Increasing returns,monopolistic competition,and international trade

This paper develops a simple, general equilibrium model of noncomparative advantage trade. Trade is driven by economies of scale, which are internal to firms. Because of the scale economies, markets are imperfectly competitive. Nonetheless, one can show that trade, and gains from trade, will occur, even between countries with identical tastes, technology, and factor endowments.     

IDENTIFYING THE LINDAHL EQUILIBRIUM WITHOUT TRANSFERS AS A SOCIAL OPTIMUM

The Lindahl equilibrium is an important solution concept in economies with externalities or public goods. In this paper, a ‘Negishi‐type’ theorem that connects the Lindahl equilibrium without transfers with the social optimum solution is proposed and proved. The theorem states that the solution of a social planner's problem with the social welfare weights proportional to the inverse of the private shadow prices of externalities in an auxiliary Nash equilibrium is the Lindahl equilibrium without transfers. To verify the theorem constructively, an algorithm for finding the Lindahl equilibrium is developed. Its efficacy is demonstrated through a numerical example.     

Unpacking sources of comparative advantage: A quantitative approach

This paper develops an approach for quantifying the importance of different sources of comparative advantage, by extending the Eaton and Kortum (2002) model to predict industry trade flows. In this framework, comparative advantage is determined by the interaction of country and industry characteristics, with countries specializing in industries whose production needs they can best meet with their factor endowments and institutional strengths. I estimate the model parameters using: (i) OLS; and (ii) a simulated method of moments procedure that accounts for the prevalence of zeros in the bilateral trade data. I apply the model to explore various quantitative questions, such as how much distance, Ricardian productivity, factor endowments, and institutions each matter for country welfare in the global trade equilibrium.     

Unpacking sources of comparative advantage: A quantitative approach

This paper develops an approach for quantifying the importance of different sources of comparative advantage, by extending the Eaton and Kortum (2002) model to predict industry trade flows. In this framework, comparative advantage is determined by the interaction of country and industry characteristics, with countries specializing in industries whose production needs they can best meet with their factor endowments and institutional strengths. I estimate the model parameters using: (i) OLS; and (ii) a simulated method of moments procedure that accounts for the prevalence of zeros in the bilateral trade data. I apply the model to explore various quantitative questions, such as how much distance, Ricardian productivity, factor endowments, and institutions each matter for country welfare in the global trade equilibrium.     

China,India and the Commodity Boom: Economic and Environmental Implications for Low‐income Countries

The international role of China has risen steadily for two decades – and has become even more important in the current global recession. The growing supply of labour‐intensive manufactured exports from China has been accompanied by a huge expansion in its imports both of raw materials and of skill‐intensive manufactured parts and components. This ‘offshoring’ of intermediates production by a large, labour‐abundant economy has economic and environmental implications for other developing economies. More recently, the rapid expansion of the Indian economy and trade indicates that it too will soon exert similar effects on global markets. We sketch a model showing how the growth of these developing‐country ‘giants’ generates adjustment pressures on other developing economies. We discuss in particular how differences in relative factor endowments of resource‐rich economies can produce quite different outcomes in the context of product fragmentation and expanding commodity trade. We also explore the effects on production, trade, environment and prospects for future growth in resource‐rich economies, particularly in the context of weak institutions and other market failures. We illustrate these different impacts by considering the cases of Indonesia, Malaysia and Thailand and highlight implications for growth, development and policy.     

Endogenous trade policy through majority voting: an empirical investigation

The median-voter approach to trade policy determination (within a Heckscher-Ohlin framework) as in Mayer [Am. Econ. Rev. 74(5) (1984) 970] predicts that an increase in inequality, holding constant the economy’s overall relative endowments, raises trade barriers in capital-abundant economies and lowers them in capital-scarce economies. We find support for this prediction using cross-country data on inequality, capital-abundance and diverse measures of protection. We perform certain robustness checks that include controlling for the effects of political rights and schooling as well as using alternative datasets on factor endowments.     

LONG RUN DEMAND FOR LABOUR IN THE CONSUMER GOOD INDUSTRY

We consider, for alternative models of production, the comparative statics of constant‐returns economies in long run competitive equilibrium, for which reswitching, capital‐reversing and consumption‐reversal are all completely absent. Notwithstanding the ‘well‐behaved’ nature of these economies, the use of labour per unit of output in the consumer good industry is always positively related to the real wage rate.     

Can sustained growth be attained through trading exhaustible resources for foreign research?

