Manage Research Papers

R. Naylor and M. Cripps

There has been significant interest recently both in the empirical investigation of the determinants of trade union membership, in the UK and elsewhere, and in the theoretical analysis of the economic effects of the closed shop trade union. However, there is little rigorous microeconomic explanation of union membership which is relevant for much of the UK and similar labour markets where the 'open shop' union is prevalent. This paper attempts to overcome the free-rider problem of explaining union membership in the open shop. We show that stable intermediate union density is a possible equilibrium outcome in a generalised social custom model. We argue that the approach has important empirical implications and is able to explain a number of otherwise puzzling features of union membership. We also analyse the simultaneous determination of wages and union membership, deriving a number of interesting comparative static results. In particular, we find that there is a critical or threshold level of union density [and an associated critical wage level] in the establishment below which membership will unravel to a zero level from which it will not then recover easily. We find also that the nature of the dependence of union power on union membership is a crucial determinant of the level [and stability properties] of membership and of the comparative static outcomes.

N.F.R. Crafts and T. Mills 

In three recent papers we have combined modern time series analysis with the most recent data for industrial production and GDP to obtain new and improved estimates of trends in economic growth in nineteenth century Britain and Europe.1 The new methodology used in these papers obviates the need to specify discrete breaks in trend ex-ante, guards against biases in estimation resulting from incorrect assumptions as to the stationarity of residuals, and allows trend and cycle to be jointly modelled as stochastic processes, while the data series investigated embody the revisions to the once predominant work of Hoffmann and Deane and Cole that stem from the work of Crafts, Feinstein, and Harley. In this paper we extend our earlier work to consider trends in real wages, which we regard as a crucial indicator of the performance of the economy over time. As in the case of the analysis of trends in output growth, the time series approach adopted here provides substantially better estimating techniques than have hitherto been used in this area, and again there are improved data series available.3 In section II we review this work in some detail and build upon it to develop an annual series of money wages, deflated by the cost of living, for 1750-1913.4 For the period 1830-1913 we are also able to analyze a new series for own-product real wages based on Feinstein's latest revisions to his national income estimates.

W.H. Buiter and P.A. Pesenti 

The recent theory of exchange rate dynamics within a target zone holds that exchange rates under a currency band are less responsive to fundamental shocks than exchange rates under a free float, provided that the intervention rules of the Central Bank(s) are common knowledge. These results are derived after having assumed a priori that excess volatility due to rational bubbles does not occur in the foreign exchange market. In this paper we consider instead a setup in which the existence of speculative behaviour is a datum the Central Bank has to deal with. We show that the defense of the target zone in the presence of bubbles is viable if the Central Bank accamodates speculative attacks when the latter are consistent with the survival of the target zone itself and expectations are self-fulfilling. We show that the instantaneous volatility of exchange rates within a band is not necessarily less than the volatility under free float. There need not be a constant trade-off between the volatility of the change in the exchange rate and the volatility of the change in the interest rate differential. Fundamental-dependent bubbles can account for the excess response of the exchange rate to the fundamental. The relationship between the exchange rate and the interest differential need not be negative, even if the target zone is fully credible.

W. Narendranthan and P. Elias 

The issue of whether or not there is evidence of a causal relationship between the experience of unemployment and the future economic activity of an individual is, as yet, unresolved by labour economists. Theoretical reasoning suggests that one may expect to find such a relationship, either through a reduction in human capital or through employer 'labelling' or 'screening' processes. This paper considers the issues which lend complexity to the problem and seeks to address these issues using a variety of techniques. In particular, problems arising from interval and point sampling of longitudinal information, the effects of observed and unobserved heterogeneity and from the lack of control for serially correlated exogenous factors are
investigated. The study focuses upon the work histories of a group of young males who left school in 1974 at the age of 16 years in the U.K. We find that, having controlled for observed and unobserved heterogeneity, the odds of becoming unemployed are 2.3 times higher for youths who were unemployed last year than for youths who were not unemployed; but, given the current status, the past unemployment history of the individual is not informative about his future chances of being unemployed.

R. Kanbur, M. Keen and M. Tuomala 

This paper is concerned with the optimal use of income information in the design of tax/transfer systems to alleviate poverty. The issue is one of optimal non-linear income taxation, but using a non-welfarist objective function that seems to accord well with the common concerns of policy debate: an income-based poverty index. We show that one of the key results of the welfarist literature is overturned: if it is desirable for everybody to work, the optimal marginal tax rate on the very poorest individuals is strictly negative. More generally, it is argued that the non-welfarist perspective points towards lower marginal tax rates in the lower part of the distribution than does the welfarist. Numerical simulations suggest, however, that this effect is of limited quantitative significance. Using conventional functional forms and parameter values, optimal marginal tax rates on the poor are in the 60-70% range.

W.H. Buiter and V.U. Grilli

This paper analyzes Krugman's contention that there is a "gold standard paradox" in the speculative attack literature. The paradox occurs if when a country runs out of gold its currency appreciates or, equivalently, if a speculative attack happens only after the country would have run out of reserves in the absence of a speculative attack. We first show that this "gold standard paradox is a very general phenomenon", relevant for all price fixing or price stabilisation schemes, which does not require mean reverting processes for the fundamentals and which can be present in discrete time models as well as in continuous time models. Next we show that the explicit consideration of the presence and role of international currency arbitrageurs is one way of eliminating the paradox. If a "natural collapse" appears to occur before a speculative collapse, abritrageurs keep official reserves just above the critical threshold level until the speculative attack point is reached. When the speculative attack occurs, official reserves do not undergo any finite change. The increased non-arbitrage demand for the currency of the country that abandons the gold standard is met out of the accumulated currency holdings of private arbitrageurs.

R. Naylor and G. Myles

Whilst there is a significant empirical literature on the effects of unions on pay discrimination, there is little by way of a rigorous theoretical treatment of this important topic. This is particularly surprising given the many recent developments in the economic theory of the trade union. This paper offers a theoretical framework which integrates models of union-firm bargaining with the analysis of employer discrimination. Within the class of right-to-manage models of union-firm bargaining, we consider the bargain between a rent-maximising union and a utility-maximising employer with discriminatory tastes. Our main conclusion is that only weak conditions have to be satisfied for the presence of a union with bargaining power over the wage rates paid by a discriminating firm to reduce the wage gap between the different worker groups and, in the right-to-manage model, for the wage gap to fall monotonically as union bargaining power increases. Amongst other results, we also find that as employer discrimination increases, the monopoly union bargains a higher wage for the group against which the firm is discriminating

K. Cowling

This paper seeks to update and extend the analysis contained in Monopoly Capitalisml, by considering research done since its publication. I will also consider some of the criticisms of the book which have been made. I will proceed by first identifying the central themes of the book and then pick-up the topics which appear to merit some reassessment. These include Rivalry and Collusion, Efficient Bargaining, Savings and Corporate Control, Equilibrium vs Anti Equilibrium and lastly, the Internationalisation of Production.

S.N. Broadberry and N.F.R. Crafts 

The recent historiography of interwar British industrial development offers an intriguing but ultimately rather unsatisfactory menu of rival interpretations. Although informed to an extent by descriptive statistics and drawing on concepts from business history, the literature contains very little in the way of formal economic or quantitative analysis of productivity performance. Indeed, unlike the 1870-1914 period, the 1920s and 1930s were neglected by the revisionist pioneers of the new economic history and yet they represent a key part of the story of Britain's relative economic decline. In this paper we argue that current discussion of the progress and potential of British industry in the 1930s place too great a weight on the presence of new industries or the absence of modern corporate structures while relatively neglecting the important roles of human capital, of the determinants of the outcomes of bargaining over work effort and of the process of exit of inefficient producers. Simple economic models are used to yield insights into factors inhibiting
productivity in 1930s Britain which have been given little prominence in the historiography. We further seek to establish the plausibility of these claims using both econometric and case study evidence to elaborate on the well-known data of productivity levels and growth across different sectors of industry.

M. Miller and A. Sutherland 

Alan Walters has suggested that the European Monetary System will prove dynamically unstable when capital controls are removed. The argument is analysed within a model which includes overlapping contracts. It is found that the short run effects predicted by Walters only arise when the credibility of the peg differs as between the labour and financial markets: but even if such a difference exists the system is stable in the long run.

