A contribution to estimate a benchmark capital stock. An optimal consistency method

There are alternative methods of estimating capital stock for a benchmark year. However, these methods are costly and time‐consuming, requiring the gathering of much basic information as well as the use of some convenient assumptions and guesses. In addition, a way is needed of checking whether the estimated benchmark is at the correct level. This paper proposes an optimal consistency method (OCM), which enables a capital stock to be estimated for a benchmark year, and which can also be used in checking the consistency of alternative estimates. This method, in contrast to most current approaches, pays due regards both to potential output and to the productivity of capital. It is applied to 45 cases for nine OECD countries and six Latin American ones. It works reasonably well, and it requires only small amounts of data, which are readily available. It appears to exhibit similar accuracy to alternative methods, but it is virtually inexpensive in both time and funding.     

Habit Formation, Catching Up with the Joneses, and Economic Growth

Our objective is to investigate how alternative assumptions about preferences affect the process of economic growth. To do this, we analyze a neoclassical growth model under three alternative preference specifications: (i) time separable, (ii) catching up with the Joneses, and (iii) habit formation. Departing from the time separable specification leads to important differences in the dynamic structure, the adjustment path followed by key economic variables, the correlation patterns implied by the time series generated by the model, and the speed of convergence to the new steady state. In the catching up with the Joneses economy the differences arise from a consumption externality, while in the habit formation economy the difference arises from the fact that agents not only smooth consumption but also its rate of change.     

The Borda rule,Condorcet consistency and Condorcet stability

Summary. The Borda rule is known to be the least vulnerable scoring rule to Condorcet inconsistency, Saari (2000). Such inconsistency occurs when the Condorcet winner (the alternative which is preferred to any other alternative by a simple majority) is not selected by the Borda rule. This note exposes the relationship between the Borda rule and the Condorcet q-majority principle as well as the Condorcet q-majority voting rule. The main result establishes that the Borda rule is Condorcet q-majority consistent when where k is the number of alternatives. The second result establishes that is the minimal degree of majority decisiveness corresponding to the Borda rule under sincere voting. The same majority is required to ensure decisiveness under the Borda rule and to ensure that a q-rule (the generalized q-majority Condorcet rule) is a voting rule. Received: April 8, 2002; revised version: July 17, 2002 Correspondence to:S. Nitzan     

Testing misspecified non-nested factor demand systems: Some Monte Carlo results

Empirical factor demand analysis is a topic in which a choice must be made among several competing non-nested functional forms. Each of the commonly used factor demand systems, such as Translog, Generalized Leontief, Quadratic, and Generalized McFadden, exhibits statistical inadequacy when tested for the absence of residual autocorrelation, homoskedasticity and normality. This does not necessarily imply that the whole system is invalid, especially if misspecification affects only a subset of the equations forming the entire system. Since there is no theoretical guidance on how to select the model which is most able to capture the relevant features of the data, formal testing procedures can be useful. In the literature, paired and joint univariate non-nested tests (e.g. Davidson-MacKinnon's J and P tests, Bera-McAleer test and Barten-McAleer test) have been discussed at length, whereas virtually no attention has been paid to multivariate non-nested tests. In this paper we show how multivariate non-nested tests can be derived from their univariate counterparts, and we apply these tests to compare alternative factor demand systems. Since the outcome of a non-nested test is likely to be influenced by the type of misspecification affecting the competing models, we investigate the empirical performance of a multivariate non-nested test using new Monte Carlo experiments. The competing models are compared indirectly via a statistically adequate model which is considered as if it were the DGP. Under such circumstances, the distribution of the non-nested test of an incorrect null, when it is evaluated at the DGP, tends to be closer to the distribution of the test under the correct null, at least in small samples. A non-nested test is expected to select the model which is closest to the DGP. Moreover, we investigate the empirical behaviour of a non-nested test when the DGP has, in turn, autoregressive, heteroskedastic and non-normal errors. Finally, we provide some suggestions for the applied researcher. First version received: November 1999/Final version received: May 2001     

Application of analytic hierarchy process-based model of Ratio of Comprehensive Cost to Comprehensive Profit (RCCCP) in pest management

