Showing papers on "Physical capital published in 1985"

Earnings, Schooling, Ability, and Cognitive Skills

Abstract: Conventional estimates now available for a large number of countries generally indicate that the social returns to education are positive, large, and competitive with returns to investment in physical capital.' That such estimates are good guides for public resource allocation has, however, been questioned. The heart of the problem lies in the interpretation of the positive relationship between the education and the earnings of workers: whether, as the conventional estimates assume, the coefficient of the education variable in the earnings function measures the effect on the productivity of workers of human capital acquired in school. It has been hypothesized *that education in part, or instead, represents screening for native ability and motivation, or credentialism, and that as a consequence conventional measures of the social benefit of education are substantially upward biased.2 In this paper we attempt to distinguish the influence on earnings of cognitive achievement, native ability, and years of education as a means of adjudicating the human capital, screening, and credentialist hypotheses. Our econometric analysis is based on two rigorously comparable micro data sets from Kenya and Tanzania, generated by surveys of the urban wage-labor force specifically for this study. These data sets contain the usual variables found in earnings function estimates of the benefits of schooling-individual earnings, years of education, and years of employment experience. In addition, they contain two variables-measures of the worker's cognitive skills and of his or her reasoning ability-not previously found in studies of developing countries and only rarely found in studies of the education-earnings relationship in developed countries.3 With these variables we can estimate the direct effects on earnings of cognitive skills, ability, and years of schooling. By using them to estimate educational production functions and educational attainment functions, and linking these functions with the earnings function in a recursive framework, we can also assess the various indirect effects on earnings of ability and years of schooling. Having data sets from two countries very similar with respect to size, resource endowments, structure of production and employment, and level of development means that not only can we subject our results to the usual statistical tests, but we can also assess their replicability. Both Kenya and Tanzania have nearly achieved the objective of universal primary education while university enrollments remain at less than 1 percent of the relevant age group. The important policy issues re* Boissiere: Development Research Department, The World Bank, 1818 H Street, Washington, D.C. 20433; Knight: Institute of Economics and Statistics, Oxford University; Sabot: Williams College, Williamstown, MA 01267. We are grateful to the Educational Testing Service of Princeton for the design of tests used in this study and to J. Armitage, J. Behrman, J. Hausman, D. Hendry, D. Jamison, and an anonymous referee for their insights and advice. Helpful comments were also received from participants in seminars at Oxford and Yale universities. The views presented here are our own; they should not be interpreted as reflecting those of the World Bank. 'George Psacharopoulos (1973; 1981) contains a listing of 44 countries in which rate of return studies had been conducted and of the estimates obtained. 2For instance, Kenneth Arrow (1973), Mark Blaug (1976), Samuel Bowles and Herbert Gintis (1976), John Riley (1979), Michael Spence (1976), and Lester Thurow (1975). 3For attempts to control for ability and/or for cognitive achievement in studies for the United States, see Jere Behrman et al. (1980), Gary Chamberlain and Zvi Griliches (1977), Griliches and William Mason (1972), Michael Olneck (1977), Paul Taubman and Terence Wales (1974), Taubman (1975), and David Wise (1975); see also the survey articles by Griliches (1977; 1979). In most instances the data refer to special subgroups in the population and clear distinction cannot be made between natural ability and cognitive skills acquired in school-

Dynamic Behavior of Capital Accumulation in a Cash-in-Advance Model

Abstract: This paper analyzes the dynamic behavior of capital accumulationin Stockman's (1981) cash-in-advance model. If the cash-in-advance constraint applies only to consuittion, then money is superneutral along the transition path as well as in the long run. Alternatively, if the cash-in-advance constraint applies to gross investment as well as consumption, then a permanent increase in the rate of monetary growth reduces the steady state capital stock. The effect on the speed of adjustment depends on the sign of a certain simple function of the parameters of preferences and technology.

