Estimating the Demand for Housing, Land, and Neighbourhood Characteristics

This paper provides estimates of the structure of demand for individual housing and neighbourhood characteristics and for land in two British cities. We estimate a hedonic price function, and from this obtain the implicit prices of house attributes. These prices are used to estimate a demand system for each city. These perform well, and enable us to calculate price and income elasticities for each of the non-dichotomous characteristics and for land. To counteract criticisms of demand estimates derived within the hedonic framework a method is developed for selecting an appropriate set of instrumental variables. Estimates derived from this method, however, differ only slightly from those obtained using the conventional techniques. Several features of these estimates provide insights into the unusual characteristics of the British housing market, the effects of constraints imposed by land use planning, and the effects of changing income distribution on the structure of demand.     

Unionisation structures, productivity and firm performance: New insights from a heterogeneous firm model

This paper introduces collective bargaining at the firm and at the sector level into the heterogeneous firm model of Melitz and Ottaviano (Melitz, M. J., Ottaviano, G. I. P., 2008. Market size, trade, and productivity. Review of Economic Studies 75 (1), 295-316). It then analyses how the two bargaining regimes change aggregate industry productivity and firm performance relative to a competitive labour market. While sector-level bargaining forces the least productive firms to exit and thus increases average productivity relative to the competitive benchmark, firm-level bargaining allows less productive firms to stay in the market and thus reduces average productivity. Sector-level bargaining also results in higher average output and profit levels than either firm-level bargaining or a competitive labour market. The paper also shows that the choice between sector- and firm-level bargaining can involve a trade-off between product variety and product prices: Not only the average price level but also product variety tends to be lower under sector-level bargaining than under firm-level bargaining.     

Dynamic competition with consumer inertia

We study a framework where two duopolists compete repeatedly in prices and where chosen prices potentially affect future market shares, but certainly do not affect current sales. This assumption of consumer inertia causes (noncooperative) coordination on high prices only to be possible as an equilibrium for low values of the discount factor. High discount factors increase opportunism and aggressiveness of competition to such an extent that high prices are no longer sustainable as an equilibrium outcome. Moreover, we find that both monopolization and enduring market share and price fluctuations (price wars) can be equilibrium path phenomena without requiring exogenous shocks in market or firm characteristics.     

Input-Output Decomposition Analysis of Sectoral Price Gaps between Japan and China

Sectoral price gaps that were observed in 1990 between Japan and China are studied in this paper by using a decomposition procedure within the input-output framework. The empirical results show that Japan exhibited producer prices that were higher than those observed in China mainly because it registered higher wages that were only partially offset by higher productivity. The effects on output cost gaps of primaryinput price differences and relative productivity levels are analysed. The effects arising from the use of direct inputs as well as the indirect effects that are incorporated into the difference of intermediate-input prices are accounted for by means of an input-output decomposition technique.     

Valuation Accuracy and Infinity Horizon Forecast: Empirical Evidence from Europe

This paper focuses on the assumptions of infinite-horizon forecasting in the field of firm valuation. The estimate of long-run continuing values is based on the hypothesis that companies should have reached the steady state at the end of the period of explicit forecasts. It is argued that the equivalence between cash accounting and accrual accounting is the way of verifying the steady-state assumption, defined as the state when a firm earns exactly its cost of capital, i.e., what we would expect in pure-competition settings. From this definition, we derive that the "ideal" growth rate to use in steady state is equal to the reinvestment rate times Weighted Average Cost of Capital. To validate our approach, we collect a sample of 784 analyst valuations and compare how the implied target prices deviate from what the target prices would have been using the "ideal" steady-state growth rates. Using Logit and Cox regression models, we find that this deviation has predictive value over the probability that actual market price reaches the target price over the following 12-month period—the smaller the deviation the greater is the likelihood that the market price reaches the target price.     

Estimating the Accounting Price of Foreign Exchange: An Input–Output Approach

When adjustments in the foreign exchange market involve changes in the production of marginally traded goods, the traditional formula for calculating the accounting (shadow) price of foreign exchange assumes that domestic prices and marginal costs at efficiency prices for those goods are equal. In this paper, a method is proposed for estimating an accounting price ratio of foreign exchange in a partial equilibrium framework, abandoning that assumption. For that purpose, input–output techniques are used, to take into account the effets of changes in the production of traded goods.     

Research into public attitudes and the attitudes of the public to inflation

The purpose of this paper has been to compare research evidence related to consumer attitudes to specific price increases and to inflation as a general phenomenon with attitudes of British governments as expressed in government anti-inflation policies. In carrying out the enquiries the aim was to bridge the gap between economics and psychology. The findings indicate that the learning and relearning of prices in time of inflation presents considerable problems; so does communication between governments and the public. One message which would appear to have got through to governments is that of consumer discontent with rising prices. In response governments have at times introduced price restraint policies. The author suggests that the existence of inflation has shifted the focus of attention from satisfactions to dissatisfactions and that it may be necessary therefore to examine which factors are most important for consumer studies and for government policies: consumer attempts to maximize their satisfactions or their attempts to minimize their discontents?     

