Kenneth Arrow : biography
Thus, if each person votes to get as much cake as possible, choice 4 would be third from the top in everyone’s list, and would in any direct choice lose 2 to 1 against an unequal distribution. Since all of these choices are Pareto-optimal – no one’s welfare can be improved without reducing the welfare of others – choice 4 would not be chosen, since there would always be other preferred choices.
General equilibrium theory
Working with Gérard Debreu, Arrow produced the first rigorous proof of the existence of a market clearing equilibrium, given certain restrictive assumptions. For this work and his other contributions, Debreu won the Nobel prize in 1983. Arrow went on to extend the model and its analysis to include uncertainty, the stability of equilibria, and whether a competitive equilibrium is efficient.
Arrow was instrumental in kick-starting research into endogenous-growth theory (also known as new-growth theory), which sought to explain the source of technical change, which is a key driver of economic growth. Until this theory came to prominence, technical change was assumed to occur exogenously—that is, it was assumed to occur outside economic activities, and was outside (exogenous) to common economic models. At the same time there was no economic explanation for why it occurred. Endogenous-growth theory provided standard economic reasons for why firms innovate, leading economists to think of innovation and technical change as determined by economic actors, that is endogenously to economic activities, and thus belong inside the model. A vast literature on this theory has developed subsequently to Arrow’s pioneering work.
In other pioneering research, Arrow investigated the problems caused by asymmetric information in markets. In many transactions, one party (usually the seller) has more information about the product being sold than the other party. Asymmetric information creates incentives for the party with more information to cheat the party with less information; as a result, a number of market structures have developed, including warranties and third party authentication, which enable markets with asymmetric information to function. Arrow analysed this issue for medical care (a 1963 paper entitled , in the American Economic Review); later researchers investigated many other markets, particularly second-hand assets, online auctions and insurance.
- Arrow, Kenneth J., 1951a, "Alternative approaches to the theory of choice in risk-taking situations," Econometrica, 19: 404-437
- Arrow, Kenneth J., 1953, "Hurwicz’s optimality criterion for decision making under ignorance," Technical Report 6, Stanford University
- Arrow, Kenneth J., 1959a, "Functions of a theory of behaviour under uncertainty," Metroeconomica, 11: 12-20
- Arrow, Kenneth J., 1959b, "Toward a Theory of Price Adjustment." In Moses Abramovitz et al., eds. The Allocation of Economic Resources: Essays in Honor of Bernard Francis Haley. Stanford: Stanford University Press
- , pp. (press +).
- Arrow, Kenneth J., 1968, "Economic Equilibrium." In D. L. Sills (ed.) International Encyclopedia of the Social Sciences 4: 376–88. London and New York: Macmillan and the Free Press.
- Arrow, Kenneth J., 1969. "The Organization of Economic Activity: Issues Pertinent to the Choice of Market versus Non-market Allocations", in Analysis and Evaluation of Public Expenditures: The PPP System, Volume 1, pp. 47–64. Washington, D.C., Government Printing Office, Washington, PDF reprint as pp. (press +) and in Arrow, 1983b, ch. 7, pp. 133–55.
- Arrow, Kenneth J., and Hurwicz, L. (1972) "Decision making under ignorance," in C. F. Carter and J.L. Ford (eds.), Uncertainty and Expectations in Economics. Essays in Honour of G.L.S. Shackle. Oxford: Basil Blackwell.
- Arrow, Kenneth J., 1977. "Extended Sympathy and the Possibility of Social Choice", American Economic Review, 67(1), p -225. Reprinted in Arrow. 1983a, pp. ISBN 0-674-13760-4
- Arrow, Kenneth J. Collected Papers of Kenneth J. Arrow, Harvard University Press: