Manage Research Papers

W.H. Buiter & J. Eaton

The demise of Bretton Woods and of the short-lived Smithsonian agreement has raised questions about exchange rate management by monetary authorities acting in isolation from one another. For instance, will individual monetary authorities have an incentive to stabilise the exchange rate? To what extent will monetary actions abroad disrupt domestic monetary policy? What are the gains from co-ordinating monetary policy? The problems that arise when different agents pursue independent policies in interdependent economies have been explored by a number of authors. Aoki (1976), Cooper (1969), Hamada x976),-Allen and Kenen (1980), McFadden (1967), Patrick (1973), Kydland (1976) and Pindyck (1976), among others, have made significant contributions. Different authors have focused on different aspects of decentralized policy formation. One purpose of this paper is to provide a general discussion of decentralization. In part 2 we provide a theoretical framework for analysing policy formation among independent authorities operating in an interdependent environment. We distinguish three dimensions of the problem and discuss, by way of example, the Mundell (1962) assignment problem in terms of our typology. We show that instability in Mundell's context does not arise because different authorities are assigned different and inappropriate targets, but because they fail to formulate strategies in a co-operative way.

N. Liviatan

Anti-inflationary monetary policy faces special problems under flexible exchange rates and free capital movements. While this policy might be quite effective in reducing inflation it is also likely to create changes in relative prices which can be undesirable. In particular the short run capital imports which are induced by the restrictive policy may bias the deflationary effect towards the exchange rate and thus lead to its appreciation in real terms. While this phenomenon may be temporary it may cause sufficient concern in an export oriented economy. A situation of this sort arose in the Israeli economy in the second part of 1978 when restrictive monetary policies led to a considerable (real) appreciation of the exchange rate. This has been followed by various restrictive measures on the movements of short run capital imports in order to protect the interests of the exporting industries which are given top priority in the Israeli economy.

Maxine Berg

The putting out or domestic system, once a traditional subject of research among students of the origins of the Industrial Revolution, has recently been revitalised and transformed into a supposedly new subject with the new name of 'proto-industrialisation.' Detached from its earlier mercantile and urban associations and its traditional place in the historians' analysis of the breakdown of guild restrictions, the phenomenon has recently been placed in the context of the study of demographic and agrarian change.1 Proto-industry, or rural industry practiced in conjunction with agricultural pursuits, has by its very name been identified as the source of industrialisation, and has been described as the great organisational innovation of the pre-industrial period. Great marvels of industrial organisation might have been achieved in the large urban and state enterprises of the Seventeenth and Eighteenth Centuries. And certainly the naval shipyards and arsenals, royal textile and tapestry works, glass and paper works became known for their size, division of labour and industrial discipline. But the increases in productivity and mass production in these exemplary preindustrial works were still, it is claimed, as nothing beside the remarkable effects of the modest but all pervasive domestic industries.

M. Harrison

In trying to sort out some of the economic issues raised by Soviet experience before and during the last war, I thought that some clarification might be obtained from the Feldman model of expanded repro-duction. The Feldman model has often been used to address the issues of rapid Soviet industrialisation and of priority to heavy industry. It can be developed to illustrate the choice of priorities in resource mobilisation for war. In my view the significance of the results is historical and, for reasons given below, I do not attribute to them any contemporary or future significance whatsoever.

D. Leech & J Cubbin

A large number of empirical studies have examined the question of the divorce between ownership and control as to either its extent (following Berle and Means (1932)) or its implication*, for behaviour (following Marris (1964)). These studies have used different samples, different variables and have employed very different criteria to decide on the location of control within each corporation (see Table 1). In addition there appears to be considerable confusion over nomenclature, in particular the meaning of the phrase "owner-controlled". It is therefore not surprising that they come to different conclusions on both questions.

M. Homma

It has long been recognised that a consumer's preference or a firm's production possibility is itself affected by the allocation of resources among other consumers and firms. The presence of such dependent effects, usually referred to, as "externalities" shows that not all the economic behaviour is mediated through the market price system. While the problem of externalities has received increasing attention, analysis of its effects on the stability of a competitive economy appears to have suffered comparative neglected.

