Showing papers in "Quarterly Journal of Economics in 1981"

A Transactions Theory of Trade Credit Use

Abstract: This paper derives a transactions theory of trade credit use from the motives of trading partners to economize on the joint costs of exchange. In the formal analysis, uncertain delivery time is used to generate a demand by firms to hold inventories of both goods and money. Trade credit is viewed as a mechanism that separates the exchange of money from the uncertainty present in the exchange of goods. By forewarning both trading partners of the timing of money flows, credit permits a reduction in precautionary money holdings and the more effective management of net money accumulations.

Ingredients of Famine Analysis: Availability and Entitlements

Abstract: Famines often take place in situations of moderate to good food availability, without any significant decline of food supply per head. The paper presents an alternative approach to famines, which does not concentrate on availability, but on people's ability to command food through legal means available in the society (including the use of production possibilities, trade opportunities, entitlements vis-a-vis the state, etc.). The approach is explained, focusing on exchange entitlement mappings, fluctuations in which can lead to big shifts in the intergroup distribution of food command. The approach is then applied to the Bengal famine of 1943, the Ethiopian famine in Wollo in 1973, and the Bangladesh famine in 1974, and some general conclusions are drawn about the nature and classes of famines.

On the indeterminacy of equilibrium exchange rates

Abstract: In this paper we consider a particular international economic policy regime: the laissez-faire regime, the distinguishing features of which are unrestricted portfolio choice and floating exchange rates. And as we show, this regime, although favored by many economists, is not economically feasible. It does not have a determinate equilibrium. That is an implication of an overlapping-generations model. More basically, it is an implication of the notion that money is wanted only in order to accomplish trades.

Productivity and City Size: A Critique of the Evidence

Abstract: A critique of two leading articles in the productivity and city-size literature results in revised estimates of the productivity advantages of large cities. In particular, extant estimates of the elasticity of productivity with city size are revised downward by over 100 percent for the manufacturing sector and about 25 percent for the entire urban economy. After revision, productivity advantages of larger cities are found to be much larger for the nonmanufacturing sector than for the manufacturing sector. Hence, revitalization policies for large cities should be focused on nonmanufacturing sectors.

The Measurement of Productive Efficiency: A Reconsideration

Abstract: The purpose of this paper is to generalize the Farrell indexes of productive efficiency to nonhomothetic production technologies, and at the same time maintain the cost interpretation of the Farrell measures. Since the generalized indexes rely heavily on recent developments in the estimation of frontier cost and production functions, several frontier models are reviewed. In addition to generalized indexes of technical, allocative, and overall productive efficiency, a variety of single-factor efficiency measures are discussed. The applicability of the proposed efficiency measures is illustrated with a numerical example of electric power generation.

Fixed Costs, Sunk Costs, Entry Barriers, and Sustainability of Monopoly

Abstract: This paper shows that (i) fixed costs of sufficient magnitude assure the existence of a vector of sustainable prices for the products of a natural monopolist-prices making him invulnerable against entry; (ii) nevertheless, fixed costs do not constitute barriers to entry; that is, they need not have undesirable welfare consequences; (iii) indeed, in market forms that we call perfectly contestable large fixed costs are completely compatible with many desirable attributes of competitive equilibrium; (iv) sunk costs do, however, constitute barriers to entry; and (v) finally, the profit and welfare consequences of entry barriers are described formally. In this paper it is shown that (i) fixed costs of sufficient magnitude assure the existence of a vector of sustainable prices-a set of product prices that make a (natural) monopolist invulnerable against successful entry; (ii) nevertheless, costs that are truly fixed do not constitute barriers to entry; that is, they do not have the welfare consequences normally attributed to barriers to entry; (iii) indeed, there are markets of a form (which we call perfectly contestable markets, and whose properties may be approximated in practice) in which large fixed costs are completely compatible with many if not most of the desirable attributes of competitive equilibrium; (iv) sunk costs do, however, constitute barriers to entry; and (v) finally, the resource allocation problems that stem from fixed costs are formally identical with those that accompany public goods-both their sources and their character are the same. Thus, the rationale for public supply of public goods may be no different from that pertaining to nationalization of natural monopolies.

