Showing papers on "Physical capital published in 1989"

Government Size and Economic Growth: A New Framework and Some Evidence from Cross-Section and Time-Series Data: Comment

Abstract: In a recent paper, Rati Ram (1986a) derived an equation for economic growth from two separate production functions, one for the government sector and the other for the nongovernment sector' Three different specifications of the growth equation were estimated using data for 115 countries covering the period 1960-80 International cross-section regressions for 1960-70 and 1970-80 as well as time-series regressions for individual countries were considered The following were the main results (Ram, 1986a, pp 191-92): (1) the overall impact of government size on growth is positive in almost all cases; (2) the (marginal) externality effect of government size is generally positive; (3) compared with the rest of the economy, factor productivity in the government sector appears to be higher, at least during the 1960s; and (4) there is a broad harmony between the estimates obtained from crosssection and time-series data From a policy standpoint, Ram's results, if widely accepted, have important implications, especially in regard to the economic development of the lowand middle-income developing countries For instance, the results can be interpreted to favor a relatively large role for governments in the economies of developing countries, especially if the factor productivity in the government sector is higher than in the nongovernntent sector The results of Ram, however, are in contrast to the findings of Daniel Landau (1986) Landau used a regression model within the framework of a pooled cross-section (65 LDCs) and time-series (1960-80) to assess the impact of a wide variety of government expenditure variables on the rate of economic growth The regressors included not only measures of government expenditure but also the level of per capita product, indicators of international economic conditions, human and physical capital variables, the structure of production, historical-political factors, geo-climatic factors, and others On the impact of government on economic growth, Landau's (1986, p 68) conclusions are: "Government consumption expenditure' excluding military and educational expenditure appears to have noticeably reduced economic growth Military and transfer expenditures do not appear to have had much impact on economic growth Governmental educational expenditures seem to be inefficient at generating actual education Government capital development expenditure appears to do nothing to accelerate economic growth" The conclusions of Ram and Landau are in sharp contrast to each other largely due to significant differences in their models and in the specification of government-size variables Ram's model has a better theoretical foundation compared to the multiple-regression approach of Landau On the other hand, Landau used a variety of government expenditure components as against aggregate government consumption which Ram used Their models and results, therefore, need to be carefully evaluated in further research on the subject This paper is an attempt in that direction and is aimed at a critical review of Ram's model and reexamination of his results *Department of Economics and Statistics, National University of Singapore, Kent Ridge, Singapore 0511 The author is grateful to Ganesha and Sai Gayathri for inspiration, to Koh Lin Ji for computing assistance, and to Basant Kapur, Tse Yiu Kuen, Dudley Luckett, and Mukul Asher for comments and advice Special thanks are due to the four referees of the Review for substantial comments on the earlier versions of this paper IRam adapted the two-sector growth model of Gershon Feder (1983) Feder examined the relationship between exports and economic growth

Markets, Market Failures, and Development

Abstract: A central question in development economics is, how can we account for differences in the levels of income and the rates of growth between the developed and less developed economies? In the 1950s and 1960s, there was a standard answer to this question: the poor are just like the rich, except they are poorer-they have less human and nonhuman capital. There was an immediate prescription for this diagnosis: increase the resources of LDCs, either by transferring capital to them (either direct aid or education) or by encouraging them to save more. Today, these answers seem less convincing that they did two decades ago. If the problem were primarily a shortage of physical capital, the return to capital should be much higher in LDCs than in developed countries, and the natural avarice of capitalists would lead to a flow of capital from the more developed to the less developed economies (see Howard Pack, 1984 and my 1988 paper). If the problem were primarily a shortage of human capital, then the educated in LDCs should receive a higher (absolute as well as relative) income than the educated in more developed economies. How then can we account for high levels of unemployment among the educated and the migration of the educated from LDCs to more developed economies? Moreover, the predictions of the standard neoclassical growth model, of a convergence of growth rates in per capita income, with permanent differences in per capita consumption being explained by differences in savings rates and reproduction rates, do not seem to have been borne out. These observations suggest that the LDCs differ from the developed countries in at least some other important respects, and this view is corroborated by those studies which have looked at the productivity of similar plants operating in developed and less developed economies. (See Pack, 1984; 1987.) The difference can be attributed, perhaps tautologically, to differences in economic organization, to how individuals (factors of production) interact, and to the institutions which mediate those interactions. Among the most important of these "institutions" are markets. It is by now well recognized that there are many instances of market failures in more developed economies (see Bruce Greenwald and myself, 1986). In some cases, market failures may be ameliorated by nonmarket institutions. If, for instance, capital markets do not function well ("perfectly"), if only because of costly and imperfect information, nonmarket institutions (internal capital markets within large conglomerates) may develop.' Market failure is more prevalent in LDCs, and the nonmarket institutions that ameliorate its consequences are, at least in many instances, less successful in doing so. The objective of this paper is to explore the causes and consequences of these market failures and the failure of private nonmarket solutions, and to suggest possible roles for government intervention. tDiscussants: Anne 0. Krueger, Duke University; Stanley Fischer, World Bank.

