Manage Research Papers

J.R. Cable

Research suggests that there are potential mutual gains to be had from participatory production, yet traditional non-participatory organisation remains the norm in Western economies, and participatory 'alternatives' constitute a deviation. The paper argues that this apparent non-realisation of mutually beneficial outcomes by rational economic agents may be explained with the aid of a prisoners' dilemma game framework, which provides an insightful new way of looking at the participation issue. Two conceptually separate origins of potential participatory gains are distinguished, in 'efficient bargaining' effects and in technology shifts; and an important distinction between 'ultimate' and 'effective' technology is made. Public policy intervention to promote participation, it is argued, is not ipso facto a denial of mutual social gains, and may be necessary to secure them.

G. Frewer

Well-known models of optimal taxation are considered. Particular functional forms are selected to represent consumer preferences. Uncertainty about the parameters of these functions is introduced. Propositions are stated describing the consequences for optimal taxation.

P.L. Stoneman

Technological diffusion is the process by which innovations (be they new products, new processes or new management methods) spread within and across economies. Some understanding of the process of technological diffusion is essential if we are to gain any insight into processes of economic growth and development, for, whatever the emphasis has been in the past in research and public policy, it is the application of innovations (diffusion) rather than the generation of innovations (invention or R & D) that leads to the realisation of benefits from technological advance.

Andrew Henley

As an attempt at linking together profitability, income distribution and economic crisis the work of Weisskopf (1979) represents a very important seminal contribution to the literature. In a cunningly simple model Weisskopf assesses the importance of the three major Marxist explanations of economic crisis in explaining the behaviour of the rate of profit in the non-financial corporate business sector of the United States economy since World War Two. This paper extends Weisskopf's study in two ways. Firstly we reassemble his database and extend his analysis from 1975 to 1982, incorporating two new complete business cycles in order to assess whether or not his conclusions about profitability crisis in the post-war period still hold. Secondly we break down his measure of labour share into wages, salaries and supplemental benefit contributions (pension schemes, health care schemes, and unemployment insurance schemes contributions) in order to assess the importance of the degree of monopoly theory in explaining what has been observed in terms of profit rate crisis. So in section 2 of the paper an extensive review of Weisskopf's methodology and results is presented. Section 3 extends his analysis to incorporate the new data for two additional business cycles spanning the period 1975 to 1982. Section 4 explains the methodology behind the decomposition of Weisskopf's aggregated measure of labour share and section 5 presents the empirical analysis for this breakdown. In section 6 we assess how the degree of monopoly theory can explain the trend of wage share observed .in section 5 and some final conclusions are drawn in section 7.

A. Harrison & M Stewart

Empirical work on strikes has tended primarily to concern itself with strike incidence, with the recurring finding that strikes occur procyclically. Less attention has been paid to strike duration and the cyclical fluctuations it might display, although a variety of theoretical models have been proposed suggesting that strike duration will vary with the business cycle. This paper presents an empirical investigation of this issue, using Canadian microdata to estimate flexible models of conditional strike-settlement probabilities. Two contrasting hazard models are estimated and compared. Both utilise a flexible polynomial representation for the duration dependence and explicitly incorporate unobserved heterogeneity. The first is a beta-logit model recently proposed by Kennan (1984), and the second is a discrete analogue of the familiar proportional-hazards model with a Gamma mixing distribution. Score tests for a number of potential specification errors are also constructed for both models. The models are estimated on a sample of individual contract strikes in manufacturing over wage issues during the period 1971-1980. The results strongly support the hypothesis that strike duration varies countercyclically, with conditional settlement probabilities at the peak of the cycle being up to twice as high as at the trough. A supplementary finding is that this cyclical sensitivity is even more marked in the paper and printing industries, and that individual conditional settlement probabilities there are much lower, ceteris earibus, than elsewhere in manufacturing. The hypothesis of homogeneity across industries and unions in the remainder of manufacturing is accepted by the data.

D. Leech

The relationship between shareholding concentration and share-holder voting power and the question of corporate control has long seen recognised as being of central importance in the economies of the firm and has given rise to a large literature. Despite this, however, and the fact that quite sharp differences in perspective exist in this literature, relatively little work has been done on actually attempting to measure, in a theoretically rigorous way, the quantitative significance of empirically-observed differences in concentration on the distribution of power. On the other hand the literature on game theory is replete with theoretical examples of the application of the theory of simple games to shareholder voting. Although methods for applying this theory to real-world voting situations exist, little work appears to have been done on this particular question, although applications have been made to problems 1/ in political science. This paper is an investigation of the empirical application of the method of power indices for simple games to shareholder voting using data for a sample of British companies collected by Collett and Yarrow, previously analysed by them (1976) and by Cubbin and Leech (1983).

R.E. Mariano

Many econometric models for forecasting and policy analysis consist of a statistically estimated system of nonlinear simultaneous stochastic equations. The distinguishing feature of these models is the nonlinearity of the solution for the endogenous variables in terms of model disturbances. Despite the widespread use of these models, there has been little formal analysis of predictions based on such models. Furthermore, practitioners' validation of such models has proceeded, for the most part, on an informal basis. This paper covers a preliminary study of the finite-sample properties of predictors in nonlinear systems and as such provides an additional analytical treatment in parallel with the large-sample asymptotic analysis carried out recently by Mariano and Brown (1983a, 1983b, 1984, 1985).

Geoff Frewer

A theoretical model is presented in which the decision marker's choice of step length for reform is allowed to depend on the consequences which this is expected to have for the accuracy of information about the structure of the economy. Also, destabilisation by means of introducing variance into policies, is desirable under some circumstances since it speeds up the learning process.

S. Dowrick

In general we expect efficient bargaining between a union and an employer to cover employment as well as wages. But employers may find that they win higher profits if they bargain over wages alone, since the threat of job losses can inhibit workers from pressing wage demands. This is shown
to be the case in typical models which use the general (asymmetric) co-operative Nash-bargaining solution. So it is argued that the inclusion of jobs in bargaining is not just a question of efficiency, but also a question of power.

R. Kupisz

Empirical work on money demand in developed economies pertains to be based on sound microeconomic principles. If this is truly the case, estimated models should be unaffected by country boundaries, given that as economists we believe the majority of people to be motivated by the same basic forces. In the development literature, however, it is usually maintained that the problems of LDC's must be taken specifically into account, which would appear to contradict the above argument. Surprisingly little attempt has been made to investigate whether functions specific to the LDC's really are better at explaining money demand than the more general functions estimated for the U.K. or U.S.A.; whether there is, in fact, little difference in explanatory powers or whether limitations imposed by the data problems that are notoriously endemic to LDC's allow any meaningful conclusions to be made. These are the questions that I hope to address in this paper.

D. Leech

Capital market constraints on the firm are traditionally described as working through two mutually reinforcing mechanisms. First, a direct limitation on management discretion operates through accountability to shareholders. Larger shareholders are assumed continuously to monitor company performance particularly in its effect on profitability and equity values. In the event of a departure from profit maximisation they will organise to use their voting power to force changes in company policy or, in the limit, to replace the existing top-level management with one more acceptable to them. Behind this institutional threat lies the second constraint, the possibility of an increase in share concentration leading to a takeover should the share price fall low enough or the threat prove ineffective (for example if concentration is too low).

S. Dowrick

Baran and Sweezy (1968, p.85) argue that "the working class as a whole is (not) in a position to encroach on surplus ... under monopoly capitalism employers can and do pass on higher labour costs in the form of higher prices". In Section 2 I examine this claim that employers' power in product markets can transcend conflict over the process and pay of labour, discussing the implications for conflict between groups of workers as well as conflict between workers and employers. Despite ample evidence of employers' monopoly pricing power, there is also evidence that profit margins do change in response to workers' strength - an observation which, I argue, is not adequately explained by theories based on the threat of foreign competition or by theories of oligopolistic uncertainty. Section 4 explores the hypothesis that employers and workers bargain over jobs as well as wages, a hypothesis which could explain workers' potential to erode profit margins.

J. Seade

This paper considers the conjectural variations model of oligopoly and introduces a shift in its equilibrium solution : a cost-side shift, such as a change in technology or input prices, or the introduction of excise tax. The equilibrium effects of this cost-displacement are then found, deriving and examining explicit expressions for the resulting movements in individual outputs and hence in price, profits and market structure.

W. Narendranathan & S. Nickell

A lot of attention has been focussed on the issue of the effects of the level of benefits on the duration of unemployment in the last decade. These analyses have been carried out either in a reduced form framework or an approximate structural form framework allowing for some dynamics, or in a proper structural form static framework. The reduced form approach is mainly concerned with the specification and estimation of the conditional probability of leaving an unemployment spell - see for example, Lancaster (1979), Nickell (1979), Lancaster and Nickell (1980). Search theory is then made use of, to interpret the estimated coefficients in the model. Within the search theory framework, this conditional probability can be interpreted as a product of (a) the probability of coming across a vacancy and being offered the job when applied for, and (b) the probability of accepting this offer. The latter probability, being a function of a minimum acceptable wage (reservation wage) to the individual would therefore depend on various variables like for example, personal characteristics, environmental influences etc. Hence, if one is interested in distinguishing various effects, one needs a structure for the problem.

