Adverse selection and intermediation

EUROPEAN UNIVERSITY INSTITUTE, FLORENCE

DEPARTMENT O F ECONOMICS

R K I N G P A P E R No. 87/306

<?\

SECTIO N AND INTERMEDIATION

by

> Paolo G.

GAREIXA

/V

*1 wish to thank Jean Gabszewicz for helpful guidance through the writing of the

paper. I am also indebted to Claude d Aspremont, Chris Pissarides and Alex Svoronos

for clarifying comments. Remaining mistakes and omissions are my own.

Financial support by the European University Institute is gratefully acknowledged.

BADIA FIESOLANA, SAN DOMENICO (F I)

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All rights reserved. No part of this paper may be reproduced in any form without

permission of the author.

(C) Paolo G. Garella Printed in Italy in July 1987 European University Institute

Badia Fiesolana 50016 San Domenico (Fi)

-Italy

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Abstract

The paper deals with the intervention of an intermediary in a mar­ ket where adverse selection destroys the agents' trade possibilities. It is assumed that the intermediary, like any other buyer, cannot distinguish the good quality from the bad quality commodity units. The main result is that, if some conditions on the qualities distribution over the sellers population are satisfied, random price discrimination of the sellers is sufficient to make intermediation profitable. In particular, random price discrimination is a way of (partially) sorting out qualities, and obtains a reduction in the per unit cost of purchasing a lot of given average quality. The intermedia­ ry's Intervention leads to an ex ante Pareto improvement.

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INTRODUCTION

The possibility that the buyers' lack of complete information regarding the products' quality leads to a market equilibrium where no trade takes pla­ ce was Akerlof's (1970) "lemons impasse". There, Akerlof also mentioned some of the institutions arising to counteract the disruptive effects of quality uncertainty; guarantees, brand-names, chains (like hotel-chains), licensing practices and certifications among professional groups, are some examples. Intermediation as an institution of this kind has not, to my knowledge, been included in the list. In the first place, the present paper aims to study intermediation as an institution wich mitigates the effects of quality uncer­ tainty, in the sense that it can enlarge the set of trade opportunities avai­ lable to economic agents.

Without intermediaries, a market can work through direct (bilateral) exchange between sellers and buyers. Some form of arbitrage would ensure that goods with identical characteristics are priced uniformly. The essence of the lemons phenomenon is that goods of different qualities are uniformly priced, because the buyers cannot realize these differences. The average quality of the goods offered for sale is, however, a function of the market price. Low quality goods are supplied at a low price, high qualities being added as the price rises. Then, it may happen that at any positive price de­ mand falls short of supply, a price reduction lowering average quality so much as to further reduce demand

. 1

The only "equilibrium" is then obtained

at zero price, with zero supply.

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A first consideration on intermediaries is that they are not constrai­ ned to price goods uniformly, neither on the supply nor on the demand side. Indeed the main result of the present analysis is that an intermediary who randomly price-discriminates sellers can overcome a market failure. He has to randomize because he cannot himself distinguish the good from the bad units. Of course, this type of randomization is not used as such in the real world (at least not explicitly). Intermediaries perform several, and often joint, activities, like certification, risk-pooling, risk-spreading, storage, transportation, etc., which can eventually be analyzed separately. The idea exploited here is that an intermediary has some liberty to "organize" the exchange mechanism and he is not confined to the acceptation of a given mar­ ket price.

The argument is developed in two parts. In the next section, an exam­ ple is presented of a market where the "lemons impasse" is observed. In the frame of that example, the mechanism through which an intermediary can reali­ ze a profit and restore trade is described. Then, in section 3, a generali­ zation of the result is provided. Some conditions on the distribution of qualities over the sellers population are found, which enable the random pri­ cing scheme to induce a kind of self-selection among sellers. Low prices are accepted only by low quality sellers, while at higher prices, higher quality sellers join the pool of acceptors. This type of self-selection, though im­ perfect is effective and allows the intermediary to reduce (with respect to direct exchange) the per-unit cost of purchasing a lot of given average qua­ lity. Finally, in section 4, a discussion of the result follows.

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2.

LEMONS” AND THE MIDDLEMAN: AN EXAMPLE

As an illustrating example, consider a market for an indivisible good. There are a continuum of sellers and a continuum of buyers. Each unit of the good has quality denoted by q e[ 0 , 1 ] . Higher qualities are unanimously pre­

ferred to lower ones. Qualities are uniformly distributed among sellers: each seller, indexed s £[

0

,

1

], owns only one unit and there is one seller for each existing quality grade. Accordingly, if the quality owned by seller s is denoted q(s), we assume that q(s) = s. Furthermore, seller s is initially endowed with money income R(s) =

1

.

A buyer is said to be of type b, with b e [0,1 ], if he has initial income R(b) - 2.5 + b. Buyers do not own any unit of the good for trade. There is only one buyer of each type, and he buys at most one unit.

The buyers' utility function depends upon income and the quality of the owned good, and it is written as

u(q,R(b)) = q . R(b) + R(b); (1)

while the sellers' utility function is written as

u(q,R(s)) - /q . R(s) + R(s).

