A MODEL OF ENDOGENOUS PAYOFF MOTIVES AND ENDOGENOUS TIMING IN A MIXED DUOPOLY*

A model of endogenous payoff motives and endogenous order of moves is analysed in a mixed duopoly. We find that, when a non‐negative price constraint is imposed on public and private firms' quantity choice, both firms always choose to be relative‐payoff‐maximisers, and both simultaneous move and sequential move can be sustained in equilibrium. In contrast, when non‐negative absolute profit constraint is imposed, public and private firms always choose to be absolute‐payoff‐maximisers, and only sequential move can be sustained in equilibrium.     

WEIGHTED COUNTRY PRODUCT DUMMY VARIABLE REGRESSIONS AND INDEX NUMBER FORMULAE

The article considers a very simple type of hedonic regression model where the only characteristic of a commodity is the commodity itself. This regression model is known as the country product dummy method for calculating country price parities in the context of making international comparisons. The paper considers only the two country or two period case and introduces value or quantity weights into the regression. The resulting measures of overall price change between the two countries or time periods are compared to traditional bilateral index number formulae. It is shown how the Geary Khamis, Walsh and Törnqvist price indexes can be obtained as special cases of this framework.     

CAPITAL–LABOUR SUBSTITUTION AND ENDOGENOUS FLUCTUATIONS: A MONOPOLISTIC COMPETITION APPROACH WITH VARIABLE MARKUP*

This paper analyses an overlapping generations model with endogenous product diversity where strategic interactions between producers are introduced; it examines how they affect the stability properties of the steady state. Because of free entry, strategic interactions between producers imply a new dynamic feature, markup variability, promoting indeterminacy and endogenous cycles. Indeed, in contrast to the model without strategic interaction, endogenous fluctuations can occur when the substitution between the production factors, capital and labour, is not too weak, but in accordance with empirical estimates.     

OPTIMAL DEBT AND ENDOGENOUS GROWTH IN MODELS OF INTERNATIONAL FINANCE

The International Monetary Fund, the World Bank and the bond rating agencies did not anticipate the crises in Asia 1997–98 and in Argentina 2001 . With this statement in mind, we consider some multi-stage inter-temporal stochastic optimisation models in international finance that imply theoretically founded and empirically measurable Early Warning Signals. The mathematical technique is dynamic programming/stochastic optimal control (DP/SOC).
The variables of interest are the optimal foreign debt, consumption, capital and the growth rate of GDP. They are used as benchmarks of economic performance. By comparing the actual debt to the optimal debt we derive a measure of the sustainability of the debt and vulnerability to default problems. The two sources of uncertainty – the productivity of capital and the real interest rate on the foreign debt – are modeled as stochastic processes. Specific applications of the DP/SOC techniques are given for country defaults in Asia and Latin America, and the US current account deficits.     

ENDOGENOUS FLUCTUATIONS IN TWO‐COUNTRY MODELS*

This paper investigates the interlinkage in the business cycles of large‐country economies in a free‐trade equilibrium. We consider a two‐country, two‐good, two‐factor general equilibrium model with Cobb‐Douglas technologies and linear preferences. We also assume decreasing returns to scale in the consumption good sector. We first identify the determinants of each country's global accumulation pattern in autarky equilibrium, and secondly we show how a country's business cycles may spread throughout the world once trade opens. We thus give capital intensity conditions for local and global stability of competitive equilibrium paths.     

TAXES AND GROWTH: TESTING THE NEOCLASSICAL AND ENDOGENOUS GROWTH MODELS

Changes in the tax rate alter real growth permanently in an endogenous growth model, but only temporarily in a neoclassical model, where the only permanent effect is a decrease in the steady-state level of output per capita. Using data from the 1960'1992 period for a panel of 11 Organization of Economic Cooperation and Development economies, this paper's empirical results support the following conclusions. First, consistent with the tax smoothing hypothesis, tax rates have exhibited significant persistent changes while output growth rates have not. Second, a higher tax rate permanently reduces the level of output but has no permanent effects on the output growth rate. These findings are inconsistent with endogenous growth mechanisms and suggest that the relationship between output and the tax rate is best described by the neoclassical growth model. (JEL E62, 041)     

ENDOGENOUS FERTILITY AND THE CONSUMPTION TAX*

The differential incidence between the consumption tax and the labour income tax is examined in a model where altruistic parents decide the number of children endogenously. In contrast with past results, the consumption tax is not neutral and exerts distortional effects. As a result, welfare gets worse off through the tax reform of switching from a labour income tax to a consumption tax. This provides the argument about the treatment of bequests under a consumption tax.     

STOCHASTIC PROCESS MODELS AND THE DISTRIBUTION OF EARNINGS*

This article examines several hypotheses concerning the stochastic nature of year to year variations in individual incomes in light of newly available microdata on individual earnings. In particular, the models of Solow (1951), Champernowne (1953), and Rutherford (1955) are examined in some detail, and their predictions as to changes to be expected in the distribution of individual incomes are tested. The author concludes that the distributions arrived at using these models are not very similar either to each other or to the actual distribution of earnings. Thus, he believes that as an “explanation” of earnings dynamics stochastic process models are unsatisfactory. He further criticizes these models on the grounds that they foster a bias toward the belief in the inevitability, and perhaps desirability, of the current distribution of earnings.     

