PRICE AND EXCHANGE RATE DETERMINATION DURING THE GREENBACK SUSPENSION

The editors of the Special Issue Quantitative Economic Historywish to point out that in the article by C. W. Calomiris, ‘Priceand Exchange Rate Determination During the Greenback Suspension’,the results of the F tests reported in the upper part of Table7 on page 215 are p-values and not F statistics. In addition,the reference to the low level of significance of F tests onpage xvi of the Introduction should be deleted. The editorsapologize to readers for any misunderstanding which may havearisen on this account.     

Private Finance

This paper considers the arguments for and against private-sectorfinancing—as opposed to operational management—ofpublic services. Under certain conditions the costs of publicand private finance will be similar, but these conditions areunlikely to hold for many public services. Using examples fromthe UK, we show how decisions to introduce private financingare often political, with little economic rationale.     

LABOUR SKILLS AND HUMAN CAPITAL IN THE EXPLANATION OF TRADE PATTERNS

In the discussion of the qualitative inferences to be drawnfrom the signs of _s and c₃ [OEP 43.2 p. 448], possibilities(ii), (iii) and (iv) and the beginning of the immediately followingparagraph should read:

1. if both _s and c₃ are positive and ß₃₁> ß₃₂
2. if _s is positive and c₃ is negative theneither ß₃₁and ß₃₂ are both positive andß₃₁ > ß₃₂,or they are both negativeand |ß₃₂|>|ß₃₁|,or ß₃₁ ispositive and ß₃₂ is negative.
3. if _sis negative andc₃ is positive then either ß₃₁and ß₃₂ areboth positive and ß₃₂ < ß₃₁,or theyare both negative and |ß₃₁| > |ß₃₂|,or ß₃₁ is negative and ß₃₂ is positive.

Notice that without first confirming that _s = 0 when c³ 0 nothingmuch can be said about the factor content of trade by lookingat c₃ alone; for, in terms of signs of ß₃₁ and ß₃₂,c₃ < 0 precludes only the combination (ß₃₁ <0 & ß₃₂ > 0); and c₃ > 0 precludes onlythe combination (ß₃₁ > 0 & ß₃₂ <0). Similarly...     

Competition Policy and Innovation

The question addressed by the paper is whether standard proceduresand widely accepted insights of competition policy remain validwhen one deals with potentially anti-competitive conduct ininnovative industries. The question of appropriateness arisesbecause competition in these industries displays features thatare radically different from those encountered in traditionalsectors of the economy. Competition is for the market ratherthan in the market, dynamic aspects of competition matter morethan allocative aspects, intellectual property rights (IPR)reinforce network effects present in knowledge-based industries.The paper examines why these differences matter with respectto market delineation, assessment of intensity of competition,and predatory conduct. It also raises the question as to whatextent competition law limits the innovators' rights not tolicense their inventions to others, especially when they correspondto essential facilities. It explores the problem created byexcessive protection as well as the hold-up problem that arisesin a context of sequential innovations. It examines the antitrustposition in regard to the treatment of collaborative arrangementsamong holders of IPRs, such as cross-licences, patent-pools,and joint-standard settings. Finally, it presents a discussionon a possible role of competition law in shaping intellectualproperty laws in order to benefit from the complementarity betweenintellectual protection and antitrust rules.     

The risk premium for evaluating public projects

Governments face a lower apparent cost of capital than privatefirms. However, the low cost of borrowing by governments doesnot reflect superior capabilities to choose or manage projects.Instead, it reflects the fact that governments have recourseto taxpayers, who de facto provide a fairly open-ended creditinsurance to the government. If taxpayers were remunerated forthe risk they assume in the case of tax-financed projects, thenex ante there would be no capital cost advantage to governmentfinance. The risk premium on government finance would, in principle,be no different from that of private investors. There is thusno justification on the basis of capital cost advantages forgovernment funding or guaranteeing the provision of privategoods or services. Privatization is, therefore, valuable, ifit improves business efficiency when evaluated at the risk-adjustedprivate cost of capital. No more need be demonstrated in a value-for-moneytest.     

Immigration and labour-market outcomes in the United States: a political-economy puzzle

Based on a larger survey of the literature (Gaston and Nelson,2000), this paper argues: (i) that econometric research uniformlyfinds very small labour-market effects of immigration; (ii)that labour and trade economists have differed in their interpretationof this finding; and (iii) that this difference is driven exclusivelyby different dimensionality assumptions (with labour economistspreferring a 1-sector x m-factor model and trade economistsan n-sector x m-factor model). It is then argued that the tradeeconomists' model, along with its presumption of factor-priceinsensitivity to immigration is the more useful as a presumptiongenerator. The paper concludes with a discussion of the political-economyimplications of these results.     

