Showing papers on "Inefficiency published in 1981"

The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics

Abstract: This essay offers a rational political explanation for the notorious inefficiency of pork barrel projects with an optimization model of legislative behavior and legislative institutions. The model emphasizes the (economically arbitrary, from a welfare point of view) importance of the geographic incidence of benefits and costs owing to the geographic basis for political representation. We explore the implications of a legislator's objective function and derive conditions under which a representative legislature will select an omnibus of projects each of which exceeds the efficient scale.

The Market for Know-How and the Efficient International Transfer of Technology

Abstract: This article explores the nature of international technology transfer and the operation of the market for know-how. It begins by examining the relationship between codification and transfer costs and then analyzes various imperfections in the market for know-how. The special properties of know-how are shown to confound various aspects of the exchange process when arms-length contracting is involved. The internalization of the exchange process within multinational firms serves to bypass many of these difficulties, and explains why the multinational firm is of such importance. Several forms of regulation of technology imports and exports are examined. It is discovered that the process is insufficiently well understood to permit the design of effective regulation that, moreover, appears unlikely to eliminate inefficiency. An efficiency focus is maintained throughout since I feel no qualification to pontificate on complex and confused distributional issues.

Issue in pollution control: interplant cost differences and economies of scale.

Abstract: Debate on interplant pollution-control cost differences focuses on the question of whether a system of taxes or transferable discharge permits should require those plants with low treatment costs to control a higher share of effluents. Another issue under debate is whether those industries with a large minimum size may be effectively barred by pollution-control requirements. Evidence of the inefficiency of present institutional arrangements is shown by studying production function estimations of 30 pulp and paper mills in Wisconsin and Michigan. A more-efficient reallocation of pollution-control resources could be effected with more market-oriented regimes. 58 references, 6 tables. (DCK)

On the Role of Social Security as a Means for Efficient Risk-Bearing in an Economy Where Human Capital Is Not Tradeable

Abstract: An intertemporal general equilibrium model of an economy with overlapping generations and two factors of production, labor and capital, is used to analyze the economic inefficiencies caused by the non- tradeability of human capital -and to derive a constrained pareto-optimal sys tern of taxes and transfers which "c.orrectS1 these inefficiencies. It is shown that, in the absence of such a system, this market failure causes the equilibrium path of the economy to deviate from the optimum for two reasons: First, as is well known, people cannot achieve their optimal lifecycle consumption program because early in life when most of their wealth is in the form of human capital, they cannot consume as much as they would otherwise choose. Second, investors cannot achieve an optimal portfolio allocation of their savings. Not only will some investors be forced to bear more risk than they would choose in the absence of this market failure, but because factor shares are uncertain, the portfolios held by investors will be inefficient. The young are "forced" to invest "too much" of their savings in human capital and the old are "forced" to invest "too little" in human capital. Hence, all investors bear "factor-share" risk which if human capital were tradeable, could be diversified away. It is shown that a optimal system of taxes and transfers not unlike the current Social Security system can eliminate this inefficiency, and therefore, it is suggested that a latent function of the present system may be to improve the efficiency of risk-bearing in the economy.

Control and Behavior of Nonprofit Firms: The Case of Blue Shield

Abstract: Concern about managerial discretion and differences in objectives of owners and managers dates back at least as far as the Berle and Means [4] study of the separation of ownership from control in large American corporations. That study has led to a large body of literature investigating the implications of managerial discretion on firm behavior.' Under some circumstances, it has been predicted that managerial decisions would deviate from cost minimizing/profit maximizing decisions. Alchian and Demsetz [1] argue that this deviation is greater in nonprofit firms due to their attenuated property rights structures. Recent contributions by Frech [9], Frech and Ginsburg [10], and Vogel [16] have explored managerial decision making in nonprofit health insurance companies. Specifically, their articles deal with the operating inefficiency of Blue Cross-Blue Shield plans. The present work extends this literature by considering the interaction of two important limits on possible administrative inefficiency for the nonprofit firm. The limitations are in the form of competitive market forces and residual claimants with an interest in administrative efficiency. Discretionary behavior by managers could be expected to be minimal in competitively organized markets. Firms which fail to cost minimize under perfect competition are forced from the market in the long run. However, discretionary behavior and cost inefficiency can persist for a firm with a special advantage. For instance, firms with cost advantages relative to competitors can use their lower costs to force the exit of rivals or absorb their advantage by operating inefficiently. If the health insurance market were organized competitively, any inefficient practices among nonprofit Blue Cross or Blue Shield firms would have little normative significance to economists. Either the practices or the respective firms would vanish

