History and Coordination Failure

(with Alicia Adserà), Journal of Economic Growth 3, 267–276, 1998.

Summary. An extensive literature discusses the existence of a virtuous circle of expectations that might lead communities to Pareto-superior states among multiple potential equilibria. It is generally accepted that such multiplicity stems fundamentally from the presence of positive agglomeration externalities. We examine a two-sector model in this class, and look for intertemporal perfect foresight equilibria. It turns out that under some plausible conditions, positive externalities must coexist with external diseconomies elsewhere in the model, for there to exist equilibria that break free of historical initial conditions. Our main distinguishing assumption is that the positive agglomeration externalities appear with a time lag(that can be made vanishingly small). Then, in the absence of external diseconomies elsewhere, the long-run behaviour of the economy resembles that predicted by myopic adjustment. This finding is independent of the degree of forward-looking behavior exhibited by the agents.

Evolving Aspirations and Cooperation

(with Rajeeva Karandikar,  Dilip Mookherjee, and Fernando Vega-Redondo), Journal of Economic Theory 80, 292-331, 1998.

Summary. A 2×2 game is played repeatedly by two satisficing players. The game considered includes the Prisoner’s Dilemma, as well as games of coordination and common interest. Each player has an aspiration at each date, and takes an action. The action is switched at the subsequent period only if the achieved payoff falls below aspirations; the switching probability depends on the shortfall. Aspirations are periodically updated according to payoff experience, but are occasionally subject to trembles. For sufficiently slow updating of aspirations and small tremble probability, it is shown that both players must ultimately cooperate most of the time.

Equilibrium Binding Agreements

(with Rajiv Vohra), Journal of Economic Theory 73, 30-78, 1997.

Summary. We study equilibrium binding agreements, the coalition structures that form under such agreements, and the efficiency of the outcomes that result. We analyze such agreements in a context where the payoff to each player depends on the actions of all other players. Thus a game in strategic form is a natural starting point. Unlike the device of a characteristic function, explicit attention is paid to the behavior of the complementary set of players when a coalition blocks a proposed agreement. A solution concept and its applications are discussed.

Vertical Linkages between Formal and Informal Financial Institutions

(with Maria Floro), Review of Development Economics 1, 34-56, 1997.

Summary. The paper investigates vertical linkages between formal and informal financial institutions. Specifically, it studies a policy that expands formal credit to informal lenders, in the hope that this will improve loan terms for borrowers who are shut out of the formal sector. Special attention is paid to the Philippines. It is argued that the effects of stronger vertical links depend on the form of lender competition. In particular, if the relationship between lenders is one of strategic cooperation (sustained by threats of reprisal in a repeated setting), an expansion of formal credit may worsen the terms faced by informal borrowers.

Egalitarianism and Incentives

(with Kaoru Ueda), Journal of Economic Theory 71, 324-348, 1996.

Summary. A group of agents is collectively engaged in a joint productive activity. Each agent supplies an observable input, and output is then collectively shared among the members according a social welfare function. However, individual actions are taken on a selfish basis, and the collective decision is only made after inputs are chosen. This leads to inefficiency. The aim of this paper is to show formally that, contrary to popular belief, the degree of inefficiency decreases in the extent of egalitarianism embodied in the social welfare function.

Cooperation in Community Interaction without Information Flows

(with Parikshit Ghosh), Review of Economic Studies 63, 491–519, 1996.

Summary. We study cooperative behavior in communities where the flow of information regarding past conduct is limited or missing. Players are initially randomly matched with no knowledge of each other’s past actions; they endogenously decide whether or not to continue
the repeated relationship. We define social equilibrium in such communities. Such equilibria
are characterized by an initial testing phase, followed by cooperation if the test is successful. It is precisely the presence of myopic types that permit cooperation, by raising barriers to entry into new relationships.

Labor Tying

(with Anindita Mukherjee), Journal of Development Economics 47, 207-239, 1995.

Summary. The co-existence of seasonal fluctuations in income and imperfect credit markets suggests that tied contracts should dominate rural labor markets. However,  empirical observation from India suggests that this is far from being the case, and indeed, that there is a declining trend in  labor tying. In our model,  casual labor markets are always active despite the presence of  seasonality, and a variety of implications are derived that  link economic growth, changing information flows, and the decline of labor tying over time.

On the Measurement of Polarization

(with Joan Esteban), Econometrica  62, 819–851, 1994.

Summary. This paper is concerned with the conceptualization and measurement of polarization. Suppose that a population is grouped into significantly-sized “clusters’,” such that each cluster is “similar” in terms of the attributes of its members, but different clusters have “dissimilar” attributes. In that case we would say that the society is “polarized.” We study these intuitive criteria carefully, and provide a theory of measurement.