regulatory reform in britain regulatory reform in britain john kay and john vickers major sectors of the british economy are currently undergoing far reaching regulatory reform deregulation removal of barriers to competition and the introduction of new methods of regulation are occurring notably in financial services some of the professions and in utility industries such as telecommunications gas and electricity this paper gives an economic assessment of these developments the authors examine the root causes of market failure that call for regulation externalities monopoly and information problems and the pros and cons of various regulatory responses a broad distinction is drawn between structural regulation the determination of which firms or types of firms can engage in which activities and conduct regulation the control of how firms behave in their chosen activities recent examples of deregulation plus re regulation in britain are seen in part as a shift from structural to conduct regulation the relative merits of the two modes of regulation are complex to assess but it is argued that some recent regulatory reforms are placing undue reliance on conduct regulation as well as assessing individual industries the authors draw general conclusions about the desirability of regulatory solutions that make full use of market forces

competition and social influence the diffusion of the sixth generation processor in the global computer industry1 when is a social actor most strongly influenced by its peers this article addresses this question by clarifying when computer firms were most strongly affected by the choices of their structurally equivalent rivals to adopt a well known technology intel s sixth generation processor the core hypothesis is that the effect of adoptions by structurally equivalent firms increases with the competitive pressure that a focal firm faces in its market position the results show that a chosen firm is most strongly influenced by comparable others when it faces scale based competition and is diversified the implications of this study are twofold a social actor s sensitivity to the conduct of others may depend not only on its place in a hierarchy but also on the nature of its ties to an external audience and a contingent theory of social influence may be necessary to characterize diffusion processes correctly particularly when external and time varying nonnetwork factors have significant effects

surveys in public sector economics part i public sector production 2 shadow pricing in the public sector peter hammond professor of economics stanford university 3 regulation of public utilities and nationalized industries ingo vogelsang professor of economics boston university 4 economics of publicly provided goods and services paul hare professor of economics heriot watt university part ii distribution and welfare 5 the political economy of fiscal policy daniel ingberman and robert inman respectively assistant professor of public policy and management wharton school university of pennsylvania and professor of finance economics and public management university of pennsylvania 6 policy targetting in a new welfare framework with poverty john beath geoff lewis and david ulph both john beath and geoff lewis are lecturers in economics bristol university david ulph is professor of economics bristol university 7 the structure of income and commodity taxation christopher heady lecturer in economics university college london part iii estimation and computation 8 econometric issues in public sector economics richard blundell director of the institute for fiscal studies 9 general equilibrium computation applied to public sector issues john piggot professor of economics university of sydney with appendix by jon fuller

output dynamics in real business cycles models the time series literature reports two stylized facts about output dynamics in the united states gnp growth is positively autocorrelated and gnp appears to have an important trend reverting component this paper investigates whether current real business cycle rbc models are consistent with these stylized facts many rbc models have weak internal propagation mechanisms and must rely on external sources of dynamics to replicate both facts models that incorporate labor adjustment costs are partially successful they endogenously generate positive autocorrelation in output growth but they need implausibly large transitory shocks to match the trend reverting component in output

attack defence and contagion in networks sanjeev goyal acknowledges support from a keynes fellowship cambridge inet institute and european research area complexity net resilience and interaction of networks in ecology and economics adrien vigier acknowledges support from a gates cambridge fellowship as well as a core fellowship from universite catholique de louvain

the neutrality of the real equilibrium under alternative financing of government expenditures abstract in this paper we derive necessary and sufficient conditions under which the real equilibrium of an economy is independent of government financing policies the economy to which these conditions apply has lump sum taxes complete markets and it is characterized by consumers that form expectations rationally under uncertainty the important theorem we prove is that in such an economy consumption is neutral to alternative government financing policies weak neutrality if and only if the present value of taxes paid by each consumer including the inflation tax remains fixed and consumer utility functions are separable in money and consumption we show that no economy can be simultaneously neutral to financing shifts between debt and taxes debt and money and money and taxes

grabber holder dynamics and network effects in technology innovation abstract economists and marketing researchers have examined how network effects can have an impact on the adoption of technology and products and how an intrinsic inferior product or technology may dominate the market however their studies have not explained how a producer could create network effect for a new product and how after successfully creating the network effect for this product the producer could lose it in a short period of time while these studies provide insight into technology innovation after it happened they fail to shed light on understanding many of the surprises that we experience in the process the objective of this paper is to present a fundamental framework that helps us understand most of the surprising outcomes that we have seen in technology innovation processes especially the winners and losers in an innovation process the framework is built on a grabber holder dynamic model that captures how all the intelligent agents involved in an innovation shape the forces that either induce a strong network effect or destroy a network effect that is already in place the model can be used to explain many surprising events that have happened in technology innovation in this paper i apply the model to the personal computer innovation