Option Value: Empirical Evidence from a Case Study of Recreation and Water Quality

Abstract: A procedure for measuring option value and other preservation values of water quality is developed and applied to a case study area in the South Platte River Basin, Colorado. Benefits from water-based recreation activities are the focus of the study. The results provide an empirical test and confirmation of Weisbrod's proposal that option value and other preservation values represent important social benefits, and should be added to the aggregate consumer surplus of recreation activities to determine the total benefit of environmental amenities to society. In the absence of such an estimate, insufficient resources would be allocated by society to preservation of unique environments such as pristine mountain streams where mineral and energy development may irreversibly degrade water quality.

The Theory of Domestic Content Protection and Content Preference

Abstract: This paper investigates the resource reallocation effected by content protection and content preference schemes under alternative assumptions regarding the definition of domestic content, the number of intermediate goods, and the market structure of the domestic intermediate good industry. Content protection is shown to be equivalent to a combination of more familiar commercial policies. However, the extent of application of these policies is determined endogenously by parameters of the production functions for intermediate and final goods. A number of anomalous and undesirable outcomes that may result from content protection and content preference are discussed.

Social Security and the Retirement Decision

Abstract: The effect of Social Security and private pensions on individual retirement decisions is modeled, relaxing in turn three commonly maintained assumptions—perfect capital markets, actuarial fairness, and certain lifetimes—which together imply that there is no effect. In each case, raising the contribution level can cause systematic changes (of either sign in general) in individual retirement decisions. For Social Security, the effects associated with forced saving and deviations from actuarial fairness probably tend to advance retirement. But those effects that arise solely from the insurance aspect of Social Security and private pensions are ambiguous in sign, owing to the presence of a substitution effect that tends to delay retirement because the insurance benefits can be fully realized only by working longer.

The Information Content of the Interest Rate and Optimal Monetary Policy

Abstract: Optimal monetary policy rules are derived in a rational expectations cum contracting framework. Monetary policy is redundant if wage setters exploit the incomplete current information embodied in today's nominal interest rate. However, the monetary authorities can save wage setters the costs of “indexing†to the interest rate. A contemporaneous money supply feedback rule is as effective as wage indexation. A lagged rule, relevant under a regime of money supply targeting, is also as effective if investors use the interest rate. Both rules have the same implications for the real interest rate as Poole's combination policy. However, the two rules have strikingly different implications for the nominal interest rate.

Uncertainty and Optimal Social Security Systems

Abstract: This paper examines the annuity aspect of social security within the framework of an overlapping-generations model. The duration of life is assumed to be uncertain. Under a fully funded system, demand for social security is determined by each generation so as to maximize expected lifetime utility, taking into account the welfare of future generations. Under a pay-as-you-go system with intergenerational transfers, demand for retirement benefits by the working population takes into account taxes paid by descendants. It is shown that the two modes of finance are equivalent in terms of all real aggregates. Effects of changes in expected lifetime and in the birth rate are analyzed. Starting at the optimal level, a compulsory balanced increase in social security taxes and benefits is shown to increase short-run savings.

Demand Curves for Animal Consumers

Abstract: Results are reported from experiments showing that both income-compensated and ordinary (uncompensated) demand curves for nonhuman consumers are negatively sloped. Essential commodities are determined to be gross complements, while nonessential goods are independent or gross substitutes. The experiments extend the concepts underlying value theory to nonhumans and provide a basis for intensive experimental investigations of additional aspects of the theory.

Free Riding and Collective Action: An Experiment in Public Microeconomics

Abstract: The well-known free-rider hypothesis is examined experimentally to see (i) whether individuals behave systematically as free riders when systematic incentives to do so are created, and (ii) the extent to which free riding actually occurs. Though the experiment's participants behaved in accordance with the hypothesis, the quantitative extent to which such behavior occurred was rather modest. From this it may be concluded that the free-rider hypothesis as presently stated indicates an incompleteness in standard public microeconomics rather than providing a description of the real world.

