19 results
2 - Liquidity and monetary policy
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- By Douglas Gale
- Edited by Jagjit S. Chadha, University of Kent, Canterbury, Sean Holly, University of Cambridge
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- Book:
- Interest Rates, Prices and Liquidity
- Published online:
- 05 November 2011
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- 27 October 2011, pp 32-70
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Summary
Introduction
In the period leading up to the financial crisis of 2007–8, financial institutions of all sorts increased their leverage in the wholesale markets, relying heavily on collateralised borrowing in the form of repurchase agreements (‘repos’) and issuance of asset-backed commercial paper (ABCP). As the crisis approached, lenders became nervous and significantly shortened the maturity of the loans they were prepared to make. When the crisis hit, the disappearance of short-term funding created severe problems for many financial institutions. Some large firms failed and further failures were prevented only by the intervention of the central banks.
Although the origin of the crisis may have been the US sub-prime mortgage market, the early stages looked like a crisis of liquidity provision. At the end of July 2007, two Bear Stearns funds filed for bankruptcy and a third suspended redemptions. More bad news followed and then, on 7 August, BNP Paribas halted redemptions from three investment funds because it could not ‘fairly’ calculate their net asset value (NAV). Potential investors, mainly money market mutual funds (MMF), declined to roll over their purchases of ABCP. Since many of the vehicles that comprised the parallel banking system (PBS) were sponsored by banks and/or had liquidity guarantees from banks, there was a fear that these assets would end up on bank balance sheets. This in turn raised concerns about counterparty risk among the banks and caused LIBOR to shoot upwards. The European central bank was forced to inject €95 billion in overnight lending into the market in order to cope with the demand for liquidity (Acharya et al., 2010).
Contributors
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- By Rose Teteki Abbey, K. C. Abraham, David Tuesday Adamo, LeRoy H. Aden, Efrain Agosto, Victor Aguilan, Gillian T. W. Ahlgren, Charanjit Kaur AjitSingh, Dorothy B E A Akoto, Giuseppe Alberigo, Daniel E. Albrecht, Ruth Albrecht, Daniel O. Aleshire, Urs Altermatt, Anand Amaladass, Michael Amaladoss, James N. Amanze, Lesley G. Anderson, Thomas C. Anderson, Victor Anderson, Hope S. Antone, María Pilar Aquino, Paula Arai, Victorio Araya Guillén, S. Wesley Ariarajah, Ellen T. Armour, Brett Gregory Armstrong, Atsuhiro Asano, Naim Stifan Ateek, Mahmoud Ayoub, John Alembillah Azumah, Mercedes L. García Bachmann, Irena Backus, J. Wayne Baker, Mieke Bal, Lewis V. Baldwin, William Barbieri, António Barbosa da Silva, David Basinger, Bolaji Olukemi Bateye, Oswald Bayer, Daniel H. Bays, Rosalie Beck, Nancy Elizabeth Bedford, Guy-Thomas Bedouelle, Chorbishop Seely Beggiani, Wolfgang Behringer, Christopher M. Bellitto, Byard Bennett, Harold V. Bennett, Teresa Berger, Miguel A. Bernad, Henley Bernard, Alan E. Bernstein, Jon L. Berquist, Johannes Beutler, Ana María Bidegain, Matthew P. Binkewicz, Jennifer Bird, Joseph Blenkinsopp, Dmytro Bondarenko, Paulo Bonfatti, Riet en Pim Bons-Storm, Jessica A. Boon, Marcus J. Borg, Mark Bosco, Peter C. Bouteneff, François Bovon, William