cost uncertainty and the rate of investment abstract this paper examines the effect of cost and price uncertainty on the optimal rate of investment by firms within a general equilibrium framework former works which have studied this issue like hartman 1972 and abel 1983 1984 1985 have come to the conclusion that this effect is positive since increased price uncertainty raises expected profitability but these studies assume a fixed discount rate which is equivalent to assuming that consumers are risk neutral this paper shows that if consumers are risk averse the effect of uncertainty may be reversed and investment may be depressed when price or cost uncertainty is increased

the macroeconomic effects of government debt in a stochastic growth model abstract this paper studies how government liabilities affect macroeconomic aggregates in a standard general equilibrium growth model there are two principal results i though it is often thought that fiscal deficits crowd out investment this paper shows that deficit financed cuts in distortionary income taxation may stimulate investment even if agents expect future taxes on capital income to be higher this result is dependent on the values of two key parameters the elasticity of labor supply and the degree of persistence in the government debt process ii the economy s response to an increase in government expenditure depends on how it is financed distortionary tax finance may lead to a decline in output consumption and investment in contrast deficit finance may increase output and consumption

the role of price and nonprice factors in predicting australia s trade performance this article investigates the role of price and nonprice factors in predicting australia s trade performance results broadly suggest that australia s trade performance is largely explained by the

the effects of uncertainty on investment and the expected long run capital stock abstract this paper examines the effects of output price uncertainty on the optimal investment behavior of a risk neutral competitive firm with a constant returns to scale production function in the presence of convex costs of adjustment investment is an increasing function of q the shadow price of capital given the current price of output we find that increased uncertainty will raise the current rate of investment increased uncertainty will also increase the expected long run capital stock if the price of output is serially uncorrelated however if the price of output is serially correlated then the direction of the effect of increased uncertainty on the expected long run capital stock depends on the curvature of the marginal adjustment cost function in this case we obtain results which are directly opposite of the results in the literature and we locate the flaw in the existing analysis

a stochastic model of investment marginal q and the market value of the firm this paper presents closed form solutions for the investment and valuation of a competitive firm with a cobb douglas production function and a constant elasticity adjustment cost function in the presence of stochastic prices for output and inputs the value of the firm is a linear function of the capital stock the optimal rate of investmentis an increasing function of the slope of the value function with respect to the capital stock marginal q a mean preserving spread of the distribution of future price increases investment an increase in the scale of the random component of a price can increase decrease or not affect the rate of investment depending on the sign of the covariance of this price with a weighted average of all prices this abstract was borrowed from another version of this item

multiperiod sales production decisions under uncertainty abstract this paper studies the behavior of an expected profit maximizing multiperiod firm under uncertainty in output and demand the firm s problem is to determine in each period the level of sales and inventory and the expected output for the coming period the optimal policy is derived in an explicit closed form and is proved to be myopic it is shown that the observed phenomenon of downward price inflexibility can be explained and further specified by using the results of our model

fixed costs and long lived investments abstract fixed costs models are difficult to analyze because they feature non degenerate time varying distributions of capital across firms if investments are sufficiently long lived however then the cross sectional distribution of capital holdings has virtually no bearing on the equilibrium and the aggregate behavior of fixed cost models is essentially identical to neoclassical models the findings are due to a near infinite elasticity of investment timing for long lived investments a feature shared by fixed cost models and neoclassical models irrelevance results found in numerical studies of fixed cost models are not parametric special cases but instead are fundamental properties of models with long lived investment goods

investment demand when economic depreciation is stochastic the neoclassical model of investment by a risk neutral firm is generalized to include uncertainty about the rate of depreciation by replacing the deterministic capital accumulation identity with a stochastic variant ito s stochastic dynamic optimization is used to derive conditions for optimal investment a nondegenerate steady state distribution of the capital stock is shown to exist and is derived for the empirically important case of a normalized quadratic profit function and static price expectations it is demonstrated for this case that uncertainty about the rate of depreciation decreases the expected steady state capital stock and investment

accelerated depreciation and the efficacy of temporary fiscal policy implications for an inflationary economy abstract the effect on investment of temporary tax rate changes depends on the age profile of depreciation deductions if the depreciation allowance schedule is accelerated then temporary cuts in the corporate tax rate could reduce investment inflation causes the age profile of real depreciation deductions to become accelerated and thus could make temporary tax cuts have a contractionary effect on investment two currently proposed reforms are shown to exacerbate this effect under each of these proposals temporary tax cuts are likely to have opposite effects on investment in short lived and long lived capital thereby complicating the conduct of countercyclical fiscal policy

policy rivalry among industrial states what can we learn from models of strategic trade policy the economic theory of international trade has changed dramatically over the last decade by admitting into its mainstream a body of literature that focuses on the implications of monopolistic and oligopolistic elements in international markets by applying the tools of the new industrial organization in an international context two new classes of models have emerged models of intra industry trade and models of strategic trade policy the policy implications of models of strategic trade policy were quite disturbing for the economics profession since these models demonstrated that the classical harmony between national and cosmopolitan welfare maximization does not exist if one assumes opportunities for strategic manipulation of oligopolistic international industries this article reviews two prominent models of strategic trade policy the brander spencer model and the krugman model and relates them to more familiar earlier concepts such as stackelberg s asymmetrical duopoly solution and the venerable infant industry argument for government intervention the primary purpose of this article however is to provide a synopsis of the large literature addressing the question of whether models of strategic trade policy can give guidance for government policy

