Showing papers on "Physical capital published in 1971"

Capital Market Equilibrium with Divergent Borrowing and Lending Rates

Abstract: The Capital Asset Pricing Model of Sharpe [10, 1964], Lintner [8, 1965], and Mossin [9, 1966] showed how it was possible to derive under fairly stringent assumptions the conditions for equilibrium in a market for risky assets. Recent work has been directed at relaxing these assumptions, and this paper extends the progress made thus far by deriving some properties of capital market equilibrium when investors are faced with divergent borrowing and lending rates and when these rates may vary among investors.

Measuring Human Capital Returns

Abstract: The correct measure of the return on human capital investment is the wealth effect of the wage increase which the investment makes possible. A geometric model of this investment decision is examined. The currently pervasive "income difference" measure is shown to contain an upward bias positively related to the size of the investment. Alternative tests for "shortage" and "surplus" conditions are developed which correct for this bias. It is shown that labor supply schedules may bend backward only when the relevant wage changes are incorrectly anticipated. It also is shown that among individuals who differ only in wealth, those with less wealth will elect to invest in human capital at lower wage levels in the relevant employments.

The Substitution of Capital for Capital

Abstract: A LTHOUGH homogeneous capital stocks remain a frequent construct in growth theory and the literature on production relations, economists have not missed the fact that trucks are not lathes. Thus considerable effort has gone into specifying the conditions under which aggregation is conceptually permissible.1 Recently, the aggregation of capital services from diverse capital stocks has become an important consideration in the explanation of productivity change for the American economy. Jorgenson and Griliches 2 note the rise in the ratio of equipment stocks to structures stocks over the period 1945-1965. They employ the presumed increase in aggregate capital services from the use of relatively shorter lived assets to explain about 25 per cent of the residual change in the measure of total factor productivity. But very little has been done thus far to identify those variables that exert major influences on changes in the composition of capital goods.3 This paper is directed toward a remedy for this deficiency. In assessing shifts in composition, we have two principal objectives. First, to determine (through the use of an investment matrix) the extent to which changes in the composition of aggregate investment arise from differential industry investment rates as distinct from changes in the coefficients of the matrix itself. Second, to ascertain the determinants of the shifts in aggregate investment, particularly the ratio of equipment to structures. We shall show that the relative prices of capital goods have not been among the principal determinants of such substitution. The theory and estimates of this paper ascribe the changes in composition to variations in the relative costs of capital and labor and to the shift of investment in times of capacity expansion toward new plants with higher ratios of structures to equipment outlays than those for existing plants.

Capital Accumulation, Labor Saving, and Labor Absorption Once More

Abstract: I. Introduction, 40.—II. A neoclassical approach to labor absorption with factor price variability, 42.—III. Asian history and simulation: a look at the models' predictions, 49.—IV. Estimation with Philippine manufacturing data, 54.—V. Conclusion, 64.

Rate Regulation and the Cost of Capital in the Insurance Industry

Abstract: We have discussed some of the effects of rate regulation in the property and casualty insurance industry. One consequence of the regulatory environment is that an optimal capital structure may clearly exist in this industry. If the rate of return to the insureds is generally deficient, we would expect that property and casualty stock companies would have an incentive to lever themselves to the maximum extent permissible by selling insurance. The classic monopoly of the economic literature finances its lucrative investment opportunities in a competitive capital market. The stock insurance company invests in that market, but the relative distribution of the return earned there may be less than equitable due to the process and standards of rate regulation.

U.S. Comparative Advantage: Some Further Results

Abstract: IN THE LAST ISSUE OF this journal, Helen Junz and I reported the preliminary results of an analysis of the sources of U.S. comparative advantage in trade in manufactured goods. The basic answer was that the U.S. advantage is in commodities whose production uses human capital intensively.' We looked only at data for the mid-1960s, which were developed separately by Keesing and Hufbauer.2 To study the data, we performed multiple regressions relating net exports by standard international trade classification (SITC) commodity groups to six production characteristics: human capital per man (H), physical capital per man (K), a measure of the presence of economies of scale in production (S), the date at which the commodity first appeared in the U.S. export schedule (P), the ratio of expenditures on research and development to value added (RD), and the

Differential Capital Charges and Resource Allocation in Soviet Industry

Abstract: This study attempts to estimate the magnitude of the output loss that can be attributed to differential capital charges in Soviet industry. It does this by estimating the quantity of resources that could be freed if the observed output of each industry were produced not with the observed combination of capital and labor, but with an efficient combination--defined as the combination that equates the marginal rate of equal-product substitution of capital for labor in each industry to the equilibrium factor price ratio. Subject to a number of assumptions, the model developed here indicates that, in the period 1960-64, a reallocation of capital and labor that equalized factor returns among the main Soviet industrial sectors, holding the level and mix of output constant, would have freed resources with an annual value equal to 3-4 percent of value added in the industries covered.

