Theoretical tests of the rational expectations hypothesis in economic dynamical models

This paper examines different theoretical stability tests of infinite-horizon rational expectations equilibria. These ‘tests’ have different status: two of them express that the considered equilibrium is ‘isolated’ [neither (non-sunspot) equilibria (test 1) nor (well-behaved) sunspot equilibria exist in a neighbourhood (test 2)] and two of them are learning criteria [either standard ‘evolutive learning’ (test 3) or game-theoretical ‘eductive’ learning (test 4)]. Surprisingly, these four tests select the same steady state equilibria in the class of one-dimensional one-step-forward looking economic models. The extension of this equivalence theorem to n-dimensional and then more complex systems is discussed.     

Linear-quadratic approximation, external habit and targeting rules

We examine the linear-quadratic approximation of nonlinear dynamic stochastic optimization problems. A discrete-time version of Magill [1977a. A local analysis of N-sector capital accumulation under uncertainty. Journal of Economic Theory 15(2), 211–219] is generalized to models with forward-looking variables paying special attention to second-order conditions. This is the ‘large distortions’ case in the literature. We apply the approach to monetary policy in a DSGE model with external habit in consumption. We then develop a condition for ‘target-implementability’, a concept related to ‘targeting rules’. Finally, we extend the approach to a comparison between cooperative and non-cooperative equilibria in a two-country model and show that the ‘small distortions’ approximation is inappropriate for this exercise.     

Towards a common understanding of the differences between purchasing, procurement and commissioning in the UK public sector

This paper recognises that commissioning has now become an important term in the lexicon of UK public policy but the term ‘commissioning’ is taking on a different meaning than that traditionally used within the purchasing and supply management community. The frequent inter-changeability of the terms ‘commissioning’, ‘procurement’ and ‘purchasing’ is now causing confusion and means different things to different people. Therefore the academic community needs to help practitioners understand the differences and implications. A document analysis of various UK Central Government departments’ commissioning frameworks was used to establish the key themes and compare commissioning, procurement and purchasing. This paper discusses the similarities and differences, and argues that commissioning is different from procurement, but that commissioning offers major opportunities for Procurement practitioners to make a strategic contribution.     

Dynamic programming for non-additive stochastic objectives

We derive the existence of an optimum and the techniques of dynamic programming for non-additive stochastic objectives. Our key assumption for non-negative objectives is that asymptotic impatience exceeds asymptotic ‘mean’ growth, where ‘mean’ growth is derived not only from intertemporal inelasticity and the random return on investment but also from the curvature of the non-additive stochastic aggregator (i.e. the ‘certainty equivalent’). We provide broad families of new, interesting, and tractable examples. They illustrate that ‘mean’ growth can exist even when the distribution of returns has unbounded support, that power discounting often implies infinite asymptotic impatience, and that non-positive objectives are easily handled with few restrictions on growth.     

Age-specific dynamic labor demand and human capital investment

To study the optimal age-specific labor demand and human capital investment at the firm level we extend the standard dynamic labor demand model by introducing ‘age’ as a second dynamic variable and distinguish between two types of workers: ‘low skilled’ and ‘high skilled’. Applying an age-structured optimal control model we derive qualitative features of the optimal age-specific hiring and training effort. For the case of a linear revenue and production function we prove that firms do not anticipate changes in adjustment costs in their optimal decisions. This result no longer holds if a nonlinear revenue or production function is considered.     

The latin model of welfare: Do ‘insertion contracts’ reduce long-term dependence?

This paper aims to present an assessment of the welfare policies implemented in most South European countries. Welfare programs in these countries try to combine a basic level of economic protection and measures favoring life and labor skills (‘insertion benefits’) of low-income households. We focus on a specific program set up with the twofold strategy of cash and ‘insertion benefits’ (Madrid's IMI) and, more precisely, on the so-called ‘insertion projects’, consisting in a gradual mix of job search assistance, training and subsidized jobs. We evaluate the effects of these ‘insertion projects’ on welfare recidivism and the duration of off-welfare spells using propensity score-matching methods. Our results suggest that propensity score estimators appear to reduce selectivity due to non-random participation. Both recidivism rates as well as the duration of off-welfare spells suggest potentially successful interventions.     

Economic dynamics of reservoir sedimentation management: Optimal control with singularly perturbed equations of motion

We analyze the economic dynamics of reservoir sedimentation management using the hydrosuction-dredging sediment-removal system. System dynamics depend on two interdependent hydraulic processes evolving at different rates. The accumulation of water impounded in the reservoir evolves on a ‘fast’ time scale, while the loss of water storage capacity to trapped sediments evolves on a ‘slow’ time scale. We formulate a multidimensional optimal control problem with singularly perturbed equations of motion to accommodate the disparate time scales. We apply singular perturbation methods to approximate (via polynomial series expansion) a ‘slow’ manifold reducing multi-dimensional solution space to the single-dimensional subspace confining long-term dynamics.     