On the Mechanics of Economic Development

Abstract: This paper considers the prospects for constructing a neoclassical theory of growth and international trade that is consistent with some of the main features of economic development. Three models are considered and compared to evidence: a model emphasizing physical capital accumulation and technological change, a model emphasizing human capital accumulation through schooling, and a model emphasizing specialized human capital accumulation through learning-by-doing.

Two-Person Dynamic Equilibrium in the Capital Market

Abstract: When several investors with different risk aversions trade competitively in a capital market, the allocation of wealth fluctuates randomly among them and acts as a state variable against which each market participant will want to hedge. This hedging motive complicates the investors' portfolio choice and the equilibrium in the capital market. This article features two investors, with the same degree of impatience, one of them being logarithmic and the other having an isoelastic utility function. They face one risky constant- return-to-scale stationary production opportunity and they can borrow and lend to and from each other. The behaviors of the allocation of wealth and of the aggregate capital stock are characterized, along with the behavior of the rate of interest, the security market line, and the portfolio holdings. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Measurable Dynamic Gains from Trade

Abstract: Productive factors such as human and physical capital are accumulated and trade can affect the steady-state levels of such factors. Consequently, trade liberalization will have dynamic effects on output and welfare as the economy moves to its new steady state, in addition to its usual static effects. The output impact of this dynamic effect is measurable and appears to be quite large. The welfare impact of this dynamic effect is also measurable. The size of this dynamic gain from trade depends on the importance of external scale economies.

Capital Controls and International Capital Market Segmentation: The Evidence from the Japanese and American Stock Markets

Abstract: The paper focuses on two countries, Japan and the U.S., to test the integration of capital markets. In Japan, the enactment of the Foreign Exchange and Foreign Trade -Control Law in December of 1980 amounted to a true regime switch that virtually eliminated capital controls. Using multifactor asset pricing models, we show that the price of risk in the U.S. and Japanese stock markets was different before, but not after, the liberalization. This evidence supports the view that governments are the source of international capital market segmentation. THE NOTION THAT WORLD capital markets are perfectly integrated is central to most theoretical developments in both international finance and macroeconomics; indeed, it also lies behind much of the recent international policy discussion. Capital markets are integrated if assets with perfectly correlated rates of return have the same price regardless of the location in which they are traded.1 Segmentation may arise either because of government impediments to capital movements or because of individuals' attitudes or irrationality. If the hypothesis that the international capital markets are integrated is rejected, there is still an important empirical question left unanswered which is related to the source of segmentation. While there is a rich body of theoretical research on international market integration, only a few studies have tried to investigate this important question empirically. A first group of empirical studies on market integration has generally adopted

Seniority, Wages and Productivity: A Turbulent Decade

Abstract: Why does a worker's wage tend to grow with seniority in the firm, and what does this have to do with productivity? Two decades ago, neoclassical labor economists thought that the theory of human capital provided a good answer to this question. The last decade has, however, been one of puzzles and doubt. At this point few would give an unambiguous answer. And much hinges on the answer. An attractive feature of human capital theory is that it yields a consistent and coherent explanation for several aspects of the employer-employee relationship. For example, seniority systems, layoff policies that vary with skill, and the relationship between tenure and turnover can be explained in terms of human capital. The fact that these explanations are connected leads, however, to something like a domino effect: doubts about one cast doubt on the others. If the human capital explanation for the wage-seniority relationship is flawed, then human capital explanations for other phenomena may require reevaluation. In addition, an important body of empirical research is built around the assumption that, at any point in time, a person's wage indicates the person's productivity. Included here is the extensive literature on the human capital earnings function, as well as work on labor demand, market discrimination, and compensating differentials. That assumption has become controversial in recent years, in part because implicit contract theories predict that compensation will be redistributed over the period of the contract. If a person's spot wage has little to do with spot productivity, but rather is an instrument of a complex insurance or deferred compensation scheme, then a reassessment of the empirical research may be necessary.

Vertical integration in the U.S. auto industry : A note on the influence of transaction specific assets

Abstract: Recent refinements in the theory of the firm suggest that organization form may be sensitive not only to the degree to which assets are specific to a transaction but also to the type of capital employed. This paper reports evidence regarding the relative influence of transaction-specific investments in physical and human capital on the pattern of vertical integration using new data obtained directly from U.S. auto manufacturers. The results support the proposition that investments in specialized technical know-how have a stronger influence than those in specialized physical capital on the decision to integrate production within the firm.

