Costs of short-term credit for small and large firms

Changes in costs of credit for small and large firms respond differently to economic conditions and the markets are segmented. Costs for small firms are less responsive to changing economic conditions. Small firms borrow via credit card loans and from banks. Dynamic models prove the costs of funds are negative functions of quantities borrowed and positive functions of the Fed funds rate. During recessions, the decline in funds’ prices to large firms is greater than the reductions to small firms. Large firms benefit to a greater extent than small firms when prices of credit are changing.     

Linear-quadratic approximation, external habit and targeting rules

We examine the linear-quadratic approximation of nonlinear dynamic stochastic optimization problems. A discrete-time version of Magill [1977a. A local analysis of N-sector capital accumulation under uncertainty. Journal of Economic Theory 15(2), 211–219] is generalized to models with forward-looking variables paying special attention to second-order conditions. This is the ‘large distortions’ case in the literature. We apply the approach to monetary policy in a DSGE model with external habit in consumption. We then develop a condition for ‘target-implementability’, a concept related to ‘targeting rules’. Finally, we extend the approach to a comparison between cooperative and non-cooperative equilibria in a two-country model and show that the ‘small distortions’ approximation is inappropriate for this exercise.     

A theory of formal conceptual definitions: developing theory-building measurement instruments

This study develops the need for formal conceptual definitions (sometimes called nominal definitions) and how to develop better measurement instruments for theory-building. It develops the underlying theory for ‘good’ formal conceptual definitions by defining terms, demonstrating that formal conceptual definitions are needed for all theory-building empirical research, explains how and why ‘good’ formal conceptual definitions are used to develop properties and their measures, and last, it logically explains that good formal conceptual definitions are necessary conditions for construct validity (content validity, criterion validity, convergent validity, and discriminant validity) while statistical tests are sufficient conditions for validity. This theory development explains why formal conceptual definitions are necessary before any traditional statistical empirical validity tests are performed. This study suggests that any statistical validity tests are not meaningful if the concept is not formally defined.In short, the theory of formal conceptual definitions provides a structure to develop ‘good’ measures of the formal theory that leads to ‘good’ empirical theory-building.     

On lags and chaos in economic dynamic models

This paper discusses the role of lags in dynamic economic models. Applications of discrete dynamical systems to economics are considered and the shortcomings of their (implicit) treatment of lags are criticized. An abstract, probabilistic view of lags is then provided, within which fixed delay lags are shown to be a special case. A basic equivalence is proved between: (i) a system with an indefinitely large number of agents, reacting to inputs with randomly gamma distributed, discrete lags, and (ii) a system with one single ‘representative‘ agent reacting to inputs with a continuous, multiple exponential lag. Finally, the paper analyses a single-loop feedback system cuopling a multiple exponential lag and a non-linearity of the one-hump type. The dynamic behavior of the system is studied by means of analytical and numerical methods, and the conditions for periodic and chaotic solutions are investigated.     

Women’s position in the household

Women’s labor market position has changed dramatically during the past century, while changes in the home have followed at a slower pace. Marriage and motherhood and responsibilities for most household labor still affect women’s choices about whether and under what conditions to work for pay. The U.S. government does not have a coherent set of policies about work/family life, lagging far behind Canada and western Europe. Employer policies can be helpful but are more available to workers at higher income levels and are more likely to be used by women than men. Thus, women continue to make “choices” under seriously constrained conditions.     

Supplier perspective on business relationships: experiences from six small suppliers

In this paper, the suppliers’ contributions to their customers’ processes are analysed from the perspective of the supplier, and the conditions for mutual learning are discussed. The study is based on case studies of six suppliers connected to three lift truck companies. The case studies reveal that collaboration is not fully developed, and the reasons for this are analysed. The barriers to mutual learning seem to relate to the customers’ demands for price reductions, the customers’ lack of interest in co-operating, unequal relations between customer and supplier, and constraints regarding co-operation with the customers’ competitors.     

