efficient methods of measuring welfare change and compensated income in terms of ordinary demand functions a utility maximizing consumer with a completely known system of ordinary demand functions q h p c is considered let p qo and p q be two arbitrary equilibrium situations the problem is to evaluate in which of the situations the utility is higher without knowing the utility function revealed preference theory tells that the ordinary demand functions which are in principle observable contain enough information to solve the problem remaining difficulties are therefore mainly computational we present how the compensated income c i c p qo and the compensated demand h p cl1 are calculated with arbitrary accuracy using only the ordinary demand system our two efficient algorithms also have interesting interpretations in terms of index numbers and consumer surplus measures

the new institutional economics this outstanding book presents new original contributions from some of the world s leading economists including ronald coase douglass c north masahiko aoki oliver e williamson and harold demsetz it demonstrates the extent and depth of the new institutional economics research programme which is having a worldwide impact on the economics profession

export demand us farm income and land prices 1945 1985 the growing openness of the u s economy has caused world supply and demand conditions to have significant farm level impacts emphasizing the important macroeconomic linkages between capital goods and factor markets in agriculture schuh 1983 this study considers the linkage from the international grain market to u s farm income in the post war period 194985 this linkage suggests that export demand may also have played an important role affecting land and other input prices through the derived demand relationship burt 1986 phipps 1984 and robison lins and venkataraman 1985 have each shown that land prices are closely tied to real and expected net returns to farming this study seeks to supplement their findings by examining the relative role of exports in determining these returns over time empirical results clearly show the export farm income connection the further linkage to land values while present is somewhat less clear

price independent welfare prescriptions and population size abstract this note investigates the extension of roberts price independent welfare prescriptions to alternatives in which population size and composition can vary we show that ethically unsatisfactory orderings result suppose that a single person is to be added to a population that is unaffected in utility terms either all such additions must be regarded as bad or some expansions in which the added person s life is not worth living must be ranked as social improvements journal of economic literature classification number d63

information competition and markets one of the dominant characteristics of modern capitalist economies is the important role played by competition not the peculiar static form of pure price competition embodied in the arrow debreu model but rather a dynamic competition more akin to the kind of competition represented by sports contests and other races including patent races in recent years there have been several attempts to explain why firms often base the pay of their workers and managers on relative performance see for example edward lazear and sherwin rosen 1981 such compensation schemes become desirable when three conditions are satisfied a the input effort of workers managers must not be directly observable at least without cost thus firms must either expend resources to monitor inputs or devise reward structures in which compensation is a function of variables such as output or profits which are themselves functions of inputs but are less costly to observe b the relationship between input and output must be stochastic so that by observing output one cannot perfectly infer what the input was c finally the stochastic disturbances which affect the relationship between input and output of different firms must be correlated by looking at the performance of one worker relative to that of others one can make better inferences about his effort than one can make without using this information not only can competition provide a basis of comparison which enables the design of reward structures that can simultaneously provide a high level of incentives with relatively low level risk but compensation schemes based on relative performance have the further advantage of automatically adjusting incentives to changes in the economic environment we refer to this as built in flexibility in a first best world with perfect information concerning the nature of the technology but where it is still costly to monitor individuals activities the compensation scheme would vary from time to time as the environment changed such changes in the compensation scheme are costly to implement and the information required to do so is seldom available when a task is easier the individual s rewards for performing the task should be reduced if pay is based on relative performance although all individuals perform better when they exert the same level of effort their compensation is automatically adjusted thus teachers frequently grade on the curve and a significant fraction of the pay of successful salesmen often consists of bonuses based on relative performance

exact welfare measurement for producers under uncertainty many useful results have been derived for different characterizations of uncertainty in the theory of the firm for example sandmo batra and ullah pope and kramer blair however the limited literature available on producer welfare measurement under uncertainty pope chavas and just pope and chavas just hueth and schmitz is pessimistic about the possibilities for deriving exact welfare measures from ex ante supply functions the only exception is pope and chavas who derive error bounds for the use of producer s surplus as an approximation for true welfare change that are analogous to willig s bounds for consumer s surplus as an approximation of compensating or equivalent variation however these results are presumably subject to the same shortcomings noted by hausman and amended by haveman gabay and andreoni for willig s error bounds even though compensating or equivalent variation is approximated well a poor approximation of deadweight loss may result pope chavas and just show that the ex ante supply function derived from an uncertainty model is generally not sufficient for determining true welfare change except in the special case of constant absolute risk aversion because decisions depend on the firm s wealth for nonneutral risk preferences a parameter price change induces a wealth effect in addition to an ordinary output effect thus for exact welfare measurement under price uncertainty the unobservable compensated constant expected utility supply function is needed newbery and stiglitz among others have shown that the area above an expected supply function is generally not a valid welfare measure

