different paths to free trade the gains from regionalism we compare free trade reached through expanding regional trading blocs to free trade accomplished by multilateral negotiation with sunk costs the outcomes are different trade in an imperfectly competitive good flows disproportionately more between the original members of a regional agreement even after free trade is reached they secure a higher welfare level from regionalism than from free trade achieved multilaterally nonmembers however reach a lower welfare level a surprising result is that world welfare during free trade is greater when it is achieved by the regional path we conclude with some empirical evidence from the european union that is consistent with the model

explaining the border effect the role of exchange rate variability shipping costs and geography this paper exploits a three dimensional panel data set of prices on 27 traded goods over 88 quarters across 96 cities in the us and japan we show that a simple average of good level real exchange rates tracks the nominal exchange rate well suggesting strong evidence of sticky prices focusing on dispersion in prices between city pairs we find that crossing the us japan border is equivalent to adding as much as 43 000 trillion miles to the cross country volatility of relative prices we turn next to economic explanations for this so called border effect and to its dynamics distance unit shipping costs and exchange rate variability collectively explain a substantial portion of the observed international market segmentation relative wage variability on the other hand has little independent impact on segmentation 2001 elsevier science b v all rights reserved

economic determinants of free trade agreements abstract the purpose of this study is to provide the first systematic empirical analysis of the economic determinants of the formation of free trade agreements ftas and of the likelihood of ftas between pairs of countries using a qualitative choice model we develop this econometric model based upon a general equilibrium model of world trade with two factors of production two monopolistically competitive product markets and explicit intercontinental and intracontinental transportation costs among multiple countries on multiple continents the empirical model correctly predicts based solely upon economic characteristics 85 of the 286 ftas existing in 1996 among 1431 pairs of countries and 97 of the remaining 1145 pairs with no ftas

the effects of uncertainty on investment and the expected long run capital stock abstract this paper examines the effects of output price uncertainty on the optimal investment behavior of a risk neutral competitive firm with a constant returns to scale production function in the presence of convex costs of adjustment investment is an increasing function of q the shadow price of capital given the current price of output we find that increased uncertainty will raise the current rate of investment increased uncertainty will also increase the expected long run capital stock if the price of output is serially uncorrelated however if the price of output is serially correlated then the direction of the effect of increased uncertainty on the expected long run capital stock depends on the curvature of the marginal adjustment cost function in this case we obtain results which are directly opposite of the results in the literature and we locate the flaw in the existing analysis

cost uncertainty and the rate of investment abstract this paper examines the effect of cost and price uncertainty on the optimal rate of investment by firms within a general equilibrium framework former works which have studied this issue like hartman 1972 and abel 1983 1984 1985 have come to the conclusion that this effect is positive since increased price uncertainty raises expected profitability but these studies assume a fixed discount rate which is equivalent to assuming that consumers are risk neutral this paper shows that if consumers are risk averse the effect of uncertainty may be reversed and investment may be depressed when price or cost uncertainty is increased

a stochastic model of investment marginal q and the market value of the firm this paper presents closed form solutions for the investment and valuation of a competitive firm with a cobb douglas production function and a constant elasticity adjustment cost function in the presence of stochastic prices for output and inputs the value of the firm is a linear function of the capital stock the optimal rate of investmentis an increasing function of the slope of the value function with respect to the capital stock marginal q a mean preserving spread of the distribution of future price increases investment an increase in the scale of the random component of a price can increase decrease or not affect the rate of investment depending on the sign of the covariance of this price with a weighted average of all prices this abstract was borrowed from another version of this item

multiperiod sales production decisions under uncertainty abstract this paper studies the behavior of an expected profit maximizing multiperiod firm under uncertainty in output and demand the firm s problem is to determine in each period the level of sales and inventory and the expected output for the coming period the optimal policy is derived in an explicit closed form and is proved to be myopic it is shown that the observed phenomenon of downward price inflexibility can be explained and further specified by using the results of our model

assessing the enlargement and deepening of the european union this paper estimates a theoreticallymotivated gravity model to examine the effect of the european union eu on trade and whet her the order of entry has affected the trade performance of member countries additionally we analyse the impact of the diffe rent phases of eu integration on trade the results show that both original countries and successive enlargements boost intra b loc trade moreover the results suggest that the deepening in the integration process has led to more trade creation among members finally only the latter ph ase of the european integration process the single currency has increased trade with non members

