Practitioners' Corner

The first 150 words of the full text of this article appear below. The year 1982 was not a particularly good period for the worldeconomy. At year's end, the Organization for Economic Cooperationand Development (OECD) revised its growth figures for membernations from slightly over 1% to –0.5%, with some 32 millionunemployed in its 24 member states. In the United States thejobless rate was 11% and 30% of plant capacity stood idle. OttoEckstein found the economy in its worst shape in nearly halfa century. Truly the year belonged to Scrooge. Yet 1982 was a very good year indeed for financial econometrics,the debut of an explosion of activity in the area that continuesvigorously 20 years later, as the emergence of the Journal ofFinancial Econometrics attests. In fact, it can convincinglybe argued that 1982 heralded the beginning of our subject, andperhaps with the recent awarding of the Nobel Prize in Economicsto Robert Engle . . . [Full Text of this Article]     

The Evolution of the Social Contract

Two transitions in the evolution of the social contract are considered, the first from the dominance hierarchies of the great apes (used as a proxy for our prehuman ancestors) to the egalitarian political structure of non-sedentary hunter-gatherer bands, and the second, to the reintroduction of hierarchical institutions of governance, primarily a result of living in fixed settlements after the inception of agriculture. The first transition was a product of biological and cultural evolution, which brought about big brains, language, higher consciousness, and a lower rate of time preference that enabled early man to sustain an egalitarian social contract and thereby escape the domination that confronted his prehuman ancestors. The second transition was a product of cultural evolution alone. The high costs of enforcing the hunter-gatherer social contract caused it to break down and be replaced by hierarchy when the domestication of plants and animals gave rise to a sedentary existence and increased populations. However, it is shown that the very biological and cultural adaptations that made hunter-gatherer egalitarianism possible were a necessary foundation for the spontaneous creation of complex culture and the evolution of institutions that would once again eventually make freedom possible and economic prosperity possible.     

Capital Investment under Alternative Marketing Scenarios in the Hog Industry: A Real Option Approach

This paper uses a real option approach to analyze the impact of alternative marketing contracts on the decision to invest in a cooperatively owned hog facility. For the numerical analysis of the impact, this paper uses a simulation method that incorporates early exercise, multiple‐state variables, multi‐choice decisions and temporal optimality. The results show that the option values that stem from the value of waiting to invest and choosing between alternative marketing methods amounts to 20–36% of the initial investment. Further, having an option to choose an alternative marketing method with different risk structure does add to the value of waiting to invest. Having an option to enter a 15‐year marketing contract increases the value of waiting by as much as $117,097 for the pork production example in this paper. Finally, the value of the option to wait is unilaterally lower under a risk‐reducing contract scenario than under a spot market alternative. This could explain the explosion in hog production facility investment during the 1990s when prevalence of contract production increased. Les auteurs ont recouru à l'approche du choix véritable pour analyser l'impact d'autres solutions de mise en marché sur la capacité d'investir ou pas dans un élevage de porcs exploitéà la manière d'une coopérative. Aux fins de l'analyse, on s'est servi d'une méthode de simulation intégrant une brève campagne, de multiples variables d'État, des décisions à choix multiple et des conditions optimales dans le temps. Les résultats indiquent que l'existence d'un choix réel permettant à l'exploitant d'attendre avant d'investir et de sélectionner entre plusieurs méthodes de mise en marché représente 20 à 36 pour cent de l'investissement initial. Par ailleurs, le fait d'avoir accès à une autre méthode de mise en marché, à structure de risque différente, ne donne pas plus de valeur à la capacité d'attendre avant de procéder aux investissements. La possibilité de signer une entente de commercialisation de quinze ans accroît la valeur de l'attente de jusqu'à 117,097 $ pour le type d'élevage porcin retenu comme exemple. Enfin, l'existence d'une entente de commercialisation atténuant les risques réduit unilatéralement la valeur de l'option « attente », comparativement à ce qui se produit quand l'éleveur n'a d'autre choix qu'écouler ses bêtes sur le marché au comptant. Ces résultats pourraient expliquer l'explosion des investissements observée dans le secteur du porc au cours des années 90, où la production sous contrat avait sensiblement augmenté.     