J. Seade

A well-known result of Mirrlees (1971; proposition 3) says that the optimal marginal rate of income tax is non-negative throughout the scale, for the model he considers and given only a mild regularity condition on preferences. That is, the burden of taxation unambiguously increases with earnings. This result is very useful. The model to which it applies is admittedly special (identical leisure/consumption preferences), but it is reassuring to know that no further specialisation of assumptions is required to reach such a basic conclusion: incentive effects from taxation will never turn the desired pattern of redistribution on its head, at any level of income.

C.J. Ellis

In most temporary equilibrium models the market operates as follows. At the start of the market period the relative price vector is announced. Agents (consumers and producers) then compute and announce their initial market offers based upon Walrasian supply and demand curves. If the relative price vector is not the Walrasian constellation then some market offers go unsatisfied and markets clear on the "short side". Agents who face a quantity constraint on one market adjust their behaviour upon others in an attempt to achieve levels of transactions consistent with the solution to their constrained utility maximisation problems. However this approach assumes sufficient flexibility within each market period to allow behaviour in each market to adjust completely to the quantity constraints actually experienced in other markets in the same period. It can be argued that such flexibility is less than perfect, particuarly in the upward direction. In that case, agents will have to base their initial offers not merely on the fixed prices, but also upon their expectations of quantity constraints in other markets. It is these offers that are confronted in each market within a market period. They can be revised downwards, but not upwards, if the actual quantity constraints in other markets turn out to be different from those expected. With this mechanism, each period's markets clear by the familiar quantity adjustment. This will be shown to generate three new types of temporary equilibria termed "expectational" Keynesian, Classical, and Repressed Inflation. These new temporary equilibria will be shown to have interested intra period adjustment properties.

P. Michel

The recent development of macroeconomic models with fixed prices has shown the importance of considering the type of unemployment in the economy, since this determines the effects of economic policy decisions. These models differ from the Keynesian approach by the hypothesis of rigidity of all prices, by the fact that equilibrium results from a tatonnement on quantities, and by the behaviour of firms whose role is as passive as that of households: firms and households are symmetrically treated. The most active role is that of the auctioneer who instead of adjusting prices, adjusts quantities. Keynesian equilibrium is defined by 'Aggregated Demand and Aggregate Supply Functions" and given an aggregate production function, it corresponds to a determined price level. But given fixed prices, there is generally no equality between production and aggregate supply and demand.

M. Homma

Within a two-class growing economy with public capital, a comparative dynamic analysis of differential shift from a wage income to a corporation profit tax is carried out to appreciate the distributional effects of tax substitution on capitalists and workers, and to set out the conditions which determine the magnitude of the tax shifting. It is also shown that the differential tax substitution induces decreased saving and capital shallowing lowering, the private capital/labour ratio, and that a higher rate of a corporation profit tax increases the tax shifting and vice versa in the steady state equilibrium with both classes existing.

Robert F. Engle, David F. Hendry & Jean-Francois Richard

In spite of the importance of exogeneity in econometric modelling, an unambiguous definition does not seem to have been proposed to date. This lack has not only hindered systematic discussion, it has served to confuse the connections between "causality" and "exogeneity". Moreover, many existing definitions have been formulated in terms of disturbances from relationships which contain unknown parameters, yet whether or not such disturbances satisfy certain orthogonality conditions with other observables may be a matter of construction or may be a testable hypothesis: a clear distinction between these situations is. essential. To achieve such an objective, we formulate definitions in terms of the distributions of the observable variables, distinguishing between exogeneity assumptions and causality assumptions, where causality is used in the sense of Granger (1969). Following in particular Koopman's pioneering article (1950), exogeneity will be related to the statistical completeness of a model. In short, a variable will be considered exogenous for a given purpose if a statistical analysis can be conducted conditionally on that variable without loss of relevant sample information.