technical change uncertainty and investment the expected investment dynamics of the risk neutral firm is examined in the presence of uncertainty in the future evolution of the real wage and the stock of technical knowledge a model of the adjustment cost firm is developed that is characterized by quasi fixed factor augmenting technical change that is taken exogenously by the firm the effect of wage and technical change uncertainty on investment behavior is assessed using comparative stochastic dynamic analysis

investment the current account and the relative price of non traded goods in a small open economy abstract this paper incorporates traded and non traded investment expenditure into an infinite horizon setting with optimizing economic agents extending previous research that has incorporated traded and non traded investment into a two period setting the paper analyzes the dynamic adjustment of the relative price of non traded output the market price of capital and the current account following exogenous shocks to the system the exogenous shocks considered by the paper include permanent transitory and anticipated changes in an income tax and an investment subsidy as well as changes in the level of government purchases of traded and non traded output

are developing countries really defying the embedded liberalism compact this study evaluates the embedded liberalism hypothesis in a broad swath of less developed countries ldc s the authors find that ldc governments pursue a distinct welfare state policy that protects citizens from economic insecurities associated with global market expansion specifically governments use public employment and particularly employment in civil services and administration to foster domestic stability alongside market expansion however such jobs are targeted to politically salient groups not poorer groups that might also face increased economic uncertainty postopenness in turn public employment shores up public support for openness the authors findings suggest that free traders have reasons both to celebrate and to bemoan this ldc embedded liberalism compact on the positive side ldc governments are working hard to maintain political support for free trade on the other hand the compromise of protecting privileged groups at the expense of others in society raises questions about the long term sustainability of their strategy

external shocks and financial collapse foreign loan guarantees and intertemporal substitution of investment in texas and chile in the decade of the 1980 s the banking systems of a number of economies including those of argentina chile costa rica malaysia norway texas and venezuela collapsed in the face of external shocks however the collapses did not occur immediately following the external shocks in general macroeconomic stabilization efforts were followed by investment booms before the collapses brock 1992 the investment booms were made possible by government guarantees on foreign loans extended to the economies government foreign loan guarantees potentially are useful instruments for the fiscal management of financial losses suffered by banks and firms if financial claims against domestic assets increase in riskiness as a result of an external shock a problem of underinvestment in an economy may occur foreigners who might otherwise lend to the economy will not do so if their financial claims are placed in the same risk category as other existing claims foreign loan guarantees permit the financing of new projects while failed banks and firms are being recapitalized or liquidated although foreign loan guarantees in the aftermath of an external shock encourage foreigners to lend to financially distressed banks and firms this paper will explore the possibility that these loan guarantees may also distort an economy s macroeconomic adjustment by permitting a postponement of the liquidation process for example the failure to close banks quickly has been singled out by sergio de la cuadra and salvador valdes 1992 as the dominant macroeconomic problem distorting the adjustment of the chilean economy in 1981 and 1982 paul horvitz 1992 has also emphasized political unwillingness to shut down insolvent savings and loans as a major element in the magnificantion of the costs of the financial collapse in texas this paper first develops an analytical model in which a government s delay in the payment of loan guarantees produces an intertemporal shifting of investment expenditure into the period preceding the termination of the guarantees the paper then examines case studies of chile 1981 1985 and texas 1984 1988 to illustrate the macroeconomic consequences of delays in the closure of insolvent financial institutions

administrative cooperation and disease control in cross border pork production abstract in recent years the continuous structural change in the value chain of modern food production has been characterised by an increasing international division of labour among manufacturing companies a regional specialisation of primary agricultural production is especially apparent in meat production thus the german dutch border area has developed into a region of unprecedented intensive pork production while the netherlands specialises in piglet production the production of fattened pigs continues to grow in northwest germany as a result of this increasing transnational value chain development german imports of dutch piglets have risen continuously since 2000 however this structural interweaving of pork production between the netherlands and germany has resulted in many new challenges for the cooperation between the various participants and in particular for the administrative authorities in the field of food and feed safety as well as efficient animal disease control the motivation for this exploratory study stems from the lack of scientific work on this topic to date the aim of this research is to illustrate the relevance of functioning cross border cooperation in the food sector using commodity flow structures and disease spread analysis results indicate that cross border cooperation between authorities during a csf epidemic can reduce the risk of recurrence and the duration by 50

will the new keynesian macroeconomics resurrect the is lm model the is lm model has no greater prospect of being a viable analytical vehicle for macroeconomics in the 1990s than the ford pinto has of being a sporty reliable car for the 1990s because of its treatment of expectations the is lm model as traditionally constructed and currently used is a hazardous base on which to build positive theories of business fluctuations and to undertake policy analysis to simplify economic reality sufficiently to use the is lm model as an analytical tool economists must essentially ignore expectations we now know that this simplification eliminates key determinants of aggregate demand the last two decades of research have taught economists that the assumption of rational expectations is a powerful part of economic explanations of individual and market behavior ranging from consumption and investment dynamics to pricing of stocks and bonds the emphasis on expectations in the macro model is the end result of a process of building microeconomic underpinnings that was initiated in the 1950s and 1960s when the goal was to develop dynamic theoretical foundations for the is and lm schedules inevitably consideration of dynamic choice pushed the question of expectations to the forefront as a result most of the equations of the is lm model are now viewed as summarizing purposeful economic behavior in which choices over time play a central role however as we will see this finding means there is no way to maintain traditional uses of the is lm model

lumpy investment and corporate tax policy in the presence of both convex and nonconvex capital adjustment costs in a dynamic general equilibrium model corporate tax policy generates both intensive and extensive margin effects via the channel of marginal q i ts impact is determined largely by the strength of the extensive margin effect which in turn depends on the cross sectional distribution of firms depending on the initial distribution of firms the economy displays asymmetric responses to tax changes moreover an anticipated increase in the future investment tax credit reduces investment and adjustment rate initially

