixit and Pierre Picard
4 Markets under Stress: The Case of Extreme Event
Insurance 35
Dwight Jaffee and Thomas Russell
5 Per-Mile Premiums for Auto Insurance 53
Aaron S. Edlin
6 Capital Adequacy Regulation: In Search of a Rationale 83
Franklin Allen and Douglas Gale
7 Learning Revisited 111
Margaret Bray
vi Contents
8 Regulating Nonlinear Environmental Systems under Knightian
Uncertainty 127
William Brock and Anastasios Xepapadeas
9 Conflicting Preferences and Voluntary Restrictions on
Choices 145
Jacob Glazer and Andrew Weiss
10 Punctuality: A Cultural Trait as Equilibrium 163
Kaushik Basu and Jo¨rgen W. Weibull
11 A Few Righteous Men: Imperfect Information, Quit-for-Tat, and
Critical Mass in the Dynamics of Cooperation 183
Serge Moresi and Steven Salop
12 Market Structure, Organizational Structure, and R&D
Diversity 195
Joseph Farrell, Richard J. Gilbert, and Michael L. Katz
13 Patent Oppositions 221
Jonathan Levin and Richard Levin
14 The Economics of Vertical Restraints 247
Patrick Rey
II Macroeconomics, Public Economics, and Development 269
15 Stumbling Toward a Macroeconomics of the Medium Run 271
Robert M. Solow
16 Waiting for Work 283
George A. Akerlof, Andrew K. Rose, and Janet L. Yellen
17 Welfare Economics in Imperfect Economies 299
Kenneth Arrow, Partha Dasgupta and Karl-Go¨ran Ma¨ler
18 Optimality or Sustainability? 331
Geoffrey Heal
Contents vii
19 Labor Market Flexibility and the Welfare State 349
A. B. Atkinson
20 The Fiscal Politics of Big Governments: Do Coalitions
Matter? 367
Luisa Lambertini and Costas Azariadis
21 Indirect Taxation and Redistribution: The Scope of the Atkinson-
Stiglitz Theorem 387
Robin Boadway and Pierre Pestieau
22 Optimum Income Taxation When Earnings Are Imperfectly
Correlated with Productivity 405
David L. Bevan
23 Can Government Collect Resources without Hurting Investors?
Taxation of Returns from Assets 419
Raaj Sah and Kenji Wada
24 Reforming the Taxation of Human Capital: A Modest Proposal
for Promoting Economic Growth 439
Paul A. David
25 Birth, Recoveries, Vaccinations, and Externalities 469
Mark Gersovitz
26 The Road Less Traveled: Oligopoly and Competition Policy in
General Equilibrium 485
J. Peter Neary
27 Trade, Geography, and Monopolistic Competition: Theory and
an Application to Spatial Inequalities in Developing
Countries 501
Anthony J. Venables
28 Public Policy for Growth and Poverty Reduction 519
Nicholas Stern
viii Contents
29 Risk, Reform, and Privatization 535
David M. Newbery
30 Can Privatization Come Too Soon? Politics after the Big Bang in
Post-Communist Societies 549
Karla Hoff
Appendix 567
31 Information and the Change in the Paradigm in
Economics 569
Joseph E. Stiglitz
32 Joseph E. Stiglitz Bibliography 641
Index 683
Introduction
