The measurement of productivity in the nonmarket sector

In many sectors of the economy, governments either provide various services at no cost or at highly subsidized prices. Examples are the health, education and general government sectors. The System of National Accounts 1993 recommends valuing these nonmarket outputs at their costs of production but it does not give much guidance on exactly how to do this. In this paper, an explicit methodology is developed that enables one to construct these marginal cost prices. However, in the main text, an activity analysis approach is taken in order to simplify the analysis, so in particular, constant returns to scale, no substitution production functions for the specific activities in the nonmarket sector are assumed. It is shown that it is possible to obtain meaningful measures of Total Factor Productivity growth in this framework. An “Appendix” relaxes some of the restrictive assumptions that are used in the main text.     

A dual measure of correlation between the Solow residual and output growth

In this paper, we measure U.S. technology shocks by implementing a dual approach, which is based on price data instead of aggregate quantity data. By doing so, we find the relative volatility of technology shocks and the correlation between output fluctuation and technology shocks to be much smaller than those revealed in most real-business-cycle (RBC) studies. Our results support the findings of Burside et al. (Eur Econ Rev 40:861–869, 1996), who showed that the correlation between technology shocks and output is exaggerated in the RBC literature. This suggests that one should examine other sources of fluctuations for a better understanding of the business cycle phenomena.     

EFFECTS OF SECTOR AGGREGATION ON CO2 MULTIPLIERS IN MULTIREGIONAL INPUT–OUTPUT ANALYSES

The past few years have seen the emergence of several global multiregional input–output (MRIO) databases. Due to the cost and complexity of developing such extensive tables, industry sectors are generally represented at a rather aggregate level. Currently, one of the most important applications of input–output analysis is environmental assessments, for which highly aggregate sectors may not be sufficient to yield accurate results. We experiment with four of the most important global MRIO systems available, analyzing the sensitivity of a set of aggregate CO₂ multipliers to aggregations in the MRIO tables used to calculate them. Across databases, we find (a) significant sensitivity to background system detail and (b) that sub-sectors contained within the same aggregate MRIO sector may exhibit highly different carbon multipliers. We conclude that the additional information provided by the extra sector detail may warrant the additional costs of compilation, due to the heterogeneous nature of economic sectors in terms of their environmental characteristics.     

Index Number Theory Using Differences Rather Than Ratios

A bstract    Traditional index number theory decomposes a value ratio into the product of a price index times a quantity index. The price (quantity) index is interpreted as an aggregate price (quantity) ratio. The present paper takes an alternative approach to index number theory, started by Bennet and Montgomery in the 1920s, which decomposes a value difference into the sum of a price difference plus a quantity difference. Axiomatic and economic approaches to this alternative branch of index theory are considered in the present paper. The analysis presented has some relevance to accounting theory in which revenue, cost, or profit changes need to be decomposed into price quantity components or where standard or budgeted performance is compared with actual performance (variance analysis). The methodology presented in the paper is also relevant for consumer surplus analysis.     

Heterogeneous response of disaggregate inflation to monetary policy regime change: The role of price stickiness

This paper explores how a monetary regime change affects headline inflation via differential effects on various sectors in the economy. Using disaggregated CPI data for Canada, we find that the response to the adoption of inflation targeting (IT) was quite heterogeneous across sectors. While sticky-price sectors experienced a notable change in inflation dynamics following IT adoption, little structural change was observed in flexible price sectors. Our analysis based on a common factor model suggests that the structural changes in the sticky price sectors are driven by a decline in their responses to common aggregate shocks, including a monetary shock.     

Short and long-run cost efficiency in Indian public bus companies using Data Envelopment Analysis

State Transport Undertakings (STUs) are key players in providing mass road transport in India. Given that they operate under high levels of government imposed regulatory constraints, it is imperative to study their efficiency levels. Given that capital is a relatively scarce resource in developing countries like India, it is important to obtain efficiency in the short-run where some inputs are fixed as well as over the long run, where all inputs are variable. The technique used for capturing efficiency is Data Envelopment Analysis (DEA). A key possible limitation of DEA models based on physical inputs and outputs is that for an inefficient firm, reduction in some or all inputs may be recommended. It may often be desirable for an inefficient firm to increase some less expensive inputs while reducing the use of relatively expensive ones. Hence, when market price data is available, it is advisable to use the cost variant of DEA. Also, it is possible to determine variable cost efficiency in the short run when some inputs cannot be varied. Such inputs are referred to as “quasi-fixed” inputs. In this paper, we examine short and long term efficiencies of select bus companies in India known as State Transport Undertakings (STUs) over a period of 10 years. Fleet strength has been used as the quasi-fixed input. It is possible to ascertain, through a comparison of shadow price of the quasi-fixed input, vis-à-vis its market price, as to whether the quantity of this input is sub-optimally small or large. It is found that by adopting efficiency enhancing practices, STUs can cumulatively reduce their operating costs to the extent of 9123.35 million dollars. Also the tendency to minimize costs is found to be declining over time. In the short run some STUs are found to operate with a sub optimally low fleet size.     

