On incentive structures of a socialist economy

This paper considers an incentive structure B_T as an alternative to the incentive structure B_D recently suggested by Domar. Both of these incentive structures induce managers in a planned economy to provide the socially desirable output level while allowing them to set prices. In two aspects B_T is better than B_D. First, B_D works only if demand is elastic at the optimal output level while B_T works whether demand is elastic or inelastic at that level. Second, even when demand is elastic at the optimal level, there are circumstances for which output converges to the optimal level faster under B_T than under B_D.     

Modelling risk premia in CO2 allowances spot and futures prices

This article analyzes the modelling of risk premia in CO₂ allowances spot and futures prices, valid for compliance under the EU Emissions Trading Scheme (EU ETS). Similarly to electricity markets, a salient characteristic of CO₂ allowances is that the theory of storage does not hold, as CO₂ allowances only exist on the balance sheets of companies regulated by the scheme. The main result features positive time-varying risk premia in CO₂ spot and futures prices, which are strictly higher for post-2012 contracts (€6–9/ton of CO₂) than for Phase II contracts (€0–6/ton of CO₂). Contrary to Benth et al.'s (2008) for electricity markets, a positive relationship between risk premia and time-to-maturity is found in the EU ETS. As for relative differences between CO₂ futures and spot prices, CO₂ futures traded between + 1% (December 2008 contract) and + 33% (December 2014 contract) above spot prices during February 2008–April 2009. Contrary to Bessembinder and Lemmon (2002) for the electricity market, a positive relationship between risk premia and the variance/skewness of CO₂ spot prices is found. The futures-spot bias to the EU ETS explains around 1–6% of the variance of CO₂ futures premia.     

Buyer search and price dispersion: a laboratory study

We study markets with costly buyer search in which sellers simultaneously post prices. Buyers costlessly observe one or (with probability 1−q) two of the posted prices, and can accept one or pay to search again. The experiment varies q, the search cost, and the number of buyers. Equilibrium theory predicts a unified very low (high) price for q=0 (q=1) and predicts specific distributions of dispersed prices for q=1/3 and 2/3. Actual prices conform closely to the predictions in some treatments. Buyers’ reservation prices are biased away from the extremes, however, and sellers’ prices have positive autocorrelation and cross-sectional correlation.     

Economic Fluctuation,Macro Control,and Monetary Policy in the Transitional Chinese Economy

Since 1978, China has experienced four episodes of economic fluctuations, during which the government used macro controls to restore stability. This paper finds that (i) tight monetary policy reinforced by administrative actions checks the economic overheating, (ii) monetary policy affects significantly industrial output, retail sales, and prices, but it has no effect on fixed-asset investment and merchandise imports, (iii) a long-run stable relationship exists between financial variables and economic activity, and (vi) money aggregates outperform bank credits in predicting future changes in activities. The evidence provides ways for the People's Bank of China to improve the effectiveness of monetary policy.J. Comp. Econom.,October 1997,25(2), pp. 180–195. National University of Singapore, 10 Kent Ridge Crescent, Singapore 119260.     

A Generalized Exactly Additive Decomposition of Aggregate Labor Productivity Growth

Aggregate labor productivity (ALP) growth—i.e., growth of output per unit of labor—may be decomposed into additive contributions due to within‐sector productivity growth effect, dynamic structural reallocation effect (Baumol effect), and static structural reallocation effect (Denison effect) of cross‐sectional components (e.g., industry or region) of output and labor. This paper implements ALP growth decomposition that is “generalized” to output in constant prices and to output in chained prices (i.e., chained volume measure or CVM) and “exactly additive” since with either output the sum of contributions exactly equals “actual” ALP growth. It compares this “generalized exactly additive” decomposition (GEAD) to the “traditional” (TRAD) ALP growth decomposition devised for output in constant prices. The results show GEAD and TRAD are exactly additive when output is in constant prices, but GEAD is exactly additive while TRAD is not when output is in CVM. Also, GEAD components are empirically purer than or analytically superior to those from TRAD. Moreover, considering that contributions to ALP growth can be classified by industry or region each year over many years, GEAD provides a more well‐grounded picture over time of industrial or regional transformation than TRAD. Therefore, GEAD should replace TRAD in practice.     