D. Bowman, Paul S. Boyer, David Brakke, Richard E. Brantley, Marcus Braybrooke, Ian Breward, Ênio José da Costa Brito, Jewel Spears Brooker, Johannes Brosseder, Nicholas Canfield Read Brown, Robert F. Brown, Pamela K. Brubaker, Walter Brueggemann, Bishop Colin O. Buchanan, Stanley M. Burgess, Amy Nelson Burnett, J. Patout Burns, David B. Burrell, David Buttrick, James P. Byrd, Lavinia Byrne, Gerado Caetano, Marcos Caldas, Alkiviadis Calivas, William J. Callahan, Salvatore Calomino, Euan K. Cameron, William S. Campbell, Marcelo Ayres Camurça, Daniel F. Caner, Paul E. Capetz, Carlos F. Cardoza-Orlandi, Patrick W. Carey, Barbara Carvill, Hal Cauthron, Subhadra Mitra Channa, Mark D. Chapman, James H. Charlesworth, Kenneth R. Chase, Chen Zemin, Luciano Chianeque, Philip Chia Phin Yin, Francisca H. Chimhanda, Daniel Chiquete, John T. Chirban, Soobin Choi, Robert Choquette, Mita Choudhury, Gerald Christianson, John Chryssavgis, Sejong Chun, Esther Chung-Kim, Charles M. A. Clark, Elizabeth A. Clark, Sathianathan Clarke, Fred Cloud, John B. Cobb, W. Owen Cole, John A Coleman, John J. Collins, Sylvia Collins-Mayo, Paul K. Conkin, Beth A. Conklin, Sean Connolly, Demetrios J. Constantelos, Michael A. Conway, Paula M. Cooey, Austin Cooper, Michael L. Cooper-White, Pamela Cooper-White, L. William Countryman, Sérgio Coutinho, Pamela Couture, Shannon Craigo-Snell, James L. Crenshaw, David Crowner, Humberto Horacio Cucchetti, Lawrence S. Cunningham, Elizabeth Mason Currier, Emmanuel Cutrone, Mary L. Daniel, David D. Daniels, Robert Darden, Rolf Darge, Isaiah Dau, Jeffry C. Davis, Jane Dawson, Valentin Dedji, John W. de Gruchy, Paul DeHart, Wendy J. Deichmann Edwards, Miguel A. De La Torre, George E. Demacopoulos, Thomas de Mayo, Leah DeVun, Beatriz de Vasconcellos Dias, Dennis C. Dickerson, John M. Dillon, Luis Miguel Donatello, Igor Dorfmann-Lazarev, Susanna Drake, Jonathan A. Draper, N. Dreher Martin, Otto Dreydoppel, Angelyn Dries, A. J. Droge, Francis X. D'Sa, Marilyn Dunn, Nicole Wilkinson Duran, Rifaat Ebied, Mark J. Edwards, William H. Edwards, Leonard H. Ehrlich, Nancy L. Eiesland, Martin Elbel, J. Harold Ellens, Stephen Ellingson, Marvin M. Ellison, Robert Ellsberg, Jean Bethke Elshtain, Eldon Jay Epp, Peter C. Erb, Tassilo Erhardt, Maria Erling, Noel Leo Erskine, Gillian R. Evans, Virginia Fabella, Michael A. Fahey, Edward Farley, Margaret A. Farley, Wendy Farley, Robert Fastiggi, Seena Fazel, Duncan S. Ferguson, Helwar Figueroa, Paul Corby Finney, Kyriaki Karidoyanes FitzGerald, Thomas E. FitzGerald, John R. Fitzmier, Marie Therese Flanagan, Sabina Flanagan, Claude Flipo, Ronald B. Flowers, Carole Fontaine, David Ford, Mary Ford, Stephanie A. Ford, Jim Forest, William Franke, Robert M. Franklin, Ruth Franzén, Edward H. Friedman, Samuel Frouisou, Lorelei F. Fuchs, Jojo M. Fung, Inger Furseth, Richard R. Gaillardetz, Brandon Gallaher, China Galland, Mark Galli, Ismael García, Tharscisse Gatwa, Jean-Marie Gaudeul, Luis María Gavilanes del Castillo, Pavel L. Gavrilyuk, Volney P. Gay, Metropolitan Athanasios Geevargis, Kondothra M. George, Mary Gerhart, Simon Gikandi, Maurice Gilbert, Michael J. Gillgannon, Verónica Giménez Beliveau, Terryl Givens, Beth Glazier-McDonald, Philip Gleason, Menghun Goh, Brian Golding, Bishop Hilario M. Gomez, Michelle A. Gonzalez, Donald K. Gorrell, Roy Gottfried, Tamara Grdzelidze, Joel B. Green, Niels Henrik Gregersen, Cristina Grenholm, Herbert Griffiths, Eric W. Gritsch, Erich S. Gruen, Christoffer H. Grundmann, Paul H. Gundani, Jon