Showing papers in "The American Economic Review in 1970"

Migration unemployment and development: a two-sector analysis.

Abstract: This study examines why rural-urban labor migration persists and is even increasing in many developing nations despite the existence of positive marginal products in agriculture and significant levels of urban unemployment. Conventional economic models have difficulty reconciling rational behavioral explanations with growing levels of urban unemployment in the absence of absolute labor redundancy in the overall economy. This paper formulates a 2-sector model of rural-urban migration which recognizes the existence of a politically determined minimum urban wage at levels substantially higher than agricultural earnings. The distinguishing feature of the model is that migration proceeds in response to urban-rural differences in expected earnings with the urban employment rate acting as an equilibrating force on such migration. The overall model is used to demonstrate 1) that given the politically determined high minimum wage the continued existence of rural-urban migration in spite of substantial urban unemployment represents an economically rational choice on the part of the individual migrants and 2) that economists standard policy recommendation of generating urban employment opportunities through the use of "shadow prices" implemented by means of wage subsidies or direct government hiring may lead to a worsening of the urban unemployment problem. Welfare implications of alternative policies associated with various programs to retain rural population are assessed under the assumption that the full wage flexibility suggested by economic theory is politically unfeasible; it is concluded that in the absence of wage flexibility an optimal policy would include both partial wage subsidies or direct government employment and measures to restrict free migration. The basic model is a 2-sector internal trade model with unemployment the 2 sectors being the permanent urban sector which specializes in production of manufactured goods and the rural which either uses all available labor to produce agricultural goods or exports part of the labor to the urban sector. It is assumed that the typical migrant retains his ties to the rural sector but the assumption is not necessary for the argument.

The structure of dependence

Abstract: In the last chapter, Lipton stressed the importance of the internal determinants of inequality In this chapter, Theotonio dos Santos, a Brazilian economist,, points his finger at external conditions Dos Santos is a member of what has been called the “dependentista school” of development thinkers, the great majority of whom are Latin American intellectuals Dependency theory comes in many varieties; indeed, some argue that there is no such thing as dependency “theory” Nonetheless, there is a body of thinking that is common to many of those who form part of this school, and in this chapter dos Santos presents a concise statement of some of its fundamental tenets He begins by defining dependence and showing its linkages to Marxian theory and goes on to elaborate three basic forms of dependence: (1) colonial, (2) financial-industrial, and (3) multinational This latter form, arising out of the power of the large multinational corporations that maintain operations in developing countries, is of greatest concern to dos Santos because he sees it as limiting the developmental potential of newly industrializing nations This new form of dependence restricts the size of the local market and thus contributes to income inequality in developing nations Ultimately, according to dos Santos, dependent development must culminate in revolutionary movements of the left or right

The Economics of Production

Abstract: DISCUSSING “Medieval Economic Theory in Modern Industrial Life,” Prof. Mauritz Bonn, of Berlin, before Section F (Economic Science and Statistics) at the recent Glasgow meeting of the British Association, stated that the chief feature of medieval economic theory was probably the conception of production as a mere physical act of turning out goods. The money value side of it was of no importance. In strict accordance with this conception, distribution proper, outside physical transportation, was rather despised. Price was a kind of simple computation of different costs; costs being equivalent to actual outlay and the necessary expenses of maintaining a status of living. The price was ‘just’ when the return to the producer covered these elements.

Multiperiod Consumption-Investment Decisions

Abstract: Publisher Summary The simplest version of the multiperiod consumption-investment problem considers a consumer with wealth w1, defined as the market value of his assets at the beginning of period 1, which must be allocated to consumption c1 and a portfolio investment w1–c1 The portfolio will yield an uncertain wealth level w2 at the beginning of period 2, which must be divided between consumption c2 and investment w2–c2 Consumption-investment decisions must be made at the beginning of each period, until the consumer dies and his wealth is distributed among his heirs The consumer's objective is to maximize the expected utility of lifetime consumption This chapter reviews uncertainty models of the multiperiod consumption-investment problem considered by Edmund Phelps, Nils Hakansson, and Jan Mossin and presents a more general multiperiod consumption-investment model but one that nevertheless leads to interesting hypotheses about observable aspects of consumer behavior The main result is the proposition that if the consumer is risk averse, that is, the utility function for lifetime consumption is strictly concave and markets for consumption goods and portfolio assets are perfect, 3 then the consumer's observable behavior in the market in any period is indistinguishable from that of a risk averse expected utility maximizer who has a one-period horizon