It is assumed that q - 0 if no unit of the good is owned. At the outset, therefore, the buyers have utility u(0,R(b)) =■ 2.5 ♦ b, and sellers u(s,1) =

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The willingness to buy of buyers, denoted r(b,q) Is defined as that price representing the maximum buyer b Is willing to pay for good of quality q, (i.e. r(b,q) is such that u(0,R(b)) = u(q,R(b) - r(b,q)). The willingness to sell of seller s is defined as the lowest price he is willing to accept in exchange of the unit he owns, (i.e., v(s) is such that u(s,

1

) » u(

0,1

+ v(s)). It is immediate, then, to verify that

r(b,q) - [q / (1 + q)] . (2.5 + b) (2) and

v(s) * /s. (3)

6

-From (3) we can derive the total quantity, denoted X(p) and the average quality q(p) of supplied goods at market price p. In particular, denoting by s(p) the seller who is indifferent between selling or remaining in the

* 2

status quo, we have s(p) = p , and

X (p ) = p

2

if

0

< p <

1

, -

1

if p >

1

, and

q(p)

- . Js s ds ;

0

2 P_ 2 (4) (5)

It is assumed that the buyers know, or can infer from the data of the model, the average quality, q(p), but are not able to identify the difference between one and the other unit. Individuals are assumed to be expected uti­ lity maximisers, so that (

2

) can be rewritten as

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2

r(b,q(p)) = . (2.5 + b). 2+P

(6)

Denoting by b the indifferent buyer and setting r(b,q(p)) = p in (2) above, it is found that total demand, D(p), is

It is then easy to check that D(p) < X(p) for all strictly positive prices.

The only price2 , then, at which demand equals supply is p - 0, with no transactions taking place: it is the "lemons impasse".

As a last remark on the opportunities of direct exchange, notice that no seller can increase his utility if he sells his unit in order to buy back one of average quality q(p). Indeed, selling to buy back yields expected

2 2 a*

utility u(p /

2

,

1

) =

1

♦ (p /

2)7

while selling once and for all yields u(

0

,

1

+ p) «

1

+ p, for all p e[

0

,

1

].

In this scenario assume that an intermediary intervenes. Like any other buyer, he is not able to ascertain the quality content of any unit. Assume, however, that he is ready to offer, to each forthcoming seller, a nonnegative price. The choice of which price to offer is made as follows. The intermediary performs a random choice, from a preselected set of prices

Dtp) - 0 if p -

0

3,5 - [(2 ♦ p2 ) / p] if p e (0,1] Max)[3-5 - (3 p)] ,0} if p > 1.

(7)

using a given random device. It is assumed, further, that the same lottery

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Is performed independently each time a seller visits the intermediary's shop. Each seller is restricted to enter the lottery only once, but he has the right to refrain from trade.

In the example treated here, a price equal to 0.5 is accepted by any seller having willingness to sell at most 0.5, but is refused by any other seller; a price equal to 1 is accepted by any seller.

Now, suppose the middleman chooses the vector of prices p - (p0,Pi,P2) A (0, 1/2, 1) and the vector of probabilities w = (5/8, 1/A, 1/8), with w 0 = 5/8 being the probability that p, * 0 is selected, w t =1/1) being that of se­ lecting p, = 1/2, and w 2 = 1 / 8 that of selecting p2 = 1 .

A simple calculation shows that the expected quantity, X(p,w) bought by the intermediary, after all sellers have visited his shop, the expected total expenditure, E(p,w), and the expected average quality, q(p,w), are respecti­ vely:

8

-X(p,w) = w, . s(p,) + w 2 . s(p2) - 3/16

E(p,w) = p, . [w, . s(pj)] + p 2 . [w, . s (p2 )] = 5/32 q(p,w) = w, . . q(p,) ♦ w2 . 3 . q(p2) =

3

/

8

.

The buyers remain incapable of identifying the quality of any particular unit, but are able to calculate q(p,w); in other words, it is assumed that the intermediary's lottery is known by the buyers, while they do not know which unit has been sold at which price to the intermediary.

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Now, suppose that the middleman quotes selling price pg = 0.901 for any unit from the mixture of qualities he has bought. It is then easy to see that the willingness to buy of buyer b ■= 13/16 for quality q(p,w) is r

(1

3/1 6

, 3/8) - 0.901. Hence at that selling price demand would equal the intermedia­ ted supply and the middleman's net expected profit can be calculated as

Y(p,w) * (0.901) . -

3

I * 0.012

a positive amount.

The success of intermediation, as opposed to the failure of direct ex­ change, rests upon the induced random self-selection among sellers. Low pri­ ces are accepted only by low quality sellers, while at higher prices, higher quality sellers join the pool of acceptors. This type of self-selection, though imperfect, is effective. If one compares the results of random pri­ ce-discrimination with those of non-dlsoriminatory pricing, one obtains the following: to buy a quantity x *

3/16

at a uniform price, the intermediary has to quote the (buying) price p - /

3

/

1 6

, obtaining an average quality equal to q(/3/1

6

) = 3/32. With the random discrimination in the example above, the middleman buys quantity X = 3/16 at an average cost E(p,w) / X(p,w) - 5/6 obtaining average quality q(p,w) = 3/8. Accordingly, while the per-unit cost has been almost doubled, the average quality is almost four times as large, with respect to the non-discriminatory intermediation, for X * 3/16.

Without discrimination, the intermediary cannot equal supply to demand at any selling price higher than /

3

/I

6

, the buying price. Therefore his pro­ fit can only be negative. The contrary is true when he uses random discrimi­

nation.