strategic interdependence in models of property rights the concept of strategic interdependence has opened a wide spectrum of explanation beyond the robinson crusoe economy this essay explores the implications of strategic interdependence for the theory of property rights and the new institutional economics schotter it attempts to clarify some of the linkages from institutional economics to micro and macroeconomic theory by considering how property institutions result from strategic interdependence confer payoffs to individual agents and reflect collective choices based on individual preferences

economic welfare evaluations for producers under uncertainty the validity of producer and consumer surplus measures of firm welfare under risk is examined under constant absolute risk aversion and output price uncertainty only these measures are an exact measure of firm welfare as defined by compensating variation equivalent variation or the change in the certainty equivalent under decreasing absolute risk aversion qualitative comparisons of various measures are discussed for example producer s surplus as measured by the area above the uncompensated risk averse supply curve overstates the compensating variation of a change in expected price of output procedures for calculating firm welfare under production uncertainty and a variety of economic environments are proposed generally these procedures are applicable only when absolute risk aversion is constant

the value of ideal contingency markets in agriculture an incomplete markets equilibrium in which no contingency markets are available is compared to a complete markets equilibrium formed by introducing a futures market and a crop insurance market the two regimes are compared using comparative static and welfare analyses numerical examples highlight important characteristics of the model and illustrate how the effects of introducing contingency markets can be quantified the main conclusions are that contingency markets in agriculture increase economic efficiency but there is no guarantee that farmers and consumers both benefit it is found that futures and crop insurance markets may reduce farmer welfare when the demand for farm products is price inelastic

sources procedures and microeconomic effects of innovation fabio arcangeli paul david frank engelman christopher freeman massimo moggi richard nelson luigi orsenigo nathan rosenberg michele salvati g n von tunzelman two anonymous referees and the participants at the meeting of the committee on distribution growth and technical progress of the italian national research council cnr rome november 16 1985 have helped with various redraftings a particularly grateful acknowledgment is for the insightful and patient help of moses abramovitz this work has been undertaken at the science policy research unit spru university of sussex as part of the research program of the designated research centre sponsored by the economic and social research council esrc earlier support to the research that led to this paper by the italian national research council cnr is also gratefully acknowledged the statistical research has been undertaken with the assistance of stephano brioschi ilaria fornari and giovannu prennushi

how effective are fiscal incentives for r d a review of the evidence this paper surveys the econometric evidence on the effectiveness of fiscal incentives for r d we describe the effects of tax systems in oecd countries on the user cost of r d the current position changes over time and across different firms in different countries we describe and criticize the methodologies used to evaluate the effect of the tax system on

measuring economic welfare is theory a cookbook for empirical analysis welfare economics is first and foremost a policy science in his classic treatise a k sen says welfare economics is concerned with policy recommendations gunnar myrdal in discussing the economist and the politician proposes that the politician may reasonably expect from the economist that he should explain the actual situation and state the effects of different modes of action in relation to the same initial situation empirical welfare economics should provide guidance to policy makers in evaluating actual policies in real markets using available data and reasonable methods real markets are characterized by multimarket spillovers dynamic responses to economic policy uncertainty and incomplete market structures while theoretical models

equivalent expenditure functions and expenditure dependent equivalence scales abstract this paper presents and investigates a new class of equivalent expenditure functions that is a generalization of the one that corresponds to exact independent of base equivalence scales it provides less restrictive household demands especially for children s goods and has associated equivalence scales that may depend on expenditure we show that under certain conditions equivalent expenditure functions and the associated expenditure dependent equivalence scales can be uniquely estimated from demand data we estimate them using canadian data and find that the resulting scales are both plausible and expenditure dependent the estimated equivalence scales for households with children decline significantly as expenditure increases

making economic welfare analysis useful in the policy process implications of the public choice literature the major use of economic welfare analysis envisioned by its inventors and innovators was to offer guidance to policy makers however in spite of widespread advice by welfare economists many major economic policies that are apparently contrary to accepted principles of welfare economics continue to be employed as a result a common view among economists is that the policy process is often misguided on the other hand those closer to the policy process argue that welfare economists are misguided for example in agricultural policy cochrane argues that the welfare measures derived from the economist s model of perfect competition are irrelevant to actual policy issues with this opinion expressed within policy circles several questions must be raised how can welfare economics be made relevant to actual policy issues why has welfare economics played a role in some policy issues and not in others do cases where principles of welfare economics are not followed represent a failing of the policy process or do these cases represent a failing of economic analysis economists have acknowledged the inapplicability of the perfect competition model in several respects for example in agriculture which is a fairly competitive sector brandow argues that the perfect competition model is far from duplicated in free markets and its assumptions are breathtakingly heroic p 271 nevertheless the competitive norm has continued to be an absolute measuring rod of performance is this practice warranted even when the failure of assumptions is serious under what assumptions is the standard of economic efficiency defined by the competitive norm inappropriate what standards are appropriate this paper addresses some of these issues by drawing on the public choice literature this literature has its roots in welfare economics arrow buchanan and tullock however the public choice literature has diverged markedly from empirical economic welfare practices which yield the advice usually offered to policy makers in broad terms empirical marshallian welfare practices have followed a normative role of evaluating the efficiency of alternative policies suggesting at least implicitly that the most efficient policy should be adopted or that a cost is incurred in not so doing on the other hand much of the public choice literature takes a more positive role of understanding how various policies are chosen and under what conditions those choice processes are appropriate this is the motivation for drawing on the study of public choice to improve the usefulness of economic welfare analysis in the policy process

