ENDOGENOUS FLUCTUATIONS IN TWO‐COUNTRY MODELS*

This paper investigates the interlinkage in the business cycles of large‐country economies in a free‐trade equilibrium. We consider a two‐country, two‐good, two‐factor general equilibrium model with Cobb‐Douglas technologies and linear preferences. We also assume decreasing returns to scale in the consumption good sector. We first identify the determinants of each country's global accumulation pattern in autarky equilibrium, and secondly we show how a country's business cycles may spread throughout the world once trade opens. We thus give capital intensity conditions for local and global stability of competitive equilibrium paths.     

OPTIMAL GROWTH IN A TWO‐SECTOR RSS MODEL WITHOUT DISCOUNTING: A GEOMETRIC INVESTIGATION*

This essay reports results on optimal growth in a two‐sector model with fixed coefficients, irreversible investment and no discounting. Under normalization, the model can be represented by two real numbers, but despite its deceptive simplicity, it admits rich transition dynamics and apparent pathologies that seem to have been missed in earlier work. From a methodological point of view, and in the light of recent work of Nishimura and Yano, this essay can also be seen as a further rehabilitation of geometric methods as an engine of analysis.     

SOCIAL STATUS,EDUCATION AND GOVERNMENT SPENDING IN A TWO‐SECTOR MODEL OF ENDOGENOUS GROWTH*

This paper extends the relative wealth specification of status preference to the two‐sector Uzawa (1965 )– Lucas (1988 ) model and examines the effectiveness of government spending on economic growth. It is found that the desire for relative wealth‐induced social status and/or the education component of relative wealth‐induced social status are important ingredients in determining the growth rate effects of government spending. Provided that the agent is concerned with his or her relative social position, the education‐induced social status plays a more important role than the physical‐asset‐induced social status in determining the validity of public spending on growth. If individuals do not care about their education‐driven social rewards, then an increase in government spending has no effect on the balanced growth rate regardless of the presence of the physical‐asset‐induced social status. A rise in government spending reduces the long‐run growth rate if the education‐induced social status is present.     

OPTIMAL TRANSITION DYNAMICS IN THE LEONTIEF TWO‐SECTOR GROWTH MODEL WITH DURABLE CAPITAL: THE CASE OF CAPITAL INTENSIVE CONSUMPTION GOODS*

We present results on undiscounted optimal policies in the Leontief two‐sector growth model with durable capital. Unlike the results with a labour intensive consumption goods sector, we show that a monotonic optimal programme is only one special case out of many richer possibilities of transition dynamics. Depending on the initial capital stock, and a key parameter ζ that could be interpreted as a marginal rate of transformation of capital between today and tomorrow, an optimal programme may converge to a period‐two cycle; and even when it converges to the golden rule stock, it can do so (damped) cyclically or with a “jump”.     

GROWTH OF SECTOR REAL PRODUCT*

This paper is concerned with the influence of different estimation procedures on the data for real output by industry group of a number of O.E.C.D. countries. The authors have examined the methods and indicators used in preparing sector real output data and have tried to assess the effect of the different methods on the recorded changes of sector real output. The data for real output, employment and productivity are compared for the different sectors and countries. The comparison between sectors lays particular emphasis on the dichotomy between the services and non-service sectors of the economy. In this comparison as well as in inter-country comparison it is seen that the data are influenced to a considerable extent by different methods. The survey of estimation methods also shows the incidence of use of double deflation techniques and other methods in the different countries, and the extent to which quality change, output specification and valuation problems are reflected in the different methods.     

SEQUENTIAL TWO‐PLAYER GAMES WITH AMBIGUITY*

If players' beliefs are strictly nonadditive, the Dempster–Shafer updating rule can be used to define beliefs off the equilibrium path. We define an equilibrium concept in sequential two‐person games where players update their beliefs with the Dempster–Shafer updating rule. We show that in the limit as uncertainty tends to zero, our equilibrium approximates Bayesian Nash equilibrium. We argue that our equilibrium can be used to define a refinement of Bayesian Nash equilibrium by imposing context‐dependent constraints on beliefs under uncertainty.     

