Economics, Department of

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Generality Versus Context Specificity: First, Second and Third Best in Theory and Policy

Author: 
Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2016-09-06
Abstract: 

Second-best theory established that a policy's effect on community welfare (or any other objective function) varies with its specific context. In contrast, Ng argues that fulfilling first-best conditions piecemeal is optimal whenever the policy maker's information is insufficient to determine the direction of the change in the variable under consideration that will raise welfare, irrespective of the conditions in that market. We argue: (1) that Ng's own assumptions imply not that first-best conditions should be established under these circumstances, but that the status quo should be maintained; (2) that when Ng's key assumption is altered to be empirically relevant, all policy decisions become fully context-specific; (3) that Woo's argument for accepting Ng's conclusions in spite of point (2) is incorrect. The conclusion discusses valid uses of piecemeal welfare theory in spite of second best.

Document type: 
Article
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Economic Policy with and Without Maximizing Rules

Author: 
Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2017-01-11
Abstract: 

This paper contrasts the static neoclassical and the evolutionary views of the economy and economic policy. It responds to Ng's comments on Lipsey's original criticism of third-best theory. Under a relevant definition of informational poverty and Ng's other assumptions, the expected value of any policy-created divergence from the status quo is negative: If there is not enough known to determine what to do, nothing should be done, rather than establishing first-best conditions as Ng's analysis has it. It is argued that Ng's analysis of his two other information states adds little to what common sense suggests. To address Ng's argument that policies using context-specific objective functions lack the required welfare basis, the paper studies how economic policy is actually pursued absent guides provided by welfare economics. Policies that follow from evolutionary economic theory imply that what are seen as 'distortions' in welfare economics are actually desirable forces that drive economic growth.

Document type: 
Article
File(s): 

Joseph Agassi, the M2t Seminar, and His Influence on My Work

Author: 
Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2017-01-12
Abstract: 

This paper discusses the influence on my research and writings of several methodological principles that we, the members of the LSE Staff Seminar on Methodology, Measurement and Testing learned directly from Joseph Agassi and indirectly from Karl Popper. It begins  with the origins of the seminar and my text book, An Introduction to Positive Economics. It goes on to cover methodological issues that arose in my subsequent papers including: the importance of having empirical content in economic theories, the poverty of theories that are built only to pass sunrise tests, why non-robust assumptions need to be tested, the concept of refutability, the fussy distinction between normative and positive statements, the impossibility of giving purely positive policy advice, the testing of existential statements, fallacious attempts to deduce empirical propositions from definitional identities, the distinction between internally and externally driven research programs, the poverty of modern welfare economics as a guide  to policy and the possibility of deriving policy advice without such guidance. It concludes with a short discussion of the revolutionary implications of accepting technological change as being generated endogenously under conditions of genuine uncertainty rather than measurable risk.

Document type: 
Book chapter
File(s): 

What is the Optimal Trading Frequency in Financial Markets?

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2016-12
Abstract: 

This paper studies the impact of increasing trading frequency in financial markets on allocative efficiency. We build and solve a dynamic model of sequential double auctions in which traders trade strategically with demand schedules. Trading needs are generated by time-varying private information about the asset value and private values for owning the asset, as well as quadratic inventory costs. We characterize a linear equilibrium with stationary strategies and its efficiency properties in closed form. Frequent trading (more double auctions per unit of time) allows more immediate asset reallocation after new information arrives, at the cost of a lower volume of beneficial trades in each double auction. Under stated conditions, the trading frequency that maximizes allocative efficiency coincides with the information arrival frequency for scheduled information releases, but can far exceed the information arrival frequency if new information arrives stochastically.  A simple calibration of the model suggests that a moderate market slowdown to the level of seconds or minutes per double auction can improve allocative efficiency for assets with relatively narrow investor participation and relatively infrequent news, such as small- and micro-cap stocks.

Document type: 
Article
File(s): 

Policies for Green Growth Versus Policies for No Growth: A Matter of Timing

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2016-12
Abstract: 

Advocates of green-growth policies and those who advocate policies to stop growth both accept that the world faces serious environmental problems. They disagree on and debate about appropriate remedies. Green-growth advocates argue that it is possible to create a green economy compatible with sustained growth. The no-growth advocates argue that the whole growth process must be stopped if the planet is to be saved from catastrophe. This short paper argues that choosing the optimal policy for dealing with these serious problems does not require deciding which group is right. Instead it is argued that the optimal policy is to act as if the green-growth advocates are right and only if they are proved wrong by the failure of their policies to do the job, should no-growth policies be attempted.

Document type: 
Book chapter
File(s): 

Joint Tax Evasion

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2002
Document type: 
Article
File(s): 

Dissuasion du crime et concurrence entre juridictions

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2002
Document type: 
Article
File(s): 

Dissuasion du Crime: un Survol

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2000
Document type: 
Article
File(s): 

Amnesties and Cooperation

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2000
Document type: 
Article
File(s): 

Severance Payments and Unemployment Insurance: A Commitment Issue

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2004
Document type: 
Article
File(s):