On the uniqueness of optimal prices set by monopolistic sellers

This paper considers price determination by monopolistic sellers who know the distribution of valuations among the potential buyers. We derive a novel condition under which the optimal price set by the monopolist is unique. In many settings, this condition is easy to interpret, and it is valid for a very wide range of distributions of valuations. The results carry over to the optimal minimum price in independent private value auctions. In addition, they can be fruitfully applied in the analysis of quantity discount price policies.     

Price cap regulation and the ratchet effect: a generalized index approach

In this study we estimate a variable cost function on a panel of English and Welsh Water and Sewerage companies, observed over two full regulatory periods (1995–2004). The main aim of the paper is to investigate the presence of a ratchet effect in the cost cutting activity associated with the price cap regulatory regime. By applying the Generalized Index of Technical Change approach suggested by Baltagi and Griffin (J Polit Econ 96(1):20–41, (1988)), we provide some empirical evidence consistent with the existence of regulatory cycles. In particular, firms’ cost cutting activity tends to increase in the early phase of the regulatory cycle, while it weakens as the price review approaches. D24, L51, L95.     

Information management with specific investments and cost-based transfer prices

Abstract

We analyse information flows in a profit-centre organisation with internal trade between two risk-neutral divisions. Prior to production, the divisions make unverifiable investments in intrafirm synergies. After investments are made, the selling division announces a cost-based transfer price which includes a mark-up on variable costs. The buying division then decides what quantity to purchase at that unit cost. From the head office's perspective, the key issues are to influence both, divisional investments and the seller's manipulation of the mark-up. To do so, the head office can fund a pre-decision information system before divisional investments are made. The system produces forward-looking information that can be used to improve the divisions' investment decisions, but which cannot be used in evaluating their performance. Our analytical framework allows us to identify cost and revenue structures for which pre-decision information either supports or destroys intrafirm synergies by motivating or discouraging divisional investments, thereby resulting in an increase in, decrease in or in no impact whatsoever on, firm profit. Among our most interesting findings is the counterintuitive result that pre-decision information can undermine the incentives of risk-neutral agents to invest specifically. Our results add to earlier agency models that found different, albeit equally dysfunctional effects of pre-decision information. Contrary to these studies, our findings are not driven by either risk aversion or rent extraction.     

Competition with Aftermarket Power When Consumers Are Heterogeneous

We study a model of competitive foremarkets and partly monopolized aftermarkets. We show that high aftermarket power prompts firms to engage in inefficiently aggressive below‐cost pricing in the foremarket. This inefficiency is driven by the presence of consumers with valuations below marginal cost. While for intermediate aftermarket power their presence leads to a competition‐softening effect, for high aftermarket power firms attract increasing numbers of unprofitable consumers by aggressively pricing below cost. For high aftermarket power, firms' equilibrium profits can therefore be decreasing in aftermarket power but are always higher than for low aftermarket power. If firms engage in price discrimination by bundling the foremarket and aftermarket goods or by reducing their aftermarket power, they avoid selling to unprofitable consumers but also reduce the competition‐softening effect. This decreases firms' equilibrium profits but increases consumer and social welfare.     

Do house price developments spillover across euro area countries? Evidence from a global VAR

This paper empirically assesses the prospects for house price spillovers in the euro area, where co-movement in house prices across countries may be particularly relevant given a general trend with monetary union toward increasing linkages in trade, financial markets, and general economic conditions. A global VAR is estimated for three housing demand variables (real house prices, real per capita income, and the cost of borrowing, captured by a real long-term interest rate) on the basis of quarterly data for 7 euro area countries (Belgium, Germany, Ireland, Spain, France, Italy and the Netherlands), which together comprise nearly 90% of euro area GDP, over the period 1971–2009. The results suggest limited house price spillovers in the euro area, albeit with evidence of some overshooting in the first year after the shock, followed by a long run aggregate euro area impact of country-specific changes in real house prices related in part to the country’s economic weight. This contrasts with the impacts of a shock to domestic long-term interest rates, causing a permanent shift in house prices after 2–3 years. Underlying this aggregate development are rather heterogeneous house price spillovers at the country level, with a strong importance for weights – either economic or geographic – in governing their general magnitude. More generally, the impact of financing costs on house prices appears to have grown though time.     

