radicalism versus gradualism an analytical survey of the transition strategy debate academic debate on a transition strategy for former socialist economies continues even a quarter century after the collapse of the communism in central and eastern europe and the former soviet union in this paper through an analytical survey of 137 preceding studies we present an overall picture of the debate and examine the relationship between the debate attitudes and the literature attributes in related studies we found that the radicalists maintain a consistent debate attitude from the viewpoints of time speed and policy sequence of economic transition while the debate attitude of the gradualists is more diversified we also found that there is another group of researchers that stays within the framework of the radicalism versus gradualism debate while at the same time keeping at arm s length from both the radicalists and the gradualists in addition our regression estimation of qualitative selection models provides interesting findings on the relationship between the debate attitudes and the literature attributes

structural factors in the economic reforms of china eastern europe and the former soviet union reform in china and russia jeffrey sachs and wing thye woo china s experience does not show that gradual reform is superior to the shock therapy undertaken in eastern europe and the former soviet union eefsu differing performance primarily reflects different economic structures prior to reform china was a peasant agricultural society eefsu was urban and overindustrialized in both jobs in state enterprises were so heavily subsidized that workers refused to move to new industries elsewhere even when productivity in the latter was much higher in eefsu the large state sector impeded structural adjustment curtailing subsidies would have produced many losers who used their power to resist this outcome failure to curtail subsidies then cut off the potential supply of labour and other factors to new emerging firms china s state enterprises have not performed as well as the rest of the chinese economy and do not explain its success rapid growth was possible because the large agricultural sector contained vast surplus labour and did not enjoy subsidies and soft budget constraints once constraints on migration across regions and jobs were removed this labour was available to fuel expansion in new industries unlike the distributional conflict in eefsu in china reallocation of labour allowed all groups to gain in both partial liberalization also unleashed macroeconomic pressures manageable in china because of rapid growth and adequate monetary policy but explosive in much of eefsu because of deeper structural problems and gross monetary mismanagement

economic growth and productivity a case study of south korea the economic performance that south korea has achieved over the past quarter century is often likened to a miracle recently much interest has been expressed in the driving forces behind the korean economic transformation using the valueadded measure of output christiansen and cummings have shown that technology measured by tfp accounts for about 43 of korean economic growth between 1960 and 1973 this figure is considerably high compared with recent major studies on japanese and singaporean economic growth we found that the value added framework is not appropriate for the description of the structure of the korean economy and re examined the sources of korean economic growth using the gross output framework surprisingly it has been discovered that only 7 of real output growth in the manufacturing sector during the 1962 1981 period is attributable to technological progress these findings parallel those for the japanese and singapore economies

price decontrol the microeconomic case for the big bang approach the paper presents the microeconomic case for rapid and comprehensive price decontrol as the appropriate first step in the transition to the market to make our point we consider the likely impact of the big bang price decontrol on a former socialist economy with particular attention to the welfare consequences for the consumer of eliminating shortages and queues the costs of monopoly power of state enterprises the possibility of major disruptions in the intermediate goods markets and the politico economic issues involved copyright 1991 by oxford university press

trade offs and depletion in choice abstract four experiments examine why choices deplete executive resources the authors show that the resolution of trade offs is a driver of depletion effects arising from choice and the larger the trade offs the greater is the depletion effect the authors also find that choice difficulty not related to trade offs does not influence the depleting effect of the choices finally the authors find that though people can intuit some depletion effects they do not intuit that choices or trade offs within choices might be depleting and therefore fail to predict that larger trade offs are more depleting

social defaults observed choices become choice defaults defaults effects can be created by social contexts the observed choices of others can become social defaults increasing their choice share social default effects are a novel form of social influence not due to normative or informational influence participants were more likely to mimic observed choices when choosing in private than in public experiment 1 and when stakes were low rather than high experiment 2 like other default effects social default effects were greater for uncertain rather than certain choices experiment 3 and were weaker when choices required justification experiment 4 social default effects appear to occur automatically as they become stronger when cognitive resources are constrained by time pressure or load and they can be sufficiently strong to induce preference reversals experiments 5 and 6

factor substitution average firm size and economic growth this paper extends the lucas 1978 the bell journal of economics 9 2 508 523 analysis of firm size by taking into account a normalised aggregate ces production function in a general equilibrium framework it is proved that there is an inverse relation between the elasticity of substitution and average firm size if interpreted together with the fact that richer countries are characterised by a higher elasticity of substitution this result can explain why the recent literature finds a positive association between the importance of smes in an economy and its stage of development but seems to fail in finding causality between the two both have a common origin a high value of the elasticity of substitution this paper also provides a first empirical test of the theory proposed using cross country data from both developed and developing countries

the taylor principle fights back part ii abstract the existing literature holds that the taylor principle often leads to indeterminacy in new keynesian models that allow for capital accumulation and limited asset market participation this conclusion is special however to the case of continuous full employment when the assumption of perfect wage flexibility is relaxed very slightly so that the labor market clears quickly but not instantaneously determinacy is the norm the threat of indeterminacy is limited to a tiny irrelevant corner of the parameter space where the elasticity of labor supply is unusually high and real wage adjustment is unbelievably fast everywhere else the taylor principle guarantees a unique rational expectations equilibrium the dramatic difference in results reflects the sensitivity of the monetary transmission mechanism to the speed of adjustment in the labor market

ces production functions and economic growth we examine inconsistencies and controversies related to the use of ces production functions in growth models first we show that not all variants of ces functions commonly used are consistently specified second using a simple growth model we find that a higher elasticity of substitution leads to a higher steady state and makes the emergence of permanent growth more probable it is also pointed out that the effect of a higher elasticity of substitution on the speed of convergence depends on the relative scarcity of the factors of production finally we discuss possible explanations of variations in the elasticity of substitution jel classification o41 o11

a political economy approach to the neoclassical gradualist model of transition a political economy approach to the neoclassical gradualist model of transition requires the exposition of what i define the primary elements of the model which are economic analysis definition of a good society speed political structure ideological structure and whether the initial conditions were incorporated in the model after the identification of the primary elements of the neoclassical gradualist model the next step is to identify secondary elements the desired changes with respect to price liberalization stabilization privatization institutional structure monetary policy and the financial system fiscal policy international trade and foreign aid and social policy the analytical framework developed makes possible to understand the neoclassical gradualist model from a new and more enlightening perspective we are better able to comprehend the complexities involved and the disagreements about the reform process the adoption of a gradual process of transition did not only involve specifying the required policies of a successful transition but also entailed a process a sequence by which the reforms should be introduced as such a process of transition consistent with the policies recommended by the neoclassical gradualists economists is developed the conclusion reveals the inconsistencies in the model copyright blackwell publishers ltd 2005