Participation and Poverty Reduction: An Analytical Framework and Overview of the Issues

This paper examines the relationship between community participationand the efficacy of interventions designed to reduce poverty.It outlines a simple model that identifies three actors involvedin the provision of antipoverty interventions: financiers, providersand beneficiaries. This model is used to illustrate what happenswhen the poor move from being passive beneficiaries to beingthe providers of these interventions. Beneficiary participationhas the potential to lower the cost of providing these interventions.It can ensure that they more closely reflect the preferencesof the population that they are designed to serve. However,this benefit is contingent on the ability of communities toengage in collective actions. In fractionalised communities,or where trust and/or social capital are weak, there is a riskthat community participation may result in the capture of benefitsby local elites, to the detriment of the poor. Further, we arguethat the failure to delegate true decision-making authority(allowing for de jure but not de facto participation), may resultin beneficiaries being reluctant to act because of concernsthat they will be subsequently overruled.     

Legal Theories of Financial Development

This paper examines legal theories of international differencesin financial development. The law and finance theory stressesthat legal traditions differ in terms of (i) their emphasison the rights of private property owners vis-à-vis thestate and (ii) their ability to adapt to changing commercialand financial conditions, so that historically determined legaltraditions shape financial development today. Other theoriesreject the centrality of legal tradition in accounting for cross-countrydifferences in financial development. The results are broadlyconsistent with legal theories of financial development, thoughit is difficult to identify the precise channel through whichlegal tradition influences financial development.     

OPTIMAL PRE-COMMITMENT IN MACROECONOMIC POLICY: A GAME THEORETIC ANALYSIS OF FISCAL POLICY

The version of the paper published in Oxford Economic Papers(Volume 42, October 1990, pp. 695–714) erroneously omittedthe figures. This note presents the figures and briefly describesthe results they show. The paper proposed a new solution to the problem of time inconsistency.A subgame-perfect trigger strategy equilibrium was presentedin which the public expected the government to renege on itsoriginally announced policy at some later date. The government'spre-commitment to its announced policy was determined endogenouslyas part of the equilibrium. The equilibrium was illustrated using Blanchard's (1985) modelof fiscal policy. I examined the [political] problem of maintainingaggregate consumption while reducing the level of governmentdebt. The problem of time inconsistency arises in this contextbecause the government has an incentive to renege on its promiseto raise future taxes. Numerical solutions of the model showedthat the government would renege after a period that dependedon its expected tenure and preferences. Figures 1 to 4 showthe behavior of the economy under policies with no pre-commitment([t₀t^*) = 0), a moderate period of precommitment ([t₀t^*) = 33.5),and a long period of pre-commitment ([t₀t^*) = 140.2). Figure 1 shows that governments with greater credibility willprefer to push the costs of falling consumption further intothe future. This is achieved by adopting policies that promiseto raise future revenues while cutting current taxes so thatthe fall in the value of government debt is offset by the risein human wealth [see Figures 2 and 4]. One important consequenceof these policies is that the level of government debt risesduring much of the period of pre-commitment. Figure 5 is used in the appendix to prove proposition 1     

Credible Carbon Policy

The paper sets out the credibility problem in carbon policy,provides a number of examples of non-credibility in recent energypolicy, and identifies the costs of failing to address it. Thetime inconsistency of carbon policy—arising because ofmultiple objectives, the irreversibility of energy investments,and the scope for ex-post reneging on ex-ante commitments toset policy instruments, such as carbon taxes or emission permits,at appropriate levels—is set in a conceptual framework.Analogies with monetary policy are drawn, and a solution tothe time-inconsistency problem is proposed through the establishmentof an energy/carbon agency.     

MOVEMENTS IN THE AVERAGE AGE OF THE CAPITAL STOCK

ADOPTING an approach suggested by Richard Nelson (1964), thepaper reports a model which both identifies the (proximate)determinants of the average age of the capital stock and whichmay be used to obtain an index number series for the averageage from readily available data. The method is illustrated byapplying it to data for the Net Capital Stock in the U.K. overthe period 1948–1981. Oxford Econ. Pap., March 1985, 37(1), pp. 64–70.     

Capital structure and short-term decisions

Share price pressure can lead to managerial myopia as managersface incentives to make short-run decisions. We show how long-rundebt can negate myopic behavior by serving as an incentive tohave high future earnings in order to avoid the risk of bankruptcy.We show how increases in leverage could have been a signal inresponse to growing share price pressure in the 1980s. We obtaina theory of capital structure whose predictions are in linewith recent empirically observed patterns. We demonstrate thebenefits of high bankruptcy penalties in inducing efficientdecision making, and show how debt may, ex post, lead to inefficientdecisions being taken in an effort to pay it off. This ex postconsequence of debt can potentially undermine its ex ante incentivebenefits.     

The I-r hump: irreversible investment under uncertainty

t is well known that if investment is irreversible and uncertain,there exists a benefit to waiting. When such benefits are takeninto account, the relationship between interest rates and investmentmay be quite complex. In particular, when net revenues followa Gaussian random walk, model investment tends to zero at bothhigh and low interest rates. That is, investment is a hump-shapedfunction of r.     

Can non-renewable resources alleviate the knife-edge character of endogenous growth?