Efficiency and information aggregation in auctions with costly information

Consider an auction in which k identical objects are sold to n > k bidders who each have a value for one object which can have both private and common components to it. Private information concerning the common component of the object is not exogenously given, but rather endogenous and bidders face a cost to becoming informed. If the cost of information is not prohibitively high, then the equilibrium price in a uniform price auction will not aggregate private information, in contrast to the costless information case. Moreover, for a wide class of auctions if the cost of information is not prohibitively high then the objects can only be allocated in a weakly efficient sense, and then only if the equilibrium proportion of endogenously informed agents is vanishing as the economy grows. In spite of these results, it is shown that there is a mechanism for which there exist equilibria and for which (weak) efficiency is achieved as the economy grows in the face of endogenous information acquisition.Received: 6 August 2001, Accepted: 27 July 2002, JEL Classification: C72, D44, D82Financial support under NSF grant SBR-9507912 is gratefully acknowledged. I thank Valentina Bali for conversations out of which this project grew, and Larry Ausubel for a very helpful discussion of an early version of this paper at the 1998 summer meetings of the Econometric Society from which I have borrowed in structuring the exposition of the paper. I also thank Andy Postlewaite, Jeroen Swinkels, and an associate editor and anonymous referee for helpful comments and suggestions on earlier drafts.     

Disclosure Policy in a Mixed Market

This paper investigates the optimal disclosure strategy for private information in a mixed duopoly market, where a state-owned enterprise (SOE) and a joint-stock company compete to supply products. I construct a model where the two firms compete in either quantity or price, and uncertainty is associated with either marginal cost or market demand. The model identifies the optimal disclosure strategies that constitute a perfect Bayesian equilibrium by type of competition and uncertainty. In Cournot competition, both firms disclose information under cost uncertainty, while only the SOE or neither firm discloses information under demand uncertainty. Alternatively, in Bertrand competition, only the joint-stock company discloses information under cost uncertainty or demand uncertainty. Recently, developed countries have required the same level of disclosure standards for SOEs as for ordinary joint-stock companies. The findings described in this paper warn that such mandatory disclosure by SOEs can trigger a reaction by joint-stock companies, putting the economy at risk of a reduction in welfare.     

Multi‐unit pricing

A price takes the form of a cost for either one unit (single‐unit pricing) or multiple units (multi‐unit pricing). I consider a monopolist selling units of a good to a population of homogeneous consumers to explain why one is preferred to the other. A mental cost arises if the division problem a multi‐unit price causes is done. If marginal utility remains high multiple units are desired. Multi‐unit pricing is preferred since it creates a cost if fewer units are purchased. If utility exhibits strong diminishing returns single‐unit pricing is used to avoid the calculation. Copyright © 2008 John Wiley & Sons, Ltd.     

Quantity precommitment and price-matching

We study the effects of price-matching in a capacity-constrained duopoly setting. We show that no firm does worse at any pure equilibrium under price-matching relative to Bertrand, but as capacity increases, one or both firms do better relative to Bertrand. If the firms choose their capacities simultaneously before making pricing decisions, then the effect of price-matching varies with the cost of capacity. Specifically, when the cost is “high” price-matching either (i) has no effect on the market price, i.e., the market price associated with the pure SPEs is the Cournot one, or (ii) weakly decreases the market price relative to Cournot. Furthermore, when the cost is “low” price-matching leads to a set of (pure) SPE prices that includes the Cournot price in the interior. Therefore, price-matching does not necessarily benefit the firms when firms select their capacities before competing in price.     

Tests of Representative Firm Models: Results for German Manufacturing Industries

Many studies of producer behavior consider cost and input demand functions derived from microeconomic theory and estimate them on the basis of aggregate data. If the characteristics of the firms differ, the negligence of heterogeneity can lead to estimation bias. An alternative is to restrict individual behavioral functions to being linear in the firm specific parameters. The aim of this paper is to describe aggregate producer behavior without placing too strong restrictions on functional form and to explicitly account for firm heterogeneity. Estimation for German manufacturing sectors confirms that neglected heterogeneity is an important source of bias in representative firm models.     

Advertising a second-price auction

This study examines a symmetric private-value second-price auction model in which the seller solicits bidders at a cost, sets a reserve price, and receives a payoff which is a convex combination of revenue and welfare. The bidder’s valuations are drawn from a distribution with a decreasing hazard rate and non-decreasing virtual valuations. We find that at equilibrium the seller adopts an advertising policy which minimizes the uncertainty over the number of participants, and sets a reserve price which only depends on the distribution of valuations and the weight on revenue in the objective function. A welfare-maximizing seller is shown to advertise more than a revenue-maximizing seller, and a ceteris paribus increase in the advertising level is proved to increase the expected winner’s rent.     