P. Gunnemann, Petre Guran, Vidar L. Haanes, Jeremiah M. Hackett, Getatchew Haile, Douglas John Hall, Nicholas Hammond, Daphne Hampson, Jehu J. Hanciles, Barry Hankins, Jennifer Haraguchi, Stanley S. Harakas, Anthony John Harding, Conrad L. Harkins, J. William Harmless, Marjory Harper, Amir Harrak, Joel F. Harrington, Mark W. Harris, Susan Ashbrook Harvey, Van A. Harvey, R. Chris Hassel, Jione Havea, Daniel Hawk, Diana L. Hayes, Leslie Hayes, Priscilla Hayner, S. Mark Heim, Simo Heininen, Richard P. Heitzenrater, Eila Helander, David Hempton, Scott H. Hendrix, Jan-Olav Henriksen, Gina Hens-Piazza, Carter Heyward, Nicholas J. Higham, David Hilliard, Norman A. Hjelm, Peter C. Hodgson, Arthur Holder, M. Jan Holton, Dwight N. Hopkins, Ronnie Po-chia Hsia, Po-Ho Huang, James Hudnut-Beumler, Jennifer S. Hughes, Leonard M. Hummel, Mary E. Hunt, Laennec Hurbon, Mark Hutchinson, Susan E. Hylen, Mary Beth Ingham, H. Larry Ingle, Dale T. Irvin, Jon Isaak, Paul John Isaak, Ada María Isasi-Díaz, Hans Raun Iversen, Margaret C. Jacob, Arthur James, Maria Jansdotter-Samuelsson, David Jasper, Werner G. Jeanrond, Renée Jeffery, David Lyle Jeffrey, Theodore W. Jennings, David H. Jensen, Robin Margaret Jensen, David Jobling, Dale A. Johnson, Elizabeth A. Johnson, Maxwell E. Johnson, Sarah Johnson, Mark D. Johnston, F. Stanley Jones, James William Jones, John R. Jones, Alissa Jones Nelson, Inge Jonsson, Jan Joosten, Elizabeth Judd, Mulambya Peggy Kabonde, Robert Kaggwa, Sylvester Kahakwa, Isaac Kalimi, Ogbu U. Kalu, Eunice Kamaara, Wayne C. Kannaday, Musimbi Kanyoro, Veli-Matti Kärkkäinen, Frank Kaufmann, Léon Nguapitshi Kayongo, Richard Kearney, Alice A. Keefe, Ralph Keen, Catherine Keller, Anthony J. Kelly, Karen Kennelly, Kathi Lynn Kern, Fergus Kerr, Edward Kessler, George Kilcourse, Heup Young Kim, Kim Sung-Hae, Kim Yong-Bock, Kim Yung Suk, Richard King, Thomas M. King, Robert M. Kingdon, Ross Kinsler, Hans G. Kippenberg, Cheryl A. Kirk-Duggan, Clifton Kirkpatrick, Leonid Kishkovsky, Nadieszda Kizenko, Jeffrey Klaiber, Hans-Josef Klauck, Sidney Knight, Samuel Kobia, Robert Kolb, Karla Ann Koll, Heikki Kotila, Donald Kraybill, Philip D. W. Krey, Yves Krumenacker, Jeffrey Kah-Jin Kuan, Simanga R. Kumalo, Peter Kuzmic, Simon Shui-Man Kwan, Kwok Pui-lan, André LaCocque, Stephen E. Lahey, John Tsz Pang Lai, Emiel Lamberts, Armando Lampe, Craig Lampe, Beverly J. Lanzetta, Eve LaPlante, Lizette Larson-Miller, Ariel Bybee Laughton, Leonard Lawlor, Bentley Layton, Robin A. Leaver, Karen Lebacqz, Archie Chi Chung Lee, Marilyn J. Legge, Hervé LeGrand, D. L. LeMahieu, Raymond Lemieux, Bill J. Leonard, Ellen M. Leonard, Outi Leppä, Jean Lesaulnier, Nantawan Boonprasat Lewis, Henrietta Leyser, Alexei Lidov, Bernard Lightman, Paul Chang-Ha Lim, Carter Lindberg, Mark R. Lindsay, James R. Linville, James C. Livingston, Ann Loades, David Loades, Jean-Claude Loba-Mkole, Lo Lung Kwong, Wati Longchar, Eleazar López, David W. Lotz, Andrew Louth, Robin W. Lovin, William Luis, Frank D. Macchia, Diarmaid N. J. MacCulloch, Kirk R. MacGregor, Marjory A. MacLean, Donald MacLeod, Tomas S. Maddela, Inge Mager, Laurenti Magesa, David G. Maillu, Fortunato Mallimaci, Philip Mamalakis, Kä Mana, Ukachukwu Chris Manus, Herbert Robinson Marbury, Reuel Norman Marigza, Jacqueline Mariña, Antti Marjanen, Luiz C. L. Marques, Madipoane Masenya (ngwan'a Mphahlele), Caleb J. D. Maskell, Steve Mason, Thomas Massaro, Fernando Matamoros Ponce, András Máté-Tóth, Odair Pedroso Mateus, Dinis Matsolo, Fumitaka Matsuoka, John D'Arcy May, Yelena Mazour-Matusevich, Theodore Mbazumutima, John S. McClure, Christian McConnell, Lee Martin McDonald, Gary B. McGee, Thomas McGowan, Alister E. McGrath, Richard J. McGregor, John A. McGuckin, Maud Burnett McInerney, Elsie Anne McKee, Mary B. McKinley, James F. McMillan, Ernan McMullin, Kathleen E. McVey, M. 