structural change and income distribution an inverted u relationship abstract this paper constructs a disequilibrium model in order to analyse the structural transition characterized by the emergence of a new sector we show that in an economy where preferences and technology adapt over time multiple long term outcomes are mainly brought about by different distributive rules governing the assignment of innovative rents between workers and entrepreneurs we robustly establish that a successful transition to a two sector economy is ensured by a balanced distribution restoring the co ordination of investment and consumption plans instead when innovative rents are too concentrated in favor of either workers or entrepreneurs the system does not fully accomplish the transition and unemployment might emerge in contrast with the standard view of a negative relationship between real wages and employment

trends in household saving don t justify tax incentives to boost saving despite diverse trends in household saving in oecd countries many governments are introducing tax incentives designed to boost saving by particular groups such schemes have been justified by many trends including increasing income inequality ageing populations and greater cross border competition it is dangerous however to base policy on what is happening to aggregate household saving alone first personal saving should be viewed within a lifecycle context saving may look inadequate today but households may already have made plans to redress this in future second data on aggregate saving conceal significant differences between different household groups only disaggregation yields reliable inferences on which policy can be based in particular it is impossible to assess the consequences of demographic changes without analysis that distinguishes between different generations we reassess household saving by computing the evolution of lifetime profiles of consumption income and saving of different cohorts over time and then analyse the effect of demographic and other changes we find little evidence for the assertion that tax incentives to promote national saving are needed now to stave off a future drought in household saving

finite lifetimes and the effects of budget deficits on national saving abstract even though realistic deficit policies shift sizable tax burdens to future generations the assumption of an infinite horizon is a good approximation for analyzing a deficit s short run saving effect on individuals who are neither liquidity constrained nor myopic recent u s experience casts significant doubt on these assumptions however and appears difficult to reconcile with the ricardian equivalence proposition that the timing of taxes does not affect national saving recent deficits have coincided with reduced national saving and a substantial increase in the share of gnp devoted to consumption

international differences in saving the adequacy of national saving has taken on increasing importance in an era of large external imbalances among the major industrial countries at least among economists current account imbalances are seen as largely the outcome of domestic patterns of saving and investment rather than trade practices thus the low level of saving in the united states rather than a failure of japan to open its economy is the primary cause of the u s current account deficit most of the discussion of the decline of u s saving has focused upon the emergence of a large government budget deficit in the 1980s and has largely ignored an equally large decline in an already low level of private saving at the same time much of what we think we know about private saving behavior and the potential effectiveness of various policies to influence it are dominated by experience only within our own country but many of the factors in which we are most interested have exhibited very limited historical variation within the united states and of necessity the conclusions are ambiguous the purpose of this note is to make use of an underutilized data source that provides information on the saving and investment of the industrial countries within a common accounting framework to examine the pattern of change over time and the similarity of response to various economic disturbances in the 1970s and 1980s the basic annual data are drawn from the system of national accounts sna submitted by the individual member countries to the oecd for the period 1960 87 while the original analysis was undertaken for the seven largest nations plus a representative set of six smaller countries but the summary reported here is limited to the united states japan and an aggregate of nine european countries the data are presented within a simple accounting framework that relates the current account surplus ca to the difference between domestic saving s and domestic investment i domestic saving and investment can be further subdivided into their public and private components

speculative growth hints from the u s economy we propose a framework for understanding episodes of vigorous economic expansion and extreme asset valuations we interpret this phenomenon as a high valuation equilibrium with a low cost of capital based on optimism about future funding the key ingredient for such equilibrium is feedback from increased growth to a decline in the long run cost of capital this feedback arises when an expansion comes with technological progress in the capital sector when fiscal rules generate procyclical fiscal surpluses when the rest of the world has lower expansion potential or high saving needs and when financial constraints are relaxed by the expansion itself

differences in managerial values a study of u s hong kong and prc managers in this study of convergence divergence of managerial values four western developed measures machiavellianism locus of control intolerance of ambiguity and dogmatism and the four dimensions of the eastern developed chinese value survey confucian dynamism human heartedness integration and moral discipline were the measures used the findings indicate that often times both culture and the business environment interact to create a unique set of managerial values in a country

