The End of Alchemy by Mervyn King: A Review Essay

I review The End of Alchemy by Mervyn King, published by W. W. Norton and Company in 2016. I discuss King’s proposed regulatory reform, the “pawnbroker for all seasons” (PFAS), and I compare it to an alternative solution developed in my own work. I argue that unregulated trade in the financial markets will not, in general, lead to Pareto-optimal allocations. As a consequence, solutions like the PFAS that correct problems with existing institutions are likely to be circumvented by the development of new ones. (JEL D81, D82, E44, G01, G18, G28, L51)

DON and Shapley Value for Allocation among Cooperating Agents in a Network: Conditions for Equivalence

In a paper appearing in a recent issue of this journal ( Studies in Microeconomics), the authors explored a new method to allocate a divisible resource efficiently among cooperating agents located at the vertices of a connected undirected network. It was shown in that article that maximizing social welfare of the agents produces Pareto optimal allocations, referred to as dominance over neighbourhood (DON), capturing the notion of dominance over neighbourhood in terms of network degree. In this article, we show that the allocation suggested by the method competes well with current cooperative game-theoretic power centrality measures. We discuss the conditions under which DON turns exactly equivalent to a recent ‘fringe-based’ Shapley Value formulation for fixed networks, raising the possibility of such solutions being both Pareto optimal in a utilitarian social welfare maximization sense as well as fair in the Shapley value sense.

Pareto meets Olson – A Note on Pareto-optimality and Group Size in Linear Public Goods Games

SummaryIn this paper I examine the relationship between Pareto-optimality and group size in linear public goods games or experiments. In particular, I use the standard setting of homogeneous linear public goods experiments and apply a recently developed tool to identify all Pareto-optimal allocations in such settings. It turns out that under any conceivable circumstances, ceteris paribus, small groups have a higher Pareto-ratio (Pareto-optimal allocations over total allocations) than large groups. Hence, if Pareto-optimality of an allocation is a property that makes such allocations acceptable and maintainable, small groups will find is easier to provide Pareto-optimal amounts of a public good than large groups. This is a novel reasoning for Mancur Olson′s claim, in particular, with respect to what he has termed inclusive goods and inclusive groups.