The Holding Period Distinction of the Capital Gains Tax

Abstract: United States tax law distinguishes between short-term and long-term capital gains. By taxing long-term gains at a lower rate the law creates an incentive for investors to postpone the realization of short-term gains. This study examines the lock-in effect induced by the differential tax treatment of long- and short-term gains. Analysis of data on corporate stock transactions from 1973 suggests that the lock-in effect is large and, thus, causes investors to alter their investment portfolios. The existence of such an effect is inefficient and results in a reduction in capital market efficiency. The inefficiency might be justified if there were convincing reasons which supported the existence of the holding period distinction. It is commonly argued, for instance, that eliminating the distinction would encourage short-term speculation at the expense of long-term commitment to capital. It is also claimed that this would result in a loss of revenue to the government. This study relies on IRS data and simulations using the NBER-TAXSIM file to examine the validity of these arguments. The results of this study suggest that the holding period distinction is not very effective in deterring speculation and does not increase government revenues; in fact, it may decrease them.

Scarcity, Efficiency and Disequilibrium in Resource Markets

Abstract: Possible interpretations of the concept of scarcity in extractive resource markets are presented and then related to traditional economic ideas of efficient patterns of resource use. Sources of inefficiency in resource markets are then considered, with the main emphasis being on disequilibrium. Various simple models of disequilibrium suggest that resource markets are more stable if traders’ expectations are based on quantity rather than price information, so that the provision of such information increases efficiency.

Assessment and Planning

Abstract: This chapter discusses the methods for tracking energy usage, savings, and investment The energy management requires much more than technology It depends on the motivation and training of personnel The economics are always critical The regulations and codes can provide barriers to or incentives for energy management programs Once a program has been initiated, it should be reviewed and assessed periodically The particular thought should be given to planning, both for the energy management program and to the new or the expanded facilities that can be involved Once an energy management program has been initiated, a continuing assessment should be carried out to evaluate the benefits of the program and to determine if changes are required A particularly important parameter for businesses is the impact on corporate profits The experience has shown that energy waste is as much influenced by the attitude, motivation, and training of personnel as it is by the inefficiency of equipment and systems In some cases institutional barriers, such as regulations, taxes, or codes, can discourage efficient energy use

Pricing Inefficiency under Profit Regulation

Abstract: Rate-of-return regulation of a profit seeking firm invites two kinds of distortion: (1) inputs may not be chosen efficiently to produce given levels of output, and (2) the output levels may not be chosen efficiently. Most attention has been accorded the first of these, the technical input distortion. It can even be controlled, at least in principle, under particular goals and by alternative forms of profit regulation. We focus here on the second distortion, the matter of inefficient output levels caused by nonoptimal relative prices for multiple outputs. Our approach is to present second-best welfare maximizing prices and then see whether firms will adopt them when seeking goals other than welfare (goals such as profit, sales, cost or output) and when subject to various constraints which represent profit regulation. Over a range of possible goals and forms of profit constraint we find pricing efficiency is difficult to achieve. By pursuing a maximum sum of profits per unit of capital (or of cost) pricing efficiency can be approached, but the promise of that remedy is limited. Inducing reasonably efficient relative prices in a multiproduct regulated firm thus is seen as a difficult task that deserves considerably more attention than it has received.

Individual health accounts: an alternative health care financing approach.

Abstract: After examining the major determinants of inefficiency in health care markets and several recent proposals to correct these problems, this paper introduces a market-oriented alternative which could be highly efficient while meeting all the established goals of a national health plan. To achieve these objectives, traditional forms of insurance would be replaced by a system with the following characteristics: (1) Instead of buying insurance, individuals and their employers would be required to contribute into individual health accounts from which each family would pay for medical care; (2) Once accumulations attain a designated level, any excess accumulations are distributed to the individual; and (3) A national health fund is established to support those without regular accumulations or those whose accounts have been depleted. This paper develops these principles to show how everyone would have access to care as well as the financial security normally associated with comprehensive insurance. But, by inducing many patients to behave as if they were paying for the full cost of care through reductions in potential earnings from their accounts, the paper explains how significant savings in total spending could also be achieved.

The administrative costs of non-profit health insurers.

Abstract: Interest in the efficiency or inefficiency of non-profit firms has spawned research on the administrative costs of Blue Cross and Blue Shield plans. Relying on plausible implications of the property rights theory of the firm, both Blair, Ginsburg, and Vogel (1975) and Vogel (1977) noted some evidence of inefficiency in these firms. Our analysis, however, utilizing their models and more recent data, reveals little convincing evidence for the view that Blue Shield plans are inefficient.