N.F.R. Crafts and T. Mills

Alec Ford's analysis of economic fluctuations, synthesised in his contributions to Aldcroft & Fearon (1972) and Floud & McCloskey (1981), remains the focal point of discussions of the trade cycle before 1914. Perhaps the best known element of this work concentrates on the statistical investigation of nominal demand variables, notably in terms of deviations from nine-year moving averages. The most widely cited recent paper on pre-1914 business cycles (Eichengreen, 1983a) also concentrates its quantitative analysis on short-term correlations between changes in money, exports, output, prices etc. by using a vector autoregression approach. Although Ford's exposition takes changes in effective demand as central to the analysis, he does not favour an endogenous cycle of a multiplier-accelerator kind as capturing the essential nature of the Victorian economy. His view of the underlying sources of fluctuations in this period places its emphasis on long run real factors associated with an international process of capital accumulation and long run economic development such that he would "support the use of a weak multiplier-accelerator model with erratic shocks (autonomous investment abroad could be one strong source) with emphasis on 'real' forces, although the monetary or interest rate factor must not be neglected. The 'trade cycle' in this period for Britain is seen as inextricably linked with the growth and development process not only of Britain but of the primary producers and borrowers" (1972, p. 159).

M. Miller and A. Sutherland 

In this paper the surprising conclusion of Smith and Smith (1990) that the prospect of Britain's return to Gold in 1925 had the effect of weakening sterling is subjected to critical analysis. It is shown that this conclusion is reversed when the trend in the UK money stock prior to joining the Gold Standard is treated as endogenous; and when nonstationary solutions are considered. It is further suggested that a more realistic interpretation of events must involve the use of a model with price inertia. The final section of the paper considers the major difference between the UK's return to Gold and its impending entry into the EMS, namely the current lack of credibility attached to an exchange rate peg for sterling.

F. Delgado and B. Dumas 

An exchange-rate system is a set of contracts which commits Central banks to intervene in the foreign-exchange market. The design features of the system include: the rules -of intervention, the limits placed on exchange rates and the "crisis scenario" which describes possible transitions to new regimes in case one Central bank runs out of reserves or borrowing capacity. This paper considers the various trade-offs one faces in designing an exchange-rate system. Svensson (1989) has already analyzed the degree of variability in the exchange rate, the interest rate and the fundamentals. But the trade off also pertains to the amount of reserves which the Central banks must have on hand in order to forestall a speculative attack and make the system sustainable. The amount of reserves needed depends crucially on the assumed crisis scenario.

G. Batdsen 

Useful results on statistical inference and reparameterizations when estimating error correction models are summarized. The suggested approach is tested in a pilot Monte Carlo study and illustrated by estimating a money demand function for Norway. The estimated model forecasts well 21 period ahead in spite of deregulation of credit markets during the forecast period.

P. Stoneman and M. Karshenas 

In this paper we set up a general duration model of technology adoption which incorporates the main factors discussed in the different demand side theories of diffusion of new process technologies. The model is applied to the data on diffusion of CNC in the UK engineering industry. It is found that while there is strong evidence for the rank and endogenous learning effects, there seems to be little evidence in support of the stock and order effects, as characterized by the game theoretic models.

V. Christiansen

A simplified version of an analysis by Mayshar (1977) is established in order to expose and explain the key factor behind the case for subsidizing private risky investment. A critical evaluation of the analysis motivates an extension of the model to incorporate moral hazard. It is demonstrated that the main conclusion of the former analysis carries over to the revised model under reasonable assumptions.

M. Karshenas and P. Stoneman

In this paper existing epidemic models of diffusion in the literature are modified to give freer interaction between exogenous and endogenous factors in the diffusion process and to also reflect the role of economic factors in that process. A new encompassing model is proposed and its properties explored. The model is applied to the diffusion of colour television ownership in the UK and outperforms the existing models in the literature. The exogenous factors play a dominant role in the diffusion of colour television in the UK.

P. Stoneman

In this paper we explore the demand for consumer technologies that involve joint inputs in the generation of the service flow. An intertemporal model is used in the analysis. The impact of hardware and software prices on hardware and software demand as well as the impact of changes in the size of the software catalogue are analysed. The model allows copying and it is shown that the ease of copying has a significant impact on hardware and software demands and that the presence of copying has a significant impact on the reactions of hardware and software purchases to changes in the size of the software catalogue and its intertemporal availability. The role of copying in the competition between technologies is also addressed, and it is shown that the prospect of a copying facility on a forthcoming technology will tend to reduce the demand for a current technology without such a facility and moreover will reduce the demand for software for that technology.

R. Fraser 

This paper presents a new approach to assessing the impact of price support policies on producer behaviour. This approach takes explicit account of the impact of such policies on a producer's uncertain production environment and includes a numerical procedure for calculating ex ante price variability from ex post producer price data. The methodology is applied to European agricultural industries in which intervention purchasing schemes operate. Results show that price support policies can so severely distort the signal producers receive from world markets that their supply response is the opposite of that which would occur in the absence of the policy.

D. Collie

This paper analyses how retaliation affects the profit shifting argument for export subsidies. Trade policy is modelled as a multistage game. At the first stage the foreign country sets its export subsidy, and then at the second stage the domestic country sets its tariff and/or production subsidy. If the domestic country pursues an optimal trade policy then it will always gain from a foreign export subsidy. When the domestic country uses a tariff and a production subsidy, the optimal foreign policy is an export subsidy. If the domestic country only uses a tariff then an export tax is usually the optimal foreign policy.

D. Collie

This paper proves the existence and uniqueness of Cournot equilibrium in models of international trade under oligopoly. The existence of Cournot equilibrium is established without the usual assumption that profit functions are concave. Instead the proof uses a weaker "aggregate concavity" condition. A simple proof is used to establish the uniqueness of the equilibrium. And, the paper considers the implications of the assumptions, used to prove the existence and uniqueness of the equilibrium, on the comparative static results.

M. Berg and P. Hudson 

The historiography of the industrial revolution in England has moved away from viewing the late eighteenth and early nineteenth centuries as a unique
turning point in economic and social development.(2) The notion of radical change in industry and society occurring over a specific period was
effectively challenged in the 1920s and 1930s by J. H. Clapham and others who stressed the long tap roots of development and the incomplete nature
of economic and social transformation. (3) After this it was no longer possible to claim that industrial society emerged de novo at any time between c. 1750 and 1850, but the idea of industrial revolution survived into the 1960s and 1970s. In 1968 Hobsbawm was unequivocal in stating that the British industrial revolution was the most fundamental transformation in the history of the world recorded in written documents. (4) Rostow's work was still widely influential and the social history of what was seen as a new type of class society was only starting to be written. The idea that the late eighteenth and early nineteenth centuries witnessed a significant socio-economic discontinuity remained well entrenched.

G. Bardsen and J.T. Klovland 

Using cointegration techniques this paper presents an empirical analysis of the relationship between nominal GDP or domestic expenditure on the one hand and money and credit variables on the other. The main findings are: (1) In the period from 1966 to 1983 there is a relatively firm relationship between the nominal income variables and credit, which subsequently breaks down completely during the ensuing period of credit market deregulation; (2~ Nominal income and the broad money stock, M2, are cointegrated throughout the period 1966 to 1989 within a model augmented by the own rate of interest on M2 and a bond yield. Thus M2, adjusted for the effects of interest rates affecting the demand for money, seems to provide the most reliable long—run anchor for nominal income in Norway in the period considered here.

G.D. Myles

A two-sector model of imperfect competition with intermediate goods is developed and analysed by numerical simulation. It is shown how an objective notion of demand can be derived and employed in three concepts of equilibrium that differ in the possibilities for price-discrimination and collusion. The results indicate that there may be excessive use of labour relative to produced input in production, that price discrimination reduces both welfare and profits and that collusion between firms is beneficial to both the firms and the consumer. In addition, collusion may result in produced inputs being sold at a price less than marginal cost.

