A BEJEAP Topics article.

Abstract

This paper analyzes an extension of a model of production and predation due to Grossman (1998) to a multiple community setting. In a multiple community setting, defense expenditures in any one community have the property of a local public good. Such expenditures produce effects on other communities. These effects include changes in the distribution of population among communities, the redistribution of predatory effort over communities, and an induced change in the predator/producer ratio in the economy as a whole. The question we address is whether the level of defense chosen by local governments so as to maximize the per capita consumption of their own producers, given defense levels elsewhere, always produces a second-best outcome. Our analysis shows that if the number of communities is fixed, fully rational local government decision-making leads to the same level of defense activity and equilibrium per capita consumption as would be chosen by a central planner. However, if individual local governments are boundedly rational, in the sense that they do not anticipate the effects of their own defense activity on the equilibrium predator/producer ratio and distribution of producer activity, then competition among local governments never achieves a first-best outcome. Furthermore, the equilibrium associated with competition among boundedly rational local governments can sometimes yield a lower consumption per capita in equilibrium than would be achieved if there were no local governments and each agent who chose to be a producer also chose his/her own level of defense.

Erratum

On page 17, the derivation of the symmetric equilibrium level of defense, d(n,t), and predator/producer ratio, p(n,t), is erroneously described as involving equation (12).

Solving simultaneously the fixed-point condition (12) and the indifference condition between predators and producers as derived in (5), we obtain the symmetric equilibrium level of defense, d(n,t), and predator/producer ratio, p(n,t).

The correct description is:

Solving simultaneously the indifference condition (5) and the symmetric equilibrium condition C_ia(d_-i,p;n,t,k) = C_ib(p;n,t,k), we obtain the symmetric equilibrium level of defense, d(n,t), and predator/producer ratio, p(n,t).

Originally published in Topics in Economic Analysis & Policy.

Recommended Citation

Han, Shinkyoo and Ochs, Jack (2004) "Producers and Predators in a Multiple Community Setting," Topics in Economic Analysis & Policy: Vol. 4 : Iss. 1, Article 11.
Available at: http://www.bepress.com/bejeap/topics/vol4/iss1/art11