productivity gains from geographic concentration of human capital evidence from the cities abstract based on recent theoretical developments the argument is made that the average level of human capital is a local public good cities with higher average levels of human capital should therefore have higher wages and higher land rents after conditioning on the characteristics of individual workers and dwellings this prediction is supported by data for standard metropolitan statistical areas smsas in the united states where the smsa average levels of formal education and work experience are used as proxies for the average level of human capital the alternative explanations of omitted smsa variables and self selection are evaluated an estimate of the effect of an additional year of average education on total factor productivity is computed

what are cities worth land rents local productivity and the total value of amenities abstract this paper models how to use widely available data on wages and housing costs to infer land rents local productivity and the total value of local amenities in the presence of federal taxes and locally produced nontraded goods i apply the model to u s metropolitan areas with the aid of visually intuitive graphs the results improve measures of productivity and feature large differences in land rents wage and housing cost differences across metropolitan areas are accounted for more by productivity than quality of life differences regressions using individual amenities reveal that the most productive and valuable cities are typically coastal sunny mild educated and large

satiation in discounted utility in this paper we propose a model of intertemporal choice that explicitly incorporates satiation due to previous consumption in the evaluation of the utility of current consumption in the discounted utility du model the utility of consumption is evaluated afresh in each time period in our model the utility of current consumption represents an incremental utility from the past level when the time interval between consumption periods is large and there are therefore no carryover effects our model coincides with the du model for short time intervals between consumption periods the satiation due to previous consumption lowers the utility of current consumption several implications of our model are examined and comparisons with the du model and the habituation model are made

bubbles and self enforcing debt we characterize equilibria with endogenous debt constraints for a general equilibrium economy with limited commitment in which the only consequence of default is losing the ability to borrow in future periods first we show that equilibrium debt limits must satisfy a simple condition that allows agents to exactly roll over existing debt period by period second we provide an equivalence result whereby the resulting set of equilibrium allocations with self enforcing private debt is equivalent to the allocations that are sustained with unbacked public debt or rational bubbles in contrast to the classic result by bulow and rogoff 1989a positive levels of debt are sustainable in our environment because the interest rate is sufficiently low to provide repayment incentives

firm survival in traded industries does localization moderate the effects of founding team experience prior studies of the impact of founder team industry and start up experience on firm survival have paid little attention to location decisions or cluster effects in this paper we focus on young firms doing business in industries that compete for customers in geographically dispersed markets traded industries we examine whether regional concentrations localization of related industrial firms moderate the effects of founder team industry and start up experience on firm survival the study draws on firm level data from the kauffman firm survey and on county business patterns data from the us census bureau we found that localization negatively moderates the positive effects of founder team prior industry experience on firm survival we did not find significant moderating effects of localization on founder team prior start up experience our findings highlight the importance of accounting for location decisions and cluster effects when evaluating the human capital inputs of founder teams

wage premia in employment clusters how important is worker heterogeneity this article tests whether the correlation between wages and concentration of employment can be explained by unobserved worker productivity residential location is used as a proxy for unobserved productivity and average commute time to workplace is used to test whether location based productivity differences are compensated away by longer commutes analyses using confidential data from the 2000 decennial census find that estimates of agglomeration wage premia within metropolitan areas are robust to comparisons within residential location and that estimates do not persist after controlling for commuting costs suggesting that the productivity differences across locations are due to location not individual unobservables

agglomeration spillovers and wage and housing cost gradients across the urban hierarchy abstract the tyranny of distance in terms of its effect on median earnings and housing costs is examined for rural and urban u s counties first we develop a series of distance metrics for an area s remoteness from multiple tiers of the urban hierarchy second we consider geographical access of buyers and sellers through market potential measures typical of those used in empirical studies of the new economic geography we estimate penalties of about 5 to 9 for median earnings and 12 to 17 for housing costs for area remoteness from the combined tiers of the urban hierarchy differences in market potential also influence factor prices but these effects generally are smaller than those produced by urban hierarchy distances thus it appears that empirical tests of new economic geography models need to consider sources of agglomeration spillovers beyond aggregate market potential

does globalization affect growth evidence from a new index of globalization the study develops an index of globalization covering its three main dimensions economic integration social integration and political integration using panel data for 123 countries in 1970 2000 it is analysed empirically whether the overall index of globalization as well as sub indexes constructed to measure the single dimensions affect economic growth as the results show globalization indeed promotes growth the dimensions most robustly related with growth refer to actual economic flows and restrictions in developed countries although less robustly information flows also promote growth whereas political integration has no effect

