Manage Research Papers

Carlo Perroni and Kim A. Scharf

This paper examines how capital tax competition affects jurisdiction formation. We describe a locational model of public goods provision, where jurisdictions are represented by coalitions of consumers with similar tastes, and where the levels of taxation and local public goods provision within jurisdictions are selected by majority voting. We show that in this setting interjurisdictional tax competition results in an enlargement of jurisdictional boundaries, and can raise welfare for all members of a jurisdiction even in the absence of intrajuris-dietional transfers.

Kim A. Scharf

We describe a fiscal choice model where individuals vote over levels of proportional income taxation and over tax incentives for giving, and investigate how tax incentives for giving affect political equilibrium outcomes. We show that the availability of tax incentives can cause a regime switch and induce a low income policymaker to select a private provision regime over a pure public provision regime even when the median voter is a donor. Although such a switch involves a higher relative burden for high income individuals, this can be offset by induced changes in fiscal choices by policymakers, and improve welfare for both low and high income types

Alan A. Carruth, Mark A. Hooker and Andrew J. Oswald

This paper develops an efficiency-wage model where input prices affect the equilibrium rate of unemployment. We show that a simple framework based on only two prices (the real price of oil and the real rate of interest) is able to explain the main post-war movements in the rate of U.S. joblessness. The equations do well in forecasting unemployment many years out-of-sample, and provide evidence that the oil-price spike associated with Iraq’s invasion of Kuwait appears to be a component of the “mystery” recession which followed.

Mark B. Stewart and Joanna K. Swaffield

This paper investigates transitions into and out of low pay in Britain in the 1990s. It finds considerable persistence in low pay. In addition, the low paid are more likely to move into non-employment; those entering employment from a spell outside are more likely to be low paid; and those who had been low paid prior to the spell of non-employment are even more likely than other entrants to be low paid again when they subsequently move back into employment. There is thus evidence of a cycle of low pay and no pay. Modelling transition probabilities into and out of low pay requires the 'initial conditions' problem to be addressed. Simple probability models of these transitions suffer from endogenous selection bias as a result of conditioning on the initial low pay state. This paper uses a bivariate model with endogenous selection to address this problem and parental variables to instrument the initial state. The empirical evidence presented indicates that exogenous selection into the initial state is strongly rejected and that ignoring the endogenous selection of conditioning on the initial low pay state distorts the estimated coefficients. Typically the estimated coefficients (and their t-ratios) are much reduced (in absolute value) when allowance is made for endogenous selection. Ignoring the endogenous selection is found to result in the collective effect of observed current heterogeneity being overstated by a factor of about 2. However factors such as training, plant size, union coverage and gender generally retain their significant influence on the probability of remaining low paid, although with substantially reduced effects. There is evidence of considerable ceteris paribus dependence of the probability of being low paid on whether or not an individual was low paid in the previous year.

Dennis Leech

In general in organisations whose system of governance involves weighted majority voting, power and voting weight differ. Power indices are a value concept for majority voting games which provide a means of analysing this difference. This paper provides new algorithms for computing the two classical power indices (the Banzhaf index and the Shapley-Shubik index) and applies them to the voting distribution in the two governing bodies of the IMF in each year since its foundation. The focus is both substantive, being an analysis of the political economy of the IMF, and methodological, as a study of the use of the power indices. Power relations are studied with respect to two types of decisions: ordinary decisions requiring a simple majority and decisions requiring a special majority of 80% or 85%. Clear cut results are obtained for the former: among the G5 countries discrepancies between power and voting weight have declined over time with the exception of the United States which continues to have much more power than its weight even though that weight has declined. In the nineteen forties the United Kingdom's power was considerably below its relatively large nominal voting power, similarly to some extent for France. Both power indices give results which are qualitatively comparable. For decisions requiring special majorities, however, few general results emerge because of conflict between the indices.

R. Jha and Mark J. Rhodes

Although there is a very large literature on the links between farm size and farm productivity in Indian agriculture there is virtually none that discusses the influence of farm size on technical efficiency. hi this paper we try to fill this gap. We use panel data on a large number of farms for two Indian states, Haryana (which has been significantly affected by the Green Revolution) and Madhya Pradesh (where the Green Revolution has had less effect), to estimate a translog production frontier for wheat production and model the determinants of technical efficiency. It is discovered that a separate frontier, of the non-neutral type proposed by Huang and Liu (1994), for each state is needed. In Haryana larger farm size and ownership of land and machines positively influence technical efficiency. This is not the case in Madhya Pradesh. Thus, with the Green Revolution advancing, policy to increase farm productivity will call for land consolidation and vesting of ownership rights of land and capital with farmers. Several policy conclusions are also advanced.

Leonardo Gambacorta

The growing prospect of European monetary integration has prompted interest in the study of differences in financial systems and their consequences for monetary transmission processes. This paper analyses the case of a monetary union composed of countries with heterogeneous "credit channels". In order to better insulate the economies from the asymmetric effects produced by differences in national financial systems, a money supply process, based on the interest rate on bonds and its spread with respect to the bank lending rate, is proposed. Using a two-country rational expectations model, this study compares the performance of the "pure" policies (money targeting, interest rate on bonds and spread pegging) and highlights the properties of the optimal monetary instrument.

Christina Dawkins

Previous sensitivity analysis procedures for applied general equilibrium models have focussed on the values of exogenously assigned elasticity parameters, while the calibrated parameters - those that are obtained from combining elasticity information with flow or stock data - have been largely ignored. Calibrated parameters are central to a model's specification, and uncertainty surrounding their values influences the credibility of the model's results. This paper introduces and illustrates a calibrated parameter sensitivity analysis (CPSA) which, when combined with previous elasticity sensitivity analysis procedures, allows modelers to undertake sensitivity analysis over the full set of model parameters. The 'extended sensitivity analysis' methodology is illustrated for tax incidence results from an applied general equilibrium model of C6te d'Ivoire.

Cavelle Creightney

This paper examines the cooperative bargaining approach to intrahousehold distribution. The 2-person symmetric Nash model is extended to a gener­alized model for several household members. Also a model employing a generalized utilitarian solution is proposed and the intrahousehold models suggested by Chiappori (1992) are reviewed. It is argued that the traditional model is a special case of Chiappori's efficiency model, in turn a special ease of the generalized utilitarian model which is in turn a special case of the generalized Nash model. The demand functions and comparative statics of these models are obtained and a structure of nested hypotheses is derived. These results extend those of McElroy (1990). It is also argued that the sharing rule and Pareto efficiency models proposed by Chiappori are not equivalent as has been suggested. The distinction between exogenous and endogenous household sharing rules is emphasized. Two further cooperative bargaining solutions, namely the dictatorial and the egalitarian solutions, are examined and applied to the intrahousehold bargaining problem. The demand functions implied by these solutions and the comparative statics of the models are obtained and discussed. The analyses in this paper show that different cooperative bargaining solutions yield different predictions for de­mand functions and for the response of individual and household demands to parameter changes. The choice of an appropriate bargaining solution cannot be settled theoretically and is therefore essentially an empirical question.

Hans-Martin Krolzig and Michael P. Clements

While there has been a great deal of interest in the modelling of non-linearities in economic time series, there is no clear consensus regarding the forecasting abilities of non-linear time series models. We evaluate the performance of two leading non-linear models in forecasting post-war US GNP, the self-exciting threshold autoregressive model and the Markov-switching autoregressive model. Two methods of analysis are employed: an empirical forecast accuracy comparison of the two models, and a Monte Carlo study. The latter allows us to control for factors that may otherwise undermine the performance of the non-linear models.

