Showing papers on "Factor price published in 1988"

Price and Authority in Inter-Profit Center Transactions

Abstract: Price and authority have traditionally been regarded as alternative social mechanisms for allocating resources. However, actual transactions-whether inter- or intrafirm-can be evaluated in terms of the extent to which they combine both of these mechanisms. An especially revealing example of this is the exchange of goods between two profit centers in the multi-profit center firm. Three of the most common arrangements, or transfer pricing polices, for effecting these transactions are examined here. Exchange autonomy transfers depend primarily on price, with no or minimal use of authority. Mandated full cost transfers involve a substantial exercise of authority relative to the use of price. Mandated market based transfers use both authority and price in important ways. For all three policies, the transaction costs of these internal transactions may exceed these costs on external transactions.

Search, Price Setting and Inflation

Abstract: A model of monopolistic competition in an inflationary environment is developed which embodies optimal sequential search, price dynamics and entry on the part of consumers and firms respectively. Equilibrium price strategies are (S, s); these bounds increase continuously with consumer search costs, and so does price dispersion. Indeed, the whole equilibrium varies smoothly from the competitive (Bertrand) to the monopolistic (Diamond (1971)) end of the spectrum. The latter's paradoxical result is explained as a limiting case where frictions on firms' side of the market (price adjustment costs) but not on buyers' (search costs) tend to zero. A positive relationship between (smooth and perfectly anticipated) inflation and price dispersion or uncertainty is established.

Distributional Analysis of Portfolio Choice

Abstract: Trading in a market is compared with receiving some particular consu mption bundle, given increasing state-independent preferences and complete markets. The analysis focuses on the distribution price of t he particular bundle. The distributional price is the price of the ch eapest utility-equivalent bundle sold in the market. The distribution al price is determined by the distribution functions of the outside b undle and the state price density. Simple portfolio performance measu res illustrate the value of the approach. Unlike CAPM-based measures, these measures are valid even when superior information is the sourc e of superior performance. Copyright 1988 by the University of Chicago.

The Effects of Commodity Price Stabilization Programs

Abstract: In this paper, the authors analyze the effects of commodity programs in which the government attempts to support and stabilize price through open market purchases and sales. Specifically, they as sess the effects of such programs on the U.S. soybean market using a rational-expectations model that allows for private storage, expected -price-responsive production, and arbitrary support and release price s. A salient feature of the model is that private storage and product ion behavior adjusts to changes in government policy. Stochastic simu lations of the market model demonstrate that price stabilization prog rams can reduce long-run market price and destabilize producer revenu e. Copyright 1988 by American Economic Association.

Price Dispersion and Inflation: Evidence from Israel

Abstract: The paper considers the question whether observed price differentials reflect perceived differences in quality, service agreements, or location or whether information imperfections can explain this phenomenon. It sets out theoretical arguments linking inflation to reductions in the information stock held by agents and thus to greater price dispersion. The hypothesis is tested using monthly price data for 13 uniquely defined goods sold in Israel between 1971 and 1984. Price dispersion is shown to be positively related to the rate of market price inflation. Since inflation is an unlikely proxy for changes in perceived characteristics, the findings support price dispersion theories based on "optimally imperfect" decision making

Costs of Price Adjustment and the Welfare Economics of Inflation and Disinflation

Abstract: This paper studies the welfare consequences of inflation and disinflation in a model in which monopol istic firms incur a fixed cost of price adjustment. It is shown that a moderately increasing price level is associated with higher social welfare than a perfectly stable price level, and the model therefore provides theoretical support for the widespread belief that a little bit of inflation is good for the economy. Nevertheless, it is also tr ue that the eradication of a moderate inflation leads to an increase in social welfare. Copyright 1988 by American Economic Association.