how responsive is business capital formation to its user cost an exploration with micro data abstract the response of business capital formation to its user cost is critical to evaluating tax reform deficit reduction and monetary policy evidence for a substantial user cost elasticity however is sparse most evidence has been based on aggregate data although several recent studies with firm level data report substantial effects with a particularly rich micro dataset containing over 26 000 observations this paper explores what can be learned about the user cost elasticity while the results depend to some extent on the specification and econometric technique various diagnostics lead us to prefer a precisely estimated but small elasticity of approximately 0 25 this paper is dedicated to the memory of robert eisner who labored early and ably on uncovering the determinants of investment spending and highlighting the importance of the question found in the title of this paper

the effect of ordering decisions by choice set size on consumer search consumers frequently engage in sequential decisions this article explores whether the order of these decisions can influence the manner in which consumers search through the possible choice options results from five studies suggest that ordering decisions by increasing vs decreasing choice set size leads to greater search depth measured by both sampling count and decision time initial smaller choice sets in increasing sequences appear to initiate a maximizing mind set which then persists even as participants encounter later larger choice sets these participants report a greater desire to maximize and are less satisfied with their decisions consistent with research on chronic maximizers in addition they continue to exhibit maximizing behavior in subsequent unrelated tasks supporting a mind set account of the differences in search in sum decision makers are proposed to be sticky adapters initial decision strategies seem to constrain the extent to which they adapt to new contexts

time delay complexity and support for taxation people often experience the benefits of taxation over time we design an intertemporal market experiment with negative externalities to examine how delaying the benefits of taxation affects support for taxes we find that when negative externalities occur immediately people learn to adopt pigouvian taxes which are aimed at reducing negative externalities and restoring market efficiency by contrast when negative externalities are delayed people are less receptive to taxation this effect persists over time our data reveal that the strong negative delay effect can be explained in large part by narrow bracketing and the increased perceived complexity of the environment rather than by time discounting per se we argue and demonstrate that increasing the transparency of intertemporal tradeoffs can effectively promote support for taxation

patterns of transition from plan to market patterns of transition from plan to market martha de melo cevdet denizer and alan gelb hungary s bankruptcy experience 1992 1993 cheryl w gray sabine schlorke and miklos szanyi why and when do governments initiate public enterprise reform jose edgardo campos and hadi salehi esfahani roads land use and deforestation a spatial model applied to belize kenneth m chomitz and david a gray industrial centralization in indonesia j vernon henderson and ari kuncoro guidlines on searching for a dalton improving tax reform an illustration with data from indonesia shlomo yitzhaki and jeffrey d lewis a new data set measuring income inequality klaus deininger and lyn squire

the dynamics of hours worked and technology the response of hours worked to technology shocks in the postwar us economy has increased over time we offer a structural interpretation of this important time varying macroeconomic moment the time varying patterns captured by a structural var are consistent with those obtained from a parsimonious rbc model with a less than unitary elasticity of substitution between capital and labour the observed changes in the response of hours are attributable to increases in the magnitude of the degree of capital labour substitution finally we conjecture that the observed time variation in is related to changes in the skill composition of the work force and biases in technological change

ballot position choice fatigue and voter behaviour in this paper we examine the eect of choice fatigue on decision making we exploit a natural experiment in which voters face the same contest at dierent ballot positions due to dierences in the number of local issues on their ballot facing more decisions before a given contest signi cantly increases the tendency to abstain or rely on decision shortcuts such as voting for the status quo or the rst listed candidate we estimate that without choice fatigue abstentions would decrease by 8 and 6 of the propositions in our dataset would have passed rather than failed

circumstance and choice the role of initial conditions and policies in transition economies the experience of countries in transition from a planned to a market oriented economy has varied greatly the clearest differences are between the east asian countries china and vietnam and the countries of central and eastern europe cee and the former soviet union fsu china and vietnam have contained inflation and benefited from continued high growth in gdp since the beginning of their reforms while all cee and fsu countries have experienced large declines in output and most have experienced hyperinflation but even in cee and the fsu differences are marked some countries have lost over half of their gdp and growth performance in a number of countries is still poor while others are growing strongly some are still suffering from high inflation while others have successfully reduced annual inflation what determines this divergence of outcomes across transition countries no study so far has analyzed the interaction of all factors including initial conditions political change and reforms in a unified framework including cee the fsu china and vietnam the authors examine these broader interactions but focus first on the role of initial conditions such as initial macroeconomic distortions and differences in economic structure and institutions which have been emphasized less in the literature they find that initial conditions and economic policy jointly determine the large differences in economic performance among the 28 transition economies in the sample initial conditions dominate in explaining inflation but economic liberalization is the most important factor determining differences in growth but reform policy choices are not exogenous they depend in turn on both initial conditions and political reform with political reform the most important determinant of the speed and comprehensiveness of economic liberalization other findings provide additional insight into these relationships results show that liberalization has a negative contemporaneous impact but a stronger positive effect on performance over time the results also show that macroeconomic and structural distortions are negatively related to both policy and performance regarding the former unfavorable initial conditions discourage policy reforms but do not diminish their effectiveness once they are implemented the authors find some evidence that the influence of initial conditions diminishes over time this is in part because many of the initial conditions are themselves modified in the course of transition monetary overhangs are dissipated through inflation industrial overhang is eroded as plants shut down and market memory returns through experience

in quest of the slutsky diamond the slutsky equation can be constructed as a parallelogram a diamond the area of which is proportional to the elasticity of substitution this construction permits to show immediately that demand functions become concave on an interval if the elasticity of substitution increases sufficiently also the diamond sheds light on the fact that the production level increases with the elasticity of substitution as an application the author shows that the elasticity of substitution has a direct bearing not only on the rate of growth of an economy but also on the very existence of sustained growth copyright 1989 by american economic association

the long term success of the neoclassical growth model in this paper we seek to re establish the link between the constant elasticity of substitution ces production function and neoclassical solow growth theory we do so in three dimensions first we review the increasing importance of the ces technology in modern dynamic macroeconomics in expanding not only theory but also in addressing important policy questions second we aue that the importance of the ces function in growth theory is intimately linked to normalization finally we examine the data congruence between ces functions and recent growth patterns in the usa and the euro area economies where we apply a supply side system incorporating a ces function with factor augmenting and time varying technical progress