(Special Paper 1997)

PROGRAMME AND PROCEEDINGS OF 1997 WARWICK SUMMER RESEARCH WORKSHOP ON "DYNAMIC GAMES AND THEIR ECONOMIC APPLICATIONS" HELD IN THE DEPARTMENT OF ECONOMICS 14-25 JULY 1997

Michael P. Clements and Jeremy P. Smith

Periodic models for seasonal data allow the parameters of the model to vary across the different seasons. This paper uses the components of UK consumption to see whether the periodic autoregressive (PAR) model yields more accurate forecasts than non-periodic models, such as the airline model of Box and Jenkins (1970), and autoregressive models that pre-test for (seasonal) unit roots. We analyse possible explanations for the relatively poor forecast performance of the periodic models that we find, notwithstanding the apparent support such models receive from the data in-sample.

Guido Ascari

In this paper we incorporate staggered wage setting a' la Taylor (1979) into an optimising dynamic general equilibrium framework. The aim is to study whether staggered wages could induce a high degree of persistence in the real effects of money shocks, as some recent studies have suggested. Firstly, we are able to investigate how the parameters of Taylor's model depend upon the microeconomic fundamentals and the conduct of monetary policy. Secondly, we show that, once explicit microfoundations are taken into account: (0 the model is highly non-linear and consequently a log-linear approximation becomes a bad approximation for a staggered wage economy; (ii) the conduct of monetary policy affects the structural parameters of Taylor's wage setting equation, providing a clear example of the Lucas critique; (iii) the inertia of the system and the short-run output-inflation trade-off are inversely related to the level of average inflation. Thirdly, we conclude that high persistence of the real effects of money shocks in staggered wage models is an unlikely outcome. Sensible values of the microeconomic parameters and/or a moderate rate of underlying inflation as we observe in western economies cut down persistence not only far below a near random-walk behaviour, but also below any level notably different from zero

Andrew Benito

The paper considers the estimation of wage differentials both between and within public and private sector labour markets, employing data from the 1991 BITS. When controlling for a range of individual and job characteristics, including industry affiliation, the mean differential is estimated at 30 % for public sector women but is insignificantly different from zero for men. Employees in the N. H. S. or Higher Education sectors experience a 10 - 12 % pay penalty relative to those employed in local government. Differences in wage premia on the basis of education, workplace size, gender, race and union presence between public and private sectors are also found.

Michael P. Clements and Reinhardt Madlener

Much of the short—run movement in energy demand in the UK appears to be seasonal, and the contribution of long—run factors to short—run forecasts is slight. Nevertheless, using a variety of techniques, including a recently developed test that is applicable irrespective of the orders of integration of the data, we obtain a long—run income elasticity of demand of about one third, and we are unable to reject a zero price elasticity. Periodic models that allow for a seasonally varying response of demand to its principle determinants are shown to provide superior short—run forecasts to well—known seasonal time series models, and to univariate periodic models, even ex ante, when the determinants themselves have to be forecast. However, the relatively short data sample and small number of forecasts suggests caution in generalising these results.

Marcus Miller and Lei Zhang

Do emerging economies need a bankruptcy procedure to handle potential debt defaults? Jeff Sachs and John Williamson, for example, say yes. But others, including notably the two Working Groups who issued reports on Crisis Resolution (on behalf of G10 and the Institute of International Finance) say no — mainly on account of "moral hazard" ascribed to debtors. But could the replacement of syndicated bank lending with widely held bond debt under the Brady plan have posed a problem of inter-creditor conflict sufficiently pressing to have tipped the balance in favour of having an orderly procedure? To investigate this, we use the basic tools of finance, starting with the valuation of corporate debt and then going on to sovereign debt. What we find is that, without "water-tight" sovereign immunity, creditors face a serious Prisoner's Dilemma in the absence of a code. Though it may be collectively inefficient, individual creditors may see it in their self-interest to grab what they can of the available collateral in a "race of the vultures". Avoiding inter-creditor conflicts of this sort is the primary reason for having a bankruptcy code. Our simulations also suggest that the case is fairly robust in the face of "moral hazard" problems among debtor countries.

Marcus Miller

Europe is rushing headlong into monetary union armed with preconditions reflecting mistrust among would-be partners rather than what is needed for a successful common currency. Current negotiations on the future structure and policy of EMU, in particular, seem to resemble a game of "Chicken"! It is surely unlikely that this will produce the sort of monetary policy needed to mitigate the effects of Eurosclerosis. It is suggested, therefore, that willingness to initiate labour market reforms would be a far more effective criterion for membership than the current Maastricht conditions.

Marcus Miller, R. Ippolito and Lei Zhang

Producing high technology output and supplying sophisticated services often involves costly investment in industry specific skills. But the threat of poaching means that it is the individual "stakeholder", not the firm, who must bear the cost. We investigate various mechanisms for funding human capital investment in an industry equilibrium framework where capital market imperfections would (in the absence of intervention) result in underinvestment. The main result is that government provision of loan guarantees (conditional on no-bankruptcy) leads to wage hikes which (by forcing exit of some firms thus increasing monopoly power) raise profits in a socially inefficient manner: income contingent loans and levy subsidy schemes, meanwhile, can result in a socially efficient outcome.

Robin A. Naylor

In this paper, we analyse the relationship between wage outcomes and the nature of international trade and economic integration when labour markets are unionised and a homogeneous product market is characterised by intra-industry trade. We characterise the full set of possible trade regimes for different combinations of wages and derive unions' wage reaction functions. We show that a union's choice between a high and a low-wage strategy will depend on the value of trade costs. We find that: (i) compared to a non-union setting, unions reduce the prohibitive trade cost and that (ii) this rules out trade in that region of trade costs over which, in the non-union model, welfare falls as trade costs fall, (iii) in any trade equilibrium, falling trade costs lead monopoly unions to set higher wages, (iv) there is a range of trade costs for which equilibrium is non-existent and (v) the characterisation of the union wage-setting game as a Prisoners' Dilemma, and hence the incentives for international union coordination of wage demands, depend upon the extent of trade costs.

Michael P. Clements and Jeremy Smith

Periodic models for seasonal data allow the parameters of the model to vary across the different seasons. This paper uses the components of UK consumption to see whether the periodic autoregressive (PAR) model yields more accurate forecasts than non-periodic models, such as the airline model of Box and Jenkins (1970), and autoregressive models that pre-test for (seasonal) unit roots. We analyse possible explanations for the relatively poor forecast performance of the periodic models that we find, notwithstanding the apparent support such models receive from the data in-sample.

Andrew J. Oswald

If a nation's economic performance improves, how much extra happiness does that buy its citizens? Most public debate assumes -- without real evidence -- that the answer is a lot. This paper examines the question by using information on well-being in Western countries. The data are of four kinds: on reported happiness, on reported life satisfaction, on reported job satisfaction, and on the number of suicides. These reveal patterns that are not visible to the anecdotal eye. In industrialized countries, well-being appears to rise as real national income grows. But the rise is so small as to be sometimes almost undetectable. Unemployment, however, seems to be a large source of unhappiness. This suggests that governments ought to be trying to reduce the amount of joblessness in the economy. In a country that is already rich, policy aimed instead at raising economic growth may be of comparatively little value.

Chris Doyle and Jennifer C. Smith

We present a model which ties together rational drug consumption, taxation, crime and other drug-related externalities. Drug control policy is addressed using an optimal tax framework. Consumption, possession and production of a drug may be prohibited, legalized or decriminalized. In all regimes illicit production of a drug may take place and drug-related crime occurs. We show that illicit drug production, the price elasticity of demand for a drug, the addictive nature of a drug, the effectiveness of drug enforcement strategies, and income distribution all influence optimal (second best) policy. Prohibition is contrasted with decriminalization and legalization, and where legalization yields a higher welfare than prohibition we show that this can be associated with greater drug-related crime and more drug addiction. The model is discussed in the context of US National Drug Control Strategy

Andrew J. Oswald

This paper describes a theory of rational emulation and deviance. It assumes that individuals care about relative position (or 'status'), and constructs a model of decision-making in social and economic settings. The analysis shows why individuals who want to be different from others will, paradoxically, find it rational to imitate other people. The model demonstrates that status-risk-averse individuals follow others while status-risk-lovers act deviantly. The paper also provides a choice-theoretic foundation for a number of ideas in the social psychology and economics literatures.

