Effective pollution control policy for China

China began enforcing a system of pollution levies in 1982. However, senior environmental officials expressed doubt that this system was improving the environment and, in 1996, they began to place greater reliance on mill closure as the penalty for poor environmental performance. Since then, managers have found means of subverting many of the intended mill closures, and this causes us to return to the question of the abatement efficiency and effectiveness of the levies. This paper uses production evidence from 34 papermills in two representative provinces to examine the abatement efficiency and effectiveness of the levies. The paper industry is an important industry for this question because it is the largest polluter of China’s rural environment. We use a distance function to determine individual output-based and revenue-based shadow prices for each mill during the years that the levies were the main environmental incentive. The output-based shadow prices for pollutants display no recognizable trends over time and they are very different for firms in different locations. The revenue-based shadow prices are widely variable between mills and locations as well. These findings indicate that the marginal opportunity costs of abatement were also widely divergent and that there was no trend toward improved abatement efficiency. The way to correct this is to improve the performance of the market—not to reject the market altogether as the more recent reliance on mill closures does. This observation suggests that a system of tradable permits would be an improvement on relatively less successful administrative measures such as forced mill closures.     

Estimating the Accounting Price of Foreign Exchange: An Input–Output Approach

When adjustments in the foreign exchange market involve changes in the production of marginally traded goods, the traditional formula for calculating the accounting (shadow) price of foreign exchange assumes that domestic prices and marginal costs at efficiency prices for those goods are equal. In this paper, a method is proposed for estimating an accounting price ratio of foreign exchange in a partial equilibrium framework, abandoning that assumption. For that purpose, input–output techniques are used, to take into account the effets of changes in the production of traded goods.     

Eco-efficiency analysis of consumer durables using absolute shadow prices

We develop a method for eco-efficiency analysis of consumer durables that is based on Data Envelopment Analysis (DEA). In contrast to previous product efficiency studies, we consider the measurement problem from the policy perspective. The innovation of the paper is to measure efficiency in terms of absolute shadow prices that are optimized endogenously within the model to maximize efficiency of the good. Thus, the efficiency measure has a direct economic interpretation as a monetary loss due to inefficiency, expressed in some currency unit. The advantages as well as technical differences between the proposed approach and the traditional production-side methods are discussed in detail. We illustrate the approach by an application to eco-efficiency evaluation of Sport Utility Vehicles.     

Efficiency of insurance firms with endogenous risk management and financial intermediation activities

Risk management is now present in many economic sectors. However, none of existing studies consider risk management as a potential determinant of firm performance. In this paper, we investigate the role of risk management and financial intermediation in creating value for financial institutions by analyzing U.S. property-liability insurers. Our main goal is to test how risk management and financial intermediation activities create value for insurers by enhancing economic efficiency through cost reductions. We consider these two activities as intermediate outputs and estimate their shadow prices. Insurer cost efficiency is measured using an econometric cost function. The econometric results show that both activities significantly increase the efficiency of the property-liability insurance industry.     

浅述影子价格涵义及其在水运建设项目中的作用

项目评价的一项重要内容就是经济评价,经济评价和财务评价之间有着明显的差别,其中最重要的一个区别就是两者使用的价格不同,财务评价使用的是市场价格,而经济评价采用的则是影子价格。影子价格是指在项目经济评价中采用的部分货物经调整计算的价格,它是投资项目经济评价的通用参数,能够反映社会对这些货物真实价值的度量。本文论述了影子价格的概念和类型,提出了影子价格的理论以及确定方法,介绍影子价格应用于水运建设项目中的作用。     

浅议工程项目影子价格理论

影子价格是为实现一定的经济发展目标而人为确定的、比市场价格更能反映出资源真实价值、能促进合理利用资源的经济价格,而非真正意义上的市场价格。它不仅能更合理地反映出产品价值,而且还能反映社会劳动消耗、市场的供求关系和资源的稀缺程度,有利于资源的优化配置。影子价格是分析计算项目对国民经济的净贡献,评价项目的经济合理性的重要的参数之一。本文主要阐释了影子价格的概念、类别、选取及计算方法。     

Bank equity and macroprudential policy

This paper proposes an alternative macroprudential policy in the framework of Gertler et al. (2012). In their model, the central bank subsidizes bank outside equity, where the subsidy rate is determined by the shadow cost of the deposit. We find that the alternative rule in which the subsidy rate responds to the aggregate bank outside equity ratio is welfare improving because it has a better stabilization effect on the bank asset deterioration after a financial shock. We disentangle different channels through which macroprudential policies affect the economy and demonstrate that the better stabilization in the post-crisis economy has a positive effect on the economy in normal times through security prices.     