On the non-existence of oligopolistic equilibria in differentiated products spaces

In a large class of product differentiation models á la Hotelling, the firms' payoffs in the game involving location in the differentiated products space exclusively depends on the distance to their neighbouring firms, rather than on the firms' locations proper. This leads to a degeneracy on the firms' strategy space. Using alternative equilibrium concepts, this is shown to be the reason for the non-existence of non-cooperative equilibria, especially if the firms' technologies are not identical.     

Pareto optimality in continuous-time OLG economies

The aim of this paper is the achievement of a complete characterization of the Pareto optimality of competitive equilibria for deterministic, pure exchange, continuous-time economies with a countable number of overlapping generations, where each consumer’s life-span consists in a bounded interval of time. For such an environment, we obtain separate sufficient and necessary conditions for Pareto optimality in the form of the Cass’ criterion, that is, in terms of the equilibrium prices. However, these conditions are not equivalent in general. Therefore, in order to get that equivalence we are compelled to impose certain restrictions, either on consumers’ lifetimes, assuming that all of them have the same longevity, or on the dynamic behaviour of relative intertemporal equilibrium prices. In both cases, we are able to derive a single condition that is sufficient and necessary for efficiency, thus achieving full characterizations.     

A positional version of Arrow’s theorem

Arrow’s theorem is based on two “vertical” aggregation conditions expressed in terms of the relative positions of two alternatives in a preference ranking. This note obtains the same result for the strict preference case using instead two “horizontal” aggregation conditions expressed in terms of the absolute position of an alternative in a preference ranking.     

In-work policies in Europe: Killing two birds with one stone?

Generous social assistance has been held responsible for inactivity traps and social exclusion in several European countries, hence the recent trend of promoting employment through in-work transfers. Yet, the relative consensus on the need for ‘making work pay’ policies is muddied by a number of concerns relative to the design of the reforms and the treatment of the family dimension. Relying on EUROMOD, a EU-15 integrated tax-benefit microsimulation software, we simulate two types of in-work benefits. The first one is means-tested on family income, in the fashion of the British Working Family Tax Credit, while the second is a purely individualized policy. Both reforms are built on the same cost basis (after behavioral responses) and simulated in three European countries suspected to experience large poverty traps, namely Finland, France and Germany. The potential labor supply responses to the reforms and the subsequent redistributive impacts are assessed for each country using a structural discrete-choice model. We compare how both reforms achieve poverty reduction and social inclusion (measured as the number of transitions into activity). All three countries present different initial conditions, including existing tax-benefit systems and distribution of incomes and wages. These sources of heterogeneity are exploited together with different labor supply elasticities to explain the cross-country differences in the impact of the reforms.     

Implementing a generic smooth function

We define a realization of a smooth, real-valued function in a manner which is based upon Hurwicz's model of privacy-preserving economic mechanisms. Realizations are distinguished by ‘type’ — a measure of the kind of information that the realization requires from each agent in order to operate. Necessary conditions for the existence of a realization of a particular type are given, and the types of realizations which exist for a generic smooth function are classified. Most of the mathematical techniques in this paper are commonly used in differential geometry and in the study of smooth mappings. Some results from the theory of algebraic equations are also employed.     

Perceptions of economic insecurity: Evidence from Russia

Economic insecurity is an inherent characteristic of the transition from a planned economy to a market-oriented economy and workers’ assessments of their economic insecurity have direct consequences not only for their happiness/well-being, but also on consumption and saving behavior. This study utilizes data from the nationally representative Russian Longitudinal Monitoring Survey to study perceptions of economic insecurity among workers in both rural and urban settlements. Analyzing three measures of perceived economic insecurity, we find that perceptions of insecurity were higher when economic conditions were deteriorating (1995–1998), and lower when economic conditions had stabilized (2000–2004). While perceived insecurity varies substantially by worker characteristics–those with less education, women, and unskilled and semi-skilled manual workers feel most vulnerable–, differences in observed characteristics explain a relatively small part of the ruralurban perceptions gap; other factors, such as different rates of economic recovery in rural and urban locales are also important. Individual well-being and household consumption tend to be lower when concerns about economic insecurity are present.     