Energienachfrage und Potential Output in Gesamtwirtschaft und Industrie

Summary The purpose of this article is to estimate the effects of the quadrupling of oil prices at the end of 1973 on potential output of the Austrian economy as a whole and of manufacturing in particular. The hypothesis is tested that the increase of relative energy prices (energy prices relative to domestic prices) makes previous measures of potential output obsolete. Using dynamic Cobb-Douglas type production functions for estimating potential output leads to the following results. If energy is implemented in the production function (either directly as a third factor in addition to capital and labour or indirectly via relative energy prices) there is strong evidence that part of the prerecession potential output has become obsolete in the recession of 1975. A comparison with an estimated potential output which doesn't take into account energy as a factor of production indicates that such a procedure could lead to wrong policy conclusions.

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Empirica 2'78 Zeitschrift des Österreichischen Institutes für Wirtschaftsforschung

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Für wertvolle Anregungen danke ich den Universitätsprofessoren Dr.E. Streissler und Dr.G. Tichy.     

Analysis and quantification of a new fiscally neutral European tax

The present study contributes to the discussion on the new European tax or excise which would be based on taxing end consumption (taxing the products and not the production) according to how much CO₂ is emitted during the production of particular commodities, irrespective of whether all or a part of this process takes place inside or outside the EU. The analysis is based on the input–output model, which provides an appropriate and unique approach for measuring the total CO₂ content of the various commodities taking the entire production chain into account. The calculation by products can be the basis for the estimation of product specific CO₂ taxes. The model calculations based on the input–output table for the EU-27 for the year 2011 leads to the tax rate of 40.69 euros per tonne of CO₂ emissions, which could have generated fiscal revenue in the amount of 1% of EU GDP. In line with the principle of fiscal neutrality, a reduction of the labour costs by ?2.03% could compensate the introduction of a CO₂ tax by the amount of 40.69 euros per tonne of CO₂. The cost push effects lead to change of relative prices in favour of environmentally produced goods and services.     

General equilibrium effects of environmental policy: A CGE-modeling approach

Estimation of emission control cost functions is often carried out in a partial equilibrium framework, i.e., under the assumption that emission control measures have negligible effects on input and output prices. In this paper a computable general equilibrium model is used for simulation of the impact on factor prices and resource allocation of reductions of SO _infx ^sup- , NO _infx ^su- and CO₂-emissions. Thus the model includes markets for tradable emission permits, and the equilibrium prices of permits reflect the marginal costs of emission control. The results suggest that major emission reductions are likely to have general equilibrium effects, and thus that emission control cost functions that fail to take these effects into account may give a distorted picture of the economic impact of emission control.     

The macroeconomic effects of fiscal policy

We investigate the macroeconomic effects of fiscal policy using a Bayesian Structural Vector Autoregression (B-SVAR) approach. We identify fiscal policy shocks via a partial identification scheme, but also: (i) include the feedback from government debt; (ii) look at the impact on the composition of output; (iii) assess the effects on asset markets; (iv) use quarterly data; and (v) analyse empirical evidence from the US, the UK, Germany and Italy. The results show that government spending shocks, in general, have a small effect on Gross Domestic Product (GDP); lead to important ‘crowding-out’ effects; have a varied impact on housing prices and generate a quick fall in stock prices. Government revenue shocks generate a mixed effect on housing prices and a small and positive effect on stock prices. The empirical evidence also suggests that it is important to explicitly consider the government debt dynamics in the model.     

Aumann-Shapley prices as a scarf social equilibrium

Considered are economies with a single output (a single consumption good) which is produced from l inputs by means of an increasing returns to scale production function f. We show that for quasi-concave and homogeneous functions f of degree r ? 1, the Aumann-Shapley prices constitute a simple Scarf Social Equilibrium. Put differently, Shapley value of the associated atomless game is in the core of that game. Such is not the situation, however, in the more general case when f exhibits increasing returns to scale (but in homogeneous).     