Andrew J Oswald

The paper conjectures that the high unemployment of the Western economies has been produced by the decline of the private house-rental market and the rise of home-ownership. Evidence is provided for the developed nations, the states of the USA, and the regions of the UK, Italy, France and Sweden. Although its calculations should be viewed as tentative, the paper's results imply that a 10 percentage point rise in the owner-occupation rate is associated with an increase of approximately 2 percentage points in the unemployment rate. This would be sufficient to explain a significant part of the rise in joblessness in the industrialized countries

Andrew J. Oswald

Is the labor market well-approximated by a competitive model, or is wage determination instead a kind of non-competitive rent-sharing? This unsealed question lies at the heart of labor economics and macroeconomics. The paper argues that new research -- drawing upon data of a kind not available to previous generations of researchers — appears to provide persuasive evidence for the existence of rent-sharing in the labor market.

Graham Aylott

Following the seminal work of Samuelson (1975), a theoretical literature has grown examining the macroeconomic relationship between social security, aggregate saving and the allocation of resources within an overlapping generations economy. One such paper by Hu (1979) suggests inter alia that a "pay-as-you-go" (PAYG) pension scheme cannot secure the optimal allocation of resources in the presence of either endogenous retirement or a bequest motive. This paper aims to extend the analysis of this issue, by showing that a suitably designed two tier PAYG pension scheme can in fact secure the first best outcome in the presence of endogenous retirement, provided either that no bequest motive is present, or that it takes the strategic form introduced by Bernheim et al. (1984, 1985). Under such a scheme the total pension benefit paid is positively related to the working lifetime of the individual.

R. Boadway, I. Horiba and R. Jha

It has realized since Pigou (1947) that if public goods are financed by distortionary taxa¬tion, the marginal social cost of providing the public good will exceed the actual resource cost by the marginal deadweight cost of taxation. Atkinson and Stern (1974) formally derived public goods decision rules for an economy financing the public goods using linear taxes. Subsequent work by Browning (1978), Wildasin (1984) and Usher (1986). has expanded our understanding of the way in which distortionary taxes influence the optimal size of the public sector. As the survey by Auerbach (1987) reveals, the direction of subsequent research on the marginal cost of public funds has been manifold, and has admitted, among other things, more complicated production structures, the effects of pre existing taxes, risk, and imperfect information. Recent has analyzed the marginal cost and marginal benefit of public funds when public goods are substitutes/complements to private goods (Mikami (1993)), when equity is an objective of taxation (Wilson (1991), when non-linear taxes are used to finance the public goods (Tuomala (1990), Boadway and Keen (1993)), and during a process of tax reform (Schob (1994))

Michael Waterson & Morten Hviid with the assistance of Aydin Hayri

Luisa Affuso

Not for Distribution

Carlo Morelli

The objective of this paper is to examine the transition from atomistic to oligoplistic competition within the grocery food retailing market and to locate this transition within a wider industrial economics and economic history literature. The focus of the paper is the period from the end of post-war rationing in 1954 to the passing of the Trading Stamps Act in 1964. The paper maintains that it is this decade that determined the future pattern of development within the grocery retailing market. The findings of the paper are then discussed in relation to debates over theories of the firm, British relative economic decline and contemporary competition policy

Mark B. Stewart and Joanna K. Swaffield

This paper investigates constraints on desired hours of work using information on hours preferences from the British Household Panel Survey for 1991. Over a third of male manual workers would prefer to work fewer hours at the prevailing wage than they do and we estimate that on average desired hours per week are 4.3 lower than actual hours. We hypothesize that job insecurity and scarcity of alternative job opportunities enable employers to set hours constraints above employee preferences and find that the minimum hours constraints set by firms are an increasing function of the unemployment rate an individual faces

Michael P Clements and Jeremy Smith

We compare a number of methods that have been proposed in the literature for obtaining h-step ahead minimum mean square error forecasts for SETAR models. These forecasts are compared to those from an AR model. The comparison of forecasting methods is made using Monte Carlo simulation. The Monte Carlo method of calculating SETAR forecasts is generally at least as good as that of the other methods we consider. An exception is when the disturbances in the SETAR model come from a highly asymmetric distribution, when a Bootstrap method is to be preferred. An empirical application calculates multi-period forecasts from a SETAR model of US GNP using a number of the forecasting methods. We find that whether there are improvements in forecast performance relative to a linear AR model depends on the historical epoch we select, and whether forecasts are evaluated conditional on the regime the process was in at the time the forecast was made.

R. Jha and A. P. Sahu

This paper examines the role tax policy can play in fostering human capital accumulation in a resource constrained dual economy whose population is growing. The study shows how human capital accumulation, in turn, affects the intersectoral terms of trade and the economic growth process of such an economy. The dual economy is assumed to consist of two sectors, agriculture and manufacturing. Production in agriculture requires unskilled labor, land and capital whereas production in the manufacturing sector requires skilled and unskilled labor and capital. Schooling facilities are limited and access is rationed by the government. Moreover, schooling requires an investment of time. The paper demonstrates the existence of a unique short run equilibrium. It also demonstrates that the steady state equilibrium is unique and locally stable. Comparative steady state analysis suggests that a balanced budget increase in public investment in education (financed by a tax increase on capital income and/or incomes of skilled workers), alters the terms trade between agriculture and manufacturing sectors and favorably affects the economic growth process.

Stephen Rosevear

The paper focuses on the wartime planning and post war administration of regional policy in Britain. It examines negotiations between the Conservative and Labour parties and relations between the Board of Trade and individual motor manufacturers. First, the paper suggests that Labour were committed to safeguarding commercial efficiency. Second, it argues that Board of Trade officials lacked the economic knowledge to successfully administer discriminatory location policies. Given the commitment to commercial efficiency, industrialists circumvented distribution of industry controls by stressing the potential economic losses of decentralisation. Finally, the paper suggests that the Board of Trade's failings mirrored wider problems in the civil service. Throughout the 1940's bureaucrats acquired new responsibilities for which they lacked economic training. This constituted a serious constraint on Labour's policy ambitions

Michael P Clements and Jeremy Smith

In this paper we investigate the multi-period forecast performance of a number of empirical self-exciting threshold autoregressive (SETAR) models that have been proposed in the literature for modelling exchange rates and GNP, amongst other variables. We take each of the empirical SETAR models in turn as the DGP to ensure that the ‘non-linearity’ characterises the future, and compare the forecast performance of SETAR and linear autoregressive models on a number of quantitative and qualitative criteria. Our results indicate that non-linear models have an edge in certain states of nature but not in others, and that this can be highlighted by evaluating forecasts conditional upon the regime.

A. Mongiardino

The purpose of this paper is to develop a theoretical model of the attack on the Italian Lira and the British pound and the subsequent exit of these currencies from the ERM in September 1992. One element that has been crucial in the formulation of agents' expectations of future exchange rates, and hence the sustainability of the system, has been the degree of willingness of the Bundesbank to intervene and support the weak currencies of the System. The model will focus on this aspect and will provide a framework where the agents' uncertainty about the stance of the Bundesbank towards the 'weak' currencies of the System is reflected in increasingly high interest rate differentials between the 'weak' countries and Germany, a well known characteristics of the period immediately preceding the ERM crisis of 1992

Jonathan Cave

The standard analysis of single-product monopoly regulation with hidden information is adapted to an oligopoly setting using a simple "virtual objective function" approach (which also provides a novel approach to oligopolistic collusion).

Jonathan Cave

The standard analysis of single-product monopoly regulation with hidden information is adapted to an oligopoly setting using two simple approaches: a "virtual objective function" approach (which also provides a novel approach to oligopolistic collusion) and a Bayesian mechanism design analysis

Dennis Leech and G. Halstead

This paper argues that previous empirical work on the explanation for Hong Kong's export growth, by focusing on the values of the estimated price and income elasticities, has failed to provide a full account. It is necessary also to look at changes in the explanatory variables in the model, both their signs and their magnitudes: a large change in a variable with a small elasticity may explain more than a small change in one with a large elasticity. It also shows that a previous test of the hypothesis that Hong Kong is a "small country" whose exports are independent of world income lack power. It supports the conclusion that Hong Kong's export growth can be better explained by growth in income in export markets than by price reductions

Aydin Hayri

I develop a model of secondary market pricing of sovereign debt when the creditors can reduce the debt. The sovereign obtains a stochastic revenue flow from the external sector and have a constant debt flow obligation. Default is costly for both the sovereign and the creditors and the possibility to reduce debt creates a surplus. The creditors can capture this surplus only if they can continuously adjust the debt flow. With discrete adjustments, they have to share with the sovereign. I find that the more volatile the sovereign's revenue flow (ie, the underlying process is favourable for the sovereign), the bigger and later will be the debt relief. A country going through multiple debt reductions will get bigger reductions in later rounds, and the secondary market price of its debt will have bigger jumps at later reductions. Previous empirical work on sovereign debt provides empirical support for my model.

Maria Vagliasindi

This paper examines the relevance of the well known "no distortion at the top" result in a model of vertical differentiation. The analysis shows that the no crossing condition is a sufficient but not necessary condition in order to get no distortion at the top. Relaxing some of the canonical preferences' assumptions we generate non standard cases. We also extend the analysis allowing consumers to buy more than one unit of the products. In the presence of interactions between quality and quantity the occurrence of non standard cases become more likely, though the implications on the optimal customers' bundles are less obvious.

Michael P. Clements

A test of forecast rationality based on the weak efficiency of fixed-event forecasts has recently been proposed by Nordhaus (1987). This paper considers the scope for pooling fixed-event forecasts across 'events' to deliver more powerful tests of the weak-efficiency hypothesis. In an empirical illustration we demonstrate the usefulness of this approach when only a small number of forecasts are available. We also suggest an interpretation of the rejection of the null hypothesis of weak efficiency in favour of negative autocorrelation in series of revisions to fixed-event forecasts. The relationship between weak efficiency and rationality when loss functions are asym¬metric and prediction error variances are time-varying is also considered

Jesus Otero and Jeremy Smith

In this paper we assess, via Monte Carlo simulations, the effects of some seasonal adjustment linear filters on cointegrating regressions. We find that the use of filters has adverse consequences in terms of the power of the Augmented Dickey and Fuller and Phillips and Perron tests for cointegration. As an empirical application, we re examine the results of the money demand modelling exercise performed by Carrasquilla and Galindo (1994); we find that when one attempts to model the variables' seasonal pattern using simple methods, instead of removing it by filtering the data, the null hypothesis of non-cointegration is no longer accepted.

Jennifer C Smith

This paper uses a unique panel of data at the level of the bargaining group to examine aspects of `right-to-manage' models of wage determination. Empirical measures of firms' and unions' bargaining power are identified and found to be important influences on wage setting. The role of union characteristics in wage determination is examined; results confirm their importance and illuminate previous survey findings. Features of the local labour market are shown to affect bargained wages over and above the influence of aggregate factors.

Jennifer C Smith

This paper investigates the determinants of real interest rates at world and country level. The starting point is the idea that real interest rates reflect the interaction of desired saving and planned investment, using the framework developed by Barro and Sala-i-Martin (1990) and Barro (1992). The paper updates previous results and extends the analysis to study long real interest rates. We analyse which factors have been responsible for real rate `regime shifts' during 1959 to 1992. We examine the determinants of interest rate differentials across ten major industrialised countries and provide estimates of the extent of capital market integration

Aydin Hayri

In these times of budget cutting, government departments are looking into performance based funding schemes for public institutions, such as universities and hospitals, to obtain more output (research or patient care) for the same amount of total funds. A key difference from other applications of relative performance schemes lies in the fact that here the performance of institutions depends on their personnel who can move from one institution to another. Thus the incentives that are meant for individual researchers or doctors are provided via institutions and labour markets. This paper is a first attempt in the literature to look at such schemes.

Robert Skidelsky & Liam Halligan

Seventy-six per cent of all Russians agree that inflation is the country's most pressing problem.' Similarly, all mainstream parties in Russia agree on the need to lower inflation. The question is how. In this Paper, we outline the main theories of persisting high inflation and test them informally by reference to the three main attempts to stabilise the Russian macroeconomy between 1992-4. We then assess the prospects for the success of the fourth and current effort. Our main conclusion is that the political and financial preconditions for a rapid reduction of inflation to low levels — to below the 40 per cent a year achieved by the successful post-Communist economies — were not in place at the start of the reforms in 1992 and have only slowly and painfully been assembled from repeated experience of failure or partial success. This does not mean that the reformers were wrong to try. It is sometimes necessary to act even if the prospects for success are poor on a cool estimate of probabilities. A degree of illusion is probably a necessary prerequisite for action, since too vivid a conception of the difficulties in store can paralyse the will. This is not to deny that technical mistakes were made. But it seems to us that most of them were avoidable only with hindsight. Yegor Gaidar has offered the most telling insight into the state of mind of the first post-Communist reformers.

Berthold Herrendorf

This paper considers an institutional arrangement, in which the government assigns a publicly announced inflation target to an instrument independent central bank, but retains the discretion to revise the target after wages have been set. We argue that since this arrangement is perfectly transparent, it resolves Canzoneri's private information problem, ensures perfect monitoring of the government, and enhances the effectiveness of reputational forces. The paper characterizes cases in which, for this reason, inflation targeting mitigates the inflationary bias of monetary policy

Berthold Herrendorf and Ben Lockwood

This paper shows that delegation of monetary policy to a weight—conservative central banker is optimal, although the government can also use an inflation contract, an employment target, an inflation target, or any combination of these, to control the central banker. The key feature of our model is a stochastic inflation bias, arising when wage setters receive some information about a supply shock prior to signing nominal wage contracts. Weight—conservatism is shown to be desirable if the stochastic inflation bias cannot be eliminated by optimal choice of the delegation parameters.

H. Coulombe, A.D. McKay and J.I. Round

The conceptual basis underlying the identification of household economic activity, and of informal sector activity in particular, suggests that estimates of value added ought to be derived at an economy-wide level for different categories of activity. The new 1993 SNA makes a distinction between household enterprises owned and operated by own-account workers, that is, family enterprises; and household enterprises of employers, which we refer to as micro-enterprises. But there is also a sectoral dimension, starting with the distinction between farm and non-farm enterprises, although a much finer disaggregation of activities is desirable for national accounts purposes.

Wiji Arulampalam, Alison L. Booth and Peter Elias

This paper examines the impact of work-related training on expected wages growth, using longitudinal data from the British National Child Development Study. The analysis covers a crucial decade in the working lives of a cohort of young men - the years from the age of 23 to the age of 33. We use hurdle negative binomial models to estimate the number of work-related training events. This approach, which has not been used for training before, allows us to account for the fact that more than 50% of sample members experienced no work-related training over the period 1981 to 1991. We find evidence of strong complementarities between past general education and training, suggesting that reliance on job-related training to increase the skills of the British workforce will result in an increase in the skills of the already-educated, but will not improve the skills of individuals entering the labour market with a low level of education. The results generated from the hurdle count model are subsequently used in estimation of the wages growth model. We find that each additional training event is estimated to increase wages growth by 0.7 per cent, for young men experiencing at least one training occurrence over the decade.