estimating dynamic localization economies the inadvertent success of the specialization index and the location quotient estimating dynamic localization economies the inadvertent success of the specialization index and the location quotient regional studies after addressing definitional issues on the concepts of c

economic geography and wages abstract this paper estimates the agglomeration benefits that arise from vertical linkages between firms we identify the agglomeration benefits off the spatial variation in firms nominal wages u

consumer habituation this paper examines how consumers willingness to pay for goods is determined by past patterns of consumption the central result is atheorem of interior maximum which states that willingness to pay for a good is maximized at a moderate level of habitual consumption the theorem is derived from a simple model of adaptive behavior that involves a shifting s shaped value function the detailed analysis of the impact of consumption frequency and intensity on willingness to pay reveals an unsuspected implication of diminishing sensitivity even as it leads to a formalization of consumer habituation patterns including sensitization habituation and response recovery upon withdrawal that matches and integrates the most robust empirical regularities attendant on nonassociative learning in neurobiology and behavioral psychology an examination of the implications for demand dynamics and pricing highlights deterministic recurrent and transient patterns of consumption at higher price points

the ricardian approach to budget deficits persistent budget deficits have increased economists interest in theories and evidence about fiscal policy this paper develops the ricardian approach and contrasts it with standard models the discussion considers from major theoretical objections to ricardian equivalence finite lifetimes imperfect capital markets uncertainty about future taxes and incomes and the distorting effects of taxation the paper then considers empirical evidence on interest rates consumption and saving and current account deficits the conclusion is that the ricardian approach is a useful first order approximation and that this approach will probably become the benchmark model for assessing fiscal policy this abstract was borrowed from another version of this item

external effects in u s procyclical productivity abstract in this paper we highlight a new dimension of the aggregate procyclical productivity phenomenon we show that estimates of the degree of returns to scale are larger for manufacturing as a whole than for two digit industries since this difference must be due to factors that are only internalized at the most aggregate level we term it an external effect this result rules out explanations based on own input variation such as true increasing returns and unmeasured factor utilization tied to own activity as the sole explanations for aggregate procyclical productivity we explore several potential explanations of this external effect

predicting utility under satiation and habit formation we introduce a modification of the discounted utility model that accounts for both satiation and habit formation in intertemporal choice preferences depend on the satiation level and the habitual consumption level these two state variables together with the shape of the value function drive the properties of the model one unique feature of our model is that it addresses the trade off between seeking variety and maintaining acquired habits we examine several properties of our model such as the nontrivial patterns of desirability willingness to pay for an additional unit of consumption or the effect of abstaining from consumption craving we explore the shape of optimal consumption patterns in discrete and continuous choice settings if subjects underestimate the changes in satiation and habituation levels as occurs under projection bias our model explains why people buy more when hungry or prefer variety in advance of consumption but stay with the same consumption good in actual use

the economics of density evidence from the berlin wall this paper develops a quantitative model of internal city structure that features agglomeration and dispersion forces and an arbitrary number of heterogeneous city blocks the model remains tractable and amenable to empirical analysis because of stochastic shocks to commuting decisions which yield a gravity equation for commuting flows to structurally estimate agglomeration and dispersion forces we use data on thousands of city blocks in berlin for 1936 1986 and 2006 and exogenous variation from the city s division and reunification we estimate substantial and highly localized production and residential externalities we show that the model with the estimated agglomeration parameters can account both qualitatively and quantitatively for the observed changes in city structure we show how our quantitative framework can be used to undertake counterfactuals for changes in the organization of economic activity within cities in response for example to changes in the transport network

loss aversion in a consumption savings model abstract we propose a model of consumption and saving based on kahneman and tversky s prospect theory that implies a fundamental asymmetry in consumption behavior inconsistent with other models of consumption when there is sufficient income uncertainty a person resists lowering consumption in response to bad news about future income this resistance is greater than the resistance to increasing consumption in response to good news we present empirical evidence from five countries that confirms this behavior

indivisible labor lotteries and equilibrium abstract this paper considers an economy where labor is indivisible and agents are identical although the discontinuity in labor supply at the individual level disappears as a result of aggregation it is shown that indivisible labor has strong consequences for the aggregate bahavior of the economy it is also shown that optimal allocations involve lotteries over employment and consumption