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10

3. SOME GENERALIZATIONS

The purpose of the present section is to show that the example illus­ trated above does not constitute an isolated case. In what follows I shall study the conditions under which intermediation of the kind introduced above can succeed. It is maintained that adverse selection leads to a zero-price equilibrium.

The same informational asymmetry as before is assumed. Again q(s) = s: sellers of type s own quality s eC0,1]. F(s) represents the distribution of qualities over the population of sellers. It is assumed that f(s), the den­ sity corresponding to F(s), is such that f(s) > 0, f'(s) > 0, Vs e[0,1].

Furthermore, it is assumed that R(s), the income of a type-s seller, is equal to K, K > 0.

On the buyer's side, it is supposed that R(b) is an increasing monotone function of b, Vb e[0,1] and that R(0) > 0. The notation G(b) represents the proportion of buyers with income not exceeding b, with first derivative g(b) > 0, Vb e[0,1].

The utility function u(q,R) is assumed to be twice continuously diffe­ rentiable, with positive first derivatives with respect to both arguments, negative second derivative with respect to R, zero second derivative with respect to q.

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Finally, u(q,R) Is supposed to be separable so that we have E[u(q,R)] * u(E(q),R), where E(q) denotes the expected value of quality, given the avai­ lable Information.

It can then be shown that the sellers' willingness to sell, v(s), is monotone increasing and continous in s, so that, denoting by s(p) the solu­ tion of the equation v(s) = p,

X(p) - F(s(p)). (8)

Then, the average quality supplied at price p is given by

q(p) - --- !— . /3<P) s . f(s) ds. (9) F(s(p)) 0

It is immediate to verify that supply, as defined by (8) is upward slo­ ping, and that X(p) » 1, q'(p) = 0 for all p > v(1).

In an analogous way, letting r(b,q(p)) = p, it is possible to solve for b(p), the indifferent buyer at price p. It follows that

d(p) - 1 - G(b(p)). (10)

Given price p, all buyers with willingness to buy higher than p, i.e., i. buyers "to the right" of b(p), are ready to buy. Also, notice that r(b,: increasing in q.

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12

Finally, it is assumed that

d(p) < X(p), p > 0.

A situation of this kind is depicted in Figure 1 below.3

Figure 1

Now, in order to analyse the intervention of the intermediary recall the notation (p,w), defining a lottery where p^ is the ith element of p , the vector of prices, with associated probability w^; 1 = 0 , ..., n. Then, if the random pricing of units for sale is performed with the same restrictions as those described in the preceding section, one has:'*

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X(p,w) . F(s(p.)) (11)

E(p,w) pt . w. . FtstPj)) (12)

n w i ' F(s ( P i > 5

q(p,w) - 2 --- . q(p ). (13)

X(p,w) 1

Now, if we consider more closely the expression for the average quality q(p,w) obtained by the intermediary, we notice that there must exist a non degenerate interval of prices, say A c [o, v (1)], such that if p e A, q'(p) q'(p) > 0, q"(p) > 0 (see Appendix). Consequently, we may state

Lemma 1

If pM , p,, p2 are elements of A, with p2 > PH > Pi > 0, 0 < a < 1, and PM = o Pj + (1 - a)p2 , then

a . q(p2) + (1 - a) . q(p,) > q(pM >.

Proof

q'(p) > 0 and q"(p) > 0 for p e A. Q.E.D.

The main implication of Lemma 1 is that by using a randomization scheme of the kind described in the preceding section, the intermediary can buy qua­ lity q(p,w) > q(pM ), at a per unit cost not exceeding p„. This can be shown

n M

considering the scheme (p,w) with in particular p„ = 0, p, and p2 >,0, and with w 0 , w,, w2 > 0 , w„ = 1 - Wj - w2 . Now, given p, and p2 , define the

function

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114

-a(w,,w2) w2 ■ F( s(p2)) X(p,w)

Using (11) and (12), we get

p2 . a(w,,w2) + [1 - a(wt,w2)] . p 2 E(q,w) X(p,w)

(IH)

(15)

an expression for the intermediary's per unit cost of buying quantity X(p,w). Since Lemma 1 holds for any 0 < a < 1, it is possible to choose w,, w2 such that

a(w,,w2) . p2 + [1 - a(w,,w2)] . p t - PM

obtaining a lottery (p.w) yielding average quality

q(p,w)d|f(wi ,w2 ) . q(p2) * [1 - atw^Wj)] . qtpj > q(pM ).

As a digression, notice that if the function q(p) was strictly concave with respect to the abscissas, as in Figure 2, then the randomization propo­ sed by the intermediary could only deteriorate the average quality from a gi­ ven lot.

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Figure 2

To complete the analysis assume now that the Intermediary plans to sell at a uniform price, pg , all the units he has bought. It is natural to cons­ traint p so that there is sufficient demand to exhaust the whole stock of merchandise bought by the middleman. Formally, let b satisfy

1 - G(b) - X(p,w),

then

ps defr(b,q<p’" » '

Intermediation is profitable if pg is equal or greater than E(p,w)/X(p,w). The main result of this section can now be proved.

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16

Proposition 1

If for some pM e A, d(pM ) > 0, then intermediation is profitable.

Proof: Let

P ■ (0, p lt p2); Pi, P: > 0, p,, pj e * and p2 > pM > p,

w * (w0, w , , w2), ^ w i » 1; w 0 , w,, w 2 > 0.