A. Sutherland 

A number of recent papers (Krugman (1988), Miller and Weller (1988), Froot and Obstfelt (1989a) and Flood and Garber (1989)) make use of continuous time stochastic rational expectations models to analyse the operation of currency bands. Although this type of model yields a unique solution for the exchange rate when a currency band is in operation, there appear to be many possible solutions when the exchange rate is allowed to float freely. In deterministic rational expectations models there are also many possible solutions to a free float regime - but only the stable manifold has the property that the asset price is the integrated discounted value of fundamentals. For this reason the stable manifold is usually regarded as the "fundamental" solution in deterministic models (see Blanchard and Fischer (1989)). By contrast, the other solutions are referred to as "bubbles" solutions because at any point in time the current exchange rate is sustained by future capital gains or losses rather than any consideration of fundamentals.

M. Miller, A. Sutherland and M. Ichikawa

Krugman (1988) provides a stationary characterisation of an exchange rate inside a currency band. Here we derive the non-stationary solution for a floating exchange rate which applies when currency dealers expect such a band to be imposed at a known future date.

C. Fraser and Al Hollander

Clubs are voluntarily-shared but excludable facilities prone to congestion. Examples include tolled trunk road, the telephone system and "gentlemen's" clubs. Despite 25 years of development, the clubs literature does not contain a satisfactory treatment of the membership of the sharing group which allows for differences in income and/or tastes and for agents' self-selection to club membership or non-membership. This paper provides such a
treatment and applies it to profit-maximising and revenue-constrained welfare-maximising clubs and to the analysis of the social organisation of a facility of fixed size.

J. Leahy and D. Leech

A large, mostly theoretical, literature emphasizes the structure of share ownership as a determinant of the behaviour of a company which has market power. In firms where ownership is so dispersed that no shareholder is in a position to dominate decision taking, managers might have the discretion to pursue goals other than those of the owners of the firm. Company performance is affected because of conflicts of interest between managers and owners due to differences in the presumed incentives they face, the former not necessarily seeking to maximize profits on behalf of the latter. This literature originated with the discussion by Berle and Means (1932) of the implications of the separation of ownership and control, nowadays treated as a special case of the general principal-agent problem, and has recently been surveyed by McEachern (1975), Hay and Morris (1979), Marris and Mueller (1980) and Lawriwsky (1984)1. Of the empirical work it contains, most of it is American and there are relatively few British studies. This paper reports an empirical analysis which was motivated partly by a desire to gain more information about British companies but mainly by a belief that recent methodological advances in the analysis of ownership structure require application in a systematic study. Moreover, the recent change of emphasis in the explanation of profitability away from the industry-level structure-conduct-performance paradigm to a firm-level approach suggests a greater-need to focus on the role of company ownership variables.

V. Christiansen

State contingent and asset specific capital income taxes are studied within the framework of a two-period, two-asset and two-state model. Distortions of savings and choice of portfolio in the presence of uncertainty are discussed. Important properties of the taxes are exposed. Conditions for having no portfolio distortion at the tax optimum are established.

V. Christiansen 

A simple portfolio model is used to examine the efficiency effects of capital income taxes when the economy faces aggregate risk. To achieve a first best optimum the use of state contingent lump-sum taxes is required. Through the tax policy the riskiness of total consumption is partly assigned to the private consumption and partly to the public consumption. State independent income taxes may generate a misallocation of risk and distort the allocation of resources between assets. The second best optimum, representing a trade-off between these inefficiencies, is characterized. Uniform taxation is shown to be optimal only in very special cases. Finally, the second best optimality rule for public consumption is extended to the case of uncertainty.

T. Worrall and J. Thomas

When an investor, for example a transnational corporation invests abroad it runs the risk that its investment will be expropriated. The host country although it might have a short-term incentive to expropriate has a long-term incentive to foster good relations to attract more investment in the future. This conflict between short-term and long-term incentives determines the type of contracts agreed by transnational corporations and host countries. In a model of the manufacturing industry with a continuous flow of investment it is shown that investment is initially underprovided, increases over time, tending, for certain parameter values, to the efficient level.

L. Hannah

Businessmen have felt the whip of competition in the 1980s, but this has been tempered by the feeling that, whatever happens in specific policy areas, Mrs Thatcher's government both prizes and respects the businessman's function in society. Such respect is not entirely new. Yet many commentators (and particularly those from overseas) have remarked on the unusually strong anti industrial, anti-enterprise or anti-business strands in British
culture. The high point of this literature, copiously bolstered by damning quotations from novelists, poets and opinion makers over more than a century, was Martin J. Wiener's 1981 book English Culture and the Decline of the Industrial Spirit 1850-1980.1 A Texan professor of history, Wiener chronicled the development of gentlemanly anti-business ideals, their transmission through the public school and university systems, the myths of rural innocence
lost in industrialised Britain, and the middle :classes' persistent ambivalence to science, innovation and entrepreneurship. He warmed to his theme in picturesque and often, grotesque detail, with the shocked reaction of a Texan sophisticate clearly visible through the scientific detachment of his analysis, somewhat like the pioneer anthropologist viewing with wry, - distaste the strange sexual mores of a newly discovered tribe.

W. Lewchuk 

The term Fordism today stands for a system of production which has come to symbolize factory technology in the twentieth century. It is usually associated with unskilled labour and mechanical innovations such as the moving assembly line, well suited to producing large numbers of standardized commodities. However, Fordism also had important social implications. It involved a major reordering of authority relations on the shop floor and an increase in managerial control of production decisions including how hard labour would work. This paper will examine the rise of Fordism in the United States and its diffusion to the British motor vehicle industry. It will suggest that diffusion was incomplete because British management was
unwilling, as distinct from unable, to reorder authority relations on the American model, making other aspects of Fordism less attractive.

P.A. David 

Many observers of contemporary economic trends have been perplexed by the contemporary conjuncture of rapid technological innovation with disappointingly slow gains in measured productivity. The purpose of this essay is to show modern economists, and others who share their puzzlement in this matter, the direct relevance to their concerns of historical studies that trace the evolution of techno-economic regimes formed around "general purpose engines". For this purpose an explicit parallel is drawn between two such engines -- the computer and the dynamo. Although the analogy between information technology and electrical technology would have many limitations were it to be interpreted very literally, it nevertheless proves illuminating. Each of the principal empirical phenomena that go to make up modern perceptions of a "productivity paradox", had a striking historical precedent in the conditions that obtained a little less than a century ago in the industrialized West. In 1900 contemporaries might well have said that the electric dynamos were to be seen "everywhere but in the economic statistics". Exploring the reasons for that state of affairs, and the features of commonality between computer and dynamo -- particularly in the dynamics of their diffusion and their incremental improvement, and the problems of capturing their initial effects with conventional productivity measures provides some clues to help understand our current situation. The paper stresses the importance of keeping an appropriately long time-frame in mind when discussing the connections between the information revolution and productivity growth, as well as appreciating the contingent, path-dependent nature of the process of transition between one techno-economic regime and the next.

J. Foreman-Peck

Widespread public concern greeted the performance of British Telecom after liberalisation and privatisation, respectively under Acts of 1981 and 1984. This paper presents two methods of examining whether this dissatisfaction is warranted by comparison with what might have been expected from the earlier industry organisation. Both a total factor productivity approach and a small econometric model show that the regime change made little difference to efficiency growth.

M. Miller and P. Weller

We formulate a stochastic rational-expectations model of exchange rate determination in which there are random shocks to the process of
sluggish price adjustment. We examine the effects of imposing limits upon the range of variation of both nominal and real exchange rates, and describe the intervention policies needed to defend the bands in each case. We consider the possibility that commitment to defend a particular nominal band may be less than fully credible, and analyze the implications of operating certain rules for realignment. We contrast our results with those which arise in the Krugman model of a nominal band.

