Manage Research Papers

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.

J. Smith and I. McLean

The introduction of the poll tax in Britain in April 1990 was one of the most controversial policies of the prime ministership of Margaret Thatcher between 1979 and 1991. Despite the unpopulatiry of the tax the Conservatives comfortably held onto office in the 1992 General Election, although with a substantially reduced majority. This paper investigates whether the poll tax might have indirectly benefitted the Conservative party by discouraging people from registering on the electoral roll, and thus preventing them casting their vote in the 1992 General Election. The results suggest a central estimate of eight seats could have been gained by the Labout and Liberal Democrat parties from the Conservatives, leaving the Conservatives vulnerable to loosing it's majority in by-election defeats before the next scheduled General Election.

J. Willner

We analyse a simple economy with a consumption good, an intermediate good and a public good, where there are capitalists, shop-keepers and workers. It follows that the capitalists and the shop-keepers would always vote for a lower tax rate than the workers although preferences are identical. No group would support a larger public sector than in the first-best solution under free entry and exit among the shop-keepers. A low tax rate would increase the number of supporters of low taxes and vice versa.

G. Femminis

This paper uses a model with deterred entry to study the relationships between the growth rate, which is endogenous, and the degree of imperfect competition. In an infinitely lived representative agent framework they are shown to be independent, while with Blanchard's type overlapping generations, this "neutrality results" does not hold, resulting in more complex policy problems. It is also verified that dynamic inefficiency, in such a model, is impossible.

G. Stewart

Does the ownership of capital confer a strategic advantage within the firm? The formation of a firm frequently represents an attempt by an individual to secure a return on knowledge and we demonstrate that, in this context, there can be an incentive to pre commit capital before contracting with other members of the firm - that is, to be the "capitalist". Results are also obtained on the investment level and wage rate. The key ingredient of the model is emergence of a product market entry threat from within the firm. This contrasts with the anonymous external potential entrant prevalent in the literature.

P. Krugman and M. Miller

The desire to avoid speculative runs on currencies appears to be one of the main reasons leading policy-makers to impose currency bands; but the standard analysis of target zones rules out any speculative inefficiencies by assumption. As an alternative, we first present simple models of excess volatility due to stop-loss trading; and then go on to consider what target zones might accomplish in this context. The principle result is that the speculation of informed traders shifts from being destabilising to being stabilising, once the target zone assures them that stop-loss orders will not be triggered.

S. Broadberry

This paper presents estimates of relative levels of labour productivity in manufacturing since 1870 for three of the major manufacturing economies.' Comparative labour productivity trends in manufacturing for Britain, the US and Germany are very different from the trends in comparative GDP per employee, which inform most accounts of long run productivity performance (Maddison, 1982, 1991; Feinstein, 1988a; Baumol, 1986). First, the whole economy evidence suggests that the US overtook Britain as labour productivity leader in the early 1890s, then forged substantially ahead to 1950, with Britain pulling back close to American levels of labour productivity by the late 1980s. However, the evidence from manufacturing suggests that the US labour productivity levels were already about twice the British level in 1870, that the US superiority was still close to this two-to-one level in the late 1980s, although there had been substantial swings in comparative labour productivity in the intervening years, particularly across the two World. Wars. Second, the whole economy evidence suggests that German labour productivity levels were substantially below the British level in 1870 and caught up only by the 1970s. However, the evidence from manufacturing suggests that German labour productivity levels were already close to British levels in the late nineteenth century, and pulled substantially ahead after the Second World War, particularly during the 1970s, although the gap narrowed substantially during the 1980s.

P. Gatrell and M. Harrison

The Soviet economic mobilisation for World War II was relatively intense, if not efficient, both by international standards, and by the Russian standards of World War I. By comparison with 1914, the Soviet capacity for economic mobilisation had been enlarged by interwar economic growth (the increased size of the economy, and its higher development level). Soviet policy and system characteristics more appropriate to wartime also played a part. These findings are further demonstrated through comparative study of the respective roles of the Russian and Soviet civilian economies in the two wars.