Furthermore let w,, w 2 be such that a(w,, w 2 ) . p2 + [1 - a(w,, w 2)] . p, = pM> where ct(w,, w 2) is as defined by (13). Notice that, for any 0 < A < 1, a(Aw,, Aw2) - a(w,, w 2 ), so that Lemma 1 holds for any A. Now, d(p ) > 0 -> 3 bM : bM < 1, and r(bM>q(pM )) = p . Accordingly, Lemma 1 implies that

r(bM ,q(p,w)) > pM ,

since the function r(b,q) is increasing in q.

Finally notice that X(p,w) > X(p,w') where w' - (w'0, Awlf Aw2 ) and w'0 * 1 - Aw, - Aw2. Therefore the scheme

(p,w') * (0, p,, p2 ; w'0 , Aw,, Aw2),

with A chosen so as to have X(p,w') = 1 - G(b„) is profitable if p = r(b. ,

M 3 M q(p,w’)). Q.E.D.

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In the proof of Proposition 1 it is assumed that the intermediary uses a random pricing mechanism with only two strictly positive prices, no claim is made that this be the "optimal" scheme. The use of a unique selling pri­ ce, by contrast, can be justified with the hypothesis that buyers do not know at which price each particular unit has been bought by the intermediary. The latter, in turn, is not able to credibly communicate any information regar­ ding the products' qualities.

M . CONCLUDING COMMENTS

Intermediaries enjoy a certain freedom in organizing their own activi­ ties. This idea has been exploited to show that an intermediary can overcome a market failure of the type envisaged by Akerlof (1970). The intermediary has been assumed to act simply as a middleman between buyers and sellers and to possess the same initial information as any other buyer in the market. The procedure used by the intermediary is the following: he publicly announ­ ces his willingness to perform a random selection of price to be proposed to each forthcoming seller. He performs this same lottery independently for each seller. No cost is imposed on the latter, but he is restricted to par­ ticipate only once. Since there is no alternative trade opportunity, all sellers participate, with the proviso that they can refrain from trade. The merchandise bought is then sold by the intermediary at a unique selling pri­

ce .

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18

-First, in the context of a simple example, and then in a less specific frame, it has been shown that random pricing schemes can be designed to make intermediation profitable. The condition that the distribution of qualities over the sellers population be quasi-convex has been used to ensure that this randomization leads to an improvement of the average quality to be interme­ diated. If the intermediary was endowed with more information about the pro­ ducts' qualities (or if he could acquire it and transfer it to the buyers), then it is expected that the working of intermediation be eased, and its pro­ fitability improved. In a sense, therefore, we have been looking for minimal prerequisites to explain the success of intermediating structures.

In the context analyzed here, the middleman's intervention leads to a welfare improvement in the sense of Pareto. In fact, all agents can achieve a level of expected utility at least as high as the level achievable without intermediation. The latter opens a market where trade was impossible and mu­ tually (ex ante) beneficial exchanges can be realized.

The middleman's strategy is admittedly artificial and it is not possi­ ble to relate it, in a direct way, to the functioning of intermediaries of some sort. For Instance, financial institutions, like banks, and also insu­ rance companies, perform a host of joint activities and it would be mislea­ ding to explain their working by the use of random pricing devices.5 Surely, the decisions whether or not to grant a loan, whether or not to supply insu­ rance are not based on purely hazardous criteria. Used car dealers, too, perform some test and learn about the car's quality so as to reject the "le­ mons". Doubtless, however, bad bargains are inevitable, to some degree, by any intermediary (banks, insurance companies or dealers of any sort). An as­

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sessment of qualities remains to some extent imperfect. Often, this residual uncertainty is coped with by the use of "indexes": car dealers observe the age of a car, insurance companies that of the customers, and often even race is used to discriminate (e.g., on the labor market).

Now, indexes, as defined by Spence (197*0, are unalterable characteris­ tics of the good for trade. As far as their relation with the good's charac­ teristics is uncertain or nonexistent (like in the case of race), their use may approximate that of a random device of the type described in the prece­ ding sections. The main difference is that the frequencies of the indexes in the population to be sorted are note manipulable, but objectively given. Su­ rely, these topics deserve further investigation.

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FOOTNOTES

In the simple version of the "market for lemons" it is held that the buyers' perception of average quality is correct (see Wilson (1980)).

This is exclusively the effect of the informational asymmetry here as­ sumed. If buyers could identify the quality content of any particular unit of the good, then seller s could trade with any buyer of type b b(s), where b(s) satisfies the equality /s - (s /(1+s)) . (2.5 + b (s )). It can be easily checked, then, that all quality grades s > 1/10 could find more than one buyer under complete information.

It can be shown that d'(p) = - g(b(p)) . > 0 implies q'(p) > 0, as implied by the result in the Appendix. p

Expression (12) can be easily understood considering, as an example, P * (0, Pi, p2 ) with p2 > p, > 0, w « (w„, w , , w 2) with w,, w 2 > 0. Then q(p,w) (w,+w2) . F(s(p,)) X(p,w) ,s(Pi) f(s) F(s(p,)) ds [F(s(p2 )) - F(s(p,))] j-s(p2) f (s) ds X(p,w) s(Pi) F(s(p2)) - F(s(Pi)) which clearly reduces to the expression (12).