capital labor substitution and equilibrium indeterminacy empirical evidence indicates that the elasticity of capital labor substitution for the aggregate u s economy is below unity in contrast the existing indeterminacy literature has mostly restricted attention to a cobb douglas production function which imposes a substitution elasticity exactly equal to unity this paper examines the quantitative relationship between capital labor substitution and the conditions needed for equilibrium indeterminacy and belief driven fluctuations in a one sector growth model with variable capital utilization the substitution elasticity has little quantitative impact on the minimum degree of increasing returns needed for indeterminacy however when capital utilization is constant a below unity substitution elasticity sharply raises the minimum degree of increasing returns in this version of the model lower substitution elasticities impose a higher adjustment cost on labor hours that cannot be mitigated by shifts in the capital utilization rate overall our results show that empirically plausible departures from the cobb douglas specification can make indeterminacy more difficult to achieve

the 1956 contribution to economic growth theory by robert solow a major landmark and some of its undiscovered riches the famous 1956 contribution by robert solow was always thought to be central to positive or descriptive economic growth theory we show that it is also at the core of optimal growth because the fisher equation of competitive equilibrium is nothing short of an euler equation it corresponds to the maximization of the sum of discounted consumption flows from this equation an optimal savings rate results with reasonable very reachable values we also show the importance of the elasticity of substitution there is a threshold value of this parameter leading to a permanent growth rate of income per person that is above the labour augmenting rate of technical progress and that rate does depend upon the investment saving ratio

common fallacies in the debate on the transition to a market economy fallacies and other lessons leszek balcerowicz words and the concepts they express exert a powerful influence on political debate and policy decisions in transition economies in this introductory essay the principal architect of the first radical reform programme in europe after the fall of the berlin wall develops a lexicon of common fallacies in the political debate and introduces many of the main themes of the volume one common fallacy is that of country specificity ukraine is different what worked or did not work elsewhere is not relevant here some countries may indeed have specific economic problems viz the huge military industrial sector in ukraine but economic theory is clear about which policies are best for basic problems macroeconomic stabilization as the appropriate response to hyperinflation price liberalization and liberalization of supply are the prescribed therapy for massive shortages etc so there are useful lessons to be learned from prior experience by the same token erroneous interpretation of those experiences can give credence to mistaken policy arguments for example the argument that whatever has been done before in the west must be right is itself clearly wrong similarly balcerowicz argues that china s success does not prove the universal merits of gradualism the agricultural reforms of the late 1970s in china were in practice surprisingly radical the essay identifies many other pitfalls in reasoning about transition experience several having to do with the failure to apply ceteris paribus reasoning for example the fall in output in 1991 in all the countries connected with the former soviet union including finland was caused in large part by the collapse of their trade with the union and certainly not exclusively by the policies they followed there are numerous other examples

shocking stuff technology hours and factor substitution the response of hours to technology shocks is a key controversy in macroeconomics we show that differences between rbc and nk models hinge on highly restrictive views of technology we introduce ces production technologies and demonstrate that the response of hours depends on the factor augmenting nature of shocks and the capital labor substitution elasticity in both models we develop analytical expressions to establish the thresholds determining its sign this opens new margins for shock identification combining theory and var evidence we discuss how our models provide new robust restrictions for empirical work especially using the labor income share

incremental changes and dual track transition understanding the case of china dual track transition in china fan gang this paper explains why china has taken the incremental approach to economic reform while others have taken a radical approach why china has been successful in its gradual transition in the 1980s while others had failed in the 1970s and why and how the reform objective model has evolved over time in china when comparing china with the former socialist economies which are undertaking reforms the paper gives particular attention to the following two factors first the initial economic situations especially the growth of real incomes during the pre reform period this first factor determines what approach to reform would be politically acceptable the second factor is the economic structures inherited from the previous regime specifically did there exist a repressed sector which could serve as a source from which the new system could emerge and develop this second factor determines what approach is economically feasible different approaches are therefore rationalized as conditional optimum in different circumstances the paper also investigates the special problems and difficulties for an incremental dual track transition such as delayed ownership reform in the state sector distorted allocation of resources between the state and non state sectors and macroeconomic instability during the transition a better formulation of reform strategies and stabilization policies is recommended although it is recognized that incremental reform is in many ways a spontaneous bottom up process

when more seems like less differential price framing increases the choice share of higher priced options four experiments supported by six supplemental studies show that premium but higher priced products e g direct flights larger capacity data storage devices are more popular when the additional

willpower and the optimal control of visceral urges common intuition and experimental psychology suggest that the ability to self regulate willpower is a depletable resource we investigate the behavior of an agent who optimally consumes a cake or paycheck or workload over time and who recognizes that restraining his consumption too much would exhaust his willpower and leave him unable to manage his consumption unlike prior models of self control a model with willpower depletion can explain the increasing consumption sequences observable in high frequency data and corresponding laboratory findings the apparent links between unrelated self control behaviors and the altered economic behavior following imposition of cognitive loads at the same time willpower depletion provides an alternative explanation for a taste for commitment intertemporal preference reversals and procrastination accounting for willpower depletion thus provides a more unified theory of time preference it also provides an explanation for anomalous intratemporal behaviors such as low correlations between health related activities

unemployment wage bargaining and capital labour substitution many economists believe that capital accumulation technical progress and labour force expansion have no lasting effect on unemployment this view rests on the empirically doubtful assumption that the elasticity of substitution between labour and capital is equal to unity i e production is cobb douglas using a simple model based on the work of layard nickell and jackman this paper demonstrates that with a lower elasticity of substitution the equilibrium unemployment rate is affected by all of the above factors it considers briefly how capital accumulation may be endogenised and what long run implications this has for unemployment copyright 1999 by oxford university press

order in product customization decisions evidence from field experiments differentiated product models are predicated on the belief that a product s utility can be derived from the summation of utilities for its individual attributes in one framed field experiment and two natural field experiments we test this assumption by experimentally manipulating the order of attribute presentation in the product customization process of custom made suits and automobiles we find that order affects the design of a suit that people configure and the design and price of a car that people purchase by influencing the likelihood that they will accept the default option suggested by the firm

macroeconomic impacts of fdi in transition economies a meta analysis summary in this paper we conduct a meta analysis of the literature that empirically examines the impact of foreign direct investment fdi on economic growth in central and eastern europe and the former soviet union we found that existing studies indicate a growth enhancing effect of fdi in the region as a whole the results of our meta regression analysis suggest that the effect size and statistical significance of the reported estimates strongly depend on study conditions we also found that the relevant studies fail to present genuine evidence of a non zero fdi effect more research is necessary to identify the true effect

how misleading is linearization evaluating the dynamics of the neoclassical growth model this paper investigates the reliability of employing linearization to evaluate the dynamic adjustments to changes in productive government spending in a ramsey growth model if government expenditure is introduced as a flow and the dynamic adjustment is fast linearization may yield a reasonably good approximation to the true dynamics even for fairly large policy shocks if government expenditure assumes the form of a stock leading to more sluggish adjustment linearization may yield misleading predictions these errors occur at the beginning of the transition and weigh heavily in welfare calculations the implications for temporary shocks and the speed of convergence are also considered