taxes incentives and production the case of turkey abstract this paper investigates the effectiveness of investment incentives and corporate income taxes in influencing production and investment decisions in the turkish electrical machinery non electrical machinery and transportation equipment industries three tax instruments are considered the corporate income tax cit the investment tax allowance ita and the capital cost allowance cca the results show that since there are significant capital adjustment costs it is important to distinguish between the short intermediate and long run effects associated with the tax instruments production decisions are relatively more responsive to changes in the ita rate compared to changes in either the cca or cit rates in each of the runs however the ita and cca rates are equally cost effective in stimulating investment and superior to the cit the cca and ita rates generate investment expenditures of 1 5 to 2 5 times the loss in government revenue thus targeted instruments outperform the general cit instrument in addition although the incentive to invest is enhanced there is little effect on output and employment therefore these tax incentives essentially after production techniques

the effect of the investment tax credit on the value of the firm abstract a change in the tax law that increases investment incentives for new assets may result in excess returns on new investment causing firm value to increase alternatively because the investment incentives apply only to new investments the value of existing assets that compete with these investments may decline in general investment incentives have a theoretically ambiguous effect on firm value cross sectional tests examine the changes in firm value to repeated changes of the investment tax credit changes in firm value are found to be positively related to the expected receipt of investment tax credits no evidence is found to support a relationship between expected changes in the value of a firm s existing assets and changes in firm value

a patent race in a real options setting investment strategy valuation capm beta and return volatility abstract in this paper we study financial properties of r d intensive firms through a continuous time real options patent race model numerical analysis in this study shows that intense competition drives a firm to invest more aggressively which then pushes up its cost of capital and return volatility while introducing negative return correlation with its competitor furthermore we find that a firm s position in competition has important impacts on its financial properties for instance a firm s cost of capital is a non monotonic function of its relative position in the race in addition the relationship between cash flow uncertainty and investment can be negative when a firm is far ahead or far behind or positive when firms are close in the race

investment crowding out firm level evidence from northern germany michalek j ciaian p and kancs d a investment crowding out firm level evidence from northern germany regional studies the main objective of this paper is to estimate the extent to which firm investment is substituted crowded out by investment support policies granted under the european union rural development programme rdp the empirical analyses employed the difference in difference propensity score matching approach which allows several important sources of bias to be addressed such as selection bias simultaneity bias and functional form misspecification from which many previous studies suffer using panel data of 1333 firms from the schleswig holstein region in germany it is found that the crowding out effect of the rdp is close to 100 implying that firms use public support to substitute for private investments furthermore no evidence was found that due to the rdp programme support firms would have brought forward their investments planned originally for a later period rejecting t

dynamic effects of the unemployment insurance tax on temporary layoffs abstract the reserve ratio method of experience rating the unemployment insurance ui tax is an inherently dynamic process a tax rate is assigned to a firm based on its reserve ratio the ratio of the balance in its ui account to its taxable payroll therefore in making layoff decisions that will deplete its ui balance a firm will consider the effect on its future ui tax rate this study explores the incentive effects of this method of ui financing on temporary layoff behavior of firms in a dynamic context

the impact of perceived expectations and uncertainty on firm investment this paper analyses the differential impact of perceived expectations and uncertainty on investment spending in small and large firms we analyse two types of investment viz aggregate investment and investment in energy saving technologies using dutch firm level data the results show that expectations and uncertainty about input and output prices and domestic demand have sub stantial but different effects on investment spending in firms of different sizes furthermore we find evidence at least for small firms that there are important differences between the effects of uncertainty about input and output variables

growth entry and exit of firms a dynamic model of industry equilibrium is presented which shows how growth entry and exit of firms are interrelated by taking into account the fact that a firm s profitability is to some degree subject to random shocks the simultaneous occurrence of entry and exit can be explained formally in addition by also taking internal growth costs into account it is shown that excess profits can persist in long run equilibrium even in perfect competition and with constant returns to scale the model is consistent with the facts that industry growth comes mainly from existing firms and that most firms grow at rates which do not systematically depend on their scale of operations i introduction

productivity growth in u s agriculture under dynamic adjustment a dynamic measure of productivity growth adjusted for deviations from the long run equilibrium is established within an adjustment cost framework an empirical application to u s agriculture is presented which permits identifying the dynamic linkages between technical change and productivity growth in u s agriculture total factor productivity as dynamically measured grew at 1 50 per annum the combined effect of scale quality adjusted input growth and long run disequilibrium input use contributes only 3 44 of the growth while technical change dominates the growth of total factor productivity

a bottleneck capital model of development abstract a simple augmentation of the ramsey cass koopmans growth model allows it to match observed transitions by initially poor economies a high convexity installation cost directly dampens investment demand for a first capital input the resulting scarcity acts as a bottleneck strongly dampening demand for investment in a complementary capital input as well the match to observed transitions holds both for narrow and broad interpretations of capital in either case the bottleneck capital s share of factor income need not be large

the efficient market hypothesis and insider trading on the stock market we study the behavior of a large trader with private information about the mean of an asset with a risky return we argue that if the variability of the return is not too great typically the trader will find it desirable to ensure that the market price does not reveal his information that is that a pooling equilibrium arises such an equilibrium has the advantage of avoiding the incentive constraints that arise in separating equilibria where information can be inferred from prices thus the efficient market hypothesis may well fail if there is imperfect competition despite the uniformativeness of prices the other competitive traders are also better off in the pooling equilibrium than in any separating equilibrium again if one assumes limited variability

