the transition to market economies in an endogenous growth model with altruistic agents this paper considers an endogenous transition from a self sufficient traditional economy to a market economy and its consequences on fertility and growth the transition can occur if private intergenerational transfers are unable to secure old age consumption as adequately as savings on capital markets otherwise individuals stay in the traditional economy unless the mass production technology in the market economy is sufficiently more advanced than individually accessible technologies markets emerge only if per capita output exceeds a certain level given a fixed cost of forming markets the transition reduces fertility and promotes growth under plausible restrictions jel classification e20 j13 o10

monopolistic competition increasing returns to specialization and output persistence abstract devereux et al economics letters 1993 41 57 61 showed that introducing together imperfect competition and increasing returns to specialization into real business cycle rbc type models results in making output more persistent than the underlying technology shocks we carry out a simple generalization of their model which clearly disentangles the two features and show that the added persistence is actually because of the increasing returns to specialization

on the dixit stiglitz model of monopolistic competition our purpose in this note is to revisit the popular monopolistic competition model of avinash k dixit and joseph e stiglitz 1977 and to stress the fact that the variant of this model used in the recent macroeconomic literature is significantly different from the original in particular by taking n as the number of active monopolists the recent discussion of dixit and stiglitz 1993 and xiaokai yang and ben j heijdra 1993 about the the advantages of neglecting terms of the order 1 n in the computed elasticities is significantly affected by the choice of the variant of the model the basic model presented in section i has been used from the start by dixit and stiglitz to study optimum product diversity it is a simple general equilibrium model with n monopolistic goods and a numeraire good which can be interpreted as labor or leisure time or as the aggregation of all the other goods in the economy the variant of the model analyzed in section ii was independently developed by several authors for different simple applications in macroeconomics 1 it is an enlarged model that includes an additional good interpreted as labor time but not taken as the numeraire more importantly the enlarged model does not lead to a general equilibrium analysis until the wage rate taken as given in a first step is adjusted competitively or strategically it is for the basic model that yang and heijdra 1993 yh give an alternative computation method taking into account the priceindex effect of individual pricing decisions this effect had been neglected in the original paper of dixit and stiglitz 1977 ds who were only concerned with the large n case ensured by low fixed costs and imperfect substitution between the monopolistic goods limiting their model to the special case of a unitary elasticity of substitution between the monopolistic goods and the numeraire good yh obtain an explicit solution but yh s solution is still an approximation because it neglects the indirect effects that feedback has on pricing decisions we will show that in the enlarged model taking into account this income feedback effect allows for an explicit solution and simplifies calculations but in the variant some meaningful cases are incompatible with free entry and thus prohibit the use of ds s approximation however as we conclude in section iii this is not to say that their approximation should never be used on the contrary the approximation hypothesis is a very useful part of dixit and stiglitz s contribution

economic development and the division of production between households and markets a model is presented in which scale economies give market production a cost advantage over household production but in which market production is limited by the extent of the market the production process is viewed as a series of stages each further refining and specializing the product of the previous stage as processing proceeds the number of intermediate goods increases and markets thin out firms specialize in the early stages of production and house holds in the later stages as an economy grows production shifts out of households and into the market several other changes associated with economic development are also accounted for

multipliers imperfect competition or increasing returns to scale abstract in a recent paper rotemberg and woodford 1995 study the behavior of imperfectly competitive economies to conclude that imperfect competition magnifies the response of output to certain exogenous shocks we show that their results are entirely driven by the presence of increasing returns to scale and not by imperfect competition

money new keynesian macroeconomics and the business cycle abstract we show in this paper that the typical modern business cycle cannot be reduced to the real business cycles archetype a monopolistic competition model with price adjustment costs affected by technological and monetary shocks better mimics the economic fluctuations in two countries with very different cyclical properties namely france and the united states in our model monetary shocks are necessary to reproduce the standard deviation of output the money output correlation the labour productivity worked hours relative standard deviation the labour productivity worked hours correlation and the mark up output correlation with two independent shocks one real more specifically defined than the solow residual and one nominal the model gives an answer to some empirical puzzles which were left unexplained by traditional rbc models

comparing four models of aggregate fluctuations due to self fulfilling expectations abstract this paper compares four equilibrium business cycle models with increasing returns to scale production technologies that allow for aggregate fluctuations due to self fulfilling expectations necessary and sufficient conditions for the existence of stationary sunspot equilibria are derived numerical examples demonstrate that the degree of increasing returns necessary for the existence of stationary sunspot equilibria lies in the upper range of available empirical estimates the paper also shows that persistent fluctuations are not a necessary property of these four models when the only source of fluctuations is changes in people s expectations about the future path of the economy journal of economic literature classification numbers e32 d43