diffusion of a new product under network effects the us dvd market we formulate a model that captures the inter dependence between hardware demand and software supply indirect network effect in the dvd industry the identification of the network effect comes from the difference in software availability across two different formats vhs and dvd we find that a 1 increase in the number of dvd titles raises the demand for dvd players by 0 87 simultaneously a 1 increase in video player ownership leads to a 0 14 increase in the variety of video titles our simulations show that hardware manufacturers might be able to internalize the network externality to increase total industry revenues

privatisation and liberalisation in an industry with network externalities abstract network externalities and sunk costs can make a profit maximising monopoly superior to competition even if a large number of firms can enter competition can outperform a public monopoly only if sunk costs become significantly lower

externalities technological complementarities and sustained economic growth externalities as conventionally defined miss many of the spillovers that are both causes and consequences of the technological changes that underlie economic growth we introduce a much wider concept called technological complementarities new general purpose technologies gpts rejuvenate the growth process by creating technological complementarities which are adequately measured neither by total factor productivity tfp nor by externalities there would be major gains from technological change even if the returns on capital invested in innovation never exceeded the returns on investing in existing technologies so that there were neither externalities nor positive changes in tfp

inflation hedging and the demand for money some empirical evidence this paper explores the role of nominal rate of return uncertainty and inflation hedging as potentially important factors explaining the pattern of money demand using u s quarterly data over the period 1952 2 1982 4 it is shown that in conformity with theoretical considerations the nominal rate of return uncertainty variable tends to have a significantly positive effect and the inflation hedging variable the covariance between nominal rate of return and inflation rate a significantly negative effect on the demand for money these findings seem to be reasonably robust in terms of various definitions of income interest rates inflation rate and money variables as well as in terms of different estimation methods

competing technologies the learning curve and rational expectations abstract the problem of choice between several variants of a technology subject to dynamic learning economies is examined in a rational expectations model with overlapping adopters it is shown that even with rational expectations the long term market outcome depends sensitively on the pattern of early chance events and that only one variant of the technology will come to dominate the market in the long run this variant need not be the one which is socially optimal or most promising technically

inflation risk taxes and the demand for owner occupied housing a bstract a portfolio choice model is formulated which focuses on the possibility of inflation hedging motives in housing demand in the 1970s an asset demand equation is used to estimate the capitalization of inflation expectations into house prices through tax mortgage and hedging effects the empirical results indicate that even after accounting for tax and mortgage effects the hedging motive was significant in bidding up house prices one implication is that the tax effects of inflation may have been overstated in previous research that ignored inflation risk

indeterminacy and increasing returns abstract we investigate properties of the one sector growth model with increasing returns under two organizational structures capable of reconciling the existence of aggregate increasing returns with competitive behavior by firms the first involves input externalities the second involves monopolistic competition we show for parameters in close accord with recent literature on real business cycles that the model displays an indeterminate steady state that can be exploited to generate a model of business fluctuations driven by self fulfilling beliefs in our first class of models growth is generated by exogenous increases in factor productivity in the second class the marginal product of capital is large enough for endogenous growth journal of economic literature classification numbers e00 e3 o40

inflation risk and the speed of adjustment in short run money demand functions abstract after 1973 money demand functions show a slow speed of adjustment including inflation risk does not help this the ser shows multiple minima as a function of the estimated rho in the error with higher speeds and rhos associated

r d implementation and stagnation a schumpeterian theory of convergence clubs we use schumpeterian growth theory to account for the divergence in per capita income that has taken place between countries since the mid 19th century as well as for the convergence that took place amongst the richest countries during the second half of the 20th century the argument is based on the premise that technological change underwent a fundamental transformation in the 19th century associated with new scientific ideas and the increasingly scientific content of new technologies countries then sorted themselves into three convergence groups r d implementation and stagnation a country s group membership depends on initial conditions as well as on fundamentals

the dynamo and the computer an historical perspective on the modern productivity paradox the dynamo and the computer an historical perspective on the modern productivity paradox author s paul a david source the american economic review vol 80 no 2 papers and proceedings of the hundred and second annual meeting of the american economic association may 1990 pp 355 361 published by american economic association stable url http www jstor org stable 2006600 accessed 08 12 2010 01 40

