Equilibrium dynamics in discrete-time endogenous growth models with social constant returns

The existing literature establishes possibilities of local determinacy and dynamic indeterminacy in continuous-time two-sector models of endogenous growth with social constant returns. The necessary and sufficient condition for local determinacy is that the factor intensity rankings of the two sectors are consistent in the private/physical and social/value sense. The necessary and sufficient condition for dynamic indeterminacy is that the final (consumable) good sector is human (pure) capital intensive in the private sense but physical (consumable) capital intensive in the social sense. This paper re-examines the dynamic properties in a discrete-time endogenous growth framework and finds that conventional propositions obtained in continuous time need not be valid. It is shown that the established necessary and sufficient conditions on factor intensity rankings for local determinacy and dynamic indeterminacy are neither sufficient nor necessary, as the magnitudes of time preference and capital depreciation rates both play essential roles. We have benefitted from discussion with Robert Becker, Eric Bond, Michael Kaganovich, Karl Shell and participants of the Midwest Macroeconomic Conference in Chicago and the Midwest Economic Theory and International Trade Meetings at Indiana University. The fourth author acknowledges financial support from the Institute of Economics and Business Administration of Kobe University and the Institute of Economic Research of Kyoto University to enable this international collaboration.     

How to Turn an Industry Green: Taxes versus Subsidies

Environmental policies frequently target the ratio of dirty to green output within the same industry. To achieve such targets, the green sector may be subsidized or the dirty sector be taxed. We show that in a monopolistic competition setting, the two policy approaches have different welfare effects, depending on the design of the instrument (ad valorem versus unit instrument) and the initial situation (size of the dirty sector). For a strong green policy (a severe reduction of the dirty sector) a tax is the dominant instrument. If initially the dirty sector is important, then for moderate policy targets a subsidy may be the superior tool. These findings have implications for policies such as the Californian Zero Emission Bill.This paper benefited from the comments of Wilhelm Althammer, Michael Kohlhaas, Michael Pflüger, Thomas Ziesemer, participants at the EEA Annual Congress 2003, Stockholm, at the WEAI Annual Conference 2004, Vancouver, and two anonymous referees. The authors are responsible for any remaining errors.     

Bertrand-Edgeworth duopoly with unit cost asymmetry

Summary This paper characterizes the set of Nash equilibria in a price setting duopoly in which firms have limited capacity, and in which unit costs of production up to capacity may differ. Assuming concave revenue and efficient rationing, we show that the case of different unit costs involves a tractable generalization of the methods used to analyze the case of identical costs. However, the supports of the two firms' equilibrium price distributions need no longer be connected and need not coincide. In addition, the supports of the equilibrium price distributions need no longer be continuous in the underlying parameters of the model.As an application of our characterization, we examine the Kreps-Scheinkman model of capacity choice followed by Bertrand-Edgeworth price competition and show that, unlike in the case of identical costs, Cournot equilibrium capacity levels need not arise as subgame-perfect equilibria. The low-cost firm has greater incentive to price its rival out of the market than exists under Cournot behavior.We are grateful to Joseph Harrington, Marie Thursby, Casper de Vries and, especially, William Novshek for helpful discussions and comments. Thomas Faith and Ioannis Tournas provided valuable research assistance. This paper was presented at the Winter Meetings of the Econometric Society in December 1988, the Midwest Mathematical Economics Conference in April 1989, the Sixteenth Annual Congress of the European Association for Research in Industrial Economics in August 1989, the European Meetings of the Econometric Society in September 1989, and in seminars at the Ecole Nationale des Ponts et Chaussées, Erasmus University Rotterdam, Indiana University, INSEAD, Texas A&M University, Tilburg University, the University of Bonn and the University of Florida. Deneckere acknowledges financial support through National Science Foundation Grant SES-8619012 and the Kellogg Graduate School of Management's Beatrice/Esmark Research Chair. Kovenock acknowledges financial support through Erasmus University Rotterdam, the Purdue Research Foundation, the Ford Motor Company Fund, and an Ameritech Foundation Summer Faculty Research Grant.     