taste for diversity and the optimality of economic growth abstract we disentangle the taste for diversity in consumption present in endogenous growth models with expanding product variety from the elasticity of substitution between consumption goods this seriously affects the welfare analysis of the model if taste for diversity is relatively small the market rate of growth may be suboptimally large

the extensive margin and monetary policy abstract the creation of new firms referred to as the extensive margin is a significant but overlooked dimension of monetary policy a monetary var documents that monetary policy has significant effects on firm creation an analytically tractable model combining sticky prices and firm entry shows that entry alters the transmission of monetary policy innovations acting much like a type of investment in more standard models monetary policy rules that offset the uncertainty of productivity shocks can raise the mean level of entry and thereby welfare suggesting a new motivation for stabilization policy

monopolistic competition increasing returns to scale and the importance of productivity shocks abstract the neoclassical growth model is extended to incorporate monopolistic competition and increasing returns to scale implications for the measurement of productivity change through the solow residual are studied it is found that for this extension productivity fluctuations continue to account for a substantial fraction of output volatility the model cannot account for volatility of employment

nominal price rigidity money supply endogeneity and business cycles abstract this paper investigates the ability of nominal price rigidity to explain the co movement of inflation with the cyclical component of output observed in the post war u s data a dynamic general equilibrium model is constructed with the introduction of monopolistic competition and nominal price rigidity in a standard real business cycle model allowing for an endogenous money supply rule it is then demonstrated that sticky price models can explain the observed associations between movements in inflation and output much better than flexible price models this result depends little on whether money supply is assumed to be endogenous or not

general equilibria in large economies with endogenous structure of division of labor abstract we study a general equilibrium model with specialization and division of labor the market coordinates all individuals decisions in choosing their patterns of specialization in order to utilize positive network effects of division of labor net of transaction costs we establish the equilibrium existence theorem the first and second welfare theorems and the core equivalence for a family of general equilibrium models with both possible increasing returns and transaction costs using an analytical framework with consumer producers economies of specialization and transaction costs we resurrect the spirit of the classical economics of the division of labor in a modern body of mathematical formalism

taste for variety and optimum production patterns in monopolistic competition abstract many positive and normative results in models using the monopolistic competition framework of the dixit stiglitz spence type depend on the value of an important parameter the taste for variety in these models however the taste for variety is linked in a close but arbitrary manner to the degree of market power of monopolistic competitors in this paper we make a simple modification to the basic model which clearly disentangles taste for variety and market power we then show how this changes the usual comparisons between social optimum and market outcomes

government spending and welfare with returns to specialization we explore a novel channel through which government spending can stimulate consumption and welfare through its effects on aggregate productivity without directly affecting either utility or production possibilities in the presence of monopolistic competition and increasing returns to specialization it is shown that government spending can partly alleviate the inefficiencies of monopolistic competition this is because government spending generates an endogenous increase in total factor productivity by increasing the variety of intermediate goods if the degree of increasing returns to variety is large enough a rise in such wasteful government spending may increase consumption levels enough to increase welfare

revenue implications of money creation under leviathan most governments possess a monopoly franchise in the creation of money economists provide an analytical justification for this institutional arrangement either in terms of the use of monetary aggregates for macro economic stabilization or in terms of the alleged inability of competitive markets to generate tolerably efficient monetary results any complete case for the government s monetary monopoly must however depend on a comparison of market and political arrangements a comparison that requires predictions about how governments are likely to behave once a monopoly franchise is assigned similarly such predictions are crucial in evaluating restrictions that might be imposed on the government s exercise of its money creation power in designing a monetary constitution in the analysis of political arrangements the revenue implications of the money creation power are probably more significant than considerations of either macro economic stability or optimality in the money supply although those revenue implications are incidental to demonstrating the nature of market failure in monetary arrangements they are fundamental in understanding how the government might exploit a monopoly in money creation once granted our interest in the revenue effects of money creation stems from a broader study of constitutional restrictions on the revenueraising authority of government see our book the power to create money is naturally encompassed in this restrictions on the revenue raising power must embody restrictions on the power to create money consequently the fiscal constitution has important implications for the monetary constitution in this paper we examine both the revenue implications of money creation and desirable consitutional restrictions on the money creation power within the context of a specific model of political processes

optimal labour contracts under asymmetric information an introduction the review of economic studies has instituted a new series of lectures to be given annually by a younger british economist at the association of university teachers of economics meetings the choice of lecturer is determined by a panel whose members are currently professors hahn mirrlees and nobay this paper is a revised version of the first lecture in the series it was presented at the aute meeting held at the university of surrey in april 1982 and was refereed in the usual way mak