C.R. Nelson & Hejoon Kang

Econometric analysis of time series data is frequently preceded by regression on time to remove a trend component in the data. The resulting residuals are then treated as a stationary series to which procedures requiring station-arity, such as spectral analysis, can be applied. The objective is often to investigate the dynamics of transitory movements in the system; for example, in econometric models of the business cycle. When the data does consist of a deterministic function of time plus a stationary error then regression residuals will clearly be unbiased estimates of the stationary component. However, if the data is generated by (possibly repeated) summation of a stationary and invertible process then the series cannot be expressed as a deterministic function of time plus a stationary deviation, even though a least squares trend line and the associated residuals can always be calculated for any given finite sample. In a recent paper, Chan, Hayya, and Ord (1977)(hereafter CHO) were able to show that residuals from linear regression of a realization of a random walk (the summation of-a purely random series) on time have autocovariances which for given lag are a function of time and therefore that the residuals. are not stationary. Further, CHO established that the expected sample autocovariance function (the expected autocovariances for given lag averaged over the time interval of the sample) is a function of sample size as well as lag and therefore an artifact of the detrending procedure. This function is ;characterized by CHO in their Figure 1 as being effectively linear. in lag (although the exact function is a fifth degree polynomial) with the rate of decay from unity at the origin depending inversely on sample size. The first differences of a random walk are, of course, stationary with zero autocovariance at all lags. They concluded that "the low frequency portion of the spectrum will be exaggerated and the high frequency portion attenuated" relative to the appropriate first difference transformation.

R. Cornes

The objective of this paper is to analyse some issues raised by the exogenous determination of factor prices in an open economy. To do this, we exploit the tools of duality analysis, particularly the restricted profit function. Some of these issues have been discussed by Brecher (1974) and Schweinberger (1978). Our treatment is closer in spirit to that of Schweinberger, which restricts attention to the small country case and which has n produced commodities. The present analysis considerably simplifies derivation of existing results, extends the discussion to consider the effects of exogenous commodity price changes on the system, and looks at an instructive special case.

R. Cornes

Economists have long recognised that the actions of individual agents may affect the decisions or the well being of others in important ways without necessarily being mediated through the market. This recognition has spawned a large and evergnowing literature. When modelling the behaviour of consumers, this literature has generally used the direct utility function as the basic tool of analysis. In this paper, we discuss the use of alternative, dual formulations of consumer behaviour. In Section III we discuss the use of the minimum expenditure function and of the indirect utility function in modelling the behaviour of an individual consumer who acts as a price taker in markets for tradeable commodities and as a quantity taker in his consumption of certain environmental commodities. Subsequently, we look at a simple model involving reciprocal externalities which has recently been the subject of discussion by Diamond and Mirrlees (1973), Sandmo (1978), Sadka (1978) and Sheshinski (1978). Part of this literature deliberately abstracts from real income effects, and in discussing this part we find the minimum expenditure function and its associated compensated demand functions particularly fruitful. It is our belief that the dual approach serves to clarify a number of issues in this area.

R.S. Morland

During the last fifteen years or so, the role of population growth in the development process has received increasing attention. This has been manifested in the literature in three broad areas. In the first, the effects of rapid population growth on the growth of income have been studied with the use of simulation models (Enke (1971) (1974), Simon (1976)) which sometimes include endogenous population growth (Suits et al (1975), Hazledine and Moreland (1977)). In general these models show that per capita income could be increased by reducing the birth rate. However, they are often either unsophisticated in terms of the demographic structure (Suits et al (1975)) or the coefficients are imposed a priori (Enke (1971)) or key demographic rates are imposed exogenously (Simon (1976)) so that no feedback exists between the economy and demographic variables.

N.H. Stern

The basic theorem of welfare economics tells us that, under standard assumptions, the first best can be achieved as a competitive equilibrium with zero taxes on commodities and the appropriate lump sum tax for each individual. The calculation of the appropriate set of lump sum taxes requires information on individuals which they have an incentive not to reveal - for example Mirrlees (1974) has shown that, where individuals differ in skills it is likely that the first best will require utility to decrease with skill. It is then natural to ask how well one can do with a tax system which does not discriminate between individuals. This has led to the theory of optimum income taxation where we assume that only income is observed and all individuals face the same income tax schedule. This schedule is then chosen to maximise welfare.

R.F. Engle

In order to assess the validity of the specification of an econometric model, it is useful to have a variety of diagnostic statistics which might provide evidence on the existence and possibly the type of misspecification involved. One source of diagnostics is hypothesis tests where the model under consideration is taken to be the null and the alternative is some generaliation. A particularly attractive approach is to construct optimal test statistics against a variety of specific alternatives. In this way it is possible to have reasonable power against a collection of interesting alternatives, although when looking at sets of non-independent statistics, one must be cautious about interpretations of the overall size of the test.