Capital Mobility in the World Economy: Theory and Measurement

Abstract: This paper is a critical assessment of some recent empirical evidence on the extent of international capital mobility Its major conclusion is that while much of this evidence is difficult to interpret without ambiguity, it is consistent with a world economy in which the degree of capital mobility is high and increasing Two main approaches to the measurement of capital mobility are discussed The first, traditional, approach is based on comparing expected yields on assets located in different countries The second,and more novel, approach is based on comparing national saving rates and domestic investment rates

New Estimates of Federal Government Tangible Capital and Net Investment

Abstract: Government capital formation raises a number of issues important to national economic well-being, yet the U.S., unlike most advanced countries, does not account for capital in its formal budget documents. We estimate depreciation of government capital using a methodology developed by Hulten and Wykoff which is based on used asset price data. We estimate a federal government net nonresidential capital stock of over $800 billion in 1984, more than 20% higher than estimated by the BEA. We also find much larger net federal investment since World War II than the BEA. The behavior of military and civilian structures and equipment is also examined.We analyze the potential importance of these results for measuring the net national savings rate, national wealth, the trend in government capital formation relative to private capital formation, and the relationship between net investment and deficits.

Notes on the Effect of Capital Gains Taxation on Non-Austrian Assets

Abstract: Capital gains taxes are different from most other taxes on capital. Because they are levied on a realisation basis, how much capital gains tax is paid depends on when an asset is sold not when the capital gain actually occurred. If you buy an asset for price P(t0) at time t0 and you sell it at T, your tax (payable at T) is τ [P(T) − P(t0)], where τ is the statutory rate of capital gains tax. This is true regardless of when the increase in value took place. That is, the tax depends only on P(t0)and P(T);it is independent of the rest of the price path P(t). If assets appreciate, the longer you hold an asset the lower the discounted value of taxes paid on increases in value which took place just after you acquired the asset. In the United States, if sale of an asset can be put off until death no capital gains taxes need be paid. Accrual taxation of capital gains would tax capital gains as they accrue. If capital gains are taxed on an accrual basis, the effect is to lower the after tax rate of return by a factor equal to the tax rate. That is, if an asset grows according to under accrual taxation at rate λ, its rate of return at time s will be α(s)(1 − λ). Since tax obligations are incurred as capital gains are earned, if investors pay tax at the same rate, tax burdens are independent of changes in ownership.

Human Capital, Minimum Wage and Unemployment: A Harris-Todaro Model of a Developed Open Economy

Abstract: In many developed countries unemployment is a serious and persistent problem. Although the character of this problem is highly complex, one of its features which can easily be observed is the substantially higher incidence of unemployment among unskilled workers than among those who are skilled. A possible explanation for this is the existence of an institutionally given minimum wage, which exceeds the market-clearing wage for unskilled labour but lies below the equilibrium wage for skilled labour. Moreover, for those who find themselves unemployed because of the minimum wage, the principal source of job opportunities tends to be the services sector of the economy, which is relatively intensive in its use of unskilled labour. The objective of this paper is to develop a simple model of a small, open economy based on these observations and to examine the policy implications that emerge from it in connection with the unemployment problem. The focus of the analysis, however, is not on the cyclical aspects of this problem but rather on its steady-state nature. The basic structure of the model is as follows. Our economy has two sectors engaged in the production of consumption goods. One of these goods is assumed to be traded internationally and the other is non-traded. Following Rodriguez (1975), I draw a further distinction between the two sectors: nontraded goods, which may be regarded as services, are assumed to require the use of only capital and unskilled labour as inputs, while the traded-goods sector uses only capital and skilled labour. Skills are viewed as productive human capital which can be acquired through formal training. In order to sharpen the focus of our analysis on the process of human capital formation, I will ignore the problems of physical capital accumulation and population growth.' The economy is assumed to be small, facing a given world price of traded goods as well as a given rental at which the supply of capital from abroad is infinitely elastic. In contrast with the assumption of perfect capital mobility, neither type of labour is mobile internationally. With only one traded commodity and one mobile factor, international trade for this economy amounts to an exchange of the single traded consumption good for the services of capital at fixed terms of trade. Section I of the paper presents the model and solves for the stationary composition of the labour force (i.e. skilled v. unskilled) and the equilibrium values of relative factor and commodity prices. Section II introdluces an institutionally given minimum wage which is binding only in the market for unskilled labour. In the spirit of Harris and Todaro (1970), it is assumed that