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Phan, Isabel Apawo Phiri, William S. F. Pickering, Derrick G. Pitard, William Elvis Plata, Zlatko Plese, John Plummer, James Newton Poling, Ronald Popivchak, Andrew Porter, Ute Possekel, James M. Powell, Enos Das Pradhan, Devadasan Premnath, Jaime Adrían Prieto Valladares, Anne Primavesi, Randall Prior, María Alicia Puente Lutteroth, Eduardo Guzmão Quadros, Albert Rabil, Laurent William Ramambason, Apolonio M. Ranche, Vololona Randriamanantena Andriamitandrina, Lawrence R. Rast, Paul L. Redditt, Adele Reinhartz, Rolf Rendtorff, Pål Repstad, James N. Rhodes, John K. Riches, Joerg Rieger, Sharon H. Ringe, Sandra Rios, Tyler Roberts, David M. Robinson, James M. Robinson, Joanne Maguire Robinson, Richard A. H. Robinson, Roy R. Robson, Jack B. Rogers, Maria Roginska, Sidney Rooy, Rev. Garnett Roper, Maria José Fontelas Rosado-Nunes, Andrew C. Ross, Stefan Rossbach, François Rossier, John D. Roth, John K. Roth, Phillip Rothwell, Richard E. 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Yee, Viktor Yelensky, Yeo Khiok-Khng, Gustav K. K. Yeung, Angela Yiu, Amos Yong, Yong Ting Jin, You Bin, Youhanna Nessim Youssef, Eliana Yunes, Robert Michael Zaller, Valarie H. Ziegler, Barbara Brown Zikmund, Joyce Ann Zimmerman, Aurora Zlotnik, Zhuo Xinping
- Edited by Daniel Patte, Vanderbilt University, Tennessee
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- The Cambridge Dictionary of Christianity
- Published online:
- 05 August 2012
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- 20 September 2010, pp xi-xliv
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2 - Corporate Governance and Competition
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- By Franklin Allen, University of Pennsylvania, Douglas Gale, New York University
- Edited by Xavier Vives
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- Corporate Governance
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- 05 June 2012
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- 02 October 2000, pp 23-94
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Summary
Introduction
In most countries, managers of corporations are legally responsible to the shareholders. In their seminal contribution on the separation of ownership and control, Berle and Means (1932) argue that in practice managers do not pursue the interests of shareholders. Instead they pursue their own interests, which results in waste and inefficiency. The contrast between the legal rights of shareholders and the de facto control of managers highlighted by Berle and Means led to the development of the agency approach to corporate governance (see, among others, Coase 1937; Jensen and Meckling 1976; Fama and Jensen 1983a,b; and Hart 1995). An excellent survey is contained in Shleifer and Vishny (1997).
The agency theory of corporate governance focuses on the question:
“How can shareholders ensure that managers pursue the shareholders' interests.”
We argue that this focus is much too narrow. A comparison of governance mechanisms in different countries and in different sectors of the economy suggests that an alternative approach is called for.