Incorporating ancillary measures of process and quality change into a superlative productivity index

One of the persistent problems plaguing the measurement of productivity and output is accounting for changes in product quality. A similar problem arises in attempting to explain shifts in a production function using information on changes in the characteristics of the production process itself. We consider these problems under a behavioral model in which the firm chooses a profit-maximizing bundle of input/output/process characteristics as well as the profit maximizing levels of input and output. This view of quality change is similar to the endogenous design index advocated by Triplett [1983] for industrial prices and the endogenous quality indexes analyzed by Pollak [1983] for consumer prices. We show how a price-characteristics locus can be used to adjust the Tornqvist output- and input-oriented multifactor productivity indexes of Caves, Christensen and Diewert [1982] for changes in input, output and process characteristics. To show the applicability of the methodology to services, we apply the results in the framework of the commercial banking measurement of Fixler [1988] to measure the impact of bank branching on multifactor productivity.The refereeing process of this paper was handled through R. Färe.     

Effective Rates of Sectoral Productivity Change

In effective rates of sectoral productivity change, some of the inputs are treated as produced. Here, this is extended to cover all the inputs. All the sectoral rates of productivity growth based on a static input–output (IO) framework are shown to be equal to the corresponding rates of decrease in the production price. For the direct rate, all the input prices are treated as exogenous constants. For the effective rates, prices of the inputs, which are treated as produced, are determined by production technology. The fully effective rate is derived from the price equations of the closed dynamic IO model. It is equal to the rate of decrease in the production price when the prices of all inputs, human capital and human time included, depend on production technology. The overall rate, obtained as a weighted sum of the fully effective sectoral rates, is equal to the rate of growth in the growth potential of the economy.     

Risk shocks and housing supply: A quantitative analysis

This paper analyzes the role of stochastic uncertainty in a multi-sector housing model with financial frictions. We include time varying uncertainty (i.e. risk shocks) in the technology shocks that affect housing production and provide estimates of the time-series properties of risk shocks by using firm level productivity data. The analysis demonstrates that risk shocks to the housing production sector are a quantitatively important impulse mechanism for understanding housing price movements. Specifically, the model can match the volatility of housing prices observed in the data. It is also demonstrated that adjustment costs are important in replicating the contemporaneous correlation of housing prices with GDP and residential investment. Critically, bankruptcy costs act as an endogenous markup factor in housing prices and are an important determinant of house price volatility. However, in comparison to housing demand shocks, risk shocks have low explanatory power for real quantities.     

Producer price dispersion,real output,and the analysis of production

For many years, economists have successfully analyzed aggregate production data using the single price assumption to construct real output. However, economists using these same techniques to examine firm and establishment level data have had difficulty interpreting the ensuing results. This paper explores whether price dispersion across individual producers could explain these problems. Using data from the hydraulic cement industry, this paper shows that omitting individual prices introduces measurement errors in real output that are correlated with factor prices. These errors lead to biased estimates of the production function and productivity growth equations. A method of simultaneously estimating real output and price is introduced to overcome these problems.The refereeing process of this paper was handled through R. Sickles.     

Uncertainty and the measurement of productivity

The purpose of this paper is to provide an empirically implementable framework for the analysis of the effects of uncertainty on firm behavior. In particular, the paper provides a model which can be used to calculate productivity growth for firms facing uncertainty and to decompose the growth in total factor productivity into its various components. It can also be used to identify the contributions of uncertainty and risk aversion.Applying the model to the U.S. textile industry, we find that price uncertainty had a small effect on productivity growth.The refereeing process of this paper was handled through M. Brown.     

The Terms of Trade and the International Transfers of Productivity Gains

In international economic relations, when movements of labour are limited and fiscal redistributive policies non-existent, changes in the terms of trade (the ratio between the prices of exports and imports) are the main driving force for the international redistribution of incomes or of productivity gains. The concept of productivity flows linked to price changes can be extended from the interindustry framework to deal with international relations bringing some new insights into the terms of trade issues. The paper develops a conceptual framework for the computation of international flows of productivity gains, taking into consideration the role of exchange rates and the meaning of Purchasing Power Parities. It is completed by a set of computations on Swiss relations with the rest of the world.     