two level ces production technology in the solow and diamond growth models the two level ces aggregate production function that nests a ces into another ces function has recently been used extensively in theoretical and empirical applications of macroeconomics this paper examines its theoretical properties and establishes existence and stability conditions of equilibria under the solow and diamond growth models in addition it examines the efiect of changes in substitution parameters on transitional growth and steady states it is shown that in the solow model the su cient condition for a steady state is fulfllled for a larger range of substitution parameter values than with the basic ces function in the diamond model an increase in substitution parameters results in higher transitional growth under weaker conditions than with the basic ces function

the transition to a market economy pitfalls of partial reform we present a theory of a partial economic reform of a planned economy similar to the one that took place in russia since 1988 and in china earlier in such a reform some markets are liberalized in the sense that producers can sell output to whomever they want including private firms at free prices but at the same time must sell to state firms at state prices we show that such a reform can result in a substantial diversion of subsidized inputs away from state firms and toward private firms even when state firms value these inputs more the result may be a reduction of total output the simple analysis sheds light on many consequences of the soviet reform such as breakdown of coordination of production increased state policing of delivery quotas prohibitions of trading cooperatives and opposition to privatization the model also explains why partial reform failed in russia but worked in china

the normalized ces production function theory and empirics abstract the elasticity of substitution between capital and labor and in turn the direction of technical change are critical parameters in many fields of economics until recently though the application of production functions with specifically non unitary substitution elasticities i e non cobb douglas was hampered by empirical and theoretical uncertainties as recently revealed normalization of production technology systems holds out the promise of resolving many of those uncertainties we survey and assess the intrinsic links between production as conceptualized in a production function factor substitution as made most explicit in constant elasticity of substitution functions and normalization defined by the fixing of baseline values for relevant variables first we recall how the normalized constant elasticity of substitution function came into existence and what normalization implies for its formal properties then we deal with the key role of normalization in recent advances in the theory of business cycles and of economic growth next we discuss the benefits normalization brings for empirical estimation and empirical growth research finally we identify promising areas of future research

the process of socialist economic transformation in this paper we consider the reform process in those central and east european countries that have made the decision to move from a more or a less planned socialist system to a private market economy one in which private ownership predominates and most resources are allocated through markets because the reform process is both complex and intertwined with political factors especially the shift towards representative democracy and because there are substantial differences among the reforming countries no single detailed road map can guide the way to the new systems rather the paper sets out general considerations that provide a framework for reform and relates the choices to some initial conditions of the various reforming countries the framework applies also to the soviet union or in the event of its disintegration to its successor states as they move to market systems

the moderating role of submarket dynamics on the product customization firm survival relationship in this paper we examine how the provision of product customization services affects firm survival integrating literatures on industry evolution product related adapting services and entry deterrence we hypothesize that the relationship between product customization the costly modification of a product to cater to customer needs and firm survival differs across industries based on the extent of submarkets we argue that in industries that feature submarkets more prominently the positive association between product customization and firm survival is stronger for two conceptually distinct and empirically distinguishable mechanisms customizing firms enter new submarkets and also deter potential entry we conclude that offering product customization services has strategic benefits that sometimes outweigh the cost of coordinating with customers

economic growth and the elasticity of substitution two theorems and some suggestions at the beginning of the twentieth century the work of the swedish economist knut wicksell 1901 marked an important advance in our understanding of the relationship between the structure of production functions and income distribution wicksell had asked the following question among many others suppose that the marginal productivities are equal to the remuneration rates of each factor what then should be the form of the corresponding production function he pointed out p 125 that the general integral of the partial differential equation implied by this relationship was of the form y lf kil which meant in turn that the product y was necessarily a homogeneous of degree one function of capital k and labor l as an example he gave a function where the shares of k and l in y were constant and wrote down the function which would be rediscovered decades later by charles w cobb and paul h douglas 1928 however it is only half a century later in robert m solow s nobel prize winning 1956 essay that implications between the structure of the production function and long run equilibrium or disequilibrium of the economy were drawn in his classic article a contribution to the theory of economic growth solow had considered three cases analytically other cases were also discussed geometrically using a phase diagram he had labeled the two first cases 1hlarrod domar and cobb douglas respectively and he referred to the third type of production function as offering a bit of variety it was y ak 2 l 2 2 a particular case of y akp lp 1p in those early days solow had not pointed out to the reader that his cases could have been numbered 0 1 and 2 following the elasticity of substitution of the corresponding production function it would be only five years later in 1961 that with his coauthors kenneth j arrow et al he would find the general form of the two factor constant elasticity of substitution ces production function by integrating the differential equation corresponding to the observed relationship between output per capita and the wage rate solow s third case was indeed highly interesting since it allowed the possibility of everincreasing income per head even without any technical progress indeed solow showed that due to the efficiency of the system entailed by the particular production function he had chosen there existed a threshold for the savings rates s to generate investment per head large enough for income per head to grow forever that threshold was s nla2 where n is the growth rate of the population it was then natural to ask whether one could express that threshold in terms of the elasticity of substitution a the value of that threshold was determined by de la grandville 1989 to be equal to s no3 or where a is k s coefficient in a normalized ces function equal to a in solow s third case where u 2 for any s and n values this relationship gives also the threshold value in implicit form by the solution of ao1 1 log 3q or ilog nls by totally differentiating the last relationship one could observe that the threshold for the elasticity of substitution to entail ever sustained growth was an in klump faculty of mathematics and economics university of ulm helmholtzstrasse 20 d 89081 ulm germany de la grandville department of economics university of geneva 102 boulevard carl vogt ch 1211 geneva 4 switzerland we gratefully acknowledge the comments of seminar participants at stanford university and at the universities of stuttgart hohenheim and munich where parts of the paper were presented also we would like to thank without implicating in any way robert solow for his insightful remarks and an anonymous referee for very helnfuil supgestions wicksell cobb and douglas would no doubt burst with pride if they knew that one of our first year students wrote in a paper of his of course we recognize here a kirk douglas production function

factor substitution and economies of scale and utilisation in kuwait s crude oil industry abstract the cost structure of the crude oil industry in kuwait has been examined with specific focus on factor substitution and economies of scale and utilisation this has been done by estimating translog cost functions both long run and short run using time series data covering the period from 1976 to 1996 the results indicate that the implied production structure is non homothetic and the pattern of scale effect is labour saving but capital and material using the evidence also supports the presence of an induced exogenous technical change which is non neutral labour and capital using and material saving the elasticity of substitution between capital and labour is positive implying that the two inputs are substitute the results also indicate the existence of diseconomies of scale in the production of crude oil but no economies or diseconomies of utilisation

