INCOME INEQUALITY AND POVERTY: SOME PROBLEMS

In an important recent book dealing with the measurement of income inequality with particular reference to poverty,¹ Prof. N. Kakwani derives several poverty indices, investigates the effect of negative income tax schemes with the help of those indices and gives a numerical illustration based on Malaysian data.
The aim of this note is to point out some logical flaws in his argument. Some of the ideas expressed in the part of his book we are concerned with have been disseminated for some time now² and referred to in subsequent literature;³ yet their shortcomings do not seem to have attracted anyone's attention. The introductory section gives a concise presentation of the relevant part of Kakwani's contribution. The next two sections deal with some problems with his approach.     

PROBLEMS IN WELFARE MEASUREMENT

In its first part, this note is a summary of the French version of the discussion paper submitted to the present IARIW Conference. ¹ The second part is devoted to theoretical aspects of aggregation, as regards preference aggregation, and gives necessary and sufficient conditions which are useful for our purposes.     

EMPLOYEE BENEFITS AND SOCIAL SECURITY

Future growth in employee benefits has a significant linkage with the long-range actuarial position of Social Security (OASDI). Earlier research by this author explained the sensitivity of the projected long-range OASDI deficit to the assumption about the rate of growth of fringe benefits. ¹ This paper summarizes, updates, and extends the discussion of the implications of fringe-benefit growth to include distributional effects     

Uncertainty, Patent Length and Firm R&D: a Comment

In a recent paper, Goel (1996) analyses the effect of patent length on firm's R&D in a model where the timing of innovations is stochastic. He concludes that: 'Higher patent length does not necessarily lead to more R&D spending' (1996, p. 77). More precisely, 'in projects with high probabilities of innovation success firms might actually reduce their R&D spending when the patent length increases' (1996, p. 78). This conclusion, however, is flawed. The purpose of this note is to correct Goel's analysis, showing that in his model an increase in patent's length unambiguously leads to higher R&D investment.¹     

DYNAMIC PROCESS ANALYSIS AND A MODEL OF THE TRADE CYCLE

In a recent article H. R. Hudson has merged real and monetary-factors to produce a comparative statics trade cycle model.¹ The present paper introduces specific dynamic relationships into the model, shows that as a result the system need not behave in the fashion described by Hudson, and argues that the model thus amended provides a more suitable explanation of post-war fluctuations.     

An IMPOSSIBILITY THEOREM IN PURE PUBLIC GOODS ECONOMIES WITH FEASIBILITY CONSTRAINTS: VOTING BY COMMITTEES IN NON-RECTANGULAR FEASIBLE SETS*

We consider the problem of choosing an alternative in a pure public goods economy with feasibility constraints when voters have "additively-separable and single-peaked"preferences.Our purpose is to identify tops-only voting procedures satisfying "nonmanipulability" and "voter sovereignty". First, we show that such procedures are generalizations of the schemes of "voting by committees"¹)introduced by Barbera, Sonnenschein and Zhou (1991) in the sense that these procedures are defined similarly for the generalized feasible set. Second, we establish that when no two goods can be simultaneously produced at their maximal feasible levels, the procedures are characterized by the existence of a very powerful voter.     

The Consumer Tax Equivalent of a Tariff with Imperfect Substitutes

In estimating the Consumer Tax Equivalent (CTE) and Producer Subsidy Equivalent (PSE) of a tariff, it is often assumed that the imported good is a perfect substitute for the relevant locally made good. However, in evaluating the economy-wide effects of a change in tariff using general equilibrium models, it is common to assume that the imported good is an imperfect substitute (so-called Arming-ton assumption)¹ This paper estimates CTE assuming imperfect substitution in order to be consistent with the assumption commonly used in general equilibrium models. It shows how estimates of the CTE and PSE are sensitive to assumptions about the substitution elasticity of demand and the price elasticity of supply for the locally made good.     

Strategic Trading and Welfare in a Dynamic Market

This paper studies a dynamic model of a financial market with N strategic agents. Agents receive random stock endowments at each period and trade to share dividend risk. Endowments are the only private information in the model. We find that agents trade slowly even when the time between trades goes to 0. In fact, welfare loss due to strategic behaviour increases as the time between trades decreases. In the limit when the time between trades goes to 0, welfare loss is of order 1/ N , and not 1/ N ² as in the static models of the double auctions literature. The model is very tractable and closed-form solutions are obtained in a special case.     