A Consistent Formulation of the Leontief Pollution Model

We consider the environmental Leontief model, which is an input–output model augmented by pollution-generation and pollution-abatement sectors. Two formulations of this model, dating back to Leontief's work in 1970, can be found in the literature. One formulation treats an exogenously given vector of the tolerated level of pollutants (environmental standards) as a negative variable on the right-hand side of the model. The other formulation supposes that each industry eliminates a given proportion of the pollution that it creates, so that the proportions of gross pollutants which are subject to treatment by each sector enter as given parameters. Even in the case when the levels of production and abatement in the two different model formulations are equal, the solutions of the dual or price model are different for cases where some net pollution is left untreated. First, the analytical relationship between the two price models is established. Secondly, both models formulated in a linear programming framework are extended by imposing emission charges (effluent taxes) for untreated pollution. Finally, it will be shown how to estimate the level of emission charges for both model formulations such that they provide the same levels of production and abatement, as well as the same shadow prices. This is illustrated by a numerical example.     

A framework to measure the relative socio-economic performance of developing countries

This research develops a framework to estimate the relative efficiency of developing countries in utilizing both their domestic and external resources to achieve the Millennium Development Goals. The analysis highlights distinct efficiency differences across lending groups and geographic regions e.g. between Sub-Saharan Africa and Latin America. The performance of regions exposed to natural disasters and political violence need to be analyzed individually and risk management ought to be an integrated part of development policy. The gap between the Millennium Development Goals and human rights approaches is then examined. Finally, we qualify a country's performance level as potentially sustainable in terms of human, social and environmental welfare, in turn searching for realistic benchmarks and intermediate targets for the relatively inefficient countries. Principal component analysis in combination with data envelopment analysis was applied to solve the problem of efficiency overestimation with multi-dimensional scaling used to present the issue graphically. In summary, the aim of this work is not to rank countries in a league table rather to provide a framework that combines economic, environmental and social issues in order to search for sustainable, pragmatic benchmarks, pushing the boundaries of the Human Development Index.     

Economic interpretations of DEA

Research on productive efficiency at the firm level has developed as an important and active strand of research the last decades, both within operations research, management science and economics. Two apparently different definitions of efficiency are examined, but it is shown that when both estimation methods are based on solving linear programming problems the definitions of efficiency are identical. The purpose of the paper is to give the basic ideas of efficiency analyses using DEA as a tool for researchers not so familiar with efficiency analysis and DEA. The concept of shadow prices is given special attention.     

Joint production national income definitions and pricing in linear environmental models

Economic activity is explicitly modelled as a set of joint production processes encompassing the generation of environmental pollution. Particular results of Leontief, generalized by Lowe, which would finance environmental protection through a number of tax or pricing schemes, are shown to be inconsistent with strictly correct definitions of national income. Qualified use of linear joint production environmental models is accepted, where these use efficiency prices and recognize data limitations. Such models can aid understanding of the costs, in terms of other goods and services foregone, of attaining particular standards of environmental protection.     

Shadow profit maximization and a measure of overall inefficiency

Determining the profit maximizing input–output bundle of a firm requires data on prices. This paper shows how endogenously determined shadow prices can be used in place of actual prices to obtain the optimal input–output bundle where the firm’s shadow profit is maximized. This approach amounts to an application of the Weak Axiom of Profit Maximization (WAPM) formulated by Varian [(1984) The Non-parametric approach to production analysis. Econometrica 52:3 (May) 579–597] based on shadow prices rather than actual prices. At these shadow prices, the shadow profit of a firm is zero. The maximum shadow profit that could have been attained at some other input–output bundle is shown to be a measure of the inefficiency of the firm. Because the benchmark input–output bundle is always an observed bundle from the data, it can be determined without having to solve any elaborate programming problem.

Consistent estimation of technical and allocative efficiencies for a semiparametric stochastic cost frontier with shadow input prices

Conventional parametric stochastic cost frontier models are likely to suffer from biased inferences due to misspecification and the ignorance of allocative efficiency (AE). To fill up the gap in the literature, this article proposes a semiparametric stochastic cost frontier with shadow input prices that combines a parametric portion with a nonparametric portion and that allows for the presence of both technical efficiency (TE) and AE. The introduction of AE and the nonparametric function into the cost function complicates substantially the estimation procedure. We develop a new estimation procedure that leads to consistent estimators and valid TE and AE measures, which are proved by conducting Monte Carlo simulations.     