Fiscal reform and governmental efficiency: Hanging tough

Abstract: Many surveys of taxpayers in the wake of the fiscal reforms of the 1970's have indicated that frustration with the inefficiency and wastefulness of government is a major motive behind their votes for tax and expenditure limitations. There is a strongly held belief that government can do as much as it is currently doing with much less money. There is also a widespread belief that by reducing the dollar resources available to governments, they will be forced to become less wasteful and more efficient. This paper argues that increased efficiency in local government is an unlikely consequence of the fiscal reform movement. Indeed, lessened efficiency is a more probable outcome.

The Accuracy of Canadian Short-Term Economic Forecasts Revisited

Abstract: The second numerator covariance in (11) vanishes when t'(wl) is a constant, highlighting the inefficiency of liner tax schedules which confront individuals having high and low labour supply elasticities with the same marginal tax rate. The other major difference is that the remaining covariance is between marginal utility and income in (13) but taxes in (11). This difference emphasizes another ground for the superiority of non-linear over linear tax schedules. Non-linear tax functions can increase collections disproportionately where the marginal loss in social welfare, u 1 is lowest.

Rural factor markets in Pakistan

Abstract: Four important and inter-related issues in the economics of agriculture in developing countries are production efficiency, tenancy, technological innovation and rural-urban migration. These issues are examined in this study by analysing the working of rural factor markets using empirical evidence on selected farmers in four villages and an important sub-division in Pakistans Punjab province. The pattern of land holding in Pakistan suggests that land is very unequally distributed. This observation is the basis for may proposals of land reform. It has been argued that inequality in land distribution is undesirable per se as well as because it leads to inefficiency in agricultural production. Empirical evidence from the villages suggests that an inverse relationship exists between farm size and productivity thus lending support to the second part of the argument. Explanations in terms of the working of rural land and labour markets are offered for the existence of the relationship. Tenancy is important in Pakistan. Its existence is explained in terms of adjustments in factor endowments by landowners and landless cultivators given that markets for labour and draught power operate imperfectly. Different tenurial contracts imply different sets of incentives that influence decisions regarding resource allocation on the farm. The empirical evidence suggests that adjustments are made - such as devising cost-sharing, input stipulation and supervision arrangements - to ensure that different tenurial contracts are equally efficient. It is argued that despite the apparent difficulties of access to 'green revolution' technology inputs due to imperfections in their distribution and scarcity of rural credit, small farms use inputs such as high yield variety seeds and chemical fertilizers no less intensively compared to the large farmers. The evidence suggests that new markets for factor services and intricate but more accessible networks of fertilizer and seed distribution may have developed to facilitate the use by small farmers. The relationship between migration and rural credit markets is examined. It is argued that migration may improve the credit ratings of households and thus may facilitate borrowing in the rural credit market. Detailed comments are also made on the role of other rural-end variables such as non-farm income, mechanization, output per capita, education and available land per capita in influencing the decision to migrate. The underlying theme of the study is the analysis of operations in rural factor markets. We analyse, carefully, interactions in these markets and then examine some important aspects of policies in the light of our analysis of the four issues.

Revenue sharing and monopoly government: A reply

Abstract: The purpose of our article on the economic consequences of revenue sharing was relatively straightforward: It was to refute, with a particular view of government, the commonly stated proposition that revenue sharing (as well as many other forms of inter-government grants) is intended to decentralize governmental powers by distributing federal government revenues to state and local governments. Further, our purpose was to argue that state and local governments saw in revenue sharing a means of cartelizing tax collections, of charging monopoly tax-prices. In this regard, our analysis extended the economic theory of regulation, developed by George Stigler and refined by others, to the state and local government 'market.' The line of analysis is fully compatible with explanations for the rate and regulations instituted by, for example, the CAB. We fully expected many of the same consequences experienced from, say, the regulation of the airline industry to appear in the government market. The main conclusions of the paper were (1) revenue sharing would move stat~ and local governments away from their competitive tax-price equilibrium (which was used in our article more as a conceptual reference point than as a description of the actual state of affairs in the real world) and would lead to greater tax collections by all levels of government and (2) would give rise to inefficiency in the allocation of resources. The comments of Professors Friedman and Kurth on our article are useful because they make quite explicit a point that was subsumed in our analysis, mainly that regulation and control of competition in the price dimension will lead to competitive pressures in areas not controlled. As in the case of regulation of the airline industry, suppressed price competition can be, eventually, expected to be reflected in non-price dimensions, like the quality and quantity of government services. These points do not disturb us for two reasons. First, again, our purpose was to argue that revenue sharing leads to inefficiency, and inefficiency that goes by the name of'under' or 'over' production is still inefficiency. Second, the Friedman-Kurth argument reinforces our position which is that state and local government officials had a private interest in the creation and extension