speeding up the internet regulation and investment in european fiber optic infrastructure in this paper we study how the coexistence of access regulations for legacy copper and fiber networks shapes the incentives to invest in network infrastructure to this end we develop a theoretical model explaining investment incentives by incumbent telecom operators and heterogeneous entrants and test its main predictions using panel data from 27 eu member states over the last decade our theoretical model extends the existing literature by among other things allowing for heterogeneous entrants in internet access markets as we consider both other telecom and cable tv operators as entrants in the empirical part we use a novel data set including information on physical fiber network investments legacy network access regulation and recently imposed fiber access regulations our main finding is that more stringent access regulations for both the legacy and the fiber networks harm investments by incumbent telecom operators but in line with our theoretical model do not affect cable tv operators

implementation cycles investment and growth we develop a model of intrinsic cycles driven by the decentralized behavior of entrepreneurs and firms making continuous divisible improvements in their productivity we show that when the introduction of productivity improvements is endogenous implementation cycles arise even in the presence of reversible investment and consumption smoothing the implied cyclical equilibrium is unique within its class and shares several features in common with actual business cycles in particular its predictions are qualitatively consistent with the joint behavior of the investment rate and tobin s q during u s recessions

animal spirits as an engine of boom busts and throttle of productivity growth abstract the news shock literature interprets empirical news shock identifications as signals about future productivity under this view changes in productivity cause changes in expectations i investigate an alternative interpretation whereby changes in expectations cause changes in productivity i present a model where firms adopt the technology of a deterministic frontier and where self fulfilling expectational shocks unleash a frenzy of adoption through which firms increase productivity consistent with the news evidence stock prices and aggregate activity boom yet tfp increases with a lag simulations using i i d expectational shocks yield moments consistent with the data and qualitatively capture both high frequency boom busts and lower frequency fluctuations finally estimating a beaudry portier style vecm on the simulated model output to identify a news shock recovers impulse response functions largely consistent with the beaudry and portier 2006 results

investment shocks and business cycles abstract the origins of business cycles are still controversial among macroeconomists this paper contributes to this debate by studying the driving forces of fluctuations in an estimated new neoclassical synthesis model of the u s economy in this model most of the variability of output and hours at business cycle frequencies is due to shocks to the marginal efficiency of investment imperfect competition and to a lesser extent technological frictions are the key to their transmission although labor supply shocks explain a large fraction of the fluctuations in hours at very low frequencies they are irrelevant over the business cycle this finding is important because the microfoundations of these disturbances are widely regarded as unappealing

coordinating adoption decisions under externalities and incomplete information abstract a monopolist sells a good whose value depends on the number of buyers who adopt it as well as on their private types the seller coordinates the buyers adoption decisions based on their reported types and charges them the price based on the number of adoptions we study ex post implementable sales schemes that are collusion proof and show that under the revenue maximizing scheme more buyer types are willing to adopt when there are more adoptions and the number of adoptions is maximized subject to the participation constraints

rational incompatibility with international product standards abstract international product standardization enables traditional price based competition but the existence of redesign costs or network effects creates market frictions that diminish the incentive to standardize if there already exists a different technology in an established market this leads to multi attribute competition between products and will generally reduce trade flows not only do incumbent firms using a different technology have an incentive to deviate from an international standard but a host country government concerned for its consumers welfare has no incentive to enforce the international standard and may even value deviation from the international standard through technical barriers to trade

the market value of rarity abstract most theories of demand assume that consumers value the characteristics of products but are unconcerned with how many other consumers also consume the product however several theories of demand argue that consumers can value the exclusivity of possessing a rare object we test this implication on a particular collectible rare coins our paper examines the case of coins of a given type and identical quality that have mintages in different quantities this allows us to exclude the common case in which rarity or price itself is an indicator of quality for our sample rarer coins command higher prices rarity in the form of original mintage more strongly influences the market price than does collectibility as represented by the rarest coins of each mint mark or year we also point out that here may be other goods such as automobiles for which rarity may influence market demand

local network externalities and market segmentation this paper models interaction between groups of agents by means of a graph where each node represents a group of agents and an arc represents bilateral interaction it departs from the standard katz shapiro framework by assuming that network benefits are restricted only amongst groups of linked agents it shows that even if rival firms engage in bertrand competition this form of network externalities permits strong market segmentation in which firms divide up the market and earn positive profits the analysis also shows that some graphs or network structures do not permit such segmentation while for others there are easy to interpret conditions under which market segmentation obtains in equilibrium c 2009 elsevier b v all rights reserved