Recent works on financial intermediaries are: Diamond (1984), Wood (1981). A general equilibrium approach to intermediation can be found in Townsend (1983). Laffont (1975) analyses the role of experts in markets with adverse selection. For an analysis of intermediation, seen as a distribution mechanism, see Phlips and Thisse (1981).

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REFERENCES

AKERLOF, G. (1970), The market for "Lemons": quality uncertainty and the market mechanism. Quarterly Journal of Economics, 84, 488-500.

DIAMOND, D. (1984), Financial intermediation and delegated monitoring. Re­ view of Economic Studies, 51, 393-414.

GABSZEWICZ, J. and J.-F. THISSE (1979), Price competition, qualities and in­ come disparities. Journal of Economic Theory, 20, 340-359.

LAFF0NT, J.-J. (1975), Optimism and experts against adverse selection in a competitive economy. Journal of Economic Theory, 10, 284-308.

PHLIPS, L. and J.-F. THISSE (1981), Pricing, distribution and the supply of storage. European Economic Review, 13, 223-245.

SPENCE, M. (1974), Market signaling: informational transfers in hiring and related screening processes. Harvard University Press, Cambridge, Mas­ sachusetts.

TOWNSEND, R.M. (1983), Theories of intermediated structures. Carnegie-Ro- chester Conference Series on Public Policy, 18, 221-272.

WILSON, C. (1980), The nature of equilibrium in markets with adverse selec­ tion. Bell Journal of Economics, 11, 108-190.

WOOD, J.M. (1981), Financial intermediaries and monetary control. Journal of Monetary Economics, 8,145-163.

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- 22

APPENDIX

Result 1 ; 1 .

q(p)_= — *--- . /s p ' s . f(s) ds is quasi convex, and

def o

F(s(p))

3 A = [0,v(D] such that: A is open and q'(p) > 0, q"(p) > 0 if p e A, where v(1) is that price p at which s ((v )1) - 1.

Proof:

First notice that q(p) can be expressed as h . g(p), where g(p) = s(p), as defined by solving from

u(s(p),K) - u(0,K+p) and

h(s) - [1/F(s>] . /s s . f(s) ds. o

Since g(p) is strictly convex, proving that h(s) is quasi-convex in s is equivalent to prove that q(p) is quasi-convex in p. Integrating by parts,

h(s) > [1/F(s)] . [s F(s) - /® F(s) ds], and 6h(s)/6s • [f(s)/FCs))2] . /S FCs) ds > 0, s e (0,1] o = 0, if s - 0.

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Hence h(s) is monotone increasing in s. It is easy, furthermore, to show that, given the convexity of F(s),

i h ( 0 ) *

\

h ( 1 ) > h ( l ) .

This result and the fact that 6h(s)/Ss > 0 quarantee that h(s) is quasi-con- vex on [0,1], and that it has convex portions.

Q.E.D.

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WORKING PAPERS ECONOMICS DEPARTMENT

85/155: François DUCHENE Beyond the First C.A.P.

85/156: Domenico Mario NUTI Political and Economic Fluctuations in the Socialist System

85/157: Christophe DEISSENBERG On the Determination of Macroeconomic Policies with Robust Outcome

85/161: Domenico Mario NUTI A Critique of Orwell’s Oligarchic Collectivism as an Economic System 85/162: Will BARTLETT Optimal Employment and Investment Policies in Self-Financed Producer Cooperatives

85/169: Jean JASKOLD GABSZEWICZ Paolo GARELLA

Asymmetric International Trade

85/170: Jean JASKOLD GABSZEWICZ Paolo GARELLA

Subjective Price Search and Price Competition

85/173: Berc RUSTEM

Kumaraswamy VELUPILLAI

On Rationalizing Expectations

85/178: Dwight M. JAFFEE Term Structure Intermediation by Depository Institutions

85/179: Gerd WEINRICH Price and Wage Dynamics in a Simple Macroeconomic Model with Stochastic Rationing

85/180: Domenico Mario NUTI Economic Planning in Market Economies: Scope, Instruments, Institutions 85/181: Will BARTLETT Enterprise Investment and Public

Consumption in a Self-Managed Economy 85/186: Will BARTLETT

Gerd WEINRICH

Instability and Indexation in a Labour- Managed Economy - A General Equilibrium Quantity Rationing Approach

85/187: Jesper JESPERSEN Some Reflexions on the Longer Term Con­ sequences of a Mounting Public Debt 85/188: Jean JASKOLD GABSZEWICZ

Paolo GARELLA

Scattered Sellers and Ill-Informed Buye: A Model of Price Dispersion

85/194: 85/195:

Domenico Mario NUTI Pierre DEHEZ Jean-Paul FITOUSSI

The Share Economy: Plausibility and Viability of Weitzman’s Model Wage Indexation and Macroeconomic Fluctuations

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85/196: 85/198: 85/200: 85/201: 86/206: 86/212: 86/214: 86/218: 86

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222

:

86/223 : 86/224: 86/225: 86/227: 86/228: 86/229: 86/230: 86/232: 2 -Werner HILDENBRAND Will BARTLETT Milica UVALIC Domenico Mario NUTI

Ernesto SCREPANTI Volker DEVILLE Emil CLAASSEN Melvyn KRAUSS Alberto CHILOSI Emil CLAASSEN Edmund S . PHELPS