uncertainty in the theory of renewable resource markets the natural growth rate of most renewable resource stocks is in part stochastic this paper examines the implications of such ecological uncertainty for competitive equilibrium in a market with property rights we show that stochastic fluctuations add a risk premium to the rate of return required to keep a unit of stock in situ and we examine the effects of fluctuations on resource rent examples are used to show that extraction can increase decrease or be left unchanged as the variance of the fluctuations increases depending on the extent of market self correction regulatory implications are also discussed renewable resource economics has traditionally been concerned with the study of dynamically optimal harvesting policies given a deterministic function for the natural growth of the resource stock issues have included the existence and characteristics of steady state equilibria for the optimally managed resource the need for and design of regulatory policies to prevent over exploitation and conditions under which as a social optimum or otherwise the resource will be exploited to extinction 1 much of this work has been based on the assumption of a fixed and exogenous price for the harvested resource typically resulting in bang bang solutions for the harvesting policy however some recent papers make price endogenous and thereby describe how the extraction rate and the rate of return and asset value of the resource behave in a competitive market with property rights 2

investment demand when economic depreciation is stochastic the neoclassical model of investment by a risk neutral firm is generalized to include uncertainty about the rate of depreciation by replacing the deterministic capital accumulation identity with a stochastic variant ito s stochastic dynamic optimization is used to derive conditions for optimal investment a nondegenerate steady state distribution of the capital stock is shown to exist and is derived for the empirically important case of a normalized quadratic profit function and static price expectations it is demonstrated for this case that uncertainty about the rate of depreciation decreases the expected steady state capital stock and investment

technical change uncertainty and investment the expected investment dynamics of the risk neutral firm is examined in the presence of uncertainty in the future evolution of the real wage and the stock of technical knowledge a model of the adjustment cost firm is developed that is characterized by quasi fixed factor augmenting technical change that is taken exogenously by the firm the effect of wage and technical change uncertainty on investment behavior is assessed using comparative stochastic dynamic analysis

financial inclusion and financial integrity aligned incentives summary the financial action task force embraces financial inclusion as complementary to anti money laundering and counter terrorist financing as it enhances transparency this support is based on the premise that the increased use of formal financial services leads to a reduction of usage of informal services we present evidence on eight african countries that both are not negatively associated moreover informal employment and cash preference reduce the inclination to use mobile financial services if an increase in transparency acts as disincentive to use formal services the alignment of financial inclusion and integrity will fail

the regionalism debate an overview the following sections are included introductiondefinitionswto provisions for ptashistorical evolutioneffects on union membersvinerian analysis welfare effects of a tariff preferencetransport costs and ptasrules of origin in ftasnon traditional gains guaranteed market access shelter from contingent protection locking in the reforms and dispute settlementimplications for the global trading systemcan pta expansion lead to global free trade do ptas make multilateral liberalization less likely do ptas lead to a rise in trade barriers against nonmembers the spaghetti bowl phenomenonwto illegal policies in ptasopen regionalism deep integrationconclusions minimizing the adverse effects of ptasreferences this abstract was borrowed from another version of this item

uncertain climate change and the international policy response abstract the implications of alternative policy responses to uncertain climate change are analyzed within the context of a simple dynamic economic model the analysis emphasizes two sources of uncertainty that surround climate change scientific uncertainty about how greenhouse gas emissions affect the climate and natural climatic variability the analysis also incorporates an economy s ability to mitigate climate changes through emissions reductions as well as its ability to adapt to such changes through adjusting production decisions while the model is very stylized and excludes some broader issues of social optimality and the allocation of rights to resources across generations basic implications of uncertainty in a dynamic world are highlighted that have not been previously discussed these results suggest that analysts will have a difficult time trying to determine whether a certain emissions strategy improves economic efficiency whether the benefits are greater than the costs when uncertainty is explicitly incorporated into the analysis