John Cable

Empirical research on self-managed and participatory firms faces a major difficulty over the measurement of the key, participation variable. Indicators such as the proportion of workers belonging to a cooperative, workers' financial stakes in the firm, the existence of a Works Council, the number of worker directors, and so on, which feature in previous work, capture only aspects of the phenomenon. But the extent of employee involvement in the actual running of the firm - "workers' ability to directly influence or form the management and work process in an enterprise.(1) - can vary extensively under both cooperative and conventional production arrangements, in ways not necessarily caught by variables such as these.

John Cable

In recent years there has been a widespread growth of producer cooperatives, codetermination, profit-sharing and other participation schemes. This has occurred not only in Western industrialised countries, including Britain, but also in the developing world, and in some Eastern-bloc 'command' economies. These developments provide social scientists with rich and expanding opportunities for research on self-managed and participatory firms: on their relative survival, growth and productivity rates; on the interrelationship between participation and human capital formation or the ',quality' of the labour force; on the implications for wage determination, unionisation, the quality of working life; and so on.

Keith Cowling

We now live in an era where production and markets are controlled by giant corporations with a trans-national base. We also live in an era where national and international controls over trade and capital flows have been progressively reduced. The resulting combination of unified international markets and giant international firms bestriding them provides a ready mechanism for the processes of deindustrialisation to develop wherever the conditions for capitalist accumulation are weakened. In contrast to the earlier history of the development of monopolies and cartels around the turn of the century, when protectionism was demanded to restrict or eliminate foreign competition in domestic and colonial markets, the new period of international oligopoly is characterized by demands on the part of the giant corporations for free trade 1) and the supranational institutions to pursue and sanction it: a global freedom to pursue accumulation, given their own dominance within the global system and given the threat, or potential threat, of organized labour
and universal suffrage at the level of the nation state. It might be said we now have a neo-imperalism of free trade in similar vein to the nineteenth century British imperialism of free trade2), but this time, rather than being of national origin, the imperialism is that of the Transnationals.

Andrew Henley

The question of what effect if and trades unions have on the functional distribution of income is an old one. Conventional production theory suggests that the presence of a monopoly element on the supply side of a particular labour market may well raise wages but in the long run any factor substitution away from labour would have an ambiguous effect on the factor income distribution depending on the value of the elasticity of substitution. Distributional gains would only accrue to labour under conditions of inelastic factor substitutability (see, for example, Addison & Siebert 1979). A considerable body of econometric research (surveyed in King and Regan 1976) has given general credence to the view that the elasticity of substitution between capital and labour, using cross sectional analysis, is equal to one across a large array of different industries. Adoption of this "stylised" fact leads to the conclusion that a rise in the price of labour would cause such a substitution from labour to capital as to leave the functional distribution unaffected. One might therefore conclude that trades unions can have little or no effect on income distribution. Time series research has tended to conclude (King & Regan 1976) that the elasticity of substitution is, if anything, a little below unity. Under such conditions a monopolistic trade union could increase its income share by raising wages. The descriptive evidence of Levinson (1954), however, suggests that in the long run unions may have very little impact on wage share. Levinson noted that although union membership had increased in the United States by a multiple of five over the period 1929 to 1952 profit share had remained more or less constant and labour share had only risen slightly. Other authors (see King & Regan 1976) suggest that labour share has been constant, if not falling. A recent paper (Kallenberg et. al. 1984) also concludes from a time series model that trades unions have had little or no impact on labour share (variously defined) in the U.S. printing industry over the period 1946 to 1978.

Paul Stoneman & N.J. Ireland

In the literature on the Economics of Technological Change it has become almost a convention to analyse the generation of new technology (Research and Development, or invention and innovation, or patenting behaviour) and the diffusion of new technology, as separate components in an overall process. It is the purpose of this paper to argue that the generation and use of new technology are inextricably linked and that separate analysis should be considered at best as yielding only part of the answers to any problems in the economics of technological change.

John Brack

This paper is concerned with the generation and testing of predictions on price adjustment from a model of symmetric oligopoly. Two types of industry demand regimes are considered, linear, and iso-elastic. It is shown that these can be distinguished by a simple test, and linear demand is given strong support. It is then shown that the industry conjectural variation may be treated as a function whose properties can be established by non-linear estimation of the price adjustment equation.

C.N. Pitelis

The main purpose of this paper is to test the substitution hypothesis of saving for the case of Life Assurance and Pension Funds (LAPF) on the one hand, and other (personal and corporate) savings, on the other. The focus is the postwar U.K. period. Earlier U.K. findings on this issue rejected the substitution hypothesis. Most, in particular time series, studies though, are subject to various limitations: that is, they focused on a very short period of time: made an uncritical use of the official data, that may cast doubt on their results: estimated consumption functions, which do not explicitly allow the testing of the effects of LAPP on other than personal savings too, such as corporate retentions: finally, confined their attention to in most cases - one specification of the consumption function.

P. Burridge & K.F. Wallis

Public discussion of seasonally adjusted time series usually concentrates on the current data, that is, the seasonally adjusted value of the current month's unemployment or money supply, for example. That such figures will be revised in subsequent months, as new data offer a clearer picture of short-run movements in the series, is increasingly recognised. One*might then wish to attach a standard error to the preliminary data as an indication of the likely magnitude of subsequent revisions. Moreover, if the final adjusted value that eventually emerges is regarded as only an estimate of a "true" deseasonalized series, then again, an indication of the likely error is called for. It is the purpose of this paper to propose a framework for the calculation of such quantities, in the• context of an approach to seasonal adjustment that is gaining increasing support. While research that would have as an "important byproduct... estimates of the random 'variability of seasonally adjusted series" was recommended over twenty years ago by the President's Committee to Appraise Employment and Unemployment Statistics (1962, p.19), the problem still appears to be open.

A.R. Hall

We derive the information matrix test, suggested by White (1982), for the normal fixed regressor linear model, and show that the statistic decomposes asymptotically into the sum of three indep­endent quadratic forms. One of these is White's (1980) general test for heteroscedasticity and the remaining two components are quadratic forms in the third and fourth powers of the residuals respectively. Our results show that the test will fail to detect serial correlation and never be asymptotically optimal against heteroscedasticity, skewness and non-normal kurtosis. The information matrix test is contrasted with the test procedures of Bera and Jarque (1983) and Godfrey and Wickens (1982), who construct a composite statistic from asymptotically optimal and independent tests against particular alternatives. Our results suggest that this alternative strategy is likely to be a more fruitful source of a general regression diagnostic.

A. Henley

This paper presents evidence on the impact of trade unions on wageshare under different collective bargaining arrangements, using a Kaleckian degree of monopoly frame-work. Comparable results are presented for union impact on wage levels and from these inferences are drawn about how the impact on wageshare is broken down into wage and productivity effects. It is found that unions make most distributional gains where bargaining is on a two-tier level, allowing unions flexibility to push down the degree of monopoly yet preserving national solidarity.

S. Wijnbergen

Using a standard complete specialization model of a small open economy within a rigorous intertemporal optimization framework with contract-based wage rigidity, we show that permanent tariffs lead to a current account deterioration and a fall in employment, contradicting most of the literature on macro-economic effects of import tariffs. The crucial lactor in this complete reversal of standard results is the impact of tariffs on domestic real product wages via wage indexation. Temporary tariffs will have less of a negative impact on the CA or potentially even a positive impact, because they increase the consumption rate of interest (the terms at which future consumption can be traded for current consumption) and so increase private savings. Extensions towards incorporating a more general production structure, investment and the use of tariff revenues to provide wage subsidies are presented.

D. Leech

Berle and Means' classic study of the separation of ownership and control remains authoritative and influential despite having been criticised on various grounds by a number of authors. This paper argues that, firstly, the Berle and Means approach to determining company control implicitly assumes a static framework inappropriate to analysing early twentieth century corporations. Secondly, accepting their approach, their control-type criterion in terms of shareholding concentration is too high and biases their results. Thirdly, the use of the same criterion for all companies fails to recognise the importance of shareholding dispersion and further biases their results-. A probabilistic voting model is-described which makes explicit the assumptions behind the concept of factual control. This is applied to the data on 16 companies used by Berle and Means and their classification of them as managerial is shown to be invalid.