F.E. Kydland & E.C. Prescott

Within a rational expectations framework, policy has effect if it alters relative prices and policy evaluations are exercises in modern public finance theory. The time inconsistency of an optimal taxation plan precludes the use of standard control theory for its determination. In this article recursive methods are developed that overcome this difficulty. The technique is novel in that the constraint set as well as the value function are determined recursively. Even though there is little hope of the optimal plan being implemented - because of its time inconsistency - we think the exercise is of more than pedagogical interest. The optimal plan's return is a benchmark with which to compare the time consistent solution under alternative institutional constraints which society might choose to impose upon itself.

A. Holly

In applied work in macroeconomics using simultaneous equation systems relationships-between variables are sometimes described by means of a triangular model. However, in a simultaneous equation spirit the a priori assumption of full recursivity is typically not made. The purpose of this paper is to suggest a recursiveness test for models which are already written in a triangular form. It is a score test (Rao (1948)) applied to the concentrated likelihood function, which is equivalent to Neyman's C(a) test (1959). As indicated in Holly (1978) this type of procedure is quite general and can be applied to a large variety of tests of model specification. It is based on estimators of the model under the null hypothesis, which are, in the particular case of the recursity test the O.L.S. estimators of each structural equation.

J. Cable & F.R. Fitzroy

Somewhere between traditional entrepreneurial firms and worker-cooperatives on the spectrum of alternative firm types lie a range of industrial partnership models, involving varying degrees of worker participation in decision-making, and/or profit-sharing. In West Germany there are known to be more than seven hundred firms in this category. Many belong to Arbeitsgemeinschaft zur Forderung der Partnerschaft in der Wirtschaft e.V. (AGP) headed by Michael Lezius. Guski and Schneider have recently published a register of these firms in collaboration with Lezius.11 Their analysis reveals a variety of legal configurations heavily influenced by tax and company law. The size of employee profit and stock shares also varies greatly, most being relatively small. About half the firms in the sample have instituted some form of employee participation in what is normally regarded as managerial decision making. The schemes introduced by AGP members range from employee control in a few worker-managed co-operatives among the many small firms to minimal consultative and informative practice in the more sparsely represented larger firms.

M. Harrison

What is primary socialist accumulation? The idea of 'primary' (sometimes called 'primitive') socialist accumulation was first developed by Preobrazhensky, the Bolshevik economist and spokesman for the Trotskyist opposition in the USSR in the 1920s. The idea was based on an analogy with Marx's writing on primary capitalist accumulation. Primary capitalist accumulation meant the initial phase of growth in which the capitalist elements of the economy developed at the expense of the pre-capitalist sector. With 'capitalist' changed to 'socialist' Preobrazhensky had the idea of primary socialist accumulation, clearly relevant to the USSR in the 1920s

J. Cable

Merger activity in West Germany remained at a low level in comparison with most industrialised countries until the late nineteen-sixties, but has increased very rapidly since then.1 Mergers notified to the Federal Cartel Office under §23 of the 1958 Act Against Restraint of Competition (GWB) averaged around 40 per year up to 1968. The number then rose to a peak of 305 during a merger wave which occurred in 1969-71, contemporaneously with similar waves in a number of other countries and especially the USA. Thereafter, despite the introduction of merger controls under GWB from 1974, the merger rate has grown dramatically bringing the annual total to 554 in 1977, nearly twice the level of the previous, 1970 peak. Admittedly these statistics exaggerate the true increase in merger activity for two reasons. First, the coverage of the Cartel Office series is complete only after 1973, and was most incomplete before 1967, when serious discussion of merger controls began. Secondly, there has been a marked increase in the acquisition of smaller companies since 1973, due to the existence of a size threshold for immunity from control in the merger policy implemented by the 1973 amendment to GWB. Nevertheless it is clear that a significant increase in merger activity has occurred. This was viewed with some concern in the second report of the Monopolies Commission (MK),2 and a revision of merger controls is expected in the forthcoming (fourth) amendment to GWB.3

J. Cable

West Germany's recovery and growth to a position of economic leadership over most other industrialised nations appears to have been achieved without the aid of widespread merger activity, at least up to the late nineteen-sixties. Although the official statistics understate the true number of mergers in the period, there is no evidence of significant merger waves in the fifties and sixties comparable with US and UK experience. However, Germany did share with almost all developed market economies the experience of a merger wave : between 1969 and 1971, when there was a distinct surge in the level of merger activity. Thereafter, German experience diverged once again from that of most other countries, with a continuing rapid growth of mergers throughout the 1970's.

