Showing papers on "Factor price published in 1983"

The price variability-volume relationship on speculative markets

Abstract: This paper concerns the relationship between the variability of the daily price change and the daily volume of trading on the speculative markets. Our work extends the theory of speculative markets in two ways. First, we derive from economic theory the joint probability distribution of the price change and the trading volume over any interval of time within the trading day. And second, we determine how this joint distribution changes as more traders enter (or exit from) the market. The model's parameters are estimated by FIML using daily data from the 90-day T-bills futures market. The results of the estimation can reconcile a conflict between the price variability-volume relationship for this market and the relationship obtained by previous investigators for other speculative markets. THIS PAPER CONCERNS the relationship between the variability of the daily price change and the volume of trading on speculative markets. Previous empirical studies [2, 3, 6, 12, 14, 16] of both futures and equity markets always find a positive association between price variability (as measured by the squared price change Ap2) and the trading volume.2 There are two explanations for the relationship. Clark's [2] explanation, which is secondary to his effort to explain why the probability distribution of the daily price change is leptokurtic, emphasizes randomness in the number of within-day transactions. In Clark's model the daily price change is the sum of a random number of within-day price changes. The variance of the daily price change is thus a random variable with a mean proportional to the mean number of daily transactions. Clark argues that the trading volume is related positively to the number of within-day transactions, and so the trading volume is related positively to the variability of the price change. The second explanation is due to Epps and Epps [6]. Their model examines the mechanics of within-day trading. The change in the market price on each within-day transaction or market clearing is the average of the changes in all of the traders' reservation prices. Epps and Epps assume there is a positive relationship between the extent to which traders disagree when they revise their reservation prices and the absolute value of the change in the market price. That is, an increase in the extent to which traders disagree is associated with a larger absolute price change. The price variability-volume relationship arises, then, because the volume of trading is positively related to the extent to which traders disagree when they revise their reservation prices.

Toward an explanation of national price levels

Abstract: The purpose of this paper is to call attention to the need for a theory of comparative national price levels and to explore some of the elements that seem to belong to such a theory. Most theoretical discussions have maintained that national price levels tend towards equality and focus on presumably temporary divergences from equality. Yet strong evidence has been accumulating that there are large and long-standing differences inprice levels, the highest of which are more than twice those of countries with the lowest prices. Long-run price level differences are most clearly related to levels of real per capita output, with richer countries having higher price levels.These differences have been explained as resulting from greater advantages in productivity for the wealthier countries in goods production, mostly tradable, than in services production, mostly nontradable. The differences in relative productivity may be in total factor productivity or only in labor productivity, reflecting the greater capital intensity of goods production and possibly a higher elasticity of substitution between capital and labor in goods production.We find in the empirical analysis that a large part of the differences in price levels can be explained by structural factors such as real GDP per capita, the degree of openness of the economy, and the share of nontradable goods in output. The only non-structural factor emerging from a preliminary analysis of several of these was the rate of growth of the quantity of money.

The emergence of isolation and interlinkage in rural markets

Abstract: 15% of the rice farmers paid interest charges over 200%, while 20% of them took loans at a zero' interest.2 Similarly in India one can find adjacent villages paying different wages to unskilled labourers. Some economists have suggested explaining the absence of arbitrage and migration in the face of such price dispersions in terms of two important and (in this context) new concepts: isolation and interlinkage. It has been postulated, notably by Bhaduri (1977), that rural credit markets are 'isolated' and thus each moneylender-landlord acts as a monopolist. It is argued here that while the reference to monopoly is misleading, isolation is indeed a salient feature of rural markets and is closely related to interlinkage. This paper maintains that there are natural reasons for the emergence of isolation and interlinkage in less developed economies. It is argued that rural credit markets are characterised by 'potential risk', and this generates an inherent tendency for them to get interlocked with other markets. Based on this, a theory is developed which gives many results but, more importantly, provides some crucial conceptual insights. Firstly, it shows that many concepts, which are well-defined in traditional market analysis, are ambiguous in this new framework. Thus a remark like "Factor prices in backward regions do not reflect social costs" is difficult to interpret if markets in backward regions are interlinked because 'prices'