the equal absolute sacrifice principle revisited abstract we summarize the literature on equal absolute sacrifice income taxes and make some extensions we adapt the utilitarian equal sacrifice criterion to a wide class of rank dependent social welfare functions and find that liabilities depend on both income and position in the distribution we investigate whether such taxes need be progressive using a combination of analytics and simulation and in the process uncover tax functions not previously recognized as equating sacrifices finally out of horizontal equity considerations a new concept of the equal treatment of equals by an income tax emerges with implications for future work whose significance is discussed

the implications of reliability theory for environmental institutional design and decision making despite being a pillar of modem economic thinking expected utility theory eut has many limitations for explaining behavior in the presence of uncertainty these limitations are well known and oft repeated e g arrow runge and myers but economists have just begun to pursue other theoretical frameworks for understanding how both market and nonmarket institutions cope with real world uncertainty the potential rewards of this pursuit are ample since eut s contribution has been at the individual decision making level whereas the most serious theoretical deficiencies are in accounting for the linkages from individual decisions to institutional formation and behavior coleman p 184 the merit of the pursuit notwithstanding uncertainty is a difficult analytical concept because it has been confused with discussions of risk and subjective probability distributions to further the confusion many writers have resorted to pretentious adjectives such as profound and irresolvable goodin or structural walters to distinguish true uncertainty in the spirit of knight the clearest definition of uncertainty is lack of knowledge of states or actions and at the extreme sheer ignorance 1 uncertainty created by imperfect knowledge and humans limited reasoning skills is the most dominant consideration in understanding any organization or living system hodgson kay walters one key problem for any theory of institutional behavior under uncertainty is to explain the origin and stability of institutions rather than simply to treat them as exogenous neoclassical decision models based on eut have limited value for this task because the market institution is the centerpiece of analysis other social institutions are viewed as constraints and information problems are defined as transactions costs that only impact the allocation from exchange e g dahlman schmid williamson as a result the influence of uncertainty on the origin and functions of these institutions is not fully explored 2 the recent work of heiner 1983 1985 1986 on reliability theory rt offers an alternative theoretical framework to explain institutions as responses to problems of uncertainty given that institutions are a regularity in social behavior schotter p 11 rt is promising because it directly harnesses the determinants of uncertainty to characterize regularity in behavior heiner 1983 p 571 in the following section we outline the basic principles of rt and contrast it with eut we then explore the implications of rt for the the authors are associate professors in the food and resource economics department university of florida florida agricultural experiment station journal series no 9215

social welfare and interpersonal utility comparisons in applied policy research it is a fair generalization to say that most applied policy analysis during the past half century has been conducted according to compensation principles a policy change has been thought potentially desirable if the sum over all individuals of the subjective money value of the change is positive whether winners should compensate losers is a separate issue left to politicians this paradigm is expedient because it is unconcerned about whether in the absence of full compensation the policy change is good or bad and because the pareto principle upon which it rests is very weak it suggests that welfare economics has achieved the status of a value weak science the only problem remaining would be to refine the measures of an individual s money equivalent of an economic change hallam unfortunately the compensation test has proved to be an inadequate analytical tool its inadequacy does not arise from the oftenmentioned difficulties with utility change measurement uncertainty or preference reversals rather it arises from a failure to fully address questions that policy makers ask to which framework should one turn if as is likely compensation is very costly or if it alters resource allocations stiglitz p 31 runge and myers even if compensation is costless and nondistorting how should one think about the desirability of compensation itself to answer these questions satisfactorily one must appeal to social welfare functionals and to the interpersonal and ethical information the functionals incorporate in the following a social welfare approach to applied policy research is outlined and some issues in implementation are discussed

corporate social responsibility and multinational corporation identity norwegian strategies in the chilean aquaculture industry this study brings an organizational identity perspective to the debate regarding corporate social responsibility csr and multinational corporations mncs the basic proposition is that organizational identities warrant closer attention since they influence csr strategies it is further argued that a more explicit distinction between principles and practices or between being and doing is needed when debating whether multiple organizational identities are required for mncs operating in locations characterized by different stakeholder demands in terms of identity construction two translation processes are suggested to be pertinent from hypernorms to organizational principles and the translation of organizational principles to practices the first translation is relevant since hypernorms alone do not create the distinctiveness needed for an organizational identity to develop and the second translation helps in explaining the ability to endorse local contracts

