TAX-PRICE REFORM WITH DIRECTLY UNPRODUCTIVE PROFIT-SEEKING (DUP) ACTIVITIES*

This paper explores the extent to which insights available from existing writings on directly unproductive profit-seeking (DUP) activities in international trade modify rules of tax and tariff reform in normative public economics and examines in what way these should affect advice on tax policy usually given to developing countries. The analysis proceeds by developing two models. The first incorporates revenue seeking directly into a standard open economy public finance model and examines whether analysis of policy reform and economic costs of distortionary tariffs must be modified. The second includes a political component in the form of lobbying for subsidies – the expenditure side of the budget – as well as a normative economic component that raises taxes – the revenue side – to finance the social costs of such lobbying. The model can be used to determine the effects of politically determined expenditures on tax setting. The analysis shows that the grammar of welfare-theoretic arguments that underlies the reform and design of tax and tariff structures is robust to the inclusion of DUP activities of the type considered here. In particular, the latter lend no presumption in favor of uniformity in tax and tariff structures. It is argued that existing policy advice on tax and tariff reform derived from models where DUP activities have traditionally played no role continues to be appropriate when account is taken of formal treatments of DUP-type phenomena extant in the current literature.     

Macroeconomic policy and output comovement: The formal and informal sectors in India

Is the informal sector different from the formal sector? We present an aggregative analysis of the formal and informal sectors in India to investigate the extent to which the two can be viewed as broadly homogeneous. Using a macroeconometric framework, the paper analyzes over past three decades the behavior of the two sectors with respect to each other and several government-related policy variables. It is found that the formal and informal sectors display markedly different attributes in terms of their relationship to policy variables. Furthermore, the informal sector appears to be decoupled from the rest of the economy.     

Empirical Analysis of a Dynamic Duopoly Model of Competition

Empirically validating and testing the specification of game theoretic models has received limited attention in the marketing literature. The authors provide an econometric framework for estimating the parameters of response functions when the observed data in the market place are the Nash equilibrium outcomes of an underlying dynamic duopoly game specification. Specifically, the estimation procedure accounts for the joint endogeneity of market shares and marketing efforts of market rivals using a system of simultaneous equations that included the market response function and the Nash equilibrium conditions. A formal statistical test is used to detect model misspecification. The empirical analysis is carried out using data from four product markets: pharmaceutical, soft drink, beer, and detergent. Comparisons are provided with conventional estimation of the response function parameters in which the equilibrium conditions are ignored in the estimation. Managerial implications of the empirical results are discussed.     

THRESHOLD AUTOREGRESSIVE MODELING IN FINANCE: THE PRICE DIFFERENCES OF EQUIVALENT ASSETS1

Threshold autoregressive (TAR) models condition the first moment of a time series on lagged information using a step-function-type nonlinear structure. TAR techniques are expected to be relevant in financial time-series modeling in situations where deviations of prices from equilibrium values depend on discrete transaction costs and where market regulators follow intervention rules based on threshold values of control variables. an important finance application is in modeling the difference in prices of equivalent assets in the presence of transaction costs. the focus of this paper is on motivating the use of TAR models in this context and on the statistical estimation and testing procedures. the procedures are illustrated by modeling the difference between the prices of an index futures contract and the equivalent underlying cash index. It is found that the hypothesis of linearity is conclusively rejected in favor of threshold nonlinearity and that the estimated thresholds are largely consistent with arbitrage-related transaction costs.     

Money and production, and liquidity trap

We prove the existence of monetary equilibrium in a finite horizon economy with production. We also show that if agents expect the monetary authority to significantly decrease the supply of bank money available for short-term loans in the future, then the economy will fall into a liquidity trap today.     

APPLICATIONS OF GAME THEORY MODELS IN AGRICULTURE*

Due to the time lag between investment and payoff, the price-taking nature of agriculture, stochastic weather variables and other factors, the uncertainty faced by decision makers in agriculture is greater than and different from that confronting managers of most other sectors of economy. In this paper, game theory models have been applied to the problem of decision making under uncertainty in agriculture. The authors examine and compare the pros and cons of the four conventional theories of choice in decision making in agriculture. The four theories are: (a) Wald's maximin criterion, (b) Laplace's principle of “insufficient reason”, (c) Hurwicz's “optimism-pessimism” criterion and (d) Savage's “regret” criterion. In this study, applications have been made to the choice of type of farming, optimum dosage of fertiliser and manure and the most appropriate time of selling agricultural produce. The authors propose an additional theory of choice—the criterion of “benefit”—which seems more appropriate than the conventional theories under many situations.     

Will African Agriculture Survive Climate Change?

Measurement of the likely magnitude of the economic impact ofclimate change on African agriculture has been a challenge.Using data from a survey of more than 9,000 farmers across 11African countries, a cross-sectional approach estimates howfarm net revenues are affected by climate change compared withcurrent mean temperature. Revenues fall with warming for drylandcrops (temperature elasticity of –1.9) and livestock (–5.4),whereas revenues rise for irrigated crops (elasticity of 0.5),which are located in relatively cool parts of Africa and arebuffered by irrigation from the effects of warming. At first,warming has little net aggregate effect as the gains for irrigatedcrops offset the losses for dryland crops and livestock. Warming,however, will likely reduce dryland farm income immedia-tely.The final effects will also depend on changes in precipitation,because revenues from all farm types increase with precipitation.Because irrigated farms are less sensitive to climate, wherewater is available, irrigation is a practical adaptation toclimate change in Africa.     

Corporate Governance in India

The Indian corporate governance system has both supported and held back India's ascent to the top ranks of the world's economies. While on paper the country's legal system provides some of the best investor protection in the world, enforcement is a major problem, with overburdened courts and significant corruption. Ownership remains concentrated and family business groups continue to be the dominant business model, with significant pyramiding and evidence of tunneling activity that transfers cash flow and value from minority to controlling shareholders. But for all its shortcomings, Indian corporate governance has taken major steps toward becoming a system capable of inspiring confidence among institutional and, increasingly, foreign investors. The Securities and Exchanges Board of India (SEBI), which was established as part of the comprehensive economic reforms launched in 1991, has made considerable progress in becoming a rigorous regulatory regime that helps ensure transparency and fair practice. And the National Stock Exchange of India, also established as part of the reforms, now functions with enough efficiency and transparency to be generating the third‐largest number of trades in the world, just behind the NASDAQ and NYSE. Among more recent changes, the enactment of Sarbanes—Oxley type measures in 2004—which includes protections for minority shareholders in family‐ or “promoter”‐led businesses—has contributed to recent increases in institutional and foreign stock ownership. And while family‐ and government‐controlled business groups continue to be the rule, India has also seen the rise of successful companies like Infosys that are free of the influence of a dominant family or group and have made the individual shareholder their central governance focus.