agglomeration and land rents evidence from the prefectures abstract we use japanese prefectural wage and land rent data to estimate the magnitude of agglomeration effects in manufacturing and financial services we also examine the geographical range of agglomeration effects by estimating the extent to which they diminish with distance using a specification that encompasses the polar cases of purely local agglomeration economies on the one hand and national increasing returns on the other we find that the extent of agglomeration economies in both industries is significant but that their effect decays much faster with distance in financial services than in manufacturing that is the geographical reach of spillovers in financial services appears to be much lower than in manufacturing

a theory of rational addiction we develop a theory of rational addiction in which rationality means a consistent plan to maximize utility over time strong addiction to a good requires a big effect of past consumption of the good on current consumption such powerful complementarities cause some steady states to be unstable they are an important part of our analysis because even small deviations from the consumption at an unstable steady state can lead to large cumulative rises over time in addictive consumption or to rapid falls in consumption to abstention our theory also implies that cold turkey is used to end strong addictions that addicts often go on binges that addicts respond more to permanent than to temporary changes in prices of addictive goods and that anxiety and tensions can precipitate an addiction

globalization and household saving is there a link abstractthis article proposes that globalization can affect household saving in the long run in a number of ways social interactions between different cultures can induce value changes which can result in shifts in consumption and saving behaviour international trade allows consumers to have easier access to status goods stimulating consumption and dampening saving extending from veblen s conspicuous consumption theory saving may also decrease when globalization leads to greater population mobility and fosters urbanization thus enhancing the importance of consumption as a way to display wealth in addition financial globalization reduces credit constraints and allows households to save less using cross country data from the united nations un the oecd and other sources this article finds evidence that household saving declines as globalization deepens especially in the social and cultural dimensions

economic growth with bubbles this paper presents a stylized model of economic growth with bubbles this model views asset price bubbles as a market generated device to moderate the effects of frictions in financial markets improving the allocation of investments and raising the capital stock and welfare the model illustrates various channels through which asset price bubbles affect the incentives for innovation and economic reforms and therefore the rate of economic growth the model also offers a new perspective on the effects of financial development on asset price bubbles and economic growth

wages rents and the quality of life this study focuses on the role of wages and rents in allocating workers to locations with various quantities of amenities the theory demonstrates that if the amenity is also productive then the sign of the wage gradient is unclear while the rent gradient is positive the theory is extended to include the housing market and nontraded goods these extensions require little modification of the conclusion the empirical work on wages shows that the regional wage differences can be explained largely by these local attributes with the use of site price data implicit prices are estimated and quality of life rankings for the cities are computed

size location and agglomeration of inward foreign direct investment fdi in the united states halvorsen t size location and agglomeration of inward foreign direct investment fdi in the united states regional studies since the late 1970s a range of economic development policies to attract foreign direct investments fdis have been tried out despite a policy reorientation from a large size bias to policies also favouring smaller investments little empirical work has been performed on the determinants of investment size this paper presents empirical evidence on how the size of fdis is determined by agglomeration and other state level factors the results indicate that fdi agglomeration and urbanization affect investment size and that taxes markets labour land and the concentration of scientific knowledge are important determinants in the size composition of fdi halvorsen t le montant la localisation et l agglomeration de l investissement direct etranger ide aux etats unis regional studies depuis la fin des annees 1970 on met en vigueur toute une serie de politiques de developpeme

new estimates of quality of life in urban areas implicit markets capture compensation for intraurban and interregional differe nces in amenities and yield differences in housing prices and wages these pecuniary differences become preference based weights in a qual ity of life index hedonic equations are estimated using microdata fr om the 1980 census and assembled county based amenity data on climati c environmental and urban conditions ranking of 253 urban counties reveals substantial variation within as well as among the 185 urba n areas the quality of life differences across counties within one s msa is almost one half of the difference between the top and bottom ranked counties in the nation copyright 1988 by american economic association