is strategic behavior by a dominant trader with inside information always optimal abstract we consider a price setting game in which a dominant informed trader sets price taking into account the reactions of uninformed traders who behave competitively we show that there are conditions under which the dominant informed trader may prefer to behave competitively and we also prove a no trade result

investment under alternative return assumptions comparing random walks and mean reversion abstract many recent theoretical papers have come under attack for modeling prices as geometric brownian motion this process can diverge over time implying that firms facing this price process can earn infinite profits we explore the significance of this attack and contrast investment under geometric brownian motion with investment assuming mean reversion while analytically more complex mean reversion in many cases is a more plausible assumption allowing for supply responses to increasing prices we show that cumulative investment is generally unaffected by the use of a mean reversion process rather than geometric brownian motion and provide an explanation for this result

risk aversion indivisible timing options and gambling in this paper we model the behavior of a risk averse agent who seeks to maximize expected utility and who has an indivisible asset and a timing option over when to sell this asset our main contribution is to show that contrary to intuition optimal behavior for such a risk averse agent can include risk increasing gambles for example a manager with a choice over when to disinvest from a project a private homeowner with a property to sell or an employee with a grant of american style stock options may be better off taking positions in other assets with zero sharpe ratio that are uncorrelated with the underlying project house or stock price risk the results have wider implications for the modeling and interpretation of portfolio optimization problems involving american style timing decisions

reversal of migration flows a fresh look at the german reunification we investigate the dynamic effects of interregional labor market integration on migration flows capital formation and the price for housing services the co evolution of these variables depends on initial conditions at the time of labor market integration in an initially capital poor economy there may be a reversal of migration flows during the transition to the steady state while housing costs are increasing over time although capital may accumulate while labor emigrates early in the transition the causal effect of immigration on capital investments and housing costs is positive we present new data on the evolution of net migration flows and rental rates for housing in east germany after 1990 our results are consistent with the presented evidence in the reverse migration scenario

the effects of uncertainty and adjustment costs on investment in the almond industry a neoclassical model of investment behavior is developed wherein firms are assumed to maximize the expected present value of net revenue under leontief technology prices and yields are assumed to be stochastic this framework yields investment as a function of the expected present value of the output from one unit of capital and the variance of the expected value this theory is applied to investment in the almond industry the model outperforms both a model without uncertainty and one with neither uncertainty nor adjustment costs using in sample and out of sample tests copyright 1989 by mit press

investment tax incentives prices and the supply of capital goods using data on the prices of capital goods this paper shows that much of the benefit of investment tax incentives does not go to investing firms but rather to capital suppliers through higher prices the reduction in the cost of capital from a 10 percent investment tax credit increases equipment prices 3 5 7 0 percent this lasts several years and is largest for assets with large order backlogs low import competition or with a large fraction of buyers able to use investment subsidies capital goods workers wages rise too instrumental variables estimates of the short run supply elasticity are around 1 and can explain the traditionally small estimates of investment demand elasticities in absolute value the demand elasticity implied here exceeds 1

evaluating the impact of investment incentives the case of italy s law 488 1992 abstract italy s law 488 1992 allows firms willing to invest in lagging areas to receive a public subsidy by comparing subsidized firms with firms with rejected applications this paper evaluates whether the program made investments possible that otherwise would not have been made we find evidence that financed firms brought forward investment projects originally planned for the post intervention period to take advantage of the incentives we also find some support that subsidized firms may have taken some of the investment opportunities that unsubsidized firms would have exploited in the absence of incentives

adjustment costs uncertainty and the behavior of the firm this paper examines the effects of demand and cost uncertainty on a firm s investment output and pricing decisions but unlike most earlier studies in which demand and cost are simply not known at the time an output or pricing decision is made here i consider uncertainties over future demand and costs it will be seen that the effects of such uncertainties depend critically on the characteristics of the firm s adjustment costs i treat demand uncertainty in a dynamic context by letting the market demand function shift randomly but continuously through time according to a stochastic process this means that today s demand is known exactly but future demand may be larger or smaller and has a variance that increases with the time horizon likewise uncertainty over factor costs is characterized by treating those variables as stochastic processes i combine this characterization of uncertainty with a dynamic model of the firm in which some factor inputs can be adjusted freely in response to stochastic demand changes but other factors are quasi fixed in that adjustment costs are incurred when they are changed in this model the firm s price and output are random processes but we can examine the firm s behavior in expected value terms of interest is whether the presence of uncertainty should cause competitive or monopolistic firms to invest and produce more or less than they would otherwise how the effects of uncertainty are influenced by the presence of risk aversion and how the use of inventories can alter the impact of uncertainty on capacity and sales of course these questions have been addressed by others in the past among the earliest studies of demand uncertainty are those of edwin mills 1959 1962 and samuel karlin and charles carr 1962 mills examined a single period monopolistic firm that sets both output and price and showed that additive demand uncertainty i e the demand function is of the form q q p u where u is a random variable leads to a lower price if marginal cost is constant so that the firm reduces the expected loss from discarding unsold production karlin and carr confirmed for both the static case and the multiperiod case with inventory carryover that additive uncertainty tends to reduce the price and increase the output of a risk neutral firm while multiplicative uncertainty does the opposite other papers have been concerned with the way in which the error term enters the demand function additively multiplicatively or nonlinearly the implications of choosing price ex ante instead of output the implications of risk aversion and the use of inventories for example agnar sandmo 1971 and david baron 1970 showed that a risk averse competitive firm will produce less when the price is a random variable or subject to an additive error term but a riskneutral firm will not alter its production hayne leland 1972 extended these results to a monopolistic firm whose demand can depend in a general way on a random error term for example q q p u and showed that uncertainty reduces the production of a