After investigation and analysis of the practice of pesticide application in the protected horticultural fields of the Agricultural Experimental Zone in Pudong district, Shanghai, China, analytic hierarchy process (AHP) was applied to evaluate 5 alternative pest-control strategies (including three gray insect-proof net rooms (with mesh) of different height, white insect-proof thin film rooms (without mesh) and normal control and prevention areas (without any covering nets or thin films)). Comprehensive Profit (CP) and Comprehensive Cost (CC) were used in this paper to analyze the superiority of different strategies in protected horticultural fields for pest management. CP and CC of the pest-control strategies were used as the targets of AHP, in which CP was classified into economic, social and ecological profit, while CC was split into economic, social and ecological cost. Ratio of Comprehensive Cost to Comprehensive Profit (RCCCP) was calculated by dividing Comprehensive Cost (CC) by Comprehensive Profits (CP). According to the analysis, the best strategy was to apply gray insect-proof net rooms of 2.2 m high and 360 (12 m × 30 m) square meters in protected horticultural fields for pest management.     

Testing of unit roots and other fractionally integrated hypotheses in the presence of structural breaks

Tests of unit roots and other nonstationary hypotheses that were proposed by Robinson (1994) are applied in this article to the Nelson and Plosser's (1982) series. The tests can be expressed in a way allowing for structural breaks under both the null and the alternative hypotheses. When applying the tests to the same dataset as in Perron (1989), we observe that our results might be consistent with those in Perron (1989) when testing the nulls of trend-stationarity or a unit-root. However, we also observe that fractionally integrated hypotheses may be plausible alternatives in the context of structural breaks at a known period of time. Final version received: August 2000/Final version accepted: August 2001 RID="*" ID="*"  The author gratefully acknowledges the financial support from the European TMR grant No. ERBFMRX-CT-98-0213. Comments of two anonymous referees are also acknowledged.     

Social polarization, fiscal instability and growth

We present a dynamic model of fiscal policy in a simple growth framework where social polarization (of preferences) plays a central role in the evolution of fiscal instability and growth collapse. In a highly polarized society, a deficit occurs endogenously, fiscal spending path becomes more volatile, output collapses, and economic growth rate is reduced along the transition path to a new lower level of output. One novel feature is that the size of fiscal deficit, the magnitude of fiscal volatility, and the size of reduction in output and growth rate are explicitly shown to be increasing functions of the degree of social polarization. This is because of the positive relationship between the polarization of preferences and the incentive for policymakers (or socio-economic groups) to overexploit the government resources in a common pool setting (polarization effect). Thereby, we offer a fiscal instability channel that negatively links social polarization and growth, which is an alternative yet distinct explanation for the empirical finding that social polarization is harmful to growth. Moreover, we fully distinguish the incentive to engage in such short-term policies under political uncertainty from that under polarization. Polarization and political uncertainty are shown to be distinct yet critical to the dynamic coordination failure in the common pool setting.     

The economic consequences of substituting carbon payments for crop subsidies in U.S. agriculture

There is a growing body of literature on the costs of sequestering carbon. However, no studies have examined the interplay between farm commodity programs and carbon sequestration programs. This study investigates two dimensions of the interaction between farm commodity programs and afforestation programs, using a price-endogenous sector model of agriculture in the United States. First, this study compares the fiscal and welfare costs of achieving specific carbon targets through afforestation, with and without current farm programs. Second, it examines the welfare, fiscal, and carbon consequences of replacing existing farm subsidies, wholly or in part, with payments for carbon. Two approaches, Hicksian and Marshallian, are investigated. In the first, the sector model is used to quantify the carbon consequences and fiscal costs associated with various combinations of farm commodity and carbon sequestration programs that leave consumers and producers in the U.S. agricultural sector no worse off than under existing farm programs. The second approach focuses on the carbon and welfare consequences of various farm commodity and carbon sequestration programs that hold total program fiscal costs constant at current levels. Althouth the methodology and data are applied to the United States, the issues addressed are common in a number of developed nations, particularly within the European Union (EU). Adapting existing sector models in these nations to perform similar analyses would provide policy makers with more precise information about the nature of the trade-offs involved with second-best policies for replacing farm commodity subsidies with tree planting subsidies.The research reported in this paper was partially funded by the United States Environmental Protection Agency under contract number 68W90077. It does not reflect the official position of that agency. Mention of trade names does not constitute endorsement.     