the virtues of gradualism and legitimacy in the transition to a market economy this paper presents a simplified model of sectoral restructuring in eastern europe a move towards allocative efficiency is desired by the reform minded government but the shift to higher productivity which such efficiency requires would lead to massive layoffs and labour reallocation in the transition period we look at the impact of political constraints unanimity and or majority worker approval on reform proposals when the government faces a heterogeneous workforce holding private information on relative outside opportunities when the budgetary consequences of exit compensations are so important as to make partial reforms preferable to full reforms gradualism emerges as the optimum in a dynamic context without government commitment it is also shown that under democratic majority rule a government in control of the agenda of reforms can win majority approval for plans which end up hurting majority interests intertemporally by threatening to switch majorities in future reform proposals this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

steady state growth and the elasticity of substitution in a neoclassical economy with endogenous capital and labor augmenting technical change the steady state growth rate of output per worker is shown to increase in the elasticity of substitution between capital and labor this confirms the assessment of klump and de la grandville 2000 that the elasticity of substitution is a powerful engine of economic growth however unlike their findings my result applies to the steady state growth rate moreover it does not hinge on particular assumptions on how aggregate savings come about it holds for any household sector allowing savings to grow at the same rate as aggregate output

animal spirits financial crises and persistent unemployment this article uses a rational expectations model with multiple equilibrium unemployment rates to explain financial crises the model has equilibria where asset prices are unbounded above i argue that this is an important feature of any rational agent explanation of a financial crisis since for the expansion phase of the crisis to be rational investors must credibly believe that asset prices could keep increasing forever with positive probability i explain the sudden crash in asset prices that precipitates a financial crisis as a large shock to expectations that leads to a permanent increase in the unemployment rate

costly information acquisition experimental analysis of a boundedly rational model the directed cognition model assumes that agents use partially myopic option value calculations to select their next cognitive operation the current paper tests this model by studying information acquisition in two experiments in the first experiment information acquisition has an explicit financial cost in the second experiment information acquisition is costly because time is scarce the directed cognition model successfully predicts aggregate information acquisition patterns in these experiments when the directed cognition model and the fully rational model make demonstrably different predictions the directed cognition model better matches the laboratory evidence jel d83

the political economy of transition the overriding importance of political constraints in the transition process has led to developments of the theory of the political economy of reform what are the main insights from that theory how does it reflect the transition reality what have we learned and what do we still need to learn the present article will attempt to answer those questions

capital labor substitution structural change and the labor income share abstract recent work has documented declines in the labor income share in the united states and beyond this paper documents that this decline was more pronounced in manufacturing than in services in the u s and in a broad set of other industrialized economies and shows that a model with cross sectoral differences in productivity growth and in the degree of capital labor substitutability is consistent with these trends we calibrate the model exploiting additional information on the pace of structural change from manufacturing to services on which the model also has predictions we then conduct a decomposition to establish the relative importance of several potential drivers of changes in factor income shares and structural change that have been proposed in the literature this exercise reveals that differences in the degree of capital bias of technical change across sectors combined with differences in substitution possibilities are key determinants of the observed patterns

the big push deja vu a review of jeffrey sachs s the end of poverty economic possibilities for our time jeffrey sachs s new book the end of poverty economic possibilities for our time penguin press new york 2005 advocates a big push featuring large increases in aid to finance a package of complementary investments in order to end world poverty these recommendations are remarkably similar to those first made in the 1950s and 1960s in development economics today as then the big push recommendation overlooks the unsolvable information and incentive problems facing any large scale planning exercise a more promising approach would be to design incentives for aid agents to implement interventions piecemeal whenever they deliver large benefits for the poor relative to costs

life expectancy schooling time retirement and growth i analyze how changes in life expectancy affect retirement age education time and growth rates of economies i set up a continuous time overlapping generations model of endogenous growth with externalities in human capital production i find that increases in life expectancy give rise to first higher retirement ages and second higher education spans a threshold level for life expectancy exists such that per capita growth rates follow an inverted u pattern i introduction in this article i analyze how changes in life expectancy may affect optimal education time retirement age and the growth rates of economies to this end i set up a continuous time overlapping generations growth model with human capital accumulation that i solve numerically the issue of the effects of the reduction in mortality rates and the resulting increases in life expectancy on economic growth rates has been recently addressed in the literature through both empirical and theoretical studies along these lines i focus on human capital acquisition and its transmission across generations as the force driving the growth rate concerning empirical studies the hypothesis that the reduction in mortality rates has caused higher levels of investment in human capital and therefore augmented growth rates is partially supported for various economies thus kalemli ozcan et al 2000 show an increase in life expectancy at birth along with an increase in average numbers of years of schooling in england they claim that after averaging across lower income countries there is apparently a connection between increases in life expectancy at birth and increases in gross secondary school enrollment that is positively connected with higher growth rates observed preliminary data from latin american and caribbean countries show that gross domestic product gdp growth is statistically associated with life expectancy for instance estimates based on data from mexico suggest that for any additional year of life expectancy there will be an additional 1 increase in gdp 15 years later see world health organization 1999 box 1 2 9 along the same lines rodriguez and sachs 1999 also find a positive effect of life expectancy on gdp growth for the case of venezuela barro and sala i martin 1995 estimate for a sample of 97 countries that a 13 year increment in life expectancy would increase the per capita growth rate by 1 4 per year they also find however some exceptions where increments in life expectancy have not resulted in higher growth even though all of them exhibited higher schooling levels in the period 1960 85 malmberg 1994 gives another exception higher growth was achieved when middle aged persons were numerous whereas increases in dependent age groups led to lower per capita growth in sweden finally some other studies find mixed evidence so that increments in life expectancy result in higher growth rates for low levels of life expectancy but in lower growth rates for high levels of life expectancy see zhang et al 2003 and references therein a common result in most theoretical studies that include some sort of human capital is that an increase in life expectancy lengthens the period needed to recover investment in human capital which translates into higher returns to individual education or human capital investment this augmented return will give rise to higher levels of investment in human capital which in turn will raise growth rates ehrlich and lui 1991 show in a three overlapping generations model how improvements in longevity lower fertility thus raising educational investment and long term growth meltzer 1995 finds that mortality reductions may favor economic growth by increasing educational investment kalemli ozcan et al 2000 show in an overlapping generations model a la blanchard that if mortality drops life expectancy increases so that an augmented life horizon to enjoy the return to human capital investment gives rise to higher schooling human capital investment although growth is not affected because the growth rate in their model is identically equal to zero

