Matthew O. Jackson • Andrew McLennan (Eds.) Foundations in Microeconomic Theory Hugo F. Sonnenschein Matthew O. Jackson • Andrew McLennan (Eds.) Foundations in Microeconomic Theory A Volume in Honor of Hugo F. Sonnenschein ^ Springer Professor Matthew O. Jackson Professor Andrew McLennan Stanford University School of Economics Department of Economics University of Queensland Stanford, CA 94305-6072 Rm. 520, Colin Clark Building USA The University of Queensland [email protected] NSW 4072 Australia [email protected] ISBN: 978-3-540-74056-8 e-ISBN: 978-3"540-74057-5 Library of Congress Control Number: 2007941253 © 2008 Springer-Verlag Berlin Heidelberg This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9,1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMX Design GmbH, Heidelberg Printed on acid-free paper 987654321 spnnger.com Contents Introduction 1 A Brief Biographical Sketch of Hugo F. Sonnenschein 5 1 Kevin C. Sontheimer on Hugo F. Sonnenschein 9 An Existence Theorem for the Second Best Kevin C, Sontheimer 11 2 John Roberts on Hugo E Sonnenschein 33 An EquiUbrium Model with Involuntary Unemployment at Flexible, Competitive Prices and Wages John Roberts 35 3 Kunio Kawamata on Hugo E Sonnenschein 55 Price Distortion and Potential Welfare Kunio Kawamata 57 4 Salvador Barbera on Hugo E Sonnenschein 83 The Manipulation of Social Choice Mechanisms That Do Not Leave "Too Much" to Chance Salvador Barbera 85 5 Javier Ruiz-Castillo on Hugo E Sonnenschein 101 Residential Land Use Javier Ruiz-Castillo 103 6 WiUiam Novshek on Hugo E Sonnenschein 109 Cournot Equilibrium with Free Entry William Novshek Ill 7 Richard M. Peck on Hugo E Sonnenschein 125 Power, Majority Voting, and Linear Income Tax Schedules Richard M. Peck 127 Contents 8 Andrew McLennan on Hugo F. Sonnenschein 143 Sequential Bargaining as a Noncooperative Foundation for Walrasian Equilibrium Andrew McLennan and Hugo Sonnenschein 145 9 Dilip Abreu on Hugo F. Sonnenschein 175 Virtual Implementaion in Iteratively Undominated Strategies: Complete Information Dilip Abreu and Hitoshi Matsushima 177 10 Vijay Krishna on Hugo F. Sonnenschein 193 Finitely Repeated Games Jean-Pierre Benoit and Vijay Krishna 195 11 David G. Pearce on Hugo F. Sonnenschein 213 Nonpaternalistic Sympathy and the Inefficiency of Consistent Intertemporal Plans David G, Pearce 215 12 Matthew O. Jackson on Hugo F. Sonnenschein 233 Strategy-Proof Exchange Salvador Barbera and Matthew O, Jackson 235 13 Marc Dudey on Hugo E Sonnenschein 273 Dynamic Monopoly with Nondurable Goods Marc Dudey 275 14 In-Koo Cho on Hugo E Sonnenschein 295 Signaling Games and Stable Equilibria In-Koo Cho and David M, Kreps 297 15 Faruk Gul on Hugo E Sonnenschein 341 Unobservable Investment and the Hold-up Problem Faruk Gul 343 16 Arunava Sen on Hugo E Sonnenschein 377 The Implementaton of Social Choice Functions via Social Choice Correspondences: A General Formulation and a Limit Result Arunava Sen 379 VI Contents 17 Philip J. Reny on Hugo E Sonnenschein 395 On the Existence of Pure and Mixed Strategy Nash EquiUbria In Discontinuous Games Philip I Reny 397 18 James Dow on Hugo E Sonnenschein 425 Nash EquiUbrium under Knightian Uncertainty: Breaking Down Backward Induction James Dow and Sergio Ribeiro Da Costa Werlang 427 19 George E Mailath on Hugo E Sonnenschein 447 Jeroen M. Swinkels on Hugo E Sonnenschein 449 Extensive Form Reasoning in Normal Form Games George J. Mailath, Larry Samuelsonj and Jeroen M, Swinkels 451 20 James Bergin on Hugo E Sonnenschein 481 Player Type Distributions as State Variables and Information Revelation in Zero Sum Repeated Games with Discounting James Bergin 485 21 Daniel R. Vincent on Hugo E Sonnenschein 503 Repeated Signalling Games and Dynamic Trading Relationships DanielR. Vincent 505 22 Lin Zhou on Hugo E Sonnenschein 525 Impossibility of Strategy-Proof Mechanisms in Economies with Pure Public Goods Lin Zhou 527 23 Zachary Cohn on Hugo E Sonnenschein 541 vu Introduction What a wonderful occasion it is to be celebrating 65 years of Hugo Sonnen- schein! Given his many contributions to economic research and academia more broadly, there is much to celebrate. This volume, presented to Hugo at a confer­ ence in his honor at the University of Chicago in October 2005, highlights one of his deepest contributions. It is perhaps the hardest to detect from reading his bios and vita; but something that he is famous for among economists in general and economic theorists in particular. It is his incredible record as a mentor and