Growth and Welfare Effects of Tax Cuts: The Case of a Productive Public Input with Technological Risk

This paper analyzes the dynamic impact of tax cuts within a stochastic model of endogenous growth with a congested public input. A decreasing taxation of deterministic income parts leads to the well-known positive growth effect. Nevertheless, due to the insurance effect associated with the taxation of stochastic income flows, the overall growth impact of taxation is ambiguous. It is shown that the optimal structure of financing government expenditure does not only depend on the degree of rivalry but also on the degree of risk aversion. The optimal real value of government debt decreases with a rise in congestion. We identify that in the case of proportional congestion, the base for tax cuts should be the growth neutral consumption tax. Maximizing the growth rate does not automatically coincide with maximizing welfare. Hence, the base for tax cuts gains importance to realize a welfare optimal policy.     

Land Development: Risk, Return and Risk Management

We model and examine the financial aspects of the land development process incorporating the industry practice of preselling lots to builders through the use of option contracts as a risk management technique. Using contingent claims valuation, we are able to determine endogenously the land value, presale option value, credits spreads and the effects of presales on debt pricing and equity expected returns. We show that using presales options effectively shift market risk from the land developer to the builder. Results from the model are consistent with the high rates of return on equity observed in empirical surveys; they also suggest that developers may be justified in pursuing projects with substantially lower expected returns to equity when a large number of lots can be presold. Additionally, we show that presales reduce default risk dramatically for leveraged projects and can support a considerable reduction in the cost of construction financing. Large debt risk premiums are justified for highly levered projects, which helps explain the use of mezzanine financing in the land development industry to reduce expected default costs.

Long‐term Futures Curves and Seasonal Structures of Wheat in the European Union and the United States

A two‐factor affine theoretical model is used to estimate the long‐term futures curves for wheat in the European Union and the United States, as represented by the Euronext and CME markets, respectively. The CME futures curve exhibits a long‐term equilibrium; in contrast, the Euronext futures curve does not show a tendency for futures to revert to a long‐term equilibrium value. The estimated seasonality is relatively similar for both markets. However, the seasonal minimum and maximum points in the futures curve occur one to two months later for Euronext compared to the CME. More importantly, the futures curve for Euronext has a much more marked seasonality than the CME futures curve. Credible intervals of the futures curves are also estimated. The width clearly increases for longer maturities, but it does so much faster for Euronext than for the CME. For long‐maturity futures, variability in the parameter estimates (as opposed to the residual errors) accounts for most of the width of the credible intervals, especially for Euronext. The proposed model can be used to price long‐term futures options, long‐term price insurance, and long‐term swaps, among other applications. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 33:1118–1142, 2013     

When Production and Consumption Meet: Cultural Contradictions and the Enchanting Myth of Customer Sovereignty

ABSTRACT The central cultural contradiction of capitalism, argued Bell some 25 years ago, was the existence of rationalized, disciplined production alongside free and hedonistic consumption. This paper argues that this thesis, although overstated, has resonance within contemporary capitalism. The paper then considers the question of how this contradiction is managed when production and consumption meet directly within the service interaction. On the production-side rationalization is joined by customer-orientation, and on the consumption-side management promotes consumption of the enchanting myth of sovereignty. Here the customer is meant to experience a sense of being sovereign. At the same time the space is created for the customer to be, potentially, substantively directed and influenced to follow the requirements that flow from the rationalized elements of production. Key aspects of the service interaction, including the menu and its presentation, the display of empathy and aesthetic labour, and the use of naming within the service interaction, are analysed in terms of the promotion of the enchanting myth of sovereignty. Consumption, however, is a fragile process, and remains, to an important degree, 'unmanageable'. The analysis, therefore, also examines how the promotion of the enchanting myth of sovereignty systematically creates the conditions for the myth's negation.     

Public policies and convergence

This paper employs a dynamic framework to compare the effects of alternative government policies on convergence of industrialized economies to the technology frontier. The government's instruments include facilitating private investment and education policy. The latter enhances skills of heterogenous specialists and implies the decision on their respective shares. The analysis distinguishes between an isolated policy of a single economy and coordinated policies of various countries. Which policy maximizes the speed of convergence is crucially affected by the economy's state of development. A policy switch between the mentioned instruments while catching-up may be preferable.     

Introduction to the Special Issue

This special issue, “Developing the African Continent: Selected Issues,” is the outgrowth of a conference held in Gaborone, Botswana, August 19–21, 2008 sponsored by the Institute for Economic Policy Studies (IEPS), Worcester Massachusetts, USA. The theme of the conference was, “Developing the African Continent: Who is in Charge?”