John D Geanakoplos | Yale University (original) (raw)

We thank Ryan Chahrour and Ben Marx for research assistance, Deborah Lucas for helpful comments a... more We thank Ryan Chahrour and Ben Marx for research assistance, Deborah Lucas for helpful comments and suggestions, and staff at the Social Security Administration's Office of the Chief Actuary for help with data on projected contributions and benefits.

Economic Theory (forthcoming)

We prove that in competitive market economies with no insurance for idiosyncratic risks, agents ... more We prove that in competitive market economies with no insurance for idiosyncratic
risks, agents will always overinvest in illiquid long term assets and underinvest
in short term liquid assets. We take as our setting the seminal model
of Diamond and Dybvig (1983), who Örst posed the question in a tractable
model. We reach such a simple conclusion under mild conditions because we
stick to the basic competitive market framework, avoiding the banks and intermediaries
that Diamond and Dybvig and others introduced.

Status is greatly valued in the real world, yet it has not received much attention from economic ... more Status is greatly valued in the real world, yet it has not received much attention from economic theorists. We examine how the owner of a firm can best combine money and status to get her employees to work hard for the least total cost. We find that she should motivate workers of low skill mostly by status and high skill mostly by money. Moreover, she should do so by using a small number of titles and wage levels. This often results in star wages to the elite performers and, more generally, in wage jumps for small increases in productivity.

We show that cross-border financial flows arise when countries differ in their abilities to use a... more We show that cross-border financial flows arise when countries differ in their abilities to use assets as collateral. Financial integration is a way of sharing scarce collateral. The ability of one country to leverage and tranche assets provides attractive financial contracts to investors in the other country, and general equilibrium effects on prices create opportunities for investors in the financially advanced country to invest abroad. Foreign demand for collateral and for collateral-backed financial promises increases the collateral value of domestic assets, and cheap foreign assets provide attractive returns to investors who do not demand collateral to issue promises. Gross global flows respond dynamically to fundamentals, exporting and amplifying financial volatility.

American Journal of Economics and Sociology, 2005

The Geneva Papers on Risk and Insurance Theory, 1990

Progress and Confusion, 2016

I believe that credit plays a central role in the booms and busts of market economies, and even i... more I believe that credit plays a central role in the booms and busts of market economies, and even in milder fluctuations. But I do not believe that the credit conditions influencing booms and busts are driven primarily by fluctuations in riskless interest rates, or by the wrong riskless interest rates. When bankers say credit is tight, they do not simply mean that riskless interest rates are so high they are choking off demand for loans. They mean that many businesses and households that would like to borrow at the current riskless interest rates cannot get a loan. They are referring to the supply side of the credit market, not just the demand side. The reason some borrowers cannot get a loan at the same (riskless) interest rate that others do is that their lenders are afraid they may default. Risky interest rates (or spreads to riskless interest rates on loans that might default) are often more important indicators of economic conditions than riskless interest rates. Nevertheless, central bankers have paid scant attention to default in their macroeconomic models. 1 In my opinion, central banks should pay attention to, and influence, risky interest rates if they want to preserve financial stability. When lenders are afraid of default, they often ask for collateral to secure their loans. How much collateral they require is a crucial variable in the economy called the collateral rate or leverage. Lenders also worry about the creditworthiness of the borrowers, which in the case of firms is represented by credit ratings and in the case of households is often represented by a FICO credit score. 2 The credit conditions of the economy cannot be summarized accurately by a single riskless interest rate, but rather by an entire surface, where the offered interest rate from lenders can be thought of as a function of the collateral and the FICO score: r = f (collateral, FICO). 3 The higher the collateral, or the higher the

SSRN Electronic Journal, 2019

A synthesis of new and old approaches in understanding macroeconomic fluctuations and the role of... more A synthesis of new and old approaches in understanding macroeconomic fluctuations and the role of monetary policy (MP) is the credit surface, where the interest rate is a function of multiple credit terms: leverage, credit rating, term, etc. We gauge credit conditions using the credit surface in mortgage, corporate bond, and peer-to-peer lending markets, and explore its relationship with economic activity in these segments of the economy. In addition, we study the transmission of MP through the corporate bond credit surface. Our results suggest that the passthrough of MP is heterogeneous and non-monotonic in ex-ante riskiness, initially declining as risk increases but then increasing. Our preliminary results support the view that the credit surface is important for macroeconomic fluctuations and the transmission of MP.