Richard Urwin

An efficient financial market is one which is efficient in processing information, so that current prices incorporate all relevant data, correctly evaluated. It has two features which ought to be emphasised. Firstly, as prices are presumed to move Immediately to a new equilibrium when 'shocked', they represent the harmonious outcome of utility and profit maximising behaviour. The signals sent by these prices will ensure that any consequent resource allocation is an efficient one. Secondly, since the return on a financial asset consists of a yield and capital gain or loss, expectations of the future play an important role in determining the current price. Asset markets are inherently speculative, but the efficient markets hypothesis suggests that all opportunities for investors to earn unusual profit by exploiting available information will be eliminated. The price of a security at time t will reflect all relevant knowledge about the future which will affect its expected return, which results in the anticipated return to speculative activity being zero.

C.D. Fraser

This paper considers explicitly costly choice between mean-preserving distributions of a random variable. First, we extend a theorem of Diamond-Rothschild-Stiglitz to our environment. We then apply the result to risk and inequality analysis. W.r.t. the former, we generalise Ehrlich and Becker's seminal analysis of self-protection. W.r.t. the latter, we establish a sufficient condition for lump-sum-tax-financed and proportional tax-financed expenditure upon reducing inequality in pre-tax income or abilities to increase with society's absolute inequality aversion. This requires everyone's relative inequality aversion to lie within the interval [1,2]. We draw upon empirical evidence to show:, Norway may satisfy this requirement; the U.S. may not. Additionally, we examine the impact of variations in national income upon proportional tax-financed inequality reduction.

P. Burridge & K.F. Wallis

Time series models are presented for which the seasonal component estimates delivered by linear least squares signal extraction closely approximate those of the standard option of the widely-used Census X-11 program. Earlier work is extended by consideration of a broader class of models and by examination of asymmetric filters in addition to the symmetric filter implicit in the adjustment of historical data. Various criteria that guide the specification of unobserved-component models are discussed, and a new preferred model is presented. Other models generate filters that approximate X-11 rather well, explaining the wide acceptance of the X-11 method.

Saul Estrin & Jan Svejnar

In this paper we model and test alternative explanations of income determination in participatory and labor-managed firms. In the Yugoslav context, this involves distinguishing between the competing contentions that earnings differentials are related to the system of self-management per se or are a consequence of capital rationing by the authorities. Our initial aim is theoretical; to develop an adequate general formulation of the problem and an appropriate framework in which to embed the hypotheses. It is also felt that rigorous empirical findings in this area will be an important input in evaluating the Yugoslav labor-managed system as well as the increasing degree of worker participation in other countries.

M. Harrison

Nikolai Alekseevich Voznesensky was born on 1 December (18 Novem¬ber in the old style) 1903, the second son of a foreman's family. They lived near Chern', a small town of Tula province to the south of Moscow. Leaving full time education at fourteen, Nikolai found his first job in the year of revolution 1917, apprenticed as a carpenter to the local undertaker. At the first opportunity, however, he left to become a typesetter at a printing works.

C.N. Pitelis

An asymmetrical choice approach is followed to analyse the link between corporate control, social choice and capital accumulation; based on the explicit recognition of the existence of different classes in modern capitalist economies. /t is argued that all existing attempts to explore the issue are insufficient in that they are based on a classless-or classes do not matter-framework. We suggest that corporate decisions with regard to retentions do constrain the possibilities of choice over the consumption-saving patterns, of all - but a controlling subset of the owners - classes of the economy. Under plausible assumptions this acts beneficially on potential capital accumulation: a phenomenon due to, and being a specific characteristic of, todays large joint stock companies.

M.S. Grieco

The object of this paper is to present an anatomy of the imbalanced development of Corby in the post-war period. The consequences of this imbalanced development, which caused a small Northamptonshire village to grow into .a major steel town, are now reflected in the grim economic and social problems of Corby following on from the closure of major sections of the steel works. The paper focusses, in particular, on the role of Planning in this failure. It is argued that the principle of balance which has at the heart of the New Town ideology found no place in the development of Corby New Town. Indeed, it is shown that the New Town status itself was used in further accentuating the regional and structural imbalance represented in Corby - a striking contrast with the common view of the role of New Towns. The paper concludes by drawing out the policy implications of this Planning failure.

Richard Whipp & M Grieco

Within the literature on the family, we contend, there has been an over-concentration on the character of conjugal roles and upon the related issue of male authority, to the exclusion of a concern with the wider kinsh4p structure (Bott, 1957; 1971 - Rapoport and Rapoport, 1976). This paper will demonstrate the implications of such shortcoming for the understanding of work organization. Much of this concern with conjugal roles owes it explanation to the quasi-ecological focus on co-residence in both historical and contemporary accounts of the family. A focus on co-residence as the measure of family structure is not surprising, given the relative ease with which such data can be collected; relational data is more difficult to collect and has correspondingly received less attention. This data collection problem has resulted in an imbalance in the attention devoted to the cellular/ nuclear family, with this type of family being portrayed as the predominant form at the expense of a proper consideration of the role of the extended family or the kin network in the modern world (Parson and Bales, 1956).

R. Sugden & C.N. Pitelis

The paper suggests that the largely static, ahistorical existing literature on the theory of the firm is inadequate in its treatment of the control issue. It tends to classify firms as either owner or manager controlled using an ex post analysis of share distribution. In contrast, this paper reverses the direction of causality, explaining the control of firms in a dynamic, historical framework. It concludes that the observed distribution of shares will suffice to give a subset of owners control. The arguments are illustrated by a series of diagrams, and supported by an examination of recently reported empirical evidence.

P.A. Geroski and K.G. Knight

This paper is a. survey of some aspects of U.K. strikes, particularly for the late 1960s - early 1970s period, and a survey of bargaining theory and the theory of strikes. Both theory and evidence combine to present a distinction between "noisy" strikes, and more substantive strikes which play a role in the resolution of issues through collective bargaining processes.

C.N. Pitelis

This paper examines the possibility of an under consumptionist tendency operating in the British economy in the recent recession as a result of (i) increases in contractual savings resulting in an increasing private_ savings-income ratio as a result of the lack of perfect substitutability between contractual and discretionary savings; (ii) a posited link between consumption and investment, either direct or indirect via the effects of falling consumption on capacity utilization and the rate of profit. Comparisons are made between our version and Baran and Sweezylm theory of under consumption. Some temporal, spatial and theoretical limitations of our approach are also examined.

P. Turner

The idea of optimal policy design using an explicit loss function was a natural consequence of the development of econometric models of the macroeconomy. Since the economic theory underlying these was, at first the comparative static Keynesian model the techniques used tended to be static also. This approach can be seen in Tinbergen (1956). In addition since most of the early theory of open-economy macroeconomics was within the small, open economy framework single controller models were felt adequate to capture the policy optimisation problem facing a country. As models have come increasingly to concentrate on the dynamics of macroeconomic variables and the interdependence of economies has become more obvious it has become necessary to modify and extend our optimisation methods. The problem of dynamic models is easily dealt with using the standard techniques of optimal control theory i.e. dynamic programming or Pontryagin methods. The problem of interdependence can be handled by use of game theoretic concepts. We propose to set out the standard solution concepts of game theory in a static context because we feel this gives an intuition for the issues which it is difficult to obtain from the more technically demanding dynamic game literature. As an application we will consider throughout the problem of policy optimisation with interdependent economies.

P. Burridge and K.F. Wallis

The state-space method is applied to the problem of separating an autoregressive (AR) signal from composite AR and white normal noise. In the stationary case, for which the Wiener filter exists, we show explicitly its equivalence to the steady-state Kalman filter. Existing results for difference-stationary processes are generalized to the explosive AR case, with careful attention paid to initial conditions; the limiting filter is shown to be stable. Conditions are given for convergence of the signal extraction error variance, and these are seen to exclude the existence of an unstable common factor in signal and noise autoregressions, but not nonstationarity. The general argument is illustrated with simple examples and the role of controllability and detectability is explored in an appendix.

R. Sugden

The paper criticises the conjectural variation model for saying little about the determinants of industry equilibrium. It therefore examines more closely the behaviour underlying firms' actions. Collusion amongst firms focusing on the possibility of joint profit maximisation is brought to the centre of the analysis. It is suggested that industry equilibrium be analysed in terms of its deviation from the joint profit maximum, the deviation depending upon firms' retaliatory power, cost functions, and demand functions. This is illustrated by examining the formal specification of a firm's price-cost margin.

M. Miller and M. Salmon

It has been argued that the Bretton Woods system (of pegged but adjustable exchange rates) set up after World War II was designed specifically to prevent the manipulation of exchange rates in pursuit of national macroeconomic objectives (see R.Cooper); so it is perhaps no coincidence that the ending of pegged rates has led to the re-emergence of theories and policies involving such "manipulation". Before the War, when inflation was low and unemployment high in the major industrialised nations, this involved "competitive depreciation" as countries tried to gain employment; in the late 1970's and early 1980's, however, countries like the UK and the US have embarked on policies of competitive appreciation in order to cut inflation, regarded as the first priority. Sharp movements in exchange rates, however, constitute a threat to orderly trade and stimulate protectionism, as Bergsten (1981) argues.