Price Smoothing and Inventory

Abstract: This paper explains the phenomenon of price rigidity (or price smoothing) as the outcome of the optimal inventory policy of a multi-period profit-maximizing firm under demand and output uncertainties. Price smoothing may be manifested in two forms. First, price changes may be moderated with respect to those implied by the demand function; and second, the firm may choose to restrict price fluctuations by establishing upper and/or lower bounds on prices. We show that the extent of the asymmetry in price smoothing depends on the relationship between the inventory holding cost and the backlog penalty cost. Our model accommodates a wide range

Optimal Price Subsidy Policy for Accelerating the Diffusion Of Innovation

Abstract: Due to the risk inherent in dependence on foreign oil, there is a social benefit in aiding the introduction of alternative energy sources into the market place. The Federal government has initiated a number of programs, including price subsidies, to help accelerate the market diffusion of new, alternative energy systems. We develop a model to investigate analytically the effects of a price subsidy over time on the rate of market diffusion. The model considers word-of-mouth effects and learning curve cost declines. Under a set of conditions that a new technology should be expected to meet before commercialization, the optimal subsidy level is shown to be nonincreasing in time. The related market price is shown to be closely related to the diffusion effect. If there is no such effect, the price to the customer is constant. If there is positive diffusion effect, price increases in time, while if market saturation causes demand to decline over time price decreases in time.

Trade in Used Equipment with Heterogeneous Firms

Abstract: This paper examines the pattern of trade in used asset markets where firms have differing factor prices and utilization rates of capital goods. Depreciation is modeled as an increase in down time as machines age, and a measure of comparative advantage is derived that will explain the pattern of trade when there are two types of firms. It is shown that with heterogeneous firms, the price of used machines will reflect the characteristics of firms as well as the productivity of used machines, and the implications of this result for the study of depreciation are discussed. Finally, the relationship between firm characteristics and choice between purchasing new and used truck tractors is presented as an illustration of the predictions of the model.

Technological Uncertainty and the Theory of the Firm

Abstract: Several recent articles [1; 6] have generalized the theory of the firm to incorporate price uncertainty and risk aversion. It is now well known that the risk averse entrepreneur will select that level of output at which the expected price equals the marginal cost plus the marginal risk premium. Leland [5] provides a similar generalization given demand uncertainty. However, in each case the assumption of a well-specified technology is maintained. This paper complements and generalizes the earlier work on the theory of the firm by investigating the effect which technological uncertainty has on the firm's optimal production decision. Like the earlier work on the theory of the firm, we show that the firm selects the level of input at which the expected marginal productivity equals the factor price plus the marginal risk premium. Unlike the earlier work, we show that the sign of the marginal risk premium is not always positive and that it depends on the structure of the firm's technology.' We show that the distinction between price and technological uncertainty is important because each can lead to different implications for firm behavior. Like its predecessors, the model of the firm presented here assumes a single ownerentrepreneur who makes the production decision. We modify the Baron and Sandmo models by assuming that the entrepreneur knows the cost of each production decision but not the output. As a result the entrepreneur's decision yields a random variable denoting output and a linear transformation of it denoting profit. The entrepreneur chooses the random variable denoting profit to maximize his expected utility. There are at least three distinct, ways in which our notion of technological uncertainty may be interpreted. First, the entrepreneur may not know the location of the production surface. In this case each production decision yields a random output; an increase in the

Costs, economies of scale and factor demand in bus transport

Abstract: The study uses a two-factor translog cost function model, which is subject to very few a priori restrictions, to investigate the cost structure of bus transport analysing relationships between production cost and output and input factor prices. Also evaluated is the demand for factors of production, factor substitution and price elasticities. The data base investigated represents the Israeli bus sector. The empirical results tabulated include scale economies, fixed factor proportions - type production technology, non-linear separability of factors in cost functions, and also small own-price elasticity of demand of labour relative to capital. (A)

The incentives for resale price maintenance under imperfect information

Abstract: This paper considers both the incentives for and the welfare effects of resale price maintenance (RPM) in retail markets characterized by imperfect consumer information. In markets where point-of-sale information on the product is essential for sales and information on prices is costly, RPM permits manufacturers with some monopoly power to resolve two incentive conflicts with retailers. First, because retailers with price-setting powers do not appropriate the gains in profit to an upstream manufacturer from actions taken to increase demand, their incentives to inform consumers of the product and to set low prices are inadequate. This purely vertical externality results in the classic “double mark-up” of final prices. Second, when consumers' costs of price search vary, stores offering low prices and no information can exist in the market equilibrium. These discount houses free-ride on the informational services of high-price informing retail outlets — a horizontal externality. In the imperfect information setting of this paper, (1) administered pricing improves monopolists' profits by resolving the incentive conflict; (2) the profitable use of a price floor reduces the maximum retail price charged and may reduce the average retail price; (3) price floors or administered prices can be Pareto-improving and more likely welfare (surplus)-improving; (4) price floors are welfare-improving.