budget deficits rhetoric and reality w v t hatever the real or imagined ills of the economy the news media most politicians and a fair proportion of the economics profession are quick to point to the culprit the budget deficit no matter that few appear to know or care precisely what deficit they are talking about or how it is measured no matter that few bother to explain in terms of a relevant model just how government deficits may be expected to impact the economy no matter that few offer any empirical data to sustain their judgments so budget deficits cause inflation budget deficits raise interest rates budget deficits bring on the trade deficits budget deficits crowd out investment budget deficits are an irresponsible mortgage on the future and budget deficits caused the october 1987 stock market crash and now threaten further financial cataclysms is there truth in any of these assertions or does it all depend budget deficits do matter and their effects contrary to barro s ricardian equivalence theorem can be substantial as most economists have recognized for at least half a century budget deficits can however be too small as well as too large to know which you have to measure them right and you have to analyze their role in the world in which we live pure walrasian and rational expectation market clearing models may prove more useful for academic advancement than for promotion of economic health i need not repeat many of the objections to the equivalence theorem raised by bernheim and gramlich and addressed by barro in this symposium however there is

naive reinforcement learning with endogenous aspirations this article considers a simple model of reinforcement learning all behavior change derives from the reinforcing or deterring effect of instantaneous payoff experiences payoff experiences are reinforcing or deterring depending on whether the payoff exceeds an aspiration level or falls short of it over time the aspiration level is adjusted toward the actually experienced payoffs this article shows that aspiration level adjustments may improve the decision maker s long run performance by preventing him or her from feeling dissatisfied with even the best available strategies however such movements also lead to persistent deviations from expected payoff maximization by creating probability matching effects

a cue theory of consumption psychological experiments demonstrate that repeated pairings of a cue and a consumption good eventually create cue based complementarities the presence of the cue raises the marginal utility derived from consumption in this paper such dynamic preferences are embedded in a rational choice model behavior that arises from this model is characterized by endogenous cue sensitivities costly cue management commitment and cue based spikes in impatience the model is used to understand addictive habit forming behaviors and marketing the model explains why preferences change rapidly from moment to moment why temptations should sometimes be avoided and how firms package and position goods

the determinants of household and private savings in thailand a broad set of possible determinants of household and private savings behaviour is examined through an in depth case study of thailand during the period 1960 to 2004 results suggest that an increase in economic growth inflation and terms of trade all have a significant positive impact on household and private saving rates in contrast the availability of bank credit tends to reduce household and private saving rates while an increase in both old and young dependency has a negative impact on household and private saving rates the magnitude of the impact on the former is far greater than that on the latter furthermore public saving seems to crowd out household and private saving but less than proportionately this reflects a possible role of fiscal policy in increasing national savings in the economy over and above these variables corporate saving is another important determinant of household saving an increase in the former brings about a significant reduction in the latter

the impact of natural culture and economic ideology on managerial work values a study of the united states russia japan and china this study assesses the impact of economic ideology and national culture on the individual work values of managers in the united states russia japan and china the convergence divergence crossvergence cdc framework was used as theoretical framework for the study while the schwartz value survey svs was used to operationalize over investigation of managerial work values across these four countries the findings largely support the crossvergence prospective while also confirming the role of national culture implications from the findings are drawn for the convergence divergence crossvergence of values as well as for the feasibility of multidomestic or global strategies for a corporate culture

international evidence on how income inequality and credit market imperfections affect private saving rates abstract this paper empirically examines the hypothesis that income distribution exerts an independent effect on private saving rates across countries and tests particular channels for income inequality to affect private saving rates cross sectional and panel regression results show that inequality has a robust positive effect on private saving rates that depends on financial market development and credit available to the private sector the paper thus identifies credit market imperfections as the likely reason for the inequality private saving link the data provide no evidence supporting a subsistence channel for inequality to affect private saving as suggested by nonhomothetic utility functions

the role of intergenerational transfers in aggregate capital accumulation this paper uses historical u s data to directly estimate the contribution of intergenerational transfers to aggregate capital accumulation the evidence presented indicates that intergenerational transfers account for the vast majority of aggregate u s capital formation only a negligible fraction of actual capital accumulation can be traced to life cycle or hump savings a major difference between this study and previous investigations of this issue is the use of more accurate longitudinal age earnings and age consumption profiles these profiles are simply too flat to generate substantial life cycle savings this paper suggests the importance of and need for substantially greater research and data collection on intergenerational transfers life cycle models of savings that emphasize savings for retirement as the dominant form of capital accumulation should give way to models that illuminate the determinants of intergenerational transfers