uncertainty in the demand for money during hyperinflation much recent empirical work on hyperinflation has centered on the direct and indirect effects of uncertainty on the demand for money we test the hypothesis originally put forward by klein that uncertainty positively affects the demand for real balances a variant of cagan s demand for money function is utilized and operational measures of uncertainty are derived by fitting autoregressive integrated moving average models to the inflation series for each of three hyperinflation nations we find that the most reasonable measures of variation do not significantly enter the money demand function for any of the three hyperinflations studied

an exploration into pigou s theory of cycles abstract this paper explores a theory of business cycles in which recessions and booms arise due to difficulties encountered by agents in properly forecasting the economy s future needs in terms of capital the idea has a long history in the macroeconomic literature as reflected by the work of pigou industrial fluctuation macmillan london 1926 the contribution of this paper is twofold first we illustrate the type of general equilibrium structure that can give rise to such phenomena second we examine the extent to which such a model can explain the observed pattern of u s recessions frequency depth without relying on technological regress we argue that such a model offer a framework for understanding elements of both the recent u s recession and of the asia downturns of the late 1990s

theorizing path dependence a review of positive feedback mechanisms in technology markets regional clusters and organizations the concept of path dependence has often been criticized as vague and only narrowly applicable although we can find some very refined definitions of the concept we also find a wide range of empirical phenomena being described as path dependent we argue that more detailed accounts of the positive feedback mechanisms that form paths can take path dependence beyond this state of being overdetermined but under specified reviewing three well described cases of path dependent dynamics in technology markets regional clustering and organizations we define a core set of positive feedback mechanisms that constitute path dependence at different analysis levels and clarify the relationship between positive feedback and increasing returns we show that path dependent processes that is processes driven by positive feedback that veer toward rigidity or lock in can be but do not have to be found under many labels including structural inertia coevolution or institutional persistence we conclude that a precise definition of path dependence does not need to be at odds with the concept s widespread use in understanding organizational and industrial development processes copyright 2013 the author 2012 published by oxford university press on behalf of associazione icc all rights reserved oxford university press

the value of time and recent u s money demand instability much controversy has surrounded the u s money demand relationship or more precisely its stability this is rather disappointing in light of the central importance of money demand estimates for the formulation and implementation of effective monetary policy and for almost all theories of aggregate economic activity to date the vast majority of alternative money demand specifications have generally failed to produce a stable money demand function throughout the 1970s and 1980s

a liquidity in advance model of the demand for money under price uncertainty abstract we develop a model of money demand in which the asset and goods markets open sequentially money balances are subject to price level and consumption risk empirical evidence from a bivariate arch framework suggests both sources of risk reduced money demand in the 1970s inflation risk depresses money demand throughout our sample 1962 1987 the econometric analysis resolves conflicting empirical estimates reported in the literature

a positive theory of flexibility in accounting standards abstract we develop a positive theory of accounting standards when standards generate network externalities and differ in the amount of reporting discretion or flexibility they provide firms we evaluate expected value maximizing firms preferences between two standards regimes rigid and flexible as the number of firms subject to each standard varies as the organization of the securities market varies and as the mapping from the underlying economics of the firms transactions to the accounting reports produced under the two standards vary we also compare firms preferences between the two regimes to the preferences of profit maximizing traders in the firms securities

the economics of convention c onventions regulate much of economic and social life yet they have received surprisingly little attention from economists by a convention we mean a pattern of behavior that is customary expected and self enforcing everyone conforms everyone expects others to conform and everyone has good reason to conform because conforming is in each person s best interest when everyone else plans to conform lewis 1969 familiar examples include following rules of the road adhering to conventional codes of dress and using words with their conventional meanings conventions with direct economic implications include species of money and credit industrial and technological standards accounting rules and forms of economic contracts indeed it would scarcely be an exaggeration to say that almost all economic and social institutions are governed to some extent by convention the main feature of a convention is that out of a host of conceivable choices only one is actually used this fact also explains why conventions are needed they resolve problems of indeterminacy in interactions that have multiple equilibria indeed from a formal point of view we may define a convention as an equilibrium that everyone expects in interactions that have more than one equilibrium the economic significance of conventions is that they reduce transaction costs imagine the inconvenience if whenever two vehicles approached one another the important exceptions are sugden 1986 and ullman margalit 1977 the interested reader might also refer to the symposium on social norms that appeared in the fall 1989 issue of this journal with articles by sugden 1989 and elster 1989