Optimal Price and Advertising Policy for a Convenience Goods Retailer

Abstract: Convenience goods are bought without much consideration or effort on the part of the consumer. Buyers don't try to get the best bargain when purchasing individual convenience items. Instead, they adapt their store choice habits so that they can expect, on average, good value for money in the long run. Store choice is governed by aggregate information which is received on the price levels of stores. This is embodied in store price images. A store price image is defined in the subsequent paper as a perceived difference between the store's price level and a reference level that consumers expect of stores about which they have no particular information. Store price images are learnt adaptively over time. We propose a theoretical model of store price image adaptation and a two-stage sales response model. According to the latter, a store's price image and advertising determine the number of customers attracted per period. Sales per visit, however, depend only on the prices actually observed in the store. For this sales model, we have studied the optimal price and advertising policy making simple assumptions of cost. Our main interest is the interaction between optimal advertising and price image. It turns out that image improvement is achieved mainly through pricing; increased advertising follows only after the price image has been improved. Therefore, as long as the price image is poor relative to some optimal equilibrium level, a larger portion of the marketing budget should be allocated to lower prices rather than to advertising. In phases where the price image declines towards the equilibrium, however, heavier advertising is profitable.

The Effect of Policy Reforms on Agricultural Incentives in Sub-Saharan Africa

Abstract: In 1981 the World Bank's report on SubSaharan Africa cited trade and exchange-rate biases against exports, poor macroeconomic and public sector management, and a price bias against agriculture as contributing to the region's poor performance and slow growth (World Bank 1981, 1986b). Since then, average per capita income in the region has continued to fall; overall agricultural production has grown more slowly than population; declining food production per capita has led to rising food imports; and, for many of the primary agricultural exports, Africa's share of world trade has fallen steadily from 1970 to 1983. Many African governments now agree on the central role of agriculture and the need to strengthen incentives in the sector (United Nations). This paper assesses how reforms in macroeconomic and sector policies have affected agricultural incentives. Government policies can be broadly classified into three groups: macroeconomic policies that affect incentives in all sectors generally, agricultural sector policies that affect farm profitability directly by changing commodity and input prices, and general and sector-specific policies that may affect farm profitability indirectly by changing factor prices and influencing productivity (e.g., public expenditures on research, extension, and infrastructure). This paper analyzes the impact on agricultural incentives of the first two groups of policies. The analysis of producer prices presented below is based on data for about twothirds of the countries in Sub-Saharan Africa, which account for more than three-fourths of agricultural gross domestic product (GDP). (Country coverage varies by indicator depending in part on whether comprehensive data are available.)' Simple averages are used to summarize policy performance across countries (in contrast to weighted averages commonly used to assess aggregate economic effects). The analysis of producer prices covers one to four principal export crops per country.2

Price dispersion, price flexibility, and repeated purchasing

Abstract: This paper presents a search model in which consumers repeatedly purchase a commodity. The repetition of purchases leads to the formation of implicit contracts with sellers which generate a kink in the demand curve facing each seller. These kinks can generate equilibrium price dispersion under conditions where single-purchase search models predict no price dispersion. Despite the kinks, prices are at least partially flexible in that some, and possibly all, sellers change their prices in response to changes in production costs or demand. Dispersion de prix, flexibilite des prix et achats repetes. Ce memoire presente un modele de recherche dans lequel les consommateurs font des achats repete's d'un bien. La repetition de l'achat entraine la formation de contrats implicites avec les vendeurs. Ceci cree un pli dans la cedule de demande A laquelle chaque vendeur fait face. Ces plis peuvent engendrer une dispersion des prix d'equilibre alors que le meme modele ne predirait aucune dispersion de prix en l'absence d'achats repet's. Malgre les plis, les prix sont au moins partiellement flexibles puisque certains vendeurs, tous peut-&re, peuvent changer leurs prix en reponse A des changements dans les cofuts de production ou dans la demande.

A Method for Evaluating Supply Response to Price Underwriting

Abstract: In this paper a method for evaluating the supply response of individual producers to a price underwriting scheme is presented. The method includes precise formulae to take account of the impact of price underwriting on the producer's uncertain conditions. The Australian Wheat Board's guaranteed minimum price scheme is taken as a specific example of price underwriting in practice. Results show the scheme to lead to only relatively small supply responses. The impact on producer behaviour of an increase in price uncertainty in the presence of an underwriting scheme is also demonstrated in the paper.

The Effect of Multinational Firms' Operations on Their Domestic Employment

Abstract: Given the level of its production in the U.S., a firm that produces more abroad tends to have fewer employees in the U.S. and to pay slightly higher salaries and wages to them. The most likely explanation seems to be that the larger a firm's foreign production, the greater its ability to allocate the more labor-intensive and less skill-intensive portions of its activity to locations outside the United States. This relationship is stronger among manufacturing firms than among service industry firms, probably because services are less tradable than manufactured goods or components, and service industries may therefore be less able to break up the production process to take advantage of differences in factor prices.