the choice of techniques and the optimality of market equilibrium with rational expectations this paper shows that in the absence of a complete set of risk markets prices provide incorrect signals for guiding production decisions even if all individuals have rational expectations concerning the distribution of prices which will prevail on the market next period the market allocation is in general not a constrained pareto optimum essentially the only conditions under which for all technologies the market equilibrium is a constrained pareto optimum are those in which risk markets are redundant we derive the necessary and sufficient conditions for redundancy of risk markets which turn out to be extremely restrictive

birth date dependent population ethics critical level principles abstract this paper investigates birth date dependent principles for social evaluation in an intertemporal framework in which population size may vary we weaken the strong pareto principle in order to allow individuals birth dates to matter in establishing a social ordering using the axiomindependence of the utilities of the dead we characterize population principles with a recursive structure if the individual substitution principle and an individual intertemporal equivalence axiom are added birth date dependent generalizations of the critical level generalized utilitarian principles result stationarity leads to the special case of geometric discounting journal of economic literatureclassification numbers d63 d71

social criteria for evaluating population change abstract many applications of economic analysis require social evaluations of alternatives involving different numbers of people in this paper we use the tools of social choice theory to provide an axiomatic formulation of this problem it yields a class of social criteria called critical level generalized utilitarianism this class and its implications are compared with other criteria and are found to yield intuitively appealing results

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

exact consumer s surplus and deadweight loss consumer s surplus is a widely used tool in applied welfare economics both economic theorists and cost benefit analysis often use consumer s surplus despite its somewhat dubious reputation the basic idea is to evaluate the value to a consumer or his willingness to pay for a change in price of a good from say pricep to pricep because price changes affect consumer welfare an evaluation of this effect is often a key input to public policy decisions yet consumer s surplus is probably the most controversial of widely used economic concepts both paul samuelson and ian little conclude that the economics profession would be better off without it it is my feeling of the situation that substantial agreement exists on the correct quantities to be measured the amount the consumer would pay or would need to be paid to be just as well off after the price change as he was before the price change the quantities correspond to john hicks compensating variation measures an alternative measure which takes ex post price change utility as the basis of comparison is hicks equivalent variation the controversy arises in the measurement of these quantities the usual measurement procedure is to use the area to the left of the marshallian market demand curve between two price levels jules dupuit originated this measure of welfare change and alfred marshall and hicks derived appropriate conditions for its use the primary condition for the area to the left of the demand curve to correspond to the compensating variation is to have constant marginal utility of income marshall gave this condition and if it holds the same quantity will be derived as the area to the left of the compensated hicksian demand curve this area to the left of the compensated demand curve is exactly what the compensating variation and equivalent variation measure thus the constant marginal utility of income is a sufficient condition for marshallian consumer s surplus to be equal to hicks consumer s surplus in this case arnold harberger s plea to use the welfare triangle as one half times the product of the price change times the quantity change to measure deadweight loss corresponds to the correct theoretical amount of welfare change in a recent paper robert willig derives bounds for the percentage difference between the correct measure of either the compensating or equivalent variation and the marshallian measure derived form the market demand curve his bounds which depend on the income elasticity of demand for the single good in the region of price change being considered as well as the proportion of the consumer s income spent on the good demonstrate that the marshallian consumer s surplus is often a good approximation to hicks consumer s surplus the fact that the proportion of the consumer s income spent matters as well as the income elasticity was first pointed out by harold hotelling willig contends that the approximation error will be less than the errors involved in estimating the demand curve thus he hopes to remove the need for apology that applied economists often need to give to theorists who remark on the inappropriateness of using marshallian consumer s surplus to measure welfare change however in this paper i show that for the case primarily considered by willig of a single price change which is also the situation in which consumer s surplus is often used in applied work no approximation is necessary professor of economics massachusetts institute of technology and research associate national bureau of economic research i would like to thank peter diamond erwin diewert daniel mcfadden robert merton robert solow hal varian joel yellin and the referees for help and comments research support from the national science foundation is acknowledged the reason that we still have two rather than one of samuelson s six measures of consumer s surplus arises from an index number problem of the correct basis for the welfare comparison i will give both measures but plan to concentrate on the compensating variation

compensating variation consumer s surplus and welfare the compensating variation was defined by j r hicks 1942 as the amount one would have to deduct from a person s income to make him just as well off after a change in prices and income as he had been in the initial situation if the compensating variation is positive the individual is better off under the new situation since the compensating variation furnishes a uniquely defined numerical cardinal indicator of welfare improvement it provides an implicit ranking of alternative prospective situations not only relative to the initial situation but also relative to each other in practice this appears to be how this and other tools of cost benefit analysis are actually used one is interested in knowing not only whether a particular bridge or a particular excise tax will lead to an improvement in welfare but which out of a set of alternative bridges or alternative tax systems will improve welfare the most 1 in this paper we analyze conditions under which the compensating variation can be validly used in this generalized sense these turn out to be precisely the same as conditions previously derived see our 1976 paper for the valid use of consumer s surplus as a welfare measure in our final section we analyze the problem of deriving the generalized equivalent and compensating variations either exactly or approximately from observable demand functions by means of generalizations of or alternatives to consumer s surplus