Energy price uncertainty and optimal factor intensity: A mean-variance analysis

Abstract: THE DRAMATIC INCREASE in energy prices in the 1970s has stimulated interest in the effect of energy prices on the demands for various factors of production. In analyzing the choice of energy-using characteristics of capital, it is important to recognize that a firm's energy-capital ratio is much more flexible prior to undertaking a capital investment than it is after the capital is put in place. In this paper we examine factor intensity choices in a stochastic putty-clay model. Ex ante, when the firm is making investment decisions, the price of energy is unknown. The energy/capital ratio is flexible ex ante and the firm chooses the optimal energy intensity based on the probability distribution of energy prices. Ex post, the energy/capital ratio is fixed and the price of energy is known. The firm cannot adjust the energy/capital ratio but can choose not to use its capital if the realized price of energy is too high.2 Recently, Kon [3] has studied factor demands in a stochastic putty-clay model in which the price of output is random and the prices of factors of production are known with certainty. In this paper, we focus on the effects of energy prices and thus treat factor prices as random and the output price as known with certainty. This difference in the source of randomness appears to make little difference in the comparison of optimal factor intensity under certainty and under uncertainty; indeed Proposition 1 in this paper corresponds to Kon's Proposition 1. In this paper we then go on to examine the effects on optimal factor intensity of changes in the mean and variance of the price of energy.3 The option to shut down during unfavorable price regimes plays an important role in our analysis. In Section 1 we develop a stochastic putty-clay model and compare a risk-neutral firm's behavior under certainty and uncertainty. The effects on energy-intensity of changes in the mean and variance of energy prices are analyzed in Section 2.

The Measurement and Sources of Technological Change Biases, with an Application to Postwar Japanese Agriculture

Abstract: Technological change bias in agriculture has important effects on and is affected by other changes in an economy. Labour-saving technological change, for example, enables more farm labour to migrate to the non-farm sector (Kako, 1978). A land-using bias, on the other hand, may stimulate efficiency differentiation among farm groups and lead to a rise in farm land prices (Lee 1980a), while a machinery-using bias accelerates the rate of investment in agricultural machinery. All of these affect the income distribution as well as the economic growth path of the economy. In spite of its importance, there are relatively few empirical studies of biases in technological change. The purpose of this paper is to present, first, an empirical method of measuring technological change biases in many-factor production with an application to postwar Japanese agriculture, and then to investigate the factors that guided the evolution of biases in agriculture. Sources of biases have been one of the critical concerns of growth economics. Relative factor prices have been asserted to be the prime motivator of biases. However, land size per farm, output price and innovation lags are also important factors affecting technological change biases. The fundamental method used here to test these hypotheses is to measure the biases in four regions among which economic variables have been lifferent or have moved at different rates, and then to examine the relationship between the measured biases and the economic variables. Since the Japanese agriculture sector has undergone substantial technological changes in the rapid economic growth since the Second World War, it provides an ideal case study which is of considerable relevance to similar but less developed countries in South-east Asia. In the first section, we present a theory of measuring biases in many-factor production, using a production function approach. In Section II, the homogeneous translog production function is estimated with micro-farm data on rice production in postwar Japan. Section III analyses the characteristic structure of technological change in postwar Japanese agriculture, and then investigates the sources of the biases following the method presented. In the final section, we draw conclusions about the sources and implications of the measured biases.

Employment-Output Conflicts, Factor-Price Distortions, and Choice of Technique: Empirical Results From Sierra Leone

Abstract: The purpose of this paper is to bring empirical evidence from a comprehensive, microlevel survey of the major economic sectors of Sierra Leone to bear on the debate over the employment-output conflict. With the surge of interest in employment issues in developing countries, there has been considerable discussion of potential conflict between employment and output objectives in the design of development strategies.' Much of this debate has centered on the question of choice of technique and on whether or not factor-price distortions have fa-

