Publication Type

Working Paper

Publication Date

1-2017

Abstract

We investigate the conditions under which the first-best allocation without commitment is sustainable in a production economy. While it is widely known in the literature that allowing capital accumulation creates a distortion, we find that it can help to sustain the first-best allocation. We also find that for a certain set of endowment economiesin which the efficient allocation is not sustainable, the efficient allocation becomes sustainable once we introduce a production technology with very small returns to scale orany returns to scale higher than that of the minimum value. In some cases, gains fromefficient resource allocation between agents can be so large that they can compensate forthe increase in the outside option that arises when capital moves from the less-productiveto the more-productive agent.

Keywords

Limited Commitment, Enforcement Constraints, First-best Allocation, Production Economy

Discipline

Econometrics | Industrial Organization

Research Areas

Econometrics

First Page

1

Last Page

27

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://jungholee.weebly.com/uploads/3/8/6/4/38644437/sustainability20170110.pdf

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