Michael P. Clements and David F. Hendry

We delineate conditions which favour multi-step, or dynamic, estimation for multi-step forecasting. An analytical example shows how dynamic estimation (DE) may accommodate incorrectly-specified models as the forecast lead alters, improving forecast performance for some misspecifications. However, in correctly-specified models, reducing finite-sample biases does not justify DE. In a Monte Carlo forecasting study for integrated processes, estimating a unit root in the presence of a neglected negative moving-average error may favour DE, though other solutions exist to that scenario. A second Monte Carlo study obtains the estimator biases and explains these using asymptotic approximations.

Berthold Herrendorf

This paper employs an optimal taxation framework in order to study the credibility of monetary policy—making in an open economy. Since inflation is, in part, uncontrollable due to stochastic disturbances, the authority's actions cannot be monitored perfectly when the exchange rate floats, thus implying that reputational forces may become ineffective. In contrast, pegging the nominal exchange rate to a low—inflation currency allows perfect monitoring, because the exchange rate is, in principle, controllable. For this reason, exchange rate pegging may import credibility and result in the best reputational equilibrium, even though the authority retains the discretion to devalue unexpectedly

Lei Zhang

Using an irreversible investment model of oil development, this paper shows how a fiscal regime can be neutral in that the decision to develop is not affect by tax and efficient in recouping economic rents where cumulated operating profits are taxed if and only if they surpass an appropriate level of tax deductible allowances. For a simplified version of the Petroleum Revenue Tax (PRT) applied to the United Kingdom Continental Shelf until 1993, numerical calculations suggest that PRT was both neutral and relatively efficient. Why then was it substantially removed in 1993? One explanation is that the tax regime may be responding to the oil price so the fiscal change may be reversible, another is that it had disincentive effects not captured in our analysis.

Amrita Dhillon and Emmanuel Petrakis

In this paper we study interactions between labour and product markets, in an imperfectly competitive industry with centralized wage bargaining. Firms jointly bargain with the union over wages and then compete in prices or quantities. We show that the bargained wage is independent of the number of firms, the degree of substitutability of firms' products, and the type of market competition, in a broad class of industry specifications, including the standard linear symmetric demand system - linear one factor technology one. These results are robust with respect to different specifications of union's objectives. Finally we propose, motivated by the above independence property, that the bargained wage in a Bertrand homogenous market be taken as the limit of the solution of the differentiated case as the degree of substitutability goes to one.

Neil Rankin

A 1990s view is that inflation is best avoided by delegating monetary policy to an independent central bank. However most analyses overlook fiscal policy, which cannot be delegated. Here we make a very simple extension of the usual policy game by introducing the government as a third player, in charge of a fiscal instrument for demand management. If the government delegates monetary policy, there will be a battle over aggregate demand. Although the bank wins, so that inflation is avoided, it is at the cost of an excessive interest rate. Society's welfare may be lower than with no delegation

Jeremy Smith, Nick Taylor and Sanjay Yadav

A number of papers have looked at the bias in the fractional integration parameter, d, using a variety of alternative estimation techniques. This paper supplements that literature by investigating the bias in both the short-term and long-term parameters for a range of ARFIMA models using a more comprehensive range of estimation techniques. The results suggest that all estimation procedures yield slightly biased estimates of the long-run parameter, and that these biases become larger with the introduction of short-term AR or MA parameters. The bias in the short-run parameters mirrors that in the long-run parameters. These biases often causes model selection criteria to select an incorrect ARMA specification, having filtered out the long-run parameter. Incorrect specification of the short-run parameters in the ARFIMA model can accentuate the bias in the long-run parameter

Carlo Perroni and Thomas F. Rutherford

This paper presents a procedure for testing the global properties of functional forms which recognizes their specific role in economic equilibrium modelling. This procedure is employed to investigate the regularity and the third-order curvature properties of three widely used flexible functional forms, the Translog, the Generalized Leontief and the Normalized Quadratic functional forms. We contrast the results from these flexible forms with a globally regular flexible form, the Non-separable Nested Constant-Elasticity-of-Substitution functional form. Our results indicate that inherently regular representations are best suited for equilibrium analysis.

S. Wiji Arulampalam, Alison Booth and Peter Elias

This paper uses the data from the National Child Development Study (NCDS) to examine the impact of vocational education and training received over the period 1981 to 1991 on the wages growth of young men in employment in both 1981 and 1991. Issues of sample selectivity and of training endogeneity are also addressed. In particular, the paper examines the durability and transferability of work-related training and educational courses received over the period 1981 to 1991, and estimates the extent to which employer-provision, job mobility and certification of courses affect individual productivity, as proxied by wages growth in a fixed effects model.

Martin W. Cripps and Jonathan P. Thomas

The paper analyzes the Nash equilibria of discounted repeated games with one-sided incomplete information. If the informed player is arbitrarily patient relative to the uninformed player, then the characterization is essentially the same as that in the undiscounted case. This implies that even small amounts of incomplete information can lead to a discontinuous change in the equilibrium payoff set. For the case of equal discount factors, however, a result akin to the folk theorem holds when a complete information game is perturbed by a small amount of incomplete information

Maria Vagliasindi and Michael Waterson

The aim of this paper is to consider in some detail the modelling implications of the introduction of regulation in vertically related markets, allowing for non-linear pricing. Laffont and Tirole focus their analysis on socially optimal linear access price regulation under incomplete information, following the Bayesian Nash approach to regulation. By contrast, we leave aside asymmetric information issues, paying particular attention to the problems related to the entrant's behaviour and non-linear pricing. In fact, regarding competitive issues Laffont and Tirole (1990) and (1994) make rather specific assumptions, as competitors are assumed to have an unlimited capacity and they do not really need to undertake any economic decisions. In particular, the price they face is just set equal to the sum of the marginal cost and the access price and they are only allowed to charge linear price schedules. Furthermore, also the authority (as well as the incumbent) makes use only of a linear access pricing policy. After specifying the main assumptions of the proposed games we show how when the incumbent remains the monopolist of an intermediate good (e.g. a network facility) which is consumed both internally and by any potential competitors, with second degree price discrimination, cream skimming turns out to be the only strategy of competition allowed by the incumbent. We also show how the access charge determined by the incumbent depends, apart from the type of network cost function, on the entrant's cost, the game's structure and the strategy of competition chosen by the entrant. Therefore, in this framework the Baumol-Willig rule is optimal only in a very narrow set of circumstances. Finally, we show how the same results derived for a vertically integrated industry still hold under vertical separation when a) perfect discrimination between downstream producers is not forbidden; and/or b) it is possible to resell access rights.
We believe that these and many other extensions of the analysis are helpful in understanding this intriguing field of study, since they not only have a particular relevance from a theoretical perspective, but also bring considerable practical implications for the policy to apply in many relevant utility industries.

Clive D. Fraser

We study parents' demand for insurance and protection in a Beckerian context. Parents derive utility from the household's material living standard and number of children and there is a trade-off between the two. Several important new results emerge. These include: first, a duality between how an increase in an exogenous child mortality risk affects the demand for children and how an exogenous increase in the number of children affects the demand for physical safety for a given child; second, a distinction between and the different implications of endogenous safety as a private good and as a local public good for the household; third, the important interactions between the parents' demand for insurance and personal and household safety and the presence and nature of their bequest functions.

