CONTEMPORARY ECONOMIC ISSUES Volume 4: Economic Behaviour and Design

This is lEA conference volume no. 124

CONTEMPORARY ECONOMIC ISSUES

Congress Editor: Michael Bruno

Volume 1 REGIONAL EXPERIENCE AND SYSTEM REFORM Justin Yifu Lin (editor)

Volume 2 LABOUR, FOOD AND POVERTY Yair Mundlak (editor)

Volume 3 TRADE, PAYMENTS AND DEBT Daniel Cohen (editor)

Volume 4 ECONOMIC BEHAVIOUR AND DESIGN Murat R. Sertel (editor)

Volume 5 MACROECONOMICS AND FINANCE Holger C. Wolf (editor)

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Contemporary Economic Issues Proceedings of the Eleventh World Congress of the International Economic Association, Tunis

Congress Editor: Michael Bruno

Volume 4 ECONOMIC BEHAVIOUR AND DESIGN

Edited by

Murat R. Sertel

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Library of Congress Cataloging-in-Publication Data International Economic Association. World Congress (11th : 1995 : Tunis, Tunisia) Contemporary economic issues I congress editor Michael Bruno. p. em.- (lEA conference volume; 121, 122, 123, 124, 125) Includes bibliographical references and index. Contents: v. 1. Regional experience and system reform I edited by Justin Yifu Lin- v. 2. Labour, food and poverty I edited by Yair Mundlak- v. 3. Trade, payments and debt I edited by Daniel Cohen - v .4. Economic behaviour and design I edited by Murat R. Sertel - v. 5. Macroeconomics and finance I edited by Holger Wolf. ISBN 978-0-312-21506-4(cloth: v. 1)-ISBN 978-0-312-17744-7(cloth v. 2). -ISBN 978-0-312-17760-7(cloth : v. 3).- ISBN 978-0-312-21958-1 (cloth: v. 4).- ISBN 978-0-312-17759-l(cloth: v. 5) 1. Economics-Congresses. 2. Economic policy-Congresses. 3. Finance-Congresses. I. Bruno, Michael. II. Mundlak, Yair, 1927- . III. Cohen, Daniel, 1953- . IV. Wolf, Holger C. V. Title. VI. Series: I.E.A. conference volume ; no. 122, etc. HB2l.I65 1995 330--dc21 95--4526

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Contents

The International Economic Association

Preface by Michael Bruno

List of Contributors

List of Abbreviations and Acronyms

Introduction: Discoveries vs Inventions in Economics Murat R. Serlel

PART I REGULATORY DESIGN AND CORRUPTION

1 Liberalization and Regulation of Network Utilities David M Newbery

2 Bayesian Regulatory Mechanisms: Corruption and Learning Semih Koray and i smail Saglam

3 Cartels Run by Criminal Organizations and Market Contestability Gianluca Fiorentini

PART II DESIGNS FOR COLLECTIVE DECISION-MAKING

4 Designing Mechanisms, in Particular for Electoral Systems: The Majoritarian Compromise

Leonid Hurwicz and Murat R. Serlel

5 Inter-Generational Equity and the Rate of Discount in Long-Term Social Investment Kenneth 1. A"ow

6 Induced Technical Change, Scientific Advance and the Efficient Control of Pollution Francesco Fe"ante

v

vii

ix

Xlll

xiv

xvii

3

30

49

69

89

103

VI Contents

PART III DECENTRALIZATION OF INFORMATION

7 Decentralized Information Processing in the Theory of Organizations 125 Timothy van Zandt

8 A Model of Economic Equilibrium in the Market for Information Goods 161 Vladimir l. Danilov, Gleb A. Koshevoy and Alexandre l. Sotskov

PART IV ORDER AND CHAOS IN ECONOMIC DYNAMICS: THEORY REVIEWED

9 The Microeconomics of Invention and Innovation David B. Audretsch

10 The Prehistory of Chaotic Economic Dynamics J Barkley Rosser, Jr

11 Theories of 'Endogenous' Growth in Historical Perspective Heinz D. Kurz and Neri Salvadori

185

207

225

The International Economic Association

A non-profit organization with purely scientific aims, the International Economic Association (lEA) was founded in 1950. It is a federation of some sixty national economic associations in all parts of the world. Its basic purpose is the development of economics as an intellectual discipline, recognizing a diversity of problems, systems and values in the world and taking note of methodological diversities.