real business cycles and the animal spirits hypothesis abstract we calibrate a quantitative equilibrium macroeconomic model with an aggregate technology that is subject to increasing returns and show that this model may display fluctuations at business cycle frequencies even when there are no shocks to the fundamentals of the economy these fluctuations are due to the self fulfilling beliefs of investors which we call animal spirits we compare the impulse response functions predicted by our model and by two other more standard models with a four variable vector autoregression on u s data our animal spirits economy is the most successful of the three at matching broad features of the dynamic responses in the data journal of economic literature classification numbers e00 e3 e32

the dynamic effects of neutral and investment specific technology shocks the neoclassical growth model is used to identify the short run effects of neutral technology shocks which affect the production of all goods homogeneously and investment specific shocks which affect only investment goods the real equipment price crucial for identifying the investment shocks experiences an abrupt increase in its average rate of decline in 1982 so the analysis is based on a split sample on the basis of the preferred specification the two technology shocks account for 73 percent of hours and 44 percent of output s business cycle variation before 1982 and 38 percent and 80 percent afterward the shocks also account for more than 40 percent of hours and 58 percent of output s forecast errors over a three to eight year horizon in both samples the majority of these effects are driven by the investment shocks

money demand during hyperinflation and stabilization bolivia 1980 1988 i introduction the stability of demand for money equations has been at issue in both econometric research and policy analysis the academic debates about the relative merits of the traditional buffer stock and the error correction models of demand for money have centered on parameter stability 1 in policy discussion the scope for remonetization following stabilization depends on the upward shift in the demand for money and the consequent predictability of higher money demand with lower rates of inflation 2 only an increased demand for money would make further credit expansion non inflationary inflation uncertainty has a pervasive effect in the money price nexus high inflation uncertainty makes money a riskier asset depressing the demand for money on a long term and possibly short term basis this impact on the demand for money means that policies influencing inflation will have an additional effect through their impact on inflation uncertainty as well as on expected inflation this paper examines the role of inflation uncertainty in a dramatic case study bolivia during the 1980s this was a decade of extreme macroeconomic instability annual inflation rates reached over 20 000 percent motivating a subsequent stabilization which drove annual inflation rates down to less than 25 percent where they have remained for more than five years perhaps more than any other country in recent history bolivia has undergone a dramatic structural shift in its macroeconomic policy regime to what extent did the demand for money shift during this period in its sensitivity to expected inflation inflation uncertainty and to underlying monetary disequilibria as the inflation stabilization progressed how fast did the money demand parameters react to this new regime change was there scope for remonetization in bolivia following the now famous stabilization plan of august 1985 the new economic plan introduced by president victor paz estenssoro 3 previous literature on the demand for money has explored the role of inflation uncertainty with ambiguous results 4 klein 1977 observed that inflation rate uncertainty reduced the average and marginal productivity of real cash balances in providing monetary services effectively a greater volume of real cash balances is required to obtain the same quality adjusted level of cash balances while the impact on the demand for money is theoretically uncertain because the income and substitution effects work in opposite directions klein provided empirical evidence that inflation uncertainty measured by a moving five year variance around a moving ten year trend with data from 1880 to 1972 actually increased the demand for money in the united states around the same time boonekamp 1978 presented a two period mean variance model of money and bond demand highlighting the potential importance of a hedging role in the demand for money in the face of inflation uncertainty related to aspects of both of these two approaches and working with a capital asset pricing model capm sweeney 1988 drew on university of michigan survey data on inflationary expectations to resolve the theoretical ambiguity of the impact of inflation uncertainty his results based on post war quarterly u s data contrasted with those of klein by showing a negative impact of inflation uncertainty on money demand in his study of the demand for money in the six hyperinflations originally examined by cagan 1956 khan 1977 measured inflation uncertainty by the absolute value of the change in inflation his model assumed that inflation uncertainty would affect the demand for money not directly but by altering the adaptive expectations parameter in the adjustment of inflation expectations his empirical estimates implied a negative impact of inflation uncertainty on the demand for money during accelerating inflation engle 1982 introduced the concept of arch autoregressive conditional heteroskedastic models with a specific application to inflation expectations

animal spirits through creative destruction we show how a schumpeterian process of creative destruction can induce rational herd behavior by entrepreneurs across diverse sectors as if fueled by animal spirits consequently a multisector economy in which productivity improvements are made by independent profit seeking entrepreneurs exhibits regular booms slowdowns and downturns as part of the long run growth process our cyclical equilibrium has higher average growth but lower welfare than the corresponding acyclical one we show how a negative relationship can emerge between volatility and growth across cycling economies and assess the extent to which our model matches several features of actual business cycles