Foreign market entry,upstream market power,and endogenous mode of downstream competition

In a differentiated duopoly model of trade and FDI featuring both horizontal and vertical product differentiation, we examine whether globalization and trade policy measures can generate welfare gains by leading firms to change their mode of competition. We show that when a high-quality foreign variety is manufactured under large frictions due to upstream monopoly power, a foreign firm can become a Bertrand competitor against a Cournot local rival in equilibrium, especially when the relative product quality of the foreign variety is sufficiently high and trade costs are sufficiently low (implying higher input price distortions due to double marginalization). Our results suggest that such strategic asymmetry is welfare improving and that the availability of FDI as an alternative to trade can make welfare-enhancing strategic asymmetry even more likely, especially when both input trade costs and fixed investment costs are sufficiently low and trade costs in final goods are sufficiently large.     

Alternative Monetary Targets,Instruments and Future Monetary Policy Frameworks

ABSTRACT

This article expands on the debate of whether merely controlling inflation can be considered a good outcome in terms of monetary policy, discussing proposals for adopting alternative monetary targets (e.g., price level, nominal GDP), alternative instruments (e.g., monetary finance, central bank digital currencies), for enlarging central banks' mandates (e.g., incorporating employment, wages, inequality, environmental objectives) and for the design of future monetary policy frameworks.

We argue that in the coming years, central banks should not simply maintain their pre-2008 standards by de-implementing unconventional monetary policies. Instead, they must take advantage of their past and recent experiences in order to improve, under an evolutionary perspective, future monetary policy and financial stability frameworks. Based on this, measures implemented since the 2008 crisis would have three possible treatments in new frameworks: i) be discarded, due to their predominantly adverse effects; ii) not be regularly implemented, but be used as backstop mechanisms if needed; iii) be incorporated as regular measures of monetary policy/financial stability frameworks. Accordingly, monetary and financial stability authorities will increasingly need to evolve and engage in a continuously adaptive and innovative process in order to face challenges posed by financial markets that are becoming more dynamic, innovative, complex, interconnected and globalised.     

A Bioeconomic Analysis of Marine Reserves for Paua (Abalone) Management at Stewart Island,New Zealand

Traditional fisheries management relies on the imposition of gear and/or effort restrictions. In spite of much experience with such techniques, the danger of fishery collapse is ever present. Biologists have advocated an alternative strategy, the establishment of marine reserves. However, it is possible that the benefits of marine reserve creation can be overstated if economic behaviour is ignored. In spite of being managed under a system of transferable quotas, the Stewart Island paua (abalone) fishery has been in decline for some time. We develop an integrated economic and biological model of this fishery and use it to predict biomass levels in a number of scenarios, including the imposition of a network of no-take areas. We identify circumstances under which the marine reserve solution outperforms traditional management techniques. We show that the benefit of a marine reserve is highest when a fishery is heavily exploited and when accounting for stochastic recruitment.     

Governance,resources and growth

Using a large sample of 50 oil exporting countries, we extend the prior literature by examining the role of quality of governance (QOG) on economic growth under the condition of heterogeneity and cross-sectional independence in errors. We document that QOG is by far the most consistent driver of economic growth both in the long- and short-run. Our result is robust to an alternative and an inverse measure of QOG. We also investigate a number of mediating factors contributing the QOG and economic growth linkage. We show that the long-run positive effect of QOG on economic growth is stronger in countries with higher information communication technology (ICT) diffusion; and such effect works only in countries with higher social capital, economic globalization, and financial development (FD). We also show that the ‘resource curse’ or ‘resource blessing’ debate in growth literature is sensitive to methodological choices.     