The lEA has, since its creation, sought to fulfill that purpose by promoting mutual understanding among economists through the org­anization of scientific meetings and common research programmes, and by means of publications on problems of fundamental as well as of current importance. Deriving from its long concern to assure profes­sional contacts between East and West and North and South, the lEA pays special attention to issues of economics in systemic transition and in the course of development. During its more than forty years of existence, it has organized a hundred round-table conferences for specialists on topics ranging from fundamental theories to methods and tools of analysis and major problems of the present-day world. Participation in round tables is at the invitation of a specialist pro­gramme committee, but eleven triennial World Congresses have regu­larly attracted the participation of individual economists from all over the world.

The Association is governed by a Council, composed of represent­atives of all member associations, and by a fifteen- member Executive Committee which is elected by the Council. The Executive Committee (1995-98) at the time of the Tunis Congress was:

President: Vice-President: Treasurer: Past President: Other Members:

Professor Jacques H. Dreze, Belgium Professor Anne Krueger, USA Professor Erich Streissler, Austria Professor Michael Bruno, Israel Professor Anthony B. Atkinson, UK Professor Vittorio Corbo, Chile Professor Karel Dyba, Czech Republic Professor Jean-Michel Grandmont, France

vii

Vlll

Advisers:

The International Economic Association

Professor Yujiro Hayami, Japan Professor Seppo Honkapohja, Finland Professor Valeri Makarov, Russia, Professor Luigi Pasinetti, Italy Professor Hans Werner Sinn, Germany Professor Rehman Sobhan, Bangladesh Professor Alan D. Woodland, Australia Professor Kenneth J. Arrow, USA Academician Oleg T. Bogomolov, Russia Professor Mustapha Nabli, Tunisia Professor Amartya Sen, India

Secretary-General: Professor Stefano Zamagni, Italy Professor Jean-Paul Fitoussi, France Professor Michael Kaser, UK General Editor:

Sir Austin Robinson was an active Adviser on the publication of lEA conference proceedings from 1954 until his final short illness in 1993.

The Association has also been fortunate in having secured many outstanding economists to serve as President:

Gottfried Haberler (1950-53), Howard S. Ellis (1953-56), Erik Lindahl (1956-59), E. A. G. Robinson (1959-62) G. Ugo Papi (1962-65), Paul A. Samuelson (1965-68), Erik Lundberg (1968-71), Fritz Machlup (1971-74), Edmond Malinvaud (1974-77), Shigeto Tsuru (1977-80), Victor L. Urquidi (1980-83), Kenneth J. Arrow (1983-86), Amartya Sen (1986-89), Anthony B. Atkinson (1989-92) and Michael Bruno (1992-95).

The activities of the Association are mainly funded from the sub­scriptions of members and grants from a number of organizations, including continuing support from UNESCO, through the Interna­tional Social Science Council.

Preface Michael Bruno

The World Congress of the International Economic Association held in Tunis in December 1995 was the eleventh in a series that started in Rome in 1956, with the most recent one being held in Moscow in 1992. This Congress was marked by being the first to take place in Africa and the Middle East. This was reflected in having special sessions devoted to the Economic Development of Sub-Saharan Africa, Maghreb Economies and the Economies of the Middle East Peace Process, besides a wide array of topics in contemporary economics of develop­ment, trade, economic growth and general economic theory. Quoting from the opening speech by the President of Tunis, His Excellency Zine EI Abidine Ben Ali:

Tunisia is very proud that your Association is holding its eleventh congress - the first such event to take place in Africa and the Middle East - on our soil. This will give you a good opportunity to concen­trate your attention on the most recent developments in economics and their role in strengthening development, as can be seen from the items on your agenda. The situation now prevailing in many coun­tries, particularly those on our African continent, more than con­firms the necessity of giving such issues an essential place in contemporary economic thinking.

Tunisia's impressive recent development effort, marking both a vigorous growth rate, low inflation, marked improvement in its social indicators, greater openness to international trade, as well as its ample cultural and historical treasures, made it a particularly interesting host country for our Association. It was a very lively Congress, with many high quality sessions, interspersed with several cultural and other events which introduced the broadly international group of attendees to the host country's institutions and culture.