Estimating Radial Measures of Productivity Growth: Frontier vs Non-Frontier Approaches

In this paper, we propose an alternative econometric framework for estimating and decomposing productivity change that does not require a distribution for inefficiency or the uncorrelatedness between inefficiency and the regressors. We develop our methodology for the input-oriented radial measure of productivity change and establish that this equals the negative of the time change in the log cost function. Our econometric framework is based on a fixed-effects, multiple-output cost frontier, where we decompose productivity change into discrete shifts in the frontier and changes in firm efficiency levels relative to the frontier. We also show that the standard non-frontier specification is nested within our frontier model and thus can produce different estimates of productivity change. Using a panel of twelve US railroads from 1951 to 1975, our estimated cost frontier suggests average annual productivity growth of roughly 0.3 percent, with efficiency change rising then falling over the period. Specification tests reject the non-frontier model, which yields smaller gains in productivity.     

Price Dynamics and Consumer Learning

This paper studies the price dynamics induced by strategic firm behavior in the presence of consumer learning about the uncertain quality differential of the products offered by a duopoly. It is found that consumers learn slowly and that prices converge also slowly to full-information levels. A consequence is that the incentives affirms to manipulate consumers' beliefs are persistent. Although pricing tends to be aggressive at the early stages, and average prices eventually increase over time, price wars may occur at intermediate stages of the product life cycle.     

The Relative Price of Non‐traded Goods under Imperfect Competition*

We consider the role of imperfect competition in explaining the relative price of non‐traded to traded goods within the Balassa–Samuelson framework. Under imperfect competition in these two sectors, relative prices depend on both productivity and mark‐up differentials. We test this hypothesis using a panel of sectors for 12 OECD countries. The empirical evidence suggests that relative price movements are well explained by productivity and mark‐up differentials.     

Bubble trouble ‐ are British house prices significantly overvalued?

The OECD last December said British house prices were overvalued by 30% or more. There has been much talk, including in a 2005 speech by Gordon Brown, of a house price bubble. This article, by Gavin Cameron, John Muellbauer and Anthony Murphy of Oxford University, finds no significant evidence for a bubble from a dynamic panel data model of British regional house prices between 1972 and 2003. The model consists of a system of inverted housing demand equations, incorporating spatial interactions and lags and relevant spatial parameter heterogeneity. The results are data consistent, with plausible long-run solutions and include a full range of explanatory variables. Novel features of the model include transaction cost effects influencing the speed of adjustment and housing market flows, as well as stocks, driving prices. Furthermore, the model allows for shifts in real and nominal interest rate effects as credit markets liberalised.     

Short-selling restrictions,takeovers and the wealth of long-run shareholders

In this paper we consider a situation in which a firm may be able to influence the investors’ ability to short-sell its stock. We analyze the effect short-selling restrictions have on the market price and the subsequent effect generated on the market for corporate control. More precisely, we argue that short-selling restrictions may lead to exclusion of pessimistic beliefs and may therefore inflate prices. Thus, if a company is poorly managed and has a stock with strong short-selling restrictions, a profitable takeover will not emerge because of the high stock price. The raider may not have the incentives to acquire the company as its price will be above its fundamental value, conditional on takeover, even accounting for the potential benefits of takeover. We then argue that such effects are detrimental to long-run shareholders and that a value-maximizing strategy is to have a stock with no short-selling restrictions.     

The Residual: On Monitoring and Benchmarking Firms,Industries, and Economies with Respect to Productivity

Productivity is an important component of profitability, and therefore an important variable for monitoring and benchmarking exercises. This survey discusses the basic accounting model as well as the various measurement problems one gets involved in. By virtue of its structural features, this model is applicable to individual firms and aggregates such as industries or economies.Though the measurement of productivity change and productivity differences is important, still more important is their explanation. Thus, first, this article reviews recent results relating to the decomposition of aggregate productivity change into components due to firm dynamics and intra-firm productivity change, results which were obtained by studying longitudinal enterprise microdata sets. Second, this article reviews a number of methods for decomposing productivity change and productivity differences, whether at the individual firm level or at aggregate level, into partial measures relating to technological change and efficiency change. The combination of both research strategies seems to be a promising undertaking.     

Leverage and the price volatility of equity shares in equilibrium

The traditional valuation formulas for corporate debt, which are derived in a complete market setting and are based on the no-arbitrage principle, imply that equity prices become more volatile as leverage increases. If the asset structure is incomplete, the presence of corporate debt affects the linear subspace spanned by the payoffs of the existing assets, and the pricing of corporate debt and shares of levered firms becomes a simultaneous valuation problem. This paper characterizes the relationship between the price of corporate debt and the share price of a levered firm in an equilibrium framework where corporate debt is a non-redundant asset. While, in the absence of bankruptcy, higher leverage always implies riskier equity, it does not necessarily mean more volatile equity prices. In fact, the link between leverage and equity price volatility depends in a particular way on investors’ preferences towards risk.