Credit risk pricing and the rationality of lending decision-making within dual banking systems: A parametric approach

The reduction of non-performing loans, and making correct provisions for them, plays a primary role in the management and minimization of banking credit risk. However, these actions depend primarily upon the cost at which banks may dispose of these bad loans. Hence, this study aims to perceive the price of banks’ credit risk via estimating the shadow price of non-performing loans. We assess and compare the perceived price of the credit risk of Islamic and conventional banks operating in 9 countries from the Middle East and Asia, using a quadratic directional distance function. Following this, we evaluate the impact of different settings of directional vectors on shadow prices by conducting a risk-sensitivity analysis. Applying bootstrap regression, the factors affecting NPLs’ prices are further investigated. The paper concludes that the estimation of the shadow prices of bad loans can provide important elements in favor of credit risk management and, therefore, credit risk mitigation.     

THE RELATIVE PERFORMANCE OF FORMAL AND INFORMAL SECTORS IN INDIA

We evaluate the relative performance of formal and informal sectors in India by looking into their productivity difference. Recognizing the intersectoral linkages in the economy, the competitive general equilibrium prices are computed; these signal the productivities. Our model synthesizes frontier analysis with the general equilibrium approach to generate shadow prices. The formal activities are found to be more productive than the informal. However, the informal services sector is as efficient as the formal one. There would be an overall productivity gain of 22% to the economy if factors were allocated to productive activities. The shadow prices from the model indicate that the formal capital and informal capital are scarce factors, while it has been the opposite for formal (regular) and informal (casual) labour. Formal labour is more productive than its informal counterpart; formal capital and informal capital are equally productive.     

Derivation of regional shadow prices

[Hurter and Moses, 1964] presented a solvable model combining input-output analysis and linear programming to derive regional product ’shadow’ prices. Their measure of prices is incomplete since it includes only regional variation-in transport and resource costs and not the intermediate product costs. The reason for this exclusion is obvious: product prices are needed to obtain intermediate product costs. In this note we extend the Hurter-Moses model to derive a full measure of regional shadow prices.     

The Lowry Model Revisited: Incorporating a Multizonal Input-Output Model into an Urban Land Use Allocation Model

This paper formulates a new generation of Lowry-style models that combine a multizonal input-output model and an urban land use allocation model. Three different types of models are proposed: 1) an unconstrained model, 2) a primal of a linear programming approach that includes land supply constraints, and 3) a modified dual of the linear programming approach that allocates land based on additional conditions of economic efficiency. The modified dual formulation improves upon the limitations of Lowry models and their derivatives. First, the proposed model has sound theoretical underpinnings that incorporate the production theory of input-output models and the behavioral theory of optimization models. Second, the proposed model allocates land on the basis of economic efficiency by imposing a procedure that equalizes shadow prices. And third, the proposed model is an optimization model that fully accounts for the spatial and sectoral relationships of multiplier effects determining land use demand.     

Shadow Price Approach to Total Factor Productivity Measurement: With an Application to Finnish Grass-Silage Production

This paper explores an intermediate route between the Fisher and the Malmquist productivity indexes so as to minimize data requirements and assumptions about economic behavior of production units and their production technology. Assuming quantity data of inputs and outputs and the behavioral hypothesis of allocative efficiency, we calculate the exact value of the Fisher ideal productivity index using implicit shadow prices revealed by the choice of input–output mix. The approach is operationalized by means of a nonparametric data envelopment analysis (DEA) model. Empirical application to Finnish grass silage farms suggests that the Malmquist and the Fisher productivity indices yield similar results when averaged over firms, but there can be major differences in the results of the two approaches at the level of individual firms.     

