Theory and Application of Directional Distance Functions

In 1957 Farrell demonstrated how cost inefficiency could be decomposed into two mutually exclusive and exhaustive components: technical and allocative inefficiency. This result is consequence of the fact that—as shown by Shephard—the cost function and the input distance function (the reciprocal of Farrell's technical efficiency measure) are dual to each other. Similarly, the revenue function and the output distance function are dual providing the basis for the decomposition of revenue inefficiency into technical and allocative components (see for example, Färe, Grosskopf and Lovell (1994)). Here we extend those results to include the directional distance function and its dual, the profit function. This provides the basis for defining and decomposing profit efficiency. As we show, the output and input distance functions (reciprocals of Farrell efficiency measures) are special cases of the directional distance function. We also show how to use the directional distance function as a tool for measuring capacity utilization using DEA type techniques.     

The opportunity cost of duality

A dual representation of a technology, e.g., a cost function, may not contain all of the technological information, but it will contain all of the information about input vectors that would be chosen by a cost-minimizing firm. At least this much is clear for deterministic technologies. The main question addressed in this paper is whether the same can be said about stochastic technologies and their dual representations. Despite some pessimism expressed in the stochastic frontier literature on this question, we argue that there is no extra cost imposed in the stochastic case. Thus, the conclusion of this paper is: Just dual it!     

Validity — the quest for reality in quantitative and qualitative research

It has been argued that fundamentally different methodological approaches have made for ‘two sociologies’. This view has obscured the fact that the problem of validity has to be tackled independently of any specific methodological premises because of the textuality of sociological data. This does not necessarily imply, however, a single, unified strategy for validity testing. In this paper, some basic theoretical presuppositions underlying the approach to validity testing in quantitative research will be contrasted with the strategies offered by Max Weber's methodological writings on the ideal type. It is argued that the use of ideal typical constructs in qualitative research (exemplified by patient's illness careers) allows systematic validity testing despite the important differences in the conceptualization of social reality which is used in quantitative research, thus serving the purpose of any empirical sociological research, that is, to gain valid insight into societies' concrete reality.     

Why England? Demographic factors, structural change and physical capital accumulation during the Industrial Revolution

Why did England industrialize first? And why was Europe ahead of the rest of the world? Unified growth theory in the tradition of Galor and Weil (2000, American Economic Review, 89, 806–828) and Galor and Moav (2002, Quartely Journal of Economics, 177(4), 1133–1191) captures the key features of the transition from stagnation to growth over time. Yet we know remarkably little about why industrialization occurred much earlier in some parts of the world than in others. To answer this question, we present a probabilistic two-sector model where the initial escape from Malthusian constraints depends on the demographic regime, capital deepening and the use of more differentiated capital equipment. Weather-induced shocks to agricultural productivity cause changes in prices and quantities, and affect wages. In a standard model with capital externalities, these fluctuations interact with the demographic regime and affect the speed of growth. Our model is calibrated to match the main characteristics of the English economy in 1700 and the observed transition until 1850. We capture one of the key features of the British Industrial Revolution emphasized by economic historians — slow growth of output and productivity. Fertility limitation is responsible for higher per capita incomes, and these in turn increase industrialization probabilities. The paper also explores the availability of nutrition for poorer segments of society. We examine the influence of redistributive institutions such as the Old Poor Law, and find they were not decisive in fostering industrialization. Simulations using parameter values for other countries show that Britain’s early escape was only partly due to chance. France could have moved out of agriculture and into manufacturing faster than Britain, but the probability was less than 25%. Contrary to recent claims in the literature, 18th century China had only a minimal chance to escape from Malthusian constraints.     

On political business cycles with endogenous election dates

The pattern of policy-generated cycles which result in the Nordhaus model is examined under different hypotheses regarding election date determination.     

Exchange rates and bertrand oligopoly

The impact of exchange-rate changes on industrial prices seems ambiguous. Incomplete and even perverse pass-through has been observed: the import prices in the depreciating country decrease while those in the appreciating country increase. To explain these counterintuitive price reactions we consider a situation of international Bertrand competition: two firms, based in different countries, are selling in both countries simultaneously. The profit-maximizing duopolists set the prices for their products in each of the two markets which are segmented on the demand side. We then study the qualitative effect of an exogenous exchange-rate change on the Bertrand-Nash equilibrium. Under the strong assumption of linear demand and cost functions we have normal exchange-rate pass-through. However, allowing for more general cost structures in this simple static model enables us to show that the import prices in both countries might move in counterintuitive directions.     

EEC action in regard to consumer safety,particularly in the food sector

The paper discusses trends and actions of the European Economic Community (EEC) in the field of consumer safety. EEC law has no fast principle of consumer safety nor special agencies responsible for it. EEC actions are restricted to specific measures, especially in the area of foodstuffs (additives, colouring agents etc.). EEC law suffers a number of deficiencies. There is — with the exception of pharmaceutical products — no regulation on EEC-wide market withdrawals. Member state safety decisions may be in conflict and put strain on the EEC principle of free movement of goods. Certain directives contain only minimum standards and therefore do not make for common safety regulations in the EEC. There are gaps in the information exchange systems among the EEC and member states even though an EEC decision of 1984 improved the situation. The author goes on to make some suggestions for future action.

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Gemeinschaftsaktionen zugunsten der Sicherheit des Verbrauchers unter besonderer Berücksichtigung des Lebensmittelrechts

Zusammenfassung Die Europäischen Gemeinschaften (EG) haben nur begrenzte Kompetenzen im Bereich der Verbrauchersicherheit. Deshalb ist dem EG-Recht ein allgemeines Prinzip unbekannt, das die Sicherheitsinteressen des Verbrauchers produktunabhängig schützt. Vielmehr geht die EG problembezogen vor; das Einstimmigkeitsprinzip und die fehlende Öffentlichkeit erzwingen eine Beschränkung auf sehr konkrete und sehr spezifische Maßnahmen. Umfängliche Regelungen gibt es vor allem im Bereich von Lebensmitteln, insbes. hinsichtlich von Zusatzstoffen.Das EG-Recht weist eine Reihe von Lücken auf. Es fehlt — bis auf die Ausnahme der Arzneimittel — eine Regelung über den Rückruf von Produkten. Konflikte zwischen dem freien Warenverkehr und mitgliedstaatlichen Schutzinteressen aus Gründen tatsächlicher oder vermeintlicher Verbrauchersicherheit sind an der Tagesordnung. Der Informationsaustausch über Produktrisiken ist unzureichend; eine entsprechende Gemeinschaftsinitative erfaßt nicht freiwillige Maßnahmen.Der Beitrag erörtert schließlich die Möglichkeiten für künftige Gemeinschaftsaktionen.The paper is a slightly changed and updated version of a paper given at a seminar in Paris on 8 November 1983, organized by the Association Française pour le Droit de l'Alimentation and dealing with safety and food.

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Ludwig Krämer works at the EC Commission, Directorate General XI (Environment, Consumer Protection, and Nuclear Safety), 10 rue Guimard, B-1049 Brussels, Belgium. The views expressed in this paper are purely personal.