Political constraints on economic efficiency: a reconsideration of the American and Soviet economies

Abstract: The formulation and execution of economic policy towards the Soviet block has generally been based on the presumption by Western governments of the inevitable and demonstrable economic superiority of capitalist over communist systems.1 Expectations derived from theoretical analysis of the misallocation of economic resources that would obtain in an economy lacking a rational price system2 appear to be sustained by empirical investigation of the Soviet Union. The impossibility of ensuring consistent and optimal plans, the failure to meet demand in terms of both quantity and quality of consumer goods and the requirement of excessive inputs of factors and resources per unit of output in both industry and agriculture compared with the mixed economies have been well documented,3 and appear to be endemic in Eastern Europe. Although it is more difficult to make international comparisons of dynamic efficiency due to the lack of an appropriate conceptual framework, both theoretical and empirical analyses appear to sustain the conventional orthodoxy. Material balances planning, and in particular the system of factor rewards prevailing in the U.S.S.R., give rise to expectations of bias against technical progress.4 The most comprehensive investigation into the sources of technological progress in the Soviet Union5 shows that in the period 1945-65, only 11 per cent of the technologies then in use had been internally generated, the rest being imported from capitalist sources. It has been estimated that, the technology gap between the U.S.A. and the U.S.S.R. may be between 10 and 25 years.6 The impressively high growth rates achieved by the Soviet Union in the 1950s and early 1960s, it is further claimed, are not evidence of the eventual dynamic superiority of the planned system, as Soviet economists insist, but are no more than a reflection of the low level of economic development which the Soviet economy had attained by the beginning of the period of the Five Year Plans.7 Once abundant and under-utilized factors of production were fully absorbed into the economy, the requirement of the extensive growth model for large inputs of labour and capital per unit of output would cause a deceleration of growth rates.8 Statistics for the 1970s appear to bear out the prediction. The presumption of the general economic superiority of capitalist over command economies, and especially that of the U.S.A. over the U.S.S.R. was particularly important in providing the intellectual foundation for American economic policy towards the U.S.S.R. in the late 1960s and the 1970s. It was widely anticipated that, because of the gross economic inefficiency of the Soviet economy, it would expropriate the bulk of the static and dynamic economic gains from trade consequent on increasing economic interdependence between the two economies.9 For the U.S.A. the benefits would be largely political and moreover of a long term nature, deriving from the extra leverage obtained by injecting a Western economic variable into the Soviet decision making process.10 Statistics again appear to substantiate the initial premise. Over the period 1970-78.the

Some core assumptions in development economics

Abstract: The paper discusses development economics. The paper critiques it. It concludes by indicating those portions that are "salvageable" for positive analysis. Development economics is concerned with the efficient allocation of resources in poor societies. It is distinctive in its stress on the temporal property of economies and in its concern with the making of efficient allocations over time. Within "conventional" economics, it is also distinguished by the stress it places on the role of the public sector. As a social science, development economics makes several core assumptions, each of which is seriously flawed. 1. That inefficiency implies irrationality. 2. That the notion of the social welfare is a meaningful concept; that it can provide a guide to public policy; that it can be measured in economic terms; and that it is embodied in the choices of governments. 3. That rational people will make choices that lead to efficient outcomes and that these outcomes will be stable. What should be retained for positive analysis is the assumption of rationality in choice and the method of equilibrium analysis. The paper concludes by illustrating the importance of these tools for research in anthropology.

The U.S. Petroleum Pipeline Industry under Regulatory Constraint

Abstract: The oil-pipeline industry is one of several that, historially, have been prime regulatory targets and, consequently, the target of considerable research on the apparent inefficiency of firms subject to rate-of-return regulation. The Averch and Johnson (A-J) test of this effect is applied for the first time to the oil-pipeline industry. The history of pipeline regulation is unique because the original-cost rate base is not regulated and because the maximum rates-of-return have not been reassessed since the 1940s. A model using the Cobb-Douglas production function produces results that are inconsistent with the A-J effect in that capital is not substituted for labor, possibly because the pipeline industry uses highly specialized labor. Other explanations could be that regulation has little effect on firm behavior or, more likely, that the difference is due to regulatory lag. Additional research is indicated to acquire enough less-aggregated data on the firm level. 31 references, 4 tables. (DCK)