Carlo Perroni

This paper examines the implications of environmental externalities for income tax design in a growing economy. We describe a model with endogenously generated knowledge, in which technical progress reduces the emissions generated by production activities. In this setting, the lack of internalization of environ-mental externalities results in an above-optimal long-run rate of growth and leads to an inefficient input mix. If emission taxes are infeasible, differential income tax sheltering of physical and knowledge investment can be effective as a second-best remedy. Simulation results from a calibrated model, under a uniform specification of intertemporal and intratemporal substitution possibilities, indicate that the intertemporal allocative effects associated with environmental externalities could dominate intratemporal distortions; hence, income tax reform could outperform indirect tax reform as a second-best Pigouvian instrument, and perform well in comparison with a first-best instrument, even in economies where environmental emissions are sectorally concentrated.

Jeremy Smith and Jesus Otero

Perron (1989) investigated the effects of an exogenous change in either the level or growth rate of a series and found that the Augmented Dickey-Fuller unit root test, allowing for such a change under the alternative hypothesis, yielded a markedly more skewed test statistic. This paper looks at the effects on the HEGY tests of an exogenous change in the level or seasonal pattern of a series. The distribution of the test statistics associated with the HEGY test are more skewed. Applying these findings to Colombian money supply and GDP series as well as UK transportation expenditure, initial results suggesting the need for a unit and seasonal root are over-turned

Kimberley A. Scharf

This paper examines the role of international tax evasion for the choice of an optimal foreign tax credit by a capital exporting region. Since a foreign tax credit raises the opportunity cost of concealing foreign source income, it can be employed to discourage evasion activity. The existence of international tax evasion possibilities could thus help rationalize a choice of tax credit in excess of a deduction-equivalent credit level. Our analysis shows that, under certain conditions, the presence of international tax evasion can indeed result in a higher optimal foreign tax credit for a capital exporting country, but the conditions for this result to hold are quite restrictive. We find that: (i) although an increase in the foreign tax credit unambiguously reduces evasion activity per unit of exported capital, it also encourages exports, and may thus result in higher total evasion costs; (ii) the presence of evasion reduces the "compounding" effect of the double taxation of foreign source income, thereby reducing the need for a foreign tax credit; (iii) by making residence based taxes distortionary, the presence of international tax evasion raises the marginal cost of the public funds that are obtained through domestic taxes, and hence raises the social cost of a foreign tax credit.

Clive Fraser

Using a Beckerian model in which parents derive utility from per capita household consumption and the number of children, we examine how child mortality risk and insurance against this affect the demand for children. We show that child mortality risk increases the demand for children and, contrary to claims in the literature, optimal fair insurance against child mortality risk will not result in parents equalising marginal utilities of consumption across states of the world and can result in them opting for payouts in states where children die. This calls into question some of the criticisms levied against the operations of tort as an implicit insurance system.

Zbigniew Zolkiewski

In the paper, aggregated computable general equilibrium (CGE) model with monopolistic behaviour of producers and households (trade unions) is developed. Monopolistic firms face downward sloping demand curve what makes them reduce output and factor demands so as to maximize profits. Trade unions push wages up over market clearing level when maximizing surplus of wage incomes over disutility of labour. Model has been calibrated for Poland, 1990 assuming certain level of monopolisation of both product and labour market. Simulations have been done that illustrate potential welfare gains of elimination of monopolistic behaviour at either of the market and at both.

Jesfis Vazquez

Two micro-founded demand functions for money are derived. One of them is Cagan's demand for money which implies the possibility of dual steady states and a high-inflation trap. Around the high-inflation steady state real money balances and inflation change slowly. The other money demand function which is obtained by assuming liquidity costs of the type in the Baumol-Tobin model, implies that there is a single steady state, therefore there is no possibility of a high-inflation trap. The steady state is unstable. Along the hyperinflationary path real money balances decrease and inflation increases, both at an increasing rate. By imposing a lower bound for per capita consumption allowing the hyperinflationary path to be feasible, we show that the inflation rate reaches a higher upper bound when the country is less financially developed and government expenditure is smaller.

P.R. Masson

The paper presents estimates of a model of the credibility of the U.K. commitment to its central parity against the deutsche mark during the period of ERM membership (1990-92). The measure of credibility used is the long term interest differential with Germany. Credibility is decomposed into two aspects: an assessment of whether the government was truly committed to the ERM, and the probability that even a committed government would be able to continue to bear the unemployment costs. Doubts about the first aspect-¬which could lead to a self-fulfilling crisis--are shown to have declined steadily during the period of ERM membership, while the second aspect is estimated to have become increasingly important, due to rising unemployment.

O. Toivanen

Oligopolistic services and branch network decisions are studied. There are two opposing effects when a firm decides the number of branches: the captivation effect of increasing market power, and a cost effect of average costs. These ideas are formalized in a two-city Hotelling model. Firms face two cost functions: the technical cost function, given by production technology and the perceived cost function which reflects also market characteristics. There are economies of scope and diseconcmies of scale at firm level and economies of scale at branch level in Finnish non-life insurance, as predicted by the model.

S.T. Turnovsky

The last several years has seen an explosion of literature dealing with the issue of endogenous growth; see e.g. Romer (1986), Lucas (1988), Barro (1990), Rebelo (1991), Jones, Manuelli, and Rossi (1991, 1993), Mulligan and Sala-i-Martin (1993), Turnovsky (1993). Virtually all of this literature treats investment as being determined residually. That is, the amount of output available for accumulation as new capital is whatever remains after the private and public sectors' consumption needs have been met. Moreover, the transformation of this new output into new capital occurs costlessly. Within this type of framework, much of the discussion has focused on fiscal issues, with both the expenditure and taxation aspects receiving attention.

N.F.R. Crafts

Since the mid-1980s there has been a major resurgence in the economics profession both of theoretical and empirical research on economic growth. In this paper I shall explore the implications of these new ideas for our understanding of the extraordinarily rapid European growth of the early post World War II period and, more briefly, of Britain's relatively slow growth rate. At the same time I wish to suggest that economists may have something to learn from the economic history of these years and that more serious study of this episode might modify some of their research findings.

G. Amisano

The paper provides a unifying framework for conducting Bayesian inference on the presence of seasonal and zero frequency unit roots in quarterly data. The main technique used is the analysis of posterior odds ratios. A new parameterization is provided for the model and the prior distributions implemented are discusses and justified. The analysis relies heavily on the application of a Gibbs sampling algorithm. Such techniques render the Bayesian approach more flexible and implementable, giving the applied researcher the possibility of specifying a vast range of prior distributions. The methods are applied to a set of UK quarterly series. Compared to previous studies, less evidence is found to support seasonal integration hypotheses.

K.A. Scharf

This paper examines the implications of increasing returns-to-scale evasion technologies for the optimal structure of commodity taxes. We find that, in the presence of evasion, tax design should aim at inducing uniform marginal evasion responses across commodities. This objective may dominate the concerns over inter-commodity distortions stressed by the traditional optimal commodity taxation literature. The resulting optimal tax structure can thus be more, or less, uniform than the one prescribed in the absence of evasion, even when uniform commodity taxation is feasible. In particular, our results imply that the presence of evasion may yield an optimal tax structure which features relatively low tax rates on commodities that have relatively low price elasticities of demand, if the demand for those commodities is relatively large. On the other hand, when all transactions are of similar size, the presence of evasion may provide a rationale for broad-based uniform taxation

T.M. Anderson and M. Hviid

The role of asymmetric information and the incentive to acquire information is considered for a monopolistically competitive economy. To focus on nominal rigidities, the money stock is the only state variable, and it is shown how informational problems can cause nominal price rigidities. Under an asymmetric information structure it is found that uninformed firms have a disproportionate large effect on aggregate prices, reinforcing the nominal rigidities caused by some firms being uninformed. Endogenizing the information structure shows as expected that for sufficiently small information costs all firms acquire information while for sufficiently large costs all firms stay uninformed. More interesting it is also found that strate­gic complementarities in price-setting may cause either multiple equilibria for the information acquisition problem or preclude existence of equilibrium.

