for a mere 7% of GDP! So, incomplete markets are the rule. That obser-

vation was in the foreground of my thinking on uncertainty through the

sixties. When I discovered Peter Diamond™s (1967) path-breaking paper

on “The Role of a Stock Market in a General Equilibrium Model,” I

immediately sought to extend his analysis”limited to ray technologies, so

An Interview with Jacques Drèze 285

that ¬rms only choose investment levels”to more general technologies. I

could not replicate his ef¬ciency result, and eventually proved the oppo-

site: stock-market equilibria need not be ef¬cient, not even constrained-

ef¬cient, under incomplete markets [Drèze (1974b)]! And this, even

though each ¬rm is adopting a production plan that is Pareto ef¬cient

from the viewpoint of its shareholders, and the stock market is competitive!

Dehez: You are referring now to the so-called “Drèze criterion” for

¬rm decisions under incomplete markets, when pro¬t maximization is

not well de¬ned. Did you pursue that theme further?

Drèze: In several directions. Some work extended the criterion to

more complex decision structures within the ¬rm [Drèze (1987b, 1989)].

Other work applied the same analysis to nonpro¬t organizations [Drèze

and Marchand (1976)] or to labor-managed ¬rms [Drèze (1976b, 1989)].

A joint paper [Geanakoplos et al. (1990)] establishes the generic inef¬-

ciency of stock-market equilibria in a general model. Right now, I am

extending the so-called “Drèze criterion” to many periods, thereby integ-

rating the concern voiced by Grossman and Hart (1979), but using more

general assumptions.

Dehez: Another instance of continuity in your research interests! From

what you have said so far, it seems that your persistent interest in uncer-

tainty has taken you in a variety of directions, con¬rming an inclination

toward diversity.

Drèze: I must indeed plead guilty on that score. It is not without ground

that my friend Agnar Sandmo likes to introduce me as a “Jacques of all

trades.” But remember: there is also a persistent quest toward integra-

tion. If I look back at the major developments of our thinking about

uncertainty over the 50 years of my professional career, I trace their

origins to three interacting disciplines, namely, statistical decision theory,

individual decision theory, and general equilibrium. Familiarity with statist-

ical decision theory, especially the work of Abraham Wald (1950), was a

clear source of inspiration to both Jimmy Savage (1972), in his work on

decision theory, and to Ken Arrow (1953), in his work on general equi-

librium. I was active on both fronts. And, there is yet another offspring

of that interaction, in which I too became involved, namely Bayesian

statistics.

Dehez: How did that come about?

Drèze: The signi¬cant development of Bayesian statistics over the past

half-century owes a lot to the pioneering research of the ¬fties at Harvard

Business School by Pratt, Raiffa, and Schlaifer. In 1958, I was hired by

Universit© Catholique de Louvain to teach statistics, econometrics, and

OR. In statistics, I was following their lead and expounding Bayesian

techniques. This was a natural approach for someone immersed in

286 Pierre Dehez and Omar Licandro

decision theory. Going from decision theory to Bayesian statistics to the

economics of uncertainty was a natural route [Drèze (1972a)]. But the

econometrics of the time, centered on simultaneous equations, was clas-

sical. Hence my students, who went from Bayesian statistics to classical

econometrics, faced a breach of continuity. So, I went to work and wrote

in 1962 a paper on the Bayesian analysis of simultaneous equations, a

paper that was never published as such but was rather in¬‚uential and

paved the way for my own later work [Drèze (1974a, 1976a), Drèze and

Morales (1976)] and that of my students Morales, Mouchart, Palm,

and Richard. That explains my involvement in Bayesian econometrics, and

the birth of what has sometimes been referred to as “the Louvain Bayesian

school.”

Dehez: So, you have been active on all three fronts just mentioned.

You mentioned current work with Aumann. There were earlier forays

into game theory with him.

Drèze: I do not regard myself

as a professional game theorist.

Bob and I did two earlier papers

[Aumann and Drèze (1975, 1987)]

combining his technical expertise

with my economic interests. Also

close to my heart is a paper with

Yossi Greenberg on “hedonic coa-

litions” [Drèze and Greenberg

(1980)], which brings in prefer-

ences of the players over the iden-

tity of the other members of the

coalition in which they belong”a

natural concern, as every member

of an economics department

knows! I wish that I could some-

day get back to that interesting

topic . . .

Figure 13.4 With Robert Aumann Dehez: Please do not bring in

(left) in Louvain-la-Neuve, 1986, the future . . . We are not done

celebrating the twentieth anniversary

with the past yet! Are we done

of CORE, which Aumann described

with the recurrent theme of un-

as “a unique breeding ground: a place

certainty?

where cross-fertilization leads to the

Drèze: If I may add a ¬nal note:

conception of new ideas, as well

There is a direct link from uncer-

as a womb”a warm, supportive

tainty to macroeconomics; every

environment in which these ideas

macrotheorist realizes that today.

can grow and mature.”

An Interview with Jacques Drèze 287

In my own thinking, the link materialized via price rigidities. Let me read

to you footnote 1 of my 1975 paper on “Existence of an Exchange

Equilibrium Under Price Rigidities”: “The present note was motivated

by research in progress on the rational aspects of wage rigidities and

unemployment compensation, viewed as a form of income insurance for

which market opportunities offer no substitute.” Said research in progress

matured progressively [Drèze (1990, 1993)], leading to my joint paper

with Christian Gollier on “Risk Sharing on the Labour Market and

Second-Best Wage Rigidities” [Drèze and Gollier (1993)], and to other

papers on reconciling risk-sharing ef¬ciency with productive ef¬ciency on

the labor market [Drèze (2000, 2002)]. But in the meantime, equilib-

rium under price rigidities had attracted the attention of macroeconomists,

and the recession initiated by the oil price hikes of the seventies had

gained momentum. Prompted by these real concerns, my research inter-

ests veered toward macroeconomics, but, here again, uncertainty matters,

under incomplete markets. Incomplete markets not only provide the

rationale for wage rigidities just mentioned, they also account for the

volatility of investment and aggregate demand, which is central to macro-

economic ¬‚uctuations. My current research on “The Macroeconomics of

Uncertainty and Incomplete Markets” [Drèze (2001a)] brings together

my concerns for uncertainty and macroeconomics, restoring again the

unity of apparently diverse themes. And it adds the dimension of endog-

enous, macroeconomic uncertainties. So, macroeconomics brings me back

to uncertainty, which closes the loop.

Licandro: So, you are claiming again underlying homogeneity. We

will come back to wage rigidities and macroeconomics, but, ¬rst, let

me ask “Jacques of all trades” how he became interested in labor

management?

Drèze: It all came from being a Professor-at-large at Cornell Univer-

sity, and being assigned the of¬ce of Jaroslav Vanek during his sabbatical.

One day at lunch, the department head, T.C. Liu, said: “When Jaroslav

can explain to me when a labor-managed ¬rm will adopt labor-saving

innovations, I will become interested”but not until then.” In the after-

noon, I was sitting in Vanek™s armchair, facing a bookcase containing

all the published work on labor management, and re¬‚ecting upon Liu™s

stricture. As my re¬‚ections took shape, they eventually led to the general

equilibrium model of labor-managed economies [Drèze (1976b)]. Liu™s

question is answered unequivocally by my equivalence result for com-

petitive equilibria and labor management equilibria”a result comparable

to that of Oskar Lange and Fred Taylor (1938) for planned economies.

Of course, I immediately went on to consider uncertainty, and the fund-

ing of labor-managed ¬rms. That line of research merged naturally with

288 Pierre Dehez and Omar Licandro