Unemployment insurance,recalls, and experience rating

In the United States, almost half of the workers who separated from their jobs ended their unemployment spell by returning to work for their last employer. In this study, we explore the impact of the experience rating (ER) system on recalls. In states using reserve ratio ER, and for a firm that is not at the minimum or the maximum tax rate, each layoff of a worker receiving unemployment benefits increases the future tax rate while each recall reduces it. This provides a natural incentive for firms to recall former workers receiving unemployment benefits. We use the Quarterly Workforce Indicators dataset, which provides information on recalls at the county level, and exploit the differences in tax schedule across states to estimate the impact of ER on recalls. We show that the recall share from hires increases with the degree of ER. We then develop a search and matching model with different unemployment insurance (UI) status, endogenous UI take-up, endogenous separations, recalls, and new hires. We illustrate that this model reproduces the effects of ER on recalls admirably. We show that an increase in the intensity of ER translates into a higher recall share at the steady state, especially for unemployed workers collecting unemployment benefits. We then use this model to analyze the labor market dynamics under alternative financing schemes. We show that ER has stabilization virtues—the higher the degree of ER, the less volatile the unemployment rate.     

Comparative costs and conservation of wild species in situ, e.g. orangutans

The extent to which conservation is feasible is constrained by budgets and the financial sacrifice stakeholders are willing to bear. Therefore a possible objective for conserving a species is to minimise the cost of achieving that stated aim. For example, if a minimum viable population (MVP) of a species is to be conserved, the size and type of habitats reserved for this could be selected to minimise cost. This requires consideration of the comparative (relative) opportunity costs of reserving different land types for conservation. A general model is developed to demonstrate this and is applied to the case of the orangutan. In the ecological literature, recommendations for reserving different types of land for conservation have been based on comparisons of either the absolute economic returns they generate if converted to commercial use or on differences in the density of a species they support. These approaches are shown to be deficient because they ignore relative trade-offs between species population and economic conversion gains at alternative sites. The proposed model is illustrated for orangutan conservation.     

Patient value: its nature,measurement, and role in real world evidence studies and outcomes-based reimbursement

The assessment of “patient value” is fundamental to clinical trials, real world evidence studies, and outcomes-based reimbursement schemes. Measures of health-related quality-of-life (HRQoL) are widely used in health research. Such measures are effective in determining the presence or absence of symptoms and functional ability. However, HRQoL measures were not intended, nor designed, to determine the value to patients of alternative health states. Functions have no intrinsic value—they are a means to fulfil human needs. However, needs can be met in a variety of ways, for example by adopting different functions or by the provision of social services. It is possible to analyze all functions in terms of the needs they satisfy. A needs model has been applied in health research since the 1990s. It is concerned with the extent to which human needs are fulfilled in the presence of disease and its treatment. It is argued that this is the major concern of the patient. Needs-based measures are patient-centric and produce a valid unidimensional index of outcome. Consequently, they provide a direct means of measuring patient value. This approach provides the possibility of evaluating health services in terms of the value they provide to consumers and payers. It also has a role to play in real-world evidence studies and outcomes-based reimbursement. It is recommended that greater attention is given in future to the development of patient-reported outcome measures that provide direct assessments of patient value.     

Bad Eggs,Learning-by-doing,and the Choice of Technology

We model long-run economic development through technology adoption under scientific uncertainty about environmental effects. There are four possible long-run equilibria in a socially planned economy: ‘High-growth’, adopt rapidly, but abandon damaging technologies once revealed (DDT, CFCs); ‘Cautious’, brake the introduction of new technologies to avoid mistakes (genetically modified organisms); ‘No-growth’, halt technological progress to preserve secondary knowledge; and ‘Collapse’, adopt rapidly without ever abandoning damaging technologies. In the base parameterization a short-sighted social planner chooses the cautious strategy. A far-sighted planner chooses the high-growth strategy, unless damages are irreversible in which case the cautious strategy again dominates. Regulatory options in the market economy are investigated. Pollution taxes do not affect the firm’s level of precaution if they can only be applied after the adopting firm has reaped the benefits; however, they do encourage the abandonment of damaging technologies. Liability rules do affect precaution, but may lead to excessive caution, or even a no-growth trap.     