are preferential trading arrangements trade liberalizing or protectionist preferential trade arrangements and especially free trade agreements have mushroomed in importance in the 1990s this has revived research on the effects of these arrangements both on the welfare of the member countries and those excluded and on the momentum for further liberalization of the open multilateral trading system this paper reviews the analyses and evidence to date as to these effects showing that analytically anything can happen and that to date there has been insufficient experience to draw conclusions from empirical evidence

regional trade agreements and the pattern of trade a networks approach this paper uses a complex network approach for the analysis trade effects from regional trade agreements on world trade flows we use bilateral trade data to compute the network community structure for every year between 1970 and 2000 we compare this to null community structures that emerge from various models based on regional and geographical classifications the implementation of rta s and gravity models of trade our results show that rta formation appears to have a cyclical pattern on the world trade network community structure we document periods where bilateral trade flows and the structure of the world trade network are consistent with those predicted by formation of rtas these cycles occur in 1980 86 and 1990 96 at the same time we document periods in which the pattern in the world trade network is not explained by rta formation two periods 1986 90 and 1997 2000 show a pattern of bilateral trade flows that moves away from the prediction that results from assuming rta formation as the driving force in the determination of the world trade network structure factors contributing to the latter parts of the cycle during our sample period include formation of regional trade networks in east asia that account for a significant portion of world trade but are not formalised by rtas in force

fifty years of trade policy the policy lessons f ive major lessons for successful global trade management defined as steady reductions in barriers and maintenance of an effective rules based system emerge from the first fifty years of the gatt wto they need to be applied to the present situation to set the stage for another half century of successful multilateral trade cooperation i will summarise the key headings at the outset and then elaborate each concluding with proposals for the wto agenda for the early part of the twenty first century

in search of optimised regional trade agreements and applications to east asia we quantitatively analyse the trade effects of enhanced trade facilitation with extended gravity equations our findings confirm that rtas comprised of countries equipped with better trade facilitation are more likely to be trade creating less likely to be trade diverting and are thus more likely to lead the world economy toward global free trade we also find that i the traditional gains from shallow integration through eliminating tariff barriers will be greater for south south rtas in east asia such as an asean china rta provided that the tariff reducing schedule is strictly fulfilled ii the gains from deeper integration through enhancing trade facilitation will be greater for north north rtas in east asia such as a japan korea rta and iii the gains from a combined trade liberalisation strategy through tariff reductions and enhanced trade facilitation will be greater for north south rtas in east asia such as a china korea and an asean 3 rta

trade policymaking in a resource rich landlocked country the wto review of mongolia the aim of this paper is to provide a comprehensive assessment of the trade policy review of mongolia tprm 2014 the tprm 2014 demonstrates that the mongolian economy is relatively open and it has very low formal trade barriers although there remain significant behind the borders barriers including poor governance and infrastructure being a landlocked country any major cross border price differences quickly results in informal trade with neighbouring china limiting mongolia s ability to pursue independent commercial policy mongolia s growth is not broad based and largely driven by the mining boom making its economy highly vulnerable to external shocks while this is not unique to mongolia and has been seen in many natural resource abundant countries experience suggests that countries with sound institutions and macroeconomic policies have overcome the so called resource curse

the impact of perceived expectations and uncertainty on firm investment this paper analyses the differential impact of perceived expectations and uncertainty on investment spending in small and large firms we analyse two types of investment viz aggregate investment and investment in energy saving technologies using dutch firm level data the results show that expectations and uncertainty about input and output prices and domestic demand have sub stantial but different effects on investment spending in firms of different sizes furthermore we find evidence at least for small firms that there are important differences between the effects of uncertainty about input and output variables

overlapping free trade agreements and international trade a network approach in our work we have analysed the effect of the hub and spoke nature of free trade agreements ftas on trade contrary to previous analyses we have considered the effects of the country s position in the fta network on the bilateral trade of the hub country we have conducted an in depth analysis of the global network of ftas focusing particularly on its evolution in the last 15 years we have utilised a panel data set covering the period 1960 2010 to investigate the effects of the hub and spoke on trade our results show that the countries that are more connected to ftas export more than those that are less involved although not all the partner countries you can connect with are the same an increase in the number of spokes that have no link between them has on average a negative effect on the trade of the hub which indicates that signing ftas with every country is not the optimal strategy for increasing trade however if we consider the way new ftas change the relative position of a country we can see that if new ftas make the country more central or less constrained in the network these new agreements have a strongly positive and significant pro trade effect