M. Miller and A. Sutherland 

This paper describes three distinct phases of UK exchange rate policy in the 1980's (monetary targeting with free floating of the early 80's, exchange rate targeting of the mid 80's and the current "pragmatic" approach) and indicates the likely reasons for the switches in policy. The demise of monetarism has been generally attributed to the instability of the velocity of money; and we argue that it was the strength of domestic demand (especially by consumers) which was to a large extent responsible for the ending of the experiment in shadowing the DM. We note that the policy stance pursued subsequently by Mr Lawson as Chancellor involved driving interest rates far above those in West Germany while keeping sterling reasonably steady against the DM. To reconcile this with free currency arbitrage, we argue that UK interest rates contained a risk premium reflecting the market belief that, come the end of the consumer boom, the Government will allow sterling to fall as a means of achieving current account adjustment.

C.D. Fraser

A voluntary public good is a non-rivalrously-consumed commodity which, nonetheless, individuals can only consume if they make some enabling expenditure. E.g., with visual broadcasting a television is required and, in much of Europe, a licence. First, we characterise the population of voluntary consumers at arbitrary levels of the licence fee. Next, we consider the optimal licence fee chosen by a utilitarian government which recognises it does not have a captive population of public good consumers. We compare this outcome with that arising when the public good is financed from general
taxation via a uniform poll tax and thus everyone consumes it.

G. Myles 

From 1966 until 1973 the U.K. government levied the Selective Employment Tax which took the form of a weekly tax upon employees in service industries. By moving beyond competitive, constant returns models, the paper reconsiders the case for such industry-specific employment taxes. It is shown that the taxes are not justified by decreasing returns to scale even when profit taxation is non-optimal. In contrast, when imperfect competition is considered industry-specific income taxes become an integral part of an optimal tax system. Optimal tax rules are derived for an imperfectly competitive economy and the determinants of relative tax rates are investigated.

M. Miller and M. Salmon

In a continuous time model of two symmetric open economies, with a floating exchange rate, we find that the pay-off to macroeconomic policy coordination depends systematically on how heterogeneous is their inflation experience. While monetary policy coordination improves welfare in handling a common rate of underlying inflation, it exacerbates the "time consistency" problem arising when there are differences (as is illustrated diagrammatically). Since the principle of "certainty equivalence" applies to time consistent policy in linear quadratic models, we are also able to give a stochastic interpretation of the deterministic results.

R. Naylor and O. Raaum

The purpose of this paper is to develop a theoretical model in which the level of union membership and the union wage mark-up are determined endogenously. This contrasts with most of the recent work on the economic theory of the trade union which has assumed a union closed shop and then focussed on the union objective function and the bargaining framework. We would argue that the empirical evidence on the pattern of union density across establishments, in the UK at least, indicates the importance of explaining the existence of the open shop, where union membership exists but can be less than 100% of the workforce. For example, Millward and Stevens (1986) in their report on the 1984 Workplace Industrial Relations Survey show that union density is at some intermediate level in as many as 50% of all private sector establishments. A closed shop is present in fewer than half the establishments in which union members are present. Furthermore, it is likely that the ability of the union to obtain a wage mark up will depend, amongst other things, upon the level of union membership and the associated bargaining arrangements in the establishment.) This underlines the need to explain the determinants of density in analysing union wage effects. We are interested to see how the results of the traditional model are affected by allowing union density to be endogenous.

W. Narendranathan and M.B. Stewart 

Unemployment durations are generally modelled by specifying the conditional probability of leaving unemployment (the hazard function). Existing studies for Britain all use very restrictive parametric specifications of the hazard function, most commonly Weibull in form. These restrictions potentially bias the estimated effects, particularly those of the time-varying economic variables and the baseline hazard. This paper investigates models for the probability of leaving unemployment with these restrictions removed. We use semi-parametric methods to estimate models with completely unrestricted baseline hazards and a model involving flexible step-function approximations to the baseline hazard. The Weibull is found not to give a satisfactory representation of the baseline hazard and its use is found to distort the pattern of unemployment income effects over the length of the spell. The existing studies for Britain also model the exit probability from unemployment rather than the probability of entering a job, despite generally interpreting the evidence as being about the latter probability. We use a competing risks model to distinguish exit into employment from exit into alternative states. We find that the single risk model of exit understates the effects of income in and out of work on the probability of entering a job.

M. Conyon and S. Machin

This paper examines the determinants of profitability in 90 U.K. manufacturing industries over the period 1983-86. It considers the importance of labour market characteristics in determining profits and how their inclusion in a profitability equation affects the concentration-margins relationship. The empirical work also pays detailed attention to the endogenous nature of variables derived from structural Industrial Organisation models and we report instrumental variables estimates of profitability equations in which there is a significant role for labour market characteristics. Indeed, both unionisation and unemployment are found to depress profit margins. The impact of concentration on profitability is seen to be biased downwards when these variables are not considered.

M. Cripps

The solution of a reputational equilibrium is given for a class of linear, quadratic, gaussian dynamic games with noisy control. Although there is imperfect monitoring, a sequential equilibrium is found where the uninformed agents always smoothly learn the type of the informed agent, there is no sudden switch in agents' strategies; a common feature of reputation models. Reputation effects are temporary in the infinite horizon case for positive discount rates, as the discount factor tends to unity there is a permanent reputation.

M. Berg

The great classics of economic history by Unwin, Wadsworth and Mann, Heaton, Hamilton and Clapham2 were written in the early years of the profession just before the lst World War and during the interwar years. Other equally well known scholars of this era were Eileen Power, Lilian Knowles, Dorothy George, Alice Clark and Ivy Pinchbeck3. The numbers and the significance of women scholars in the field during these years stand in stark contrast to their position in the field now, and indeed at any time after the Second World War (see Appendix 1 for a summary of these women and their major works). Today we remember individuals from amongst those women, but there has thus far been little interest in assessing their numbers, their social and intellectual backgrounds and connections, their research and their students. The scholarship of their major works is impressive, the
current appeal along with clear contemporary political undertones intriguing, and the dearth of scholarly work on their subjects in the years since something that calls for explanation.

R. Naylor

The logic of collective action, because of its public good and Prisoners' Dilemma characteristics, has defied satisfactory explanation within the framework of conventional economic analysis. Olson (1965) argued that in large group contexts collective action would be impossible in the absence of compulsion. This is because there is a dominating free-rider incentive not to join if joining is costly and the benefits of collective action accrue to joiners and non joiners alike. Booth (1985) showed in the context of trade union membership that collective action can be explained if individuals are sensitive to reputation effects. Booth's work represents an application to the collective action literature of the social custom model developed by Akerlof (1980). As we demonstrate in the course of this paper, Booth's model is essentially equivalent to the discrete choice analysis suggested by Schelling (1978). In each of Booth's and Schelling's models individuals are treated as identical and therefore as homogeneous with respect to their sensitivities to reputation effects - or, in Schelling's terms, to their critical mass points.

K. Cowling 

The contemporary European economic problem is usually identified in terms of persistent, large-scale unemployment, and, since full employment is a legitimate and highly desirable aim, this is indeed an important indicator of economic malaise. However full employment is clearly not a sufficient description of the absence of economic problems. In responding to Eurosclerosis we not only require a dynamism that enables sustained full employment but also one characterised by a sustained high rate of productivity growth, where such growth fully recognises, in terms of its measure of output and input, both green issues and the contribution of extra effort in all its dimensions.

D. Leech

This paper compares the theoretical bases of the Shapley-Shubik and Banzhaf indices of voting power for a legislature with weighted voting. Definitions based on probabilistic-voting assumptions, useful both as behavioral descriptions and for computation in empirical applications, are compared in terms of necessary and sufficient conditions on the choice of voting probabilities. It is shown that the Shapley-Shubik index requires stronger conditions than the Banzhaf index: the former that voting probabilities be chosen by all players from a common uniform distribution on the unit interval, the latter only that voting probabilities be selected independently from any set of distributions (on the unit interval) which have a common mean of 1/2. This result has a bearing on the theoretical criteria by which one may choose between the two indices in a voting context.

R. Blundel, M. Browning and C. Meghir 

In this paper we investigate the relationship between within-period preferences and the degree of intertemporal substitution. We first present a theoretical discussion which argues that the form of within-period preferences and the way these differ across consumers may have important consequences for the formulation and specification of intertemporal models. We then apply this methodology to a detailed study of disaggregate household expenditure patterns using a pooled cross-section of some 70,000 households across 15 years. Our objective is to assess the degree of intertemporal substitution across different household types avoiding aggregation bias and accounting for nonadditive within-period preferences and nonlinearity in Engel curves.