The Congress programme consisted of four plenary sessions (those by Professor Edmond Malinvaud, Professor Robert Putnam, the Aus­tin Robinson Memorial lecture delivered by Professor Assar Lindbeck, as well as the Presidential Address). It had three panel sessions

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x Preface

(chaired by Professors U. Reinhardt, A. Tornell and S. Fischer), and 41 regular sessions. In these there were 43 invited papers and 278 con­tributed papers. The Congress was attended by about 700 participants coming from 68 different countries.

The full list of the Programme Committee is as follows:

Bina Agarwal, University of Delhi, India Kenneth J. Arrow, Stanford University, USA Anthony B. Atkinson, Oxford University, UK David B. Audretsch, The Institute for Development Strategies,

Indiana University Richard Baldwin, University of Wisconsin, USA Kaushik Basu, Delhi School of Economics, India David Begg, Birkbeck College, London, UK Fran<;ois Bourguinon, DELTA, Paris, France Daniel Cohen, CEPREMAp, Paris, France Vittorio Corbo, Catholic University of Chile, Santiago, Chile Partha Dasgupta, University of Cambridge, UK Peter Diamond, MIT, Cambridge, Mass., USA Juan Dolado, CEMFI, Madrid, Spain Bernard Dumas, Groupe Hautes Etudes Commerciales,

Jouy-en-Josas, France Ibrahim Elbadawi, African Economic Research Consortium, Nairobi,

Kenya Riccardo Faini, University of Brescia, Italy Stanley Fischer, The World Bank, Washington, USA Nancy Folbre, University of Massachusetts, USA Alberto Giovannini, Department of the Treasury, Rome, Italy Vittorio Grilli, Department of the Treasury, Rome, Italy Oliver Hart, Harvard University, USA Sergiu Hart, Hebrew University of Jerusalem, Israel Elhanan Helpman, Tel Aviv University, Israel Wontack Hong, Seoul National University, Korea Susan Horton, University of Toronto, Canada Peter Howitt, Universite des Sciences Sociales, Toulouse, France Ponciano Intal, Philippine Institute for Development Studies,

Manila, Philippines Takatoshi Ito, NBER, Cambridge, Mass., USA Ravi Kanbur, The World Bank, Washington, USA Heinz D. Kurz, University of Graz, Austria Jean Jacques Laffont, U niversite des Sciences Sociales, Toulouse, France

Preface xi

Donald Lessard, MIT, Cambridge, Mass., USA Justin Yifu Lin, China Centre for Economic Research, Beijing, China Millard Long, The World Bank, Budapest, Hungary Karl-G6ran Maler, Stockholm School of Economics, Sweden John Moore, London School of Economics, UK Yair Mundlak, University of Chicago, USA Mustapha Kamal Nabli, University of Tunis, Tunisia Benno Ndulu, Mrican Economic Research Consortium,

Nairobi, Kenya Takashi Negishi, Aoyama Gakuin University, Tokyo, Japan Siddiq Osmani, University of Ulster, Coleraine, UK Kirit Parikh, Indira Gandhi Institute of Development Research,

Bombay, India Richard Portes, CEPR, London, UK Martin Ravaillon, The World Bank, Washington, USA Sergio Rebelo, University of Rochester, USA Uwe Reinhardt, Princeton University, USA Dani Rodrik, Columbia University, New York, USA Agnar Sandmo, Norwegian School of Economics, Bergen, Norway Murat R. Sertel, Bogazi<;i University, istanbul, Turkey Dennis Snower, Birkbeck College, London, UK Jan Svejnar, CERGE, Charles University, Prague, Czech Republic Peter Swan, University of New South Wales, Kensington NSW, Australia Peter Temin, MIT, Cambridge, Mass., USA Jacques Thisse, Ecole Nationale des Ponts et Chaussees, Paris, France Aaron Tornell, Harvard University, Cambridge, Mass., USA Hirofumi Uzawa, Japan Development Bank, Tokyo, Japan Oliver Williamson, University of California at Berkeley, Cal., USA Charles Wyplosz, INSEAD, Fontainebleau, France Shahid Yusuf, The World Bank, Washington, USA Stefano Zamagni, University of Bologna, Italy Klaus Zimmerman, University of Munich, Germany

The proceedings of the Congress are being published in five volumes under the general title Contemporary Economic Issues:

Vol. 1: Regional Experiences and System Reform edited by Justin Yifu Lin Vol. 2: Labour, Food and Poverty edited by Yair Munlak Vol. 3: Trade, Payments and Debt edited by Daniel Cohen Vol. 4: Economic Behaviour and Design edited by Murat R. Sertel Vol. 5: Macroeconomics and Finance edited by Holger C. Wolf

xii Preface

I would like to record our gratitude to our Tunisian hosts who made this a highly successful conference. Besides thanking our illustrious host, His Excellency President Zine EI Abidine Ben Ali, I would like to thank the local Organizing Committee, and first and foremost its Chairman, Mustapha Kamel Nabli, who bore the brunt of the respons­ibility for the logistics and successful implementation of the Congress. He was helped by Mongi Safra (Vice-Chairman), Mongi Azabou (Executive Secretary), Salah Maoui (Minister of Tourism), Salah Bac­cari (Minister of Culture) and the able Tunisian staff assisting them in their task.

I would like to thank Francis Ghiles (Volume 1), Michael Kaser (Volume 2), John Butler (Volume 3), Maureen Hadfield (Volume 4) and Lesley Cook (Volume 5) for taking charge of the editorial pre­paration of these volumes. I am as always grateful to Michael Kaser, the General Editor of these series. Finally, I would like to record my thanks to Jean-Paul Fitoussi, the Secretary General of the Interna­tional Economic Association, not only for initiating the Congress in Tunis, but for his constant support with the preparations along the way.

List of Contributors

Professor Kenneth J. Arrow, Stanford University, USA

Professor David B. Audretsch, The Institute for Development Strategies, Indiana University

Professor Vladimir I. DaniIov, Russian Academy of Sciences, Central Institute of Economics and Mathematics, Moscow, Russia

Dr Francesco Ferrante, Universita degli Studi di Cassino, Italy

Dr Gianluca Fiorentini, Universita degli Studi di Bologna, Italy

Professor Leonid Hurwicz, University of Minnesota, USA

Professor Semih Koray, Bilkent University, Ankara, Turkey and Cen­ter for Economic Design, BogaziC;i University, istanbul, Turkey

Professor Gleb A. Koshevoy, Russian Academy of Sciences, Central Institute of Economics and Mathematics, Moscow, Russia

Professor Heinz D. Kurz, University of Graz, Austria

Professor David M. Newbery, Cambridge University, UK

Professor J. Barkley Rosser, Jr, James Madison University, Harrison­burg, USA

Dr ismaiI Saglam, Bilkent University, Ankara, Turkey

Professor Neri Salvadori, University of Pis a, Italy

Professor Murat R. Sertel, Center for Economic Design, Bogazic;i University, istanbul, Turkey and Turkish Academy of Sciences, Ankara, Turkey

Professor Alexandre I. Sotskov, Russian Academy of Sciences, Central Institute of Economics and Mathematics, Moscow, Russia

Professor Timothy Van Zandt, Princeton University, USA

Xlll

List of Abbreviations and Acronyms AT&T B-M CEGB CEPR cm CU EDTC ESD ESI FERC FOC GW lEA IPPC IPF K-S LDC MES MMC NGM NGT NGC NVE NVP OFFER PRAM PPP PSP R&D REC SCC SCR SEB SED

American Telephone and Telecommunications Baron and Myerson Central Electricity Generating Board Centre for Economic Policy Research Contract for Difference Consumers' Union environmental direction of technological change environment -saving direction (of technical change) electricity supply industry Federal Energy Regulatory Commission first order certainty gigawatts International Economic Association Intergovernmental Panel on Climate Change innovation possibilities frontier Koray and Saglam local distributions companies minimum efficient scale Monopolies and Mergers Commission new growth model new growth theory National Grid Company Norwegian Water Resources and Energy Administration Noveto power Office of Electricity Regulation parallel random access machine pool purchase price pool sales prices research and development Regional Electricity Companies social choice correspondence social choice rule static environmental bias socially efficient direction

XlV

SDIC S-Y SMP SW TOB WN

List of Abbreviations and Acronyms

sensitive dependence on initial condition Sertel and Yilmaz system marginal price social welfare technological opportunities bias Wealth of Nations

xv

Introduction: Discoveries vs Inventions in Economics Murat R. Sertel BOGAZi<.;i UNIVERSITY AND TURKISH ACADEMY OF SCIENCES