free trade agreements for better or worse this paper cites reasons why regional free trade agreements fta s may be better than previously recognized when they are formed or expand as in nafta and why they may be worse when they multiply as is now common just about everywhere else if this argument stands it implies a fundamental reevaluation of fta s and their design

productivity growth in u s agriculture under dynamic adjustment a dynamic measure of productivity growth adjusted for deviations from the long run equilibrium is established within an adjustment cost framework an empirical application to u s agriculture is presented which permits identifying the dynamic linkages between technical change and productivity growth in u s agriculture total factor productivity as dynamically measured grew at 1 50 per annum the combined effect of scale quality adjusted input growth and long run disequilibrium input use contributes only 3 44 of the growth while technical change dominates the growth of total factor productivity

does nnp growth indicate welfare improvement abstract we show that instantaneous increases in real nnp over time are an accurate indicator of true dynamic welfare improvements this highlights a connection between the theory of green or comprehensive national income accounting and the theory of real price indices

risk aversion indivisible timing options and gambling in this paper we model the behavior of a risk averse agent who seeks to maximize expected utility and who has an indivisible asset and a timing option over when to sell this asset our main contribution is to show that contrary to intuition optimal behavior for such a risk averse agent can include risk increasing gambles for example a manager with a choice over when to disinvest from a project a private homeowner with a property to sell or an employee with a grant of american style stock options may be better off taking positions in other assets with zero sharpe ratio that are uncorrelated with the underlying project house or stock price risk the results have wider implications for the modeling and interpretation of portfolio optimization problems involving american style timing decisions

the border effect in spain this paper analyses the border effect in spain using a unique dataset on intranational trade flows over the period 1995 98 the results indicate that after controlling for market size and distance spanish regions trade around 22 times more with the rest of spain than they do with oecd countries moreover the size of the spanish bias is lower in the case of the spanish regions exports than in the case of imports although the difference is not statistically significant in most cases finally the border effect is not uniform across spanish regions

proliferating regional trade arrangements why and whither this paper investigates why regional trade arrangements rtas are proliferating extensively and how the effects of multiple rtas by interacting with each other evolve over time our empirical analysis based on an extended gravity model utilising a large panel dataset of 175 countries from 1948 to 1999 shows that rtas on average increase global trade by raising intra bloc trade without damaging extra bloc trade the net trade effects however heavily depend on the types of rta strategic evolution over time which we categorise as expansionary rtas duplicate rtas or overlapping rtas we find that countries excluded from an rta can benefit more from duplicating a separate rta than from joining an existing rta this result explains why the number of bilateral trade blocs rather than the membership size of existing rtas is currently exploding we also find that the net trade creating effects of rtas are substantially lower for countries participating in overlapping rtas this result suggests that it is less likely that the currently proliferating rtas will completely merge and lead the world economy to global free trade our empirical results are robust to controlling for the characteristics of countries that may influence the impact of rtas

investment under alternative return assumptions comparing random walks and mean reversion abstract many recent theoretical papers have come under attack for modeling prices as geometric brownian motion this process can diverge over time implying that firms facing this price process can earn infinite profits we explore the significance of this attack and contrast investment under geometric brownian motion with investment assuming mean reversion while analytically more complex mean reversion in many cases is a more plausible assumption allowing for supply responses to increasing prices we show that cumulative investment is generally unaffected by the use of a mean reversion process rather than geometric brownian motion and provide an explanation for this result

asian growth and trade poles india china and east and southeast asia summary using a global general equilibrium trade model this study analyzes the impact on developing countries of 1 the dramatic expansion of trade by india china and an integrated east and southeast e se asia trade bloc and 2 productivity growth in the region china is an integral member of the e se asia bloc with strong links through value chains and trade in intermediate inputs while india is not a part of any trade bloc the analyses consider the importance of their different degrees of integration into regional and global economies focusing on potential complementarities and competition with other developing countries