Mark B Stewart

This paper examines the circumstances which enable trade unions to establish wage differentials. Union wage differentials are created by the capturing of rents and the paper considers the circumstances in which rents exist to be captured and when unions are able to do so. In line with theoretical predictions, differentials are found to be very different in establishments facing competitive product market conditions and in those with some degree of product market power. In the former, high union coverage of the industry and the union strength given by a pre-entry closed shop are found to be dominant requirements, with only a very small minority of establishments satisfying even these. In contrast there is found to be considerably greater scope for unions in firms with market power and neither of the above conditions are a requirement for the existence of a differential in this case. Unions are found to be unable to create differentials in establishments which operate primarily in international markets.

R. Naylor and P. Gregg

This paper examines empirically the determinants of union density across private sector establishments in Great Britain. The empirical analysis of union membership at the level of the aggregate labour market has received much attention recently,, whilst there is also an empirical literature focussing on the determinants of union membership using cross-section data on individuals2. However, empirical studies using cross section data at the level of the establishment are in short supply. The only major study in Britain is that by Bain and Elsheikh (1980), which draws on information from a 1978 survey of manufacturing establishments. Our paper uses data from the 1984 Workplace Industrial Relations Survey which provides detailed information on union institutions, membership, characteristics of the establishment and of its workforce, across all industrial sectors. Given the major changes which took place in the British labour market between 1978 and 1984, we feel it important to reconsider the determinants of unionisation in the light of the more recent observations.

G. D. Myles

A contracts-based model of the provision of training and employment with overlapping generations of workers is developed. Attention is focused on the role of imperfect capital markets in the determination of contracts and on intertemporal variations in the levels of training and employment, these may exhibit cyclical or chaotic behaviour.
Postal

M. Harrison

This paper presents a new measure of the real national income of the Soviet Union on the eve of World Mar II and during the war years. The new measure is compared with existing official and independent estimates. The heavy weight of the wartime Soviet defence burden is confirmed by the standards both of peace time and of other powers engaged in World War II. The Soviet commitment of labour resources to the war was also very heavy, but does not seem so impressive by international wartime standards. This reflects, in part, a real underlying constraint on Soviet wartime mobilisation rooted in the labour requirements of a large, low productivity agricultural sector.

M. Harrison

The paper examines official Soviet estimates of the change in total output and output per worker in Soviet industry during World War II. These are shown to have understated wartime industrial performance by a significant margin. New estimates of industrial production, labour inputs and productivity are put forward. The likely contribution to maintenance of total output and labour productivity arising from the rapid structural change in favour of munitions work is also assessed. While output per hour worked in munitions branches of industry grew rapidly, the productivity of labour in civilian branches may have deteriorated before recovering to pre war levels in 1944.

M. Miller, P. Weller and J. Williamson

We examine the ability of a target zone to stabilize exchange rates in the presence of two stylised forms of market inefficiency - stochastic bubbles and "fads". We show how the usual saddle path phase diagram is modified in the presence of bubbles (both where fundamentals are deterministic and where they are stochastic), and how a credible policy to defend a target zone prevents the emergence of any such bubbles. In the case of fads, we suppose that the source of shocks driving the exchange rate from its long-run equilibrium level is the fluctuating sentiment of "noise traders". The presence of "smart money" in the market exerts a stabilizing influence upon the exchange rate even in the absence of a target zone. In the presence of a fully credible target zone, where the authorities can take the necessary actions to check the swings in market sentiment, we use results on regulated Brownian motion to characterise the exchange rate trajectory, and demonstrate that the stabilizing influence of "smart money" is increased.

M. Miller and P. Weller

The extent to which exchange rate management can coexist with an independent monetary policy is examined in the context of a model with exchange rate bands. Using a Dornbusch model in which stochastic stocks are added to the Phillips curve, we analyse the implications of assuming that the monetary authorities follow certain simple rules for realigning the band when fundamentals have drifted too far from equilibrium. Assuming that information about whether the band is to be defended or there is to be a realignment is revealed at the point when the exchange rate hits the edge of the band, we show how the path of the exchange rate can be completely characterised in terms of solution to a second order non linear differential equation together with jumps in the rate at the edge of the band, which satisfy a zero-profit arbitrage condition. When the realignment is expected with certainty, hysteresis is introduced into the behaviour of the exchange rate.

G. Pyatt

This paper is an attempt to show how data on time use can be integrated with data on financial transactions or, more particularly, how the SNA can be extended by imputing value to time which is not explicitly marketed for financial remuneration. This subject has been treated previously by a variety of authors and, in particular, Hill (1977 and 1979) and Hawrylyshyn (1977) provide foundations on which the present analysis has been able to build.2 However, while Hill argues against any attempt to value time spent on inalienably personal activities, the present approach is less restrictive in suggesting that all hours of the day should be considered: leisure has an opportunity cost, and this should be recognised if we want to avoid anomalous results.

G. D. Myles

It is an implication of the productive efficiency lemma of Diamond and Mirrlees that intermediate goods should not be taxed in a world of constant returns to scale and perfect competition. Three simple models are analysed to examine whether this conclusion can be extended to accommodate imperfect competition. The importance of returns to scale and the form of the production function are emphasised and, where applicable, welfare-improving and optimal tax schemes are described that include taxes on intermediate goods. If all technologies are Leontief, productive efficiency remains desirable

T. Beasley and S. Coate

Whether those who claim benefits should face a work requirement has been an issue of long-standing social concern. Important examples of schemes which require work are the Californian workfare program, Indian food security schemes and the English Poor Law of 1834. We present two arguments for demanding work for benefits: first, a work requirement can screen the truly needy from those who are not in need of support and second, it can provide incentives for people to invest in skills which enable them to avoid poverty. In the context of a simple model of a target population with two ability types we find conditions under which a work requirement reduces the costs of poor relief, and those when it does not. We concentrate on a case when work done in return for benefits has no social value, showing that even if this is true, work requirements may be a valuable policy tool.

M Harrison

The paper presents a previously unpublished index of the total British output of munitions, 1942-5. The index was produced in the Ministry of Production's Programmes Division under E.A.G. (now Professor Sir Austin) Robinson in both weekly and monthly versions. The Robinson index was used mainly for purposes of short run management of munitions production and manpower budgets. For today's more long run historical purposes the index can be revised and extended back to 1939 on a quarterly basis. The revised index shows a fourfold increase in British munitions output in the first 18 months of the war; by the 1944 peak, munitions output was running at more than six times the October-December 1939 rate. The level and dynamic of British munitions output estimated in this way can also be compared with the performance of similar indicators of munitions output in World War II in other countries.

M Harrison

The paper examines the official Soviet index of munitions output in World War II which was first published in 1965. This index seems to have been based on annual budgetary appropriations for expenditure on ground and air munitions at current prices; since Soviet munitions prices fell rapidly in war time, it grossly understates change in the real volume of war production. Subsequently published official data on the production of different lines of ground and air munitions in physical units, supplemented by information about real spending on naval munitions, supply a reliable foundation for a new index of the volume of total munitions output. New indices for different branches of the munitions industries can be calculated in Soviet prices of either 1941 or 1944, and combined using weights based on 1941 and 1944 expenditure shares. The result shows that Soviet munitions output underwent a fourfold expansion between 1940 and the 1944 peak. The new index can also be extended back to 1937, although with some loss of reliability. When this is done, Soviet munitions output at the 1944 peak is shown to have run at 10-11 times the 1937 rate. Lastly, the level and dynamic of Soviet munitions output measured in this way can be compared with the performance of similar measures of munitions output in World War II in other countries.