does income inequality raise aggregate saving this paper reviews analytically and empirically the links between income distribution and aggregate saving consumption theory brings out a number of direct channels through which income inequality can affect overall household saving positively in most cases however recent political economy theory points toward indirect negative effects of inequality through firm investment and public saving on aggregate saving on theoretical grounds the sign of the saving inequality link is therefore ambiguous this paper presents new empirical evidence on the relationship between income distribution and aggregate saving based on a new and improved income distribution database for both industrial and developing countries the empirical results using alternative inequality and saving measures and various econometric specifications on both cross section and panel data provide no support for the notion that income inequality has any systematic effect on aggregate saving these findings are consistent with the theoretical ambiguity q 2000 elsevier science b v all rights reserved

urban economic theory land use and city size this book examines the economic reasons why people choose to live where they live and develops through analysis of the bid rent function a unified theory of urban land use and city size the first part of the book explicates the basic theory of urban land use and optimal city size residential location behavior of households is examined in a microeconomic framework and equilibrium and optimal patterns of residential land use are discussed the corresponding equilibrium and optimal city sizes are studied in a variety of contexts part two extends the classical theories of von thunen and alonso with the addition of externality factors such as local public goods crowding and congestion and racial prejudice the rigorous mathematical approach and theoretical treatment of the material make urban economic theory of interest to researchers in urban economics location theory urban geography and urban planning

habits and the anomalies in intertemporal choice this paper analyzes a model of discounted utility under habit formation habit formation means that utility in each period is determined by the difference between the received outcome and the customary outcome at that point in time preferences are rational in the sense that the decision maker correctly anticipates the habit formation process and behaves in a dynamically consistent manner i e plans are truly carried out the purpose is to demonstrate that this generalization of the discounted utility model accounts jointly and in a meaningful way for the most striking anomalies with respect to classical discounted utility theory the common difference effect is explained first this effect also called decreasing impatience effect has usually been viewed as evidence against exponential discounting then the frequently observed preference for increasing sequences of outcomes is examined such preference under the traditional discounted utility model would be regarded as a paradoxical case of negative discounting a discussion of the descriptive prescriptive and normative values of the model is included

determinants of household saving in the g 7 countries recent evidence this paper employs data from the last four decades to analyse major determinants of household saving for the group of seven g 7 nations particular attention is paid to the effects of interest rates government saving and social security contributions regression analysis is used to control for the effects of both the level and changes in income per capita and inflation

fiscal policy with heterogeneous agents and incomplete markets i undertake a quantitative investigation into the short run effects of changes in the timing of proportional income taxes for model economies in which heterogeneous households face a borrowing constraint temporary tax changes are found to have large real effects in the benchmark model a temporary tax cut increases aggregate consumption on impact by around 29 cents for every dollar of tax revenue lost comparing the benchmark incomplete markets model to a complete markets economy income tax cuts provide a larger boost to consumption and a smaller investment stimulus when asset markets are incomplete copyright 2005 wiley blackwell

free markets and fettered consumers are consumers sufficiently self interested and self reliant so that privatized markets deliver the efficiency and welfare gains they promise why are consumers uncomfortable in markets and in some case sufficiently opposed to market solutions to prevent their implementation what can be done to prepare consumers so that they function satisfactorily in markets and understand the advantages of market based resource allocation this paper examines the foundations of consumer behavior and attitudes in markets and proposes a program of scientific research to determine how consumers cope in privatized markets and the implications for market design of the limits of self reliance

population growth and local public finance in japanese cities the determinants of japanese city population growth for the period 2000 to 2005 are empirically examined with particular attention to local public finance the selection of one fiscal indicator fi from four alternatives ordinary balance ratio obr ratio of outstanding borrowing rob to the ordinary account debt service payment ratio dspr and financial power index fpi and the consideration of spatial auto correlation provide 12 regression models in each regression six additional explanatory variables are considered with reference to earlier empirical studies empirical results suggest that 1 three fis excluding dspr are significant and 2 the number of local government officers and the ratio of graduates of not less than junior college are highly significant in all specifications

increasing quality sequence when is it an optimal product introduction strategy in this paper we analyze the optimal introduction timing of a seller s products targeted at segments that differ in their willingness to pay for quality past studies suggest that an introduction sequence of a high quality product followed by a lower quality version of the product may mitigate the cannibalization effects of the low quality product on profits from the high quality product we show that if customers who value quality more possess an outside option such as a substitute product as may be the case with replacement buyers a seller may find it optimal to follow a low quality product with a higher quality one the latter being targeted at replacement buyers furthermore the ability of the seller to commit to future qualities accentuates the sequential increase in quality in the presence of such buyers thus we show that conditions other than uncertainty or technological improvements occurring over time may justify a seller adopting a strategy of sequentially increasing quality this paper was accepted by j miguel villas boas marketing