The impact of risk aversion on information transmission between firms

This paper investigates whether and to what extent the presence of risk aversion affects the welfare implications of information transmission in one of the most fundamental oligopoly models—a Cournot duopoly model with common demand uncertainty. It aims to make a bridge between the literature dealing with information sharing in oligopoly and the one discussing the firm under uncertainty. We can show that the average output level of each firm is quite sensitive to the type and amount of information, and that the presence of risk aversion has an effect of decreasing the welfare of firms, whence information transmission may sometimes be harmful rather than beneficial to risk averse firms. These results have some policy implications.We are indebted to Hirofumi Uzawa, Masao Fukuoka, Ryuzo Sato, Koichi Hamada, Michihiro Ohyama, Kunio Kawamata, Yasunori Ishii, Noboru Sakashita, Koji Okuguchi, and Masamichi Kawano for useful comments and discussions. An earlier version of this paper was presented at the Annual Meeting of the Japan Association of Economic Theory and Econometrics, University of Tsukuba, October 1989, and at the Keio Conference on Market Mechanism and Industrial Organization, Hakone, November 1989. Any errors which may remain are our sole responsibility. Partial financial help from the Tokyo Council for Economic Research, New York University, and the Ministry of Education, Grant C-01530001 is gratefully acknowledged.     

Telephone pools and economic incentives

We identify the incentive structure for a firm that participates in a pooling arrangement. These pooling arrangements have been common in the telecommunications industry, both in the United States and in Canada. We identify alternative mechanisms, including cost caps, yardstick competition, transfer prices, and fixed revenue allocators. A pooling firm has inferior incentives for cost reducing innovation, truthful reporting of costs, and avoidance of abuse relative to alternative mechanisms. These incentive problems are similar to those that arise under rate-of-return regulation. Notably, transfer/access pricing, does not rectify the poor incentives embodied in pools. However, pooling does facilitate demand enhancement, due to its ability to internalize potential network effects.The authors wish to gratefully acknowledge the financial support of Southwestern Bell Telephone in the preparation of this paper. The views expressed are those of the authors and not those of Southwestern Bell. We are grateful for comments received at the 14th Annual Conference of the Center for Research in Regulated Industries, Graduate School of Management, Rutgers University, and valuable suggestions by Michael A. Crew and the referee.     

Tariff reforms with rigid wages

This paper analyses the effects of tariff reforms on welfare and market access in a competitive small open economy, which is characterised by involuntary unemployment due to non-market clearing wages that are fixed either in terms of the numeraire or in real terms. We show that recent tariff-reform results can be extended to integrated reforms of tariffs and the wage rate, and that the inherent tension between reforms that increase welfare and market access carries over. We also derive welfare increasing tariff-reform strategies that keep the wage rate constant and show that this tension may be attenuated. We thank Peter Neary, an anonymous referee, as well as participants at the GEP Conference on New Directions in Trade Theory and at the ETSG Annual Conference in Athens for helpful comments. We acknowledge gratefully financial support from the Leverhulme Trust under Programme Grant F114/BF.     