Introducing the supply side into the LBS Model

This Briefing Paper describes a new version of the London Business School model, which incorporates our most recent research on the supply side. The changes reflect the desire to improve the specification of the supply-side of the model, and to capture the effects of taxes on the incentives to save, invest and to work, while still retaining the basic features of the income-expenditure framework. The main features of the new model are: - Gross domestic product is determined as the sum of the outputs of five sectors. Previously GDP was determined by the demand side as the sum of the expenditure components. - Domestic demand for the output of the private sector depends on domestic absorption and on the price of this output relative to import prices. Overseas demand for exports depends on world economic activity and on the price of exports relative to the world price of exports. - Supply depends on the capital stock, real unit labour costs and real raw material prices. In the short run, input prices are allowed to affect the mix between goods which are exported and those which are supplied to the domestic market. In the long run, however, the mix depends only on the price of exports relative to the price of domestically supplied goods (i.e., relative profitability). - In the short run, disequilibrium in the goods market is reflected in adjustments to prices, inventories and the external balance. - Since gross domestic product is determined by summing the output of each sector, output decisions are reconciled with expenditure decisions by making imports the difference between final expenditure and aggregate supply. - In the long run, increases in government expenditure crowd out private expenditure, but the effect takes several years to come through. - A cut in corporation taxes which is not financed by higher taxes elsewhere boosts the supply side by raising investment and the capital stock, but not by enough to raise revenues sufficiently to pay for the tax cut. Private sector saving increases but not by enough to fund higher public sector borrowing, so the current account goes into deficit. - In the short run, both supply and demand factors influence economic activity; in the long run, the path of the economy depends only on population growth, capital accumulation and technical progress.     

The Impact of Consumption Hassle on Pricing Schedules

A curious phenomenon in the retail pricing of many product categories (e.g., tuna, frozen orange juice, and tomato paste) is the existence of quantity surcharges. A related curiosity is the existence of both discounts and surcharges within the same product category. To explain the former phenomenon, extant research invokes heterogeneity in consumption parameters, heterogeneity in search costs, or concern for retail price image. To the best of our knowledge, there is no received explanation for the latter phenomenon. We add to this rich stream of work by proposing a novel explanation for quantity surcharges. Our explanation is based on the notion of consumption hassle. We analyze a market that is heterogeneous in a hedonic parameter that influences valuations as well as the effective cost of the consumption hassle. We then derive consumer choices (small pack, large pack, or two small packs) taking into account Individual Rationality (IR) and Incentive Compatibility (IC) constraints. In the absence of consumption hassle, we obtain two segments with one purchasing the small pack and the other purchasing the large pack. Moreover, the optimal pricing for the seller involves quantity discounts. However, with the introduction of consumption hassle, the market potentially splits into three segments: one purchasing the small pack, another purchasing two small packs, and the third purchasing the large pack. Moreover, the optimal pricing for the seller involves quantity surcharges. Overall, our analytical findings offer an additional explanation for the phenomenon of quantity surcharges. More importantly, they offer a rationale for the existence of multiple pricing schedules within the same product category by explicitly recognizing variations in consumption hassle. Copyright © 2012 John Wiley & Sons, Ltd.     

The supply multiplier with a self-employed private sector

Conclusion By modelling the private sector on the basis of self-employment, rather than the wage employment assumed by Hare (1987), we are able to proceed without making strong restrictions on functional forms. Our main conclusion is that the supply multiplier equationis affected by the inclusion of the private sector. The immediate effect of an increase in state sector goods purchases by the government is that there is an equal reduction in the amount of state sector goods available for the household sector. This is assumed to affect household demand for private sector output and household supply of labour to the private sector (as well as affecting household labour to the state sector, as in the Barro-Grossman model). The change in labour supply to the private sector affects the supply of goods by the private sector. The net result is that an excess demand (or supply) is created for private sector output and so the price of this output rises (or falls). In general, a change in private sector price leads to a change in state sector labour supply and output, a result, which, by definition, does not occur if the private sector is not included in the model. Thus, the supply multiplier in general takes a different value from that found by Barro and Grossman.Given that the rate of change of labour supply to the state sector with respect to the price of the private sector good is negative we obtain the following conclusion. (a) If a marginal decrease in the availability of state output results in an excess supply of private sector output (before price changes), the supply multiplier is not as negative as in the Barro-Grossman model and may even be zero or positive. (b) If, however, an excess demand for private sector output is created, the supply multiplier is actually more negative than in the Barro-Grossman model. Should, instead, the rate of change of labour supply to the state sector with respect to the price of the private sector good be positive these conclusions are reversed, in the sense that the terms excess supply in (a) and excess demand in (b) are interchanged.(The views expressed in this paper should not necessarily be attributed to the Department of Trade and Industry.) We would like to thank an anonymous reference for helpful comments, particularly in pointing out an inconsistency in our treatment of the individual and the aggregate behaviour of households in an earlier version of the paper.