investment under uncertainty and dynamic adjustment in the finnish pork industry bykyosti s pietola and robert j myersmay 1998paper prepared for a selected paper session at the annual meeting of the american agriculturaleconomics association salt lake city utah august 1998 this research was financed jointly byagricultural economics research institute in finland the academy of finland and the finnishcultural foundation we also knowledge the michigan agricultural experiment station for itssupport of this research authors are agricultural economist agricultural economics research institute helsinki finland and associate professor department of agricultural economics michigan state university eastlansing copyright 1998 by kyosti s pietola and robert j myers all rights reserved readers may makeverbatim copies of this document for non commercial purposes by any means provided that thiscopyright notice appears on all such copies

adjustment costs uncertainty and the behavior of the firm this paper examines the effects of demand and cost uncertainty on a firm s investment output and pricing decisions but unlike most earlier studies in which demand and cost are simply not known at the time an output or pricing decision is made here i consider uncertainties over future demand and costs it will be seen that the effects of such uncertainties depend critically on the characteristics of the firm s adjustment costs i treat demand uncertainty in a dynamic context by letting the market demand function shift randomly but continuously through time according to a stochastic process this means that today s demand is known exactly but future demand may be larger or smaller and has a variance that increases with the time horizon likewise uncertainty over factor costs is characterized by treating those variables as stochastic processes i combine this characterization of uncertainty with a dynamic model of the firm in which some factor inputs can be adjusted freely in response to stochastic demand changes but other factors are quasi fixed in that adjustment costs are incurred when they are changed in this model the firm s price and output are random processes but we can examine the firm s behavior in expected value terms of interest is whether the presence of uncertainty should cause competitive or monopolistic firms to invest and produce more or less than they would otherwise how the effects of uncertainty are influenced by the presence of risk aversion and how the use of inventories can alter the impact of uncertainty on capacity and sales of course these questions have been addressed by others in the past among the earliest studies of demand uncertainty are those of edwin mills 1959 1962 and samuel karlin and charles carr 1962 mills examined a single period monopolistic firm that sets both output and price and showed that additive demand uncertainty i e the demand function is of the form q q p u where u is a random variable leads to a lower price if marginal cost is constant so that the firm reduces the expected loss from discarding unsold production karlin and carr confirmed for both the static case and the multiperiod case with inventory carryover that additive uncertainty tends to reduce the price and increase the output of a risk neutral firm while multiplicative uncertainty does the opposite other papers have been concerned with the way in which the error term enters the demand function additively multiplicatively or nonlinearly the implications of choosing price ex ante instead of output the implications of risk aversion and the use of inventories for example agnar sandmo 1971 and david baron 1970 showed that a risk averse competitive firm will produce less when the price is a random variable or subject to an additive error term but a riskneutral firm will not alter its production hayne leland 1972 extended these results to a monopolistic firm whose demand can depend in a general way on a random error term for example q q p u and showed that uncertainty reduces the production of a

the intensity and timing of investment the case of land the authors model the decision to replace durable capital when intensity is variable decisions of this type include land redevelopment decisions where the density of residential or commercial development is a choice variable as well as capital replacement decisions where capacity is variable the authors provide a general yet simple formation of the problem using an optimal stopping framework they characterize the value of the project the timing of investment and the intensity of development the authors show that intensity interacts in important ways with timing taxes and project values the ability to vary intensity raises hurdle rents and delays development decisions copyright 1994 by american economic association

new bilateralism in the asia pacific this paper reviews recent changes in the geographic pattern of regional trading agreements rtas focusing on examples from the asia pacific area the general pattern is one of new bilateral agreements combined with a trend towards continentalism the new trend towards bilateralism can be explained largely by a fear of countries being excluded from their major markets as other countries secure preferential and superior access to these markets this pattern is creating many intersections between rtas with consequential multi tiered preferences and multiple systems of trade rules viewed dynamically however this pattern may have positive effects on world trade it mitigates the effects of large continental rtas and may lead to coalescence or enlargement of rtas the paper reviews models which ask the important question as to whether this process will progress all the way to free trade for the world economy