new theories of trade among industrial countries most students of international trade have long had at least a sneaking suspicion that conventional models of comparative advantage do not give an adequate account of world trade this is especially true of trade in manufactured goods both at the macro level of aggregate trade flows and at the micro level of market structure and technology it is hard to reconcile what we see in manufactures trade with the assumptions of standard trade theory in particular much of the world s trade in manufactures is trade between industrial countries with similar relative factor endowments furthermore much of the trade between these countries involves two way exchanges of goods produced with similar factor proportions where is the source of comparative advantage furthermore most manufacturing industries are characterized by at least some degree of increasing returns especially if we include dynamic scale economies associated with rd the arguments of many observers that much trade among industrial countries is based on scale economies rather than comparative advantage and the common argument that a protected home market can promote exports until recently however none of these alternatives was presented in a form which economists would properly call a model that is a formal structure in which macro behavior is derived from micro motives this lack of formalization essentially barred alternatives to comparative advantage however plausible from the mainstream of international economics in the last five years or so however there has been a significant change a number of theorists have begun to apply methods drawn from the theory of industrial organization to international trade to produce a new genre of trade models these models offer a new way of looking at tradeand particularly at manufactures trade among the industrial countries a characteristic feature of the new models is that they often rely on very special assumptions this is probably inevitable given the inherent complexity of the world once the great simplifying device of constant returns is dropped only special assumptions will yield tractable analysis in spite of the specialness of individual models however the new literature on trade is starting to give rise to concepts which look more general than the particular models used to illustrate them the purpose of this paper is to sketch out two such concepts which i believe are important and more general in application than the particular models in which they have been expressed the first is the theory of intraindustry trade a view which incorporates scale economies as well as comparative advantage as major causes of trade and gains from trade the second is the less well developed theory of technological competition which may begin to shed some light on the dynamics of international competition in research intensive industries

housing investment in the united states a supply determined model of housing investment is estimated from quarterly data over the 1963 83 period the model is built on dynamic marginal cost pricing considerations and allows short and long run supply elasticities to differ these are estimated as 1 0 and 3 0 respectively but most of the long run response occurs within 1 year rapid adjustment speed and the sizable long run elasticity of supply are important factors in understanding the volatility of housing investment the data also suggest some anomalies in the expected present value theory of asset pricing for housing capital

scarf s state reduction method flexibility and a dependent demand inventory model we consider a finite horizon inventory model with linear holding shortage and ordering costs the demand random variables are dependent and average demand is described by an exponential smoothing formula this model can be formulated as a two state variable inventory level weighted past demands dynamic program using a procedure first developed by scarf for a bayesian inventory model we are able to reformulate the model as a one state variable dynamic program resulting in a considerable computational saving over the two state variable formulation we also show that this dependent demand model orders less than or equal the amount ordered by a comparable independent demand model we establish this result under the assumption that demand represents failures that are repaired by the beginning of the next period

the intensity and timing of investment the case of land the authors model the decision to replace durable capital when intensity is variable decisions of this type include land redevelopment decisions where the density of residential or commercial development is a choice variable as well as capital replacement decisions where capacity is variable the authors provide a general yet simple formation of the problem using an optimal stopping framework they characterize the value of the project the timing of investment and the intensity of development the authors show that intensity interacts in important ways with timing taxes and project values the ability to vary intensity raises hurdle rents and delays development decisions copyright 1994 by american economic association

tax structure and growth in a model with human capital abstract the effect of the tax structure on the long run growth rate of income and consumption is analyzed where tax structure refers to the mix of taxes on physical and human capital which satisfy an exogenously given government budget constraint the factor used intensively in the consumption good sector relative to the capital goods sector as a whole is taxed more highly in a growth maximizing tax structure an endogenous labor supply the tax treatment of depreciation and the effect of replacing the income tax with a consumption tax are all considered

the timing and duration of development tax rate increases abstract the effects of permanent temporary anticipated and unanticipated changes in a development tax are considered in a model of land development the effect of uncertainty over the timing of the changes is also considered expectations regarding a future tax rate increase are shown to affect the direction of a change in the path of land development in a given time period while the duration of a rate increase affects the magnitude of the change uncertainty regarding the timing of an increase in the development tax rate increases the magnitude of a change in the path of land development

risky business the allocation of capital abstract in models of the firm a mean preserving spread in the price of output increases the expected value of profits and frequently the firm s demand for capital these results seem to contradict the conventional wisdom from financial asset pricing models where an increase in an asset s risk decreases the demand for that asset this paper shows that in general equilibrium an increase in exogenous risk usually increases expected output in that technology the result from the theory of the firm but it may also increase the risk of that technology the results from finance an increase in exogenous risk always reallocates capital toward less risky businesses

dynamic effects of permanent and temporary tax policies in a q model of investment abstract this paper incorporates the tax policy analysis of hall and jorgenson into a dynamic optimizing model with adjustment costs to develop a q model of investment this framework is particularly useful for analyzing the dynamic effects on investment of permanent and temporary changes in tax policy it is shown that contrary to the conventional intertemporal substitution argument a temporary investment tax credit need not be nore expansionary than a permanent investment tax credit the role of depreciation allowances in determining the dynamic response of investment to temporary changes in the tax rate is also investigated