In Section 2, we review the actual operation of corporate governance in the United States, United Kingdom, Germany, France, and Japan. In the United States and United Kingdom, the mechanisms for ensuring that managers operate in the interests of shareholders are the strongest. The main internal governance system is the board of directors; the main external governance system is the market for corporate control. The effectiveness of both mechanisms has been widely questioned.
Contents
- Douglas Gale, New York University
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- Strategic Foundations of General Equilibrium
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- 22 September 2009
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- 15 August 2000, pp ix-x
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2 - Perfect competition
- Douglas Gale, New York University
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- Strategic Foundations of General Equilibrium
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- 22 September 2009
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- 15 August 2000, pp 41-109
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5 - Afterthoughts
- Douglas Gale, New York University
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- Strategic Foundations of General Equilibrium
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- 22 September 2009
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- 15 August 2000, pp 204-207
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Summary
When Adam Smith wrote about the working of the invisible hand, how it led self-interested individuals to act in a way that furthered the efficient allocation of resources, he had in mind an economy that was already decentralized and complex. In this economy, each individual was a small part and had little knowledge of the whole. These individuals pursued their own narrow interests with little thought for the rest of the complex process that constituted the life of the economy. That order could come from the uncoordinated decisions of these agents is still an amazing insight.
The theory of competitive general equilibrium that culminated in the the Arrow–Debreu–McKenzie (ADM) model is a beautiful formalization of Smith's insight. It remains the best rationalization we have of the viability of the market system. It also provides an analytical model that is still the workhorse of many areas of economics. But in spite of its subtlety and power, the ADM model hardly does justice to the richness of Smith's vision. The decision-making framework represented by the ADM model, which we take to be the paradigm of perfect competition, reduces the whole economy to a single auction market. Although the ADM model can be interpreted as a theory of general equilibrium in a complete economy, it does not take seriously the distinction between partial and general equilibrium. It allows for any number of commodities, even an infinite number, and this is often interpreted as meaning that there is a large number of markets.
Index
- Douglas Gale, New York University
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- Strategic Foundations of General Equilibrium
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- 22 September 2009
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- 15 August 2000, pp 214-219
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Acknowledgments
- Douglas Gale, New York University
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- Strategic Foundations of General Equilibrium
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- 22 September 2009
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- 15 August 2000, pp xi-xii
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References
- Douglas Gale, New York University
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- Strategic Foundations of General Equilibrium
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- 22 September 2009
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- 15 August 2000, pp 208-213
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Strategic Foundations of General Equilibrium
- Dynamic Matching and Bargaining Games
- Douglas Gale
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- 22 September 2009
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- 15 August 2000
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The theory of competition has held a central place in economic analysis since Adam Smith. This book, written by one of the most distinguished of contemporary economic theorists, reports on a major research program to provide strategic foundations for the theory of perfect competition. Beginning with a concise survey of how the theory of competition has evolved, Gale makes extensive and rigorous use of dynamic matching and bargaining models to provide a more complete description of how a competitive equlibrium is achieved. Whereas economists have made use of a macroscopic description of markets in which certain behavioral characteristics, such as price-taking behavior, are taken for granted, Gale uses game theory to re-evaluate this assumption, beginning with individual agents and modelling their strategic interaction. A strategic foundation for competitive equilibrium shows how such interaction leads to competitive, price-taking behavior. Essential reading for graduate courses in game theory and general equilibrium.
3 - Continuity and anonymity
- Douglas Gale, New York University
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- Strategic Foundations of General Equilibrium
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- 22 September 2009
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Summary
Chapter 2 presented a theory of dynamic matching and bargaining games (DMBG) with a finite number of agents. This theory is more difficult than the corresponding theory for a continuum economy, chiefly because of the strategic problems that arise in finite games. The theory of bargaining deals with small numbers of players, usually only two, and strategic issues arising in these sorts of bargaining problems have been exhaustively studied. Bargaining in markets with a large but finite number of agents is still relatively unexplored territory, however. One of the few papers dealing with this topic is the innovative and imaginative paper of Rubinstein and Wolinsky (1990). It is well worth reviewing the results in this paper because they reinforce the lessons drawn from chapter 2 about the importance of Markov strategies, anonymity, and continuity.
