Substitution between water and other agricultural inputs: Implications for water conservation in a River Basin context

Substitution of irrigation water with other agricultural inputs could be an important means to conserve water in the face of growing pressures on water resources from both nonagricultural water demands and environmental water requirements. This paper discusses the potential of such substitution through an empirical analysis based on a multiple-input crop production function at the field and farm scales complemented with a numerical modeling exercise at the basin scale. Results from the crop production function analysis show that under both crop yield and net profit maximization, water is a substitute to other crop inputs for high-value crops, and is a complement to water for low-valued crops. At the basin scale, an integrated economic-hydrologic river basin model is used to analyze the role of other factors in crop input substitution, including the spatial connections among water sources and demands, hydro-agronomic conditions, and institutional settings for water allocation. Results show that in the case study area, the Maipo River basin in Chile, where water is very scarce, moving from the current, input-constrained, situation to full optimization of water resources leads to an increase in all crop inputs, including water. In that case, 301 million m³ of additional water use results in additional net profits of USD 11 million. However, if the water fee is raised by a factor of eight while overall basin irrigation profits are maintained at the original, baseline level, a reduction of water withdrawals by 326 million m³ is traded off with costs of USD 43.2 million for other inputs. Irrigation districts with a high share of low-value crops have a low potential for substituting water with other crop inputs. Therefore, investments for water substitution should also be kept low in these areas.     

Learning-by-doing and input demand of a rate-of-return regulated firm

The significance of learning by doing to input demand of a cost-minimizing rate-of-return-regulated firm is examined. Using a panel data, the results indicate that the firm's cost and input demand decisions are both influenced by learning-by-doing. The firm's cost and the rate-base (capital) input requirements decline as learning-by-doing measured by cumulative production expands. However, LBD may have different effects on the non-rate-base inputs (labor and fuel) considered in this study. While LBD ambiguously reduces fuel usage, it moderately increases labor employment. In addition to changing input intensity, LBD also influences returns to scale and elasticity of substitution.     

Budget constraints, bailouts, and the firm under central planning

Motivated by the notion of the soft budget constraint, we develop two models of an enterprise that can obtain bailouts from the state when its operating profit is negative. The models allow for uncertainty both in production and in the extent to which the enterprise can obtain subsidies. We derive the optimal factor inputs and show, via both theorems and illustrative calculations, how the availability of bailouts increases the demand for factor inputs. The dependence of this increase on the features of the bailout process is also characterized.     

外部性与重工业优先发展

In the framework of a dynamic general equilibrium model, this paper studies how vertical externalities affect the development of heavy industry in a developing economy. The model is comprised of an intermediate and a consumer product sector. The production of both types of goods has pecuniary externalities as they are featured by increasing return to scale. However, the production of an intermediate product has an additional advantage to have externalities through its technological linkage with the production of consumer goods. This is related to the nature of the roundabout production of consumer goods: a larger number of intermediate products lead to higher productivity in the production of consumer goods than do more inputs of a fixed number of intermediate products. Therefore, private investment in the intermediate sector is below the social optimal level. Government subsidies can restore the economy to the social optimum, but they become less needed as the consumer sector grows larger and the advantage of the intermediate good sector diminishes. __________ Translated from Nankai Jingji Yanjiu 南开经济研究 (Nankai Economic Studies), 2007, (2): 3–19     

Labour inputs substitution during corporate restructuring: a translog model approach for US freight railroads

After deregulation in 1980, competitive pressures forced the large US freight railroads to reduce costs and restructure, resulting in an economic renaissance of the US railroad companies after years of poor financial conditions. The most striking restructuring measure receiving much attention was dramatic labour downsizing: until 2004 employment was reduced by 60%. But other overlooked measures are the significant restructuring of workforce composition, and important changes in railroads’ workplace organization practices and corporate culture. To better understand this successful occupational restructuring, I investigate labour inputs substitutional relationships by using a translog variable cost model. Labour is decomposed into six employee categories rather than traditional production–nonproduction breakdown to estimate inputs elasticities of substitution. The data investigated is a unique firm-level dataset on the US freight Class I Railroads, covering a 22-year period, which allows this fine-grained analysis. I also document railroad workplace organization practices relating to results and reflecting changes in railroads corporate culture. I find strong substitutability between managerial positions and transportation employees, pointing to achievement of better command and control of operations; a high degree of complementarity between the most skilled employee categories and the strongest substitute relationship between transportation and maintenance of Ways&Structures groups.     