optimal trade and technology policies dynamic linkages this paper examines the dynamic linkages between technology policy on the one hand and tra de and industrial policies on the other when any of the latter polic ies affects the incentives of firms to innovate there is an independ ent argument for or against such a policy in addition to those obtain ed from the usual analysis of international oligopoly the adoption o f an r d policy involves a dynamic tradeoff in welfare the pattern o f which depends on whether an r d subsidy or tax is optimal noncoope rative r d subsidies may lead to pareto superior outcomes in the pres ence of international technological diffusion copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

uk competitiveness policy vs japanese industrial policy it is often claimed that japanese industrial policy targeted high growth or high productivity growth sectors see inter alia johnson i982 carliner i986 nester i99i tyson 1992 it is then argued that because both the targeted industries and the japanese economy have prospered it follows that japanese industrial policy must have been successful hence britain and other advanced nations either are justified in emulating or should hasten to follow the japanese example this raises the question of whether the united kingdom s competitiveness policy is the appropriate response or is a completely different animal the purpose of this paper is to explore the main areas in contention but before doing so it is important to be clear about what one means by industrial and competitiveness policies

on equilibrium in resource markets with scale economies and stochastic prices abstract in this paper i show the existence and the characteristics of equilibrium in a non renewable resource market where extraction costs are non convex and market price is subject to stochastic shocks an empirically relevant setting in my model firms may be motivated to hold inventories to facilitate production smoothing which allows them to continue producing at a smooth pace at any instant when extraction ceases e g when reserves are exhausted this aspect of the model then supports a competitive equilibrium in the presence of non convex costs casual empirical evidence is provided that supports the central features of my model for a variety of non renewable resources lending credence to the explanation for equilibrium i propose

q and the tax bias theory abstract a growing body of literature analyzes the variation in q the ratio of financial market value to asset current replacement cost and makes inferences about attributes such as monopoly power profitability managerial performance etc these studies ignore potential biases embedded in q that result from non neutral tax policies this study examines the association between q and tax biases and establishes that differences in accumulated depreciation tax shields explain significant variation in q the implication that q should be adjusted for tax biases before use in empirical research is examined further adjusting q for tax biases at least with the factors herein leads only to minor changes in econometric analyses

passive firm learning and employment projection error this paper analyzes establishment error in estimating employment targets in business startups and expansions passive firm learning models provide a testable hypothesis that other things being equal old establishments more accurately predict future employment targets than young businesses empirical evidence from 442 ohio establishments implies that an increase of ten years in establishment age is associated with a decrease in employment projection error rate of between 11 and 13 percentage points

the effect of real exchange rate uncertainty on exports empirical evidence unless very specific assumptions are made theory alone cannot determine the sign of the relation between real exchange rate uncertainty and exports on the one hand convexity of the profit function with respect to prices implies that an increase in price uncertainty raises the expected returns in the export sector on the other potential asymmetries in the cost of adjusting factors of production for example investment irreversibility and risk aversion tend to make the uncertainty exports relation negative this article examines these issues using a simple risk aversion model export equations allowing for uncertainty are then estimated for six developing countries contrary to the ambiguity of the theory the empirical relation is strongly negative estimates indicate that a 5 percent increase in the annual standard deviation of the real exchange rate can reduce exports by 2 to 30 percent in the short run these effects are substantially magnified in the long run

export instability and the economic performance of developing countries abstract this paper explores the economic consequences of export instability by developing a stochastic optimal control model that is based on the maximizing behavior of a risk averse representative agent the model offers an analytical framework that can predict the consequences of export instability for the intertemporal choices of consumption saving and investment the model s results are then used to interpret the large existing body of empirical findings on the relation between export instability and savings investment and output growth rates

returns to scale adjustment costs and the optimal investment of the mining firm abstract this paper analyses the optimal investment programme of a competitive mining firm for two different technologies and capital adjustment costs in the first part the case of a variable proportions technology with decreasing returns to scale is studied and it is concluded that under the assumption of a constant mineral price a first stage in the exploitation period of the deposit will occur in which capital stock is increasing in the second part the optimal investment programme is determined when there are constant returns to scale and hotelling s rule governs the dynamics of the mineral price

a dynamic model of the firm with uncertain earnings and adjustment costs abstract in this paper a stochastic dynamic model of the firm developed by bensoussan and lesourne is extended to allow for adjustment costs the optimal solution is derived for different scenarios dependent on the shapes of the expected earnings function and the adjustment cost function and on the different parameters of the model it turns out that besides pure investment dividend and saving policies mixed policies can also be optimal for the firm the latter do not occur in the solution of the bensoussan and lesourne model and therefore the solutions derived in this paper come closer to reality

exchange rates and traded goods prices abstract this paper presents a partial equilibrium model of the determination of domestic and export prices by a monopolistic competitive firm the model stresses the role of exchange rate uncertainty and expectations the most important result of the analysis is that the stochastic properties of deviations from the law of one price are crucially affected by the currency of denomination of export prices using data on domestic and dollar export prices of japanese goods i find that deviations from the law of one price are due to exchange rate surprises but also to price staggering and ex ante price discrimination

investment as a process of search this paper analyzes optimal capital accumulation in the face of structural uncertainty in which the firm does not fully know its own profit function and can discover it only through further investment it is shown that under structural uncertainty capital accumulation is gradual even when adjustment costs are linear and not convex it is further shown that structural uncertainty creates an incentive to market research the paper also presents an example of structural uncertainty in which an additional price uncertainty has a negative effect on investment contrary to the standard models

adjustment costs uncertainty and the theory of investment the case of non renewable natural resources abstract this paper examines the effects of mineral price and extraction cost uncertainty on the investment program of a competitive resource extracting industry that faces convex costs of adjustment the results show that depletion of mineral reserves will slow down if the marginal adjustment cost function is concave or linear whereas the effect will be ambiguous if the function is convex

