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Economic Theory of Organisation IISource: Econometrica, Vol. 39, No. 4 (Jul., 1971), pp. 251266Published by: The Econometric SocietyStable URL: http://www.jstor.org/stable/1912451Accessed: 01072015 08:50 UTC
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86 ECONOMIC THEORY
OF ORGANISATION
II
251
goods. The consumer is able to hold his
wealth in the form of
one or more of M
assets,
of
which one is riskless. Consumer
durables are
modelled as being in part
consumption goods, and in
part assets.
The prices of goods are assumed independently and nonstationarily distrib
uted,
so as
to allow
for
inflation. The real returns
on
the
(M

1) risky
assets are
assumed to be state
dependent,
and
the
consumer is
assumed
to
know
the
prob
ability distribution
of
the states and also the
conditional distributions
of returns
given the states.
The consumer
enters a period knowing
the prices of the goods, and the
state,
and he chooses
his
consumption
of
each of the goods, and his
portfolio
decision
so
as
to
maximize his expected utility.
The problem he
faces is one of
dynamic stochastic programming. By using
particular
functional forms for
the indirect utility function it is possible to solve this
problem
by
a
recursive
procedure in order to arrive at optimal
expenditure and
investment rules for
any period
t
= 0,
. .
.,
T
After we have determined the expenditure
rule, we
convert
from the
indirect
utility function to the expenditure
function,
and differentiate
this with
respect
to
the
price
vector to arrive at the demand
equation
vector for
goods
and the services
of durables.
This has
a functional
form which
corresponds
to
the
expenditure
function.
The demand
equations for assets, and the asset component of
durables
come
directly
from
the
rule for
the
optimum portfolio
composition.
86
ECONOMIC
THEORY OF
ORGANISATION II
On
the
Motivational Stability of a Planning
Procedure for
NonClassical Environ
ments, Masahiko Aoki, Kyoto
University and
Harvard
University
In
recent years, various
planning procedures
have been proposed with some
desirable
performance characteristics besides their
convergence
to an optimal
resource allocation plan
[e.g.,
informational
efficiency (ArrowHurwicz), feasi
bility
of a
plan constructed
in
finite
steps (Malinvaud and
Kornai) among others].
But, if we allow
for the possibility of such
nonclassical
environments as increasing
returns and
externalities, it may be considered that there is a kind
of
tradeoff
among
various
desirable
performance
characteristics. Especially,
informational
efficiency
as
defined by Hurwicz and
the selfinterest of
individual managers will
be in
direct conflict.
In
this paper,
two kinds
of
desirable properties of
a planning procedure
from the motivational
point
of
view,
that
is,
the consistencies
of
the
operation
rules and
a
success indicator
for
managers,
will be
formulated.
If
a
planning
procedure satisfies these two
properties,
then the
procedure
will be
called
motivationallystable.
Then
the two
procedures
that can
cope
with
increasing
returns
and
externalities
will be
proposed. They
are
both
motivationallystable,
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3/17
252 SECOND
WORLD
CONGRESS
but informationallylessefficient
than the
competitive procedure
as
proposed
by
Arrow and Hurwicz.
REFERENCES
[1]
AOKI,
M.: Investment
Planning Procedure for an Open
Economy with Increasing
Returns (Harvard
Economic Research Project, 1969).
[2] ARROW, K.
J.
AND
L.
HURWICZ:
Decentralization and Computation in
Resource Allocation,
in R. W. Pfouts
(ed.): Essays in Economics and Econometrics
(University
of North Carolina Press,
1960), pp. 34104.
[3] HURWICZ,
.: Optimality and Informational Efficiency
in Resource
Allocation Processes, in
K. J. Arrow, et al. (eds.): Mathematical
Methods in the
Social Sciences, 1959 (Stanford University
Press, 1960),
pp. 2746.
Centralization and Decentralization of DecisionMaking Mechanisms: A General
Model,
Antonio Camacho,
Northwestern University
A
general
decisiort
making
model
is
presented
under which the
notions
degree
of centralization and
degree of coerciveness can
be precisely defined.
Hurwicz,
in
his 1959 pioneer paper
on this
field, Optimality
and Informational
Efficiency
in
Resource
Allocation Processes,
formalizes the notion of informa
tion
decentralization
by imposing certain conditions
(regardingthe domain type
of
messages, etc.)
that the
response
functions
or behavior rules of the participants
in
the decision making process have to satisfy. This author followedthe same approach
in
his 1957 paper Externalities,
Optimality
and Informationally Decentralized
Resource
Allocation Mechanisms.
In the
present model,
unlike the other
two
models mentioned
above, a new
agent (the
central
agent)
is
introduced.
The
degree
of
centralization and the degree
of coerciveness are then defined by
the relation between the behavioral
rule.
of the
central agent and the behavioral
rules of the
other participants, called in
our
model the
management agents.
Several
examples
are considered
to
compare
the
performance
of centralized
and decentralized decision making processes. In particular a simple team model
with two management agents,
a central
agent,
and
a
payoff
function w
=
c

k1[al

(e1 + e2)]2 
k2[a2
(e1
+
e2)]2

k(a1

a2)2
is studied. If
we
accept
as a measure
of the
degree
of
externality
the
value of
(a2w)/(aalaa2)
=
2k,
it
is
shown
that
for
a
given
natural structure of information
and for
given
natural behavior rules,
the decentralized
decision
making process performs
better than the
centralized
one no
matter
how
high
the
externality
is. This
example
suggests (at
least
under the
context
of
our
model) that,
contrary
to
what has been
advocated
in
part
of the
economic
literature,
the solution to the
problem
of
externalities is not always internalizing or centralizing.
Growth,Stability,
and
Disequilib