MICRO-ECONOMICS OF INFORMATION-GAPS 

                        Prof. Yakov Ben-Haim 
          Yitzhak Moda'i Chair in Technology and Economics   
            Technion - Israel Institute of Technology           
                Visiting Professor at Georgia Tech 
                
                          Venue:
                     School of Economics
                     Ivan Allen College
                       G17 Habersham
               Georgia Institute of Technology
               11:00 - 12:15, 18 October 2002

High profit is better than low profit, but the need for feasibility must temper 
the aspiration for reward. To achieve this balance we must model and manage our 
severely deficient information about, and understanding of, the processes we 
confront. We must also re-evaluate our concepts of rational decision-making. 
This talk presents a conceptual introduction to the info-gap approach to micro- 
economic decisions under severe uncertainty. 

We begin with a simple example: a Cournot-like model of production decisions 
for a single commodity in an oligopolistic market. The example illustrates the 
general theorem (which will be presented but not proven) that decisions which 
are designed to maximize profit, will also have absolutely no robustness 
against uncertainty. The conclusion is that the firm should attempt to 
satisfice profit, rather than maximize it. This leaves an additional degree of 
freedom open, which can be used to augment robustness to uncertainty about the 
competitors' decisions. 

After this brief motivation for info-gap decisions, we consider several 
fundamental issues in the micro-economics of severely deficient information. 

We develop a theory of competitive partial equilibrium in which consumers and 
firms have severely deficient information about production costs. We use non- 
probabilistic info-gap models of uncertainty to represent this knowledge- 
deficiency. The analysis is based on the robustness functions for consumers and 
for firms, which express the degree of an agent's immunity to uncertainty of 
the cost functions, in decisions regarding consumption and production. Several 
propositions disclose trade-offs between robustness to uncertainty and the 
agent's aspiration for reward. Two additional propositions establish info-gap 
analogs of the neo-classical results which relate price to marginal cost and to 
marginal utility at competitive equilibrium.  We discuss a Pareto-like 
efficiency which characterizes info-gap competitive equilibrium, and discuss 
some welfare implications.  We demonstrate a "supply-side" feature of info-gap 
competitive equilibrium: the aspirations of firms, but not of consumers, 
directly influence price and aggregate consumption. 

We will conclude with a brief mention of the info-gap treatment of consumer 
demand theory. This analysis preserves the phenomenological features of 
classical demand theory, without the assumptions of rational-choice theory: 
complete, transitive preferences on the options. The info-gap choice problems 
of robust satisficing (RSP) and opportune windfalling (OWP) correspond to the 
traditional problems of expenditure minimization (EMP) and utility maximization 
(UMP), respectively. The consumer choice resulting from the RSP is the analog 
of the Hicksian demand function, while the solution of the OWP is analogous to 
the Walrasian demand. Specifically, the RSP-solution is a wealth-compensated 
demand function which obeys Walras' law and the law of price-demand trade-off.