Econometrica: Jul 1998, Volume 66, Issue 4

The Method of Simulated Scores for the Estimation of LDV Models<863:TMOSSF>2.0.CO;2-T
p. 863-896

Daniel L. McFadden, Vassilis A. Hajivassiliou

We examine the welfare properties of surplus maximization by embedding a perfectly discriminating monopoly in an otherwise standard Arrow-Debreu economy. Although we discover an inefficient equilibrium, we validate partial equilibrium intuition by showing: (i) that equilibria are efficient provided that the monopoly goods are costly, and (ii) that a natural monopoly can typically use personalized two-part tariffs in these equilibria. However, we find that Pareto optima are sometimes incompatible with surplus maximization, even when transfer payments are used. We provide insight into the source of this difficulty and give some instructive examples of economies where a second welfare theorem holds.

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