A new production function? Bowled by a googly

This paper clarifies the nature of the CES production function described in a recent paper by Bairam, Howells and Turner (BHT) in this journal. It is shown that the standard constant returns to scale CES function is a special case of the BHT function. In all other cases, the BHT function is not homogeneous of any degree in its inputs, and hence cannot be considered a neoclassical production function. Further, the BHT function is restrictive in that it does not admit homogeneous non-constant returns to scale CES functions.     

Endogenous City Formation with Production Externalities: Existence of Equilibrium

I show that equilibria exist in closed city‐system models with production externalities if firms' production possibilities vary continuously with the source of the externality, are constant returns to scale in own inputs, include inaction, and satisfy free disposal; if firms have to employ their own inputs to produce output; if there is a finite number of firm types; and if some standard conditions on preferences and endowments are satisfied. This is the first model to include production externalities in the fully general equilibrium framework required for endogenous city formation. Thus, this result provides formal support for the conjecture that production externalities lead to urban agglomeration.     

Indeterminacy with almost constant returns to scale: capital-labor substitution matters

Summary. This paper shows, in the benchmark one-sector Ramsey model, that indeterminacy and sunspots may occur when externalities are small, provided that capital and labor are more substitutable than in the usual Cobb-Douglas specification. Key to the results are the general formulations of both preferences and technology that we consider. In particular, indeterminacy is shown to occur under almost constant returns to scale provided that both concavity of utility for consumption is small enough and labor supply is close to indivisible. An important implication of the results is that, when labor supply is positively sloped, indeterminacy does not necessarily require the equilibrium wage-hours locus to be upward sloping.Received: 16 June 2004, Revised: 8 March 2005, JEL Classification Numbers: C62, D58, D91, E32.This is a companion paper of “Sunspots in real business-cycle models: completing calibration”, with new results that have emerged from extending the analysis contained in the latter article. The author would like to thank, without implicating, Bruno Decreuse, Andrew Postlewaite, Alain Venditti, Yi Wen, participants at the 2003 Society for Economic Dynamics Meeting, as well as C.D. Aliprantis, the Editor, and an anonymous referee for useful comments and suggestions.     

A Post-Keynesian Response to Piketty's ‘Fundamental Contradiction of Capitalism’

In Capital in the Twenty-First Century, Thomas Piketty presents a rich set of data that deals with income and wealth distribution, output-wealth dynamics and rates of return. He also proposes some ‘laws of capitalism’. At the core of his argument lies the ‘fundamental inequality of capitalism’, an empirical regularity stating that the rate of return on wealth is greater than the growth rate of the economy. This simple construct allows him to conclude that increasing wealth (and income) inequality is an inevitable outcome of capitalism. While we share some of his conclusions, we will highlight some shortcomings of his approach based on a Cambridge post-Keynesian growth-and-distribution model. The paper makes four points. First, r?>?g is not necessarily associated with increasing inequality in functional distribution. Second, Piketty succumbs to a fallacy of composition when he claims that a necessary condition for r?>?g is that capitalists save a large share of their capital income. Third, post-Keynesians can learn from Piketty's insights about personal income distribution and incorporate them into their models. Fourth, we reiterate the post-Keynesian argument that a well-behaved aggregate production function does not exist and cannot explain income distribution.     

RETURNS TO SCALE IN RETAIL TRADE*

This paper attempts to estimate genuine scale effects in retail trade from a cross section of retail stores in Israel. This is done by estimating a simple production function for several retail branches and employing the faithful old direct Cobb-Douglas structure with value added as output and labor and capital inputs. And indeed despite the well-known peculiarities of the retail industry, a cross section estimation produces “normal” production-function estimates with reasonable input elasticities. The estimates also identify marked increasing returns-to-scale parameters, higher in food and lower in branches less affected by consumer participation and geographical dispersion. These increasing returns may explain a good part of the increase in sales per unit of inputs observed in time series.     