monopoly with incomplete information recent theoretical research on principal agent relationships has emphasized incentive problems that arise when the parties involved are constrained by either asymmetric information or their inability to monitor each other s actions here we concentrate on the former constraint and consider the case of a single principal the monopolist the main contribution is to show that under a separability assumption strong conclusions can be drawn about the nature of optimal incentive schemes although the primary focus is on optimal quantity discounts in a monopolized market the results also shed light on related topics such as optimal income taxation and commodity bundling

externalities endogenous productivity and poverty traps abstract we present a version of the neoclassical model with an endogenous industry structure we construct a distribution of firms productivity that implies multiple steady state equilibria even with an arbitrarily small degree of increasing returns to scale while the most productive firms operate across all the steady states in a poverty trap less productive firms operate as well this results in lower average firm productivity and total factor productivity the distributions of employment by firm size across steady states are consistent with the empirical observation that poor countries have a higher fraction of employment in small firms than rich countries differences in output and total factor productivity across steady states are increasing in the degree of returns to scale the capital share and the frisch elasticity of labor supply

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

homework in development economics household production and the wealth of nations we introduce home production into the neoclassical growth model and examine its consequences for development economics in particular we study the extent to which one can account for international income differences with differences in policies that distort capital accumulation in models with home production such policies not only reduce capital accumulation but also change the mix of market and nonmarket activity hence these models can generate larger differences in output than standard models for a given policy differential we also show how the welfare implications change when we incorporate home production

constructing and estimating a realistic optimizing model of monetary policy abstract a dynamic stochastic general equilibrium dsge model with real and nominal both price and wage rigidities succeeds in capturing some key nominal features of u s business cycles additive technology shocks as well as multiplicative shocks are introduced and shown to be crucial monetary policy is specified as an interest rate targeting rule following developments in the structural vector autoregression var literature the interaction between real and nominal rigidities is essential to reproduce the liquidity effect of monetary policy the model is estimated by maximum likelihood on u s data and its fit is comparable to that of an unrestricted first order var besides producing reasonable impulse responses and second moments this model replicates a feature of u s business cycles never captured by previous research with dsge models that an increase in interest rates predicts a decrease in output two to six quarters in the future

the distribution sector and the development process are there patterns yes roger r betancourt i introduction in this article we bring together three separate strands of literature that have a bearing on the issue of whether or not there are patterns in the role of the distribution sector during the course of economic development the first strand of literature extends the kuznets 1966 tradition by searching for empirical regularities in the evolution of the share of services in gross domestic product gdp during the process of development both chenery and syrquin 1975 176 and syrquin and chenery 1989 21 26 use time series data for a cross section of countries to conclude that the share of services rises during the course of economic development measured by per capita income kravis et al 1983 corroborate this finding for a given year 1975 when per capita gdp expenditures are converted into a common unit using exchange rates but they find the share of services to be constant across per capita income levels when per capita gdp expenditures are converted at purchasing power parity rates panagariya 1 988 develops a general equilibrium three sector model that explains how economies of scale in the industrial sector and constant returns in agriculture and services can generate both of these results because services represent a rather heterogeneous category including telecommunications and domestic service within its fold the question immediately arises as to whether any of the services subcategories exhibit the same or a different pattern as the aggregate category the distribution sector defined as retail plus wholesale trade is a well established subcategory of services that accounts for a substantial portion of gdp in most countries 13 5 is the average share over the 74 countries and time period 1950 1983 in our data set should we expect the share of the distribution sector in gdp to exhibit the same rising pattern with the level of development as the share of services by juxtaposing two strands of recent literature we shall argue that on the contrary one should expect an inverted u pattern instead of a rising pattern for the share of the distribution sector as development proceeds one thread of recent literature focuses on the economic function of the distribution sector in this second subsection of literature betancourt and gautschi 1988 relying on earlier work by bucklin 1973 argue that the economic function of the retail sector is to provide consumers with a set of distribution services or implicit outputs together with the explicit items bought at retail betancourt 1993 adapts the analysis to encompass the wholesale sector a key finding in this literature is the existence of economies of scale with respect to the provision of distribution services ofer 1973 oi 1992 and betancourt and malanoski 1999 this finding contradicts directly one of the basic assumptions on which panagariya 1988 based his explanation of the pattern for services another area of recent literature focuses on development as specialization and stresses the increasing returns associated with specialization ray 1998 chs 4 5 provides an overview of various aspects of this literature romer 1987 is an early contributor to this thread of literature in the context of endogenous growth models locay 1990 stresses that the association of development with specialization leads to an increase in the variety of products available this increasing variety implies higher levels of assortment need to be provided by the distribution sector and it provides the link between the two recent strands of literature that allows us to explain how the inverted u pattern emerges the production of assortment is subject to increasing returns and by embedding this production in a simple economy wide model we generate a share for the distribution sector that increases in the early stages of development but eventually declines the arguments are elaborated in detail in the next section