NEGATIVE INTRA‐GROUP EXTERNALITIES IN TWO‐SIDED MARKETS*

Two types of agents interact on a pre‐existing free platform. Agents value positively the presence of agents of the other type but may value negatively the presence of agents of their own type. We ask whether a new platform can find fees and subsidies so as to divert agents from the existing platform and make a profit. We show that this might be impossible if intra‐group negative externalities are sufficiently (but not too) strong with respect to positive inter‐group externalities.     

MULTIPLIER EFFECTS OF PUBLIC SERVICES IN A TWO‐SECTOR MODEL OF MONOPOLISTIC COMPETITION

In a two‐sector model of monopolistic competition, this paper explores what impacts an expansion of government spending on public services has on national income. In the short run where entry and exit of firms are restricted, a rise in government spending on services like health care (which has only a role of substituting for market services) increases national income, but that on services like elderly care (which has not only this role but also another role of contributing to home production of services) decreases it. These results are reversed in the long run. Welfare effects of public services are also examined.     

STOCHASTIC PROCESS MODELS AND THE DISTRIBUTION OF EARNINGS*

This article examines several hypotheses concerning the stochastic nature of year to year variations in individual incomes in light of newly available microdata on individual earnings. In particular, the models of Solow (1951), Champernowne (1953), and Rutherford (1955) are examined in some detail, and their predictions as to changes to be expected in the distribution of individual incomes are tested. The author concludes that the distributions arrived at using these models are not very similar either to each other or to the actual distribution of earnings. Thus, he believes that as an “explanation” of earnings dynamics stochastic process models are unsatisfactory. He further criticizes these models on the grounds that they foster a bias toward the belief in the inevitability, and perhaps desirability, of the current distribution of earnings.     

IDENTIFICATION AND ESTIMATION OF AUCTION MODEL WITH TWO‐DIMENSIONAL UNOBSERVED HETEROGENEITY*

This article investigates the empirical importance of allowing for multidimensional sources of unobserved heterogeneity in auction models with private information. It develops the estimation procedure to recover the distribution of private information in the presence of two sources of unobserved heterogeneity. It is shown that this estimation procedure identifies components of the model and produces uniformly consistent estimators of these components. The results of the estimation with highway procurement data indicate that allowing for two‐dimensional unobserved heterogeneity may significantly affect the results of estimation as well as policy‐relevant instruments derived from the estimated distributions of bidders’ costs.     

UNIQUENESS AND INDETERMINACY OF THE EQUILIBRIUM GROWTH PATH IN THE UZAWA‐LUCAS MODEL WITH SECTOR SPECIFIC EXTERNALITIES*

We introduce sector specific external effects of human capital on production in an otherwise Uzawa‐Lucas model of endogenous growth; and show that the problem of indeterminacy of the competitive equilibrium growth path does not exist even if the production function satisfies the increasing returns to scale at the social level.     

THE IDENTIFICATION AND ECONOMIC CONTENT OF ORDERED CHOICE MODELS WITH STOCHASTIC THRESHOLDS*

This article extends the widely used ordered choice model by introducing stochastic thresholds and interval‐specific outcomes. The model can be interpreted as a generalization of the GAFT (MPH) framework for discrete duration data that jointly models durations and outcomes associated with different stopping times. We establish conditions for nonparametric identification. We interpret the ordered choice model as a special case of a general discrete choice model and as a special case of a dynamic discrete choice model.     

PRIOR ELICITATION IN MULTIPLE CHANGE‐POINT MODELS*

This article discusses Bayesian inference in change‐point models. The main existing approaches treat all change‐points equally, a priori, using either a Uniform prior or an informative hierarchical prior. Both approaches assume a known number of change‐points. Some undesirable properties of these approaches are discussed. We develop a new Uniform prior that allows some of the change‐points to occur out of sample. This prior has desirable properties, can be interpreted as “noninformative,” and treats the number of change‐points as unknown. Artificial and real data exercises show how these different priors can have a substantial impact on estimation and prediction.     

