MACROECONOMIC POLICY EVALUATION AND OPTIMAL CONTROL THEORY: A CRITICAL REVIEW OF SOME RECENT DEVELOPMENTS

Abstract. This survey addresses the recent literature on the application of optimal control theory and game theory to macroeconomic policy evaluation and design. This literature focuses on strategic interactions between governments and private agents engaged in dynamic non-cooperative games and emphasizes such issues as precommitment, credibility and reputation as important and endemic aspects of optimal policy design. A dominant theme is the problem of dynamic inconsistency and the inferiority of an equilibrium in single-stage full-information games without commitment. This may be alleviated in repeated games involving reputation effects and threat strategies designed to coerce rivals into pursuing particular strategies and to sustain a sequential equilibrium. The type and characteristics of a sequential equilibrium also depend importantly upon the information structure conditioning players'beliefs under uncertainty. Included here are separating and pooling equilibria, involving notions of learning, signalling and information revelation. Additional dimensions exist in stochastic systems which introduce other forms of uncertainty. Optimal control and game theory have also been applied to international macroeconomic policy design, with emphasis on the potential costs and benefits of non-cooperative and cooperative behaviour between countries and problems of international policy coordination.     

Defence markets

Although defence is a classic example of a public good, there are extensive opportunities for applying market solutions to the armed forces and defence industries. There are possibilities for beneficial inter-service rivalry and for creating profit centres within the armed forces; substitution is possible between parts of the armed forces, and competition can be used for purchasing weapons and for market-testing activities traditionally undertaken'in-house'by the armed forces. The analysis has implications for the UK strategic defence review.     

DIMENSIONAL SIMPLIFICATION AND ECONOMIC THEORIES OF LEGISLATIVE BEHAVIOR

In many many places, the political parties and political contests seem to array themselves along a single dimension. If you look at their programs in detail it always turns out that it's much more complicated than that. But it would appear that in the minds of the voters they are literally frequently arrayed on a single continuum which, as a result of the organization of the French chamber of deputies, is usually referred to as a left/right.     

QUANTIFYING THE QUALITY OF TERTIARY EDUCATION ANNUAL REPORTS

Research methods for developing disclosure indices are evaluated in relation to measuring performance for tertiary education bodies. A critique of earlier unweighted, dichotomous studies such as Dixon, Coy and Tower [1991], reveals limitations of such an approach. An alternative method (AD-Score) is advanced using 3-point scales to differentiate for: i) the quality of disclosures and, ii) a weighting of the importance of each item. Annual reports from 33 New Zealand tertiary education bodies (1985-90) were analyzed using both approaches. The results show that the AD-Score is approximately 10 percentage points lower throughout. The AD-Score also changed some of the rankings of the institutions. The scoring systems were found to be significantly different in 1990 (but not 1989). Suggestions for further improvements of the AD-Score are also offered.     

Sources and directions of technological accumulation in France: a statistical comparison with FR Germany and the UK

Technological activities are an important determinant of national economic performance. Data on R&D and on the national origins of patenting in the USA show that, compared to those of FR Germany and the UK, French technological activities have the following characteristics: (1) a relatively high rate of growth over the past 20 years in aggregate activity; (2) concentration of technological strength in sectors dominated by state procurement and related R&D funding, rather than in “core” technologies; (3) stronger performance in fast-growing technologies in defence, electrical products and fine chemicals, than in electronics and motor vehicles; (4) a relatively stable and speialized sectoral pattern of technological strengths and weaknesses; and (5) sectoral patterns of trading strengths and weaknesses that broadly reflect those in technology. These characteristics of France's technological activities cannot be explained by their greater or lesser concentration, which is very similar to that found in both FR Germany and the UK, both in aggregate and in specific sectors. As in the other two countries, a few large firms have a major influence on national technological activities, especially in R&D-intensive sectors and automobiles. These results are on the whole consistent with the recent assessment by INSEE and CEPII of France's competitive position in international markets. However, they do show a strong Franch “niche” in technologies linked to state markets, and they do suggest certain advantages in long-term stability, rather than rapaid change, in technological priorities.