market structure and u s trade flows abstract using samples of input output table detailed industries we test the impact of various elements of market structure on u s trade flows at the industry level holding factor proportions constant industry demand characteristics and the extent of scale economies have significant impacts on trade flows labor intensity at the industry level has the effects on trade flows which are predicted by the factor proportions theory capital intensity increases both import and export flows this result together with certain others suggests the importance of trade among industrialized countries in producer goods

adjusting to climate change implications of increased variability and asymmetric adjustment costs for investment in water reserves abstract in this paper we study the determination of optimal water storage capacity in a region taking into account that the supply of the resource the flow into the reserve is uncertain that a measure of the uncertainty the variance is likely to increase with climate change that building capacity is costly and that the development of water resources may entail alsoenvironmental costs we find that water storage capacity in the long run ispositivelyrelated to increases in uncertainty if the marginal benefit of water withdrawal isconvexand that for the case of costly reversibility of investment a range of inaction for investment appears and the stability of water storage capacity with respect to changes in variance increases

price volatility and risk exposure on the interaction of quota and product markets we consider an industry with firms that produce a final good emitting pollution to different degree as a side effect pollution is regulated by a tradable quota system where some quotas may have been allocated at the outset i e before the quota market is opened we study how volatility in quota price affects firm behaviour taking into account the impact of quota price on final good price the impact on the individual firm differs depending on how polluting it is whether it is clean or dirty and whether it has been allocated quotas at the outset in the absence of long term or forward contracting a grandfathering regime where clean firms are allocated no quotas and dirty firms are allocated quotas for a part of their emissions minimizes the impact on firm behavior relative to a risk neutral benchmark with forward contracts and in the absence of wealth effects initial quota allocation has no effect on firm behaviour allowing for abatement does not change the qualitative nature of our results

the effects of taxes and dividend policy on capital accumulation and macroeconomic behavior abstract this paper analyzes the macrodynamic effects of changes in various tax rates in an intertemporal optimizing framework two aspects emphasized include the role of dividend policy and the behavior of the stock market both permanent and temporary tax changes are considered with the transitional adjustment paths being characterized in detail the contrast between the short run and long run effects is highlighted in particular an increase in any of the tax rates will cause short run employment to fall and with the capital stock fixed instantaneously the capital labor ratio immediately rises over time as the capital stock declines the capital labor ratio falls

behaviour of non renewable natural resource firms under uncertainty optimizing or ad hoc abstract this paper tests the assumption of optimizing behaviour by natural resource firms in the framework of an intertemporal model of non renewable resource development and production using data from the petroleum industry it is argued that the presence of geological and price uncertainty presents a situation in which standard objections to non optimizing behaviour may not hold as an alternative it is proposed that firms use an ad hoc rule of thumb to update decisions as the values of variables change econometric results support ad hoc behaviour as opposed to intertemporal profit maximization

asymmetric information option to wait to invest and the optimal level of investment abstract this paper analyzes equilibrium rationing on credit markets in the case of gains from waiting to acquire information about the future profitability of investment we compare the competitive outcome with the socially optimal level of investment we show that the opportunity to postpone investment changes the nature of the inefficiencies of the competitive outcome fundamentally without the option to wait high risk firms tend to invest and the outcome is characterized by a situation of underinvestment if firms can wait high risk firms benefit the most from waiting in this case low risk firms tend to invest immediately and a situation of overinvestment will result since from the banks point of view firms do not delay enough

adjustment costs and investment in a stochastic endogenous growth model abstract this paper introduces costly investment into a stochastic equilibrium macro model investment is determined by an endogenously determined tobin q that depends upon the structural parameters of the economy the model permits a sequence of economies allowing for an increasing role of government to be studied the effects of both a structural change taking the form of a higher variance of productivity shocks and fiscal policy on the equilibrium is analyzed paying particular attention to the impact on the growth rate and its variability the role of the tobin q in determining the response of the mean growth rate and its variance is emphasized

liability management of financial intermediaries in a dynamic and uncertain perspective this paper examines the effect of rate uncertainty first for the loan rate alone next for both asset and liability rates on the liability funding decisions of a risk neutral intermediary in this model a la pindyck rates evolve according to stochastic processes convex adjustment costs arise from the dichotomy of existing core deposits and new savings balances and the intermediary s cash flow is embedded into capital market theory then we show that the stationary equilibrium obtains at the intersection of the locus of no change in deposit holdings with the isocline of zero change in savings balances loan rate uncertainty alone shifts the savings isocline outward when marginal adjustment costs are rising at an increasing rate but when asset and liability rates are uncertain their impact on the mean intermediation spread core deposit holdings and adjustment costs depends on whether they are correlated or not

persistent and transitory shocks learning and investment dynamics this paper introduces a new approach to understanding investment the distinctive feature of our approach is that shocks to the economic fundamentals have both persistent and transitory components and that firms must disentangle the persistent from the transitory shocks the model generates interesting dynamics simulations of the model show that the response of investment to changes in the interest rate can vary widely over time that the current response of investment depends on the sequence of past shocks that investment will respond less when the firm is confident about its beliefs and more when a change in economic fundamentals challenges the firm s beliefs and that investment booms and crashes may occur without any change in the true state of the economy simulations of the model also show that it captures many stylized facts of investment dynamics documented in previous empirical studies