D. Collie and M. Hviid

In a Cournot duopoly model of international competition between a domestic and foreign firm, it is shown that when the foreign firm has incomplete information about the marginal cost of the domestic firm then the domestic government can use an export subsidy to signal the competitiveness of its firm. This signalling effect strengthens the usual profit-sharing argument for an export subsidy. The optimal export subsidy in the signalling equilibrium may be twice as large as the optimal profit-shifting export subsidy under complete information.

K. Cowling and R. Naylor

In orthodox economic theory individuals are modelled as rational economic consumers maximising their utilities given their preferences and the market prices of the commodities over which preferences are defined. This paper challenges the validity of such an approach. Commercial forces originating in the objectives of producers are likely to exert an influence on preferences and the choice set open to the individual is restricted by the requirements of the market system. Once it is established that the wants to which production is responding are determined, at least in part, within the system of production, then the whole structure of the system is invertible: adjustments can be brought about just as easily by the manipulation of preferences as by the reallocation of the budget by the individual. One implication of our analysis is that there are likely to be a wide range of contexts in which conventional market structures do not provide the most efficient form of resource allocation. The paper concludes by drawing out the implications of the analysis for the design of industrial policy.

N.J. Ireland

In many societies, individuals care how others view them. In their efforts to impress, such individuals engage in consumption signals which attempt to establish higher levels of status than their true status type. This leads to an inefficiency which offers the possibility of a Pareto-improving tax policy. The impacts of tax policy and benefits on the signalling equilibrium are considered.

R. Rivera Campos

A Hartian model of imperfect competition, extended to an open economy where domestic and foreign firms compete, has been constructed within an overlapping - generations framework. It is shown that the effects of devaluation on the economic activity are closely linked to the technology used by the firms. An unemployment equilibrium exists and in the short-run money is non-neutral and devaluation is contractionary. In the long run devaluation passes through completely to the domestic price and the output returns to its long-run equilibrium with unemployment.

H. Dixon and N. Rankin

The importance of imperfect competition has long been recognised in many areas of economics, perhaps most obviously in industrial economics and in the labour economics of trade unions. Despite the clear divergence of output and labour markets from the competitive paradigm in most countries, macroeconomics where it has used microfoundations has tended to stick to the Walrasian market-clearing approach. However, over the last decade a shift has begun away from a concentration on the Walrasian price-taker towards a world where firms, unions and governments may be strategic agents. This paper takes stock of this burgeoning literature, focusing on the macroeconomic policy and welfare implications of imperfect competition, and contrasting them with those of Walrasian models. We seek to answer three fundamental questions. First, what is the nature of macroeconomic equilibrium with imperfect competition in output and labour markets? With monopoly power in the output market causing price to exceed marginal cost, and union power leading to the real wage exceeding the disutility of labour, we would expect imperfectly competitive macroeconomies to have lower levels of output and employment than Walrasian economies, a Pareto-inefficient allocation of resources, and the possibility of involuntary unemployment. Few would disagree that deviations from perfect competition will probably have undesirable consequences. Second, to what extent can macroeconomic policy be used to raise output and employment in an imperfectly competitive macroeconomy? Third, if policy can raise output and employment, what will be the effect on the welfare of agents?

T. Bergstrom and M. Bagnoli

Inmost times and places, women on average marry men who are older than themselves. We propose a partial explanation for this difference and for why it is diminishing. In a society where the economic roles of males are more varied and specialized than the roles of females, it may be that the relative desirability of females as marriage partners becomes evident at an earlier age for females than it does for males. We study an equilibrium model in which the males who regard their prospects as unusually good choose to wait until their economic success is revealed before choosing a bride. In equilibrium, the most desirable young females choose successful older males. Young males who do not believe that time will not treat than kindly will offer to marry at a young age. Although they are aware that young males available for marriage are no bargain, the less desirable young females will be offered no better option than the lottery presented by marrying a young male. We show the existence of equilibrium for models of this type and explore the properties of equilibrium.