Economic Efficiency and the Distribution of Benefits from College Instruction

Abstract: Economic efficiency implies an equating, at the margin, of benefits and costs. In this paper we explore a concept of \"efficiency\" which is broader than the usual framework and which applies to commodities and services produced and distributed largely outside the private, profit maximizing sector. An assessment of the economic efficiency of producing such a commodity requires the determination of its outputs and the valuation or weighting of these outputs.' Our principal point is that these weights, in turn, depend on who receives the outputs; thus, distributional issues are at the heart of economic efficiency studies involving a wide range of activities undertaken in the governmental and private, nonprofit sectors.2 One of these activities-the production and distribution of college instruction in economicsillustrates well the significance of this particular approach to the analysis of economic efficiency. We argue that in analyzing the economic efficiency of instruction, distributional issues-that is, who receives the benefits-should be considered explicitly; if not, they will necessarily be considered implicitly. The pervasive failure to include distributional issues in efficiency studies suggests an excessively narrow concept of efficiency. This is particularly inappropriate in evaluating instruction, since in education, as in most services, decisions regarding what to teach and how to teach have a strong influence on who receives the benefits.3

The Efficiency (Contradictions) of Multinational Corporations.

Abstract: Multinational corporations are a substitute for the market as a method of organizing international exchange. They are " . . . islands of conscious power in an ocean of unconscious cooperation," to use D. H. Robertson's phrase.1 This essay examines some of the contradictions of this latest stage in the development of private business enterprise. At the outset, we should note that the multinational corporation raises more questions than economic theory can answer. Multinational corporations are typically large firms operating in imperfect markets and the question of their efficiency is a question of the efficiency of oligopolistic decision making, an area where much of welfare economics breaks down, especially the proposition that competition allocates resources efficiently and that there is a harmony between private profit maximization and the general interest. Moreover, multinational corporations bring into high definition such social and political problems as want creation, alienation, domination, and the relationship or interface between corporations and national states (including the question of imperialism), which cannot be analyzed in purely "economic" terms.

Managerial Pay and Corporate Performance

Abstract: ing, for the moment, from potential statistical and measurement problems, and in the absence of theoretical reasons to specify an alternative form of functional relationship, we may begin by postulating that a top executive's compensation is related in linear fashion to both the profits and sales of the firm he manages. The structural form of the relationship can be written: (1) Cit = ao + a,-rxi + a2Sij + ui, Where, C, r, and S represent executive compensation, corporate profits, and corporate sales, respectively, and u is a random disturbance term. Subscript i denotes the firm and subscript t the period to which the measure applies. By supplying a basis for observing the magnitude of the coefficients a, and a2 and the levels of statistical significance attaching thereto, the above specification provides a natural vehicle for inferring the relative influence of the two independent variables upon compensation, and thereby testing the alternative hypotheses. The emergence of a positive value for the constant term ao would imply, in effect, that executive rewards rise less than in proportion to company sales and/or profits. Thus, it seems probable that a $50 thousand difference in annual profits between two firms in the $100 million profit range would result in a smaller difference in the pay of their respective chief executives than would the same dollar profit difference in the case of two firms whose yearly earnings were in the $100 thousand range. Represented graphically, the compensation vs. profits or compensation vs. sales relationship would therefore be expected to be concave downward for a sample of enterprises differing widely in size, and the linear approximation to any segment of such an underlying relationship would necessarily include a positive intercept value. It follows, then, that a, and a2 must be interpreted in marginal-although constant for the sample range-terms throughout. Statistical Problems Unfortunately, direct application of equation (1) to any generalized sample of crosssectional data can be expected to encounter several possible sources of statistical bias. For one thing, the efficiency of least square estimates depends upon the variances of the disturbance terms being constant. Examination of scatter diagrams of pilot regression runs using equation (1) revealed, as anticipated, that the error terms were not constant but were approximately in proportion to the dependent variable. Moreover, and as one might also suspect, those firms relatively large by virtually any scale criterion were also characterized by relatively high sales and profits levels. This scale-associated linkage between the independent variables poses the threat of serious collinearity,4 with re4The high degrees of correlation between the independent variables in their natural form were indicated by the presence of simple correlation coefficients which in most cases, exceeded .9. This high degree of observed This content downloaded from 157.55.39.104 on Mon, 20 Jun 2016 05:40:33 UTC All use subject to http://about.jstor.org/terms