Labor Specialization and the Extent of the Market

Abstract: This paper presents an analytical model of labor specialization Workers make human capital investment decisions on the depth and the breadth of their skill Given that firms have diverse job requirements and increasing returns to scale, workers invest more for the depth of their human capital and less for the breadth as the size of the labor market increases Also, the larger the size of the market, the more varieties of job requirements are used so that the average match between a worker and a firm improves

Fractal Structure in the Capital Markets

Abstract: (1989). Fractal Structure in the Capital Markets. Financial Analysts Journal: Vol. 45, No. 4, pp. 32-37.

Capital gains tax policy toward entrepreneurship

Abstract: Presents evidence on the source of funds to the venture capital industry and documents the relatively minor role played by individual investors. Places capital gains on venture investments in context and compares their total value with the value of all realized gains.

Externalities and Growth Accounting

Abstract: We reexamine several bodies of data on the growth of output, labor, and capital, within the context of a model that admits the possibility of an externality to the capital input. The model is an augmented version of Paul Romer's (1987) reformulation of the Solow model. Unlike Romer, however, we find no evidence of an externality to capital. This finding implies nothing about the size of possible spillovers in the creation of knowledge because in our model, causality runs exclusively from knowledge to capital.

Life-Cycle Labor Supply with Human Capital Accumulation

Abstract: A dynamic model of labor supply under uncertainty with endogenous human capital accumulation is developed and estimated using 1968-81 Panel Study of Income Dynamics male panel data. Given a learning-by-doing technology for human capital investment and a translog utility function, structural parameters for preferences and technology are estimated from the orthogonality conditions implied by the Euler equations assuming rational expectations. The parameter estimates conform to economic theory. Simulations of the model suggest that the intertemporal labor supply elasticity with endogenous wages will rise over the lifecycle, producing different policy implications than typical models with exogenous wages and constant intertemporal elasticities. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

The Structure of Canadian Inter-Industry R & D Spillovers, and the Rates of Return to R & D

Abstract: This paper estimates the effects of interindustry R&D spillovers on the production cost of nine major Canadian industries. Production costs in all nine are affected by spillovers and six industries are influenced by at least two different source industries. Rates of return to R&D capital for each industry are also estimated. Private rates of return on R&D are at least two and a half times those on physical capital. Rates of return on R&D, inclusive of spillovers, are also computed: for industries that are major sources of spillover, the spillover-inclusive returns are at least twice the private returns. Copyright 1989 by Blackwell Publishing Ltd.

Risk capital financing and the separation of ownership and control in business groups

Abstract: This paper analyses business groups, composed of legally independent firms connected through a network of cross-shareholdings. A model which allows to calculate the value of the firms of a group and the integrated ownership shares held by an outside stockholder, is described. A taxonomy for the collection of risk capital generalizing the one which applies for a single firm is proposed; the connection between the process of raising risk capital and the separation of ownership from control in business groups is demonstrated and given a formal mathematical description. Empirical evidence relating to the amount of risk capital collected by Italian business groups in the '80s and to the extent of the divorce between ownership and control is also provided.

Human Capital Responses to Technological Change in the Labor Market

Abstract: In a broad sense, the relation of human capital to economic growth is reciprocal. This study focuses more narrowly on labor market consequences of human capital adjustments to the pace of technological change. Using Jorgensons multifactor productivity growth indexes for industrial sectors in the 1960's and 1970's the study explores effects of differential pace of technological changes on industry demands for educated and trained workers as reflected in PSID data covering the 1968 to 1983 period. The findings show relative increases both in quantity demanded (utilization) and in price (wages) of skilled workers in the more progressive sectors. Steeper wage profiles, lesser turnover, and lesser unemployment characterize labor in sectors whose productivity grew faster in preceding years. The growth of sectoral capital intensity produces similar effects. But, as newer vintages of capital contain new technology, the skill bias of capital intensity partly reflects the skill bias of technology.

What determines the rate of growth and technological change

Abstract: There is substantial research about cross section and time series correlations between economic growth and various economic, social, demographic and political variables. After analyzing these correlations, the paper makes the following conclusions. Exogenous increases do not seem to cause increases in the rate of technological change, but instead seem to be associated with lower rates of return to capital. Increased openness to international trade speeds up growth and technological change as do an increase in scientists and engineers. Countries more open to trade have a higher level of investment and capital growth - which is not associated with a fall in the marginal product of capital. Countries that become more integrated with world markets seem to have a higher marginal product of capital. Increases in capital investment associated with a higher per capita GDP are associated with a fall in the marginal product of capital. Increases in capital investment associated with increases in trade are not. This suggests that policies to encourage more open trading may be as important to growth as additional foreign lending - especially in their cumulative effects - and at the same time enhance the efficient use of foreign loans.