malaysian trade policy and the 2001 wto trade policy review the purpose of this paper is two fold to examine developments in trade and investment policy regimes in malaysia following the on set of the financial crisis using the trade policy review malaysia 2001 of the wto as a reference point and to evaluate the review in terms of the objectives of the wto trade policy review mechanism as set out in the marrakesh agreement it is found that by and large malaysia has managed to come out of the crisis without compromising on its long standing commitment to maintaining a relatively open trade and investment policy regime by the regional standards however there are some disturbing post crisis developments which deserve scrutiny in a future review these include increase in the degree of dispersion of tariff rates because of high tariff peaks relating to a few product lines increased reliance on non automatic import licensing to regulate imports of a significant number of products which directly compete with domestic production by public sector enterprises and unexplained delays in meeting commitments under the general agreement on trade in services gats

passive firm learning and employment projection error this paper analyzes establishment error in estimating employment targets in business startups and expansions passive firm learning models provide a testable hypothesis that other things being equal old establishments more accurately predict future employment targets than young businesses empirical evidence from 442 ohio establishments implies that an increase of ten years in establishment age is associated with a decrease in employment projection error rate of between 11 and 13 percentage points

the effect of real exchange rate uncertainty on exports empirical evidence unless very specific assumptions are made theory alone cannot determine the sign of the relation between real exchange rate uncertainty and exports on the one hand convexity of the profit function with respect to prices implies that an increase in price uncertainty raises the expected returns in the export sector on the other potential asymmetries in the cost of adjusting factors of production for example investment irreversibility and risk aversion tend to make the uncertainty exports relation negative this article examines these issues using a simple risk aversion model export equations allowing for uncertainty are then estimated for six developing countries contrary to the ambiguity of the theory the empirical relation is strongly negative estimates indicate that a 5 percent increase in the annual standard deviation of the real exchange rate can reduce exports by 2 to 30 percent in the short run these effects are substantially magnified in the long run

deeper integration in east asia regional institutions and the international economic system sea change in east asian perceptions of the international economic system is causing a determined thrust toward deeper east asian integration through regional financial and trade institutions the financial crisis of 1997 98 contributed to this change by revealing weaknesses in the international financial architecture at the same time that it bared weaknesses in domestic policies and institutions in east asia many east asians felt the existing international financial system failed to provide them with adequate prescriptions or aid at a time of great need in response governments are intensifying regional policy cooperation and have begun to develop regional institutional capacity to head off future financial crises and manage them if they occur this change in perceptions of the international economic system has been reinforced by paralysis in the world trade organisation wto the failure of governments to launch a new round of multilateral trade negotiations at the november 1999 wto ministerial meeting in seattle is helping to propel regional approaches to trade liberalisation deeper integration in east asia is a potentially substantial development which will influence the future shape of the international economic system in section 2 i review the primary factors contributing to the financial crisis and discuss the implications for policy makers in east asia in a context of diminished confidence in global institutions the emphasis is on macroeconomic policy management structural reforms changing incentive systems overhauling crisis

principles of stochastic dynamic optimization in resource management the continuous time case abstract a wide range of problems in economics agriculture and natural resource management have been analyzed using continuous time optimal control models where the state variables change over time in a stochastic manner using a firm level investment model and a model of environmental degradation this paper provides a concise introduction to continuous time stochastic control techniques the process used to derive the differential of a stochastic process is stressed and in turn is used to explain ito s lemma bellman s equation the hamilton jacobi equation the maximum principle and the expected dynamics of choice variables a basic extension of the dynamic duality literature is also provided where the hamilton jacobi equation is used to derive a stochastic and dynamic analogue of hotelling s lemma

assessing the benefits of trade facilitation a global perspective this paper estimates the relationship between trade facilitation and trade flows using a panel of disaggregated manufactured goods for the 2000 2001 period for 75 countries four categories of trade facilitation are defined measured and assessed for their impact on bilateral trade flows using a gravity model the four measures of trade facilitation are port infrastructure air and maritime customs environment regulatory environments and e business infrastructure the results suggest that raising global capacity halfway to the world average in the four areas would increase trade by 377 billion most regions of the world increase exports more than imports in large part this result stems from increased exports to oecd markets that is obtained through a country s own effort to improve ports customs regulations and services infrastructures in addition the results suggest that reform and capacity building in trade facilitation in areas related to gatt articles v viii and x that are under discussion at the world trade organisation could expand trade and exports significantly many of the reform measures necessary to achieve this goal need not necessarily require large scale investment projects but rather action in legal and administrative reform to facilitate trade