C.N. Pitelis

Increases in corporate retentions do not necessarily increase private savings by an equal amount. They may be exactly compensated by reductions in other personal savings, partly compensated, or not compensated at all. The three hypotheses are examined along with the empirical support they have received. Empirical estimation is undertaken to test the three rival hypotheses by use of U.K. time-series data. Three frameworks are adopted; a Simple Linear model, both Static 1SLS) and naive dynamic 1SLD); a General Distributed Lag (GDL) model, and the Life Cycle Hypothesis in its General Distributed Lag Equivalence :(LCHGDLE) form; a Simple Add-on ;(SAO) model derived from three identities and simple behavioural assumption(s). It is shown that; both the GDL and the LCHGDLE models can be obtained from the SAO model. This highlights the underlying naivete of their nature; all models can be nested in a general form, obtained by use of any of the GDL, LCHGDLE and SAO models. Support is found for the Add-on hypothesis; increases in corporate retentions will add-on,on a one-to-one basis, other personal savings. Doubt is cast upon the LCH prediction of perfect substitutability. Some macro-implications are briefly examined.

J.R. Cable

Static concentration measures neglect dynamic changes in market structure entirely, yet the expectation of lost market share, based on the past and current mobility of market shares in an industry, may be an important part of the competitive forces acting on the firm and affecting its behaviour. This note draws out the similarity between market share change and new entry and proposes new, linked measures of both, enabling these additional dimensions of market structure to be incorporated in empirical work.

C. Doyle

In a competitive market for an ex ante homogenous good where stores and consumers enter in a sequential manner, consumers experience either a good match or a bad match. Upon entry the individual consumer selects a store from which to sample and remains with that store if he experiences a good match. The outcome of a match is determined by an exogenous stochastic process. Consumer uncertainty enables stores to price discriminate against loyal consumers. In the steady state the market will feature two prices, with only one store at any one time charging the low price within a particular location.

J.R. Cable and P. Turner

British clearing banks have often been attacked over their provision of industrial finance. Lever and Edwards'(1980) and Edwards and Carrington (1979) are among the more recent critics; in their view the failings of the banks in this area are a major cause of Britain's relative economic decline. They emphasize the distortion of the credit system towards easy credit for consumption (especially housing) and away from productive investment. They argue that 'excessively cautious' lending policies on the part of the banks are to blame, rather than any lack of industrial projects which are viable by international standards. They describe industrial finance in the UK as 'short term, dear, unreasonably restricted in amounts, carrying legal risks, and subject to excessive security requirements', in comparison with that provided in countries such as West Germany and Japan.

H.S. Farber

A model of the determination of the union status of workers is developed that incorporates the separate decisions of workers and potential union employers in a framework which recognizes the possibility of an excess supply of workers for existing union jobs. This theoretical framework results in an empirical problem of partial observability because information on union status is not sufficient to determine whether non union workers are non union because they do not desire union representation or because they were not hired by union employers despite a preference for union representation. The problem is solved by using data from the Quality of Employment Survey that have a unique piece of information on worker preferences which allows identification and estimation of the model.

G. Stewart

An important question is whether the responses to cyclical variations in demand are different for a capitalist firm (CF) and a labour-managed firm (LMF) within a particular economy. The focus of this paper is how a given change in the labour input would be divided between its three components: employment, hours, and effort. The existence of a bilateral monopoly in the F employment relation, together with a differing response to a deterioration in the labour market, leads us to conclude that, relative to the CF, the. LMF will reduce effort more and employment less in a downturn.

G. Stewart

The main aim of this paper is to suggest a model which relates wage rates to the degree of monopsony power in the labour market. Labour market monopsony power has received relatively little theoretical or empirical attention, yet there are a number of reasons for believing it may be a fairly general phenomenon. Firstly, imperfect worker information on the existence and characteristics of alternative jobs will tend to impart a positive slope to the supply curve of labour facing a firm. Secondly, there are many social and institutional barriers to geographical mobility. Finally, the literature on segmented labour markets emphasises the barriers to mobility between jobs even within a region.

G. Stewart

Monopsony power in the labour market is shown to have important consequences for comparisons between an Illyrian labour-managed firm (LMF) and a profit-maximising capitalist firm (CF) operating in the same markets with the same technology. If the CF earns positive profits then workers earn more in the LMF than in the CF, and the level of employment in the LMF may be greater or less than in the CF. Monopsony power is also seen to have interesting implicatings for models of membership contraction in LMF's.

M. Chalkley

In this paper a model of a profit maximising firm's responses to job search is developed. This model explains the determinants of a firm's wage offer and the probability that a firm will be found in a state where it is optimal to make no offer (i.e. a 'null' offer). Comparative statics results for the case of constant returns technology are calculated and the implications of the model for a market characterised by search are discussed.

R. Sugden

Consider a firm with production facilities in various countries - a transnational corporation (TNC). The problem to be discussed in this paper is: why are there such firms? The analysis is essentially theoretical. It attempts to develop a general approach to the problem by drawing upon a critical evaluation of what Hood and Young (1979) call the "orthodox" literature on TNC's No attempt is made to empirically verify conclusions, and there is no consideration of the so-called "radical" literature on TNC's. Both of these issues await a subsequent treatment. The aim is to examine some of the deficiencies in the orthodox theoretical literature on TNC's, suggest improvements, and thus formulate a general approach to the problem "why TNC's?".

A.J. Oswald

The paper studies the theory of optimal intervention in an economy with trade unions. It is shown that the traditional remedy, a flat employment subsidy in the union sector, cannot produce a first-best welfare optimum. But non-linear wage and employment subsidies can generate a full social optimum, and the paper examines their optimal structure. One appealing form turns out to be a wage subsidy schedule which is an increasing and concave function of union employment. Employment subsidy schedules and statutory wages policy are also discussed.

A.J. Oswald

The paper studies the micro-economics of inflation taxes and marginal employment subsidies. It proves that under very weak assumptions (i) an inflation tax will reduce the long-run equilibrium wage or price and (ii) that a marginal employment subsidy will raise the long-run equilibrium employment level. The theorems are illustrated with examples. The paper also proves (iii) that in special circumstances a tax on inflation is exactly equivalent to a marginal employment subsidy.

C.N. Pitalis

The idea that different types of income - classes of income recipients will have different patterns of savings-consumption behaviour, has assumed a prominent position among economic theorists throughout the years. Recent theorising however, does not support this view. This effectively raises the issue of the nature of the savings function under conditions of monopoly capitalism; and this problem we try to tackle in this paper. Thus from section I, i, traces the historical evolution of the theory of the savings function; ii examines the nature of choice over consumption-savings patterns, that different classes of people possess. In iii, we try to identify those who have the control of the corporations. IV examines the implications of our previous theorising on : (a) The role of business retentions in a consumption function (b) The role and expected behaviour of different types of income in a consumption function. In v the previous arguments are brought together and the "monopoly capitalism" savings function is proposed. Section Iii confronts the theory with the data while in ii a justification of our theory in terms of previous existing work is given. The paper concludes with brief remarks.

Y. Miyamoto

So far it has been thought that a labour-managed (LM) firm's reaction function slopes upward in Cournot's short-run duopolistic situation where the variables acted on are quantities of output (see Vanek, 1970, pp.114-115; Ireland and Law, 1982). In this paper we will make it clear that this statement holds in some limited sense. In inquiring into the shape of the LM firm's reaction function in the short-run situation, it seems that the firm's labour cost function as defined by Meade (1974) is not only assumed to be subject to the increasing marginal labour cost of output everywhere but is also assumed to have the property that the elasticity of the short-run labour cost curve, which is defined as the proportionate rate of change of labour with respect to output, is greater than unity. However, if we assume that the marginal labour cost is positive everywhere, and is at first declining and then increasing for fixed positive levels of the other factors,1 or that, even if it is always increasing in the output, the short-run labour cost function has the property that its elasticity is at first less than, equal to, and eventually greater than unity according to an increase in output because of the existence of overhead labour, then what will happen to the LM firm's reaction function?

M. Chalkley

The predictions of job-search theory for an analysis of unemployment have long been of interest (e.g. see Lippman and Mc Call (1976 b), Barron (1975) and Feinberg (1977)). In particular an important question is with regard to the duration of search un-employment and its determinants. Unfortunately robust results in this area are few. The reason for this being the complexity of the solutions to optimal job search problems. In many cases (see
Chalkley (1982) for summary) the optimal search strategy involves setting a reservation wage. If an offer in excess of the reservation wage is obtained it is optimal to accept the offer, otherwise continued search is preferable. Where the reservation property holds it is relatively simple to relate the expected duration of search unemployment to the (set of) reservation wage(s). However the reservation wage(s) themselves can seldom be expressed analytically. In the absence of analytic expressions for the reservation wages an examination of the effect of changes in parameters of the problem on (for example) the duration of unemployment would seem to require numerical analysis.