Rubinstein and Wolinsky (1990)
Rubinstein and Wolinsky (1990, hereafter RW) contains a rich array of models, illustrating the importance of different informational and institutional assumptions in the analysis of DMBG. As a benchmark, RW begins with a model in which the matching process is exogenous. There are S sellers and B > S buyers in the market. Each seller has one unit of an indivisible good which is worth nothing to him. Each buyer wants to buy at most one unit of the indivisible good, which is worth one dollar to him.
1 - Markets and games
- Douglas Gale, New York University
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- Strategic Foundations of General Equilibrium
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- 22 September 2009
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- 15 August 2000, pp 1-40
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Summary
Strategic foundations of perfect competition
In these lectures I report on a research program that began in the early 1980s. It is part of a larger effort, underway for a much longer time, to provide strategic foundations for the theory of perfect competition. The theory of competition has held a central place in economic analysis since the time of Adam Smith (1976). By providing strategic foundations for the theory of competition, economists use the principles of game theory to motivate or justify a macroscopic description of markets in which certain behavioral characteristics, such as price-taking behavior, are taken for granted. Game theory begins with individual agents and models their strategic interaction. A strategic foundation for competitive equilibrium must show how strategic interaction by rational agents leads to competitive, price-taking behavior. In practice, this research program includes the following three steps:
1. First, describe a market or a whole economy.
In this step, the economist has to specify the commodities traded, the agents (households and firms) that make up the market or economy, their preferences, their resources, and the available technology.
2. Secondly, define an extensive-form market game describing the behavior of the agents in the market or economy.
In this step, the economist has to specify the players, the information available to each player, the strategies available to them, the outcomes resulting from their choices, and the payoffs received.
4 - Bounded rationality
- Douglas Gale, New York University
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- Strategic Foundations of General Equilibrium
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- 22 September 2009
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- 15 August 2000, pp 157-203
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Summary
In chapter 3, we appealed to a variety of notions of bounded rationality and simplicity to try to justify the special assumptions needed for the competitive limit theorem in chapter 2. These included the Markov property of equilibria used to characterize the equilibria of finite economies and the Continuity Principle imposed on the competitive sequences of equilibria.
If we take the idea of bounded rationality seriously, however, the complexity of these games is still very demanding. Furthermore, the assumption that the agents know not only their own equilibrium strategies but those of the other agents, is very demanding. Where do they get this information? Sometimes the common knowledge of equilibrium strategies is interpreted as the outcome of a process of introspective reasoning (Binmore, 1990, calls this eductive reasoning). Sometimes it is treated as the outcome of a process of learning by trial and error. Clearly, the eductive approach does not reduce the computational ability required of the agents. The trial-and-error approach may do so. Adaptive, rule-of-thumb behavior is less demanding both informationally and computationally. If it leads to equilibrium behavior, it may provide some support for the notion that boundedly rational individuals can acquire strategies that are close to equilibrium strategies.
In this chapter, I present an example of this kind of rule-of-thumb or adaptive behavior that leads not very bright agents to a competitive equilibrium.
Frontmatter
- Douglas Gale, New York University
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- Strategic Foundations of General Equilibrium
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- 22 September 2009
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- 15 August 2000, pp i-viii
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5 - Informational capacity and financial collapse
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- By Douglas Gale
- Edited by Colin Mayer, University of Warwick, Xavier Vives, Universitat Autònoma de Barcelona
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- Capital Markets and Financial Intermediation
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- 04 August 2010
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- 20 May 1993, pp 117-148
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Summary
Introduction
The starting point for the work reported in this paper is the observation that banks are information-gathering and information-processing institutions. When a bank makes a loan, it investigates the borrowing firm's assets and business plan. It later acquires information in the course of handling the firm's accounts and conducting routine banking transactions. It observes the firm's repayment history. All of this information is proprietary and may be excluded from the public domain. When a bank fails, this information may be lost. Records may be destroyed or falsified and they may be hard to interpret when key personnel leave. One important consequence of bank failures may be the loss of information: borrowers with good credit histories may be forced to seek new sources of finance without the benefit of the information that has been accumulated over the years.