It may be that a good editor should write an introduction which does some of the traditional things, such as giving a preview of the coming chapters and suggesting how they might be viewed as interrelated according to some bold or subtle pattern. In the present case, the chapters are related by no earlier plan, and their positioning within the present volume reflects at best a reasonable taxonomy applied ex post, once the chapters were chosen, leaving any quest for underlying patterns necessarily fruitless. Previewing the chapters also seems bet­ter achieved by simply looking at them. Nevertheless, as editor of this volume, I would like to write a few words at this introductory oppor­tunity, but rather on the subject of the direction and accomplishments of our discipline, a topic which Professor Edmond Malinvaud (1997) has so eloquently opened in his invited lecture, Why Economists do not Make Discoveries.

'Alas!', says Professor Malinvaud (1997), 'economics cannot boast of great discoveries of a rank to which we have become accustomed in other areas of scientific activity'. This is a very frank observation by a leading scientist in our discipline. Professor Malinvaud's lamentation is well-documented in its justification, and needs to be given an ear connected to a thoughtful mind.

Now Professor Malinvaud speaks, I believe, from the viewpoint of 'positive' economics, whether one adopts Lionel Robbins or Karl Popper as one's methodological guide in this area. Positive economics, being the scientific study of actually observed economies, what is already there as the complex of institutions which the man in the street (along with many economists) will typically call 'capitalism', is of course only a part of economics in the sense of 'what economists do'. In fact, even Karl Marx, for all his enthusiasm for a different order, was essentially a positive economist, since he studied what was already there, rather than even sketching a workable plan of what he thought

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xviii Introduction

should have been in its place. Positive economics, as an area of science where discovery is the goal, may fall short of what might have been expected of it. But there is also a rather different kind of intellectual activity which economists, as economists, engage in, and which has always counted as economics. Of course, I am referring not just to 'normative' economics, but economic design. While Professor Malin­vaud is, I believe, right in his assessment of the accomplishments of 'positive' economics, things are not so bleak when one looks at eco­nomics, instead, as an art and science of design. The objective of economic design is, not discovery, but invention.

So, what is economic design? Some time ago I had the opportunity to formulate an answer to this as follows: 'Economic design comprises the creative art and science of inventing, analysing and testing eco­nomic as well as social and political institutions and mechanisms aimed at achieving individual objectives and social goals'. This is as close as I could get to proposing a definition, requested by the (Springer­Verlag) publishers of the scientific periodical, Review of Economic Design, whose Editor-in-Chief I happen to be. In such a capacity, I had set out the Aims and Scope of this journal as follows:

In this age of Economic Design, the accumulated traditions and wealth of knowledge in normative and positive economics and the strategic analysis of game theory are applied with novel ideas in the creative tasks of designing and assembling diverse legal-economic instruments. These include constitutions and other assignments of rights, mechanisms for allocation or regulation, tax and incentive schemes, contract forms, voting and other choice aggregation pro­cedures, markets, auctions, organizational forms, such as partner­ships, together with supporting membership and other property rights, and information systems. These designs, the methods of analysis used in their scrutiny, as well as the mathematical tech­niques and empirical knowledge they employ, along with compara­tive assessments of the performance of known economic systems and implemented designs, all of these form natural components of the subject matter of Economic Design.

While Marx may have been a failure as an economic designer, luckily, the ordinary economic man was not. I do not know when it would be fair to say when economic thought began, but it does seem that much of the earlier interest in the economic sphere, sometimes couched in a religious dictum, was motivated by a need to design its