bureaucrats legislators and the size of government some recent theories have blamed the growth of government on budget maximizing bureaucrats who are assumedly capable of imposing their most preferred budget output combination on legislatures subject to cost and demand constraints however theoretical examination of the range of bargaining outcomes that might occur between bureau and legislature shows that budget maximizing behavior does not necessarily lead to super optimal levels of production nor do the suggested reforms of competition and privatization necessarily improve the situation in this bargaining model the central determinants of governmental growth are not budget maximizing bureaucrats but the legislature s decisions regarding mode of oversight and form of internal organization

an intertemporal system of dynamic consumer demand functions abstract this paper constructs and estimates a system of dynamic consumer demand equations under the assumption of rational expectations about anticipated human wealth the traditional one period budget constraint is replaced by the lifetime anticipated wealth constraint lagged dependent variables are rationalized by an adjustment cost argument in the model presented both the dynamic adjustment coefficients as well as the parameters characterizing the underlying long run preferences are identified and can be estimated we find that a weak version of the reh cannot be rejected on the data in common with most empirical studies on demand behaviour we have to reject the symmetry restrictions

the value of limited altruism abstract discounting the utilities of future people or giving smaller weights to groups other than one s own is often criticized on the grounds that the resulting objective function differs from the ethically appropriate one this paper investigates the consequences of changes in the discount rate and weights when they are moved toward the warranted ones using the utilitarian value function it is shown that except in restrictive special cases those moves do not necessarily lead to social improvements we suggest that limitations to altruism are better captured by maximizing the appropriate value function subject to lower bounds on some utilities journal of economic literature classification numbers d63 d71

expected utility maximization and demand behavior abstract this paper extends the non parametric approach to consumer demand analysis to the case of expected utility maximization we provide necessary and sufficient conditions for a set of price quantity pairs to be consistent with expected utility maximization and investigate their relationship to revealed preference conditions extensions to incomplete markets and intertemporal resolution of uncertainty are also considered

corporate social responsibility in the multinational enterprise strategic and institutional approaches what is the relationship of global and local country specific corporate social responsibility csr to international organizational strategy applying the strategic logic of the bartlett and ghoshal typology to the realm of csr multinational firms should respond to pressures for integration and responsiveness from salient stakeholders however an institutional logic would suggest that multinational firms will simply replicate the existing product market organizational strategy multidomestic transnational global in their management of csr these alternative approaches are tested with a survey instrument sent to mnes operating in mexico the results of this study are consistent with the proposition that institutional pressures rather than strategic analysis of social issues and stakeholders are guiding decision making with respect to csr we develop implications for mne management and research as well as public policy

aggregating sets of von neumann morgenstern utilities we analyze the aggregation problem without the assumption that individuals and society have fully determined and observable preferences more precisely we endow individuals ans society with sets of possible von neumann morgenstern utility functions over lotteries we generalize the classical neutrality assumption to this setting and characterize the class of neutral social welfare function this class turns out to be considerably broader for indeterminate than for determinate utilities where it basically reduces to utilitarianism in particular aggregation rules may differ by the relationship between individual and social indeterminacy we characterize several subclasses of neutral aggregation rules and show that utilitarian rules are those that yield the least indeterminate social utilities although they still fail to systematically yield a determinate social utility

induced agricultural innovation and environmental quality the case of groundwater regulation induced innovation in agriculture includes the impacts of technology on environmental quality the induced innovation hypothesis maintains that technological change substitutes abundant factors for scarce ones hayami and ruttan 1985 this hypothesis may be extended by arguing that agricultural technology change often affects the quality of factors of production such as groundwater or soil fertility once adopted for example irrigation technology may affect groundwater quality yet the market often fails to reflect the scarcity value of environmental quality characteristics

random errors dirty information and politics rational voters assessments of candidates and policy proposals are unbiased but affected by random errors clean information decreases these errors while dirty information increases them in politics most voting procedures weigh random individual errors asymmetrically thus such errors do not counterbalance one another in the aggregate they systematically affect politics this illuminates the roles of political propaganda and interest groups it helps to explain various puzzles in public choice e g the frequent use of inefficient policy instruments institutional conditions are identified that shape the aggregate impact of individual errors and the politicians incentives to produce dirty information