The Arrow-Debreu model: How math can hide a fatal conceptual error

I argue that math, like love, can cover a multitude of sins, and I use the neoclassical object of adoration, the Arrow-Debreu model, as the case in point. It is commonplace that the Arrow-Debreu (AD) model of general equilibrium does not describe the real world, but it is equally commonplace to accept it as representing the pure logic of the competitive capitalist economy in an idealized world free of transactions costs. I show that the AD model fails even as an idealized model; it actually mistakes the logic of pure capitalism. Unlike McKenzie’s model of idealized general equilibrium under constant returns to scale, Arrow and Debreu claim to have shown the existence of competitive equilibrium under decreasing returns to scale and positive pure profits. The AD model (again unlike the McKinzie model) needs to assign the profits to individuals and this is done using the notion of “ownership of the production set.” But this notion suffers from a fatal ambiguity. If Arrow and Debreu interpret it to mean “ownership of a corporation” then a simple argument in the form “labor can hire capital or capital can hire labor” defeats the alleged necessity of assigning residual claimancy to the corporation. A given corporation may or may not end up exploiting a set of production opportunities (represented by a production set) depending on whether it hires in labor and undertakes production or hires out its capital to others (all by assumption at the parametrically given prices). In the latter case, residual claimancy is elsewhere. There is no such property right as “ownership of a production set” in a private property market economy. The legal party which purchases or already owns all the inputs used up in production has the defensible legal claim on the outputs: there is no need to also “purchase the production set.” At any set of prices that allow positive pure profits, anyone in the idealized AD model could bid up the price of the inputs and thus try to reap a smaller but still positive profit. Therefore,pace Arrow and Debreu, there could be no equilibrium with positive pure profits. In the Appendix, the property rights fallacy that afflicts the AD model is shown to also afflict orthodox capital theory and corporate finance theory.     

Aumann-Shapley prices as a scarf social equilibrium

Considered are economies with a single output (a single consumption good) which is produced from l inputs by means of an increasing returns to scale production function f. We show that for quasi-concave and homogeneous functions f of degree r ? 1, the Aumann-Shapley prices constitute a simple Scarf Social Equilibrium. Put differently, Shapley value of the associated atomless game is in the core of that game. Such is not the situation, however, in the more general case when f exhibits increasing returns to scale (but in homogeneous).     

A hybrid production structure in trade: theory and implications

In models of pure theory of international trade, no unique production structure is dominant. By grafting a specific factor structure onto a Heckscher–Ohlin framework, in a hybrid general equilibrium production model, this paper presents theoretical results with implications such as: (a) the relative price increase of a traded goods sector might have expansionary or contractionary output effect depending on factor intensities; (b) uniform primary-factor augmenting technical progress in the intermediate inputs sector might lead to a decline in the output of one of the sectors; (c) favorable relative price effect in one sector will lead to a drop in the return to the specific capital type depending on the grafted production structure. The proposed framework is useful for explaining stylized facts related to wage inequality, deindustrialization and export-processing, which have a great policy relevance for trade and development.     

Household Production and Environmental Kuznets Curves – Examining the Desirability and Feasibility of Substitution

This paper provides a theoretical explanation for the widely debatedempirical finding of Environmental Kuznets Curves, i.e., U-shaped relationships between per-capita income and indicators of environmentalquality. We present a household-production model in which the degradationof environmental quality is a by-product of household activities. Householdscan not directly purchase environmental quality, but can reduce degradation by substituting more expensive cleaner inputs to production for less costlydirty inputs. If environmental quality is a normal good, one expectssubstitution towards the less polluting inputs, so that increases in incomewill increase the quality of the environment. It is shown that this onlyholds for middle income households. Poorer households spend all income on dirty inputs. When they buy more, as income rises, the pollution also rises.they do not want to substitute, as this would reduce consumption ofnon-environmental services for environmental amenities that are alreadyabundant. Thus, as income rises from low to middle levels, a U shape can result. Yet an N shape might eventually result, as richer households spend all income on clean inputs. Further substitution possibilities are exhausted.Thus as income rises again pollution rises and environmental quality falls.     

The Arrow-Debreu model: How math can hide a fatal conceptual error

I argue that math, like love, can cover a multitude of sins, and I use the neoclassical object of adoration, the Arrow-Debreu model, as the case in point. It is commonplace that the Arrow-Debreu (AD) model of general equilibrium does not describe the real world, but it is equally commonplace to accept it as representing the pure logic of the competitive capitalist economy in an idealized world free of transactions costs. I show that the AD model fails even as an idealized model; it actually mistakes the logic of pure capitalism. Unlike McKenzie’s model of idealized general equilibrium under constant returns to scale, Arrow and Debreu claim to have shown the existence of competitive equilibrium under decreasing returns to scale and positive pure profits. The AD model (again unlike the McKinzie model) needs to assign the profits to individuals and this is done using the notion of “ownership of the production set.” But this notion suffers from a fatal ambiguity. If Arrow and Debreu interpret it to mean “ownership of a corporation” then a simple argument in the form “labor can hire capital or capital can hire labor” defeats the alleged necessity of assigning residual claimancy to the corporation. A given corporation may or may not end up exploiting a set of production opportunities (represented by a production set) depending on whether it hires in labor and undertakes production or hires out its capital to others (all by assumption at the parametrically given prices). In the latter case, residual claimancy is elsewhere. There is no such property right as “ownership of a production set” in a private property market economy. The legal party which purchases or already owns all the inputs used up in production has the defensible legal claim on the outputs: there is no need to also “purchase the production set.” At any set of prices that allow positive pure profits, anyone in the idealized AD model could bid up the price of the inputs and thus try to reap a smaller but still positive profit. Therefore,pace Arrow and Debreu, there could be no equilibrium with positive pure profits. In the Appendix, the property rights fallacy that afflicts the AD model is shown to also afflict orthodox capital theory and corporate finance theory. World Bank The findings, interpretations and conclusions expressed in this paper are entirely those of the author and should not be attributed in any manner to the World Bank, to its affiliated organizations or to the members of its Board of Directors or the countries they represent.     