the design of reform packages under uncertainty the authors present a model of large scale economic reforms modeled on the transition process in eastern europe with aggregate and individual uncertainty concerning the outcome of reforms the government is assumed to choose the speed and sequencing of reforms the authors compare big bang strategies with gradualist reform packages they show that gradualist reform packages may be easier to get started optimal sequencing of reforms should aim at creating constituencies for further reforms and gradualism may generate a higher investment response because of a lower option value of waiting than would a big bang approach copyright 1995 by american economic association

preference dynamics in sequential consumer choice with defaults this research examines the impact of defaults on product choice in sequential decision settings whereas prior research has shown that a default can affect what consumers purchase by promoting choi

decision fatigue and heuristic analyst forecasts abstract psychological evidence indicates that decision quality declines after an extensive session of decision making a phenomenon known as decision fatigue we study whether decision fatigue affects analysts judgments analysts cover multiple firms and often issue several forecasts in a single day we find that forecast accuracy declines over the course of a day as the number of forecasts the analyst has already issued increases also consistent with decision fatigue we find that the more forecasts an analyst issues the higher the likelihood the analyst resorts to more heuristic decisions by herding more closely with the consensus forecast self herding i e reissuing their own previous outstanding forecasts and issuing a rounded forecast finally we find that the stock market understands these effects and discounts for analyst decision fatigue

economic performance through time prize lecture to the memory of alfred nobel december 9 1993 this abstract was borrowed from another version of this item

the solow model with ces technology nonlinearities and parameter heterogeneity this paper examines whether nonlinearities in the aggregate production function can explain parameter heterogeneity in the solow growth regressions nonlinearities in the production technology are introduced by replacing the commonly used cobb douglas cd aggregated production specification with the more general constant elasticity of substitution ces specification we first justify our choice of production function by showing that cross country regressions favour the ces over the cd technology then by using an endogenous threshold methodology we show that the solow model with ces technology is consistent with the existence of multiple regimes copyright 2004 john wiley sons ltd

russia austerity and deficit reduction in historical and comparative perspective this paper looks at russian experience with austerity programmes since the breakdown of the former soviet union in 1991 downsizing of the state was one of the major elements in a reform package designed to transform the centrally planned economy into a market one together with deregulation privatisation macroeconomic stabilisation and the opening up of the closed economy this downsizing however proved to be the single most important reason for the collapse of state institutions which in turn deepened the transformational recession contributed to the dramatic rise of income inequalities corruption and crime and the decline in life expectancy the story of the successes and failures of transition is not really the story of consistent shock therapy and inconsistent gradualism the major plot of the postsocialist transformation novel is the preservation of strong institutions in some countries very different in other respects from central europe and estonia to china uzbekistan and belarus and the collapse of these institutions in other countries at least 90 of this story is about government failure the strength of state institutions and not about market failure liberalisation copyright the author 2012 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

economic growth technical change biases and the elasticity of substitution a test of the de la grandville hypothesis a recent development in microeconomic theory suggests that the size of the elasticity of substitution between factors is relevant to economic growth this study undertakes an empirical investigation of this proposition comparing two economies the united states and south korea the authors test results support the de la grandville hypothesis that the elasticity of substitution is a potent explanatory variable of economic growth this inquiry also provides a clue to the puzzle that the u s elasticity of substitution between labor and capital is well below unity whereas that of south korea is close to unity nonetheless the u s factor shares have tended to remain fairly stable whereas the distributive shares of south korea seem to have changed in favor of capital their findings indicate that a high elasticity of substitution is a bad signal for the distribution of income under the paradigm of modern technology copyright 1991 by mit press

the optimal speed of transition a general equilibrium analysis we present a benchmark model for the optimal speed of transition from a state owned to a private market economy based on the consumption savings decision in a closed economy we abstract from frictions to focus on the macroeconomic conditions for accumulation of private capital and closure or restructuring of state owned enterprises it is shown that hard budget constraints compensate for too slow speed of enterprise closure but that an excess speed of closure may slow down transition because of output contraction effects this will especially be the case if such a deviation occurs at early stages of transition

contextual inference in markets on the informational content of product lines context can influence decisions this malleability of choice is usually invoked as evidence that people do not maximize stable preference orderings in a market equilibrium however context conveys payoff relevant information to consumers consequently these consumers rationally violate naive formulations of standard choice theoretic principles i identify informational asymmetries under which apparently anomalous behaviors namely the compromise effect and choice overload arise as market equilibria firms respond to consumers contextual inference in case of the compromise effect a firm may introduce premium loss leaders expensive goods of overly high quality that increase the demand for other goods

endogenous aggregate elasticity of substitution abstract in the literature studying aggregate economies the aggregate elasticity of substitution aes between capital and labor is often treated as a constant or deep parameter this view contrasts with the conjecture put forward by arrow et al 1961 capital labor substitution and economic efficiency review of economics and statistics 43 225 250 that aes evolves over time and changes with the process of economic development this paper evaluates this conjecture in a simple dynamic multi sector growth model in which aes is endogenously determined our findings support the conjecture and in particular demonstrate that aes tends to be positively related to the state of economic development a result consistent with recent empirical findings

good nudge lullaby choice architecture and default bias reinforcement because people disproportionally follow defaults both libertarian paternalists and marketers try to present options they want to promote as the default however setting certain defaults and thereby influencing current decisions may also affect choices in later similar decisions in this paper we explore experimentally whether the default bias can be reinforced by providing good defaults we show that people who faced better defaults in the past are more likely to follow defaults than people who faced random defaults hurting their later performance this malleability of the default bias explains certain marketing practices and serves as an insight for libertarian paternalists this article is protected by copyright all rights reserved

a rational reconstruction of the compromise effect using market data to infer utilities this article explores the possibility that consumers use market data to make inferences about product utilities the argument is made by means of an example based on the compromise effect found in extant experimental data this phenomenon is generally looked at as a manifestation of deviations from rationality in choice however assuming full rationality i describe a decision rule that is based on consumers inferences about their personal valuation of alternatives from the portfolio of market offerings and some information about their own relative tastes through a number of examples i will argue that consumers often use this or similar decision rules to make inferences about utility i then show that the decision rule may generate compromise effects in experiments and that it may be sustainable the compromise effect could therefore be seen as preliminary evidence that consumers make such inferences