Factor Market Barriers are Trade Barriers: Gains from Trade in 1992

Abstract: The European Community's economic integration by 1992 is predicted to have large economic benefits. According to traditional trade theory, the gains will come only with permanent resource migration and significant factor price changes (since in principle all trade barriers have already been removed). Yet, it seems unlikely that the 1992 reforms will be completed, if they do indeed result in factor movements large enough to substantially alter factor rewards. This paper presents a more optimistic view. It argues that factor market integration can result in economic gains, even without capital and labor migration. The basic argument is simple. For some types of goods, it is cheaper to conduct trade on an intra-firm basis, rather than an inter-firm basis (for instance roughly half of US imports are intra-firm, Helleiner [1981]). In such industries, any factor market barrier that raises the cost of foreign control of local firms also raises the cost of intra-firm trade. Consequently, removing such barriers can lead to gains from trade. The 1.0. trade literature points out that intra-firm trade requires direct foreign control which need not involve direct foreign investment (Helpman and Krugman [19851). Therefore, 1992 can logically lead to gains from additional intra-firm trade, with little additional capital or labor migration.

The real exchange rate and the fiscal aspects of a natural resource discovvery

Abstract: IT IS OFTEN the case that newly discovered resources-such as oil-are largely appropriated by the government. This paper shows that the accompanying budgetary choices have an effect on the real exchange rate, both in the short and in the long run. The discovery of a natural resource can affect the relative price on domestic and foreign goods through many channels. The "Dutch disease" literature (see for example Corden and Neary (1982), Atkinson et al. (1983), Bruno and Sachs (1982), Eastwood and Venables (1982)) concentrates on two channels: a spending effect and a reallocation effect. The spending effect originates from the increase in income and wealth associated with the new resource: higher spending leads to an excess demand for domestic non traded goods and pushes their relative price up. The reallocation effect originates from the displacement of factors of production towards the activities related to the extraction and processing of the newly discovered resource: this forces factor prices up and leads, under some conditions, to an excess demand for domestic non traded goods. The "Dutch disease" literature points to intratemporal allocation problems. But the discovery of a natural resource, known to be exhaustible, also raises intertemporal allocation problems. The possibility that the temporary windfall associated with the resource discovery be capitalized opens another channel through which relative prices may be affected. Consider an economy in which agents derive their consumption decisions from intertemporal optimization, and assume that they can only save by purchasing foreign assets. In order to smooth their consumption path these agents will use part of the temporary resource income to build up their stock of foreign assets. In the new steady state, after the resource is exhausted, their consumption will remain higher, sustained by higher flow of interest income from abroad. To maintain equilibrium in the current account, the new surplus in the service account will have to be matched by a corresponding deficit in the trade account; if domestic and foreign goods are imperfect substitutes this requires a real appreciation. The example above assumes that all the income from the newly discovered resource accrues to the private sector. Often however, the

Money and Price Level Determination in China1

Abstract: Publisher Summary This chapter focuses on money and price level determination in China. The possible effect of an increase in money supply on inflation became an important issue for the Chinese economic reform officials in 1985, when currency in circulation had increased by about 50% from the end of 1983 to the end of 1984, mainly as a result of the policy to allow individual banks the discretion to extend credit without having established a mechanism of monetary control by the central bank. The chapter focuses on the effect of the money supply on the price level in China. It also discusses the theoretical issues in applying the quantity theory of money to explaining the price level in the Chinese institutional setting, and estimates and tests equations explaining short-run price changes from year to year. Additional issues concerning short-run price determination are addressed, including the possible direct effect of aggregate wage on the price level, a possible structural change after the economic reform began in 1979, and the use of the short-run model for forecasting inflation.