Even without a bank failure, there may be separations that lead to a similar type of information loss. When a bank decides to recall a loan, it may withdraw credit from good risks, forcing them to find new sources of credit on the open market. One reason for this apparently inefficient behaviour is an example of risk shifting. If the bank is in difficulties, it has an incentive to hold on to risky assets (loans) and liquidate safe assets, because it benefits from high returns and the depositors (or the deposit insurance system) bear the losses from low returns.
2 - The efficient design of public debt
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- By Douglas Gale
- Edited by Rudiger Dornbusch, Mario Draghi
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- Book:
- Public Debt Management
- Published online:
- 05 July 2011
- Print publication:
- 30 November 1990, pp 14-47
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Summary
Introduction
With a few notable exceptions, such as Fischer (1983), Peled (1985) and Bohn (1988a, b, c), the literature on public debt has concentrated on positive issues, such as the neutrality of the debt (Barro, 1974; Tobin, 1971). In this paper I want to concentrate instead on welfare issues, in particular, the impact of debt policy on the efficiency of risk sharing.
As a prelude to the central part of the paper, Section 2 reviews the familiar issue of the neutrality of the debt. The classical Ricardian equivalence theorem assumes that markets are complete. Nonetheless, even if markets are incomplete, there is an analogue of the classical neutrality theorem. A theorem of this sort is proved in Section 2 for a generic economy with incomplete markets. It shows that changes in the size and composition of the debt are neutral as long as the set of debt instruments issued by the government is unchanged. This result is similar to the Modigliani-Miller theorem of Wallace-Chamley-Polemarchakis (see Wallace, 1981, and Chamley and Polemarchakis, 1984). On the other hand, if markets are incomplete, it is clearly possible for the government to have an impact on the economy by introducing new securities that expand risk-sharing opportunities.
There is a tension between these two results. It seems that a tiny amount of a new security has a large impact while a large change in the amount of an existing security has no impact at all.
4 - Preference shocks, liquidity, and central bank policy
- Edited by William A. Barnett, Kenneth J. Singleton
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- Book:
- New Approaches to Monetary Economics
- Published online:
- 04 August 2010
- Print publication:
- 31 July 1987, pp 69-88
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Summary
Abstract: We characterize the role of a central bank as a mechanism designer for risk-sharing across banks that are subject to privately observed “liquidity shocks.” The optimal mechanism involves borrowing/lending from a “discount window.” The optimal discount rate and the induced distortions in holdings of liquid assets suggest a rationale for subsidized lending and reserve requirements on the observable part of liquid asset holdings.
Introduction
Several recent papers have examined the micro-theoretic foundations for a theory of financial intermediation. The role of intermediaries as agents who provide delegated monitoring services has been developed in Leland and Pyle (1977) and Diamond (1984). More recently, Bryant (1980) and Diamond and Dybvig (1983) have considered issues pertaining to the optimal form of intermediary (deposit) contracts. They examine intertemporal models in which depositors are subject to privately observed preference shocks and the returns to investments depend on their time to maturity (liquidity). Within this framework, Bryant, Diamond-Dybvig and Jacklin (1986) have demonstrated the superiority of deposit contracts over Walrasian (mutual fund) trading mechanisms in providing agents with insurance for risks connected with preference shocks.
The work on banking contracts has also served to focus attention on problems of coordination across agents who have private information on (risky) investments undertaken by the depository intermediaries or mutual funds. The pioneering study of Bryant (1980) considered the instabilities (panics) and imperfect risk-sharing that would arise if bank depositors (with fixed commitment contracts) make earlier withdrawals based on information about asset returns.
Mathematics for economists: an integrated approach, by E. Roy Weintraub. Pp 180. £15 hardcover, £6·95 paperback. ISBN 0-521-24535-4/28769-3 (Cambridge University Press)
- Douglas Gale
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- Journal:
- The Mathematical Gazette / Volume 68 / Issue 443 / March 1984
- Published online by Cambridge University Press:
- 22 September 2016, pp. 68-69
- Print publication:
- March 1984
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Economics for mathematicians, by J. W. S. Cassels. Pp 145. £7·50. 1982. ISBN 0-521-28614-X (Cambridge University Press)
- Douglas Gale
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- Journal:
- The Mathematical Gazette / Volume 67 / Issue 439 / March 1983
- Published online by Cambridge University Press:
- 22 September 2016, pp. 68-69
- Print publication:
- March 1983
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