saving in developing countries this article reviews the current state of knowledge on the determinants of saving rates presenting the main findings and contributions of the recently completed world bank research project saving across the world the article discusses the basic design of the research project and its core database the world saving database it then summarizes the main project results and places them in the context of the literature on saving identifying the key policy and nonpolicy determinants of private saving rates special attention is paid to the relationship between growth and saving and the impact of specific policies on saving rates the article concludes by introducing the studies included in this special issue

the effects of sensitization and habituation in durable goods markets abstract we develop a model to study the impact of changes in price sensitivity on the firm as it introduces multiple generations of a durable product where unit costs are a convex function of quality we incorporate the psychological processes of sensitization and habituation into a model of discretionary purchasing of replacement products motivated by past experience when price sensitivity decreases with each purchase sensitization the myopic firm offers a higher quality product at a much higher price with each generation when price sensitivity increases with each purchase habituation the myopic firm engages in price skimming when sensitization is followed by habituation the myopic firm eventually provides higher quality than the market is willing to pay for leading to a steep drop off in sales and profits the actions of the forward looking firm depend on the discount rate a firm with a low discount rate builds its customer base before offering a higher quality and higher priced product in contrast a firm with a high discount rate quickly increases price and quality following the same path to falling profits of the myopic firm these results provide insight into the firm and consumer behaviors underlying the phenomenon of performance oversupply identified in the innovation literature

veblen effects in a theory of conspicuous consumption the authors examine conditions under which veblen effects arise from the desire to achieve social status by signaling wealth through conspicuous consumption while veblen effects cannot ordinarily arise when preferences satisfy a single crossing property they may emerge when this property fails in that case budget brands are priced at marginal cost while luxury brands though not intrinsically superior are sold at higher prices to consumers seeking to advertise wealth luxury brands earn strictly positive profits under conditions that would with standard formulations of preferences yield marginal cost pricing the authors explore factors that induce veblen effects and they investigate policy implications copyright 1996 by american economic association

agglomeration economies and productivity a structural estimation approach using commercial rents we gain more insight into the heterogeneity in firms productivity regarding agglomeration economies given a production function that allows for input factor substitution we identify ratios of firm specific production parameters employing a hedonic price approach we use unique microdata of commercial rents and firm characteristics and employ semiparametric estimation techniques the results show that agglomeration economies capitalize in commercial rents nevertheless expenditure on agglomeration is in general limited for example it is on average only 5 3 of expenditure on office floor space it is much higher in some sectors for retail firms it is about 20 of the expenditure on floor space 2013 the london school of economics and political science

habit formation from correlation aversion making plans about how much to consume and how much to invest in risky assets over an uncertain lifetime is a fundamental economic challenge the leading models of this planning problem use either additive or habit forming preferences for the most part these models assume an individual is either correlation neutral or correlation seeking in consumption respectively in this paper we introduce two habit forming correlation averse preference models with these preferences we find closed form solutions to the classic consumption and portfolio planning problem our solutions recommend that a correlation averse decision maker follow a habit in their consumption plans while such habits traditionally have been associated with correlation seeking preferences our model leads to consumption habits from correlation averse preferences

a neoclassical perspective on budget deficits i n the 1988 presidential campaign virtually every serious candidate spoke of the urgent need to trim government budget deficits public opinion polls have identified federal deficits as a key economic issue second only to unemployment while many economists are relieved by what they perceive to be a long overdue political response to a critical economic problem others regard the fuss as much ado about nothing it is indeed remarkable that economists can disagree so severely over an issue which commands such a uniform reaction from laymen of widely different ideologies and political affiliations generally speaking there are three schools of thought concerning the economic effects of budget deficits neoclassical keynesian and ricardian before proceeding further it is useful to review the basic structure and implications of each paradigm the neoclassical paradigm envisions farsighted individuals planning consumption over their own life cycles budget deficits raise total lifetime consumption by shifting taxes to subsequent generations if economic resources are fully employed increased consumption necessarily implies decreased saving interest rates must then rise to bring capital markets into balance thus persistent deficits crowd out private capital accumulation in the current economic environment most economists would agree that these consequences would be highly detrimental