dynamic effects of a shift in savings the role of firms policies designed to increase capital accumulation through an increase in the savings rate are being currently considered in the united states suppose that fiscal measures are implemented which increase the savings rate what will the dynamic effects on output and capital accumulation be the literature provides us with two well known but partly conflicting answers the first addressed to the short and medium run emphasizes aggregate demand effects and the possible paradox of savings an increase in the savings rate will decrease aggregate demand and may well decrease both savings and investment the second addressed to the long run emphasizes that larger savings imply a higher sustainable capital stock in steady state are the two answers somehow consistent is it plausible in particular that rational firms would initially decumulate capital only to accumulate more later that rational agents would initially save less only to save more later to study these questions a model must have three components as at any point of time equilibrium is characterized by the equality of savings and investment it must have a description of savings behavior by agents and of investment behavior by firms to allow for aggregate demand effects on production it must also allow for some price and wage inflexibility and thus give a description of price and wage behavior the choice of the paper is to focus on one of the three components namely the investment behavior of firms and to keep the analysis tractable to make the other two components as simplesimplistic as possible malinvaud 9 in studying the same issue chooses a simpler description of investment and a more refined description of the wage price mechanism section 1 characterizes the investment decision of firms in partial equilibrium section 2 embeds it in a macroeconomic model sections 3 to 5 characterize the dynamic adjustment under various degrees of price and wage rigidity

price adjustment process for rental office space abstract this paper analyzes the price adjustment process for rental office space in 17 cities across the united states over the time period 1960 to 1975 the results confirm much of what economic theory suggests landlords react to fluctuations in demand by building up or drawing down inventories of unlet or vacant office space other things equal higher levels of vacant office space mean that landlords lower their rents and reduce the difference between desired and actual vacancies empirical evidence is also presented on the normal vacancy rate across different cities

how does labor mobility affect income convergence abstract labor mobility is introduced into the neoclassical growth model for a small open economy with capital intensity below its steady state level outmigration directly contributes to faster income convergence but also creates a disincentive for gross capital investment at low relative income levels the latter disincentive effect tends to dominate so that labor mobility can actually slow the speed of income convergence

input choices under price uncertainty theory shows that depending on risk preferences and technological parameters price uncertainty may alter firms choice of capital intensity this paper presents an empirical analysis of the effect of price uncertainty on firms choices of capital and labor stocks empirical results from a cross section of manufacturing industries as well as within industries over time show that greater price uncertainty increases an industry s capital labor ratio it appears that risk aversion does not dominate firms decision making these empirical findings have implications for the analysis of factor demand and productivity and capacity utilization rates

the dispersion hypothesis in macroeconomics macroeconomics has always rested on the fiction that the behavior of aggregates was stable and therefore individual market phenomena could be safely ignored in an important recent contribution david m lilien challenged this fiction and argued that a large component of fluctuations in unemployment could be explained by the dispersion of employment growth across industries this paper develops models of consumption and investment paper in which the dispersion of economic activity can play a role the econometric evidence suggests an important role for the dispersion of economic activity in explaining aggregate consumption and investment

dynamic decisions under risk application of ito stochastic control in agriculture in agricultural economics most studies of dynamic decisions under risk have been empirical with less emphasis on theory in finance resource economics and general economics however ito stochastic control is popular for theoretical work optimal decisions can be characterized using the powerful ito stochastic calculus this paper describes the assumptions and methods of ito control constructs a dynamic model of agricultural decisions under risk and illustrates with four examples

market power in a securities market with endogenous information a rational expectations model of a securities market is developed in which one agent the monopolist behaves like a stackelberg leader and other agents behave competitively two information structures one in which each agent has identical information and the other in which each agent has independent information are examined equilibrium is shown to exist and is characterized in both cases but monopoly has a significant effect on the equilibrium only in the latter the optimal strategy of the stackelberg leader is also studied and it is shown that he will not randomize his strategy by adding white noise to his demand function even though this obfuscates the information content of the market price

on the effects of investment tax credits on economic efficiency and growth abstract this paper explores the overall efficiency effects of itcs in the context of a disaggregated dynamic general equilibrium simulation model of the u s economy this model postulates forward looking investment decisions and allows for optimal government borrowing and financial crowding out simulation results confirm the conventional wisdom that itcs are distortionary but challenge the equally conventional wisdom that itcs necessarily spur investment and gdp in addition results point to an important policy trade off introducing itcs without neutralizing their budgetary effects would lead to low efficiency losses but would reduce investment and gdp due to financial crowding out in turn imposition of itcs while blocking their budgetary effects would lead to relatively large efficiency losses while minimizing the negative impact on investment and gdp

a dynamic q model of investment financing and asset pricing an empirical test for the agricultural sector the u s agricultural sector is experiencing a financial crisis this crisis has been brought about by a decline in the real price of farm products and rising real interest rates since 1980 declining incomes have eroded farmers ability to service debt and falling land values have reduced the collateral necessary to support the debt the relationship between farm income and real estate values has recently been described by melichar 9 11 he argued that increases in income and capital gain or losses are capitalized into land values using national aggregate data from the u s agricultural sector he demonstrated that the rate of return to investment was relatively stable over time because land values respond within a short period of time to changes in income and capital gains or losses the purpose of this paper is to develop and test a model incorporating this capitalization process in order to explain the evolution of asset values in agriculture over time this explanation is important in understanding the nature of the current financial crisis in the agricultural sector and its relation to past cyclical behavior a present value model of the growing firm is developed that incorporates both investment and financing decisions it is an extension of the well known dynamic q model developed by uzawa 20 yoshikawa 22 hayashi 5 pappas 16 pindyck 17 and abel 1 the original q model was developed by tobin 18 dynamic q models rely on an adjustment or growth cost function to limit the firm s rate of investment the major innovation of the model developed here is to extend the previous work to include the financing decision this involves