N.F.R. Crafts and T.C. Mills

In a series of papers (Crafts, Leybourne & Mills, 1989a, 1990, 1991), we have analysed British industrial production over the period 1700 to 1913 using various time series approaches to decompose an index of this series into its trend and cyclical components. The publication of these papers, along with related work by Crafts (1983, 1987, 1989) and Harley (1982), has prompted numerous responses, in which our work is criticised in three basic areas. The first two criticisms, that our estimates of industrial production are incorrect and that our view of the industrial revolution is misconceived, have been the subject of detailed responses and rebuttals by Crafts & Harley (1992) and Harley & Crafts (1994). It is the third area of criticism, the appropriate way of modelling the process generating industrial production, that forms the basis for the present paper.

M. Hviid and G. Shaffer

We examine the role low-price guarantees allegedly play in supporting supracompetitive prices. We find that when firms can commit to matching or beating any lower price announced by a competitor, all Nash equilibria yield Bertrand selling prices. This result casts doubt on the robustness of the conclusions of models which restrict attention to meet-the-competition clauses only.

A. Croppenstedt

Using the concept of the stochastic frontier production function we estimate indices of technical and allocative efficiency for a sample of wheat farmers. These indices are used to derive an index of profit efficiency. The results show a substantial degree of both technical and allocative inefficiency. However technical inefficiency accounts for most of the loss in profits. The analysis is extended by isolating determinants of technical and allocative inefficiency. For the former we found good farming practice and credit availability to be important explanatory variables. With respect to allocative efficiency the determinants for some of the inputs were caste membership, acreage, and farmer and plot specific characteristics.

C.K. Harley and N.F.R. Crafts

In a recent paper Cuenca Esteban re-examined the growth of industrial output in Britain during the Industrial Revolution. His analysis was based on a revisionist assessment of the size of the cotton industry. The central finding was that cottons in the 1770s were much larger relative to industrial activity as a whole than anyone has hitherto believed with the implication that estimates of industrial output growth should be raised appreciably for the period 1770-1831, back roughly to the growth rates proposed by Deane and Cole

S. Yadav and J Smith

This paper investigates the size and power of a number of unit root tests, currently in use in both applied macro and financial economics, when the data generating process is fractionally integrated. The long persistence characteristic of fractionally integrated processes lowers the power of unit root tests, when compared with their power against stationary alternatives. The performance of the unit root tests is investigated extensively in a range of experiments, which permit the fractional process to have normal white noise errors, non-normal white noise errors, heteroscedastic errors and serially correlated errors. Power is not seriously affected by non-normality, but can be adversely affected by heteroscedastic and serially correlated errors

R. DeSantis

This paper employs the multivariate cointegration technique of Johansen to construct a price equation for Turkey over the period 1950 to 1991. In addition, a monetary model in error correction form has been formulated to explain the inflationary process in the short run. Adaptive and rational expectation hypotheses are introduced and tested one against the other. Several test statistics suggest that the ECM under adaptive expectation hypothesis is to be preferred, matching all salient features of the data. The model indicates that the per-capita money supply, the per-capita real income and the difference between the opportunity cost of holding a unit of money and its return are the cardinal variables in explaining the price dynamics in the Turkish economy. The model has very good static forecasting properties, successfully predicting the peak of the inflation rate in 1980 and the subsequent trended increase from 1982 onwards.

N. Rankin

A dynamic, stochastic optimising macromodel with predetermined money wages and labour market monopoly power is used to examine the effect on current macroeconomic variables of a temporary increase in variability of the future money supply. As a benchmark, we show that under perfect wage-price flexibility 'uncertainty irrelevance' holds, when monetary uncertainty is appropriately defined. The introduction of wage stickiness causes future monetary uncertainty to raise the nominal interest rate, with a deflationary impact on current price and output, for plausible parameterisations. It also causes the money wage to be set higher, increasing the 'natural' rate of unemployment.

A. Croppenstedt

Technical and allocative efficiency is estimated assuming a sequentially planned production process. Results show that the single equation approach is not useful in this context. Technical efficiency is not affected by using temporally disaggregated data. With regard to allocative efficiency the results for the single and the multi-stage models both show a wide divergence from profit maximisation. The virtue of the temporally disaggregated model lies in the information it yields about the importance of the interaction of inputs within and between stages. We use this information to explain the surprising result that farmers over utilise fertiliser

N.F.R. Crafts

Most empirical investigation of the new growth theory has been undertaken looking at cross-sections of countries for the period since 1960 leading to well-known papers such as those of B arro (1991), De Long and Summers (1991), Levine and Renelt (1992) and Mankiw, Romer and Weil (1992) which are reasonably successful in accounting for observed growth patterns. Equally interesting, but so far much less thoroughly studied, is how successful new growth theory is in explaining changes in growth rates over time in a given country. A recent paper which opens up this issue looking at recent decades raises significant doubts on this score and concludes that the explanatory variables highlighted by new growth theory show much greater persistence than does growth performance (Easterly et al., 1993).

S. Broadberry

The US has been the labour productivity leader in manufacturing since the early nineteenth century when Britain was the technological leader, and remains the productivity leader today when technological leadership has passed to Germany and Japan. US productivity leadership is based on the more widespread use of mass production methods, determined by resource and factor endowments and demand patterns. Countries with different conditions use craft production methods more extensively and have lower labour productivity. The two systems can coexist so long as the technologically lagging system imitates and adapts. Changes in the relative dynamism of the two systems explain changes in technological leadership, but without necessarily leading to changes in productivity leadership

K. Cowling and R. Sugden

Our aim is to begin the construction of an alternative theory of the firm. We consider the essence of a firm, its overall nature and what it is. To do so we appraise the seminal contributions of Coase. Alchian and Demsetz, and Williamson. We also examine recent debate on the modern corporation. The paper joins with Aoki, Coase and Simon in criticising an excessive concern with markets. It may be seen as a correction to the way in which Coase has been previously interpreted. Our perspective has two crucial features: rather than addressing the theory of the firm as an aspect of the analysis of markets, we analyse from strategic decision-making to the theory of the firm and the use of markets, both within and without firms; we emphasise distributional considerations and argue that capitalist firms disallow Pareto efficiency. The paper is concluded with an optimistic look at future
possibilities.

D. Clark and J. Thomas

This paper analyzes a two-stage game in which economic policy is determined as the endogenous outcome of a political process involving the interaction of two political parties and two interest groups ("lobbies"). In a symmetric world, when the political parties take into account the reaction of both lobbies to the announced policies, it is shown that, in equilibrium, economic policies can arise which are `efficient' in the sense of maximizing the sum of the lobbies' utility. Conditions are presented under which this situation can occur and the consequences of relaxing the symmetry assumption are investigated in a specific example of the general model.