N.M. Kiefer and M. Salmon

A specification test based on an Edgeworth expansion is proposed and some of its useful properties are noted. In particular the test has an important additivity property, in that a test for higher-order alternatives simply adds additional, asymptotically independent x2 variates to tests against lower order alternatives

K.G. Knight and M.B. Stewart

As unemployment increases to record levels in the U.K. increasing attention has been devoted to the distribution of unemployment. This has revealed substantial inequality in the incidence of unemployment not only by occupation, region, race and sex, but also amongst individuals. Moreover it also becomes apparent that as the total number out of work has increased so has the degree of inequality of its distribution. Nowhere is this more apparent than in the age distribution of the unemployed. A great deal of emphasis has been placed on the phenomenal increase in youth unemployment since the mid-seventies but of considerable significance has been the deterioration in the position of older workers, especially males. The evidence suggests this to be a process that has been going on since the mid-sixties in the U.K.

J.R. Cable

Internal capital markets may help solve or reduce the informational problems that impair the provision of industrial finance and the control of managerial behaviour via external capital markets. The paper argues that the participation of banks in the running of German companies may confer advantages of an internal capital markets kind, which will be reflected in firms' financial performance. Empirical results for a sample of 48 leading companies show a significant positive relationship between profitability and the nature and degree of bank involvement. Policy implications must be drawn with care, however, if some part of this could alternatively be attributable to anticompetitive effects.

C. Greenhalgh and M.B. Stewart

Job training is an important subject for discussion, since the skills on which an economy depends are largely created by the process of training. Various theories, especially the human capital model, have focussed attention on skill acquisition through training as a central determinant of individual economic success. What little empirical literature exists on this subject concentrates almost entirely on the effects of individual, government sponsored, special training programmes for those not currently at work. However, the vast majority of training experiences occur whilst the individual is in employment

C. Greenhalgh and M.B. Stewart

One of the main differences between the labour market behaviour of men and women lies in the discontinuity of labour force attachment exhibited by most women over their lifetime - largely, but not exclusively, for the purpose of raising a family. These interruptions to their labour market experience constitute an important influence on the labour market position of women and provide a potentially important factor in the explanation of their labour market disadvantage. Skills are obtained to a considerable extent through labour market experience and may be blunted in periods of absence from the labour force. In addition, absence from the labour force removes an individual from the internal labour market and may thereby reduce the probability of gaining entry to the better jobs on re-entry.

C. Greenhalgh and M.B. Stewart

Although there exists a wealth of data relating to the British labour market, there are a number of important issues for which reliance has previously had to be placed on small surveys or case studies in order to form an opinion. Thus it has been known for some time that men and women cluster in different industries and occupations and that there are relatively few women in some jobs and rather a lot in others. Even so, no clear idea has been available of the extent to which men and women achieve different average levels of occupational status, when occupations are ranked in some way that enables us to compare the various jobs done by men and women. The average amount of formal schooling has risen over the period in which the present adult labour force was entering the labour market, but there has been no clear view as to whether or not the structure of occupations has changed accordingly, nor as to whether the relative position of women has improved, deteriorated, or stayed the same. The rapid increase in labour force participation and the rise of part-time working by married women in the post-war period have been well documented, but there is little evidence on whether or not this has had a detrimental effect on the labour market position of men.

N.J. Ireland

A large literature has accumulated which examines how the optimal solution of an agent maximising the expectation of a real-valued function depending on a random parameter p and the agent's behaviour x reacts to perturbations in the first and second moments of p . In this literature p is given exogenously, i.e. independent of x . We extend the theory in two aspects. First we allow there to be many agents and broaden our attention to regard market behaviour. Second, we allow p to depend on the behaviours of the participating agents, for example when p is a price vector relevant to an oligopoly. The method used is an extension of Ireland (2), in that an analogy is made between the effects on behaviour of uncertainty in p and the effects of a change in p. We study, in particular, the Cournot solution with respect to perturbations in the first two moments of two types of parameter defining a linear demand for an industry - one parameter corresponding to ordinate intercept and the other to slope. This analysis immediately gives the old results as a corollary. We also apply the analysis to a cooperative of individuals where there is uncertainty in the return to communal work. In the applications we study the kind of simplifying assumptions necessary and the nature of the results.

M. Miller

Current macroeconomic policy differs from conventional Keynesian demand management in two major respects, namely in the announced objectives of policy and in the means chosen to pursue them. Early in its period of office the present Government indicated that it did not endorse the conventional list of objectives (namely low unemployment, low inflation, positive growth and "external balance"): in committing itself only "to reduce inflation and to create conditions in which sustainable economic growth can be achieved", it implicitly abandoned the level of unemployment and external balance as objectives. in addition, however, the Chancellor announced that "the Government intend to restore a broad balance of power in the framework for collective bargaining". In pursuing these aims the Government decided that there was no place for incomes policies (which "had failed in the past and
had led to distortions in the labour market") and that the instrument of monetary and fiscal policy should be constrained by a Medium Term Financial Strategy to achieve an explicit intermediate target for the rate of growth of a broad monetary aggregate. The initial target ranges for monetary growth (for ZM3) and the projected path for the Public Sector Borrowing Requirement (PSBR) as a percent of output are shown in Figure 1, which is reproduced from the proceedings of the Treasury Committee (1981a).

R. Sugden

This paper explores the impact, on an average degree of monopoly used to analyse the functional distribution of income, of transnational corporations (TNC's) producing in and yet trading between several countries. Cowling (1976), and Cowling and Waterson (1976) consider a closed economy and relate an industry's degree of monopoly (defined as the mark up of price over marginal cost) to its Herfindahl index of concentration, degree of collusion, and price elasticity of demand. Lyons (1979) introduces international trade into the model, allowing for imports from overseas corporations- i.e, firms which do not produce in the domestic market. This ignores the possibility of a transnational corporation, a firm which produces in more than one country, engaging in domestic production and importing from its overseas affiliates. The importance of such trade is difficult to quantify, due to lack of data, but Pani6 and Joyce (1980) assert that the proportion of UK imports of manufactured goods coming.from related enterprises may be similar to that estimated for the USA, namely 50%. Information is available for the car industry; Table 1 shows that domestically producing TNC's accounted for nearly 30% of imports in 1978, and this in spite of the excitement created by the activities of Japanese producers. Clearly, the phenomenon is a significant characteristic of international trade.

M.B. Stewart

Models estimated from censored samples are now familiar in the econometrics literature. For many cases Least Squares approximations to the Maximum Likelihood estimators are now well established. This paper is concerned with a more general problem; that of estimating an equation on the basis of data in which the dependent variably is only observed to fall in a certain range on a continuous scale, its actual value remaining unobserved. The data are also censored in the usual sense in that both end ranges are assumed to be open-ended. A number of Least Squares approximations to the Maximum Likelihood estimator are derived and compared. The results of Greene (1981) on the asymptotic bias of OLS are extended to this case. The question of information loss as a result of the grouping is also considered.

M. Chalkley

Not available online

J. Cable, Alan Carruth & Avinash Dixit

Since the pioneering study of Harberger, monopoly welfare loss has received much attention in the literature. However, no attempt has been made explicitly to incorporate oligopolistic interaction. In this paper we postulate a specific social welfare function and solve directly for the level of welfare (net surplus) under various duopoly equilibria. Our approach departs from the long-standing tradition in industrial economics in which performance (profit) is explained by structure (concentration). We look directly at welfare, and concentration is found jointly with prices, outputs and profits as part of a solution determined by preferences, behaviour (conduct) and technology. Numerical analysis and computer graphics are employed to generate estimates of welfare loss under each oligopoly solution concept, relative to the social optimum, across plausible ranges of underlying cost and demand parameters.

W.H. Buiter & M.H. Miller

The proposition that under a floating exchange rate regime restrictive monetary policy can lead to substantial "overshooting" of the nominal and real exchange rate is now accepted fairly widely. The fundamental reason is the presence of nominal stickiness or inertia in domestic factor and product markets combined with a freely flexible nominal exchange rate. Current and anticipated future monetary policy actions are reflected immediately in the nominal exchange rate, set as it is in a forward-looking efficient auction market while they are reflected only gradually and with a lag in domestic nominal labour costs and/or goods prices. Nominal appreciation of the currency therefore amounts to real appreciation - a loss of competitiveness. Since in most of the simple analytical models used to analyse the overshooting propositions there is no long-run effect of monetary policy on the real exchange rate, any short-run real appreciation implies an overshooting of the long-run equilibrium. The transitory (but potentially quite persistent) loss of competitiveness is associated with a decline in output below its capacity level. This excess capacity is one of the channels through which restrictive monetary policy brings down the rate of domestic cost and price inflation.