THE TWO‐WAY RELATIONSHIP BETWEEN GOVERNMENT SPENDING AND CORRUPTION AND ITS EFFECTS ON ECONOMIC GROWTH

The existing empirical evidence suggests that in low‐income economies, an increase in government spending leads to a reduction of growth. This article aims to explain this empirical fact by considering a growth model that incorporates a two‐way relationship between corruption and government spending. That is, government spending gives rise to corruption and rent seeking, which feeds back by distorting the structure and size of government spending. In addition, the cost of corruption depends on the wage rate. Therefore, in low‐income economies, increases in government spending tend to generate larger social losses caused by a higher level of rent dissipation and a concomitant rise in corruption and government inefficiency. Consequently, in such economies, an increase in government spending is more likely to result in a decline of economic growth. (JEL H3, O11, O41)     

APPLICATION OF PANEL DATA MODELS IN BENCHMARKING ANALYSIS OF THE ELECTRICITY DISTRIBUTION SECTOR*

ABSTRACT ** : This paper explores the application of several panel data models in measuring productive efficiency of the electricity distribution sector. Stochastic Frontier Analysis has been used to estimate the cost‐efficiency of 59 distribution utilities operating over a nine‐year period in Switzerland. The estimated coefficients and inefficiency scores are compared across three different panel data models. The results indicate that individual efficiency estimates are sensitive to the econometric specification of unobserved firm‐specific heterogeneity. This paper shows that alternative panel models such as the ‘true’ random effects model proposed by Greene (2005) could be used to explore the possible impacts of unobserved firm‐specific factors on efficiency estimates. When these factors are specified as a separate stochastic term, the efficiency estimates are substantially higher suggesting that conventional models could confound efficiency differences with other unobserved variations among companies. On the other hand, refined specification of unobserved heterogeneity might lead to an underestimation of inefficiencies by mistaking potential persistent inefficiencies as external factors. Given that specification of inefficiency and heterogeneity relies on non‐testable assumptions, there is no conclusive evidence in favour of one or the other specification. However, this paper argues that alternative panel data models along with conventional estimators can be used to obtain approximate lower and upper bounds for companies' efficiency scores.     

INTERTEMPORAL COMPLEMENTARITY AND OPTIMALITY: A STUDY OF A TWO‐DIMENSIONAL DYNAMICAL SYSTEM*

We study the underlying structure of the two‐dimensional dynamical system generated by a class of dynamic optimization models that allow for intertemporal complementarity between adjacent periods, but preserve the time‐additively separable framework of Ramsey models. Specifically, we identify conditions under which the results of the traditional Ramsey‐type theory are preserved even when the intertemporal independence assumption is relaxed. Local analysis of this theme has been presented by Samuelson (Western Economic Journal 9 (1971), 21–26). We establish global convergence results and relate them to the local analysis, by using the mathematical theory of two‐dimensional dynamical systems. We also relate the local stability property of the stationary optimal stock to the differentiability of the optimal policy function near the stationary optimal stock, by using the Stable Manifold Theorem.     

A NOTE ON “A ONE‐SECTOR NEOCLASSICAL GROWTH MODEL WITH ENDOGENOUS RETIREMENT”: EXISTENCE OF MULTIPLE STEADY STATES*

This note extends Matsuyama's 0–1 endogenous retirement choice model to the framework with continuous endogenous retirement choice to study the consumption‐saving decision and capital accumulation in an overlapping generation model. The conditions for the existence of multiple steady states have been derived. In contrast to the 0 or 1 labour choice, the partial retirement may be a stable steady state under the continuous endogenous retirement choice in the second period. And this implies that partial retirement may be a stable optimal choice. Also, we find that the retirement choice depends on the initial capital stock when there are multiple steady states.