Extending working hours: why not work 42 h rather than 38?—a CGE analysis for Germany

Faced with a record level of unemployment, the present debate in Germany is to extend the weekly hours of work. In this paper the employment effects of an economy-wide increase in weekly hours are quantified on the basis of a computable general equilibrium model for different specifications of the wage setting rule and the use of additional policy-induced public income. The simulation results back the argument of the opponents of longer working time that not more jobs will be created. However, when the higher tax revenues from GDP growth are used to reduce social security contributions, then the claim of the proponents that more jobs will be created can be supported.     

Carbon Taxes and Joint Implementation. An Applied General Equilibrium Analysis for Germany and India

Germany has committed itself toreducing its carbon emissions by 25 percent in2005 as compared to 1990 emission levels. Toachieve this goal, the government has recentlylaunched an environmental tax reform whichentails a continuous increase in energy taxesin conjunction with a revenue-neutral cut innon-wage labor costs. This policy is supposedto yield a double dividend, reducing both, theproblem of global warming and high unemploymentrates. In addition to domestic actions,international treaties on climate protectionallow for the supplementary use of flexibleinstruments to exploit cheaper emissionreduction possibilities elsewhere. One concreteoption for Germany would be to enter jointimplementation (JI) with developing countriessuch as India where Germany pays emissionreduction abroad rather than meeting itsreduction target solely by domestic action. Inthis paper, we investigate whether anenvironmental tax reform cum JI providesemployment and overall efficiency gains ascompared to an environmental tax reformstand-alone. We address this question in theframework of a large-scale general equilibriummodel for Germany and India where Germany mayundertake JI with the Indian electricitysector. Our main finding is that JI offsetslargely the adverse effects of carbon emissionconstraints on the German economy. JIsignificantly lowers the level of carbon taxesand thus reduces the total costs of abatementas well as negative effects on labor demand. Inaddition, JI triggers direct investment demandfor energy efficient power plants produced inGermany. This provides positive employmenteffects and additional income for Germany. ForIndia, joint implementation equips itselectricity industry with scarce capital goodsleading to a more efficient power productionwith lower electricity prices for the economyand substantial welfare gains.     

The impact of environmental regulation on productivity in German industries

The objective of this paper is to adjust a traditional total factor productivity (TFP) measure for the direct effect of environmental regulation on material and capital input. For this purpose we consider the fact that part of material input and pollution abatement capital have not been used to increase output but to cover the cost of using the environment as a factor of production. Therefore TFP growth rates are lower if part of the material input is allocated to abatement activities instead of producing output. We propose to treat compliance with environmental regulation as an unproductive input linked to the use of productive material input. Our aim is to answer and discuss two questions: How to measure the effect of environmental regulation on TFP, and does the effect matter. We examine data from 1975–1991 for ten pollution intensive German industries.We would like to thank Cornelia Oßwald for valuable research assistance. We are especially grateful to two anonymous referees for many helpful comments.     

Physical Search

Unidirectional search is an evolutionarily stable outcome in an economy where homogenous buyers and sellers can either move or stay. It is more efficient than bidirectional search. In unidirectional search, it is more efficient if the more numerous agents move and the less numerous agents stay, than vice versa.     

Von Neumann-Morgenstern stable sets, discounting, and Nash bargaining

We establish a link between von Neumann-Morgenstern stable set and the Nash solution in a general n-player utility set. The stable set-solution is defined with respect to a dominance relation: payoff vector u dominates v if one player prefers u even with one period delay. We show that a stable set exists and, if the utility set has a smooth surface, any stable set converges to the Nash bargaining solution when the length of the period goes to zero.     

Knowledge integration via the fusion of the data models used in automotive production systems

ABSTRACT

In this paper a novel information model that can be used in Manufacturing Execution Systems is presented. The model is based on the fusion of ISA95, AML and OPC UA. ISA95 is used to define, unify and describe the details of a product and production technology. It also enables communication with ERP systems. The AML standard allows information about the production facilities to be presented. The OPC UA address space represents different parts of an information model while the OPC communication protocol enables it to be linked to actual production systems. The proposed concept is illustrated using an actual example of a production line for electronic devices.