Price Commitment versus Flexibility: the Role of Exchange Rate Uncertainty and its Implications for Exchange Rate Passthrough

The paper investigates the incentives to commit price or retain price flexibility in a model in which exporting firms face different degrees of exchange rate uncertainty. The result shows that introducing exchange rate uncertainty can lead to the endogenous emergence of a unique leader–follower equilibrium; which firm emerges as price leader depends on the substitutability of products, the magnitude of exchange rate uncertainty, and the cost structure. This study may provide one explanation as to why some exporters set price before the realization of the nominal exchange rates (“sticky price”). The results imply exchange rate variability affects exchange rate passthrough.     

Symmetry and order in the portfolio allocation problem

Summary. This research studies the role of multivariate distribution structures on random asset returns in determining the optimal allocation vector for an expected utility maximizer. All our conclusions pertain for the set of risk averters. By carefully disturbing symmetry in the distribution of the, possibly covarying, returns, we ascertain the ordinal structure of the optimized allocation vector. Rank order of allocations is also established when a permutation symmetric random vector is mapped into the returns vector through location and scale shifts. It is shown that increased dispersion in the vectors of location and scale parameters benefit, ex-ante, investors as does a decrease in the rank correlation coefficient between the location and scale parameter vectors. Revealed preference comparative static results are identified for the location and scale vectors of asset returns. For most issues addressed, we arrive at much stronger inferences when a safe asset is available. Received: August 8, 2000; revised version: January 8, 2001     

An algebraic theory of multi-product decisions

Summary. We exploit the existence of matrix group symmetries on a production possibility set to identify group symmetries on the profit function. The groups are isomorphic, and provide a pre-ordering on firm preferences over prices. Together with additional structure on the technology, symmetries generate comparative statics on price responses. Linear and other invariances place bounds on firm choice vectors. Reflection group asymmetries on the feasible choice set also support welfare rankings over prices. The methods are adapted to study consumer decisions.Received: 12 August 2002, Revised: 30 January 2004, JEL Classification Numbers: D11, D21, C60, L23. Correspondence to: David A. Hennessy     

Smuggling and Bhagwati's Nonequivalence Between Tariffs and Quotas

The authors extend Professor Bhagwati's analysis about the nonequivalence between trade policy instruments when domestic production is monopolized and the terms of trade are endogenous, by allowing for smuggling. They show that the dominance of the ad valorem tariff over the quota is not robust. Tariffication can lower welfare even when the level of illegal imports is quite small. However, tariffication with a specific tariff is always beneficial because the specific tariff dominates the ad valorem tariff and the quota with or without smuggling. Smuggling (or the threat) also tends to lower the second–best tariff/quota, and increases welfare when imports are restricted by a quota, but lowers it under a tariff.     

An algebraic theory of portfolio allocation

Summary. Using group and majorization theory, we explore what can be established about allocation of funds among assets when asymmetries in the returns vector are carefully controlled. The key insight is that preferences over allocations can be partially ordered via majorized convex hulls that have been generated by a permutation group. Group transitivity suffices to ensure complete portfolio diversification. Point-wise stabilizer subgroups admit sectoral separability in fund allocations. We also bound the admissible allocation vector by a set of linear constraints the coefficients of which are determined by group operations on location and scale asymmetries in the rate of returns vector. For a distribution that is symmetric under a reflection group, the linear constraints may be further strengthened whenever there exists an hyperplane that separates convex sets. Received: May 15, 2001; revised version: March 20, 2002 RID="*" ID="*" Journal paper No. J-19797 of the Iowa Agriculture and Home Economics Experiment Station, Ames, Iowa. Project No. 3463, and supported by Hatch Act and State of Iowa funds. Correspondence to: D. A. Hennessy     

The possibility of reversing the trade pattern with internationally-diffused localized technical progress

This paper considers the impact of localized technical progress (gains in technology which are confined to specific capital—labor ratios) on the pattern of trade. It is shown, in the context of a two-sector model, that technological improvements which are localized to particular techniques can cause factor intensity reversals so that, even if production functions are internationally identical, the pattern of trade between nations may depend not only on relative factor endowments but also on the relative magnitudes of technical progress in each sector.     

Regulatory Actions under Adjustment Costs and the Resolution of Scientific Uncertainty

Food system regulators often decide whether to ban existing practices or approve new technologies without conclusive scientific evidence on possible damage and knowing that resolution is likely in the future. In a model with three decision points and stochastic resolution of uncertainty, we study interactions between expected losses due to regulation and information availability when a regulator is deciding on an early reversible ban and on a later reversible ban. Adjustment costs create inertia concerning intermediate signals such that earlier decisions are not overturned, and also a bias against imposing an early ban. The prospect of more later-stage information can increase or decrease the incentive to ban early, but research decreases the incentive to ban early.     

WTO Disciplines on Domestic Support and Market Access in Agri‐Food Supply Chains

Multilateral negotiations on agriculture in the WTO are making very little progress as developed economies are reluctant to bind trade‐distorting domestic support and import tariffs at levels acceptable to developing countries. This paper presents the basic Bagwell–Staiger framework as it relates to agricultural trade negotiations. In its basic version, market access commitments are sufficient to achieve efficient trade agreements. We show that vertical linkages between agricultural goods and processed food commodities may prevent countries to reach an efficient trade agreement. We argue that the features of agricultural supply chains hinder the argument that total discretion over domestic policies is appropriate. Les négociations multilatérales de l'OMC sur l'agriculture progressent très lentement étant donné que les pays développés hésitent à maintenir un soutien interne qui fausse les échanges et des barrières tarifaires à des niveaux acceptables pour les pays en développement. Le présent article traite du modèle Bagwell–Staiger dans le contexte des négociations sur le commerce des produits agricoles. Dans sa version de base, les engagements quant à l'accès au marché sont suffisants pour permettre des échanges commerciaux efficaces. Nous montrons que les liens verticaux entre les produits agricoles et les produits alimentaires transformés peuvent empêcher les pays d'atteindre un accord commercial efficace. Nous soutenons que les caractéristiques des chaînes d'approvisionnement agricole entravent l'argument voulant que l'entière discrétion quant aux politiques intérieures soit appropriée.     

Heterogeneity of southern countries and southern intellectual property rights policy

Abstract.  We develop a model with one innovating northern firm and heterogeneous southern firms that compete in a final product market. We assume southern firms differ in their ability to adapt technology and study southern incentives to protect intellectual property rights. We find that, in a non-cooperative equilibrium, governments resist IPR protection, but collectively southern countries benefit from some protection. We show that, in general, countries with more efficient firms prefer higher collective IPR protection than those with less efficient firms. Given the aggregate level of IPR protection, it is more efficient if the more efficient countries have weaker IPR protection.