Inconsequential arbitrage

We introduce the concept of inconsequential arbitrage and, in the context of a model allowing short-sales and half-lines in indifference surfaces, prove that inconsequential arbitrage is sufficient for existence of equilibrium. Moreover, with a slightly stronger condition of nonsatiation than that required for existence of equilibrium and with a mild uniformity condition on arbitrage opportunities, we show that inconsequential arbitrage, the existence of a Pareto optimal allocation, and compactness of the set of utility possibilities are equivalent. Thus, when all equilibria are Pareto optimal — for example, when local nonsatiation holds — inconsequential arbitrage is necessary and sufficient for existence of an equilibrium. By further strengthening our nonsatiation condition, we obtain a second welfare theorem for exchange economies allowing short sales.Finally, we compare inconsequential arbitrage to the conditions limiting arbitrage of Hart [Hart, O.D., 1974. J. Econ. Theory 9, 293–311], Werner [Werner, J., 1987. Econometrica 55, abs1403–1418], Dana et al. [Dana, R.A., Le Van, C., Magnien, F., 1999. J. Econ. Theory 87, 169–193] and Allouch [Allouch, N., 1999. Equilibrium and no market arbitrage. CERMSEM, Universite de Paris I]. For example, we show that the condition of Hart (translated to a general equilibrium setting) and the condition of werner are equivalent. We then show that the Hart/Werner conditions imply inconsequential arbitrage. To highlight the extent to which we extend Hart and Werner, we construct an example of an exchange economy in which inconsequential arbitrage holds (and is necessary and sufficient for existence), while the Hart/Werner conditions do not hold.     

Sufficient conditions for dynamic path controllability of economic systems

In this paper sufficient conditions for target path controllability of dynamic economic systems in state-space representation are discussed. These conditions, though stronger than necessary, are much easier to verify than the well-known (but complicated) necessary and sufficient conditions for target path controllability. It is demonstrated that the computational gain in terms of practical application of the technical conditions is substantial. For example, by means of these conditions it is possible to prove the target path controllability of Buiter's 1979 rational expectations model of an open economy — a problem which has been an unresolved one up to now.     

Non-cooperative games on hyperfinite Loeb spaces

We present a particular class of measure spaces, hyperfinite Loeb spaces, as a model of situations where individual players are strategically negligible, as in large non-anonymous games, or where information is diffused, as in games with imperfect information. We present results on the existence of Nash equilibria in both kinds of games. Our results cover the case when the action sets are taken to be the unit interval, results now known to be false when they are based on more familiar measure spaces such as the Lebesgue unit interval. We also emphasize three criteria for the modelling of such game-theoretic situations—asymptotic implementability, homogeneity and measurability—and argue for games on hyperfinite Loeb spaces on the basis of these criteria. In particular, we show through explicit examples that a sequence of finite games with an increasing number of players or sample points cannot always be represented by a limit game on a Lebesgue space, and even when it can be so represented, the limit of an existing approximate equilibrium may disappear in the limit game. Thus, games on hyperfinite Loeb spaces constitute the ‘right' model even if one is primarily interested in capturing the asymptotic nature of large but finite game-theoretic phenomena.     

The spatial structure of production with a leontief technology – II: Substitute techniques

The structure of the optimal spatial pattern of production is studied when there are dependencies among production units which can be described by a Leontief technology with substitute techniques, and when there is a single marketplace of final demand, the CBD. Transportation cost is proportional to distance. The various goods are produced in rings. There are a finite number of patterns in which these rings are arranged, and they can be obtained by a finite algorithm. The particular pattern depends on the final demand. Hence there is no ‘non- substitution’ theorem. ‘Reswitching’ of techniques can occur, that is, in an optimal pattern a technique may be operated at large and small distances from the CBD, but not at intermediate distances; this contradicts prevailing beliefs about optimal capital/land profiles.     