The Long-Run Implications of a Hicks-Neutral Technical Progress

Abstract: This paper analyzes the steady-state welfare implications of a Hicks-neutral technological progress, or alternatively, of an i nternational transfer of a Hicks-neutral superior technology within a n overlapping generations framework. The analysis indicates that prod ucers will be induced by profit motives to adopt the advanced technol ogy although its effect on factor prices and intertemporal consumptio n may reduce steady-state welfare. Morever, it is shown that in contr ast to the static results, a Hicks-neutral technical progress alters the long-run factor price ratio through the effect on capital formati on. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Factor market distortions and backward incidence of pollution control

Abstract: This paper analyzes the backward incidence of stronger pollution control into factors of production using a two-sector general equilibrium model in which the economy experiences perfect capital mobility but norigid factor price differential. In this context we conclude that higher levels of wage and capital rental differentials may act as an effective control over the pollution emission in the economy when factor price differentials directly depend on the pollution level.

Corporate Taxes and Incentives and the Structure of Production: A Selected Survey

Abstract: In this paper we develop a general intertemporal model of production, emphasizing the role of present and expected future corporate income taxes, credits and allowances along with costly adjustment and variable utilization of the quasi-fixed factors. Three specific issues are considered: 1) the direct and indirect effects of taxes operating through factor prices on the long-run input substitution, thus altering the structure of the production process; 2) the effects of tax policy changes on the rate and direction of technological change; and 3) the effects of tax policy on the inter- temporal pattern of substitutions and complementarities among the inputs that arise due to presence of quasi-fixity of some inputs. The rates of utilization of the quasi-fixed factors are determined in the short-run in conjunction with the demands for the variable factors of production. Hence, utilization rates depend on product and factor prices and therefore on tax policy. We specialize the general model in order to highlight each of the three themes and their interaction with tax policy. We also discuss the various ways in which empirical implementation of the theoretical models and a brief summary of the empirical results in the literature is also provided. Lastly, we discuss some policy implications which emerge from the analysis and empirical results.

Factor Shares in Canada, the United States, and the United Kingdom

Abstract: On income distribution, the history of economic thought recognizes two mainstreams of research. One stems from Ricardo [1817] and deals with the income distribution among factors of production, i.e., the functional distribution of income. It purports to account for the factor prices’ formation, such as wage and profit rates, and the share that the corresponding factors of production (e.g., labor, capital, and land) have in national income.

A Bayesian Approach to the Best-Choice Problem

Abstract: This article considers a version of the so-called best-choice problem. The buyer receives a random sample of price quotations for a good and desires to buy the good at as low a price as possible. After each price quotation is received, the buyer must decide either to accept the price or not, with the objective of maximizing the probability of buying the good at the lowest price. When the distribution of the price quotation is completely known, the optimal buying policy is myopic. The main purpose of this article is to show that this myopic property holds for some interesting price distributions that are updated in a Bayesian manner as successive prices are received.

Determinants of the U.S. Wheat Producer Support Price: A Time Series Analysis

Abstract: Public choice in agriculture is an emerging field in agricultural economic research. The paper's focus is on the determinants of the U.S. wheat producer support price. The econometric time-series analysis suggests that this price is largely determined by the previous price, the expected U.S. share in world exports, and expected program costs. Presidential elections also influence U.S. wheat price policies. All other things being equal, the support price tends to be lower in election years than in other years. This suggests that small interest groups' relative political economic power may be smaller in election years if they do not succeed in positioning themselves on the political economic market such that they contain the potentially decisive voter.

The optimality of partial price adjustment policies

Abstract: This paper studies the optimal price adjustment policies of a monopolistically competitive firm whose profit-maximizing price is subject to a serially correlated random disturbance. The firm chooses its price by comparing the expected cost of present and future price changes with the expected losses occurring when price deviates from its instantaneous profit-maximizing value. Partial price adjustment often is the best way to minimize the sum of these losses. Prices tend to be more flexible both in response to large shocks to the firm's profit-maximizing price and when much uncertainty exists about the future.

Price adjustment and market structure: A single-industry study

Abstract: The administered price hypothesis of Gardnier Means has continued to attract a great deal of empirical attention. Unfortunately, the results of all this research have not been consistent. The present paper tries to circumvent the usual empirical difficulties by using a lagged adjustment model for a single industry with geographically separate markets. It examines the rate of price adjustment and the frequency of price changes for newspaper advertising rates for a sample of local papers in Ireland. Adjustment equations are run for each newspaper using labour and materials cost indices as explanatory variables. The partial adjustment coefficient estimates are then related to market structure and firm specific characteristics.