The Future of OPEC: Price Level and Cartel Stability

Abstract: In the wake of events associated with the Iranian revolution, the world price of oil increased from $15 to $32 per barrel. The Energy Modeling Forum's recent review of 10 world oil models shows virtual unanimity in holding that this price increase will be permanent and, indeed, that the real price of oil will increase in the future. 1 The purpose of this paper is to seriously question the assumptions underlying such longrun projections - and hence the projections themselves. We conclude that the 1978-79 price hikes may prove to be a watershed event that effects fundamental changes in the long-run supply and demand for oil. Obviously such a conclusion must rest on specific factors germane to the long-run supply and demand for oil. On the supply side, there is the promise of large supplies of conventional oil coupled with the embryonic development of synthetic oil industries in the United States, Canada, and Venezuela. Saudi Arabia's plan to build a 1.5-billion-barrel storage facility

Economic effects of non-binding price constraints

Abstract: FOR decades, the conventional wisdom among economists has been that a "non-binding" price floor or price ceiling has no effect whatsoever on the market equilibrium and quantity.1 This hypothesis rests on the shaky theoretical assumption that the competitive firm's perception of future market conditions is not altered when the government imposes a price control. Recent experiments by Isaac and Plott [6] and Smith and Williams [18] cast doubt on this conventional wisdom, but they offer no theory to explain their findings. Similarly Working [19], Benedict [1], and Johnson [8] alluded that price supports set below the market equilibrium price would distort the supply response offarmers without explaining why. Only Lee [10] and Eeckhoudt and Hansen [4] have developed theories to explain why firms react this way. Lee used an intertemporal decision-making model to show that a price ceiling implemented above the current price would affect both price and output in the current period. However, Lee discussed only those cases where resources have a finite inventory (non-renewable resources), which once depleted cannot be produced again. Following Sandmo [15], Ishii [7], and Coes [3], Eeckhoudt and Hansen analyzed the restraining effects of minimum and maximum prices on a competitive firm. Using a static equilibrium model, they explained the short run response of a utility maximizing firm to the imposition of price constraints. However, Eeckhoudt and Hansen were unable to sign the effect that a price ceiling has on the volume of industrial output. Furthermore, they ignored all long run adjustments. Our model differs from the previous studies in that we assume firms maximize the market value of the firm. In so doing, we are able to determine both the short run and the long run effects that currently non-binding price restrictions have on a competitive industry. Consider the conventional competitive market in which the long run equilibrium is achieved when all the firms in the industry have an expected net worth comparable to their next best alternative. For simplicity, assume a price floor, Pf, is inacted that is lower than the current market price and will remain constant for the forseeable future. Furthermore, assume the government agrees

Supply Functions for Outputs and Demand Functions for Inputs in the Short and Long Run under Uncertainty

Abstract: A model of a competitive firm under price uncertainty is analyzed. The purpose is to investigate whether the Le Chatelier principle is valid if price uncertainty is introduced and when nonincreasing absolute risk aversion is assumed. It is shown that when only one price is random, the long-run effect is stronger than the short-run effect on the demand for or supply of the commodity whose price is stochastic, when its expected value increases. However, if some other price is stochastic, then the effect on the demand for or supply of the commodity whose (certain) price increases, might be stronger in the short run than in the long run. The conditions for this to occur are derived.

Conflict between Employment and Inflation: Theory and Facts

Abstract: Is there a trade-off between inflation and employment? Can policymakers generate more employment through a deliberate policy of inflation? These questions have been debated at length since the introduction of the celebrated Philips Curve1 which empirically showed a negative relationship between the rate of change in money wages and unemployment rate. The study of Philips which related to England has been reproduced for many countries. Apart from the empirical studies, there has been a growing volume of literature on the theoretical basis for such a trade-off.2 Professor Tobin once described the Philips curve as ‘an empirical finding in search of a theory’,3 while there are some who regard it as a case of ‘measurement without theory’. If, in fact, there is a trade-off between the rate of change in money wages (or price level) and employment, a policy directed towards ensuring a rise in price level can be justified on the grounds of generating additional employment.

Price constraints, forward markets and the competitive firm under price uncertainty*

Abstract: This article proposes a model of the competitive firm simultaneously facing price constraints and forward markets under price uncertainty. The incorporation of a forward market is shown to be very important because a risk-averse firm will set its production decision to the forward price regardless of its attitude toward risk. In addition, we show that risk aversion is a sufficient condition for a decrease in risk to reduce the amount hedged when risk is reduced through a mean-preserving price squeeze.