Structure of distortion equilibria and welfare in a multiregional economy

Summary We consider a convex economy with multiregions, each region facing different specific tax-subsidies. The model reduces to a model of a closed economy with an aggregate production set when there is a single region. It can also represent a model of an international economy through a reinterpretation of variables. We show that there is a unique path of allocations from a distortion equilibrium to the optimum that can be followed by proportionate changes of price distortions. Welfare monotonically increases as one follows the path towards optimum. The information on the structure of equilibria reduces multidimensional comparative statics into a one dimensional problem. The global Newton method of Smale can be used to follow the path in the direction of increasing welfare, allowing us to do comparative statics computationally. Global considerations directly show that, under a sign condition of the Jacobian of a tax function, piecemeal proportional reductions of price distortions improve welfare. A variation of the condition unifies other such conditions in the literature.I would like to thank William Brock, Takashi Fukushima, Tatsuo Hatta, Michael Jerison, Taesung Kim and referees of this Journal who provided me with many constructive comments and references. Previous versions of this paper were presented at the Far Eastern Meeting of the Econometric Society, the Midwestern Mathematical Economics Conference, and the International Conference of Korean Economists. I wish to thank the participants of these conferences for many nice comments. I also wish to thank Bruce Dieffenbach, Thad Mirer and editors of this journal who helped to streamline exposition.     

Strategic Firm Behavior Under Average-Revenue-Lagged Regulation

Price caps have been shown to have incentive properties superior to traditional rate of return regulation. Average-revenue-lagged regulation (ARL) is attractive in that steady-state prices are known to be efficient. We show that the ARL scheme can be manipulated by the firm so as to yield the unregulated global profit maximum. While tests exist that can provide the regulator with evidence of this strategic behavior, we also demonstrate that the unregulated global profit maximum will not be attainable if Laspeyres (L) regulation is employed.Jel classification: L43, L51I would like to thank Michael Crew and an anonymous referee for their extremely helpful suggestions.     

Queue-rationed equilibria with fixed costs of waiting

The welfare impact of price controls is examined here in an exchange economy where agents may need to queue in order to make a transaction. Time spent in the queue is an endogenously-determined transaction cost, which agents take as given and which adjusts so as to clear markets when prices are prevented from performing this function. When queuing is required, it enters the household’s decision as a fixed cost, rather than increasing in proportion to the amount of good exchanged, as is far more common in the previous literature. Existence of competitive equilibrium is established for this general equilibrium model. Price controls are shown to cause notable inefficiencies, which differ from those of a proportional cost model. Moreover, in certain environments, price controls will unambiguously harm all individuals relative to a Walrasian equilibrium. The author thanks Beth Allen, Chris Phelan, and Jan Werner for their valuable guidance on this work, as well as Michael Magill, Martine Quinzii, Val Lambson, Nuray Akin, participants of the 2005 Midwest Economic Theory Conference, and members of the Mathematical Economics Workshop at the University of Minnesota. This work also benefited from the thoughtful comments of an anonymous referee. Partial funding came from NSF grants DMI-0070257 and DMI-0217974.     

The role of externalities and information aggregation in market collapse

We examine the role that belief, network externality, and information aggregation play in inefficient market collapses. After receiving consecutive negative shocks, some ex-ante identical Bayesian agents will be discouraged about the unknown state of the market they invest; therefore, they will stop investing. This decision will have two effects: first, it will cause agents to aggregate information through social/observational learning; second, it will decrease the network externality effect. We show that there might be an inefficient market collapse if the externality effect diminishes too much, and the cost of re-entry to the market is too high. We also analyze the effects of strategic delay and experimentation on the exit decision of the agents. I especially thank Thomas D. Jeitschko, Matthew Mitchell, B. Ravikumar Ted Temzelides. I also thank anonymous referees, an associate editor, John Conlon, Larry Samuelson, Troy Tassier, Stephen Williamson, and seminar participants of the University of Saskatchewan, Georgia Tech, Concordia University, University of Manitoba, Iowa Alumni Workshop, Midwest Economic Theory Conferences held at Indiana Bloomington, and Notre Dame, and 1st International Conference on Business, Management and Economics organized by Yasar University.     