the cyclical behaviour of wages and profits under imperfect competition the authors build a dynamic model of the business cycle with monopolistically competitive firms with simple assumptions concerning firm entry and exit the model can explain some stylized facts of the business cycle that standard real business cycle models cannot predict they include the cyclical behavior of the shares of capital and labor income in total income and the pattern of net firm creation these predictions are robust to whether the main source of the business cycle is aggregate supply shocks or aggregate demand shocks

is there always too little research in endogenous growth with expanding product variety abstract it is generally believed that models of endogenous growth with expanding product variety typically yield a too low level of research we show here that this result is due to the implicit choice of a particular value for a crucial parameter once this parameter is set free one finds that too much research can occur as well

the relation between price and marginal cost in u s industry an examination of data on output and labor input reveals that some u s industries have marginal cost well below price the conclusion rests on the finding that cyclical variations in labor input are small compared with variations in output in booms firms produce substantially more output and sell it for a price that exceeds the costs of the added inputs the paper documents the disparity between price and marginal cost where marginal cost is estimated from annual variations in cost it considers a variety of explanations of the findings that are consistent with competition but none is found to be completely plausible

monopolistic competition and the effects of aggregate demand how important is monopolistic competition to an understanding of the effects of aggregate demand on output we ask the question at three levels can monopolistic competition by itself explain why aggregate demand movements affect output can it together with other imperfections generate effects of aggregate demand in a way that perfect competition cannot if so can it give an accurate account of the response of the economy to aggregate demand movements the answers are no yes and yes

the dynamics of smithian growth this paper analyzes the evolution of an economy where growth is driven by increased specialization caused by the geographical expansion of markets it proves that such smithian growth exhibits generic threshold behavior below a critical density of transport linkages the economy is split into isolated local markets with limited specialization above the critical density these markets begin to fuse into a large economywide market causing growth to accelerate this allows an explicit test of the consensus among historians of sung dynasty china that the economic revolution during that period was a result of commercialization caused by the creation of a national waterway network

the extent of the market and stages of agricultural specialization this paper provides empirical evidence of nonlinearity in the relationship between crop specialization in a village economy and the extent of the market size of the urban market relevant for the village the results suggest that the portfolio of crops in a village economy becomes more diversified initially as the extent of the market increases however after the market size reaches a threshold the production structure becomes specialized again this evidence on the stages of agricultural diversification is consistent with the stages of diversification identified in the recent literature for the economy as a whole and also for the manufacturing sector the evidence highlights the importance of improving farmers access to markets through investment in transport infrastructure and removal of barriers to trading

optimal fiscal policies congestion and over entry by shedding light on market imperfections and the congestion of public goods we show that free entry in a market equilibrium will lead to excessive entry relative to the social optimum moreover by specifying a generalized congestion function it is also shown that different fiscal policies including labor income tax capital income tax and government expenditure play a distinct role in terms of remedying market distortions specifically optimal income taxes decrease with the degree of market imperfections in order to remove the monopoly inefficiency while they increase with the degree of congestion in order to remedy the adverse externality caused by congestion distortion since a higher degree of increasing returns to an expansion in the variety of intermediate goods is found to intensify the congestion effect of government infrastructure expenditure the optimal rule of government expenditure proposed by barro 1990 should be modified

optimal number of standards under economies of scope in quality abstract stivers stivers andrew e 2003 quality standards with exogenously distributed quality economics letters 80 1 130 136 finds the optimal segmentation of quality when the distribution of quality is exogenous this paper characterizes the optimal number of standards as the cost of information falls both the number of standards and the market coverage of the firm rise

segmenting the market the monopolist s optimal product mix abstract in an industry producing products which differ in quality to consumers who vary in their willingness to pay it may happen that only a bounded number of producers can coexist at noncooperative price equilibrium in other words the industry is a natural oligopoly we are here concerned with a special example in which only one producer can survive our focus of interest in the present paper is to examine this monopolist s optimal product range depending on the dispersion of consumers willingness to pay income either i the monopolist will find it optimal to segment the market completely offering the maximum number of products permitted or ii the monopolist will offer only a single product the precise nature of this switch of policy which occurs at a certain critical distribution of consumer incomes willingness to pay is explored fully

