A Contribution to the Theory of Welfare Accounting

A kind of "unified theory" is proposed as a dynamic generalization of the standard consumer-surplus methodology for evaluating welfare changes. The "unified theory" allows rigorous dynamic welfare comparisons to be inferred between any two economic situations—from just knowing current incomes and observing a short-run market demand schedule. Essentially, the change in present discounted future utility is exactly captured by the formula: difference in current income plus consumer surplus . This well-known formula is thereby shown to cover a far wider class of welfare comparisons than is customarily treated in the textbook static case.     

New Zealand's Financial Management System: Implications for Democracy

This article examines the continuing debate about, and inter-relationship between, the NHS, decentralization and local participation. The focus of the article is the experience of decentralization and participation over the past 25 years and, drawing on a new conceptualization of decentralization, it identifies the extent to which the NHS supports decentralized approaches to participation.     

Decentralization, Integration and the Post-Bureaucratic Organization: The Case of R&d

We assess the relevance of theories of increased decentralization in post-bureaucratic organizations for understanding changes in the organization of the research and development (R&D) function. Analysis of a sample of companies shows that R&D is less decentralized than contemporary accounts suggest, and there are few signs of it becoming more decentralized. We present evidence on the organization of R&D in two sectors (mechanical engineering, and food and drink), which suggests: (1) most firms remain centralized in their approach to R&D, relative to other functions; (2) firms that adopt a more decentralized approach to R&D do so for more complex reasons than have been recognized; (3) inter-functional integration remains a critical issue, for centralized and decentralized organizations alike; (4) introducing market principles into R&D brings risks of market failure.     

Understanding the Behavior and Hedging of Segregated Funds Offering the Reset Feature

Abstract

Segregated funds have become an extremely popular Canadian investment vehicle. These instruments provide long-term maturity guarantees and often include complex option features. One controversial aspect is the reset feature, which provides the ability to lock in market gains. Recently, regulators have announced that firms offering these products will be subject to new capital requirements. This paper discusses the effects of volatility, interest rates, investor optimality, and product design on the cost of providing a segregated fund guarantee. For each scenario, the authors provide the appropriate management expense ratio (MER) that should be charged and demonstrate the current liability using a given fixed MER. The paper also investigates intuitive reasons that cause the reset feature to require such a dramatic increase in the hedging costs. Finally, an approximate method for handling the reset feature is presented that can be computed very efficiently, provided the correct proportional fee is charged.     

Price, scarcity rent, and a modified r per cent rule for non-renewable resources

Since Hotelling's seminal paper on the optimal depletion of exhaustible resources, much has been published; yet confusion remains about whether scarcity rent and price increase or decrease as a resource is depleted when costs tend to rise with depletion. We show that Hotelling's fundamental results of rising scarcity rent and price paths are sustained and that the path of scarcity rent converges on the r per cent rule, provided the objective function is concave. Predictions of non-monotonic or declining scarcity rent paths are due to implicit assumptions that lead to a non-concave objective function. We identify the sources of these non-concavities. JEL Classification: Q30, D90, C60
Prix, rente de rareté et une règle modifiée du r-pourcent pour les ressources non renouvelables. Malgré la volumineuse littérature spécialisée qui a fleuri depuis qu'Hotelling a écrit son mémoire fondateur sur l'épuisement optimal des ressources renouvelables, une grande confusion règne toujours quand il faut établir si la rente de rareté et le prix augmentent ou chutent à proportion que la ressource s'épuise quand les coûts tendent à croître avec l'épuisement. Ce mémoire montre que les résultats fondamentaux obtenus par Hotelling quant aux sentiers de croissance de la rente de rareté et du prix tiennent toujours, et que le sentier de croissance de la rente de rareté converge vers la règle du r-pourcent pourvu que la fonction objective soit concave. Les prédictions de sentiers de croissance non monotone ou de déclin de la rente de rareté présentées dans la littérature spécialisée sont attribuables à des postulats implicites qui engendrent une fonction objective non concave. Les auteurs identifient les sources de ces non-concavités.     

Macroeconomic dynamics in Macedonia and Slovakia: Structural estimation and comparison

This paper estimates a structural macroeconomic model using data for Macedonia and Slovakia to characterize possible challenges Macedonia can face concerning macroeconomic stabilization during its transition process. A comparison of the estimated model parameters suggests that, in Slovakia, the output gap is less sensitive to real interest rate movements and prices experience greater inertia. The estimated monetary policy reaction functions show Macedonia and Slovakia as inflation targeters, with Macedonia as the more conservative one, despite its officially applied exchange rate targeting regime. The differences in the estimated parameters imply differing transmission mechanisms for Macedonia and Slovakia. Consequently, the variance of domestic variables in Slovakia is most influenced by monetary policy shocks, while there is no single dominating shock explaining the volatility of Macedonia's macroeconomic variables. The exchange rate shock, the monetary policy shock and the demand shock are jointly important in determining the volatility of Macedonia's variables. The model simulations indicate that Macedonia experiences lower output gap and inflation volatility than Slovakia. This comes, nevertheless, at the cost of higher interest rate and real exchange rate volatility in Macedonia, which could be an indication of more volatile financial markets with possible negative implications for financial stability.     

Five charges against the precautionary principle

We defend the precautionary principle against five common charges, namely that it is ill-defined, absolutist, and a value judgement, increases risk-taking, and marginalizes science. We argue, first, that the precautionary principle is, in principle, no more vague or ill-defined than other decision principles and like them it can be made precise through elaboration and practice. Second, the precautionary principle need not be absolutist in the way that has been claimed. A way to avoid this is through combining the precautionary principle with a specification of the degree of scientific evidence required to trigger precaution, and/or with some version of the de minimis rule. Third, the precautionary principle does not lead to increased risk-taking, unless the framing is too narrow, and then the same problem applies to other decision rules as well. Fourth, the precautionary principle is indeed value-based, but only to the same extent as other decision rules. Fifth and last, the precautionary principle is not unscientific other than in the weak sense of not being exclusively based on science. In that sense all decision rules are unscientific.