J. Peter & D.D. Purvis

This paper presents a model designed to cast some light on the nature of macroeconomic responses to sectoral shocks and to provide a basis for investigation of the interaction between resource allocation and exchange-rate variability. We first develop the implications for the dynamics of the real exchange rate of a Marshallian distinction between short- and long-run supply responses to an endogenous disturbance. Marshall's partial-equilibrium analysis stressed the overshooting of a relative price due to short-run factor fixity; our analysis derives this result in a general equilibrium context. (However, in the general-equilibrium model it is possible that the long-run price response is perverse so that, rather than overshooting, the short-run relative price response would actually be in the "wrong direction".) We then extend the framework to incorporate the behaviour of money prices in the face of these changing relative prices. The model focusses on monetary equilibrium combined with rational speculation; the dynamic behaviour of the nominal exchange rate exhibits a straightforward dependence on that of the real exchange rate. But the latter is independent of monetary equilibrium and, in particular, of any speculative behaviour; any influence of speculators on the nominal exchange rate gives rise to identical movements in the equilibrium nominal price of services.

R.C. Marston

How much difference a flexible exchange rate makes to the economic performance of a country depends significantly on wage behavior. If wages are sufficiently sensitive to exchange rates, flexible rates will exhibit much the same variability of output as a fixed exchange rate regime. Foreign wage behavior is also of key importance, since high wage flexibility abroad can insulate the domestic country from some foreign disturbances regardless of domestic wage behavior, while for other economic disturbances it is the relative degree of wage flexibility that determines the desirability of flexible rates. This paper re examines the choice between fixed and flexible rates taking into account both domestic and foreign wage behaviour. Wage behavior is important to the choice between exchange rate regimes because it determines to what extent a change in the exchange rate also changes the relative prices of foreign and domestic goods. It is primarily through changes in relative prices that exchange rates affect domestic output and employment. Traditional treatments of fixed and flexible exchange rates, of which Mundell's Canadian Journal study (1963) is the best known, assumed that any change in the exchange rate resulted in an equal change in relative prices because both wages and domestic prices were assumed constant. When wages are responsive to changes in the general price level, however, domestic prices respond indirectly to changes in exchange rates, with correspondingly less effect on relative prices. In such circumstances, as shown earlier by Sachs (1980), changes in exchange rates lead to relatively small changes in real output and employment.

D.D. Hester

This paper explores how monetary policy should be conducted when the definition and measurement of money are time varying. It suggests that the recent debate about the desirability of controlling monetary aggregates or nominal interest rates is not helpful in a regime where financial innovations are occurring. The first section argues that money should be defined as immediately spendable (or collected) funds and provides empirical evi—dence that both currency and overnight repurchase agreement and Eurodollar borrowing are more closely related to personal income than are different types of bank deposits. The second surveys the adequacy of policy instru—ments and information available to the Federal Reserve in recent years. The third considers how policy should be conducted in a system that experiences innovations. A filtering approach proposed by Kalchbrenner and Tinsley is recommended. The paper argues that greater and faster data collection are desirable and that even in the best circumstances greater uncertainty about the effects of monetary policy is very likely to obtain. It concludes by recommending that monetary authorities focus on real interest rates, that banks be induced to raise new capital through stock issues, and that the Federal Reserve consider introducing real time reserve accounting.

W. Buiter

The paper presents a general solution method for rational expect-ations models that can be represented by systems of deterministic first order linear differential equations with constant coefficients. It is the continuous time adaptation of the method of Blanchard and Kahn. To obtain a unique solution there must be as many linearly independent boundary conditions as there are linearly independent state variables. Three slightly different versions of a well-known small open economy macroeconomic model were used to illustrate three fairly general ways of specifying the required boundary conditions. The first represents the standard case in which the number of stable characteristic roots equals the number of predetermined variables. The second represents the case where the number of stable roots exceeds the number of predetermined variables but equals the number of predetermined variables plus the number of "backward-looking" but non-predetermined variables whose discontinuities are linear functions of the discontinuities in the forward-looking variables. The third represents the case where the number of unstable roots is less than the number of forward-looking state variables. For the last case, boundary conditions are suggested that involve linear restrictions on the values of the state variables at a future date. The method of this paper permits the numerical solution of models with large numbers of state variables. Any combination of anticipated or unanticipated, current or future and permanent or transitory shocks can be analysed.

M. Salmon

The interface between economic theory and applied econometrics is often one of uneasy compromise, with the pragmatic justification for many accepted procedures resting on a tenuous theoretical base. This paper examines the surprisingly strong arguments that exist in terms of economic theory, for the use of error correction mechanisms in the specification of short run dynamic adjustment. A common heresy exists that while economic theory provides a detailed analysis of comparative static equilibria it can offer no guidance as to the appropriate specification of dynamic adjustment towards an equilibrium. Perhaps in consequence it is not uncommon to find examples where the-necessary dynamic specification is achieved by "tacking" onto an existing equilibrium specification some relatively ad hoc short run adjustment scheme. The intercession of stochastic arguments in this process is confused and critical implications are frequently ignored in practice, but perhaps more importantly there will typically be no guarantee that the dynamic specification is consistent with the prescribed equilibrium. Consistency in this sense requires that the short run dynamic adjustment be directed by the perceived disequili-brium and that eventual convergence to the equilibrium position be ensured. That two separate theoretical arguments, co-exist within the final specification is the root cause of many difficulties both theoretical and empirical.

K.F. Wallis

Procedures for the seasonal adjustment of economic time series have typically been evaluated by studying their effect on a sample of actual time series. Recent proposals for amendments and extensions to existing methods have also been evaluated in the same way. Perhaps this approach is thought to be inevitable given that "there seems to be no ideal process of evaluating a method of adjustment" (Granger, 1978, p.55). In contrast, however, this paper continues a line of research in which the properties of the procedures themselves are studied, in the abstract. It is hoped that this will improve our general understanding of the performance of the existing methods and their extensions, and help to explain the results of the previous empirical studies. The particular procedure considered is the U.S. Bureau of the Census Method Variant X-11 (Shiskin et al., 1967), which is widely used and is generally held to give satisfactory results in the seasonal adjustment of historical data. Our analysis proceeds by linear filter methods. The basic framework of a set of "time-varying" linear filters is presented by Wallis (1982), and further properties of these filters and their components are considered in the present paper. The use of linear methods implies that attention is restricted to the performance of X-11 in additive mode (in which seasonal components are estimated as average differences from, not average ratios to, the trend-cycle), neglecting the option of graduating extreme irregular values.

J. Seade

The principle of horizontal equity, that people with equal (full) incomes should be treated alike by the taxman, is widely regarded in the traditional public-finance literature as one of the central guiding lights of good tax design, "called for by the principle of equal justice under the law" (Musgrave (1976; p.4)). Yet, very little attention has been given to the study of this principle, in particular its necessity or even admissibility within a more general welfare-theoretic framework. The first question that arises is why horizontal equity? Some might answer that there is something to be said for the distribution of welfare in the absence of tax, whose ranking is to be preserved. This line of thought would go along historic notions of justice and deserts, held by some economists and philosophers (e.g. Nozick) but I hope not by too many; such a stand seems, to me, gratuitous, unjustified. Welfare, or at any rate the bulk of formal welfare economics, has to do with actual allocations, with (end-) results. Perhaps changes in these results should in some cases be made to matter, or comparisons with other groups or countries. But I see no reason why the comparison with the "primitive state" should be given a central role in choosing policy. All potential distributions of income and of tax burdens should be treated symmetrically, just as possibilities in the menu that they all are. Accordingly, if horizontal equity is to arise as desirable, it must be as a result of other underlying criteria which we may agree upon as constituting the social good.

Frank Hann

That a society of greedy and self seeking people constrained only by the criminal law and the law of property and contract should be capable of an orderly and coherent disposition of its economic resources is very surprising. Marx called such a society anarchic and so it is. Yet ever since Adam Smith economists have been concerned to show that such anarchy is consistent with order and indeed with certain desirable outcomes. Smith proposed that the market system acted like a guiding - an invisible - hand. It was invisible since in fact there was no actual hand on the rudder. The metaphor which he chose was exactly apposite. Two hundred years on, the basic theory has been much refined, and we know a good deal more about those instances where the hand trembles or fails. Yet there is no agreement on some of the fundamental ingredients of the story and there is also much which we simply do not understand. In this lecture I shall give my evaluation of our present theoretical state in this matter and draw a number of lessons of a somewhat practical kind.

