On economic efficiency under non-convexity

This paper investigates economic efficiency under non-convexity. The analysis relies on a generalization of the separating hyperplane theorem under non-convexity. The concept of zero-maximality is used to characterize Pareto efficiency under non-convexity. We show the existence of a separating hypersurface that can be used to provide a dual characterization of efficient allocations. When the separating hypersurface is non-linear, this implies that non-linear pricing is an integral part of economic efficiency. Implications for the decentralization of economic decisions under non-convexity are discussed.     

Measuring the productive efficiency of a group of firms

While the conventional Farrell-Färe approach to efficiency measurement can identify the most inefficient firms, it fails to consider the efficiency of a group of firms thoroughly. This paper introduces efficiency measures that can be used to find the efficiency of a group of firms and pinpoint whether the group inefficiency is due to inefficiency inside or outside individual firms. Furthermore, a new way of finding the revenue maximum shadow price vector is introduced to compute the allocative efficiency of individual firms when price data are not available.     

Wage inequality and overeducation in a model with efficiency wages

Abstract.  This paper shows that the existence and persistence of 'overeducation' can be explained by an extension of the efficiency wage model. When calibrated to fit the amounts of overeducation found in most empirical studies, the model implies that both the relative wage and the relative employment of high‐skill workers depend inversely on aggregate economic activity. Keeping aggregate employment constant, furthermore, low‐skill unemployment rises, following an increase in the relative supply of high‐skill labour, and relative wages may be insensitive to changes in relative labour supplies. The model may help to explain rising wage inequality in some countries since the early 1970s. JEL classification: J31     

Measuring the trade-off between economic growth and a clean environment

This article surveys various aspects of the measurement of environmental quality from the view point of national accounting and welfare economics. It focuses on the question whether GNP or NNP should be corrected for environmental change (green or eco-GNP) or whether physical accounts provide sufficient information for an assessment of the trade-off mentioned above. We conclude that valuation of (services from) environmental capital cannot be avoided for such assessment, but can only be made using a model based approach. Statistical agencies should continue to collect data on environmental quality and to value changes in environmental capital in the context of national resource accounting. However, official statisticians should refrain from correcting GNP or NNP for environmental change, as this correction implicitly contains a political judgment and cannot be based on mere technical knowledge.     

Can regional policy in a federation improve economic efficiency?

In the European Union and in many federal and non-federal countries, the central government pays subsidies to poor regions. These subsidies are often seen as a redistributive measure which comes at the cost of an efficiency loss. This paper develops an economic rationale for regional policy based on economic efficiency. We consider a model of a federation consisting of a rich and a poor region. The economy is characterized by imperfect competition in goods markets and unemployment. Firms initially produce in the rich region but may relocate their production to the poor region. We show that a subsidy on investment in the poor region unambiguously increases welfare if labour markets are competitive. If there is unemployment in both regions, the case for regional subsidies is weaker.     

Monopoly,economic efficiency and unemployment

The objective of this paper is to analyze the efficiency consequences of monopoly from the perspective of an efficiency-wage model of unemployment based on Shapiro and Stiglitz (1984). An important feature of our model is that a firm can raise the probability that a shirking worker is detected by increasing its effort or investment in the monitoring of workers. Using this model we study how a monopolist's decision with regard to employment, output and monitoring is affected by exogenous variables such as job separation rate, technological advances, market size, and unemployment benefits. Furthermore, by comparing with the competitive equilibrium we find that monopoly is associated with higher unemployment rate, smaller output, and less monitoring. Surprisingly, however, monopoly does not necessarily lead to lower welfare level.     

Measuring consumption efficiency with utility theory and stochastic frontier analysis

The concept of production efficiency has been studied since the 1960s, but consumption activity as well may be inefficient for various reasons, such as product complexity, lack of information, the bounded rationality of the consumer and imperfect markets, to name a few. This study proposes a conceptual framework for measuring the consumption efficiency of differentiated products, based on traditional utility theory. It employs stochastic frontier analysis (SFA) in an empirical analysis. It makes use of hedonic price theory to link traditional utility theory and the SFA framework. When the developed model is applied to the Korean personal computer market, empirical results indicate the levels and distribution of consumption efficiency in that market. The findings afford us a better understanding of the characteristics of the innovation process in that market.     

Measuring the output gap in Switzerland with linear opinion pools

We use the recently proposed linear opinion pool methodology of Garratt et al. (2014) to construct real-time output gap estimates for Switzerland over the out-of-sample period from 2003:Q1 to 2015:Q4. The model space consists of a large number of bivariate VAR specifications for the output gap and inflation, with each VAR specification using a different estimate of the output gap, lag order, and structural break information. We find that the linear opinion pool performs rather poorly. Real-time estimates of the output gap are no more accurate than those from some simple benchmark models, no more robust to ex post revisions than the real-time estimates of the individual univariate output gaps, and do not produce more accurate forecasts of inflation. The key driver of ‘good’ forecast performance is structural break information. Once the same structural break information is conditioned upon in all prediction models, the gain from averaging over many different pools of models that utilize various output gap estimates or lag structures in the VAR specification is of negligible magnitude.     

