TASTE FOR VARIETY AND OPTIMUM PRODUCT DIVERSITY IN AN OPEN ECONOMY

We extend the Benassy 'taste for variety' model to an open economy setting. With the Benassy effect, the market equilibrium is inefficient, openness reduces the varieties provided in the unconstrained optimum and there are potential gains from international coordination.     

Capital theory and the origins of the elasticity of substitution (1932-35)

Elasticity of substitution was introduced into economics duringthe early 1930s. It was discovered independently by Hicks inThe Theory of Wages and by Joan Robinson in The Economics ofImperfect Competition, and then was the centre of a polemicinvolving Kahn and Sraffa, among others. The debate focusedon imperfect competition and capital-theoretical issues. Someelements of the 1950s and 1960s capital theory controversy,such as the idea of capital as a Giffen good or the difficultiesof measuring capital, were already discussed at this early stage.     

垄断竞争、中间产品与城市规模

从分工经济与城市规模之间关系的角度,运用Dixit-Stiglitz模型框架下经济活动的规模收益递增原理,在城市内部最终产品生产企业利润最大化的条件下,系统讨论了投入的中间产品种类数与城市人口规模之间的关系、中间产品之间的替代性对城市均衡人口规模的反馈作用,以及城市内部中间产品专业化水平和互补经济程度之间的关系。在此基础上,利用广东省城市增长的部分数据进行了实证分析。认为:经济活动的集聚形成了城市;在城市体积增长和城市系统随产业的专业化与多样化发展而演进的过程中,城市规模经济的实现除了依赖生产要素流动外,最终产品生产企业对中间产品投入的需求也具有不可忽视的作用。     

The role of factor substitution in the theory of economic growth and income distribution: Two examples

While much empirical evidence suggests that the Cobb–Douglas production function may be a reasonable benchmark for aggregate analysis, we argue that the practice, particularly prevalent in contemporary growth theory, of adopting the Cobb–Douglas technology, may lead to misleading implications. Using two examples, we show that key implications of the models are highly sensitive to small deviations of the elasticity of substitution from unity. The first employs the standard neoclassical model and emphasizes the sensitivity of the speed of convergence to small changes in the elasticity of substitution. This in turn has profound consequences for wealth and income distribution. The second deals with foreign aid and highlights how the relative merits of “tied” versus “untied” aid are also very sensitive to the elasticity of substitution.     

Comment on “σ: The long and short of it”

I comment on some of the issues discussed by Robert Chirinko (Chirinko, R.S., 2008. σ: The long and short of it. Journal of Macroeconomics 30 (2), 671-686). I also offer some additional evidence and discuss the theoretical implications of the empirical findings regarding σ.     

Optimal Product Variety and Economic Growth: The Trade-off between Internal and External Economies of Scale

Received July 17, 2000; revised version received February 1, 2001     

Internalizing the Social Costs of a Small Number of Powerful,Overindebted Firms

Extraordinary debt-to-capital ratios (leverage) and the compression of markets to very few, large companies (concentration) are economic risk factors. They have contributed to vast social costs during the current economic crisis in the USA and in Europe. This theoretical study internalizes these social costs via two market-based policy instruments for the first time in a real-economy Dixit–Stiglitz framework: a tax on firms' debt capital use and a subsidy for market entrants. It helps understand the complex real-economic mechanisms that these policy instruments cause, it derives intuitive rules of thumb for setting the tax rate and the subsidy level so that they elevate welfare, and it suggests ways to practically implement the policies.     

Factor substitution and labor market friction in the United States: 1948–2010

We re-estimate the capital-labor elasticity of substitution and the biased factor-augmenting technological progress using a system approach for the aggregate U.S. economy from 1948 to 2010. Due to (i) the significant impacts of labor market dynamics on economic growth and (ii) the fundamental tension between the short-run data that are available and the long-run parameter that is required in the estimation process, we incorporate labor market friction into a supply-side system to re-estimate these important growth parameters and to explore their sensitivity to the incorporation of labor market friction. Our estimation obtains a significantly smaller-than-unity elasticity of substitution. This result is consistent with labor input measured along the extensive and intensive margin, and in both competitive and imperfect labor markets. Technological progress tends to be purely labor-augmenting, with the average growth rate around 2% per year. These findings are robust to alternatively constructed data sets and different estimation strategies.     