THE CONCENTRATION OF PERSONAL WEALTH IN AMERICA, 1969

This essay focuses on the problems of estimating the share of America's personal wealth in the hands of affluent individuals by a technique known as the estate multiplier method. Rather than exploring these problems in an empirical vacuum, we first present some results from the most recent estimates of the distribution of U.S. personal wealth.¹ The estimates—for the year 1969—are then used as a basis for gauging the sensitivity of estate multiplier estimates to variations in approach.
Section I presents new empirical findings dealing with the asset holdings of top wealth-holders and the super rich, and with the shares of specific assets owned by them. Also presented is information about the sex and marital status of the super rich.
Section II discusses various technical aspects of the estate multiplier as applied to federal estate tax returns. The main concern is with the weighting process, but attention is paid to the fact that estate tax returns filed in a given year are not for decedents who died in that year or any single year, and to the problems of adjusting the face value of life insurance to cash surrender value.     

Social Indicators

This article was prepared by Helen Owens of the Institute research staff.
Until the mid-1960's it was generally accepted that gross national product provided not only a measure of economic performance but also a useful overall indicator of some aspects of human welfare. The limitations of GNP with respect to most non-market phenomena were well recognised but the implicit assumption was made that the unmeasured aspects of welfare were positively related to changes in income as recorded in national accounts statistics. However, in the last decade or so, growing recognition of social costs and problems asociated with material advancement has led economists and other social scientists to look for new approaches to the measurement of social 'progress'.¹     

IMPACTS OF PRIVATISATION POLICY IN EUROPE

This paper examines the economic implications of the privatisation that has been occurring in Europe. Different sectors and different countries have developed separately, but policymakers can learn common lessons. Considerable experience of privatisation has produced a mounting body of empirical evidence. Developing more powerful analytical tools also permits greater rigour in studying the behaviour of newly privatised undertakings. This paper examines the nature of privatisation processes and looks at the forms of adjustment to regulatory regimes that have occurred to accommodate the newly privatised undertakings. It draws upon new empirical evidence and previous econometric studies to consider privatisation's efficiency effects, especially regarding technical or X-efficiency.¹     

TREATMENT OF GOVERNMENT ACTIVITY ON THE PRODUCTION ACCOUNT

This paper is the concluding part of a project described in an earlier paper in this journal.¹ The conceptual partition of government services into intermediate, individual and collective consumption is connected to the framework of the SNA and ESA. The paper shows how elements from both systems can be welded together in order to describe government productive activity more clearly within the general make-use matrix approach. After an attempt to clarify some of the existing terminology, figures are presented which show that the partition is feasible, in principle. The data also support the necessity of distinguishing between individual and collective consumption of government services leading to the concept of total individual consumption. Finally, the paper concludes that intermediate use, if properly defined, should be introduced as a subcategory of government consumption, but not subtracted at present from GDP.     

Changing One's Mind when the Facts Change: Incentives of Experts and the Design of Reporting Protocols

Experts often collect and report information over time. What reporting protocol elicits the most information? Here, a principal receives reports sequentially from an agent with privately known ability, who observes two signals about the state of the world. The signals differ in initial quality and, unlike previous work, differ in quality improvement . The paper finds that "mind changes" (inconsistent reports) can signal talent if a smart agent improves faster. Also, sequential reports dominate when the principal's decision is very sensitive to information; a single report dominates if the mediocre agent's signals improve faster or the agent is likely mediocre.
When the facts change, I change my mind. What do you do, sir? — John M. Keynes ¹     

Solutions For Some Dynamic Problems With Uncertainty Aversion

In a discounted expected-utility problem, tomorrow's utilities are aggregated across tomorrow's states by the expectation operator. In our problems, this aggregation is accomplished by a Choquet integral of the form ∫ u d P ^α, where α specifies uncertainty aversion. We solve all finite-state problems by either a closed form or a finite-dimensional iteration, and show that uncertainty aversion reduces the perceived return on investment, thereby decreasing the saving rate given elastic preferences and increasing the saving rate given inelastic preferences.
JEL Classification Numbers: C61, D81, D9.     