Market power of large cities and policy differences in metropolitan areas

When a single city, the ‘central city’, has a large share of the metropolis population, it will influence housing prices in other, smaller cities, the ‘suburbs’. This market power leads to differences in government policy and property values between the central city and suburbs even when residents and amenities in the two regions are identical. When the central city's government is controlled by property-owning residents, its property tax rate exceeds the rate in the suburbs. The central city will also have lower property values than suburbs.     

The proportion of blocking coalitions in atomless economies

In this paper we investigate the number of coalitions that block a given non-competitive allocation. In an atomless economy with a finite number of types we identify coalition with its profile. Considering profiles π that represent coalitions with the same proportions of types as in the whole society, we prove that there is a ball B_π with π as its center so that ‘almost half’ of the profiles in B_π are blocking. This result is an analogous result to that of Mas-Colell (1978) who dealt with large finite markets.     

Benchmark priors for Bayesian model averaging

In contrast to a posterior analysis given a particular sampling model, posterior model probabilities in the context of model uncertainty are typically rather sensitive to the specification of the prior. In particular, ‘diffuse’ priors on model-specific parameters can lead to quite unexpected consequences. Here we focus on the practically relevant situation where we need to entertain a (large) number of sampling models and we have (or wish to use) little or no subjective prior information. We aim at providing an ‘automatic’ or ‘benchmark’ prior structure that can be used in such cases. We focus on the normal linear regression model with uncertainty in the choice of regressors. We propose a partly non-informative prior structure related to a natural conjugate g-prior specification, where the amount of subjective information requested from the user is limited to the choice of a single scalar hyperparameter g_0j. The consequences of different choices for g_0j are examined. We investigate theoretical properties, such as consistency of the implied Bayesian procedure. Links with classical information criteria are provided. More importantly, we examine the finite sample implications of several choices of g_0j in a simulation study. The use of the MC³ algorithm of Madigan and York (Int. Stat. Rev. 63 (1995) 215), combined with efficient coding in Fortran, makes it feasible to conduct large simulations. In addition to posterior criteria, we shall also compare the predictive performance of different priors. A classic example concerning the economics of crime will also be provided and contrasted with results in the literature. The main findings of the paper will lead us to propose a ‘benchmark’ prior specification in a linear regression context with model uncertainty.     

Exact and asymptotic tests for possibly non-regular hypotheses on stochastic volatility models

We study the problem of testing hypotheses on the parameters of one- and two-factor stochastic volatility models (SV), allowing for the possible presence of non-regularities such as singular moment conditions and unidentified parameters, which can lead to non-standard asymptotic distributions. We focus on the development of simulation-based exact procedures–whose level can be controlled in finite samples–as well as on large-sample procedures which remain valid under non-regular conditions. We consider Wald-type, score-type and likelihood-ratio-type tests based on a simple moment estimator, which can be easily simulated. We also propose a C(α)-type test which is very easy to implement and exhibits relatively good size and power properties. Besides usual linear restrictions on the SV model coefficients, the problems studied include testing homoskedasticity against a SV alternative (which involves singular moment conditions under the null hypothesis) and testing the null hypothesis of one factor driving the dynamics of the volatility process against two factors (which raises identification difficulties). Three ways of implementing the tests based on alternative statistics are compared: asymptotic critical values (when available), a local Monte Carlo (or parametric bootstrap) test procedure, and a maximized Monte Carlo (MMC) procedure. The size and power properties of the proposed tests are examined in a simulation experiment. The results indicate that the C(α)-based tests (built upon the simple moment estimator available in closed form) have good size and power properties for regular hypotheses, while Monte Carlo tests are much more reliable than those based on asymptotic critical values. Further, in cases where the parametric bootstrap appears to fail (for example, in the presence of identification problems), the MMC procedure easily controls the level of the tests. Moreover, MMC-based tests exhibit relatively good power performance despite the conservative feature of the procedure. Finally, we present an application to a time series of returns on the Standard and Poor’s Composite Price Index.