Economic Performance in Regulated and Unregulated Environments: A Comparison of U. S. and Canadian Railroads

Abstract: An opportunity to compare economic performance under substantially different levels of regulation is afforded by the differences in the regulatory environments of U. S. and Canadian railroads. We find that the less regulated Canadian railroads have achieved far higher productivity growth than have U. S. railroads. Furthermore, in spite of natural conditions favoring U. S. railroads, Canadian railroads have achieved a higher level of productivity. These findings for the typical U. S. and Canadian railroad are borne out by similar results for specific railroads. Had U. S. railroad productivity grown at the Canadian rate, U. S. railroad costs would be several billion dollars less each year.

The Pricing of Durable Exhaustible Resources

Abstract: Partial or total durability characterizes a large class of exhaustible resources. Hotelling's r-percent rule will apply to a durable resource produced in a competitive market, but will not apply if the resource is produced in a monopolistic market. However, the r-percent rule does not mean that price is steadily rising. It is shown that in general the competitive market price will fall initially as the stock in circulation increases, and later will rise as the stock decreases and eventually depreciates toward zero after production ceases. Accounting for durability may thus help explain the U-shaped long-term price profiles observed for many resources. 11 references, 3 figures.

Factor Costs and the Diffusion of Ring Spinning in Britain Prior to World War I

Abstract: A key contribution to the attempt by "new" economic historians to absolve the British economy of the charge of technological conservatism in the late nineteenth century is Lars Sandberg's analysis of the choice of technique between ring spinning and mule spinning. In this article I demonstrate that Sandberg's analysis has serious problems and that a careful reexamination of the rings versus mules question is in order. While I point out some of the methodological problems of the neoclassical approach to choice of technique, the major focus of this paper is on the empirical shortcomings of Sandberg's analysis. My primary empirical conclusions are that the extent of the diffusion of ring spinning prior to World War I was much less than Sandberg's analysis would indicate and that it was the vertically specialized structure of the industry which imposed the major factor-cost constraint on its more rapid introduction.

Some Additional Results on Investment, Risk Taking, and Full Loss Offset Corporate Taxation with Interest Deductibility

Abstract: It is argued that a full loss offset corporate tax with interest deductibility may reduce risk taking in that entrepreneurs might decrease the amount of investment made in risky projects with higher corporate tax rates. Unlike previous results in the literature, production functions with decreasing returns to scale and the possibility of equity financing of capital investment are allowed. A corporate tax that falls in part on the returns of equity owners or entrepreneurs can, under certain conditions, reduce risk taking. If the government taxes only risk, then a corporate tax with a full loss offset can encourage investment in risky projects.

A Note on Dynamic Tax Incidence

Abstract: Under certain reasonable conditions for a growth model, the path of adjustment between steady states generated by a change in an exogenous policy variable is solved for explicitly. The overall welfare effect is then shown to be a weighted average of the short- and long-run effects for a large class of social welfare functions. These results are applied to a simple neoclassical growth model for the purpose of investigating the dynamic incidence of a labor income tax. Contrary to the claims of previous investigators, the long-run effect is shown to be more important for a wide range of parameter values.

A Dynamic Model of Investment and Capacity Utilization

Abstract: This paper develops a dynamic optimizing model of a firm with quasi-fixed factors subject to adjustment costs. The utilization rates of the quasi-fixed factors are chosen optimally by the firm, and the rates of investment in the quasi-fixed factors are based on the shadow prices of these factors, in the spirit of Tobin's q theory of investment. Capital investment is shown to be negatively related to capital utilization along the path to the steady state; however, in response to unanticipated demand shocks, capital utilization and investment are positively related.