Frank A. Schmid

Sustaining price stability is a major task of central banks in Western countries. For the Deutsche Bundesbank, it is even the main objective.1 Its performance could in fact be measured simply by looking at the inflation rates. Since this does not take into consideration the fact, that coping with inflation might be harder in some times than in others, a measure of a central bank's performance has been developed that takes into account intertemporal variation of the circumstances under which price stability is pursued. An application of this measure to the behaviour of the Deutsche Bundesbank will show that its performance was less stable over time than could be expected by just looking at the inflation rates.

Yew-Kwang Ng

Despite its failure to perfectly ensure a potential Pareto improvement, the use of the unweighted sum of compensating variations can be justified as a practically acceptable approximation. The pursuit of equality is better achieved through taxes/transfers and the actual equality-efficiency trade-off is probably regarded by most economists as excessive than inadequate. The use of distributional weights or inequality-averse criteria is thus questionable.

U. Galmarini

This paper looks at producers' taxation in a partial equilibrium model of vertically related oligopolies, where a downstream industry produces a final good using the output of an upstream industry as an input. Both ad valorem and specific taxes are considered and formulae expressing their effects on prices and profits are derived, showing how these depend on factors such as demand conditions, technology and market structure. Conditions for taxation to cause price overshifting and to raise profits are also given.

M. Berg

Women's social and economic position has so far been written of by historians largely through their participation in the labour force, and we now know a good deal about this for the nineteenth and twentieth centuries at least. Our knowledge of this for the eighteenth century is less well charted, but we at least know the general trends. It is striking how very little we know about the place of women in other aspects of the growth and transformation of industry in the eighteenth and nineteenth centuries. This is partly due to a misleading division made between issues of concern to the working classes and those of concern to the middle and upper classes. In the case of women's history this has become a divide between concerns over labour force participation and working lives as opposed to issues of domestic ideology and political rights. This paper moves beyond these divisions, to discuss the place of women in the industrial classes of the eighteenth century economy.

M. Berg

Recent research by economic historians on patterns of economic growth during the eighteenth and nineteenth centuries has raised important questions for the significance of women's work. This research has substantially changed our views on the speed and extent of industrial change during those years classically identified with the Industrial Revolution, circa 1760 to 1820.1 It has also brought about a dramatic change in perspectives of social historians on work experiences and class formations.2 While the quantitative estimates of this research and the conclusions drawn from these are already the subject of debate,3 it is appropriate now to enquire into the effect of women's work on current understandings of this classical phase of industrialization. Let us look first at currently accepted views among many historians of the economy of the eighteenth and early nineteenth centuries.

M. Berg

Current perspectives on the Industrial Revolution emphasise continuity rather than discontinuity; new estimates of the growth of industrial output and gross domestic product exhibit only gradual and intermittent increases between 1700 and 1830. To some degree these findings on the Industrial Revolution overall rely on new assessments of the industrial sector. In contrast to a long tradition of literature focussed on rapid changes in technology and work organisation - machinery, steam power and the factory system - the new perspectives point out the low productivity gains and traditionalism of most industries, apart from cotton and iron, between the eighteenth and early nineteenth centuries. N.F.R. Crafts has argued that one small and atypical sector, cotton, possibly accounted for half of all productivity gains in manufacturing: it was a modern sector floating in a sea of tradition. He draws the conclusion that '...not only was the triumph of ingenuity slow to come to fruition, but it does not seem appropriate to regard innovativeness as pervasive.'

M. Berg

The debate on the origins of the factory system has recently taken on new dimensions with a range of research on the potentials for productivity growth in different forms of
manufacturing organisation. This research currently yields contradictory findings on similar industrial environments. There is first the recent research on the growth of productivity in England's industrial revolution. The research of Crafts and others on English productivity change has distinguished the gains from high productivity factory and mechanised industry, confined mainly to the cotton industry, from the low or negligible productivity gains of most of the rest of the industrial and service sector. This research has found that most industry, unlike cotton, was technologically backward and organised in traditional small scale units. The high proportion of manufacturing taken up with this traditional manufacturing and services (and correspondingly small proportion of the high productivity modern manufacturing sector) meant an overall drag on productivity growth in the economy as a whole in the eighteenth and early nineteenth century. Crafts, Williamson and Mokyr have all defined manufacture in the eighteenth century as marked by a sharp divide between modern factory and mechanised industry on the one hand, and traditionally organised artisan industry on the other.

