This award renews support for further theoretical research on dynamic problems in industrial organization and public finance. In the area of industrial organization, the structure of the market in terms of competitiveness is a key determinant of how firms behave and how efficiently a market operates. The first part of this project will study a market dominated by two firms and will develop and test an alternative theory of oligopoly behavior. An oligopoly model will be constructed with linear demand functions and quadratic production functions and inventory storage costs. This model employs fewer restrictive assumptions than the standard models and will provide a deeper understanding of behavior of markets dominated by two firms. The second part of this project involves three studies analyzing the effects of tax policies in environments characterized by risk. The effect of tax policy on investment and consumption decisions and on the overall economic performance remains a central issue in the area of public finance. Changes in the tax codes are an important source of uncertainty that will be studied in terms of how frequent changes affect investment and consumption decisions. Another study will look at the effects of the differential taxation of capital gains, dividends, and pension type investments on choosing an investment portfolio. The third study will analyze optimal tax policy under situations where government expenditures are subject to sudden, unexpected changes. The study of oligopoly in a dynamic setting is important for better understanding monopolistic competition and the extent to which imperfect markets are efficient. The analysis of tax policy is of major importance because it may have implications for adopting more effective strategies of taxation.