SerleZ: Introduction xix

institutions: the basic agreement on property rights as expressed by the commandment 'thou shalt not steal' bears testimony to a designer's interest in economic affairs. It is to the native inventiveness of our economic designer ancestors that we owe so many brilliant economic creatures, such as exchange markets; means of communicating value through time via instruments such as money or institutions such as inheritance; productive organizations such as latifundia, and arrange­ments such as sharecropping, joint-stock companies, limited liability contracts; resource allocation procedures such as auctions; financial institutions such as banks, as well as many of our legal-economic instruments (employing the very idea of commitment by contract), such as bonds, stocks and leases (not to speak of money, already mentioned); risk-sharing and risk-exchange institutions, as in insur­ance; taxation and the provision of public goods. Our contemporary economic designers have given us the whole modern spectrum of financial instruments ranging from classical options to financial deri­vatives. Once we step outside economics as a positive science, the rest of this discipline is characterized by the intellectual activity of eco­nomic design. And here we are busy trying to figure out how to regulate, how to set the rules of the economic game, so as to be able to expect desirable outcomes from the economic activity that ought to ensue from playing the game designed. In this creative intellectual exercise, we need the positive economist's guidance as to what sort of equilibrium to expect from these games, and some of the requisite wisdom here may have to come from experimental work conducted in pilot and mock economies or economic environments, since the real ones are, by the very nature of our exercise, as yet in the design phase. But the key word here in the designers' quarter of economics is 'invention', not 'discovery'.

Now how fitting would it be to dwell upon the question: why do economists (lay or professional) not make inventions? As fitting, some could reply, as it would be to query why it does not rain in England! While positive economists and econometricians examining and meas­uring the usual economy might find little (left?) to be 'discovered' there, human creativeness, both in academia and the marketplace, seems to be sprouting abundantly with ideas on how to design our socio-economic institutions and the legal-economic instruments these employ, towards a more fecund and better-shared prosperity. More­over, we are beginning to appreciate the inventive, designer's side of economics, as the 1996 Nobel Prizes in Economics reflect. Regarding the accomplishments of our 1996 Nobel Laureates, William Vickrey's

xx Introduction

(1961) idea of a second-price auction and James Mirrlees' (1971) notions of how to tax, long exemplary in their simple elegance, master­fully dealt with the economic designer's plight of having to work in ignorance, in the absence of knowledge (regarding their types) natur­ally available to the would-be participants when they took part in the economic game whose rules are to be designed. Vickrey saw our Nobel appreciation very late in his life, as, unfortunately, he died a few days after the news of his Nobel Prize. And there are still many masters of economic design who have, perhaps, been less appreciated than the discoverers, notwithstanding the knowing complaint of Professor Mal­invaud that we are possibly discovering less than we are often herald­ing and hailing.

In contrast with the wealth of economic institutions and instruments, perhaps seldom the fruit of conscious design, but inherited as a result of anonymous folk inventions and institutional evolution, many of which I included in my sample above as due to our economic designer ancestors, we have also gradually acquired some powerful means and a rich culture of conscious economic, as well as political and, generally, social design. The growing importance of a communal economic life has brought to the forefront a heightened concern with sensible designs for taxation towards the provision of public goods and ser­vices. I Knut Wicksell and his student, Erik Lindahl (1919 and 1964), can be remembered gratefully in this regard? Paul Samuelson's (1954) indication of the inherent difficulty, as connected with the 'free rider problem', in eliciting the very data (regarding what has since come to be termed the 'types', involving the preferences and endowments, of economic agents) which are requisite in order to apply formulae such as Lindahl's solution, then Leonid Hurwicz's (1972) formulation of the incentive compatibility notion, and his demonstration of its failure even by solutions such as that of Leon Walras for market economies in the absence of public goods, these seem to have provided the spark as well as much of the fuel for the several strands of intellectual flame which have since illuminated large areas of economic design. Kenneth Arrow's (1951 and 1963) now classical existence question for certain aggregations which obeyed ethically agreeable axioms such as non­dictatoriality in summing up individual preferences into a social one - a question which he answered negatively for the axioms he picked -was again a leader, instigating a whole literature (of 'social choice and welfare') in economic design.3 The related questions of Alan Gibbard (1973) and Mark Satterthwaite (1975), followed up by Salvador Bar­bera (1977), again asked whether dictatorship could be avoided in

SerleZ: Introduction XXI

mechanism design for implementation via dominant strategies, again with negative results.

The implementation of social choice rules via Cournot (or so-called Nash) equilibrium was then addressed by Eric Maskin (1977) and characterized by Vladimir Danilov (1992). The two-person case was examined by Bhaskar Dutta and Arunava Sen (1991). Work followed by John Moore and Rafael Repullo (1988), as well as by Dilip Abreu and Arunava Sen (1990), on implementation via subgame perfect Cournot equilibrium; and by Jackson, Palfrey and Srivastava (1994) on implementation via undominated Cournot equilibrium. Bayesian implementation based on John Harsanyi's (1967-68) Bayesian games, was surveyed by Roger Myerson (1985). 'Virtual implementation' was studied by Abreu and Sen (1991). The implementation literature is by now vast and deep.