shifting foundations of agricultural policy analysis welfare economics when risk markets are incomplete the neat alignment of resources output and prices specified by the perfect competition model is far from duplicated in free markets and the equally neat alignment assumed under the constraints of a program is not experienced when programs are in effect in particular areas under empirically determined supply curves are unlikely to represent opportunity costs the basic theory is invaluable in providing a conceptual orientation for the analysis of programs but the assumptions implicit in the literal use of simple forms of it for policy conclusions are breathtakingly heroic

expected consumer s surplus and the welfare effects of price stabilization suppose a consumer faces a price which is uncertain ex ante a question which often arises is whether the consumer would benefit from a stabilization policy under which the price would then be fixed and known with certainty many authors have addressed this question by calculating the expected compensating variation of the price change others have used expected marshallian consumer s surplus often with the explanation that it is a good approximation to expected compensating variation 2 an important unresolved issue however is whether expected compensating variation does in fact provide a valid ranking of stochastic prices against stabilized prices i e a ranking in agreement with that given by expected utility in section 2 we demonstrate that expected compensating variation is not in general a valid utility indicator in essence while utility comparisons under uncertainty require the use of the cardinal properties of von neumannmorgenstern utility functions the expected surplus measures depend only on ordinal preference rankings expected compensating variation then is completely insensitive to and cannot reflect the precise factor of interest in suchstudies the consumer s attitudes toward risk we then derive a set of restrictions on the utility function which are necessary in order for expected compensating variation to be a valid measure we see that price stabilization policies can only be evaluated with compensating variation if consumer preferences are assumed to satisfy quite stringent requirements this is in constrast to the familiar certainty case in which compensating variation always provides correct rankings

investment behavior and the biased perception of limited loss deduction in income taxation abstract we use a laboratory experiment to study the extent to which investors choices are affected by limited loss deduction in income taxation we first compare investment behavior in the no tax baseline to a tax control setting in which the income from investments is taxed we find that investors significantly reduce their risk taking as predicted by theory next we compare the baseline investment choices to choices under three different types of income taxation we observe that risk taking is significantly increased with partial and with capped loss deduction but is unaffected by a tax system that allows no loss deduction since in all these treatments the after tax outcomes of the prospects were identical we conjecture that investors have a positively biased perception of partial and capped loss deduction that promotes their willingness to take risks

compensation and political feasibility facilitating welfare improving coalitions there is a broad consensus among economists policymakers and informed citizens that free market economies do not preclude many inefficiencies in resource allocation there are many circumstances where policy interventions have the potential to achieve a pareto improvement in the sense of making some people better off without making others worse off the challenge to any particular market oriented society is to design those mechanisms organizations and institutions that identify the limitations of free markets and result in those reforms that seek pareto improved outcomes

the multivariate flexible accelerator model its empirical restrictions and an application to u s manufacturing this paper derives an exhaustive set of restrictions implied by the multistock flexible accelerator specification of the adjustment cost model for the firm the flexible accelerator specification of the demand for capital and labor is estimated using u s manufacturing annual data for the 1947 1976 period the consistency of the data with the model is examined by testing the validity of the derived restrictions finally the conditions which permit aggregation over firms are determined and tested empirically the flexible accelerator specification has been popular in the empirical literature on interrelated investment and employment decisions see nadiri and rosen 38 coen and hickman 10 and schramm 40 more recent examples include sargent 39 berndt fuss and wavermann 4 berndt and morrison 6 and meese 34 under suitable assumptions the specification may be rationalized by the adjustment cost model of the firm eisner and strotz 13 lucas 30 mortensen 35 extends the work of lucas and derives some empirically testable restrictions of the accelerator specification that are implied by the adjustment cost framework the broad objective of this paper is to provide a more rigorous and comprehensive test of the adjustment cost model than is presently found in the literature this objective is achieved in three stages first we offer an alternative derivation of the mortensen restrictions and more importantly we prove theorem 1 that his restrictions are exhaustive i e we establish an integrability result for the flexible accelerator adjustment cost model second the flexible accelerator specification of the demand for capital and labor is estimated using total u s manufacturing annual data for the 1947 76 period it is assumed that firms minimize expected production costs subject to a technology which implies that capital and labor stocks are costly to adjust while a third factor materials is freely adjustable the consistency of the data with the adjustmentcost framework is examined by testing for the validity of the derived restrictions further we test the validity of some separability restrictions on the adjustmentcost technology that to varying degrees are imposed a priori in all of the cited empirical studies finally we provide a complete characterization of the individual firm technologies which justify the common assumption of the existence of a representative firm this problem of aggregation over firms which has been

market failures and government failures a theoretical model of the common agricultural policy economic theory has tried to explain the characteristics of the common agricultural policy inductively on the basis of certain economic peculiarities of agriculture however by overlooking the so called government failures of the political system as an independent variable in explaining the common agricultural policy it is impossible to explain for example the strong agricultural lobbyism the deductive theoretical model of this article integrates economic as well as political actors in order to explain the characteristics of the common agricultural policy the proposed theoretical model is not tested but the criteria for such a test are presented