N.F.R. Crafts

New policy problems awaken interest in the past and provide economic historians both with a new agenda and new tools with which to revisit the historiography of a period. The transition from the command economy of wartime to the market forces of peacetime, now the focus of renewed attention as a result of the demise of communism in Eastern Europe, is an excellent case in point. The economic history of late 1940s Britain has hitherto been written mainly by archives-led scholars and those involved in policy at the time and has been largely neglected by new economic historians. Much of the literature has been very supportive of the policy decisions of the Attlee government. For example, Tomlinson, in his widely read text, concludes that "this was a period of successful macroeconomic management by almost any standards" (1990, p.236). Cairncross summed up his magisterial account as follows: "How successful was the government? Measuring success in terms of the aims it set out in its 1945 election programme, it was obviously highly successful: full employment was maintained to almost universal surprise; there was no repetition of the inflationary boom of 1919-20 and the slump that followed; the entire programme of nationalization was carried out; the National Health service was successfully launched; the welfare state was put on a solid foundation"

J. Conyon and D. Leech

This paper examines the relationship between top director pay, company performance and corporate governance in a sample of approximately 390 companies in 1985. The reported econometric results reveal that although a statistically significant relationship can be established between highest paid director salary and company performance, the estimated elasticity is very small. In line with other research, company sales is a dominant predictor of top pay. The paper shows that measures of corporate governance also shape top directors salary. Ownership controlled firms, or where the primary shareholders are insurance companies and pension funds, or where there are non-executives on the main board depress top director pay. On the other hand, separating the role of the chairman and chief executive officer, or where there is an executive share plan in existence, plays no role in shaping top pay.

C.D. Fraser

Developing Musgrave's suggestion, Bergstrom and Comes and Bergstrom and Varian obtained necessary and sufficient conditions for separating allocation from distribution in Pareto optimal public provision and Nash equilibrium private provision of pure public goods. Assuming the most commonly analysed congestion function applies, we obtain necessary and sufficient conditions for, alternatively, the price and quality, and the price, quality, facility size and total utilisation of excludable, congestible goods to be independent of the distribution of self-selecting households' characteristics in a Stackelberg equilibrium, extending the scope of Musgrave's suggestion. When separation is possible, utility functions and optimal decisions take simple, intuitive forms.

N. Rankin

In a discrete-time model, higher variability of the future money supply affects current macroeconomic variables when beginning-of-period money is the argument of utility, but not when end-of-period money is. The effect is through the existence of a precautionary money demand

M. Bordignon

Extending Kay and Keen's (1988) work, Debreu's coefficient of resources utilization is applied to economies with public goods and it is used to discuss the issue of measuring welfare loss in the standard case where government imposes distortionary commodity taxation in order to finance the supply of a single public good. It is then argued that such a measure can help to cast light on the issue of over-under provision of public goods in second best economies

J. Andreoni and T. Bergstrom

We study three models in which public goods are supplied by private contributions. In the first model studied, tax-financed government subsidies to private contributions are shown to increase the total supply of public goods. There is a surprisingly decisive comparative statics result (with a nice proof) that if public goods and private goods are both normal goods, then increases in the subsidy rate necessarily increase the equilibrium supply of public goods. Two other models are studied, in which small changes in tax rates and government provision of public goods are neutralized in equilibrium by offsetting changes in private contributions. We explain the differences in these models that lead to opposing conclusions.

P.F. Apps and R. Rees

In a recent paper, Chiappori (1992) extends and interprets his important earlier work (Chiappori, 1988) on the "collective" model of household labor supply. The household is modeled as a pair of individuals with separate utility functions, who arrive at a Pareto efficient allocation of individual consumptions and labor supplies given the market wage rates they face. He shows that the household's decisions can be modeled as if the individuals first shared their combined non-wage income and then maximized their individual utilities subject to separate budget constraints. He then uses this approach to show essentially three things: that the model generates testable restrictions on individual labor supplies; that the observation of labor supplies is sufficient to allow recovery of individual preferences and the household sharing rule (up to an additive constant); and that the standard tools of welfare analysis can be applied to investigate such issues as, for example, the effects of tax changes on individual welfares.

Y. Kobayashi

This paper aims to show the most remarkable features of post war Japanese industrial policy and the recent change in its purpose and means under changing circumstances of the economic environment in Japan. I will mention the following three among various features of Japanese industrial policy as the most remarkable. First is the poli.7y to exclude excess competition. Second is the structural policy based on dynamic comparative advantage. And third is the policy which is characterized by a concentrated input of resources into the strategic sectors." There have been some controversies on the effects of these policies, related to such issues as whether the policy could be effective from the viewpoint of resource allocation. I will examine the issue with some theoretical analysis. The purpose and means of industrial policy in Japan has gradually changed since the first oil crisis. Simply stated, the direction of change can be expressed by the word "softening", namely an industrial policy changed from the hard type to the soft type. I will show the characteristics and causes of change in industrial policy.

G. Matsumoto

Deindustrialisation seems to be a common phenomenon for advanced countries to some extent. In particular, in the UK continuing decline in industrial competitiveness against other advanced countries named the 'British disease'. The UK has lagged behind other advanced countries and there was a continues transition of resources from manufacturing sectors to service producing sectors. The UK's economy has experienced deindustrialisationl) over the past decades. The peak of employment in UK manufacturing was 1966. After that time employment in the manufacturing sector has gradually declined.'Between 1966 and 1977, nearly 1.9 million jobs were lost in manufacturing, while a further 2.2 million were lost between 1977 and 1987'(Bazen (1989), p.11). Employees in employment in the manufacturing industries has declined to 5,097 thousand in 1988, which is under a quarter of total employees.2) Also the contribution of manufactures to the export surplus, and the UK's share of world market in manufactures have declined. If the expansion of activity and employment elsewhere in the economy is not enough to absorb the labour flooding out from the manufacturing sector, deindustrialisation may lead to unemployment

C. Mayer

There are pronounced differences in patterns of corporate ownership across countries. The most striking concerns concentration: the degree of concentration of ownership is markedly higher in France and Germany than it is in the UK. Large share stakes in France and Germany are frequently held by other companies and families. Concentration of ownership affects the form of corporate control: market processes are associated with dispersed share ownership and direct investor control with concentrated ownership. The paper suggests that there is a trade off between the anonymity of market processes and the commitment that concentrated ownership permits. More effective internal forms of corporate control have emerged in France and Germany which have obviated the need for market processes. However, the anonymity of the market may be a more effective method of correcting industry wide failure. Recent developments in Eastern Europe are interpreted in this context and an explanation is offered for the emergence of different systems in the West

F.A. Schmid

Along with the liberalisation of bank branching, which was pushed ahead in most OECD member countries during the past several decades, the fear of 'overbranched' markets has arisen. In a model of spatial competition, the welfare effects of bank branching regulation are investigated and empirical results are presented from a pooled cross-section time series analysis from four European countries. It is shown that for all observations in the sample, fewer branches would have been socially undesirable. Moreover, the frequently posed hypothesis that a positive relationship exists between the number of branches and the price for financial intermediation is rejected.

K. Williams, C. Haslam, J. Williams, A. Adcroft and S. Johal

In arguing the case for regulating the Japanese manufacturing transplants, we are challenging the two orthodoxies which have so far shaped British and Western public response to the transplants. The two orthodoxies are the right wing economic policy discourse and the business school interpretation of Japanese manufacturing efficiency. In different ways both suggest that it is unnecessary to regulate the transplants because transplants deliver the macro and micro benefits of increased efficiency without intervention. In the British right wing economic policy script (Dillow, 1990: Eltis, 1992) foreign manufacturing direct investment is a positive agent of economic transformation, and Japanese transplant manufacturing is the showpiece exhibit which provides the backdrop for Tory photo opportunities. The implicit message of the resulting news stories is that industrial strategy and regulation are unnecessary because if we allow the market to work it will bring us efficiency; Japanese company report pictures of happy smiling transplant workers add an extra message about happiness.

S. Broadberry

Conventional accounts of comparative Anglo-American economic performance, based on national accounts data see Britain as the labour productivity leader until the 1890s. However, figures for the manufacturing sector suggest that US labour productivity was already substantially higher than in Britain by the early nineteenth century. The US rise to overall productivity leadership was thus due to a combination of trends in non-manufacturing sectors and distributional shifts into the high productivity manufacturing sector rather than due to trends within manufacturing. Although labour productivity differences were smaller in agriculture, Britain still had a comparative advantage in manufacturing on account of resource endowments.