Measuring national economic performance without using prices

Recent years have seen increasing awareness of the deficiencies of conventionally defined national income as a measure of a nation's overall economic performance. Alternative measures have been proposed involving either the modification of national income accounting conventions, or the abandonment of national income itself in favour of something such as the Genuine Progress Indicator, GPI. However, such alternatives, like national income itself, all involve the use of monetary valuation for aggregation. This paper proposes a new approach to the measurement of national economic performance, which follows naturally from ecological economics as the study of economic activity rooted in a proper appreciation of its material circumstances, and which does not involve using prices for aggregation. The paper gives some results for three variants of the new approach, and compares and discusses them. While this new approach does not purport to provide a single definitive assessment of the sustainability of current economic activity, which is an infeasible goal, it could provide useful inputs to relevant research activity, and to policy analysis and debate.     

Trade efficiency and economic development: evidence from a cross country comparison

Economic theory suggests that development is enhanced through income growth, which is driven through increased trade. However, the empirical evidence of such a relationship most of the times is proved to be weak. In this study we try to determine the factors influencing this relationship by measuring ‘trade efficiency’. Using the data envelopment analysis (DEA) window method for a sample of 16 OECD countries, we obtained the efficiency scores and the optimal output levels for the inefficient countries for a time period of 5 years under consideration. Results drawn from the broadly used ratio analysis were also compared to the results derived from the DEA model. Our empirical findings show that ‘trade efficient’ countries have clear characteristics like low-exchange rates for exports, low R&D intensity, high-value intra industry trade and positive impact of net trade on their gross domestic product.     

Controlling a biological invasion: a non-classical dynamic economic model

This paper analyzes the optimal intertemporal control of a biological invasion. The invasion growth function is non-convex and control costs depend on the invasion size, resulting in a non-classical dynamic optimization problem. We characterize the long run dynamic behavior of an optimally controlled invasion and the corresponding implications for public policy. Both control and the next-period invasion size may be non-monotone functions of the current invasion size; the related optimal time paths may not be monotone or convergent. We provide conditions under which eradication, maintenance control, and no control are optimal policies.      

Labour markets, social justice and economic efficiency

In conventional economic theory, a trade-off supposedly existsbetween social justice and economic efficiency. In reality,market and other economic institutions are dominated by powerrelations, so that the sponsorship of social justice is a productivefactor. Neo-liberal economic policies, by lifting the constraintson the exercise of unequal power, increased injustice and triggereda downward economic and social spiral. Reversing this requiresa revolution in economic theory and policy focused on full employment,the working of labour markets, the organisation of work, andhousehold organisation, social provision and self-sufficiency.     

Measuring technical efficiency in the Greek agricultural sector

This paper measures the degree of technical efficiency of Greek farms at discrete points in time. Stochastic frontier production functions are estimated from four annual Farm Accountancy Data Network (FADN) surveys of the 1992–1995 period. From the results, a measure of technical efficiency is calculated for each farm for each year. The four distributions of technical efficiency values are examined and compared. All four samples show a wide range of farm-specific technical efficiency but efficiency is improving over the period. The paper also presents frontier estimates for small and large farms classified according to economic size. In that case, technical efficiency measures are calculated and their distributions are examined and compared. The results show that large farms are more efficient than small farms. However, efficiency is improving in both size farms over the period. In general, the results of this study indicate that there is substantial scope for improving technical efficiency of Greek farms.     

Portfolio efficiency of a dynamic capital asset pricing model

In the present study we show that, based on equally weighted portfolios of continuously listed Finnish and Swedish stocks, aDynamic Model of Capital Asset Pricing (DCAPM) outperforms the static Capital Asset Pricing Model (CAPM) in the Super Criterion Test. It is demonstrated that the portfolio efficiency of the dynamic model is improved, when using a properly defined transition matrix in the Kalman Filtering Algorithm.The advice and encouragement of Professor Leif Nordberg (Department of Statistics, Åbo Akademi University) is gratefully acknowledged. I thank Jaana Aaltonen for her assistance in monitoring the computer programs. I also thank an anonymous referee for his valuable comments and suggestions for improving the quality of the paper.     

Growth and unemployment in a shirking efficiency wage model

Abstract.  The relationship between growth and unemployment in a general equilibrium shirking efficiency wage model is explored. In contrast to past work on this subject, detected shirkers are not dismissed but instead incur a monetary punishment. As a result of this modification, the model can account for a stable rate of unemployment when there is positive population growth and/or technological growth in the economy. Moreover, I show that institutions and policies that limit the ability of firms to punish detected shirkers or restrict their use of discretionary bonuses can increase unemployment and reduce the economy's long run growth rate. JEL Classification: E0, J41     

A test of stability in a linear altruism model

Linear altruism predicts the estimated preferences to be independent of the subject’s position in the game, if the role allocation is randomly determined, because subjects, in each role, have the same preferences ex ante. We test and reject this hypothesis.