hungary s transition to the market the case against a big bang hungary paul hare and tamas revesz among eastern european countries hungary s great advantage is that it began economic reforms in 1968 and slowly introduced the institutions of a market economy during the 1980s these measures laid the foundation for a gradual transition to the market without the need for any sharp break with the past policy mistakes were of course made the most serious extending over several years was the 1970s investment boom funded by foreign capital which contributed to hungary s large debt burden despite this the government accounts are not now in substantial deficit and the balance of payments on current account is in modest surplus nevertheless managing the external debt is now the most difficult of hungary s problems it is important that hungarian joint ventures and privatization are now attracting significant quantities of foreign capital given the quite rapid pace of liberalization since the late 1980s the government s commitment to further changes and a reasonably satisfactory macroeconomic balance though inflation is worrying there is no case for a big bang approach in hungary such a shock could only disrupt established market relationships and expectations with little benefit the most valuable forms of aid for hungary would be debt relief and unrestricted access for hungary s products to ec markets

productivity versus elasticity a normalized constant elasticity of substitution production function applied to historical soviet data this study tests the extensive growth hypothesis which would attribute the soviet economic slowdown to low elasticity of substitution and over investment rather than deteriorating productivity growth to circumvent the low availability of data widely applicable new methods for estimating productivity and elasticity of substitution were developed based on the normalized constant elasticity of substitution ces production function one is an extended version of the solow residual calculation and the other is a direct estimation of the time varying parameter normalized ces production function the application of the methods to the soviet data showed a decreasing trend in productivity growth and a low elasticity of substitution of approximately 0 25 the results neither reject nor support the extensive growth hypothesis because of uncertainty in the interpretation of the low elasticity of substitution the results suggest that it is reasonable to assert that both deteriorating productivity growth and low

central and eastern europe a decade after the fall of state socialism regional dimensions of transition processes following the collapse of state socialism a decade ago central and eastern european countries ceecs opted for democracy and market economy there was a widespread belief that transition to a market economy via neo liberal shock therapy would lead to a quick closure of the wealth gap with the west a decade later however neo liberal expectations of convergence under market conditions never materialized instead new europe has been experiencing fragmentation and growing disparity between west and east and also within the east itself in examining regional patterns and building on the strengths of institutional and radical approaches this article challenges neo liberal accounts of uneven development in eastern europe it argues that diverging economic trajectories should be understood in the light of the structural legacies of both the state socialist and pre socialist past and the way these are exposed to and interact with international political economy

economic reform and dynamic political constraints in this paper we examine the impact of political constraints on economic reform plans with special reference to the transition from centrally planned to market economies we analyse the problem of an agenda setting reform minded government facing a bureaucracy or industrial sector for which allocative efficiency requires redundancies and an increase in work intensity the government also tries to minimize the rents conceded to its heterogeneous workforce we examine two types of political constraints unanimity rule and majority rule both in a one period and a two period horizon the main results are the following first of all we show how adverse selection and time consistency may generate the widely observed feature of gradualism as an ingredient of an optimal reform second under a majority rule it is shown to be possible for the government to obtain a majority vote for a reform scheme that intertemporally hurts majority interests indeed the government can improve rent extraction through the strategic use of the threat of future proposals the group which expects to be in the minority tomorrow may accept concessions while its votes can be used to extract rents from another group these results suggest that in a dynamic context democratic constraints should not be overestimated as an obstacle against efficiency enhancing economic reforms the results of this paper may throw some light on the political economy of current reforms in eastern europe governments and political decision makers in general always face political constraints when elaborating reform proposals they know that the need to overcome potential opposition from various groups of the population constrains proposals for change political constraints vary depending on the specific institutional structure of society and are clearly different under a military dictatorship than under a parliamentary democracy the role of political constraints seems particularly important in eastern europe today where new democratic governments face the huge task of achieving the transition to a market economy while the introduction of democracy may have removed some important obstacles to economic change namely the veto power of a powerful nomenclatura under communist one party rule fears are expressed that it could potentially jeopardize economic reforms which may during the transition period hurt a majority of the population what can economic theory tell us about optimal economic reform under political constraints this paper starts addressing this ambitious question by looking at structural reform focusing on a restructuring of economic sectors which requires massive redundancies and a significant rise in labour productivity our model illustrates the case of planning

the soviet economic decline soviet growth from 1960 to 1989 was the worst in the world after we control for investment and human capital the relative performance worsens over time there is some evidence that the burden of defense spending modestly contributed to the soviet debacle the declining soviet growth rate from 1950 to 1987 can be accounted for by a declining marginal product of capital with a constant rate of growth of total factor productivity the soviet reliance on extensive growth rising capital to output ratios was no greater than that of market economies such as japan and the republic of korea but a low elasticity of substitution between capital and labor implied especially acute diminishing returns to capital compared with the case in market economies copyright 1995 by oxford university press

when should the ask be a nudge the effect of default amounts on charitable donations abstracthow does setting a donation option as the default in a charitable appeal affect people s decisions in eight studies comprising 11 508 participants making 2 423 donation decisions in both experimental settings and a large scale natural field experiment the authors investigate the effect of choice option defaults on the donation rate average donation amount and the resulting revenue they find 1 a scale back effect in which low defaults reduce average donation amounts 2 a lower bar effect in which defaulting a low amount increases donation rate and 3 a default distraction effect in which introducing any defaults reduces the effect of other cues such as positive charity information contrary to the view that setting defaults will backfire defaults increased revenue in the field study however the findings suggest that defaults can sometimes be a self canceling intervention with countervailing effects of default option magnitude on decisions and resulting in no net effect

aggregate instability under balanced budget consumption taxes a re examination we re examine the destabilizing role of balanced budget fiscal policy rules based on consumption taxation using a one sector model with infinitely lived households we consider a specification of preferences derived from jaimovich 2008 14 and jaimovich and rebelo 2009 15 which is flexible enough to encompass varying degrees of income effect when the income effect is not too large we show that there exists a laffer curve which explains the multiplicity of steady states and that non linear consumption taxation may destabilize the economy promoting expectation driven fluctuations if the elasticity of intertemporal substitution in consumption is sufficiently larger than one and the tax rate is counter cyclical with respect to consumption numerical illustrations also show that consumption taxation may be a source of instability for most oecd countries for a wide range of structural parameters configurations we finally prove the robustness of our conclusions if we consider a discrete time setup

defaults and donations evidence from a field experiment we study the effects of defaults on charitable giving in a large scale field experiment on an online fundraising platform we exogenously vary default options along two choice dimensions the chari

