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    The Econometric Societyis collaborating with JSTOR to digitize, preserve and extend access toEconometrica.

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    Economic Theory of Organisation IISource: Econometrica, Vol. 39, No. 4 (Jul., 1971), pp. 251-266Published by: The Econometric SocietyStable URL: http://www.jstor.org/stable/1912451Accessed: 01-07-2015 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

    Non-Classical 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 (Arrow-Hurwicz), feasi-

    bility

    of a

    plan constructed

    in

    finite

    steps (Malinvaud and

    Kornai) among others].

    But, if we allow

    for the possibility of such

    non-classical

    environments as increasing

    returns and

    externalities, it may be considered that there is a kind

    of

    trade-off

    among

    various

    desirable

    performance

    characteristics. Especially,

    informational

    efficiency

    as

    defined by Hurwicz and

    the self-interest 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

    motivationally-stable.

    Then

    the two

    procedures

    that can

    cope

    with

    increasing

    returns

    and

    externalities

    will be

    proposed. They

    are

    both

    motivationally-stable,

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    252 SECOND

    WORLD

    CONGRESS

    but informationally-less-efficient

    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. 34-104.

    [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. 27-46.

    Centralization and Decentralization of Decision-Making 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