I. BOOK REVIEWS

Gerhard W eisser , Professor at Cologne University: Grenzen und Probleme des Planung
Capitalism, Market Socialism and Central Planning-Readings in Comparative Economic Systems (ed. Wayne A. LEEMAN)
Francesco VITO et al.: Lo sviluppo economico regionale
Nicolas S pulber , Professor of Economics, Indiana University: Soviet Strategy for Economic Growth and Foundations of Soviet Strategy for Economic Growth
Charles B ettelheim : L'lnde indipendante, Paris, Librairie Armand Colin, 1962, 526pp.
Pierre DES M azis : Le vocabulaire de l'économie politique. Essai sur i'apport du langage commun
Deuxième Conférence des coopératives de I'Arctique – Second Conference on Arctic Co-operatiues (trilingual document in French, English and Eskimo).     

On the relative performance of alternative regulatory instruments for constraining a firm's profitability

The issue addressed in this paper is whether certain types of regulatory instruments perform better than others when the regulator's objective is simply to restrain the regulated firm's profitability. Price cap, profit cap, profit/sales and mark-up-on-average cost caps are considered as regulatory instruments, whilst expense preference, profits, and sales revenues are considered as potential arguments in the firm's objective function. The main finding is that, for the range of objective functions considered, the price cap leads to the best outcome from an economic welfare standpoint.     

Addiction and interaction between alcohol and tobacco consumption

This paper adopts a multi-commodity habit formation model to study whether unhealthy behaviors are related, i.e. whether there are contemporaneous and inter-temporal complementarities between alcohol and tobacco consumptions in Italy. To this aim time series data of per-capita expenditures and prices during the period 1960 to 2002 are used. Own price elasticities are negative and tobacco appears to be more responsive than alcohol demand, although both responses are less than unity. Cross price elasticities are also negative and asymmetric thus suggesting complementarity. A “double dividend” could then be exploited, because public policy needs to tackle the consumption of only one good to control the demand of both. These results show that the optimal strategy for maximizing public revenues would be to raise alcohol taxation more than tobacco taxation. Finally, past consumption of one addictive good does not significantly reinforce current consumption of the other. We thank participants to the Annual Conference of the European Society for Population Economics, Verona June 2006; the 61st European Meeting of the Econometric Society, Vienna August 2006, and participants of the conference “Individual and Collective Choices in Health Protection”, Genoa November 2005 for helpful comments. We would also like to thank, without implicating, Pier Luigi Rizzi and two anonymous referees for helpful comments. Financial support from the University of Siena, PAR grant (Atheneum Research Grant), is gratefully acknowledged.     

The Changing Position of the Rural Sector in the Australian Economy since 1945

This article was prepared by Dr A. W. Smith and Rhonda Smith. It is a substantially revised version of a section of a paper presented to the 21st Annual Conference of the Australian Agricultural Economics Society held in Brisbane in February 1977. The authors are grateful to Alistair Watson, Roy Powell and Louise Barton for comments on earlier drafts     

Growing Silicon Valley on a landscape: an agent-based approach to high-tech industrial clusters

We propose a Nelson-Winter model with an explicitly defined landscape to study the formation of high-tech industrial clusters such as those in Silicon Valley. The existing literature treats clusters as the result of location choices and focuses on how firms may benefit from locating in a cluster. We deviate from this tradition by emphasizing that high-tech industrial clusters are characterized by concentrated entrepreneurship. We argue that the emergence of clusters can be explained by the social effect through which the appearance of one or a few entrepreneurs inspire many followers locally. Agent-based simulation is employed to show the dynamics of the model. Data from the simulation and the properties of the model are discussed in light of empirical regularities. Variations of the model are simulated to study policies that are favorable to the high-tech economy.JEL Classification: L11, R12This paper has been presented at the 9th International Schumpeter Society Conference in Gainesville, Florida, the Western Economic Associations 77th Annual Conference in Seattle, Washington, the 24th Annual Research Conference of the Association for Public Policy Analysis and Management in Dallas, Texas, and the Workshop on Industry and Labor Dynamics: The Agent-Based Computational Economics Approach in Turin, Italy. I would like to thank Rob Axtell, Giovanni Dosi, Olav Sorenson, and an anonymous referee for their comments, suggestions, and encouragement. I am grateful to Nikesh Patel for his superb assistance.     