We analyze the existence and the stability of a sustained balanced growth equilibrium (SBE) in a model of two non-homogeneous trading economies. A technological leader country which sells patents of new intermediate products in exchange for an exhaustible resource extracted by a technological follower trade partner. Considering a growth-essential resource, the ‘knife-edge’ assumption of exactly constant returns to scale (CRS) to manmade inputs can be alleviated, and the scale effects associated with R&D-based growth models overcome. A fully endogenous SBE is proven to exist, although its stability turns out to be a ‘knife-edge’ possibility. The long-run equilibrium is saddle-path stable assuming CRS in manmade inputs. Conversely, considering increasing returns to scale together with a completely specialized two-country trade, the equilibrium could be reached only if the two economies initially guard a particular relation, described by a particular subset of the state space.     

The Joint identification of utility and discount functions from stated choice data: An application to durable goods adoption

We present a survey design that generalizes static conjoint experiments to elicit inter-temporal adoption decisions for durable goods. We show that consumers’ utility and discount functions in a dynamic discrete choice model are jointly identified using data generated by this specific design. In contrast, based on revealed preference data, the utility and discount functions are generally not jointly identified even if consumers’ expectations are known. The separation of current-period preferences from discounting is necessary to forecast the diffusion of a durable good under alternative marketing strategies. We illustrate the approach using two surveys eliciting Blu-ray player adoption decisions. Both model-free evidence and the estimates based on a dynamic discrete choice model indicate that consumers make forward-looking adoption decisions. In both surveys the average discount rate is 43 percent, corresponding to a substantially higher degree of impatience than the rate implied by aggregate asset returns. The estimates also reveal a large degree of heterogeneity in the discount rates across consumers, but only little evidence for hyperbolic discounting.     

ON AGENT’S AGREEMENT AND PARTIAL‐EQUILIBRIUM PRICING IN INCOMPLETE MARKETS

We consider two risk‐averse financial agents who negotiate the price of an illiquid indivisible contingent claim in an incomplete semimartingale market environment. Under the assumption that the agents are exponential utility maximizers with nontraded random endowments, we provide necessary and sufficient conditions for negotiation to be successful, i.e., for the trade to occur. We also study the asymptotic case where the size of the claim is small compared to the random endowments and we give a full characterization in this case. Finally, we study a partial‐equilibrium problem for a bundle of divisible claims and establish existence and uniqueness. A number of technical results on conditional indifference prices is provided.     

SOME REMARKS ON ARBITRAGE AND PREFERENCES IN SECURITIES MARKET MODELS

We introduce the notion of a market-free-lunch that depends on the preferences of all agents participating in the market. In semimartingale models of securities markets, we characterize no arbitrage (NA) and no-free-lunch-with-vanishing-risk (NFLVR) in terms of the market-free-lunch and show that the difference between NA and NFLVR consists in the selection of the class of monotone, respectively monotone and continuous, utility functions that determines the absence of the market-free-lunch. We also provide a direct proof of the equivalence between the absence of a market-free-lunch, with respect to monotone concave preferences, and the existence of an equivalent (local/sigma) martingale measure.     

Is volatility risk priced in the securities market? Evidence from S&P 500 index options

The authors examine whether volatility risk is a priced risk factor in securities returns. Zero‐beta at‐the‐money straddle returns of the S&P 500 index are used to measure volatility risk. It is demonstrated that volatility risk captures time variation in the stochastic discount factor. The results suggest that straddle returns are important conditioning variables in asset pricing, and investors use straddle returns when forming their expectations about securities returns. One interesting finding is that different classes of firms react differently to volatility risk. For example, small firms and value firms have negative and significant volatility coefficients, whereas big firms and growth firms have positive and significant volatility coefficients during high‐volatility periods, indicating that investors see these latter firms as hedges against volatile states of the economy. Overall, these findings have important implications for portfolio formation, risk management, and hedging strategies. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:617–642, 2007     

Weak equilibria for time-inconsistent control: With applications to investment-withdrawal decisions

This paper considers time-inconsistent problems when control and stopping strategies are required to be made simultaneously (called stopping control problems by us). We first formulate the time-inconsistent stopping control problems under general multidimensional controlled diffusion model and propose a formal definition of their equilibria. We show that an admissible pair $(\widehat{u},C)$ of control-stopping policy is equilibrium if and only if the auxiliary function associated with it solves the extended HJB system, providing a methodology to verify or exclude equilibrium solutions. We provide several examples to illustrate applications to mathematical finance and control theory. For a problem whose reward function endogenously depends on the current wealth, the equilibrium is explicitly obtained. For another model with a nonexponential discount, we prove that any constant proportion strategy can not be equilibrium. We further show that general nonconstant equilibrium exists and is described by singular boundary value problems. This example shows that considering our combined problems is essentially different from investigating them separately. In the end, we also provide a two-dimensional example with a hyperbolic discount.     