technical change and irreversible investment under risk abstract a stochastic dynamic model was constructed to analyze investment decisions of an individual farmer under risk in the presence of irreversibilities embedded technical change and indivisible capital an analytical solution was obtained and its local behavior studied by numerical methods optimal investment is obtained by regulating the difference between the desired and actual capital stocks between two barriers that define an inaction interval while the desired capital drifts between the barriers no action is taken if the desired capital touches the upper barrier the farmer invests pushing the average efficiency of the actual capital stock up this in turn raises the desired capital even higher and contracts the inaction interval if these effects are strong enough the farmer will invest again until the potential gains of the technological package are exhausted if the desired capital falls enough the farmer disinvests pushing down the average productivity and expanding the inaction interval disinvestment continues until it stops either because the inaction interval becomes so wide that it is no longer optimal to disinvest or because the actual capital stock is so small that it is no longer profitable to produce

a dynamic model of the firm with uncertain earnings and adjustment costs abstract in this paper a stochastic dynamic model of the firm developed by bensoussan and lesourne is extended to allow for adjustment costs the optimal solution is derived for different scenarios dependent on the shapes of the expected earnings function and the adjustment cost function and on the different parameters of the model it turns out that besides pure investment dividend and saving policies mixed policies can also be optimal for the firm the latter do not occur in the solution of the bensoussan and lesourne model and therefore the solutions derived in this paper come closer to reality

intra industry trade and industry distribution of productivity a cournot ricardo approach this paper constructs a cournot ricardo model of trade by incorporating cournot competition in a ricardian trade model in this model the share of intra industry trade in bilateral trade volume decreases as trading partners become more different in terms of the industry distribution of labor productivity we show that this relationship is a special case of a more general relationship the share of intraindustry is decreasing in a specialization index this specialization index turns out to be equal to the difference in the industry distribution of productivity in the case of our cournot ricardo model while it is given by the difference in capital labor in the well known case of monopolistic competition as both technologies and factor endowments would be important in shaping specialization patterns in the real world we conjecture that the share of intra industry trade is decreasing in two measures of specialization the difference in the industry distribution of productivity and the difference in capital ratio our ols estimations strongly support this conjecture in fixed effects regressions both measures lose significance in the entire sample but the industry distribution of productivity is significant in explaining trade between high income countries

what do we know about the shadow economy estimates of the size of the shadow economy in 21 oecd countries are presented the average size of the shadow economy as a percentage of official gdp over 1999 2000 in these countries is 16 7 the author concludes that it is the increasing burden of taxation and social security contributions combined with rising state regulatory activities that are the driving forces for the recent growth in size of the shadow economy in the countries concerned

adjustment costs uncertainty and the theory of investment the case of non renewable natural resources abstract this paper examines the effects of mineral price and extraction cost uncertainty on the investment program of a competitive resource extracting industry that faces convex costs of adjustment the results show that depletion of mineral reserves will slow down if the marginal adjustment cost function is concave or linear whereas the effect will be ambiguous if the function is convex

exchange rates and traded goods prices abstract this paper presents a partial equilibrium model of the determination of domestic and export prices by a monopolistic competitive firm the model stresses the role of exchange rate uncertainty and expectations the most important result of the analysis is that the stochastic properties of deviations from the law of one price are crucially affected by the currency of denomination of export prices using data on domestic and dollar export prices of japanese goods i find that deviations from the law of one price are due to exchange rate surprises but also to price staggering and ex ante price discrimination