Giuliano FERRARI BRAVO

A Problem in Demand Aggregation: Per Capita Demand as a Function of Per Capita Expenditure

Bibliography on Labour-Managed Firms and Employee Participation

Hidden and Repressed Inflation in Soviet- Type Economies: Definitions, Measurements and Stabilisation

A Model of the Political-Economic Cycle in Centrally Planned Economies

Bibliography on The European Monetary System and the European Currency Unit. Budget Deficits and the Exchange Rate

The Right to Employment Principle and Self-Managed Market Socialism: A Historical Account and an Analytical Appraisal of some Old Ideas

The Optimum Monetary Constitution: Monetary Integration and Monetary Stability

Economic Equilibrium and Other Economic Concepts: A "New Palgrave" Quartet Economic Diplomacy. The Keynes-Cuno Affair

Jean-Michel GRANDMONT Donald A.R. GEORGE

Domenico Mario NUTI

Stabilizing Competitive Business Cycles Wage-earners’ Investment Funds: theory, simulation and policy

Michal Kalecki's Contributions to the Theory and Practice of Socialist Planning Domenico Mario NUTI Codetermination, Profit-Sharing and Full

Employment

Marcello DE CECCO Currency, Coinage and the Gold Standard Rosemarie FEITHEN Determinants of Labour Migration in an

Enlarged European Community

Saul ESTRIN Are There Life Cycles in Labor-Managed Derek C. JONES Firms? Evidence for France

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86/236: Will BARTLETT Milica UVALIC

Labour Managed Firms, Employee Participa­ tion and Profit Sharing - Theoretical Perspectives and European Experience. 86/240: Domenico Mario NUTI Information, Expectations and Economic

Planning

86/241: Donald D. HESTER Time, Jurisdiction and Sovereign Risk 86/242: Marcello DE CECCO Financial Innovations and Monetary Theory 86/243: Pierre DEHEZ

Jacques DREZE

Competitive Equilibria with Increasing Returns

86/244: Jacques PECK Karl SHELL

Market Uncertainty: Correlated Equilibrium and Sunspot Equilibrium in Market Games 86/245: Domenico Mario NUTI Profit-Sharing and Employment: Claims and

Overclairas

86/246: Karol Attila SOOS Informal Pressures, Mobilization, and Campaigns in the Management of Centrally Planned Economies

86/247: Tamas BAUER Reforming or Perfecting the Economic Mechanism in Eastern Europe

86/257: Luigi MONTRUCCHIO Lipschitz Continuous Policy Functions for Strongly Concave Optimization Problems 87/264: Pietro REICHLIN Endogenous Fluctuations in a Two-Sector

Overlapping Generations Economy

87/265: Bernard CORNET The Second Welfare Theorem in Nonconvex Economies

87/267: Edmund PHELPS Recent Studies of Speculative Markets in the Controversy over Rational Expecta­ tions

87/268: Pierre DEHEZ Jacques DREZE

Distributive Production Sets and Equilibria with Increasing Returns

87/269: Marcello CLARICH The German Banking System: Legal Foundations and Recent Trends

87/270: Egbert DIERKER Wilhelm NEUEFEIND

Quantity Guided Price Setting

87/276: Paul MARER Can Joint Ventures in Hungary Serve as a "Bridge" to the CMEA Market?

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87/277: Felix FITZROY Efficiency Wage Contracts, Unemployment, and Worksharing

87/279: Darrell DUFFIE Wayne SHAFER

Equilibrium and the Role of the Firm in Incomplete Markets

87/280: Martin SHUBIK A Game Theoretic Approach to the Theory of Money and Financial Institutions 87/283: Leslie T. OXLEY

Donald A.R. GEORGE

Perfect Foresight, Non-Linearity and Hyperinflation

87/284: Saul ESTRIN Derek C. JONES

The Determinants of Workers’ Participation and Productivity in Producer Cooperatives 87/285: Domenico Mario NUTI Financial Innovation under Market Socialism 87/286: Felix FITZROY Unemployment and the Share Economy:

A Sceptical Note

87/287: Paul HARE Supply Multipliers in a Centrally Planned Economy with a Private Sector

87/288: Roberto TAMBORINI The Stock Approach to the Exchange Rate: An Exposition and a Critical Appraisal 87/289: Corrado BENASSI

87/296: Gianna GIANNELLI

Asymmetric Information and Financial Markets: from Financial Intermediation

to Credit Rationing On Labour Market Theories

87/297: Domenica TROPEANO The Riddle of Foreign Exchanges: A Swedish-German Debate (1917-1919)

Spare copies of these working papers and/or a complete list of all working papers that have appeared in the Economics Department series can be obtained from the Secretariat of the Economics Department.

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EUI Working Papers are published and distributed by the European University Institute, Florence.

A complete list and copies of Working Papers can be obtained free of charge — depending on the availability of stocks — from:

The Publications Officer European University Institute

Badia Fiesolana

1-50016 San Domenico di Fiesole (FI) Italy

Please use order form overleaf

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PUBLICATIONS OF THE EUROPEAN UNIVERSITY INSTITUTE

To The Publications Officer European University Institute Badia Fiesolana

1-50016 San Domenico di Fiesole (FI) Italy

From N a m e .. . ;... ... A d d ress...