Structural Stability in Models of American Trade Union Growth

Abstract: Recent interest in trade union activity has led to the development of econometric models of union membership growth. This paper examines the structural stability of two of the leading models—Ashenfelter-Pencavel's and Bain-Elsheikh's—each of which claimed to have captured the primary determinants of union growth in the twentieth century. The models were reestimated using revised, corrected, and extended membership data, and a nonlinear, maximum-likelihood procedure was employed to estimate the shift-point for each model. Contrary to previous studies, we found evidence of a break in the structure of each model. And unlike earlier work that hypothesized a World War II break-point, our estimated point was 1937–1938, most likely reflecting the impact of the Wagner Act.

A Test of the Friedman-Savage Gambling Model

Abstract: Two fundamentally different explanations of gambling behavior have developed. The first is generally referred to as the psychological model. It stresses that gambling is an enjoyable activity for many people and is consumed like any other good or service. Participation in gambling provides one with social and personal gratification. "Unfair" bets, or those gambles with negative expected return, are taken because people misperceive probabilities in risk-taking situations. The best predictors of who will gamble according to the psychological model include race, sex, family and demographic characteristics, and one's cultural background. According to the Friedman-Savage model, a rational individual will gamble if he possesses a particular type of utility of wealth function [Friedman and Savage, 1948]. The motivation of the gambler according to this model is the high value he places on the chance of achieving a major increase in personal wealth and thus moving upward on the socioeconomic ladder:

Cheap Labor and Southern Textiles, 1880–1930

Abstract: An interpretation of the Southern capture of the American cotton textile market is presented, emphasizing capital accumulation and a process of "maturation" of the labor force. The market was divided along lines of product quality, and the precise rate of convergence was governed by the pace of demand. Simulations of the system uncover the surprising fact that the Great Textile Depression, which began in the 1920s, is not attributable to trends in demand, imports, or a chronic tendency to overproduce, but to the increase in real wages that occurred in the South as well as in the North. Possible interpretations of this development are discussed.

The Isolation Paradox and the Discount Rate for Benefit-Cost Analysis

Abstract: One argument used to justify a rate of discount for benefit-cost analysis below the market rate is based on a divergence of private and collective behavior known as the "isolation paradox." In this paper we reexamine this argument using a three-period general equilibrium model incorporating the intergenerational structure of benevolence assumed by earlier writers. We show that in this model the appropriate rate of discount is the market rate, regardless of the existence of the isolation paradox. In the absence of other market distortions, no shadow pricing of capital inputs is necessary in the calculation of net present value.

The Effect of Intertemporal Speculation on the Outcomes in Seller Posted Offer Auction Markets

Abstract: This paper extends the experimental examination of posted offer auction markets to a market with intertemporal speculators. Previous experimental results demonstrate that posted offer markets induce inefficiencies, and also an income distribution that works to the disadvantage of those facing posted prices. The results of this paper suggest that these properties of the posted offer institution hold in the presence of intertemporal speculation.

Effects of Changes in the Discount Rate on the Foreign Exchange Value of the Dollar: 1973 to 1978

Abstract: This paper attempts to analyze the effects of changes in the Federal Reserve's discount rate on the dollar's foreign exchange value. If a discount rate increase were to signal a subsequent general increase in market interest rates, one would expect U. S. dollar-denominated assets to become relatively more attractive, and the ensuing increased demand for dollar assets to tend to raise the dollar's exchange value. The reverse would be true for discount rate decreases. However, in recent years the Federal Reserve's policy of moving the discount rate with a lag behind the Federal funds rate means that market participants generally have sufficient information to anticipate changes in the discount rate. When this is the case, announcement effectsimmediate and discernible market responses to discount rate changes-do not occur. Under special circumstances in 1978, however, announcement effects could and did occur. By increasing the discount rate when the Federal funds-discount rate differential was around normal levels and by increasing the discount rate by a larger amount than the market anticipated, the Federal Reserve used the discount rate as a signal to market participants that it would use other operating instruments to bring about changes in market interest rates and the monetary base. In their 1977 article, Raymond E. Lombra and Raymond G. Torto ran a number of econometric tests for discount rate exogeneity on monthly data from January 1968 to May 1974. They concluded that discount rate movements were not independent of the spread between the discount rate and the Federal funds rate. Given rational expectations, therefore, changes in the discount rate could not generate announcement effects [Lombra and Torto, 1977]. This paper updates the work of Lombra and Torto and then attempts to test directly