Patents for genetic inventions: a tool to promote technological advance or a limitation for upstream inventions?

Today's conventional wisdom among economists and lawyers is heavily weighted toward the proposition that strong and broad patent rights are conducive to economic progress. Concerns have been raised as to the extent to which strong patent rights could build up barriers to follow-up research and thus hinder technological advance. This poses a number of difficulties particularly in the area of genetics with respect to the scope of protection and the definition of what is patentable. This article considers the problems of ‘anti-commons’, limitations for upstream inventions, patent thickets and royalty stacking with licenses for genetic inventions. A survey of 53 biotechnology companies in Switzerland builds the empirical basis of the investigation. The survey results confirm that the concepts of ‘anti-commons’, ‘patent thickets’ and ‘royalty stacking’ are indeed relevant. However, they are not highly relevant for the Swiss biotechnology industry from an economic point of view. A broad research exemption combined with a protection limited to concrete disclosure functions of DNA patents and compulsory licensing arrangements are considered as feasible remedies for overcoming certain difficulties with gene patents.     

The Delphi technique as a forecasting tool: issues and analysis

This paper systematically reviews empirical studies looking at the effectiveness of the Delphi technique, and provides a critique of this research. Findings suggest that Delphi groups outperform statistical groups (by 12 studies to two with two ‘ties’) and standard interacting groups (by five studies to one with two ‘ties’), although there is no consistent evidence that the technique outperforms other structured group procedures. However, important differences exist between the typical laboratory version of the technique and the original concept of Delphi, which make generalisations about ‘Delphi’ per se difficult. These differences derive from a lack of control of important group, task, and technique characteristics (such as the relative level of panellist expertise and the nature of feedback used). Indeed, there are theoretical and empirical reasons to believe that a Delphi conducted according to ‘ideal’ specifications might perform better than the standard laboratory interpretations. It is concluded that a different focus of research is required to answer questions on Delphi effectiveness, focusing on an analysis of the process of judgment change within nominal groups.     

A theory of formal conceptual definitions: developing theory-building measurement instruments

This study develops the need for formal conceptual definitions (sometimes called nominal definitions) and how to develop better measurement instruments for theory-building. It develops the underlying theory for ‘good’ formal conceptual definitions by defining terms, demonstrating that formal conceptual definitions are needed for all theory-building empirical research, explains how and why ‘good’ formal conceptual definitions are used to develop properties and their measures, and last, it logically explains that good formal conceptual definitions are necessary conditions for construct validity (content validity, criterion validity, convergent validity, and discriminant validity) while statistical tests are sufficient conditions for validity. This theory development explains why formal conceptual definitions are necessary before any traditional statistical empirical validity tests are performed. This study suggests that any statistical validity tests are not meaningful if the concept is not formally defined.In short, the theory of formal conceptual definitions provides a structure to develop ‘good’ measures of the formal theory that leads to ‘good’ empirical theory-building.     

Aggregate stock market behavior and investors’ low risk aversion

This paper studies whether investors’ high risk aversion can be avoided in a representative-agent model that is able to explain aggregate stock market behavior in the US financial market. We present a consumption-based asset pricing model with a representative agent who has a ‘catching up with the Joneses’ preference to show that high risk aversion can be avoided in a representative-agent model that can help explain many of the empirically observed properties of the aggregate stock market return, including the equity premium and risk-free rate puzzles, the predictability of long-horizon stock returns, and the ‘leverage effect’ in return volatility.     

Institutional investors, antitakeover defenses and success of hostile takeover bids

In this study we investigate the question of whether institutional investors enhance or reduce efficiency in the market for corporate control. In particular, given unequivocal evidence that target stockholders gain in successful takeover bids, we investigate the impact of institutional ownership in target firms on the adoption of the type of antitakeover defense as well as the outcome of takeover bids. We find that target firms are more likely to adopt value-reducing antitakeover defenses and successfully thwart takeover bids when a higher percentage of target common stock is owned by ‘pressure-indeterminate’ investors (investment counsel firms in particular). On the other hand, the probability of a successful takeover rises with the ownership of both ‘pressure-sensitive’ and ‘pressure-resistant’ investors. The above findings support the view that institutional investors do not play a homogeneous role in the market for corporate control.     

A Hotelling model with a ceiling on the stock of pollution

Environmental agreements such as the Kyoto Protocol aim to stabilize the amount of carbon in the atmosphere, which is mainly caused by the burning of nonrenewable resources such as coal. We characterize the solution to the textbook Hotelling model when there is a ceiling on the stock of emissions. We consider both increasing and decreasing demand for energy. We show that when the ceiling is binding, both the low-cost nonrenewable resource and the high-cost renewable resource may be used jointly. A key implication is that if energy demand were to decline in the long run, we may supplement energy supply through ‘clean’ renewables to meet the environmental standard, but then revert back to using only ‘dirty’ fossil fuels in the future when the ceiling has become non-binding. That is, the much heralded societal ‘transition’ to clean energy resources may be short-lived.     