Leverage and the cost of capital in a less developed capital market: comment

Abstract: THIS PAPER PRESENTS the results of a comparative study of the effects of capital structure on the cost of capital in a less developed and less efficient capital market (Indian) and in a highly developed and efficient capital market (United States). Specifically, the effect of leverage on the cost of capital is tested on a sample of 28 Indian utilities and on a sample of 77 American utilities. The results for the American utilities are consistent with the Modigliani-Miller thesis that after allowing for the tax advantage of debt financing the cost of capital is independent of capital structure. These results for the American utilities provide a useful benchmark in comparing the relative efficiency of the Indian capital market. The results for the Indian utilities are inconsistent with the Modigliani-Miller independence hypothesis and support the more traditional approach to valuation that moderate amounts of debt will lower the firm's cost of capital. In a recent article L. V. L. N. Sarma and K. S. Hanumanta Rao [7] presented empirical results inconsistent with the Modigliani-Miller thesis and concluded "that investors prefer corporate to personal leverage and, therefore, the value of a firm rises up to a leverage rate considered prudent." Their sample consisted of 30 Indian Engineering firms. Sarma and Rao do not consider the possibility that their findings could be attributed to the fact that the Indian capital market is less efficient than the United States capital market. Indeed they seem to imply that their conclusions are general enough to be extended to the American capital market. The present study confirms their findings for the Indian capital market but avoids potential sources of bias in their study.' The results of the present study do not, however, support the generalization of their conclusions to the American capital market.

Die zeitliche struktur des Produktionsprozesses und das problem der einkommensverteilung zwischen kapital und arbeit

Abstract: The Time Structure of the Production Process and the Problem of Income Distribution among Capital and Labour. — By way of introduction two capital theories are contrasted, that which views capital first of all as a produced means of production (Marx, Walras, modern growth theory) and that which takes capital to be the means of bridging the time lapse between expenditure and return (Bohm-Bawerk). The second view, it is true, has been neglected in modern theory, although it is able to deal more easily with a number of important questions. Several such examples are discussed, which would seem to indicate a general tendency towards lengthening the average production period while adapting the interest rate. Examples of this are found in the growing importance both of immaterial capital (organization, education, research) and of the cost-benefit analysis in the public sphere, as well as in the increasing notice that is being taken of external effects of production and consumption. If it can be definitely shown that there is a tendency to lengthen the average time lapse between expenditure and return, this would amount to a shift, in favour of the factor capital, in the functional distribution of income. In an appendix an exact definition is given of what is meant by an average production period, showing also how it can be empirically measured — at least approximatively.

A re-evaluation of the contribution of the rural-to-urban labor flow

Abstract: In 1954, W. Arthur Lewis published his well-known landmark article conceptualizing a two-sector model of a developing nation, and centered his analysis around the classical assumption of an unlimited supply of labor [12]. The two sectors in the model consisted of the non-capital-using subsistence sector, and the capitalist sector which used reproducible capital. Among the key features of the model was the gain in productivity to be derived from the transfer of labor from the labor-abundant subsistence sector to the more productive capital-using sector. Given an assumption of a negligible marginal productivity of labor in the subsistence sector, labor could be transferred at a very low opportunity cost and with very little required increase in wages. Cheap labor was viewed as a boon to development since it produced a “capitalist surplus” which could be reinvested in capitalist enterprise for continued growth. This capitalist surplus would continue to be reaped so long as there existed surplus labor in the subsistence sector to provide labor to the capitalist sector at a constant wage. The capitalist surplus was viewed as the key to the model since it was assumed that savings and investment were available primarily from profits and not from wages or rents.

Returns to Human and Research Capital in the Non-South Agricultural Sector of the United States, 1949–1964

Abstract: families, they account for much of the observed poverty [14]. Farm income is the sum of the returns to physical capital (land, buildings, machinery), to physical family labor, and to human capital. Hence, one of the reasons for the relatively high percentage of farm families in the low income group might be their small stock of human capital. The research reported here attempts to answer the question whether more public investment in human capital employed in agriculture would be profitable. The answer is reached through the estimation of the rate of return to human capital in the agricultural sector.

A Note on United States Direct Investment and Human Capital

Abstract: It has become increasingly recognized that international direct investment flows are not simply transfers of physical capital; they also involve transfers of skills and knowledge. The manpower that accompanies physical capital constitutes a human capital flow. An attempt to measure the magnitude of the human capital outflow in U.S. direct investment has been made by Yudin (1968). Yudin also shows that the occupational distribution of Americans abroad is much more skill-intensive than the distribution of the labor force in the United States. This result constitutes evidence that there is a large human capital outflow involved in U.S. investment abroad.' However, it is not a surprising finding, since we would expect, for economic and sociological reasons, that the upper end (in skill terms) of the U.S. occupational distribution would be more internationally mobile than the overall labor force. First, on sociological grounds, we would expect that Americans at the upper end of the skill distribution are more likely to desire to, or to be willing to, go abroad. Second, the cost of sending highly skilled (and higher paid) Americans abroad is proportionately less than the cost for less-skilled Americans. An essential question concerning the causes of the human capital outflow remains. The outflow can be determined by either a shortage of the Americans' skills in the host countries or a preference of the direct investor to use Americans rather than qualified native personnel in foreign positions. The question is: Is the factor flow caused by differences in international factor endowments or by discrimination against available local personnel? In this note we ask if the pattern of U.S. direct investmenthuman capital flows is explained by differences in factor endowments. We deduce from a simple model of a direct investor's factor choice that factors will flow according to endowment differences. We then present empirical evidence that direct investment-human capital flows are more strongly directed toward countries where the human capital endowment

Wicksell Effect. Marginal Productivity of Capital

Abstract: In general relative prices of commodities change as the rate of interest changes. This is only not the case in the standard production function model where there is basically only one commodity and therefore there exists no problem of relative prices of produced commodities. The fact that the value of a given physical capital stock depends on the rate of interest (via the prices of the capital goods) is known as the Wicksell effect. Wicksell was the first to study it systematically. It is this Wicksell effect which makes it difficult to treat “capital” as a factor of production like any other homogeneous factor of production.