M. Berg

Historiography in recent years has reverted to pessimistic interpretations of the early Nineteenth Century. Economists now claim slow productivity growth over the period - that the economy did not reach 3 per cent per year rates of growth in real output until 1830, and that most industrial sectors apart from cotton and iron were technologically primitive. It is argued that agriculture grew faster in the period from 1700-1760 than it did in any period up to the early Nineteenth Century. If the period is looked at in terms of aggregative productivity estimates, it now seems that the Industrial Revolution was a historiographical figment.' Other historians have played down the differences between England and France in terms of industrialisation and backwardness, emphasising instead differences in population structures, urban and rural divisions and skill profiles. Extreme interpretations of Britain's slow growth profile would place eighteenth-century England with other ancient regime societies, and emphasise nineteenth-century England's continuity
with this.

J. Cable and S. Charles

Recent years have seen a continuing development of participatory work-practices in many countries, from simple profit-sharing remuneration systems, through employee share-ownership plans (E90PS) and varying degrees of workers' involvement in decision-making, to the ultimate participatory form, the producer cooperative. on the other hand, we also observe tendencies towards the reassertion of traditional authoritarian management, for example
under 11mtcherite policies in Britain. We suggest that the coexistence of these divergent tendencies can be best understood, and the relative efficacy of participatory vs traditional work organisation assessed, when seen in the context of a repeated Prisoners' Dilemma (PD) game. Thus we offer a new perspective on issues discussed inter alia in a series of papers in this journal, following Williamson's (1980) contribution to its inaugural issue.

M. Miller and P. Weller

We examine the effect of introducing stochastic shocks into a linear rational expectations model with saddle point dynamics generated by a forward-looking asset price. We derive the fundamental differential equation governing the path of the asset price as a function of the "sluggish" variable. The equation does not admit of closed form solutions in general, but we provide a complete qualitative characterization of the solution paths which are symmetric about equilibrium. These are the relevant solutions to consider in the presence of symmetric boundary conditions. We present two applications. The first analyzes how financial markets might react to the implementation of fiscal stabilization policy where public expenditures are only adjusted when GNP moves outside a threshold around a target level. Bond prices are perfectly flexible and move to satisfy an arbitrage condition. The second examines exchange rate behavior in the presence of a currency subject to a known realignment rule requiring an adjustment to monetary policy.

N.F.R. Crafts, S.J. Leybourne and T.C. Mills

Cliometric research has led to a considerable revision of an earlier conventional wisdom concerning the pace and nature of economic growth during British industrialization. Britain is still very much an early industrializer and a country whose employment structure became non-agricultural to an unusual extent, but can now be seen as a case of relatively slow overall growth involving a gradual acceleration rather than a take-off in the late eighteenth and early nineteenth centuries (Crafts, 1985a). These revisions to the quantitative record of British economic development make this an opportune moment to reflect on contrasts between British industrialization and that of later developers with reference to some of the themes brought forward by Gerschenkron's 'Economic Backwardness' approach to nineteenth century European economic history. In sections 2 and 3 below we review recent developments in the historiography of nineteenth century British economic growth. Inevitably this survey relies quite heavily on already published work by Crafts. In sections 4 to 8 we build on the improved time series relating to industrial growth in Britain and Europe to reconsider the timing and extent of trend growth changes to develop an appropriate comparative perspective on Gerschenkron's notions concerning "great spurts" of industrialization. These sections constitute new research based on quantitative techniques not used hitherto in this context.

R. Naylor and M. Cripps

Recent years have seen major developments in the microeconomic analysis of the trade union. Much of the work has been concerned with the specification of union objective functions and the study of their implications for wage and employment outcomes in models of union and firm bargaining. However, there has been surprisingly little attention given to the problem of explaining the determinants of union membership in the workplace. Most models assume either fixed membership or a closed shop. Yet the level of membership is likely to be an important factor influencing the union's bargaining power. For example, in the extreme case where membership is close to zero it is likely that the union will be unable to influence the wage outcome. Given that any union-negotiated wage accrues both to union members and to non-members in the workplace, the wage outcome is a public good and hence the individual's dominant strategy is to free-ride. Cason (1965) argues that collective action will occur only if there is either compulsion or an incentive private good. Booth (1985) develops a social custom model in which unions can be shown to exist through reputation effects in the absence of either compulsion or a private good. The social custom approach derives from Akerlof (1980). A social custom is defined as, "an act whose utility to the agent performing it in some way depends on the beliefs or actions of other members of the community".

M. Conyon

This paper develops a Kaleckian income distribution model to assess the impact of various quantities on the share of wages in value added for the UK manufacturing sector. In particular it considers the empirical relationship between wage share, market structure, unionisation, and capacity effects. The sample is taken from three digit production industries over the period 1980-1984 and is analysed using sequential cross section and longitudinal techniques. The principle findings suggest that wage share and product market concentration display a consistent negative relationship, although the relationship is not necessarily linear as posited in earlier studies. Moreover, the findings indicate that union organisation ameliorates this monopolisation tendency and a positive relationship is established between unionisation and wage share. We also find that excess capacity negatively affects wage share in the sample period. The longitudinal results illustrate that industry specific effects are significant in explaining the income determination process. We conclude that omission of capacity or fixed effects in previous studies constitutes a specification bias caused by omitted variables.

M. Berg

A long and provocative historical paper published in The Review of Radical Political Economy in 1974 raised once again a question of perennial interest to economists and historians alike - what accounts for the rise of the factory system? Stephen Marglin's 'What Do Bosses Do?' forced us to think once again about some of our fundamental assumptions about why our jobs, especially those in manufacturing, were organised in the way they were. He asked some traditional Marxist questions: 'Why did the actual producer lose control of production?' and 'What social function does capitalist hierarchy serve?' He argued there were two historical steps depicting the workers of control of product and process: (1) The minute division of labour which characterised putting out, (2) The development of the centralised organisation of the factory system. He argued further that these historical stages were neither inevitable not technically superior to earlier or other alternative ways of organising work. Instead, they were innovations with a class bias; introduced not because they could produce more output for the same or fewer inputs, but because they could generate a surplus more easily captured by the capitalist class. Marglin thus challenged traditional assumptions on the economic advantages of the division of labour and the histories that had told us that new technologies and technical superiority accounted for the rise of the factory system. 'Bosses' context was propitious - a new widespread interest on the left in the critique of the factory and in workplace based struggles and grievances. But it has also survived its time. For though many of its propositions were familiar to readers of those classic chapters of Volume One of Capital, 'Manufactures' and 'Machines and Modern Industry', Marglin's presentation was also distinctive. He drew on Marx, but without the Marxist hagiography he challenged some of the basic premises of modern economics. He claimed first that one of the factors of production, entrepreneurship, was unnecessary. And he argued secondly that work was structured as it was, in factories or highly subdivided operations, so that the capitalist could have a position and claim the surplus.l Marglin's case was built, furthermore, on a historical analysis of Britain's Industrial Revolution.

M. Berg

We used to look tack to the Industrial Revolution as the great turning point in our history, as the origin and indeed cause of modern society. Eric Hobsbawm described it in his great classic, Industry and Empire . I published in 1968, as "the most fundamental transformation in the history of the world recorded in written documents. For a brief period it coincided with the history of a single country, Great Britain. His words convey images of new technology and industry, the steam engine and the cotton mill. This Industrial Revolution was a Prometheus. It was not unlike the perceptions of those in the 1830s and 1840s who saw themselves as living through an Age of Machinery. They were those such as Thomas Carlyle, who spoke of "the huge demon of Mechanisation...changing his shape like a very Proteus...and infallibly at every change of shape, oversetting whole multitudes of workmen

Paper not available

A. Van Soest, P. Kooreman and A. Kapteyn

We seek to provide fairly general conditions that may be imposed on parameters in order that any empirical consumer demand system is consistent with utility maximization. In standard demand systems the imposition of these regularity conditions is less essential than in more complex situations, like when there is rationing or when there are endogenously switching regimes. The paper starts out by giving a number of examples where the failure to properly take into account restrictions following from neoclassical theory leads to models that are not internally coherent. Let 0 be the space of parameters which generate internally coherent models. We show that even if the true parameter vector belongs to 0, failure to constrain the parameter estimates to 0 in "maximum likelihood" estimation may yield inconsistent estimates outside of 0. Next a general framework is provided in which it is possible to formulate parameter restrictions which guarantee utility consistent models. For various cases (standard demand systems, rationing, endogenous regimes) we suggest general conditions that can be imposed in order to guarantee coherency of the empirical model. Since random parameter variation is allowed for, to capture non-systematic differences in preferences across individuals, the conditions also imply restrictions on the stochastic specification of an empirical model. For a number of familiar demand systems we show what the parameter restrictions amount to in practice.