Reward Structures in a Planned Economy: The Problem of Incentives and Efficient Allocation of Resources

Abstract: This paper considers a reward mechanism for inducing the choice of a socially optimal level of output by a socialist price-setting manager. Under this mechanism the planner is assumed to have no information other than the observed output and price level. It thus has informational advantages over other schemes thus far discussed in the literature. The other schemes require the additional knowledge of demand elasticities of all the products produced in the economy. Besides this informational advantage the reward structure suggested here also eliminates other basic weaknesses of those schemes suggested previously.

Summing up on the Australian Case for Protection

Abstract: In 1929 a quasi-official report by several eminent Australian economists-The Australian Tariff; An Economic Inquiry, by J. B. Brigden, D. P. Copland, E. C. Dyason, L. F. Giblin, and C. H. Wickens-set off analytical controversy that has helped shape the discovery of what has come to be known as modern international trade theory. I had thought that this whole topic was satisfactorily understood by informed scholars and could be honorably deposited on the shelf of closed history. G. J. Manger [1976] has, however, uncovered some interesting puzzles. Since Marion Crawford Samuelson, who played a key role forty years ago in the theoretical developments, is not here to consult on doubtful matters of memory, I recently spent an afternoon in the Harvard College libraries reviewing the principal scholarly contributions. Quite aside from Manger's interesting issues, the exercise was a rewarding one. For here is a drama that involved many of the great names of our subject: Ricardo [1815-1823] and Malthus [1815], Torrens [1815] and Stuart Mill [1848]; Sidgwick [1883], Edgeworth [1897], and Bastable [1897] (and, I seem to recall Nicholson and Carver); Simon Patten [1890] and Taussig; Marshall [1879] and Pigou [1906] as well as Allyn Young [1913], Knight [1924] and Robertson [1924]; Brigden [1925, 1927a, 1927b], Benham [1926, 1927, 1935], Copland [1931], and Frank Graham [1923]; Heckscher [1919] and Ohlin [1933], Stolper and Paul Samuelson [1941], Samuelson [1938, 1939], as well as Lerner [1952] and Metzler [1949a, 1949b]; Karl Anderson [1938, 1939] and Marion Crawford Samuelson [1939]; Corden [1957], Reitsma [1958, 1960], Bhagwati and Johnson [1961], Vanek, Kemp and Ronald Jones [1962]; and many others. The story is worth telling, both in its received and revised versions.

The Duality of a Dynamic Model of Equilibrium and an Optimal Growth Model: The Heterogeneous Capital Goods Case

Abstract: The equivalence between optimal growth solutions and solutions of decentralized models of intertemporal allocation is explored in a one-consumer, heterogeneous capital goods framework. The decentralized economy follows a perfect foresight path. The main result is that the decentralized economy will impose on itself a transversality condition. This yields the interpretation of equilibrium prices as prices consistent with a certainty version of the efficient markets hypothesis. The results rest on the recent contribution by Benveniste and Scheinkman providing sufficient conditions for infinite horizon concave programs to exhibit capital value transversality as a necessary condition for optimality.

Taxes and Subsidies in the Input-Output Model

Abstract: This paper reexamines Metzler's analysis of the effects of taxes and subsidies on the competitive supply prices of output in Leontiefs system. It will be shown that Metzler's conclusions are valid even if one removes the assumptions made by Metzler, and that Allen's conclusion concerning the ad valorem tax is false. We present some interesting properties of Leontiefs system, and also provide a theorem on Metzler's matrix, proving it and deriving some useful properties on the inverse matrix of the input-output model