Optimal tax perturbations

The paper considers an economy with H households, N+1 commodities and M fixed factors with commodity taxes and government expenditures on goods and services. The paper studies under what conditions (small) Pareto improving tax changes exist, i.e., tax changes which increase the utility of each household in the economy. The basic analytical technique used is just the usual comparative statics apparatus, except that duality theory is used in order to simplify the computations. The paper derives both the changes in prices and in real incomes that are induced by (small) changes in exogenous tax variables (differential real income balanced budget incidence analysis).     

Monetary equilibrium and price stickiness reconsidered: A reply to Bagus and Howden

Bagus and Howden (Review of Austrian Economics 24(4): 383?C402, 2011) argue that price stickiness is a poor justification for advocating a flexible money supply through the issuing of fiduciary media under central or free banking. They view the contraction in output following an exogenous increase in money demand as an optimal response, worry about redistribution effects from the issuance of fiduciary media, and claim a changing money supply complicates economic calculation. Accepting their view that the contraction in output is an optimal response to an exogenous change in money demand, we still find a potentially beneficial role for monetary policy (under central banking) or fractional reserve note issue (under free banking). We show that even if all prices were perfectly flexible, changes in the money supply to offset changes in money demand might still be desirable. We point out several errors and mischaracterizations in their article, justify our decision to disregard wealth transfers, and discuss how a flexible money supply might facilitate economic calculation.     

Hedonic prices and cost/benefit analysis

Hedonic prices have been used to evaluate the willingness to pay for attributes. We reformulate the notion of hedonic price from a composite price on housing to a unit price on traded quantities, in conformity with long run competitive equilibrium theory. This formulation was suggested (but not developed) by Rosen (J. Polit. Econ.82, No. 1 (1974), 34–35). By first characterizing an efficient allocation of consumers to space, we show that hedonic unit prices can be understood as a bid-rent function which supports the efficient allocation. This is despite the fact that the lots over which consumers bid are themselves endogenous. We show that unit hedonic prices reveal preferences in a manner different from composite hedonic expenditures.     

THE INSTABILITY IN THE MONETARY POLICY REACTION FUNCTION AND THE ESTIMATION OF MONETARY POLICY SHOCKS

We extend Romer and Romer's (2004) analysis of the estimation and the effects of monetary policy shocks by controlling for (1) changes in the monetary policy reaction function and (2) changes in the response of output and prices over time with an extended data set. The results suggest that the post 1979 responses of output and prices to a monetary policy shock are significantly different from what has been reported for the whole sample: While output and prices respond significantly and negatively if their response is estimated for the whole sample period (1969–2005), the response of output is insignificant for the period of 1979–2005, and the response of prices is much weaker. The analysis of the changes in the monetary policy conducted over time allows us to partly attribute the diminished price and output responses to a successful monetary policy which led to a less volatile economy during the great moderation. (JEL E52, E32, C50)     

Examining crop price effects on production decision and resource allocation: an ex-ante approach

This article examines the output price effects on the US crop production, employing an ex-ante approach to the differential systems of input demand and output supply. The estimation results of the differential input demand show that the expansion of crop production leads to an increase in acreage (i.e. extensive margin) and a proportional rise in input usage improving yield per acre (i.e. intensive margin). The substitutable relationship between fertilizer and land supports that crop producers have an option to choose either intensive or extensive margin in response to changes in their relative prices. In addition, the estimation results of the differential output supply highlight that the composition of crop supply can be altered by changes in ex-ante crop prices. The estimation results suggest that crop producers substitute corn supply for the supply of cotton, wheat and soybeans or vice versa. Based on the estimated elasticities, the decompositions of profit-maximizing input demand are conducted, which reveals that a change in ex-ante crop prices is associated closely with resource reallocation.     

Average-cost pricing: Some evidence and implications

We present new survey evidence on pricing behavior for more than 14,000 European firms, and study its macroeconomic implications. Among firms that are price setters, roughly 75% respond that their prices are set as a markup on total costs, a business practice termed “full cost pricing”. Only 25% set prices as markups over variable or marginal costs. Moreover, using industry data for the U.S., we find that the correlation between changes in output prices and changes in variable input prices is significantly lower when fixed costs are likely to be more important.Since our results are similar to the findings in the classic and controversial paper of Hall and Hitch (1939) and subsequent survey evidence, we believe it worth studying the implications of full cost pricing for macroeconomics. We first propose a problem for the firm where full cost pricing can arise as optimizing behavior. We embed this problem, featuring an occasionally binding constraint, into a simple general equilibrium model. We show that when the model is hit by a shock that makes the constraint binding, the response of endogenous variables is amplified significantly more than it would be under the unconstrained regime.     