Inside the queue:: hypercongestion and road pricing in a continuous time–continuous place model of traffic congestion

This paper develops a continuous-time–continuous-place dynamic economic model of traffic congestion, based on car-following theory. The model integrates two archetype congestion technologies used in the economics literature: ‘static flow congestion’ and ‘dynamic bottleneck congestion.’ With endogenous departure times and a bottleneck along the route, ‘hypercongestion’ arises as a dynamic equilibrium phenomenon on the upstream road segment. Congestion tolls based on an intuitive dynamic and space-varying generalization of the standard Pigouvian tax rule can hardly be improved upon. A naïve application of a toll schedule based on Vickrey's bottleneck model performs much worse and reduces welfare in the numerical model.     

Modeling monetary policy as an unobserved variable

This paper presents a model of the U.S. Monetary Authority. It is assumed that monetary policy is a single dimensioned unobserved variable that links changes in a set of ‘causal’ variables representing economic goals and changes in money market ‘indicator’ variables. Several issues are examined pertaining to the weights attached to the causal variables including: the lag structure, changes over time, and asymmetric effects of positive and negative changes. As a by product of the model, the paper presents an estimated index of monetary policy for the years 1955–1975.     

Self-organized criticality in evolutionary systems with local interaction

This paper studies a stylized model of local interaction where agents choose from an ever increasing set of vertically ranked actions, e.g. technologies. The driving forces of the model are infrequent upward shifts (‘updates’), followed by a rapid process of local imitation (‘diffusion’). Our main focus is on the regularities displayed by the long-run distribution of diffusion waves and their implication on the performance of the system. By integrating analytical techniques and numerical simulations, we come to the following two main conclusions. (1) If non-coordination costs are sufficiently high, the system behaves critically, in the sense customarily used in physics. (2) The performance of the system is optimal at the frontier of the critical region. Heuristically, this may be interpreted as an indication that (performance-sensitive) evolutionary forces induce the system to be placed ‘at the edge of order and chaos’.     

National policies towards biotechnology

The ‘new biotechnology’ is still a very young technology - half-in, half-out of the research laboratory. This paper surveys the policies that have been emerging towards this new technology from six governments - those of the United States, Japan, the United Kingdom, France, West Germany and the Netherlands. It suggests that the publicity ‘hype’ associated with the new biotechnology firms of the U.S., and the naming of biotechnology as a ‘next generation base technology’ by the Japanese government, together played a seminal role in pressurising governments into a positive policy stance. Looking across national policies, eight common characteristics of policy are identified: substantial support for basic research; increasing emphasis on applied research; expansion of traditional policies for supporting R & D; a new emphasis on linkage between academic and industrial research; gradual convergence towards corporatist or quasi-corporatist policies; the popularity of the collaborative approach; the promotion of small firms and the venture capital market; concern with the regulatory environment.     

The ‘science’ and ‘practice’ of HRM in small firms

This paper looks at the ‘science’ and ‘practice’ of human resource management in small firms. While there is growing evidence that the practice of human resource management in small firms is characterized by informality, there is less evidence about the science, or explaining why this is the case. We look to writing on strategic human resource management, which has at its heart the resource based view of the firm, for possibilities offered to understanding the science of human resource management in small firms.     

A theoretical comparison of the opportunity and gravity models

This paper compares the opportunity model with the gravity model from a theoretical view- point. First, based on a reexamination of Schneider's model, the ‘perceived opportunity model’ is proposed as a generalization of Schneider's model. Second, the similarity of the opportunity and gravity models is examined. In particular the condition of the opportunity model behaving like the gravity model is presented. Third, the difference of these models is investigated in terms of certain general model-theoretic properties. The behavioral ‘sensitivity’ of each model to spatial configuration changes is revealed by these properties.     

Implementing property tax reforms in Bangalore: an actor-network perspective

Many municipal governments in developing countries are experiencing serious difficulties in dealing with the rapid growth of population in cities. Catalysed through processes of globalisation, the growth of cities, especially the so-called ‘mega-cities’, has not been matched by investments in infrastructure like roads and power due to the inability of local government organizations to collect adequate revenues from sources like property tax. Recognizing these difficulties, agencies such as the Asian Development Bank have initiated systems for property tax reforms in a number of Asian cities, including Bangalore. In this paper, we discuss the story of this reform process drawing upon the actor-network perspective on translations. We argue that such a perspective helps to go beyond studying innovation processes through the lens of ‘technology diffusion’, and provides a more interesting and insightful perspective of ‘technology translation’.