Real Exchange Rates and Macroeconomics: A Selective Survey

Abstract: The paper discusses real exchange rate issues of industrial and of developing countries. For real exchange rates among the key industrial countries we ask what is the best conceptual framework. To shed light on this question we look at alternative theoretical approaches and at empirical evidence on the relation among interest rates, expectations and depreciation. The discussion of developing countries' real exchange rates focuses on the link between real exchange rates, real wages and the profitability of capital. The model highlights the discrepancy between the mobility of capital (including, in the long run physical capital) and

Taxes and Capital Formation: How Important is Human Capital?

Abstract: This paper explores how explicit incorporation of human capital affects dynamic general equilibrium analysis of the effects of taxes on capital formation and welfare in a life-cycle growth model. In contrast to the results of partial equilibrium analysis, we find that estimates of the full dynamic welfare costs of capital income taxes are little affected by incorporating human capital. While the short-run impact effects of replacing income taxes with wage or consumption taxes are significantly affected by endogenizing human capital, these effects are short-lived. In the long-run the rate of return on non-human capital falls to approximately its initial net of tax level, and steady-state human capital investment plans are therefore little affected by the tax changes. Although incorporating human capital thus does not greatly alter results in our numerical simulations, a wide range of extensions and modifications of the model are discussed which could in principle modify this conclusion.

Rates of Return on Physical and R&D Capital and Structure of the Production Process: Cross Section and Time Series Evidence

Abstract: R&D investment is an outcome of a corporate plan and is influenced by the existing technology, by prices, by product demand characteristics, and by the legacy of past capital stock decisions. In this paper we focus on the determinants and interaction of labor, physical capital, and R&D capital. In particular, we investigate three major issues. The first issue relates to the nature of the factor substitution possibilities between the three inputs in response to changes in input prices in order to estimate the own and cross price elasticities of the factors of production. The second problem pertains to the magnitude by which output expansion increases labor, physical, and R&D capital. Lastly, we address the extent to which adjustment costs affect factor demands, and measure the marginal adjustment costs for physical and R&D capital.

Financial development: theories and recent experience

Abstract: For many years, practising development econo mists made pronouncements on the importance of developing the financial sector to accelerate eco nomic growth based on slender theoretical grounds. Indeed, the vast bulk of theoretical work relating financial conditions to economic development published before 1973 detected possibilities for negative or, at best, neutral effects of financial development on income levels. John Maynard Keynes (1936) argues that liquidity preference tended historically to push the real interest rate above its full-employment equilibrium level. As a result, income falls to equate saving and investment plans. Keynes suggests that liquidity preference and hence the real interest rate can be reduced by financial repression in the form of interest rate ceilings or a Gesellian stamp tax on money. James Tobin (1965) shows that a larger ratio of money to physical capital in household portfolios reduces the capital/ labour ratio and hence per capita incomes, even when the economy is operating at full employment. By reducing preference for money in favour of physical capital, financial repression can raise the capital/labour ratio and accelerate economic growth during the transition to a new higher level of per c pi a incomes. In Tobin's model, economic growth and inflation are positively related because higher inflation reduces the demand for money. More recently, a school of neo-structuralist economists proffers models in which liberalization and devel opment of the formal financial system can produce both higher inflation and lower economic growth.

The scale of informal capital markets

Abstract: Informal capital markets are the leading source of external risk capital fueling entrepreneurial startup and small business growth. They are virtually the only practical source of risk or venture-type capital for most entrepreneurs once their capital needs surpass family resources. Informal risk capital is equity and near-equity dollars invested by private individuals directly (informally) in entrepreneurs without formal intermediation.1 The importance of understanding how and where small firms obtain their risk capital is reenforced by the growing recognition of the role of small business in U.S. economic performance.2 Continued and enhanced supply of informal capital requires rational public policy. Because of the lack of reliable empirical data, it has been difficult to formulate effective policies that would guide markets where necessary, leave them alone where desirable, and accelerate their growth where possible. Such policy is best built on an accurate appreciation of the scale of informal risk capital's contribution to U.S. economic growth and change. New microdata evidence just recently available contributes a wealth of empirical data about how informal investors and entrepreneurs interact.3 The object of this paper is to use the new data to reach preliminary estimates of recent aggregate flows of informal capital. To achieve this goal I also provide collateral estimates of the stock of informal investors, recipient firms and annual transactions volume.

Investment in Segmented Capital Markets

Abstract: Bankers' screening devices are identified to determine firms' probability of borrowing in the 'formal' segment of the capital market in Pakistan. Incorporating this information, investment functions are estimated using a two stage switching regressions model with endogenous switching. It is concluded that firms that borrow in the 'formal' markets behave according to the flexible accelerator model of investment while non-borrowing firms plough back profits. Furthermore, the former have higher capital-output ratios and find it less difficult to adjust to their desired capital stocks compared to the latter. Investment determinants related to entrepreneurial and firm features are also identified.