SSRN Electronic Journal, 2019

We consider the Rothschild-Stiglitz model of insurance but without the exclusivity constraint. It... more We consider the Rothschild-Stiglitz model of insurance but without the exclusivity constraint. It turns out that there always exists a unique equilibrium, in which the reliable and unreliable consumers take out a primary insurance up to its quantity limit, and the unreliable take out further secondary insurance at a higher premium. We provide a simple proof of this result (extended to multiple types of consumers) with the hope that it may be pedagogically useful.

SSRN Electronic Journal, 2016

Brazilian Review of Econometrics, 2008

We provide a shorter proof than Geanakoplos and Polemarchakis (1986) of the existence of equilibr... more We provide a shorter proof than Geanakoplos and Polemarchakis (1986) of the existence of equilibrium in an incomplete financial market economy with numeraire assets, under the weak assumption that asset returns are non-negative. Furthermore, we relax the strict monotonicity assumption on preferences and as an application we prove the existence of equilibrium when agents may disagree on zero probability events but do not plan to go bankrupt in any state.

The Joint Institute for Nanoscience (JIN) is a cooperative venture of the University of Washingto... more The Joint Institute for Nanoscience (JIN) is a cooperative venture of the University of Washington and Pacific Northwest National Laboratory (PNNL) to encourage and enhance highimpact and high quality nanoscience and nanotechnology of all types, and to facilitate education in these areas. This first annual report for the JIN summarizes activities beginning in 2001 and ending at the close of fiscal year 2003 and therefore represents somewhat less than two years of activities. Major portions of the JIN resources are dedicated to funding graduate students and postdoctoral research associates to perform research in collaborations jointly directed by PNNL staff scientists and University of Washington (UW) professors. These fellowships were awarded on the basis of applications that included research proposals. They have been very successful in initiating intensive research collaborations between PNNL and UW, which have led to many excellent joint publications and presentations and enhanced the competitiveness of both institutions for external grant funding. JIN co-sponsors an annual Nanoscale Science and Technology Workshop held in Seattle. In addition to involving PNNL staff in various UW nanoscience courses and seminars, a National Science Foundation grant Development of UW-PNL Collaborative Curriculums in Nano-Science and Technology has allowed the development of three intensive short courses that are taught by UW faculty, PNNL staff, and faculty from other institutions, including Washington State University, the University of Idaho, Stanford University, and the University of Alaska. The initial JIN agreement recognized that expansion of cooperation beyond UW and PNNL would be highly valuable. Starting in early 2003, efforts were initiated to form a regional communication link called the Northwest Nanoscience and Nanotechnology Network (N 4). In concept, N 4 is a tool to encourage communication and help identify regional resources and nanoscience and technology activities. In addition to an overview of JIN activities, this report includes summaries of individual JIN Award Projects, an assessment of the impact of the JIN, and listings of publications and presentations linked to JIN activities.

Rivista Internazionale Di Scienze Sociali, 2011

How should the benefits of the commons, say a publicly owned fishing resource, be distributed? A ... more How should the benefits of the commons, say a publicly owned fishing resource, be distributed? A first possibility is equal division among the population. A second option is to distribute them among the people who actually exploit the resource in proportion to their activity level: this is the ""land to the tiller"" view. A third approach is the nusufruct"" view, by which a consumer of the fruits of the commons ends up contributing the average cost, whithout generating incomes for nonconsumers. The usufruct and ""land to the tiller"" views are polar opposites. One could consider intermediate positions where a fraction 0 of the benefits is distributed among consumers in proportion to their consumption, and the fraction 1-0 is distributed among fishers in proportion to their fishing effort. The paper singles out a particular value for 0 based on equalizing the ""rate of return,"" defined as follows. Consumers are th...