The Market for Managerial Labor Services and Capital Market Equilibrium

Abstract: This paper presents a model of equilibrium in a capital market for linear shares of risky firms and in a market for managerial labor in which market participants function as both investors and managers. The model yields interesting and relevant equilibrium conditions that integrate earlier separate treatments of the capital market with human capital and the incentive contracting problem regarding shirking. The theory developed here provides a microeconomic explanation of how the price of risk established in the capital market is relevant to the labor contracting problem. The analysis also provides a logical rationale for the division of responsibilities between a board of directors and the management of the firm.

Valuation of Underwriting Agreements for Raising Capital in the Japanese Capital Market

Abstract: In Japan, it has long been a common practice among corporations to issue new shares at par value and offer them to shareholders without underwriting agreements. However, in January 1969, Nihon Gakki (a musical instrument maker) successfully offered new shares at the market price through underwriting agreements. Other corporations followed suit and the capital raised through this method in fiscal year 1972 amounted to ¥861 billion, accounting for more than 65 percent of the total capital raised during the year. At present, over 70 percent of Japanese corporations raise new equity capital at the market price via the negotiated underwriting method. Almost all underwriters employ a “firm commitment” agreement, in which the underwriter agrees to purchase the whole issue from the firm at a particular price for resale to the public. The agreement is normally signed on the day before the issue announcement, at which time the offering price to the public is specified. As soon as the offering price is filed with the Tokyo Stock Exchange, the underwriter is precluded from selling the shares above this price. Though the offering price initially was highly discounted, between 1970 and 1980 this discount rate gradually decreased from 15 percent to 5 percent of the daily stock price (see Table 1). The final settlement with the underwriter usually takes place fourteen to nineteen days after the registration statement becomes effective. At that time, the company receives the proceeds of the sale, minus the underwriter's fee. This fee, which is usually fixed at 3.5 percent of the money to be raised, consists of a compensation fee, a managing fee, a sales fee, and a brokerage fee, none of which can be separated on the contract.

Effects of worker attitudes on production costs and the value of capital input

Abstract: In earlier papers we have defined and demonstrated the feasibility of estimating an index of worker performance, based on indicators of worker attitude, in the context of an equilibrium translog cost function.1 We repeat some of the background material here in compressed form. The objective of this paper is to investigate the worker-attitude phenomenon in the context of a model of the production process that explicitly recognises disequilibrium in the fixity of the capital stock during the production period.2 This approach, while it begs certain unresolved questions, is preferable to the equilibrium approach for investigation of the effect of worker attitudes on the capital requirements in US automobile manufacturing.3 We chose the disequilibrium model with two objectives. First, the capital structure of auto assembly and parts manufacturing plants is largely fixed during a particular model year. Since the model year does not coincide exactly with the calendar year, there will be some blurring of this effect, but the fixed-capital model is far preferable for this industry to the instantaneous-adjustment assumption. Second, in the equilibrium model the bias in technical change for capital in this instance induced by the effects of worker attitudes -is constrained so as to be balanced by offsetting effects in the use of other factors. The disequilibrium model, on the other hand, constrains only the variable factors in this way. While the demand (or share) equation for capital is not estimated directly, the effect of altered worker attitude can be simulated using the estimated model.4 Our earlier study found a substantial capital-using bias in the effect of worker attitudes on the equilibrium translog cost function.

