Random biographical notes

These notes, written in 1965 for Tadeusz Kowalik, provide anapt introduction to this issue of the Cambridge Journal of Economicswhich is dedicated to the memory of Maurice Dobb, for they revealthe political commitment and humanity of a modest but essentiallycourageous man. The essays which follow examine a variety ofaspects of the wide range of Maurice Dobb's contributions toeconomic knowledge. All display a spirit of constructive criticismwhich is appropriate in approaching the work of such a majorfigure.     

COMPOUNDING RISK OVER TIME: A NOTE

The widely used risk-adjusted discount rate technique of investment evaluation has long been believed to be strictly appropriate only for projects whose risk increased with time. The "certainty equivalent proof" of that belief has recently been refuted. This paper attempts to demonstrate that the other proof of that belief, called the "compounding the risk premium" approach, is also flawed since it confuses the level of investment and the rate earned on investment.     

International Adjustment With Habit-Forming Consumption: A Diagrammatic Exposition*

This paper presents a simple diagrammatic analysis of an open economy's external adjustment process under habit-forming individual preferences. the exposition focuses on the consumption side and alms to make transparent the linkage among wealth, past consumption experience, and current consumption. an extension of the standard representative-agent model to a growing economy of overlapping generations completes the paper. Under habit formation an agent's consumption exhibits a form of hysteresis, in that his current consumption depends on his past consumption experience as well as initial assets. In the overlapping-generations model aggregate hysteresis disappears in the long run.     

Structural aspects of social capital: tests for cross-national equivalence in Europe

In this contribution we start from the emerging consensus on the widely disputed phenomenon of social capital. We propose to focus on structural aspects of social capital: formal (contacts within formal organizations) and informal (contacts outside of formal organizations). First, we address methodological questions on the cross-national equivalence of these social capital measurements. Second, we re-visit substantive questions on the patterns of relationships in different European countries. In particular, we inquire to which degree formal and informal social capital can substitute each other, as well as being complementary. We take advantage of recent Eurobaromer data (2004) containing a wide range of valid measurements on both structural aspects of social capital. We find strong evidence for cross-national equivalent measurements regarding formal social capital, employing probabilistic scalogram analyses. For informal social capital, we find strong evidence for configural and metric invariance as well as evidence for partial scalar invariance, employing multi group confirmatory factor analyses. We have to reject the substantive hypothesis on substitution of formal and informal social capital for all countries under consideration, except for Romania. We corroborate the hypothesis on complementarity of formal and informal social capital.     

Time-consistent subsidies to unlucky firms

This paper examines government subsidies that prevent unlucky firms from going out of business. Subsidies can save jobs and prevent an increase in unemployment insurance expenditures, but they modify the incentives of the firms to exert adequate effort. If firms expect to obtain help, they may not undertake enough effort to decrease the probability of needing help. The cost-minimizing government must therefore trade off the savings in unemployment insurance expenditures against the increased bill in subsidies to the firms. The analysis shows that this trade-off is significantly affected by the level of commitment of the government; if the government cannot commit to a future subsidy policy, the level of subsidies will be unambiguously higher, the level of effort by the firms lower, and the number of firms making losses higher than if the government could so commit.