The principal-agent literature, in parallel, is also concerned with the design of commitment and incentive in a world of asymmetric informa­tion; the designer (in the name of the principal) lacking critical in­formation naturally available to the agents. The entire area of regulation is, of course, a prime example where principal-agent theory has for some time harvested some fine designs for US,4 as is the auction design literature, surveyed in Milgrom (1985). The public goods provi­sion literature, even from the seminal work of Theodore Groves and John Ledyard (1977), has explicitly faced the same 'plight' of the designer. An important quarter of economic design where the designer is spared this haunting syndrome is in the theory of teams led by Roy Radner (1962), and Marschak and Radner (1972), where the agents share a common (and commonly known) objective, but where the problem of information processing, communication and coordination is central.s The proposal to organize production via the 'labour-man­aged firms' of Benjamin Ward (1958) and Jaroslav Vanek (1970) is typically unconcerned with such fine matters, but seems to have come up against a wall which can be avoided only by taking the right exit which brings one to workers' enterprises, analysed in Sertel (1982), whose membership property rights have been sensibly designed.

Any modern account of the accomplishments of economics would easily bear witness to huge footprints of progress made in the field of design.6 Among the volumes which comprise the International Eco­nomic Association's XIth World Congress collection, the present Volume 4 is where the economic design content is most concentrated, as reflected in our title, Economic Behaviour and Design. It is for this reason that I felt it appropriate here to try, at least briefly, to shine a

XXII Introduction

light on the design aspect of economics, where invention rather than discovery is the main goal and fruit of our intellectual activity, and where we hope we displayed a more impressive performance, as lay or as professional economists, than Professor Malinvaud testifies to our having exhibited as positive economists in quest of discovery on what many economic designers might regard as familiar, well-trodden paths.

Notes

1. While certain religious provisions, such as zekat and fitre in the Islamic doctrine, aimed at equality, the idea of publicly approved taxes directed towards the production of public goods and services seems a relatively modern phenomenon.

2. Interestingly, Lindahl presented his solution as a model of positive eco­nomics, and as such it was probably far from being accurate or explanat­ory of the real world. As economic design, however, Lindahl's solution is a landmark and cornerstone for modern public economics.

3. Economic design subjects itself not only to the economist's inevitable concern for efficiency, but also to the criteria of fairness, equity and further notions of justice and ethics.

4. The celebrated works of Loeb and Magat (1979) and Baron and Myerson (1982) are to be cited in this connection. An advancement over the latter can also be found in Koray and Saglam, Chapter 2 of this volume.

5. Kleindorfer and Sertel's (1979) sharecropping designs, on the other hand, deprive the designer of the ability to measure inputs, although their employers' and employees' types are commonly-known but not directly bent to the pursuit of a common, team-like goal. As to the idea of 'pretend-but-perform' (Sertel, 1982; and Koray and Serte!, 1983), it forms the basis for mechanisms where agents declare their respective types subject to the commitment to behave accordingly in the future.

6. For a good survey, see Hurwicz (1985).

References

Abreu, D. and A. Sen (1990) 'Subgame Perfect Implementation: A Necessary and Almost Sufficient Condition', Journal of Economic Theory, vol. 50, pp. 285-99.

Abreu, D. and A. Sen (1991) 'Virtual Implementation in Nash Equilibrium', Econometrica, vol. 59, pp. 997-1021.

Arrow, K. J. (1951 and 1963) Social Choice and Individual Values, New York (1951), New Haven (1963): Yale University Press.

Barbera, S. (1977) 'The Manipulability of Social Choice Mechanisms that Do Not Leave Too Much Up To Chance', Econometrica, vol. 45, pp. 1573-89.

Serlel: Introduction xxiii

Baron, D. P. and R. Myerson (1982) 'Regulating a Monopoly with Unknown Costs', Econometrica, vol. 50, pp. 911-30.

Danilov, V. (1992) 'Implementation via Nash Equilibria', Econometrica, vol. 60,no.1,pp.43-56.

Dutta, B. and A. Sen (1991) 1\ Necessary and Sufficient Condition for 1Wo­Person Nash Implementation', Review of Economic Studies, vol. 58, pp. 121-128.

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