on the output effects of barriers to trade we study the macroeconomic effects of international trade policy by integrating a hecksher ohlin trade model into an optimal growth framework the model predicts that a more open economy will have higher factor productivity furthermore there is a selective development trap to which countries may or may not converge depending on policy income at the development trap falls as trade barriers increase hence cross country differences in barriers to trade may help explain the dispersion of per capita income observed across countries the effects are quantified and we show that protectionism can explain a relevant fraction of tfp and long run income differentials across countries we study the effects of international trade policy on output to do so we analyze a standard neoclassical growth model where countries can trade intermediate goods the markets of these goods are structured as in the also standard hecksher ohlin trade model thus trade happens owing to comparative advantage which emerges from differences in factor endowments across countries 2 we focus on the case of a small price taking economy one can solve for equilibrium sequentially first each period s output and trade can be treated as a static problem and its solution can be summarized by a mapping from capital and labor to the output of the final good then using that endogenous mapping as if it were an exogenous production function one can solve the intertemporal decisions of agents in the economy in that way a potentially complex dynamic trade problem is avoided it turns out that the equilibrium mapping linking inputs and final output is affected by tariffs as the gains from trade impact not only welfare but also the availability and price of intermediate inputs and hence productivity

what determines the elasticity of substitution between capital and labor a literature review this paper provides the first comprehensive review of the empirical and theoretical literature on the determinants of the elasticity of substitution between capital and labor our focus is on the two input constant elasticity of substitution ces production function we start by presenting four concise observations that summarize the empirical literature on the estimation of motivated by these observations the main part of this survey then focuses on potential determinants of capital labor substitution we first review several approaches to the microfoundation of production functions where the elasticity of substitution eos is treated as a purely technological parameter second we outline the construction of an aggregate elasticity of substitution aes in a multi sectoral framework and investigate its dependence on underlying intra and inter sectoral substitution third we discuss the influence of the institutional framework on the extent of factor substitution overall this survey highlights that the effective elasticity of substitution ees which is typically estimated in empirical studies is generally not an immutable deep parameter but depends on a multitude of technological non technological and institutional determinants based on these insights the final section identifies a number of potential empirical and theoretical avenues for future research

macropolicies in transition to a market economy a three year perspective countries in transition to market economies have had to implement macroeconoimic stabilization programs at the same time that they were engaged in massive changes of their political institutions and the systemic framework of their economies what has been the interaction of stabilization with economic liberalization and deep institutional reform in the countries of eastern europe in particular the relations among initial conditions political developments reform strategies and outcomes experience in eastern europe suggests that when there is a political breakthrough as in the countries under review a radical stabilization liberalization stragety is probably the least risky approach to reform and will not constrain output or structural reform over the medium term even stabilization that is initially successful in containing inflation will later come under pressure because of social policies and the structural transitions impelled by reform several factors are identified that affect the credibility of reforms and lessons are derived for countries that have stabilized and those that yet face this task

gradualism versus big bang speed and sustainability of reforms a beneficial reform may be blocked by a majority if it is implemented by a big bang but the same reform may succeed with an optimally designed gradualist approach a gradualist approach can sometimes split opposition force and is in this sense more politically sustainable on the other hand if both approaches are politically preferred to no reform a big bang is often preferred to gradualism in terms of both political support as well as economic efficiency

internationalization and institutional and regional change restructuring post communist networks in the region of lan w kroun czech republic uhli r d 1998 internationalization and institutional and regional change restructuring post communist networks in the region of lan w kroun czech republic reg studies 32 673 685 the aim of this paper is to establish a framework for the analysis of regional change drawing on a combination of network theory and the concepts of social and symbolic capital of bourdieu it argues that regional change in the czech republic can be analysed as a combination of network restructuring and struggles for the redefinition of symbolic capital the case study section presents an example of restructuring in the lan skroun region previously entirely dominated by one single employer using evidence from this region the paper argues that a combination of symbolic capital of foreign investment can be combined successfully with parts of local pre 1989 networks of social capital and that such a combination can reinvigorate regional economies uhli r d 1998 internationalisation et developpements institutionnel

factor substitution and factor augmenting technical progress in the united states a normalized supply side system approach abstract using a normalized ces function with factor augmenting technical progress we estimate a supply side system of the u s economy from 1953 to 1998 avoiding potential estimation biases that

coherent arbitrariness stable demand curves without stable preferences economic theories of valuation generally assume that prices of commodities and assets are derived from underlying fundamental values for example in finance theory asset prices are believed to reflect the market estimate of the discounted present value of the asset s payoff stream in labor theory the supply of labor is established by the tradeoff between the desire for consumption and the displeasure of work finally and most importantly for this chapter consumer microeconomics assumes that the demand curves for consumer products chocolates cds movies vacations drugs and so forth can be ultimately traced to the valuation of pleasures that consumers anticipate receiving from these products because it is difficult as a rule to measure fundamental values directly empirical tests of economic theory typically examine whether the effects of changes in circumstances on valuations are consistent with theoretical prediction for example whether labor supply responds appropriately to a change in the wage rate whether compensated demand curves for commodities are downward sloping or whether stock prices respond in the predicted way to share repurchases however such comparative static relationships are a necessary but not sufficient condition for fundamental valuation e g summers 1986 becker 1962 was perhaps the first to make this point explicitly when he observed that consumers choosing commodity bundles randomly from their budget set would nevertheless produce downward sloping demand curves

income and democracy existing studies establish a strong cross country correlation between income and democracy but do not control for factors that simultaneously affect both variables we show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and vari ous measures of democracy we present instrumental variables estimates that also show no causal effect of income on democracy the cross country corre lation between income and democracy reflects a positive correlation between changes in income and democracy over the past 500 years this pattern is con sistent with the idea that societies embarked on divergent political economic development paths at certain critical junctures jel d7 e 1

hedonic prices and implicit markets estimating demand and supply functions for differentiated products in choosing the level of quality to purchase the buyer of a differentiated product also chooses a point on the marginal price schedule for that product hence in general the demand functions for product characteristics cannot be consistently estimated by ordinary least squares market equilibrium results in a matching of characteristics of demanders and suppliers this matching restricts the use of buyer and seller characteristics as instruments when estimating demand and supply functions for product characteristics the paper develops these issues a stochastic structure for hedonic equilibrium models is then proposed identification results are presented and estimation procedures are outlined

how to reform a planned economy lessons from china the countries of eastern europe and the former soviet union have been flooded with advice from the west on how to liberalize their planned econo mies this advice is unfortunately offered in an empirical vacuum no one knows how these econo mies will react to the proposed liberalization meas ures there exists however a neglected source of information china offers a long time series of data over a decade s worth on the effects of reforms on a planned economy china s reforms were gradual but their cumulative effect has been large and they have been remarkably successful china s experiments provide some practical les sons on what kinds of reforms can work elsewhere the dominant school of thought among economists favours the big bang policy of reforming quickly and according to a comprehensive plan partial reforms in this view are useless they will be negated by the remnants of the planning system the proponents of big bang reform have been influential with poland czechoslovakia and rus sia announcing plans for a rapid transition to capi talism