Please send me: d ] a complete list of EUI Working Paper I 1 the following EUI Working Paper(s):

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PUBLICATIONS OF THE EUROPEAN UNIVERSITY INSTITUTE MARCH 1987

8 6 / 2 5 7 : L u i g i MONTRUCCHIO L i p s c h i t z C o n t i n u o u s P o l i c y F u n c t i o n s f o r S t r o n g l y C o n c a v e O p t i m i z a t i o n P r o b l e m s

8 6 / 2 5 8 : G u n t h e r TEUBNER U n t e r n e h m e n s k o r p o r a t i s m u s

New I n d u s t r i a l P o l i c y und d a s "W ese n " d e r j u r i s t i s c h e n P e r s o n 8 6 / 2 5 9 : S t e f a n GRUCHMANN E x t e r n a l i t a t e n m a n a g e m e n t d u r c h V e r b a e n d e 8 6 / 2 6 0 : A u r e l i o ALAIMO C i t y G ove r n m en t i n t h e N i n e t e e n t h C e n t u r y U n i t e d S t a t e s S t u d i e s a n d R e s e a r c h o f t h e A m e r i c a n H i s t o r i o g r a p h y

8 7 / 2 6 1 : O d i l e QUINTIN New S t r a t e g i e s i n t h e EEC f o r E q u a l O p p o r t u n i t i e s - i n Em ploy m en t f o r Men a n d Women.

8 7 / 2 6 2 : P a t r i c k KENIS P u b l i c O w n e r s h i p : E c o n o m i z i n g D e m o cr a c y o r D e m o c r a t i z i n g Econ om y?

8 7 / 2 6 3 : Bob JESS OP The Econ om y, t h e S t a t e a n d t h e Law : T h e o r i e s o f R e l a t i v e Autonomy and A u t o p o i e t i c C l o s u r e

8 7 / 2 6 4 : P i e t r o REICHLIN E n d o g e n o u s F l u c t u a t i o n s i n a Two- S e c t o r O v e r l a p p i n g G e n e r a t i o n s Economy

8 7 / 2 6 5 : B e r n a r d CORNET The S e c o n d W e l f a r e T h eor e m i n N o n c o n v e x E c o n o m i e s 8 7 / 2 6 6 : N a d i a URBINATI L i b e r t à e bu on g o v e r n o i n J o h n S t u a r t M i l l e P a s q u a l e V i l l a r i 8 7 / 2 6 7 : Edmund PHELPS R e c e n t S t u d i e s o f S p e c u l a t i v e M a r k e t s i n t h e C o n t r o v e r s y o v e r R a t i o n a l E x p e c t a t i o n s 8 7 / 2 6 8 : P i e r r e DEHEZ and J a c q u e s DREZE D i s t r i b u t i v e P r o d u c t i o n s S e t s and E q u i l i b r i a w i t h I n c r e a s i n g R e t u r n s

8 7 / 2 6 9 : M a r c e l l o CLARICH The German B a n k i n g S y s t e m ; L e g a l F o u n d a t i o n s a n d R e c e n t T r e n d s

8 7 / 2 7 0 : E g b e r t DIERKER a n d Q u a n t i t y G u i d e d P r i c e S e t t i n g W ilh e lm NEUEFEIND

* :Working Paper out of print

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PUBLICATIONS OF THE EUROPEAN UNIVERSITY INSTITUTE JUNE * 1987

8 7 / 2 7 1 : W i n f r i e d BOECKEN Der v e r f a s s u n g s r e c h t l i c h e S c h ü t z von A l t e r s r e n t e n a n s p r i i c h e n und - a n w a r t s c h a f t e n i n I t a l i e n und i n d e r B u n d e s r e p u b l i k D e u t s c h l a n d s o w i e d e r e n S c h ü t z im Rahmen d e r E u r o p a i s c h e n M e n s c h e n r e c h t s k o n v e n t i o n 8 7 / 2 7 2 : S e r g e NOIRET Aux o r i g i n e s d e l a r e p r i s e d e s r e l a t i o n s e n t r e Rome e t M o s c o u . I d é a l i s m e m a x i m a l i s t e e t r é a l i s m e b o l c h e v i q u e : l a m i s s i o n B o m b a c c i - C a b r i n i à C o p e n h a g u e en a v r i l 1 9 2 0 . 8 7 / 2 7 3 : G i s e l a BOCK G e s c h i c h t e , F r a u e n g e s c h i c h t e , G e s c h l e c h t e r g e s c h i c h t e 8 7 / 2 7 4 : J e a n BLONDEL M i n i s t e r i a l C a r e e r s a n d t h e N a t u r e o f P a r l i a m e n t a r y G o v e r n m e n t : The C a s e s o f A u s t r i a a n d B e l g i u m 8 7 / 2 7 5 : B i r g i t t a NEDELMANN I n d i v i d u a l s a n d P a r t i e s - C h a n g e s in P r o c e s s e s o f P o l i t i c a l M o b i l i z a t i o n 8 7 / 2 7 6 : P a u l MARER Can J o i n t V e n t u r e s i n H u n g a r y S e r v e a s a " B r i d g e " t o t h e CMEA M a r k e t ? 8 7 / 2 7 7 : F e l i x FITZROY E f f i c i e n c y Wage C o n t r a c t s , Un employ ment a n d W o r k s h a r i n g 8 7 / 2 7 8 : B e r n d MARIN C o n t r a c t i n g W i t h o u t C o n t r a c t s E c o n o m ic P o l i c y C o n c e r t a t i o n by A u t o p o i e t i c R e g i m e s b e y o n d Law 8 7 / 2 7 9 : D a r r e l l DUFFIE a n d E q u i l i b i r u m a n d t h e R o l e o f t h e F ir m Wayne SHAFER i n I n c o m p l e t e M a r k e t s 8 7 / 2 8 0 : M a r t i n SHUBIK A Game T h e o r e t i c A p p r o a c h t o t h e T h e o r y o f Money a n d F i n a n c i a l I n s t i t u t i o n s 8 7 / 2 8 1 : G o e s t a ESPING ANDERSEN S t a t e a n d M a r k e t i n t h e F o r m a t i o n o f S o c i a l S e c u r i t y R e g i m e s A P o l i t i c a l Economy A p p r o a c h 8 7 / 2 8 2 : N e i l KAY M a r k e t s a n d F a l s e H i e r a r c h i e s : Some P r o b l e m s i n T r a n s a c t i o n C o s t E c o n o m i c s