Methodologies of project selection in the presence of constraints

Conclusions The shadow prices associated with resource and policy constraints can be used to decentralize project selection among project managers so that their choices accord with these constraints and with the stipulated objective function. Project managers are instructed to value their inputs and outputs (suitably redefined so as to include contributions to social goals) at their shadow values, using as discount rate the tradeoff (minus 1) between consumption in year 1 and in year 0. They will choose the optimal set of independent projects if they adopt all those with positive NPVs and, among mutually exclusive projects with positive NPVs, if they select that with the highest NPV. Project managers will be indifferent toward projects whose NPVs are zero, and will require some additional directives if they are to adopt fractional projects to the extent prescribed in the optimum solution. If a new project were to become available for evaluation at this point, the same set of shadow prices can be used to determine its NPV. Only if this NPV were positive and the project sufficiently large would there be a need to recalculate the set of shadow prices.¹⁹ As was pointed out above, the dual variables corresponding to the primal constraints indicate the tradeoffs of resource amounts or target levels against the maximand which policymakers implicitly make when they select their values. The magnitudes of these tradeoffs may then lead them to revise the constrained target levels upwards or downwards until they reach more appropriate levels. Several iterations may be needed before a satisfactory or best-compromise solution is reached.²⁰ Instead of the constraint method outlined above, other multiobjective programming models can be used to generate as many noninferior or nondominated solutions in objective space as desired. In the weighting method first outlined by Zadeh (1963), for example, all objectives are included in the objective function of the primal program and are assigned arbitrary positive weights. After solving the corresponding linear program, these weights are systematically varied and trace out solutions (all of which are noninferior) in objective space. Once the policymaker has chosen the best of these, the weights which have given rise to it can be used as tradeoffs for the objectives under consideration.²¹ The superiority of these multiobjective methods over the UNIDO bottom-up approach resides in the fact that policymakers make their best-compromise choices in objective space rather than decision space. That is, they choose the most desired combination of objectives, and only as an implication of this are projects accepted or rejected. In the bottom-up approach, instead, the policymakers are assumed to choose directly in decision space, which includes the primal variables P_i, a procedure which appears to place the proverbial cart before the horse.One of the strengths of programming models is their versatility. Models of the type discussed above can readily be adapted to allow for such factors as a greater number of time periods, the possible reinvestment of project cash flows, the assigning of distributional weights to different economic agents, the introduction of foreign trade and investment, and limitations on the availability of specialized factors. Mutual exclusiveness within broad classes of projects can also be introduced, as can other forms of project interdependence such as one-way dependence (i.e, the investment in project i being contingent on project j being also adopted), and complementarity (the simultaneous adoption of projects i and j has different net output effects than the sum of their adoption as single projects). In cases where project indivisibility is an important consideration, integer programming can be utilized. Scale economies can also be incorporated in a programming framework (see Westphal, 1975, and Hendrick and Stoutjesdijk, 1978).This enthusiasm for programming models should be tempered by certain limitations they possess in addition to their indubitable advantages. First, in multiperiod programming models, some of the shadow prices have been found to be unstable in the sense of fluctuating sizeably from one period to the next, a feature which fails to inspire confidence in their utilization for project implementation.²² Secondly, programming models have sometimes been carelessly specified, for example by failing to bring out the implications of additional labour employment for a labour-surplus economy's consumption-investment mix, and thus attributing to labour a shadow price of zero when it is in fact positive. This would lead to the choice of unduly labour-intensive projects.²³ Thirdly, our approach assumes that a sizeable number of project proposals are ready to be evaluated at one point in time, as opposed to the UNIDO assumption that projects are considered sequentially for possible adoption. Admittedly, it is a counsel of perfection to demand of Central Planning Offices that they maintain an updated shelf full of projects ready for possible implementation. It remains, however, true that at any point in time there are limits on the amounts of financial resources and other inputs, and that deciding upon projects' merits as they roll off the drawing boards does not allow the demands on these resources to be related to the available supplies, or to the merits of alternative projects, in any systematic way. One cannot escape the conclusion that a high payoff is to be expected from devoting resources to the active recruitment of skilled project evaluators to build up a sufficiently extensive collection of potential investment projects.A fourth objection of a technical nature has recently been raised against the use of linear programming models as approximations to nonlinear programming ones. Baumol (1982) has shown that the dual prices resulting from such approximations need bear no relation to the true shadow prices yielded by the nonlinear program. They may take on zero values in cases where the inputs are in fact scarce, and positive values when the inputs are in excess supply. This point will not be pursued further here in view of the operational difficulties of estimating nonlinear functions. It should be noted, however, that a number of applications in the water-resources area have used geometric programming techniques to deal with nonlinearities.In spite of these and other objections that may be raised against the use of multiobjective programming models for project selection, I believe that they do serve to illuminate the rationale for shadow pricing in economies subject to market distortions, and that a cautious reliance on them can facilitate the actual process of project selection and implement the goals of efficiency and distributional equity which characterize both the UNIDO and the Little-Mirrlees methods of project appraisal.I wish to express my gratitude to my colleague V. Kerry Smith and to four anonymous referees whose comments have resulted in a substantial reformulation of the content and conclusions of this paper, although they are absolved of any responsibility for the final product.     

Optimal regime switching and threshold effects

We consider a general control problem with two types of optimal regime switch. The first one concerns technological and/or institutional regimes indexed by a finite number of discrete parameter values, and the second features regimes relying on given threshold values for given state variables. We propose a general optimal control framework allowing to derive the first-order optimality conditions and in particular to characterize the geometry of the shadow prices at optimal switching times (if any). We apply this new optimal control material to address the problem of the optimal management of natural resources under ecological irreversibility, and with the possibility to switch to a backstop technology.