Viability and Arbitrage Under Knightian Uncertainty

We reconsider the microeconomic foundations of financial economics. Motivated by the importance of Knightian uncertainty in markets, we present a model that does not carry any probabilistic structure ex ante, yet is based on a common order. We derive the fundamental equivalence of economic viability of asset prices and absence of arbitrage. We also obtain a modified version of the fundamental theorem of asset pricing using the notion of sublinear pricing measures. Different versions of the efficient market hypothesis are related to the assumptions one is willing to impose on the common order.

Simple bets to elicit private signals

This paper introduces two simple betting mechanisms—top‐flop and threshold betting—to elicit unverifiable information from crowds. Agents are offered bets on the rating of an item about which they received a private signal versus that of a random item. We characterize conditions for the chosen bet to reveal the agents' private signal even if the underlying ratings are biased. We further provide microeconomic foundations of the ratings, which are endogenously determined by the actions of other agents in a game setting. Our mechanisms relax standard assumptions of the literature, such as common prior, and homogeneous and risk neutral agents.

COVID-19 and Climate Change: A Tale of Two Global Problems

In this paper, we examine the similarities and the differences between two global problems, the coronavirus pandemic and climate change, and the extent to which the experience with the COVID-19 pandemic can be of use for tackling climate change. We show that both problems share the same microeconomic foundations, involving an overprovision of a global public bad. In addition, they entail externalities whose correction comes at very high economic and social costs. We leverage on a well-established problem such as climate change that has been studied for several years now, to highlight the common traits with the COVID-19 pandemic, but also important differences. The COVID-19 crisis is itself a reality check for climate policy, international governance and prevention in general. Indeed, the COVID-19 pandemic is a mock laboratory of climate change, where the time scale of unfolding events is reduced from decades to days. While the former is often measured in days, weeks, months, years, the latter is measured in years, decades, and centuries.

Evolution of heterodox mesoeconomics

The established «micro-macro» dichotomy in economics can be considered as a methodological trap today. The established «micro-macro» dichotomy in economics can be considered as such a trap today. It does not allow for exploring increasingly complex relationships in the modern economy and new emerging structures. Therefore a new theoretical space – «meso» – was required. This paper shows how, outside the orthodox mainstream, a new area of economic theory – heterodox mesoeconomics – has shaped. Based on more realistic methodological prerequisites, compared with those accepted in mainstream micro- and macroeconomics, it offers new research programmes and explanatory schemes of what is happening in economic life. The unifying principles of heterodox mesoeconomics include several methodological postulates. First, this is a departure from microeconomic foundations and principles of additive aggregation. Mesoeconomics considers the economy as a complex multi-level system in which mesostructures arise as a result of coevolution processes. Second, mesoeconomics focuses not only (and not primarily) on the price coordination mechanism with a predominance of negative feedback, but rather on the effects of positive feedbacks. Therefore, heterodox mesoeconomists investigate more complex spontaneously emerging coordination mechanisms, as well as spatial, functional and temporal mesoeconomic structures. Third, heterodox mesoeconomists focus not only on competition as the basis of economic interactions but also on cooperation, redistribution, joint activities, etc. The paper summarizes experience from the heterodox mesoeconomic research since the 1970s to the present.

JEEA-FBBVA Lecture 2018: The Microeconomic Foundations of Aggregate Production Functions

Aggregate production functions are reduced-form relationships that emerge endogenously from input–output interactions between heterogeneous producers and factors in general equilibrium. We provide a general methodology for analyzing such aggregate production functions by deriving their first- and second-order properties. Our aggregation formulas provide nonparametric characterizations of the macroelasticities of substitution between factors and of the macrobias of technical change in terms of microsufficient statistics. They allow us to generalize existing aggregation theorems and to derive new ones. We relate our results to the famous Cambridge–Cambridge controversy.