Housing market discrimination, homeownership, and savings behavior

Abstract: The test which KQ employ to demonstrate the existence of supply restrictions is based on the relative lack of single family houses available to blacks, pp 270-72 Thev find, in a sample which uses cities as observations, that the extent to which the actual black homeownership rate falls short of the expected rate is negatively correlated with the proportion of central city housing which is single family1 As KQ acknowledge, theirs is not a complete test of the supplyT restriction hypothesis This comment provides further tests of that hypothesis A relative lack of single family houses in the black housing submarket2 causes lower black homeownership because apartments are not generally available for owner occupancy and single family houses are usually owner occupied However, some single family houses in black areas may not be available for owner occupancy due to difficulties which blacks face in the mortgage market The procedure followed in this paper is to make a correction for housing stock characteristics Assuming the correction is made properly, the remaining difference between the black and white homneownership rates is due to the fact that blacks have more difficultv obtaining mortgages on single family houses Section I presents a linear probability-ofhomneownership function with a correction for housing stock characteristics Section II presents a model in which the type of tenure (own or rent) and the structure type of a household are jointly dependent variables Section III examines some implications for policv

Soviet postwar economic growth and capital-labor substitution

Abstract: What I take exception to in Earl Brubaker's comments is not so much what he says as how he says it. If he were to have phrased things a little more moderately I might almost have agreed with some of the things he said. But the tone of finality about a subject which hardly lends itself to final judgements of that sort may give his remarks an undeserved impression of substance which ought to be removed. Those parts of Brubaker's comments which touch upon difficulties of aggregation, inaccurate measurenment of "true" inputs, etc., are really universal complaints about using aggregate data that we have heard many times before. I fully and unconditionally agree that they throw up serious obstacles to the measurement, interpretation, and application of aggregate production functions. I thought that this attitude was spelled out clearly enough in my paper. But what else can you do? If y ou want to get an overall picture you've got to use aggregate statistics and aggregative models, flawed as they may be in theory or practice. As Robert Solow has quipped, "It may be crooked, but it's the only wheel in town." Brubaker has not inhibited himself from being a heavy consumer of highly aggregated numbers in order to talk about and interpret overall Soviet performance. And who can fault him for that? But isn't it then a little unfair for him to make such an issue about this very point in criticizing someone else's work? Then there is the old bugaboo about "Soviet Statistics." According to Brubaker "one can only ponder in awe how these difficulties (of production function estimation) may be compounded where the data have their underlying basis in the Soviet statistical and economic systems." This strikes me as an unwarranted exageration. There are some added real problems associated with (today's) Soviet statistics, as I indicated in the Data Appendix to my paper. But there may also be areas of equal weight in which their statistics are more accurate and comprehensive than ours (not any worse would really be a more apt description). For example, in compiling capital stock estimates, as I indicated in my paper, the Soviet Central Statistical Institute has access to such data as the value of unfinished construction, the value of capital retirements, and value of capital stock as ascertained by periodic inventories. None of these are available for the United States. The lack of unemployment in the USSR, as I also pointed out, eliminates what is one of the major headaches for production function estimation in the West. I certainly don't want to be driven into claiming any more for the Soviet data I used than that to a first approximation they are no more unfit for direct production function estimation than U.S. data (this is really damning by faint praise!). Brubaker doesn't like the fact that the imputed factor shares based on the parameter point estimates don't correspond closely enough to Western empirical factor shares. Now it's one order of magnitude to sin against economic theory (as I have) by postulating an aggregate production function and setting about measuring it. It's yet another level of sin to invoke a marginal productivity theory of distribution on one big production function and then identify factor shares with parameter values, especially for the USSR. What's more, there's nothing sacred about the derived parameter point estimates-I certainly wouldn't be willing to go to the stake for them. If my moclel has any relation to reality it has to be a very rough one. While the statistical tests performed seemed to in* Associate professor of economics, Yale University.

A Simple Model of Replenishable Natural Resource Exploitation

Abstract: The purpose of this paper is to consider maximum sustained yield programs of replenishable natural resource exploitation and to question the validity of these programs in satisfying social goals. In the treatment of such programs, two fundamental problems arise. The first is that the existence of a social discount factor (or interest rate) may cause the maximum sustained yield program to be nonoptimal.1 The second problem, considered recently in the literature, relates to the many externalities which may be present in harvesting resources.2 The most significant of these externalities is the 'stock' externality in production. That is, there is a potential misallocation of inputs in the production of natural resource product due to the fact that one input, the natural resource itself, contributes to production but may not receive payment (for example, its marginal product) because no one owns the resource. Recently, research in this area has been directed at finding optimal taxing schemes which will have the effect of assigning to an unappropriated natural resource its imputed rent.3 In this paper, a simple model will be developed which will illustrate the nature of the first of these problems in a case where the second problem is not present. To accomplish this, production will be assumed 'costless' in the sense that no inputs are used. (Production, which will be the same as consumption, has a 'cost' in the sense that it diminishes the stock of resource available for consumption in all subsequent periods.) The use of a natural resource in this model is parallel in theory to the use of capital, and the term 'investment' will be used here to indicate simply 'foregone consumption.' The intertemporal aspect of the problem suggests a dynamic model, and the model is formulated as an optimal control question. The approach parallels Kenneth Arrow in his treatment of the Reversible Ramsey Problem.