Technology, demand and distribution: a cumulative growth model with an application to the Dutch productivity growth slowdown

This paper argues that the case for real wage growth restraint,and the consequent restoration of profitability, which the mainstreamconsensus regards as a necessary condition for sustained outputand productivity growth, is based on weak foundations, becauseit neglects the negative impact of wage moderation on productivitygrowth. Using a general Keynesian growth model, which integratesa (wage-led or profit-led) demand regime and a productivityregime (incorporating the productivity-growth enhancing effectsof higher demand and higher real wages), the conditions areidentified under which real wage restraint fails to raise outputand productivity growth. The model is applied empirically tothe Netherlands (1960–2000).     

Complementarity between water pricing, water rights and local water governance: A Bayesian analysis of choice behaviour of farmers in the Krishna river basin, India

To ensure efficient water allocation and use, policy designers have adopted various strategies, including price setting, decentralising irrigation water management or improving water rights. Most of these strategies have been applied individually, without considering the complementary relationships between them. This paper uses a discrete choice model to analyse the scope for combinations of tools for irrigation water demand management and farmers' acceptance of these. In terms of local irrigation water governance, the presence or absence of collective irrigation water management, in the form of a Water Users Association, is considered. Water rights are specified in terms of the duration and quality of the entitlement and its transferability. Finally, four types of water pricing methods (area, crop, block and volumetric pricing) are considered. Using a choice experiment, we elicit the most preferred water pricing method, under different water rights situations, at different price levels and under various contexts for local irrigation water governance. Our results indicated that under conditions of improved water rights, preference for volumetric pricing increases, whilst the presence of a Water Users Association reduces this preference. Furthermore, it was found that using an appropriate combination of water demand management tools considerably increases the willingness to pay for a change in scenario.     

Transferable quotas,enforcement costs and typical firms: An empirical application to the Norwegian trawler fleet

An alternative to traditional regulations of fisheries to avoid rent dissipation is the use of individual transferable quotas (ITQ _s ) where prices in the quota market provide the necessary information to owners of harvest rights to contract with each other. However, even under such a decentralized regime, information on the underlying technology of the fishing vessels is also necessary. First, since most fisheries consist of many interrelated production processes, in order to avoid rent dissipation by discarding wrong output mix etc., the structure of production in the multispecies fishery must be known to design a proper quota system. Second, an ITQ system may create incentives for misreporting by understating the actual catch. This may especially be the case where the expected degree of self-enforcement is low. The paper proposes a way to reduce the information requirements under regulation with asymmetric information by constructing a typical firm and comparing performance for the other vessels to this firm. Based on the typical firm, and if the industry is relatively homogenous, the performance and hence catch of any other firm in the industry can be predicted within a certain range. Further, the paper applies this idea to the Norwegian trawler fleet to assess the production structure in terms of jointness, input-output separability, and the supply and demand elasticities for the fishing firms. This information characterizes the fishery and thus how the quota system may be designed and how to construct a yardstick in order to reduce the enforcement cost under a decentralized regulation of ITQs.The authors would like to thank Trond Bjørndal, Røgnvaldur Hannesson, Ola Flaaten and two referees for useful comments and suggestions.     

Finite-sample size distortion of the AESTAR unit root test: GARCH,corrected variance–covariance matrix estimators and adjusted critical values

The behaviour of the asymmetric exponential smooth transition autoregressive (AESTAR) unit root test, which allows for asymmetric and nonlinear reversion to equilibrium, is examined in the presence of generalized autoregressive conditional heteroscedasticity (GARCH). It is found that while the test is relatively robust in the presence of ‘low volatility’ GARCH processes, it exhibits substantial size distortion when large values of the volatility parameter are considered. Attempted resolution via the routine application of heteroscedasticity consistent (or ‘corrected’) covariance matrix estimators (HCCMEs) is shown to result in overwhelming size distortion due to their impact upon the finite-sample distribution of the underlying test statistic. However, application of a corrected HCCME, in combination with critical values derived specifically under its use, results in the control of test size. Analogous results for the Dickey–Fuller (1979) test are presented to permit comparison with a test considering linear, symmetric adjustment. It is found that the AESTAR test is subject to far greater distortion than its linear, symmetric alternative. In summary, the results indicate that caution must be exercised when applying the AESTAR test to macroeconomic and financial time series, particularly if routine application of corrected covariance matrix estimators occurs.