advisor of students. In putting this volume together, we have collected papers from Hugo's students with the aim of demonstrating his tremendous impact as an advisor. The papers span decades, with the earliest coming from his advisees in the first years of his career and the most recent coming in the last two years after his return to research and advising that followed his adventures as a university administrator. The con­ tributors include not only his graduate advisees, but also some of his undergraduate advisees and still others who did not have him as an advisor, but nonetheless con­ sider him a primary mentor in their training as economic theorists. Each paper is accompanied with a brief preface by the student that provides background on the paper and indicates Hugo's influence on its genesis. The impressive quality of the contributions is a fitting tribute to the overall impact that Hugo has had through his advice and mentoring. Moreover, the papers highlight the variety of ways in which Hugo has had an influence. Some are papers that came out of theses and show Hugo's central hand as advisor, and some were authored jointly with Hugo years after graduation. In other cases the influence was less direct, being related to Hugo's work or exhibiting some other personal touch that Hugo had, such as introducing the student to someone of similar interests, or posing questions that seemed to lead to nothing but puzzles at the time, but which later blossomed into profound insights. Together, we hope that this volume makes obvious the scope and depth of Hugo's impact and influence in his role as advisor. An enormous amount has been written about instruction, and about the craft of teaching. University administrations worry about it, and devote time and re­ sources to training their faculty to excel at it. In contrast, the role of the advisor still remains much more elusive and has received much less study, even though the preponderance of scholars, particularly at the highest levels of academia, would in­ clude their thesis supervisors in any list of the most important people in their lives. Introduction final steps on the path to intellectual and scholarly independence. Whether it was helping a student who lacked confidence or experience by guiding them towards questions to cut their teeth on, or having the patience to sit down with a student and paper and go through each word and sentence asking what its purpose was and whether it properly conveyed what the author intended; Hugo excelled at all aspects of guidance. What was most remarkable, was his ability to consistently get his students to perform to the very best of their abiUties. As many of us have lear­ ned, such advising and mentoring can be much more difficult than it seemed when we were working with Hugo. We believe the reminiscences gathered here combine to give a useful and fascinating picture of how one scholar succeeded brilliantly in this capacity. The Papers Much of the work in this volume had its origins in the 1970's and 80's, which was a period of upheaval in economic theory. Hugo's reputation in research was built on important results in the theory of the consumer, general equilibrium theory, and social choice. While some of his students worked in these areas, many of his students followed, and to a large extent led, the newer currents associated with the rapid development of game theory. Often, especially in other disciplines, Ph.D. students are expected to pursue the advisor's research program, but in many cases Hugo was supervising work that was at least a certain distance from his own spe­ cializations. Even though such distance makes the advisor's role more challenging intellectually, the tendency is for the advisor to receive a smaller share of the credit than he would in connection with theses that are clearly related to the advisor's own research program. Viewing the work done by Hugo's students collectively re­ veals that such an assessment would be mistaken, and the common themes visible in the papers in this volume make very evident the part that Hugo played in the rapid progress of that era. Far from being a bystander at the revolution, he was one of its masterminds. The Ust of papers included here is impressive: 1. Kevin Sontheimer : "An Existence Theorem for the Second Best," Journal of Economic Theory, 3(1), 1-22,1971. 2. John Roberts : "An Equilibrium Model with Involuntary Unemployment at Flexible, Competitive Price and WagGS,''American Economic Review, 77,856- 874,1987.