information and economic analysis a perspective ten years ago i delivered a paper before this group with the title information and economic analysis i chose the title deliberately i did not call the subject on which i was speaking the economics of information because to do so would have been to suggest that my topic like the economics of agriculture or the economics of industry or the economics of labour represented another branch of specialisation within economics i wanted to suggest that informational considerations were in fact central to the analysis of a wide variety of phenomena that they constituted a central part of the foundations of economic analysis at the time though economists had long paid lip service to the importance of information there was little formal literature the last decade has seen a burgeoning of the literature it has become to the late 7o s and early 8o s what growth theory was to the early 6o s and it has been greeted with some of the same scepticism there seems to be a myriad ofspecial cases and few general principles the little examples are often contrasted unfavourably with the generality of general equilibrium theory what have we learned have diminishing returns set in are there fruitful directions for future research and if so what are they these are the questions which i wish to address here the work of the past decade has made i think a fundamental and lasting contribution to economic analysis the contributions have been both negative and positive we have learned that much of what we believed before is of only limited validity that the traditional competitive equilibrium analysis though having the superficial appearance of generality in terms of superscripts and subscripts is indeed not very general the theory is not robust to slight alterations in the informational assumptions it is but a special and not very plausible example among the possible set of informational assumptions which can be employed to characterise an economy at the same time the theory has been able to provide insights into phenomena about which the traditional model had nothing to say or which seemed inconsistent or inexplicable within the competitive paradigm it has provided some of the micro foundations for macro economics it has provided the basis of a new theory of the firm of a new new welfare economics and of a theory of economic organisation including a comparison of economic

pesticide taxation and multi objective policy making farm modelling to evaluate profit environment trade offs abstract many countries in western europe have introduced voluntary programmes to encourage farmers to adopt environmentally more benign practices such as integrated pest management but more policy action appears to be needed to meet the environmental quality levels now demanded input taxes could assist in meeting policy objectives the issue considered here is the identification of the most appropriate specification of a tax instrument to reduce the environmental problems of agricultural pesticide usage this paper takes a farm systems approach to evaluation a case study illustration is given for a specialist arable farm in the uk combining an economic model of land use and production with a set of environmental indicators for pesticides linking these two components allows the identification of the potential trade offs between achieving reductions in the environmental burden to a number of ecological dimensions and farm income different pesticide tax specifications vary in both the magnitude and the direction of their impacts the results of the model indicate that either compromises will have to be made in environmental policy or additional instruments will be required to counter act the negative side effects of some instruments

perspectives on multinational enterprises in emerging economies multinational enterprises mnes play a pivotal role in the development of many emerging economies in consequence they became the focus of scholarly research by economists and policy analysts in contrast international business scholars have been comparatively uninterested in analysing this role of mnes yet they could make important contributions to these debates first studies taking the individual firms as starting point would enhance understanding of the interaction between mnes and the local environment second theories and research methodologies developed in international business research could provide new insights into the dynamics of mnes in emerging economies the objective of this paper is to motivate more international business scholars to engage in research on positive and negative spillovers from foreign direct investment fdi in emerging economy societies to advance this research agenda scholars need to analyse the specific activities and capabilities of the firms involved and the impact of fdi on the broader social and environmental context for management this agenda raises the ethical question to what extent ought businesses to care about their local stakeholders

measuring economic welfare new methods preface 1 an introduction to the money metric 2 the marginal utility of money as an integrating factor 3 calculation of the money metric 4 the approach of dupuit and marshall 5 the hicksian approach 6 approximations based on consumer surplus 7 a reconsideration of the theory of index numbers 8 the money metric as a basis for calculation of social welfare functions 9 measurement of the social costs of monopoly 10 a final comment and conclusion references index

modelling the determination of research output in british universities abstract the paper begins by noting some of the recent proposals for restructuring research activity in british universities mainly through a process of concentration of research resources we then review the available evidence which shows that there is little support for such concentration except in the most resource intensive disciplines since there is little firm information about the shape of research production functions either for institutions or for the system as a whole the core of the paper studies the factors likely to be important in such functions and investigates the consequences of particular functional forms finally it is concluded that more research is needed to gain a better understanding of the research process in universities and that in the meantime it would be unwise to embark on a wholesale restructuring of the system

social welfare of alternative controlled price policies recent developments in social welfare analysis provide insights into the selection of price policies in the presen t paper a ces social welfare function and a weighted average of utilitarian and leximin rules are used to identify optimal producer prices in an economy where government is the price setter and agents are risk averse the analysis distinguishes between the interests of commercial producers peasant producers consumers and taxpayers a n application to zimbabwe indicates that a maize producer price in the low medium to medium portion of the historical range would be social ly optimal if egalitarian preferences are moderate this outcome is somewhat insensitive to group weighting schemes and to interpersonal utility correspondences copyright 1993 by mit press