新贸易理论、比较利益理论及其经验研究的新成果:文献综述

此文择要评述否定贸易理论四大命题(比较利益说、要素价格均等说、斯托尔珀-萨缪尔森定理、罗宾辛斯基定理)的理论研究和经验证据,以及最新的内生比较优势理论和区别分工网络效应和规模经济的新贸易理论.大量的理论研究成果证明,上述四大命题不可能是一般规律,它们只在非常不现实的假定条件、特别的模型和特定参数值范围内成立,而相关的经验证据也推翻了这四大命题.但是,交易效率改进会使更多的分工正网络效应被利用的理论,却是有着相当广泛适用性的规律.     

A hedonic-output-index-based approach to modeling polluting technologies

Despite some recent criticisms, the conventional radial distance function, which treats undesirable by-products as either frontier shifters or inputs, remains a popular go-to formulation of polluting production processes among practitioners. This unfading popularity is arguably driven by the ability of radial distance functions, unlike alternative directional distance functions, to allow for unit-free multiplicative changes in arguments as well as, by implicitly postulating the radial direction, to free researchers from the dilemma of having to explicitly choose the directional vector. In this paper, we offer a generalization of the standard radial distance function to polluting technologies that can accommodate undesirable by-products in a more economically meaningful way. Specifically, we propose modeling undesirable outputs via a hedonic output index, which is meant to ensure that pollutants are treated as outputs, as opposed to inputs or theoretically unregulated frontier shifters, while also recognizing their undesirable nature. By using a radial input distance function generalized to encompass an (unobservable) hedonic output index of desirable and undesirable outputs, we are able to meaningfully describe relationships between different products (including the complementarity of desirable and undesirable outputs) within producible output sets as well as to represent technically feasible polluting production possibilities given inputs. An empirical application of our methodology to the case of Dutch dairy farms in 2001–2009 demonstrates the complexity of interactions between outputs, thereby attesting to the value of more elaborate representations of production possibilities.     

Productivity Growth and Input Demand: The Effect of Learning by Doing in a Gold Mining Firm in a Developing Economy

This paper analyzes the effect of learning by doing (LBD) on the firm’s productivity growth and its input demand decisions. The results indicate that LBD is an important determinant of the firm’s productivity growth. The contribution of LBD to the firm’s productivity growth is about 5.6%. Another observation is that LBD has a decreasing effect on the firm’s cost of production – a finding which is consistent with the results of many studies. Also, an increase in LBD measured by cumulative production increases the firm’s demand for capital, and decreases the firm’s demand for labor. Lastly, LBD has a significant effect on the firm’s elasticity of scale. A fundamental message derived from the study is the confirmation that the firms should invest in more large capital equipment, embark on new processing techniques, and create an environment that is conducive to on-the-job learning.     

A theory of return‐seeking firms

We introduce a theory of return‐seeking firms to study the differences between this and profit‐maximising models. A return‐seeking objective takes into account the opportunity cost of each additional resource input to a firm's production as being a potential capital input choice in an alternative project. We find that firm supply curves cease to exist in perfectly competitive markets, that supply curves may slope up as well as down, that economies of scale are necessary for any production to occur and that firms always produce on a decreasing portion of their cost curve.     

Production risk in multi-output industries: estimates from Norwegian dairy farms

Farmers who produce multiple outputs are portfolio managers in the sense that they use inputs to balance expected economic return and variance of return. This article estimates the structure of the stochastic multioutput production technology in Norwegian dairy farming, allowing for a more flexible specification of the technology than previous studies. We find that an increase in input levels leads primarily to higher output variability, and that inputs also influence the covariance of shocks between outputs. Risk reducing effects of inputs on outputs are primarily present in the covariance functions. Technical change leads to shifts in the profit distribution over the data period, but no welfare improvement for risk averse farmers.