Profit maximization mitigates competition

Summary We consider oligopolistic markets in which the notion of shareholders' utility is well-defined and compare the Bertrand-Nash equilibria in case of utility maximization with those under the usual profit maximization hypothesis. Our main result states that profit maximization leads to less price competition than utility maximization. Since profit maximization tends to raise prices, it may be regarded as beneficial for the owners as a whole. Moreover, if profit maximization is a good proxy for utility maximization, then there is no need for a general equilibrium analysis that takes the distribution of profits among consumers fully into account and partial equilibrium analysis suffices.We wish to thank Hildegard Dierker and Nina Maderner for many helpful comments. This research was partially supported by the Danish Social Science Research Council. E. Dierker is grateful to the Department of Economics, University of Copenhagen, for its outstanding hospitality. B. Grodal appreciates the support from the Department of Economics, University of Vienna.     

Does Gibrat's Law hold among young,small firms?

According to Gibrat's Law of Proportionate Effect, the growth rate of a given firm is independent of its size at the beginning of the examined period. Aimed at extending this line of investigation, the present paper uses quantile regression techniques to test whether Gibrat's Law holds for new entrants in a given industry: that is for new small firms in the early stage of their life cycle. The main finding is that for some selected industries in Italian manufacturing Gibrat's Law fails to hold in the years immediately following start-up, when smaller firms have to rush in order to achieve a size large enough to enhance their likelihood of survival. Conversely, in subsequent years the patterns of growth of new smaller firms do not differ significantly from those of larger entrants, and the Law therefore cannot be rejected.JEL Classification: L11, L60Previous versions of this paper were presented at the 27th Annual EARIE Conference (Lausanne, 7-10 September 2000) and at seminars held between 2000 and 2003 at the Economics Department of Harvard University, the Catholic University of Milan, the University of Ferrara, the University of Bologna, the Bank of Italy, and Athens University of Economics & Business. We would like to thank Carlo Bianchi, Giuseppe Colangelo, Giovanni Dosi, Steven Klepper (Editor), Stephen Martin, Ariel Pakes, Aman Ullah and, in particular, Helen Louri and two anonymous referees for their valuable comments on earlier drafts. Financial support from MIUR (Year 2000; protocol #MM13038538_001; project leader: E. Santarelli) is gratefully acknowledged.Correspondence to: E. Santarelly     

Optimal ownership in joint ventures with contributions of asymmetric partners

This paper addresses two questions concerning Joint Venture (JV) agreements. We first study the formation and the performance of a JV when the partners’ contribution has a different impact on the JV profits. Then, we check whether the JV is more likely as well as the welfare level improves when the decision on JV profit sharing among partners is delegated to an independent JV management (Management sharing) rather than jointly taken by partners (Coordinated sharing). We find that the firm whose effort has a higher impact on the JV’s profits should have a larger profit share. Moreover, at least in some cases, Management sharing increases both welfare and the probability that the JV is formed.      

Enhancing economic literacy of classroom teachers

For the past two summers, the Division of Education and the Division of Business and Economics at Indiana University at Kokomo have collaborated to produce an intense teamtaught summer economics course for pre-service education majors and in-service classroom teachers. The dual emphasis on content and application allows economics to integrate every aspect of the classroom and allows Praxis achievement. This paper explores the essential nature of Praxis in making the content or practice link—so critical for successful implementation of economics in K-12 classrooms. To determine their attitudes toward and knowledge of economics education, a pretest and post-test format was adopted. In addition, the institutional enhancers and inhibitors that dramatically affected the development and implementation of the new course of study are presented. This paper was presented at the Forty-Fourth International Atlantic Economic Society Conference in Philadelphia, Pennsylvania, October 9–12, 1997. Discussants' comments are incorporated.