‘A new paradigm of British business history’: A critique of Toms and Wilson

We provide a critical reflection of Toms and Wilson's ‘new paradigm of British business history’ by focusing on the logical consistency of their model, the robustness of its predictive powers, and its explanation of transitional change related to stages of business capitalism. For example, central to the paradigm is the importance of accountability and external economies of scale, assumed as exogenous parameters in the analysis of British business history. This assumption is challenged, as is the predictive powers of the analytical matrix in providing an all-encompassing model for British business evolution. In particular, the transitional processes in British business history are not simply reducible to an assessment of accountability and economies of scale and scope, but rather to enhance our understanding there is a need also to engage with the concept of personal capitalism. While business historians should engage with theoretical frameworks, it must also be recognized that firms are idiosyncratic, a feature of business organizations that should not be lost.     

Dynamic Optimization of Long-Term Growth Rate for a Portfolio with Transaction Costs and Logarithmic Utility

We study the optimal investment policy for an investor who has available one bank account and n risky assets modeled by log-normal diffusions. The objective is to maximize the long-run average growth of wealth for a logarithmic utility function in the presence of proportional transaction costs. This problem is formulated as an ergodic singular stochastic control problem and interpreted as the limit of a discounted control problem for vanishing discount factor. The variational inequalities for the discounted control problem and the limiting ergodic problem are established in the viscosity sense. The ergodic variational inequality is solved by using a numerical algorithm based on policy iterations and multigrid methods. A numerical example is displayed for two risky assets.     

A Stochastic Extension of the Miller-Modigliani Framework1

This paper deals with the problem of the financial valuation of a firm and its shares of stock with general financing policies in a partial equilibrium framework. the model assumes a time-dependent discount rate and a general stochastic environment in a discrete-time setting. the fundamental valuation approach under the assumption of risk neutrality is used to obtain the time path of share price, the number of outstanding shares, and the value of the firm. These are shown to be the unique conditional expectations of certain stochastic processes. A broad class of firms for which the solution formula yields finite-valued solutions is characterized. the results are extended to the non-risk-neutral case. A regularity condition, which is both necessary and sufficient for the share price to equal the capitalization of future dividends accruing to the share, is obtained. As a mathematical aside, it is shown in the appendix that in the absence of this condition, the so-called stream of dividends approach is meaningless in the sense that it does not yield any financial valuation.     

Foreign direct investment and wages: a cross-country analysis

While globalization has led to overall economic growth in a number of countries, questions abound on its distributional effects, especially on rising wage inequality across nations. The main objective of this study is to investigate empirically the effects of foreign direct investment (FDI) on wages in a cross-country setting. We investigate the general equilibrium propositions that capital inflows (outflows) increase (lower) wages in host (home) countries due to the change in relative factor endowments. We also explore whether capital inflows have differential impacts on skilled and unskilled wages in developing economies. Time-series data on 26 countries, 15 developed and 11 developing, are used to fit the labour share equation derived from a translog GNP function with net FDI stock as one of its arguments. Results confirm that capital movement brings about a cross-country convergence of wages. However, there is some evidence that inward FDI flows increase the wage gap between skilled and unskilled workers in developing countries.     

Indeterminacy and fundamental reduced form representations of DSGE models

Dynamic stochastic general equilibrium (DSGE) models are known to exhibit indeterminacy—that is, equilibrium nonuniqueness—under realistic parameterizations. This paper studies how the potential for indeterminacy impacts on the possibility of recovering a DSGE model's structural shocks via empirical vector autoregressions (VARs), which in turn requires the model's reduced form representation to be fundamental. By means of a simple example, we first establish that indeterminacy is neither necessary nor sufficient for (non)fundamental representations to arise. We then investigate the relationship between indeterminacy and nonfundamentalness in the context of a general class of linearized DSGE models, which nests the New Keynesian framework as a special case. It is shown that an indeterminate equilibrium model may generically admit a fundamental moving average representation, even when its determinate counterpart always involves nonfundamentalness. As a main implication, checking for existence of a VAR representation of a DSGE model's equilibria cannot be regarded as an indirect test for the indeterminacy hypothesis.     

A COMMENT ON MARKET FREE LUNCH AND FREE LUNCH

Frittelli (2004) introduced a market free lunch depending on the preferences of the agents in the market. He characterized no arbitrage and no free lunch with vanishing risk in terms of no market free lunch (the difference comes from the class of utility functions determining the market free lunch). In this note we complete the list of characterizations and show directly (using the theory of Orlicz spaces) that no free lunch is equivalent to the absence of market free lunch with respect to monotone concave utility functions.     

Trade and the distribution of human capital

We develop a two-country, two-sector model of trade where the only difference between the two countries is their distribution of human capital endowments. We show that even if the two countries have identical aggregate human capital endowments the pattern of trade depends on the properties of the two human capital distributions. We also show that the two distributions of endowments also completely determine the effects of trade on income inequality. We also look at a simple majority voting model. It turns out autarky and free trade with and without compensation may be the voting outcome.