Factor price

About: Factor price is a research topic. Over the lifetime, 2764 publications have been published within this topic receiving 86176 citations.

The Fallacy of the Fiscal Theory of the Price Level

Abstract: It is not common for an entire scholarly literature to be based on a fallacy, that is, ''on faulty reasoning; misleading or unsound argument''. The ''fiscal theory of the price level'', recently re-developed by Woodford, Cochrane, Sims and others, is an example of a fatally flawed research programme. The source of the fallacy is an economic misspecification. The proponents of the fiscal theory of the price level do not accept the fundamental proposition that the government''s intertemporal budget constraint is a constraint on the government''s instruments that must be satisfied for all admissible values of the economy-wide endogenous variables. Instead they require it to be satisfied only in equilibrium. This economic misspecification has implications for the mathematical or logical properties of the equilibria supported by models purporting to demonstrate the properties of the fiscal approach. These include: overdetermined (internally inconsistent) equilibria; anomalies like the apparent ability to price things that do not exist; the need for arbitrary restrictions on the exogenous and predetermined variables in the government''s budget constraint; and anomalous behaviour of the ''equilibrium'' price sequences, including behaviour that will ultimately violate physical resource constraints. The issue is of more than academic interest. Policy conclusions could be drawn from the fiscal theory of the price level that would be harmful if they influenced the actual behaviour of the fiscal and monetary authorities. The fiscal theory of the price level implies that a government could exogenously fix its real spending, revenue and seigniorage plans, and that the general price level would adjust the real value of its contractual nominal debt obligations so as to ensure government solvency. When reality dawns, the result could be painful fiscal tightening, government default or unplanned recourse to the inflation tax.

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'

International Provision of Trade Services, Trade, and Fragmentation

Abstract: The author examines the special role that trade liberalization in services industries can play in stimulating trade in both services, and goods. International trade in goods requires inputs from such trade services as transportation, insurance, and finance, for example. Restrictions on services across borders, and within foreign countries add costs, and barriers to international trade. Liberalizing trade in services could also facilitate trade in goods, providing more benefits than one might expect from analysis merely of the services trade. To emphasize the point, the author notes that the benefits for trade are arguably enhanced by the phenomenon of fragmentation. The more that production processes become split across locations, with the fragments tied together, and coordinated by various trade services, the greater the gains from reductions in the costs of services. The incentives for such fragmentation can be greater across countries, than within countries, because of the greater differences in factor prices, and technologies. But the service costs of international fragmentation can also be larger, especially if regulations, and restrictions impede the international provision of services. As a result, trade liberalization in services can stimulate the fragmentation of production of both goods, and services, thus increasing international trade, and the gains from trade even further. Since fragmentation seems to characterize an increasing portion of world specialization, the importance of service liberalization is growing apace.

Price Competition with Consumer Confusion

Abstract: This paper proposes a model in which identical sellers of a homogenous product compete in both prices and price frames (i.e., ways to present price information). We model price framing by assuming that firms’ frame choices affect the comparability of their price offers: consumers may fail to compare prices due to frame differentiation, and due to frame complexity. In the symmetric equilibrium the firms randomize over both price frames and prices, and make positive profits. This result is consistent with the observed coexistence of price and price frame dispersion in the market. We also show that (i) the nature of equilibrium depends on which source of consumer confusion dominates, and (ii) an increase in the number of firms can increase industry profits and harm consumers.