Hospital Cost Functions

Abstract: The hospital sector has been one of the most rapidly growing sectors in the American economy; expenditures on hospital services have been growing at an annual rate of 14% since 1965 (26). In 198 1 personal expenditures on hospital care were 1 18 billion dollars or 4% of the gross national product (26); an average day in a short-term hospital cost $284.33, while an average stay cost $2, 171.20 (2). The size and importance of the hospital sector has attracted much attention from health services researchers. Considerable resources have been directed to the estimation of hospital cost functions. Investigators have examined the factors that affect the level of hospital costs at a period of time and the factors that affect the increase in costs over time. The work has been given focus and some urgency by a series of policy issues involved in hospital management, third party reimbursement, and public health. At fIrst, analyses were most concerned with addressing planning issues. Is there a most effIcient size of hospital? This question concerns not only how hospital costs vary with hospital size but also how other costs such as travel costs of patients, friends, and health workers vary with hospital size. The answer would help in planning for the effIcient production and distribution of hospital services in a region. A natural extension of this set of issues is the relationship between hospital costs and hospital occupancy rates. If almost all costs were fIxed and unrelated to the number of patients served or beds fIlled, the total cost of care would be

From Utopian Theory to Practical Applications: The Case of Econometrics

Abstract: In this essay on econometrics in its conception and its use in economic planning for the betterment of man’s fate, I will try to cover a very broad field.

Income Taxes and Housing

Abstract: This paper presents new estimates of the distributional impact of special income tax provisions relating to housing. It also discusses possible secondary effects of these tax factors resulting from adjustments in the returns to capital, shifts in investment, and changes in the housing stock. The tax benefits to homeowners are shown to be

Public Utility Pricing and Output Under Risk: Comment

Abstract: In their paper in the March issue of this Reviewv, Gardner Brown, Jr. and M. Bruce Johnson argue that ". . . the optimal price will always be lower and, with linear demand, the optimal output will generally be higher than their counterparts in the riskless model of traditional theory." (Their analysis relates to a single product produced at a constant unit operating cost of b and with a constant unit capacity cost of 3. Thus in the riskless model, maximum welfare requires a price of b+i3.) Their result concerning price is an odd one. I accept that it follows from their assumptions but question the usefulness of these assumptions. The first step is to provide an intuitive understanding of their result. To do this, let us take the simplest possible case of risk where the demand curve has a probability of one half of being low and one half of being high. The price and capacity chosen must obviously be such that capacity falls between low demand and high demand at that price. If demand turns out to be low, consumers' surplus is maximized by producing up to the point where demand price equals b, since there is spare capacity and since capacity costs are fixed and hence irrelevant. If, on the other hand, demand turns out to be high, output will be limited by capacity, the excess demand being eliminated by rationing, so that price is irrelevant. Hence price can be determined so as to maximize consumers' surplus in the eventuality of low demand. Capacity, on the other hand, being excessive when there is low demand, can be determined so as to maximize consumers' surplus in the eventuality of high demand. It should be increased up to the point where the expected gain in consumers' surplus from a unit increase in capacity I (p-b) just equals the cost of that extra capacity A, where p is the (high) demand price at the level of capacity chosen. I hope that this adequately conveys the essence of Brown and Johnson's argument. It rests upon the explicit and reasonable assumption that price has to be fixed before it is known whether demand is going to be high or low. But it also rests upon the implicit assumption that rationing is always preferable to price as a means of restraining consumption at times of high demand. This assumption is not generally correct. A price greater than b will involve a loss of consumers' surplus at times of low demand but will diminish the amount of excess demand and hence the severity of rationing at times of high demand. There is thus a tradeoff between the sacrifice of consumers' surplus on the one hand and the stringency of rationing on the other hand. The terms of this trade-off and consumers' attitudes to it will depend on the circumstances of the case, so they can be usefully discussed only in terms of particular real cases. Rationing in the case of electricity means power cuts; in the case of gas it may mean a pressure drop which entails the danger of explosions; in the case of telephone service it means that some calls cannot be made. In all three of these cases, tariffs are usually set high enough to keep down the risk of failure to a very low level, i.e., they are at a level considerably in excess of operating costs.' This does not impugn the principle set out above for determining capacity,2 but it does suggest that Brown and Johnson's suggested