John Cable & Manfred J. Dirrheimer

Multidivisional firms account for a clear majority of the hundred leading companies in America and Britain, and significant proportions elsewhere in continental Europe.(1) Thus a sizeable proportion of total economic activity in Western, developed economies now takes place within the quasi-autonomous operating divisions of large industrial organizations, co-ordinated via a network of general offices. The multidivisional organization is widely accepted to be an American innovation (Chandler, (1966)).(2) Its international diffusion at first sight appears to conform to the 'culture free' theory of organization : the idea that organizational and institutional patterns are converging under a common logic or work and administration, in response to technological imperatives, and increasingly independent of cultural factors (e.g. Kerr, 1960; Harbison and Myers, 1959). In line with this view the European multidivisional development may be seen in the context of Servan-Schreiber's "American Challenge" (1968) : the revitalization of European economies with the aid of superlative American organisational methods. But as Child and Kieser (1979) point out, an alternative school of thought believes socio-cultural influences will be strongly manifested in patterns of organisational behaviour (eg, Crozier, 1964; Malinowski, 1960). And on closer inspection non-trivial differences are discernible in the institutional frameworks within which multi-divisionals have developed in different countries, and arguably in the nature of the multinationals themselves.

A Snell

Determined schemes are considered because of their overwhelming popularity. An unbiased and optimal (in the sense of minimum forecast error variance) extrapolative predictor is also described and used in the analysis because it provides a useful benchmark as the 'best' extrapolative proxy available. Section 4 examines the implications for estimation of using these three extrapolative proxies in the context of a simple two equation macro model due to Wallis (1980) and section 5 extends the model to include dynamics. The simple two equation model used bears a very close resemblance to the two main equations of the condensed St. Louis model described by Anderson and this, with its linearity and simplicity make it an ideal structure in which to house the analysis. Section 6 gives some numerical comparisons of multiplier error using the method under feasible values for the parameters. Section 7 discusses further problems that arise using the algorithm for policy analysis even when a set of consistent estimates is used. Focus here is on the seriousness of ignoring mistakes during simulation by substituting actual outcomes for expectations and on problems raised by Lucas' critique of policy evaluation (Lucas. 1976 ). Section 8 provides a summary and conclusion.

C.D. Fraser

Extant theoretical studies of goodwill have, with one exception, explored the relationship between advertising and sales. We construct a simple model of the firm's pricing and quality control when it loses goodwill, hence future sales, should it produce defective commodities. Given a deterministic relationship between defectives and the future demand schedule, the impact of the firm's time preference and record of producing defectives upon its current pricing and quality control is examined together with the conditions for the firm to be driven from the market. Risk is then introduced into the relationship between defectives produced and future goodwill loss and the consequences for price and quality of increased risk are examined.

I. Tonks

This paper is about learning. It illustrates how in a two period allocation problem with uncertainty in each period, an economic agent's decisions are influenced by the knowledge that he is able to learn about the uncertainty. The time periods are linked through the learning process of the economic agent. The problem to be analysed is that faced by a firm deciding whether or not to invest in a new technology or production process, whose returns are not known with certainty. Because of the two period environment, the firm is able to experiment with the new process in the first period, and observe the results before making another investment decision at the beginning of the second. Given the opportunity for learning, how will this affect the decision of the firm in the first period?

G. Stewart

In a recent survey,. Estrin and Bartlett c19n50) argue that one of the weaknesses of the existing empirical literature on the Yugoslav labour market is its failure to directly test the central predictions of theoretical models of labour-managed firms (Lrs). Rather, the focus has been on indirect issues such as income dispersion and labour mobility. This paper considers one of the direct theoretical predictions, namely how the enterprise adjusts its employment level in response to short-run variations in demand. Short-run employment functions are derived and then estimated.. at the industry and aggregate levels using Yugoslav quarterly data. The results are used first of all to examine competing LMF models, secondly to look for any effects of the institutional reforms that took place in 1972 and, finally, to make comparisons with a capitalist economy, the U.K.

P. Stoneman

The debate on the impact of technological change on employment has a long history. The current concern with the topic has been prompted by the realisation of the potential of microelectronics. This realisation has generated a number of commentaries (e.g. Freeman (1978), Barronand Curnow (1979), Jenkins and Sherman (1979)), the major predictions of which are that the introduction of new technology will lead to unemployment. A rider to this is that the faster new technology is introduced (ignoring international competitive aspects) the higher will be the unemployment resulting. Unfortunately much of this literature is either devoid of theory, or if theory is included it is implicit rather than explicit. The outcome of this is that much of the literature ignores what Heertje (1977) calls compensation effects. In essence, if a labour saving technology is introduced in one sector of the economy there may well be automatic responses in the economy that lead to increased employment elsewhere. The purpose of this paper is two fold: (1) To investigate the time path of employment after the introduction of new technology taking account of compensation effects. and (2) To investigate, whether, once these compensation effects are allowed for, a higher speed of diffusion does mean lower employment.

C.J. Ellis

Most macroeconomic models with quantity rationing regard agents as very naive, for despite successive periods of rationing they continue to behave as if they have had no such experience. This behaviour is logical since quantity adjustment is assumed costless and frictionless. However if we are to challenge the validity of the price tatonnement it is perhaps strange to allow free frictionless quantity adjustment. In this model quantity adjustment costs are introduced in the form of resources consumed in the adjustment process. Agents are aware of adjustment costs, but have to state initial transaction demands before the state of the world is known, consequently they base initial trades upon the maximisation of Von Neumann-Morgenstern objective functions. On learning the true state of the world agents then adjust optimally away from their initial trade vector.

K.G. Cowling & I. Molho

Whilst a considerable amount of empirical work has been done on the relationship between wage levels, the degree of industrial concentration and unionism very little has been done on wage share. This is a rather surprising state of affairs given that a positive relationship between wage levels and both concentration and unionism need not imply that the functional distribution of income between labour and capital is affected by either variable. Indeed such observations are quite consistent with the view that greater concentration implies a lower share of value-added going to workers and that this outcome cannot easily be averted by union action. Whether or not such a view is tenable requires a direct examination of wage shares and provides the motivation for this paper

K.F. Wallis

Dynamic models of the relations between economic variables often rest on theories about how unobservable expectations are formed. In this paper the "adaptive expectations" and "rational expectations" hypotheses are compared and contrasted. The main distinctions concern the size of the information set on which expectations are based, and the optimality or otherwise of expectations, given that information set. Expectations that are optimal with respect to the given information may be defined as rational. With this definition, some bivariate dynamic rational expectations models are presented, incorporating the appropriate time series forecasting rules for either a single forecast or an infinite sum of discounted forecasts. Model identification problems are discussed, and it is shown how they may be resolved by joint estimation of the bivariate process.

C.J. Ellis

In this paper we combine several strands of basic economic theory to provide a structure for analysing bilateral bargaining in the labour market. Using a quadratic revenue function and a Cobb-Douglas utility function largely for expositional ease, we derive isoprofit and isoutility cuves for one firm and union respectively. These curves are used to derive pireto efficient bargaining loci after the manner of Cartter (1959). We then introduce the concept of a bargaining core and demonstrate how different cares deriving from different preferences may be categorized. We then consider four particular solutions to the bargaining process, the monopolist, Nash and "market power !' outcomes. 'The comparative static properties of these solutions are then examined. Finally in an appendix we consider the general case of the problem and demonstrate which aspects of our earlier analysis are not dependent upon the particular functional forms.

W.H. Buiter & D.D. Purvis

This paper examines three possible sources of "de-industrialization" in an open economy: monetary disinflation, an increase in the international price of oil, and a domestic oil discovery. The analysis is conducted using a model which incorporates different speeds of adjustment in goods and asset markets; domestic goods prices respond only sluggishly to excess demand while the exchange rate (and hence the price of imported goods) adjusts quickly. Monetary disinflation leads to reduced real balances, higher interest rates, and a lower nominal exchange rate. In the short-run this causes a real appreciation and a decline in domestic manufacturing output. Perhaps surprisingly, an increase in world oil prices can create similar effects even for a country which is a net exporter of oil. Although the direct effect of an oil price increase for such a country is an increase in the demand for the domestic manufacturing good, that effect may be swamped by a real appreciation created by the increased demand for the home currency. This corresponds rather closely to the recent experiences of several oil and gas exporting countries, and is commonly referred to as the "Dutch-Disease". In our analysis, however, this is only a transitional phenomeon. Domestic oil discoveries, though necessarily finite in nature, generate permanent income effects in demand which last beyond the productive life of the new oil reserve. Initially, current income is above permanent income, leading to an improvement in the trade account; this is eventually reversed when permanent income exceeds current income. A wide variety of output response patterns are possible.