J.R. Cable and N. Wilson

using a common estimating framework and comparable, primary data for two samples of firms in the British and West German engineering industries, the paper reports productivity differentials of 20-30% in favour of firms practising profit-sharing in West Germany, and 3-8% in Britain. Model selection procedures reveal important interactions between profit-sharing and other firm characteristics in both cases. We infer (a) that the observed differentials therefore capture the joint effects of a set of organisational choices of which profit-sharing is one element, and (b) that from a policy viewpoint, profit-sharing must be seen as part of a more general, organisational design process, rather than as an optional, add-on extra, as in some previous work and policy discussion. However, the characteristics of British and West German profit-sharers turn out to be quite different, indicating that there is evidently no single, stereotype formula for the effective use of profit-sharing.

J.R. Cable and N. Wilson

The paper reports productivity differentials of 3-8% in favour of profit-sharing firms in the UK engineering industry. The estimates come from equations in which profit-sharing interacts with factor input levels and/or the firms' technological, organisational and labour-force characteristics, and imply more than a simple incentive effect on work effort, or more 'cooperative' behaviour in given circumstances. Model-selection tests reveal that these models dominate those used in previous work, where profit-sharing enters as a disembodied, Nicks-neutral shift in the production surface. A technological labour relations interpretation of the origin of the gains is suggested, which are found to be asymmetrically distributed. The results question policy measures to encourage profit-sharing which do not take account of its significance in the process of organisational design

T. Besley and R. Kanbur

By all accounts, sub-Saharan Africa is in the grip of an AIDS epidemic. Many international agencies are mobilising their resources to study the disease and to develop effective means of countering it. However, in a world of limited resources this necessarily means that other areas of development will be neglected. Not only will other life saving activities have to be curtailed, but those that improve the quality of life of those not on the threshold of death will have to be cut back. What is the optimal level of resources that should be devoted to the battle against AIDS in Africa? In answering this question, and many others in developing countries, we must answer the question: what is the social value of a life? If the answer differs from individual to individual, we may indeed be forced to discriminate between different types of diseases in the allocation of resources.

R. Kanbur and M. Keen

M.W. Cripps

Rational expectations is a maintained assumption in the analysis of economic policy. Here we examine how two types of learning rational expectations (rational and econometric) affect the time profile of optimal policy. In both cases the government adopts policies which delay convergence to rational expectations. There is also a. reduction in the inflationary bias, in one case permanently in the other temporarily.

G.D. Myles

A general equilibrium model of international trade with imperfect competition is presented and the existence of an equilibrium established. The model is applied to the analysis of tariff policy and conditions are derived under which factor price effects strengthen existing partial equilibrium arguments for tariffs. Nash equilibrium and collusive tariff setting are also analysed; collusive tariffs are lower provided there are no negative price effects linking the countries.

G.D. Myles and M.W. Cripps

There are two general issues which bedevil general equilibrium models with imperfect competition: price normalisation and the feedback from prices to incomes. We present a class of normalisations which do not affect the behaviour of oligopolists, this is argued to be the only class of normalisations with this general property. We also provide a set of necessary conditions for the existence of equilibrium with monopoly and feedback effects.

S.N. Broadberry

In this paper we examine the importance of supply and demand shocks after the First World War at both the macroeconomic level and also in the key staple industries of pig iron and cotton textiles. As well as reconciling macroeconomic and structural explanations of interwar unemployment, this provides a much needed focus on the years immediately after the First World War, which despite Dowie's (1975) plea, have remained almost completely neglected.

S.J. Machin

This paper considers the relationship between unions and labour productivity in a sample of British engineering firms. Rather than use a single indicator of union presence to determine the union effect a number of measures of unionisation are combined to form a union presence index. An average union non-union productivity differential calculated using this measure is found to be statistically insignificant although there is considerable variation around this average displayed by the firms in the sample. Finn size is also found to be a key determinant of the union impact on productivity and fines with more than 1000 employees are characterised by negative statistically significant union effects. On the other hand, in smaller firms die union impact is neutral although not very well determined. The results using the index are contrasted with the effects of the closed shop on labour productivity where firm size is also found to be important such that neutral effects occur in small firms but in larger firms the closed shop is associated with lower levels of value added per employee.

N.J. Ireland

A two-stage decision-making process is modelled where members of the firm vote for a feasible set of wage rates and then choose which work process to join. It is shown that this system is characterised by allocative inefficiency, non-continuous supply functions and wage discrimination. These could be limited by outside opportunities for members or by members having sympathy for others.

M. Salmon

The paper considers the conditions under which a system of dynamic equations will be consistent with some prespecified multivariate equilibrium specification. Connections are also drawn between recent developments in the analysis of multivariate error correction models and the theory of co-integration and what is known as —the Internal Model Principle" in the design of robust linear feedback rules . Apart from clarifying and generalising our understanding of error correction systems and co-- integration this approach suggests a relatively simple method for identifying the restrictions that determine whether a given dynamic system satisfies the conditions for being an error correction specification

G. Pyatt

What is a SAM?1 There is only one fundamental law of economics. It states that for every income there is a corresponding outlay or expenditure. The
law is the equivalent for economists of the physicists' law of energy conservation. And it plays a similar role in defining the completeness of a model or analytic formulation: no theory or model can be correct unless it is complete in the sense that all incomes and outlays are fully accounted for. A social accounting matrix, or SAM, is a simple and efficient way of representing this fundamental law. The SAM approach that then follows from it is a way of addressing problems or issues in economics which starts out by setting the problem within the framework of a social accounting matrix.

T. Basar and M. Salmon

In this paper we solve for the optimal (Stackelberg) policy in a model of credibility and monetary policy developed by Cuckierman and Meltzer(1486) . Unlike the (Nash) solution provided by Cuckierman and Meltzer the dynamic optimisation problem facing the monetary authority in this case is not of a linear quadratic form and certainty equivalence does not apply. The learning behaviour of the private sector (regarding the policy maker's preferences ) becomes intimately linked with the choice of the optimal policy and cannot be separated as in the certainty equivalent case. Once the dual effect of the optimal Stackelberg policy is recognised the monetary authority has an additional channel of influence to consider beyond that taken into account by sub—optimal certainty equivalent , Nash, policy rules. Unlike Nash behaviour the Stackelberg solution implies no inflationary bias but it lacks credibility. The learning behaviour of the private sector does not sufficiently inhibit the incentive of the monetary authority to cheat in this model despite the fact that this learning is explicitly recognised in the Stackelberg solution.

J. Driffill

The analysis of macroeconomic policy as a game of incomplete information has concerned itself largely with the problem of domestic monetary policy, inflation and unemployment, from among the areas discussed by Torsten Persson (1987) in his survey in this session. Papers by Backus and Driffill (1985a and b), Barro (1986), Vickers (1986), Driffill (1987), Rogoff (1987), and Cukierman and Meltzer (1986), focus on domestic monetary policy using roughly the same macroeconomic model and obiec tive function as was used by Kydland and Prescott (1977) and Barro and Gordon (198:1a and b).
Horn and Persson (1985) have applied similar ideas to a small open economy using e,rchange rate policy and inflation as the key macro variables, as have Andersen and Risager (1987). Guido Tabellini (1987) has analyzed a situation where a government faces a single labour union rather than a decentralized competitive sector, Keith Blackburn (1987) has introduced incomplete information into a model of international policy coordination

T.M. Anderson

The coordination of Production and consumption decisions is analysed in a static model where the interdependence between production, income and demand is explicitly modelled. With imperfect competition and non-convex production technologies it is shown that there exists a zero pure profit equilibrium with a positive level of employment and possible involuntary employment. Finally, it is shown how to arrange a form of external intervention so as to ensure full employment.