Theory and reality in north-south trade: Some explanations

Abstract: Social theories can only be understood in the context of the epoch in which they are formulated. Therefore also neo-classical theory reflects the international power structure prevailing at the time it was conceived. International trade can better be explained on the basis of differences in product complexities than on the basis of factor price differentials. Nevertheless, indirectly, the latter argument and therefore, neoclassical theory still serves as an explanation. One of the explanations for this is that the fundamental political reality has not changed that much from the time neo-classical theory was formulated. The developed world which has a technological, economic and financial superiority, dominates the Third World and instead of a colonial now a disguised neo-colonial relation essentially prevails. To arrive at an interdependent economic system, more equality is needed in technological capability. Trade then will become more of the intra-trade type, which can be explained better by speciality differences of output with rather similar degrees of complexity.

Structural Change and External Shocks: Some Simulations using a Model of the Swedish Economy

Abstract: During the 1970s the industrialized economies experienced a significant drop in labor productivity growth rates as well as two-digit rates of inflation. Together with other phenomena such as the emergence of the so-called Newly Industrialized Countries, these events have been interpreted as signs of a major shift in the pattern of economic development in the early industrialized world. Economists trying to identify the major forces behind this process, for instance Lindbeck (1983), tend to point to several different factors of which some have been operating for a long time. The abruptness of the change in economic trends, however, to a large extent is assigned to the "shocks" in the form of dramatic increases in the prices of oil and other raw materials, as well as to the ensuing recession, experienced in the beginning of the 1970s. The purpose of this paper is two-fold. The first is to analyze the impact on a national economy of the type of "shocks" experienced in the 1970s within the framework of a computable general equilibrium model implemented on Swedish data. The second purpose is to compare the computed impact of the oil price "shock" with the corresponding impact of the most recent shock, the increase of real interest rates. The underlying issue is obvious: were the raw materials price increases a major factor behind the bad economic performance in the 1970s, and if so, is it likely that the upward shift in real interest rates will have equally detrimental effects? The choice of method for this analysis has some implications which should be pointed out already at the outset. Thus, as the model essentially is designed as a neoclassical general equilibrium model, goods and factor prices are assumed to be flexible enough to clear all goods and factor markets in each period. Moreover, it does not contain financial markets. This means that the analysis, at best, can shed some light on the direct impact of changes in external prices and interest rates on real variables, while indirect effects, induced by malfunctioning goods and factor markets, real effects of higher inflation rates and various policy reactions, are disregarded. To some extent this obviously limits the value of the analysis. On the other hand the partial nature of the analysis provides an opportunity to evaluate the relative importance of direct and indirect effects of the type of external shocks experienced by the industrial national economies during the last decade.

The impact of financial constraints on the local price of farm land

Abstract: Most farm land acquisitions involve a significant commitment of money capital. The proportion of owned versus borrowed wealth used to meet the purchase commitment is reflected in the down-payment ratio. The larger the down-payment ratio, the greater the proportion of owned wealth employed in the acquisition of the land. The availability of wealth from either or both sources may impose a constraint on land acquisition and may influence the market price of land;A model of firm behavior under a money capital constraint has been developed in order to examine this influence. This model shows the firm's demand for fixed inputs (i.e. farm land) to be a function of the price of the firm's output, the prices of all inputs, and the availability of money capital constraint is binding, an easing of the constraint, ceteris paribus, can change the level of input use at which equality between marginal value product and marginal factor cost is achieved. Assuming the level of factor use to be fixed, this change may be translated into a change in factor price (i.e. land price);A single equation econometric model was specified in order to test three hypotheses derived from the theoretical model. First, given a fixed equity level, the required down-payment percentage, as a reflection of the constraint on money capital, should be negatively related to the price of farm land. Second, existing buyer wealth, also deemed a measure of money capital availability, should be positively related to land price. Third, an interaction between existing wealth and required down-payment percentage exists whereby land buyers with different levels of wealth react differently, in terms of the price they bid, to changes in the required down-payment percentage. The direction of this interaction, ambiguous in the sense that it depends on factors which might vary over a given sample of land buyers, was deemed to be negative in light of the characteristics of the present sample;The results of the estimation, using data on farm sales in Iowa over the years 1975 through 1979, failed to reject the first two hypotheses. The hypothesized interaction between wealth and down-payment percentage, although of the predicted sign, was acceptable only at lower levels of confidence.