W.F. Richter

Tiebout's (1956) hypothesis is applied to the locational choice of firms in economies with local public inputs. A system of three source-based tax instruments is proposed that, in combination with an earmarking rule, sustains production efficient allocations by decentralized decision-making. The system includes a local tax on pure profits, a local tax on land rents and a local lump sum subsidy on the settlement of firms. Applications to international economics are straightforward.

A. Vernikov

Privatisation is with good reason seen as the core of economic transformation in Eastern Europe and the USSR. Among other systemic changes, privatisation will reshape the mode of interaction between the national economy and the outside world. The Soviet-type system was traditionally characterised as a "state-trading" economy. Therefore, a transition from this situation to a foreign trade regime based on liberalised foreign-trade activity of economic agents constitutes one of the key elements and indicators of systemic change as a whole. At the same time, there is a strong feedback between trade liberalisation and the marketisation of the domestic economy, in particular its demonopolisation, promotion of competition, price liberalisation, and restructuring.

N. Rankin and D. Scalera

Privatisation is with good reason seen as the core of economic transformation in Eastern Europe and the USSR. Among other systemic changes, privatisation will reshape the mode of interaction between the national economy and the outside world. The Soviet-type system was traditionally characterised as a "state-trading" economy. Therefore, a transition from this situation to a foreign trade regime based on liberalised foreign-trade activity of economic agents constitutes one of the key elements and indicators of systemic change as a whole. At the same time, there is a strong feedback between trade liberalisation and the marketisation of the domestic economy, in particular its demonopolisation, promotion of competition, price liberalisation, and restructuring.

W. Narendranathan & M Stewart

This paper investigates how the effect of income whilst unemployed on the probability of an individual leaving unemployment varies with the length of time that the individual has been unemployed. We examine this question in the context of a variety of alternative econometric models. We extend the Proportional Hazards model with unrestricted baseline hazard to one in which there are unrestricted effects of a subset of the explanatory variables and also consider models that can be estimated as series of binary response models. The proportional hazard restrictions are rejected for the sample of British unemployed men analysed and in the binary sequence framework symmetric models such as the Logit dominate the Extreme Value model implied by extension of the Proportional Hazards formulation. Logit models with a flexible form for the duration dependence which also incorporate unobserved heterogeneity in a flexible way are estimated. The results for all formulations indicate a rapidly declining effect of unemployment income as a spell lengthens, with no significant effect for the long-term unemployed. The preferred specifications which allow for omitted heterogeneity indicate no significant effect after about 5 months and this result is robust to the inclusion or exclusion of previous labour market experience variables.

S. Dowrick and B. Spencer

The response of union utility to labour-saving innovation is analyzed within a framework of oligopolistic competition in the product market, taking account of wage bargaining under several alternative structures of industrial relations. Conditions are established under which either wages or employment will rise or fall in response to innovation. Union opposition tends to occur when labour demand is inelastic and union preferences are weighted in favour of jobs. Centralisation of bargaining from firm to industry level is likely to engender union resistance to (or support for) innovation if products are strategic substitutes (or complements).

N. Rankin

A stochastic two-period small open economy model with optimising consumption and portfolio choice is constructed. Exchange rate risk means domestic-currency bonds are imperfect substitutes for foreign-currency bonds. Expectations are rational, i.e. subjective probability distributions equal the true distributions resulting from the exogenous sources of uncertainty, which are the foreign inflation rate and either the future money supply or government spending. With the former, no real risk premium exists, but increased monetary variance reduces current output, which nominal wage rigidity makes responsive to aggregate demand With the latter a premium exists, but increased spending variance affects neither it nor output.