We enlarge the standard model of general equilibrium with incomplete market (GEI), to incorporate... more We enlarge the standard model of general equilibrium with incomplete market (GEI), to incorporate liquidity constraints as well as the possibility of bankruptcy and default. A new equilibrium results, which we abbreviate GELBI (general equilibrium with liquidity, bankruptcy and incomplete markets). When the supply of bank money and bankruptcy/default penalties are taken sufficiently high (the high regime), GEI occur as GELBI. But outside the high regime many new phenomena appear: money is (almost) never neutral, it has positive value and its optimum quantity is often finite; bankruptcy and default not only occur in equilibrium but can have welfare improving consequences for everyone; there is no real indeterminacy even with financial assets.

We show that if students care primarily about their status (relative rank) in class, they are bes... more We show that if students care primarily about their status (relative rank) in class, they are best motivated to work not by revealing their exact numerical exam scores (100,99,...,1), but instead by clumping them in broad categories (A,B,C). If their abilities are disparate, the optimal grading scheme awards fewer A's than there are alpha-quality students, creating small elites. If their abilities are common knowledge, then it is better to grade them on an absolute scale (100 to 90 is an A, etc.) rather than on a curve (top 15% is an A, etc.). We develop criteria for optimal grading schemes in terms of the stochastic dominance between student performances.

The New Palgrave Dictionary of Economics

The OLG model of Allais and Samuelson retains the methodological assumptions of agent optimizatio... more The OLG model of Allais and Samuelson retains the methodological assumptions of agent optimization and market clearing from the Arrow-Debreu model, yet its equilibrium set has different properties: Pareto inefficiency, multiplicity, positive valuation of money, and a golden rule equilibrium in which the rate of interest is equal to population growth (independent of impatience). These properties are shown to derive not from market incompleteness, but from lack of market clearing 'at infinity': they can be eliminated with land or uniform impatience. The OLG model is used to analyse bubbles, social security, demographic effects on stock returns, the foundations of monetary theory, Keynesian vs. real business cycle macromodels, and classical vs. neoclassical disputes.

TO stanch the hemorrhage of foreclosures, we don't need another bailout. What we need is a fi... more TO stanch the hemorrhage of foreclosures, we don't need another bailout. What we need is a fix — and the wisdom to see what is in our own self-interest. An avalanche of foreclosures is coming — as many as eight million in the next several years. The plan announced by the White House will not stop foreclosures because it concentrates on reducing interest payments, not reducing principal for those who owe more than their homes are worth. The plan wastes taxpayer money and won't fix the problem. For subprime and other non-prime loans, which account for more than half of all foreclosures, the best thing to do for the homeowners and for the bondholders is to write down principal far enough so that each homeowner will have equity in his house and thus an incentive to pay and not default again down the line. This is also best for taxpayers, who now effectively guarantee the securities linked to these mortgages because of the various deals we've made to support the banks. For th...

As the U.S. Social Security system has matured, the rate of return received by participants has f... more As the U.S. Social Security system has matured, the rate of return received by participants has fallen. In the coming years, around the time the Baby Boom generation retires, the system will experience a budget shortfall. Tax revenues will fall short of promised benefits, requiring outlays from the interest earnings, and then the principal, of the trust fund. Eventually, the trust fund will be depleted. This projected insolvency will necessitate benefit cuts and/or tax increases, leading to further declines in the rates of return individuals can expect. Many advocates of reform suggest that an answer to this problem is to privatize Social Security. They argue that the creation of individual accounts invested in private capital markets, and especially in the stock market, will produce better rates of return for individuals than will Social Security. For example, Stephen Moore of the Cato Institute recently claimed that "privatization offers a much higher financial rate of return to young workers than the current system... if Congress were to allow a 25 year old working woman today to invest her payroll tax contributions in private capital markets, her retirement benefit would be two to five times higher than what Social Security is offering". 1 Presidential candidate Steve Forbes criticized Social Security because "the average worker retiring today receives a lifetime return of only about 2.2 percent on the taxes he has paid into the system. Contrast this with the historic 9-10 percent annual returns from stock market investments... The advantages of an IRA-type approach are overpowering." 2 Our goal in this paper is to challenge the following popular argument: a)