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PUBLICATIONS OF THE EUROPEAN UNIVERSITY INSTITUTE JUNE 1987 8 7 / 2 8 3 : L e s l i e OXLEY and D o n a l d GEORGE P e r f e c t F o r e s i g h t , N o n - L i n e a r i t y and H y p e r i n f l a t i o n 8 7 / 2 8 4 : S a u l ESTRIN and D e r e k JONES The D e t e r m i n a n t s o f W o r k e r s ' P a r t i c i p a t i o n a n d P r o d u c t i v i t y i n P r o d u c e r C o o p e r a t i v e s

8 7 / 2 8 5 : Dom enic o M a r i o NUTI F i n a n c i a l I n n o v a t i o n u n d e r M a r k e t S o c i a l i s m

8 7 / 2 8 6 : F e l i x FITZROY Unemployme nt a n d t h e S h a r e Econ om y: A S c e p t i c a l N o te 8 7 / 2 8 7 : P a u l HARE S u p p l y M u l t i p l i e r s i n a C e n t r a l l y P l a n n e d Economy w i t h a P r i v a t e S e c t o r 8 7 / 2 8 8 : R o b e r t o TAMBORINI The S t o c k A p p r o a c h t o t h e E x c h a n g e R a t e : an E x p o s i t i o n a n d a C r i t i c a l A p p r a i s a l 8 7 / 2 8 9 : C o r r a d o BENASSI A s y m m e t r i c I n f o r m a t i o n a n d F i n a n c i a l M a r k e t s : fr o m F i n a n c i a l I n t e r m e d i a t i o n t o C r e d i t R a t i o n i n g 8 7 / 2 9 0 : J o h a n BARNARD The E u r o p e a n P a r l i a m e n t a n d A r t i c l e 17 3 o f t h e EEC T r e a t y 8 7 / 2 9 1 : G i s e l a BOCK H i s t o r y , Women's H i s t o r y , G e n d e r H i s t o r y 8 7 / 2 9 2 : F r a n k PROCHASKA A M o t h e r ' s C o u n t r y : M o t h e r s ' M e e t i n g s a n d F a m i l y W e l f a r e i n B r i t a i n , 1850 - 1950

8 7 / 2 9 3 : K a r e n OFFEN Women and t h e P o l i t i c s o f M o th e r h o o d i n F r a n c e , 1920 - 1940

8 7 / 2 9 4 : G u n t h e r TEUBNER E n t e r p r i s e C o r p o r a t i s m

8 7 / 2 9 5 : L u c i a n o BARDI P r e f e r e n c e V o t i n g a n d I n t r a - P a r t y C o m p e t i t i o n i n E u r o - E l e c t i o n s

8 7 / 2 9 6 : G i a n n a GIANNELLI On L a b o u r M a r k e t T h e o r i e s

8 7 / 2 9 7 : Dom e nic a TROPEANO The R i d d l e o f F o r e i g n E x c h a n g e s : A S w e d is h - G e r m a n D e b a t e

8 7 / 2 9 8 : B . THOM, M.BLOM T . VAN DEN BERG, C . STERK, C. KAPLAN

P a t h w a y s t o Drug A b u s e Am on gs t G i r l s i n B r i t a i n a n d H o l l a n d

:Working Paper out of print

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PUBLICATIONS OF THE EUROPEAN UNIVERSITY INSTITUTE JUNE 1987

8 7 / 2 9 9 : V.. MAQUIEIRA,

J . .C. LAGREE, P . LEW FAI M., De WAAL

8 7 / 3 0 0 : A., ELZINGA, P . NABER, R.. C IP P O L L IN I, F ., F A CCIO L I, T . PITCH 8 7 / 3 0 1 : S . , L E E S , J . SHAW, K., REISBY 8 7 / 3 0 6 : P a o l o C . GARELLA T e e n a g e L i f e s t y l e s a n d C r i m i n a l i t y i n S p a i n , F r a n c e a n d H o l l a n d D e c i s i o n - M a k i n g Ab out G i r l s by t h e C r i m i n a l J u s t i c e S y s t e m in H o l l a n d a n d I t a l y A s p e c t s o f S c h o o l C u l t u r e a n d t h e S o c i a l C o n t r o l o f G i r l s A d v e r s e S e l e c t i o n a n d I n t e r m e d i a t i o n

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