the kaldor compensation test and rational choice abstract it is well known that the kaldor compensation test can be inconsistent in the sense that it leads to contradictory or cyclical recommendations in some situations this paper shows that there is a close relationship between the consistency of this test and the rationalizability of choices from given utility possibilities sets this observation suggests that if the kaldor test is consistent social decisions can be made using a social welfare ordering in the first place therefore the information assumptions embodied in some social welfare ordering have to be accepted if the kaldor test is to be applied consistently

on the bias of the corporate tax against high risk projects this paper demonstrates that the impact of the existing tax law is not uniform across proj ects with different variances of payoffs a bias exists against projects with greater uncer tainty of payoffs which leads to an underinvestment in high risk projects the bias against higher variance projects offers a theoretical justification for such tax incentives as the research and development tax credit i introduction the impact of corporate taxes on firms investment decisions is a problem that has interested economists for years when taxes are levied on income rather than economic profits a wedge is driven between private benefits and social ben efits firms will invest to the point that after tax marginal net present value is zero whereas the socially desirable level is generally the one at which the be fore tax marginal net present value is zero this paper shows that in a world of certainty adjusting the depreciation amount is sufficient to remove the distor tion however under uncertainty the current tax regime with assymetric treat ment of gains and losses creates a bias against projects with high variances of payoffs that cannot be removed simply by juggling the depreciation amount this bias against high risk projects suggests that tax incentives such as the research and development tax credit may be needed to encourage investment in risky projects it is also shown that the favored tax treatment of debt capital may intensify the disincentive to invest in higher variance projects in section ii a model of the firm under taxation and uncertainty is de veloped section iii presents the major results of this research while section iv offers a brief summary of the results

the inefficiency of the stock market equilibrium this paper establishes that when there is not a complete set of markets but more than one commodity the stock market equilibrium will not in general be a constrained pareto optimum the economy will lack both the property of exchange and production efficiency necessary conditions which must be satisfied if the economy is to be a constrained pareto optimum for all technologies are derived if all individuals have identical homothetic indifference maps then either there must be unitary price elasticities so there is no effective risk or all individuals must have the same degree of risk aversion so there is no trade on the stock market

the normative characterization of aggregate consumers surplus measures when explicit account is taken of the fact that consumer surplus measures are typically used in a many consum er setting two issues arise namely what is the information require d to utilize the measure and what are the normative principles entai led by their use this paper develops measures which are applicable w hen individual preferences come from either of two classes their inf ormational requirements are analyzed and the social orderings which t hey induce on consumption allocations are characterized a means of e xtending these results into wider individual preference classes is th en developed copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

a model of the natural rate of unemployment since the publication of edmund phelps volume the new macroeconomics has treated the labor market as a dynamic process of rational search by unemployed workers for available vacancies wages are viewed as at least potentially flexible though free contracting between workers and firms may lead to fixed wages in the short run imperfect information is a crucial element of the theory for it implies both a need for contracting and a need for rational search rather than simple market clearing in each period a positive rate of frictional unemployment may exist in equilibrium denoted as the natural rate this unemployment is due to the frictions in the search process and imperfections in information rather than to any deficiency in aggregate demand milton friedman defined the natural rate as the level that would be ground out by the walrasian system of general equilibrium equations provided there is embedded in them the actual structural characteristics of the labor and commodity markets including market imperfections stochastic variability in demands and supplies the cost of gathering information about job vacancies and labor availabilities the costs of mobility and so on p 8 this paper reexamines the micro foundations of the natural rate in a model of labor market equilibrium in which turnover flows and imperfect information are explicitly considered workers may quit their current jobs to enter the unemployment pool in order to search among available vacancies for a more preferred position firms economize on turnover by an appropriate wage policy

food price policy the rationale for government intervention abstract policy makers in the most successful developing countries have not accepted either of the two major schools of thought on food price policy the neo classical school favours free trade to maximize efficiency of resource allocation the structuralist school favours interventions to satisfy goals for income distribution especially in the rapidly growing rice based economies of asia policy makers have been more concerned about stability of domestic prices than their level relative to world prices this concern traditionally dismissed by economists as purely political is justified on economic grounds because of improved macroeconomic and dynamic efficiency from stable food prices the paper identifies both the benefits from food price stability and the costs of achieving it

institutions and short run macroeconomic performance abstract this paper reviews the growing interest in institutions it argues that the explanation for this interest is a fresh awareness of how institutions affect economic performance this connection arises because many economic interaction take the form of one or other of three classic games prisoners dilemma coordination and chicken and the outcome in these games and hence performance of the economy is influenced by the institutional context of these interactions the paper provides a detailed illustration of this argument with a survey of the literature which relates unemployment performances to the institutions of wage setting in oecd countries