Adjustment Costs and Capital Asset Pricing

Abstract: Discrete-time models of asset pricing have hitherto generally avoided studying the relationship between the underlying technology inherent in the economy and the determinants of the price of capital. A fully articulated economy is constructed in which there is a nontrivial technology for producing capital. The existence of adjustment costs in augmenting the quantity of capital has interesting implications for the stochastic properties of asset prices, as well as other macroeconomic variables. Examples of such economies are used to illustrate this point.

The Theory and Measurement of Capital Utilisation and Its Role in Modelling Investment

Abstract: Capital utilisation and the physical stock of capital are generally assumed to be close substitutes in the production process. Thus, models of the demand for capital or of investment activity must, in principle, incorporate some notion of the optimal level of capital utilisation and its associated costs. The part played by capital utilisation in investment activity is the primary reason for this paper and it is argued that the literature in this area has tended to underemphasize its role. The discussion, however, focusses on the reasons for the lack of emphasis on capital utilisation and this is traced to both problems of theory and measurement. A simple neoclassical theoretical framework is adopted throughout, although it is fairly clear that a number of further problems will be posed by the introduction of capital utilisation into a vintage model. While the theoretical discussion is perfectly general, the empirical work uses data for the U.K. Chemicals industry, simply in order to illustrate the problems of measurement.

The Welfare Effects of a Capital Income Tax in an Open Economy

Abstract: International capital mobility has typically been ignored in discussions of the welfare effects of the capital income tax In the a typical analysis which does consider the open economy it is recognized that highly-elastic capital flows could significantly alter the usual conclusions While there have been strenuous debates about the elasticity of international capital flows, there can be little disagreement that international ownership of capital is an important and growing phenomenon In this paper, we explore the welfare effects of changes in the capital income tax from a different perspective: that of a country in which foreign ownership of a portion of the capital stock and foreign owners' payment of taxesis a reality With this modification in emphasis, a simple graphical analysis is sufficient to indicate that international capital ownership could easily dominate other welfare effects of tax changes At least, the arguments presented in this paper raise a caution about ignoring the openness of the economy simply because elasticities are believed small

Real Wages in Pakistan: Structure and Trends, 1970-84

Abstract: The structure of wages in any economy has profound implications for labour utilization, income distribution and the incentive to invest in human capital. This paper aims at measuring and analysing the level and trend of nominal and real wages in different sectors of the economy of Pakistan for the 1970-84 period. The broad patterns of wage change are then looked at in terms of their implications for employment promo lion, human capital formation and other related policy issues. The analysis is based on the best available information but the usual caveats appropriate to empirical work in Pakistan apply.

The Corporate Cost of Capital in Japan and the U.S.: A Comparison

Abstract: This paper presents evidence about the coats of corporate capital in Japan and the US, for a sample of large companies, and evaluates a variety of hypotheses about why the cost might be lower in Japan.We find that the before-tax return to capital in Japan appears slightly lower than in the U.S. when corrected book measures of earnings are used, but that this result would be reversed if market returns to Japanese equity were used in place of corrected earningsto measure the cost of equity.To what ever extent the cost of capital may actually be lower in Japan, we show that this is unlikely to be due either to a lower overall corporate tax burden or the particular tax advantages of corporate borrowing.

Information Technology, Capital Structure and the Nature of Technical Change

Abstract: This paper presents statistical evidence on (1) the importance of "soft" capital spending items like marketing and R&D investments, and (2) the dominant service content of production in the modern manufacturing firm. It pictures the firm as a dominantly information processing entity that has been gradually shifting its competitive base from process cost efficiency toward a product technology. The paper, hence, argues (3) that during the post-war period technical change has been gradually pivoting in a relatively more (hardware) capital saving direction.

International capital mobility in a specific factor model

Abstract: This model provides a useful starting point for the study of international capital mobility in the context of a small, open economy. All causes of capital flows are readily uncovered. Factor substitution plays a limited role, leading to straightforward properties. Factor price equalization and reciprocity relations are found. Future research could investigate positive, but less than infinite, capital supply elasticity, due perhaps to a risk premium.