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When Does Limited Commitment Matter In A Production Economy?, Kyoung Jin Choi, Jungho Lee

Research Collection School Of Economics

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 …