HEALTH-CARE COMPETITION: INTRODUCTION

Medicare expenditures increased 497 percent, federal medicaid expenditures 484 percent, and state and local medicaid expenditures 458 percent between 1970 and 1981. Private health-insurance premiums increased 329 percent, while patient direct payments rose 214 percent.¹ Although these results include quantity and price changes, Waldo and Gibson (1982) show that "price inflation has been a major factor in the increase in health-care spending." Moreover, health-care expenditures exceeded 10 percent of GNP (10.5 percent) for the first time in 1982 (Office of the Secretary 1983); the comparable figure in 1960 was 5.3 percent of GNP.
This rapid growth in price and quantity ("expenditures" or "costs"in the nontechnical literature) has raised a cry across the land for cost containment or increased competition in the health-care sector. Curiously, when one searches for a definition of "competition" in the same nontechnical literature, it is not immediately obvious what the word means.     

A SIMPLE CORRECTION FOR LOCAL MISSPECIFICATION

In this note a method of updating, or correcting, ML estimates is outlined¹ when departures from the assumed model are detected but believed to be small. These corrections have a particular simple regression interpretation and are thus easily obtained from standard regression packages by the applied worker. Inferences may also be drawn based on the same regression.     

INTERNATIONAL COMPARISONS OF AUSTRALIAN GDP IN THE 19TH CENTURY

This paper summarises the results of a new comparison of the level of Australian and U.K. real product in the 1890s, obtained by the direct deflation of money values of GDP by relative prices. The object of the study was to provide a check on the existing comparisons, obtained by extrapolation of time series of real GDP, as shown, for example, in Maddison (1982). Existing estimates imply that in the 1890s Australian GDP per capita was about 50 percent higher in the U.K. and U.S.A. and more than twice that for the average of 12 other western countries. The present study suggests these results probably overstate Australia's real GDP, and that Australian real GDP per capita was 36 percent higher than the U.K. in 1891 and 3 percent higher in 1900. Personal consumption per capita was 15 percent higher in Australia than in the U.K. in 1891, but about the same level in 1900.
Although this study compares prices and GDP in the colony of New South Wales with those in the U.K., the colony may be taken as representative of Australia as a whole.¹     

On Monetary Expansion, Terms of Trade and Economic Growth*

In a recent paper Roberts (1978) has extended Ramanathan's model (1975) to a two-sector, two-currency and two-country neoclassical growth model with flexible exchange rates. Under the assumption that the consumption good is relatively capital intensive, Roberts obtains two important propositions: an increase in domestic monetary expansion will increase the domestic overall capital intensity, decrease the foreign overall capital intensity, and worsen the terms of trade for the country importing the investment good; an increase in domestic monetary expansion may increase or decrease the level of trade. In this paper, we add to and generalize these results by using a simple yet thorough comparative statics analysis without the factor intensity condition.¹It will be seen that the complexity and ambiguity of Roberts' results are substantially reduced.     

FULL EMPLOYMENT AND THE NEW ECONOMICS -A COMMENT

Professor Killingsworth's paper 'Full Employment and the New Economics'¹ contains many controversial hypotheses. I prefer to avoid the pitfalls of the 'aggregate demand' versus 'structural change' controversy, and will just comment on some of the strained interpretations Killingsworth places on the data.     

AN ANALYSIS OF THE FACTORS THAT INFLUENCE STUDENT PERFORMANCE: A FRESH APPROACH TO AN OLD DEBATE

There is a general consensus that student performance at all levels has been deteriorating. Despite numerous attempts by researchers to link school expenditures with student performance, a clear relationship does not exist. Since a number of difficulties plague earlier studies, this paper attempts to remedy these problems by offering a better data design and a sounder methodology. This study uses the J 992 Massachusetts Educational Assessment Program (MEAP) test scores from 4^th, 8^th, and 12^th grade students to measure student performance. Since each student's grade falls into one of five possible categories, the application of an ordered logit model incorporates the natural ordering of the MEAP scores. The results indicate that family background and the stability of a community are the main factors affecting student performance. The data suggest that higher levels of spending have no consistent or systematic relation with student performance. (JEL 12, C25)