ENDOGENOUS SELECTION OF PRODUCERS,ASSET PRICES,AND PRODUCTIVITY SLOWDOWN*

This paper presents a simple heterogeneous agent model to show that shocks that reduce aggregate borrowing capacity of producers under borrowing constraints cause endogenous productivity slowdowns through declines in asset prices and biased selections of producers. These dynamics of the model replicate the qualitative features of the Japanese economy during the 1990s, including a decline in the within effect in total factor productivity growth decomposition as well as default on mortgage loans. Policy experiments demonstrate that foreclosure restrictions already in place mitigate an exogenous productivity slowdown, but that a tightening of foreclosure restrictions causes an endogenous productivity slowdown.     

ASYMMETRY OF CUSTOMER LOSS AND RECOVERY UNDER ENDOGENOUS PARTNERSHIPS: THEORY AND EVIDENCE*

This article is inspired by real‐world phenomena that firms lose customers based on imprecise information and take a long time to recover. If consumers are playing an ordinary repeated game with fixed partners, there is no clear reason why recovery happens slowly. However, if consumers are playing an endogenously repeated game, a class of simple efficient equilibria exhibits the asymmetry of fast loss and slow recovery of customers after a bad signal. Exit is systematic, but formation of a new partnership is random. We also give empirical evidence of our equilibria at an individual‐firm level.     

ENDOGENOUS CONSUMER PARTICIPATION AND THE RECYCLING PROBLEM*

We endogenise the extent of consumer participation in the recycling process, and analyse its effect on the ‘recycling problem’. When recycling requires consumers to undertake costly sorting activities to separate scrap from household waste, they will participate only if the net reward from sorting is positive. Consumers' sorting cost is subject to a network effect arising due to social norms. With heterogeneous consumers differing in terms of their sorting cost, the entire output of the recyclable product may not be subsequently available as scrap to the recycling firms. This increases the virgin producer's monopoly power, and may also lead to multiple equilibria if the network effect of sorting is sufficiently large. The latter result suggests a role for the government in influencing equilibrium selection to improve social welfare. Depending on the fraction of consumers that participate in recycling, increased societal pressure on consumers to recycle may decrease consumer participation and increase the virgin producer's market power.     

A COMPUTATIONALLY PRACTICAL SIMULATION ESTIMATION ALGORITHM FOR DYNAMIC PANEL DATA MODELS WITH UNOBSERVED ENDOGENOUS STATE VARIABLES*

This article develops a simulation estimation algorithm that is particularly useful for estimating dynamic panel data models with unobserved endogenous state variables. Repeated sampling experiments on dynamic probit models with serially correlated errors indicate the estimator has good small sample properties. We apply the estimator to a model of female labor supply and show that the rarely used Polya model fits the data substantially better than the popular Markov model. The Polya model also produces far less state dependence and many fewer race effects and much stronger effects of education, young children, and husband's income on female labor supply decisions.     

ENDOGENOUS MARKET STRUCTURES AND STRATEGIC TRADE POLICY*

I characterize the optimal export promoting policy for international markets whose structure is endogenous. Contrary to the ambiguous results of strategic trade policy for duopolies, it is always optimal to subsidize exports when entry is endogenous, under both quantity and price competition. With homogenous goods the optimal export subsidy is a fraction 1/ε of the price, where ε is the elasticity of demand (the exact opposite of the optimal export tax in the neoclassical trade theory). Analogously, I show the general optimality of R&D subsidies and of competitive devaluations to promote exports in foreign markets where entry is endogenous.     

ANARCHY AND AUTARKY: ENDOGENOUS PREDATION AS A BARRIER TO TRADE*

This article presents a general equilibrium two‐country Ricardian trade model with endogenous transactions costs that arise from individual utility‐maximizing allocation of labor to production and piracy. In the absence of institutions for risk sharing and coordination of defense, autarky obtains over most of the parameter space. When both trade and predation are supported in equilibrium, terms of trade effects can make security immiserizing. In that case, paradoxically, predation creates trade.     

TESTS OF UNIT ROOTS AND COINTEGRATION HYPOTHESES IN ECONOMETRIC MODELS*

A number of statistical procedures for testing the unit roots hypotheses and the cointegration hypothesis have been proposed by statisticians and econometricians. This paper unifies many of the previous studies on unit roots tests and cointegration tests in the framework of a multivariate regression model and develops some new test statistics. We give a convenient quadratic representation of the limiting distributions of test statistics using stochastic integrals with respect to Brownian motions. The test procedures in this paper include the statistics for testing the unit root, the double unit roots, the seasonal unit roots, and the cointegrating relations for special cases. We also discuss some useful generalizations of unit roots tests and cointegration tests for empirical studies.