M. Salmon & K.F. Wallis

Most macroeconometric models are built with the object, wholly or partly, of providing forecasts. The term "forecast" covers three rather distinct types of exercise: (a) genuine "ex-ante" forecasts, in which the model user predicts the actual future development of the economy, and for which projected future values of input variables must be supplied; (b) "ex-post" forecasts, in which the model user eliminates the effects of error in the projections of the input variables by calculating "forecasts" over some period in the recent past, given the actual observed values of the input variables; (c) hypothetical forecasting or policy analysis exercises, in which the model user estimates the response of the economy to alternative scenarios, that is, to alternative values of policy instruments or tc different kinds of exogenous shock. In each case there is interest in evaluating the results of the forecasting exercise, not only for its own sake but also to provide information that is useful in model validation, that is, in checking the specification of the model. Of course the various forecasting exercises and their respective evaluations are not necessarily independent of one another, for example it is often said that in order to be useful in policy analysis a model should have a good real-world forecasting record over a period that was not part of the estimation period, so that it might also be expected to provide "good" estimates of responses to policy changes.

W.H. Buiter & M.H. Miller

A model of Dornbusch is adapted to analyse the consequences for output and competitiveness of certain aspects of the U.K. government's medium term financial strategy and some other policy actions. This includes the announcement of a sequence of reductions in the target rate of monetary growth, an increase in VAT and a move to make the U.K. banking system more competitive. The impact of a discovery of domestic oil is also modeled. We consider the consequences of varying the degree of inertia in the underlying rate of inflation and of different rates of international capital mobility. A real interest rate equalization tax stabilizes the real exchange rate. but not the level of output. Once and for all changes in the level of the nominal money stock to accommodate changes in the demand for real money balances prevent 'overshooting' of the real exchange rate and fluctuations in output. It may, however, undermine the credibility of an announced policy of monetary disinflation.

T. Persson

Using a general equilibrium model with maximising agents, the transmission of disturbances under alternative exchange rate regimes are analysed and compared. Expectations of future prices and monetary policies are crucial to the analysis. Apart from specific results, the paper also provides an illustration of two more general points. First, conclusions from the analysis of globally fixed exchange rates or general floating, do not necessarily translate to the intermediate case of pegging in a world of otherwise floating rates. Second, the assumptions about the precise way that a fixed exchange rate is stab-ilized are critical for the results.

C.D. Fraser

Goldman's model of flexibility and portfolio choice with random preferences is extended to the case of two assets alternative to money, The asset highest yielding to maturity, but least flexible, is ex ante divisible but ex post indivisible. This asset is always chosen alongside money initially, irrespective of whether or not it is redeemable prematurely. When it is not so redeemable, transparent restrictions on asset prices are found to ensure that the other non-money asset is also held initially, and with a positive probability of premature redemption. When it is prematurely redeemable, these same restrictions ensure positive probability of this occurring

P.A. Weller

It is possible to identify two distinct approaches to the problem of haw to set pricing rules for public enterprise. The first, typified by the paper of Baumol and Bradford (1970), regards the problem as identical to that of setting optimal taxes. The second, first expounded in the paper of Boiteux (1956), recognises that in practice, and for a variety of reasons, governments impose budget constraints upon public enterprises, and that pricing of public sector outputs is quite likely to be determined independently of the tax structure. Our aim is to focus on the latter approach, paying particular attention to an aspect of the problem which has been somewhat neglected. We wish to take account of the fact that when a public enterprise adjusts prices, there are general equilibrium repercussions which take place in the private sector. These effects can be neglected by resorting to the expedient of assuming constant producer prices. This assumption would be inconsistent with the existence of pure profit in a competitive private sector, which is one of the cases we analyse. We consider also the implications of having a monopolistically competitive private sector, and as a polar case the situation where a single many-output monopolist operates in the private sector.

P.A. Weller

This paper is a continuation of work by Hildenbrand (1971) and Bhattacharya and Majumdar (1973) (henceforth B - M). They consider pure exchange economies in which both preferences and endowments are random. Hildenbrand examines the convergence behaviour of price vectors for which total expected excess demand is zero. He shows that as an economy increases in size, if agents are stochastically independent, then the limit of such a sequence of price vectors is an equilibrium price vector in a suitably defined limit economy. B - M consider the case where prices guarantee equilibrium in almost all states of the world. In other words, market-clearing prices are treated as random vectors. Iii particular, B - M show that under suitable assumptions there will exist a sequence of such random price vectors displaying almost sure convergence to any equilibrium price vector in a deterministic limit economy. As in the case of any convergence result, the speed of convergence is a natural question to investigate and we will be concerned in this note with establishing a result on the speed of convergence of the random price vectors as the economy increases in size. In order to provide a characterization of the result in a simple case, let us suppose that the deterministic limit economy has a unique equilibrium pc) . Assume also that the random economy consists of individuals with the same independently distributed random preferences and endowments. Then our result states that the probability that the random equilibrium price vector is further from pi, than some distance which converges to zero slower than N-1/2 (where N is the number of agents in the random economy) is less than a term which converges to zero faster than N-1/2. In the more general case we consider both distance and probability will depend upon the proportions of different types of agent in the economy. In addition, the distance will also depend upon the rate at which the proportions of agents of different types approach their limiting values.

J.A. Brack & K.G. Cowling

Over this century, the average level of weekly hours worked by the labour force as a whole has shown a fairly consistent decline. For example, from 1900. to 1979 weekly hours for the whole labour force fell from 53.2 to 39.6. However, closer examination shows that this decline is largely due to changes in the composition of the labour force, in particular, to increases in the ratio of female to male workers, and in the ratio of mhits-collar to blue--collar workers. Upon examining a group which has remained relatively homogenous through time such as production workers in manufacturing, one finds a different pattern. Since 1945, weekly hours for this group have scarcely changed; in a period of steadily rising real wages it is the failure to decline that must be explained. We attempt to provide such an explanation in this paper

J.M. Ellis

The economic debate about European monetary union is often conducted as if the problem were one of choosing between a fixed or a flexible exchange rate system (for example, see Sirc (1977)). This approach has been largely unsatisfactory, because it fails to get to grips with the main characteristic- of monetary union, which is neither of these two extremes, but is a combination of both with pegged exchange rates within the union, and with the union jointly floating against the rest of the world. It is clear that most models analysed in the literature, whether small-open-economy models or even two-country world models, are unable to get a handle on this special feature

A. Smith

This paper applies simple duality theory to integrate some elements of the theory of public finance into the theory of economic policy in open distorted economies. Results on the effect of reductions in distortions are derived which generalize the results of Dixit (Journal of Public Economics, 1975). Extensions of the theory of imiserising growth are made, focussing on the role of shadow factor prices, following Bhagwati, Srinivasan and Wan (Economic Journal, 1978). The results most relevant for piecemeal policy making (Dasgupta and Stiglitz, 1974; Findlay and Wellisz, 1976; Srinivasan and Bhagwati, 1978; all Journal of Political Economy) are shown to hold strictly only in small open economies in which all goods are internationally traded.

B. Lockwood

It is well-known that it may be possible to attain a Pareto-efficient allocation in an economy with consumption externalities by the imposition of suitable excise taxes and subsidies, although the imposition of such taxes may not be sufficient. In addition, the structure of these Pigovian excise taxes is familiar; they are levied only on the externality-causing goods, and in general will differ across individuals. In practice, however, it is usually prohibitively costly to attempt to distinguish perfectly between individual externality creators, whereas it is often feasible to impose ordinary commodity taxes on externality-creating goods as a 'second-best' corrective measure. An example that is often cited is the case of pollution from the internal combustion engine; it is infeasible to monitor the pollution emission of each separate car owner and tax him accordingly, but it is quite possible to tax petrol at a rate which is uniform across consumers.

A.J. Murfin

In econometrics, the consumption function has been subject to continual debate and respecification. This paper reinvestigates some aspects of the relation between incomes and consumption behaviour in the UK 1963-76, and, in particular, focuses on the study by Klein, Ball et al (1961) which attempts to take account of the role of income distribution. The questions of parameter stability and misspecification are considered in detail, and the conclusion is reached that a correct specification of the models presented below has yet to be found.

A.K. Dixit & V. Norman

Most propositions on the gains from trade with many consumers consider only lump-sum transfers as redistributive tools. It is widely believed that nothing can be said unless such transfers are possible. In this note we show that such a belief, and the consequent pessimism concerning the applicability of welfare propositions in trade theory, are groundless. Indirect consumer taxes are sufficient to make free trade Pareto-superior to restricted trade under the same conditions that would make free trade better than restricted trade in the one-consumer case, i.e. that there be no terms-of-trade gain from trade restrictions. This extends some earlier work in Dixit and Norman (1980, ch. 3). The essence of our argument is very simple. Suppose the government can levy taxes on all commodities entering individual consumers' utility functions, i.e. on all goods and all factors. Then, by appropriate choices of tax rates, the government can leave all consumer prices unchanged when moving from restricted trade to free trade. That will leave all consumer demands and utility levels unchanged. If such a scheme is feasible, in the sense that it gives non-negative government revenue, it means that all consumers can be made as well off with free trade as with restricted trade, thus proving weak Pareto-superiority of free trade. If government revenue is strictly positive under such a scheme, free trade can be made strongly superior simply by lowering the consumption tax rate on some good that all consumers demand in a positive quantity.