On the robustness of laissez-faire

Narayana Kocherlakota, Christopher Phelan

Research output: Contribution to journalArticle

9 Scopus citations

Abstract

This paper considers a model economy in which agents are privately informed about their type: their endowments of various goods and their preferences over these goods. While preference orderings over observable choices are allowed to be correlated with an agent's private type, we assume that the planner/government is both uncertain about the nature of this joint distribution and unable to choose among multiple equilibria of any given social mechanism. We model the planner/government as having a maxmin objective in the face of this uncertainty. Our main theorem is as follows: Once we allow for this kind of uncertainty and assume no wealth effects in preferences, the uniquely optimal social contract is laissez-faire, in which agents trade in unfettered markets with no government intervention of any kind.

Original languageEnglish (US)
Pages (from-to)2372-2387
Number of pages16
JournalJournal of Economic Theory
Volume144
Issue number6
DOIs
StatePublished - Nov 1 2009

Keywords

  • Mechanism design
  • Robustness

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