R. Cornes

Until the recent revival of interest among macroeconomists whose work is surveyed by Malinvaud (1977), the systematic analysis of quantity-constrained behaviour in a multimarket setting has attracted surprisingly little attention since the classic survey by Tobin (1952). The few exceptions, in addition to the works cited by Malinvaud, are the discussion by Gould and Henry (1967) of price control, the systematic analysis by Pollak (1969) of conditional demand functions, and a recent attempt by Howard (1977), not entirely successful, to extend the scope of the earlier treatment of consumer choice under quantity rationing by Tobin and Houthakker (1951). This paper exploits the minimum expenditure function approach to simplify the analysis of quantity-constrained consumer choice. Section I introduces the "restricted" minimum expenditure function and "restricted" compensated demand functions, which provide the basis of our approach. While our treatment of the formal rationing problem is similar to that of Neary and Roberts, we are also concerned to stress alternative applications of these functions, particularly to situations in which the quantity constraints are interpreted as externalities or public goods. Section II discusses applications of the analysis to a generalisation of the Tobin-Howthakker analysis and to the price control problem raised by Gould and Henry. Section III comments on the "virtual price system" used by Neary and Roberts, and draws attention to the formal similarity between the rationing and externality problems. Finally, section IV takes up the problem of price control in a general equilibrium context.

P.A. Weller

The relationship between the core of an exchange economy and competitive equilibrium is well-known from the work of Debreu and Scarf 1-1901. If we define a group of individuals of the same type to be a group with the same preferences and endowments, Debreu and Scarf have shown that if the' are a fixed number of types in an economy, and if the economy is expanded by increasing equal numbers of each type, then the set of core allocations converges to the set of competitive allocations. There are a number of different ways in which we can introduce uncertainty into an exchange economy. The most straightforward is to assume that there is a given set S of possible states of the world We introduce state-contingent markets for each good and simply reinterpret the Debreu-Scarf theorem. Individuals of the same type now have the same preferences for certain outcomes, the same probability distribution over states of the world, and the same distribution of endowments. In addition they are assumed to maximise expected utility. A coalition is said to block an allocation if a redistribution of endowments within the coalition leaves at least one member of the coalition with higher expected utility, and none with lower. The set of core allocations again converges to the set of competitive allocations.

T. Hazledine

I. Introduction. This paper is an attempt to assess the implications, for the theory of markets and the firm, of a body of information culled from the first forty six Reports published by the United. Kingdom Price Commission since its reconstitution in August, 1977. By now the usual method for testing theories empirically in Industrial Organisation Economics is to specify a simple mathematical 'model' of the determinants of one variable by a set of others, and to estimate the parameters of this model by applying econometric techniques (mostly ordinary least squares) to a set of numerical data. The results have been notably poor, at least by the standards of success achieved by econometrics in other fields of economics, which are themselves modest enough.: At least two possible reasons for this suggest themselves (and appear to be supported by the findings of this paper): simple mathematical models may be too 'blunt' to capture the nuances of market behaviour, and the data used (most of it from standard official sources) may not match the variables that are theoretically appropriate. As an example of the former - a firm with a dominant market share may thereby gain monopoly power to raise its prices, but it may have achieved its position by producing at lower cost than its competitors and passing on the cost differential in lower prices. As an example of data failings - there are plausible theoretical grounds for expecting market structure to be related to the levels of both price and cost, but from official data (such as Censuses of Production) we can do no more than approximately infer the difference, or margin, between price and costs through data on profitability. If both price and cost are positively related, say, to concentration, the relationship of concentration to the margin between them is likely to be blurred, at best, and impossible to interpret unambiguously.