Factor substitution,ex ante and ex post

The amount of labor used per unit of capital stock (or investment) can be varied by any one of four quite different mechanisms. Two of these – changes in crew size and in capital utilization – are variable even ex post. These mechanisms are systemmatically related and all induce factor substitution in the same (neoclassical) direction with a change in relative factor prices. The conditions necessary to support the view that ‘factor prices don't matter’ are shown to be terribly stringent.     

Incentive effects of benevolent intervention: The case of government loan guarantees

There has been a substantial recent growth in government loan guarantees to ailing firms in the United States. This paper investigates the potential incentive effects of this practice. Using the simplest available two-period model, it is shown that when firms know that loan guarantees may be forthcoming, they may be induced to adopt riskier investments and take on more leverage. These perverse incentive effects imply that the actual loan-guarantees-related contingent liability of the government could be much larger than suspected. Our policy recommendation is that the government either abandon the practice altogether or set up a federal agency that sells loan guarantees to all firms at prices that depend on the riskiness of the firm's assets and its leverage.     

On disequilibrium savings and public consumption

Conclusions A particular aspect of the present paper is the introduction of specific policy measures for the government, whose behavior on the goods market was described in earlier work as purely exogenous, like in Malinvaud. In our context, the government appears as an active economic agent, acting at absorbing any excess supply or reducing any excess demand on the goods market. Though this behavior may look somewhat arbitrary, it has the advantage to force the state of the economy towards a SME if combined with natural endogenous behavior of the other agents! Furthermore, it does not contradict observed policies through which governments stimulate or restrain economic activity via purchases or fiscal and monetary policies. Perhaps alternative policies, like direct actions on the labor market by supplying (non-productive) jobs or unemployment compensations, could have done as well: this remains an open door for further research. The preceding feature also contrasts with the recent work done by V. Böhm (1978) in a macroeconomic set up. In this paper, he studies the stability of stationary Keynesian unemployment or stationary repressed inflation states but without imposing a particular policy on the government. Comparing his work with ours, it is easily verified that if the government would keep its consumption at the levelg ^*, the SME would be stable if the economy starts out in Keynesian unemployment and unstable if the economy starts out in repressed inflation, confirming Böhm's result.Our analysis is related to an earlier work of Archibald and Lipsey (1958), dealing with the adjustment of the economy to a Stationary Equilibrium after a change in real balances. The Quantity Theory of Money postulates that along a SME, a change in the price and the wage rate from (p,w) to (p,w) leads to an adjustment in the level of stationary money holdings from m_i ^* to m_i ^*, m_i ^*=_i ^* (p,w). In this paper, Archibald and Lipsey suggest that the economy follows a sequence of temporary market equilibria: Starting from a change in real balances,prices adjust at each period through a tâtonnement process so as to match supply and demand. Our paper proposes an alternative path: At each period,quantities adjust through a tâtonnement process at constant prices.This paper is a revised version of CORE Discussion Paper 7701. We wish to thank Paul Champsaur, Jacques Drèze, Werner Hildenbrand and Reinhard John for stimulating discussions. We are grateful to Volker Böhm for valuable comments and criticisms.Research supported by the Fonds National Belge de la Recherche Scientifique.     

Climate policy and the optimal extraction of high‐ and low‐carbon fossil fuels

Abstract. We study how restricting CO₂ emissions affects resource prices and depletion over time. We use a Hotelling‐style model with two non‐renewable fossil fuels that differ in their carbon content (e.g., coal and natural gas) and in addition are imperfect substitutes in final good production. We show that an economy facing a CO₂ flow‐constraint may substitute towards the relatively dirty input. As the economy tries to maximize output per unit of emissions it is not only carbon content that matters: productivity matters as well. With an announced constraint the economy first substitutes towards the less productive input such that more of the productive input is available when constrained. Preliminary empirical results suggest that it is cost‐effective to substitute away from dirty coal to cleaner oil or gas, but to substitute from natural gas towards the dirtier input oil.