P.A. Gregg and S.J. Machin

This paper examines the relationship between trade unions and the incidence of share ownership, profit sharing and value added schemes in Britain. The first two schemes are more common in the union sector whilst the third occurs more in non-union establishments. A distinction is made between weak and strong unions and it is found that performance linked pay schemes are in general less likely to be present if an establishment has a strong union rather than a weak one.

G.D. Myles

This paper analyses the properties of a model of imperfect competition in conjunction with a preference for product variety. When the consumer treats product variety as parametric, a tax scheme is described that generates a socially optimal equilibrium from market behaviour. Welfare-improving and optimal commodity taxes are also discussed. An alternative, conjectural, definition of equilibrium is introduced; for a single consumer model this is argued to result in greater variety and utility. If further consumers are introduced, variety causes externalities in consumption; their effects are analysed and policies to overcome these discussed.

A. Wolinsky

The paper presents a simple pairwise meetings model of trade. The new feature is that agents have asymmetric information about the true state of the
world. The focus is on the transmission of the information through the process of trade. The qualitative questions is: to what extent is the information revealed to uninformed agents through the trading process, when the market is in some sense frictionless? In particular: does the decentralized process give rise to full revelation results as derived by the literature on rational expectations for centralized and competitive environments? In the context of the model of this paper, it turns out that the information is not fully revealed to uninformed agents, even when the market is in some sense approximately frictionless.

P. Weller and M. Yano

We examine the determination of spot and futures prices in rational expectations equilibrium in a model with three groups of agents, agricultural producers, processing firms and speculators. We find necessary and sufficient conditions for producers to be short, processors to be long, and for the futures price to lie below the expected future spot price (normal backwardation). The conditions impose plausible restrictions on demand elasticities, and on the elasticity of substitution in the processing technology. We use a new technique of analysis which, in contrast to much of the literature does not require restrictive assumptions to be imposed upon the structure of preferences.

Roger E.A. Farmer

This paper introduces a parametric class of Kreps Porteus preferences Chat yield closed form solutions to dynamic stochastic choice problems. These preferences are applied to a simple stochastic macroeconomic model which relaxes the representative agent assumption. This example is designed to illustrate one of the many possible ways in which these preferences may be useful to both theoretical and applied researchers.

C. Azariadis

This essay analyzes labor contracts as a device for rearranging factor incomes over time when the lack of verifiable public information about future compensation prevents finitely-lived workers from borrowing against their earnings. Specific human capital is used as an incentive to implement
intertemporal self-enforcing contracts between workers and firms. I propose a necessary and sufficient condition for the existence of such contracts, explore the resulting equilibrium earnings profiles, and investigate how imperfections in the credit market influence the way workers allocate time between current production and training.

G.D. Myles

This paper derives optimal commodity tax rules for generalequilibrium models with imperfect competition.This is achieved by constructing functions for each imperfectly competitive industry describing the effect of taxation upon prices and profits, the construction is applicable to most forms of imperfect competition. Intermediate goods prices appear as important determinants of tax rates and it is shown that the implication of the diamond-mirrlees theorem, that intermediate goods remains untaxed, is inapplicable when the competitative assumption is relaxed.

J.R. Cable

It has long been recognised that one of the most important features of a production technology lies in its implications for managerial control over, the production process. Amongst early writers, Charles Babbage observed: "One great advantage which we may derive from machinery is from the check which it affords against the inattention, the idleness, or the dishonesty of human agents." (1832, p19). His contemporary, Andrew Ure, likewise remarked: "This invention [the self-acting mule) confirms the great doctrine already propounded, that when capital enlists science into her service, the refractory hand of labour will always be taught docility." (1835, reprinted 1963, p, 54). In more recent times, the literature of scientific management after Taylor (1911) has built heavily on the principle of technological control, as its radical critics have stressed.1/ Many current examples involve the extended use of computers, as in the use of robotics in place of man-based technology in car assembly; the introduction of computerised machine tools whose programmes are locked away from their operatives; and the displacement of traditional printing skills by direct-input technology in newspaper production.

S.M. Ravi Kanbur

The object of this paper is to review the state of malnutrition and poverty in Latin America. We will be particularly interested in quantifying the magnitudes of the problem, and in identifying who the poor and malnourished are. The former provides the reason for policy action while 'the latter provides the basis for policy strategy. Our focus throughout will be on food related issues. When we discuss poverty we will be restricting attention to an inability to purchase a minimally nutritious diet, and when we discuss malnutrition we will consider the physical con-sequences of prolonged dietary deficiency. We will not, therefore, spend much time on the satisfaction of other, non-food, basic needs, although this is clearly an area of great policy interest too.

S.M. Ravi Kanbur

While there is considerable disagreement about the actual number of hungry people in the world today, there is almost universal agreement that the current situation is unacceptable. Too many individuals are subject to periodic reductions in their food intake - which leaves many dead - and even among those not subject to such transitory reductions, there is too low a level of average food intake. What is the role of global food balances in determining this pattern of individual hunger? The object of this paper is to introduce and elaborate upon three themes which emphasize the regional element in the link between global food balances and individual hunger in an entitlements based approach. The first of these themes is an extension of Sen's (1981) entitlements approach to hunger to the case of nation states in a global setting. The second theme is based around the nature of the world food market as an interlinked system of markets in internationally traded and non-traded food crops. The third and final theme emphasizes the essential and inherent conflict between net sellers and net buyers of food, in an international and national system of market based entitlements.

M. Harrison

By the end of World War II the USSR had become the strongest nation in Europe and a first rate military power. Behind Soviet victory lay her economic achievement, sustaining not only a 12 million strong army but also defence industries which mass produced modern weapons on a scale unimaginable in 1940. Table 1 shows that Soviet munitions output, already at a high4 level before the war, increased rapidly under in wartime conditions; taking the war years as a whole, cumulative Soviet defence output was exceeded only by that of the United States.

R. Naylor

In recent years there has been a growing literature on the role of social customs in the labour market. Marsden (1986), for example, has emphasised the importance of group norms and social custom in various labour market contexts. Jones (1984) develops an economic model of conformist behaviour in which an individual's work effort is determined partly by tradition and by the behaviour of other workers. A central theme of the literature is that a rational economic agent does not inhabit a social vacuum and hence that individual behaviour is influenced, to some extent, by the actions of others. The approach promises the possibility of an escape from the free^-rider problem, which, as we shall investigate, might have a number of labour market applications. Such a potential has been suggested by a number of writers in different fields. Eiser (1978), writing from a socio^-psychological perspective, has stressed the role of social norms in producing cooperative outcomes in the theoretical context of the prisoner's dilemma. Such an emphasis is consistent with Sen's (1977) argument that the concept of commitment might offer a solution to the free rider problem.

P. Burridge and K.F. Wallis

Prediction theory for stationary stochastic processes as developed by Wiener and Kolmogorov and exposited by Whittle (1963) has a wide range of applications in theoretical and empirical economics. Results for the forecasting or pure prediction problem underlie theoretical models of optimal behaviour in dynamic and uncertain environments, and support empirical time series studies in considerable number. The signal extraction problem arises when the variable to be predicted or estimated is jointly stationary with the observed series, specifically as a signal observed with a superimposed error, or more generally as one component of a process comprising several unobserved components; applications range from permanent income theory to the seasonal adjustment of economic time series. The Wiener-Kolmogorov theory is heavily utilized by such textbook authors as Sargent (1979) in macroeconomic theory and Nerlove et al. (1979) in time series analysis.

M.B. Stewart

It is usually felt that workers in the union sector of the economy earn more than they would if they worked in the non-union sector; and similarly that on average unionised plants pay higher wages than comparable non-unionised plants. Recent evidence suggests that the average union/non-union ceteris paribus wage differential in Britain may in fact be quite small, but that there is considerable variation around this average and that some groups of workers may obtain considerably larger differentials. Stewart (1983a) estimated a mean individual union membership differential for the manufacturing sector of around 8%, but found considerable variation with individual characteristics and across industries. Mulvey (1976), using aggregate industry-level data on coverage by collective agreements, found variation in the differential according to the level of bargaining and Geroski and Stewart (1986) found some evidence of difference in the differential according to the extent of coverage itself. The cummulated evidence clearly indicates that contancy of the differential is not an appropriate maintained hypothesis