Capital–labor substitution and balanced growth

This paper explores how different values of the elasticity of substitution between capital and labor (σ) impact on the balanced growth paths and growth potential of a country in exogenous growth models. The behavior of the system depends on the value of σ and the passage of σ through two critical values causes a qualitative change in the nature of the singular points and of its trajectories. The balanced growth path defined by a singular point in the form of a saddle-path exists and is locally stable if σ lies between two critical values.     

Exhaustible Resources, Monopolistic Competition, and Endogenous Growth

One of the central analytical findings of the growth literature is that continuous growth is possible even in an economy with exhaustible resources. Based on this result, this paper addresses the question of whether different equilibrium trajectories which lead to a balanced growth path are possible within an endogenous growth model with incomplete competition. Although the Solow-Stiglitz condition is violated due to a monopolistic sector, we nevertheless demonstrate that steady growth in per capita consumption is possible under the condition that the rate of entry of new monopolists exceeds that of the average monopolist's decline in output. As a necessary but not sufficient condition for indeterminacies in a growing economy, this paper demonstrates that the partial production elasticity of capital must be smaller than that of the exhaustible resource.     

Optimal public policy with endogenous mortality

We analyze the welfare‐maximizing policy mix between explicit and implicit taxation, where the probability of survival of the young agents depends upon the share of government expenditure on health, education and infrastructure. We show that increases in the survival probability lead to an increase in the reliance on seigniorage as a welfare maximizing outcome. However, the seigniorage tax base must be large enough for the benevolent planner to use the inflation tax.     

Comment on “Unwrapping some euro area growth puzzles: Factor substitution, productivity and unemployment”

This paper estimates the factor elasticity of substitution of the aggregate production function and then uses these estimates to resolve two puzzles relating to the Euro Area. The paper is novel in three ways: First it uses the CES production technology in the empirical strategy to understand real world economic phenomena; second it uses a frontier empirical methodology; and third it uses a new dataset.     

Rate-of-return dominance and efficiency in an experimental economy

Summary. One of the main challenges for monetary economics is to explain the use of assets that are dominated in rate-of-return as media of exchange. We use experimental methods to study how a fiat money might come to be used in transactions when an identically marketable, dividend-bearing asset, a consol, is also available. Our experimental economies, which have an overlapping generations structure, have the property that the only stationary rational expectations equilibria (SREE) require exclusive use of the consol as the medium of exchange. In a baseline treatment, agents use the consol exclusively, as would occur in an SREE. However, in other treatments, we observe episodes of rate-of-return dominance,with consistent use of fiat money as a medium of exchange. The results show that two properties of our economies are associated with the rate of return dominance anomaly. The first is a history of trading with fiat money, prior to the introduction of the consol. The second is the timing of the dividend payment; when the dividend payment follows the execution of trades between generations, hoarding of the consol occurs on the part of the old, who earn dividends by hoarding. In our economies, settling transactions with a dividend-bearing asset does not improve allocations over those resulting from trading with fiat money. Received: July 11, 2002; revised version: July 25, 2002 RID="*" ID="*"We thank Anne Villamil, participants in the 2000 Purdue University Conference on Monetary Economics, the Summer 2000 meetings of the Economic Science Association, and a referee, for very helpful comments. We thank the Krannert School of Management and the Purdue University Center for International Business, Education and Research for financial support and Vivian Lei for research assistance. We also thank Ron Michener for referring us to the historical account of the early introduction of money into the American colonies, as reported by Benjamin Franklin. Correspondence to: G. Camera