Standard endogenous growth models rely on the arbitrary assumptionthat the technology has exactly constant returns with respectto producible inputs. Can this knifeedge restriction be relaxedby including non-renewable resources as necessary inputs inproduction? In a one-sector optimal growth model, we find thatthe strain on the economy imposed by the need to extract successivelysmaller amounts of the nonrenewable resource can offset thepotentially explosive effects of allowing for increasing returnsto producible inputs. However, growth in per capita consumptionwill be unstable unless there is population growth. Thus, theknife-edge problem of (strictly) endogenous growth reappearsas an instability problem. But a ‘semi-endogenous’growth framework turns out to be an attractive alternative,relying on less restrictive parameter values, maintaining stability,and allowing a rich set of determinants of longrun growth.     

Management Practices, Work--L ife Balance, and Productivity: A Review of Some Recent Evidence

Increasing product-market competition is believed to be a drivingforce behind higher productivity. However, even those criticsof globalization who accept this argument claim that there isa hard trade-off because tougher competition comes at the priceof reducing work—life balance (WLB). Optimists, by contrast,argue that competition can spur better WLB practices and thereforehigher productivity, so there is a ‘win—win’situation. To address this issue we use an innovative surveytool to collect the first international data on management practicesand WLB practices, surveying 732 medium-sized manufacturingfirms in the USA, France, Germany, and the UK. We find thatthe USA has the best management practices but the worst work—lifebalance. When we look within countries, however, we reject thepessimistic ‘trade-off’ model. First, WLB outcomesare significantly associated with better management, so thatwell-run firms are both more productive and offer better conditionsfor their employees. Second, tougher competition increases averagemanagement quality but does not negatively affect employees'working environment. As with many other studies, better WLBpractices are associated with significantly higher productivity.This relationship disappears, however, after controlling forthe overall quality of management. Footnotes ¹ E-mail addresses: nbloom{at}stanford.edu; j.vanreenen{at}lse.ac.uk     

How complicated does the model have to be?

Simple macroeconomic models based on IS-LM have become unfashionablebecause of their lack of micro-foundations, and are in dangerof being effectively forgotten by the profession. Yet whilethinking about micro-foundations is a productive enterprise,complex models based on such foundations are not necessarilymore accurate than simple, ad-hoc models. Three decades of attemptsto base aggregate supply on rational behaviour have not displacedthe Phillips curve; inter-temporal models of consumption donot offer reliable predictions about aggregate demand. Meanwhile,the ease of use of small models makes them superior for manypractical applications. So we should not allow them to be drivenout of circulation.     

Contracting out by the public sector: theory, evidence, prospects

Unlike privatization, contracting out (or simply 'contracting')does not generally involve the sale of publicly owned assets.Yet it has been widely used as a mechanism for reform of public-sectorservice provision. Contracting introduces ex-ante competition-competitionfor the market through competitive tendering. This article examinesboth the theory and evidence of contracting by the public sector.It considers the theoretical conditions, such as contractualincompleteness and the ownership pf physical assets, which mayimpede efficient contracting. It also reviews the internationalevidence which suggests that savings in the order of 20 percent are achievable, without sacrificing the quality of serviceprovided. In the UK, savings of between £240m and £280mhave been estimated for contracts let at the central governmentlevel. Substantial savings have also been generated by contractingat the local government level.     

The Assessment: Games and Coordination

Coordination problems arise in a multitude of economic interactions.Recent advances in the field of game theory have shed new lighton these problems and the ways in which they might be analysed.This issue of the Oxford Review of Economic Policy first examinessome of the theoretical dimensions to this literature, as wellas some empirical and experimental insights. It goes on to applysome of these ideas to a number of important policy areas, includingmacroeconomic policy coordination, public good provision, andproblems of political coordination.     

ERRATUM NOTIFICATION: OXFORD ECONOMIC PAPERS

Page 10, subsection C of K. D. Patterson's article: The stability of some Annual Consumption Functions should read T₀–t and not t–T₀.     

Trade adjustment in the WTO system: are more safeguards the answer?

For countries to engage successfully in the international tradingsystem, their industries, firms, and workers must respond continuallyto new conditions of competition. The continuing need to adjustarises both from policy changes approved in multilateral negotiations—e.g.implementation of trade liberalization commitments, preferenceerosion, or adverse terms-of-trade consequences of export subsidyelimination—and from ongoing changes in competitive pressuresinherent in a liberal trading system—e.g. effects on comparativeadvantage of changes in technology or factor supplies. But thepolitical response to a situation calling for adjustment isoften a call for ‘safeguards’—whether as anex ante provision in negotiated agreements or as an ex postmeasure once the agreement has been signed and the reality ofnew conditions takes shape. This paper examines the range ofadjustment problems confronting the current and future internationaltrading system, the economic arguments for intervention to dealwith these problems, the adjustment environment as set out inthe current World Trade Organization (WTO) Agreements, and proposalsfor reform. While the adjustment problems we discuss apply toboth rich and poor WTO member countries, we highlight the issuesof adjustment especially relevant for developing countries.