do the economies of specialization justify the work ethics an examination of buchanan s hypothesis buchanan 1991 1994 proposes an interesting hypothesis explaining the prevalence of an ethic encouraging more work economies of specialization mean that more division of labour may increase productivity if everyone works more it increases the extent of the market which enables higher degree of division of labour and hence higher productivity individual choice between leisure and work thus results in a sub optimal level of work one way to counteract this is to maintain a work ethic this chapter examines the validity and significance of this hypothesis in the yang ng framework of inframarginal analysis a simultaneous artificial decrease in preference for leisure by all individuals decreases intrinsic utility evaluated at the original preference however using a more realistic model allowing for both home and firm market production developed by ng and zhang 2005 and discussed in chapter 9 a strong support is provided for buchanan s hypothesis as a shift in preference by everyone from leisure to market goods produced under increasing returns average cost pricing increases utility even if evaluated in accordance with the original preference buchanan s thesis probably has more relevance in ancient times when the work ethics originated but is less significant in the current world of global trade where the billions of individuals involved is sufficient to sustain specialization without artificial encouragement of additional work effort on the contrary the competition for relative standing the materialistic bias caused by our accumulation instinct and advertising and the environmental disruption of material production and consumption suggest that the discouragement of long working week may be more conducive to welfare

specialization household production and the measurement of economic growth our concern in this paper is with the measurement of economic growth or more precisely the mismeasurement of growth that may occur from ignoring household production as an economy develops production shifts from households to markets traditional measures of economic growth which ignore most household production may therefore be biased upward the existence of household production also complicates international comparisons of real gnp as there are significant differences in the relative size of the household sector across developed and developing economies there is an extensive empirical literature on the size of the household sector most estimates place the value of household production in the united states for recent years at 30 40 percent of gnp 2 previous studies have found that the relative size of the household sector has remained fairly constant over time implying that measured growth rates provide a reasonable proxy for overall growth rates existing estimates of household production however have little theoretical grounding for the most part they also ignore the use of capital in the household sector in addition most estimates relate to a single point in time 3 finally existing studies relate to time periods after which the large movements out of the household and into the market may have taken place in this paper we provide new estimates of the value added in household production for selected years from 1930 to 1985 we find that the relative size of the household sector in recent times is smaller than is commonly estimated we also find contrary to the results of others that the relative size of the household sector has fallen continuously since 1930 we conclude that real per capita output has grown from 1930 to 1985 at a rate that is significantly below the rate implied by conventional measures of output we develop in the next section a formal model of household production which we hope will help us to clear up such issues as the appropriate value to impute to household labor how to treat time spent transacting and how to deflate household production in order to obtain real output the model is not a general equilibrium model its role is not to derive implications for growth but rather to guide us in our accounting exercise

what determines aggregate returns to scale abstract this paper develops a unified framework that incorporates four features important in existing models with increasing returns fixed costs decreasing marginal costs product variety and market power when fixed costs are not allowed to vary and profits are imposed to be zero in every period only the degree of returns to variety determines the degree of aggregate increasing returns to scale when fixed costs respond to changes in aggregate activity or the zero profit condition does not hold in the short run aggregate returns depend not only on product variety but also on diminishing marginal costs or market power the degree of market power however does not affect input prices which are critical to determine the uniqueness of equilibrium

firm entry excess capacity and endogenous productivity abstract we show that sluggish firm entry causes productivity to vary endogenously in response to technology shocks the endogenous productivity effect is caused by incumbent firms utilizing excess capacity as entry adjusts we develop a nonparametric model of endogenous sunk costs and monopolistic competition to show that imperfect competition and dynamic entry are necessary and jointly sufficient conditions for endogenous productivity fluctuations quantitatively we show the endogenous productivity effect is as large as that from a traditional capital utilization effect

optimal taxation with imperfect competition and aggregate returns to specialization in this paper we explore the proposition that in economies with imperfect competitive markets the optimal capital income tax is negative and the optimal tax on firms profits is confiscatory we show that if the total factor productivity as well as the measure of firms or varieties are endogenous instead of fixed then the optimal fiscal policy can lead to different results the government faces a trade off between the fixed costs that the society pays for the

the division of labor coordination costs and knowledge this paper considers specialization and the division of labor a more extensive division of labor raises productivity because returns to the time spent on tasks are usually greater to workers who concentrate on a narrower range of skills the traditional discussion of the division of labor emphasizes the limitations to specialization imposed by the extent of the market we claim that the degree of specialization is more often determined by other considerations especially emphasized are various costs of coordinating specialized workers who perform complementary tasks and the amount of general knowledge available