the impact of rules of origin on trade flows a great deal of post war trade liberalization resulted from regional preferential trade agreements preferential trade agreements cut tariffs on goods originating only in those nations that have signed the agreement therefore they need rules of origin to determine which goods benefit from the tariff cut rules of origin have long been ignored for two good reasons they are dauntingly complex and at first sight appear mind numbingly dull the third standard reason for ignoring them the assertion that they do not matter much turns out to be wrong we show that rules of origin are important barriers to trade moreover such rules are emerging as an important trade issue for three additional reasons first preferential trade deals are proliferating worldwide second the global fragmentation of production implies complex international supply chains which are particularly constrained and distorted by rules of origin third the extent to which regionalism challenges the wto based trading system depends in part on incompatibilities and rigidities built into rules of origin our empirical results exploit a natural experiment that was created by technical changes to europe s lattice of rules of origin roos in 1997 this change known as diagonal cumulation relaxed the restrictiveness of rules of origin on trade among the eu s free trade agreement fta partners without changing the degree of tariff preference our analysis allows us to establish a lower bound and upper bound estimate of trade impact of roos reduced trade among the eu s trade partners the lower bound we find is something like 10 while the upper bound is around 70 the second part of the paper draws the policy lessons that arise from considering the implications of our empirical findings the most direct lessons are for fta writers we argue that europe s implementation of cumulation is a good way of reducing the welfare reducing impact of overlapping rules of origin without gutting their fraud fighting ability we also suggest a three part procedure for establishing a more multilateral framework for rules of origin which would be more transparent flexible administratively feasible and negotiable patricia augier michael gasiorek and charles lai tong

behaviour of non renewable natural resource firms under uncertainty optimizing or ad hoc abstract this paper tests the assumption of optimizing behaviour by natural resource firms in the framework of an intertemporal model of non renewable resource development and production using data from the petroleum industry it is argued that the presence of geological and price uncertainty presents a situation in which standard objections to non optimizing behaviour may not hold as an alternative it is proposed that firms use an ad hoc rule of thumb to update decisions as the values of variables change econometric results support ad hoc behaviour as opposed to intertemporal profit maximization

technical change and applications of dynamic duality to agriculture comment the literature on dynamic duality relationships for infinite horizon control problems has grown considerably benveniste and scheinkman chambers and lopez cooper and mclaren epstein epstein and denny mclaren and cooper given adjustment cost models of the firm with static price expectations similar to epstein recent studies have estimated systems of dynamic factor demands in agriculture howard and shumway 1988 howard and shumway 1987 taylor and monson vasavada and ball vasavada and chambers based on alternative or nonexistent assumptions about technology expectations time is often included as an exogenous variable to reflect technical change while vasavada and chambers correctly point out that alternative expectations mechanisms are essentially ad hoc a chosen expectations framework affects the basic structure of the theoretical model which in turn has implications for the technical change component in the dynamic factor demands the purpose of this comment is to explore problems with the approaches used in the literature to incorporate technical change into empirical dynamic factor demand models some simple alternatives are also discussed because the hamilton

adjustment costs and investment in a stochastic endogenous growth model abstract this paper introduces costly investment into a stochastic equilibrium macro model investment is determined by an endogenously determined tobin q that depends upon the structural parameters of the economy the model permits a sequence of economies allowing for an increasing role of government to be studied the effects of both a structural change taking the form of a higher variance of productivity shocks and fiscal policy on the equilibrium is analyzed paying particular attention to the impact on the growth rate and its variability the role of the tobin q in determining the response of the mean growth rate and its variance is emphasized

trade creation and trade diversion in the canada united states free trade agreement in this paper the changes in trade patterns introduced by the canada united states free trade agreement are examined variation in the extent of tariff liberalization under the agreement is used to identify the impact of tariff liberalization on the growth of trade both with member countries and non member countries data at the commodity level are used and the results indicate that the canada united states free trade agreement had substantial trade creation effects with little evidence of trade diversion jel classification f13 f14

a north american free trade agreement analytical issues and a computational assessment abstractthe following sections are included introductionissues in analyzing the economic impact of the naftathe computational modelcomputational resultsconclusionsstudy questionsreferencessuggested further reading this abstract was borrowed from another version of this item

free trade areas in east asia discriminatory or non discriminatory ver the past decade we have witnessed the worldwide proliferation ofregional trade arrangements rtas even after the launch of the wtomultilateral trading system rtas have continued to spread however there havebeen marked variances across regions in terms of the degree to which regionaltrade integration has been carried out the east asian region is characterised bythe dearth of rtas regional integration moves have involved merely partial orloosely institutionalised groupings i e afta asean free trade area andapec asia paci c economic cooperation in particular the major three eastasian countries china japan and korea have tended to bypass the prevalenttrend of regionalism and instead have generally preferred multilateral trade liberal isation approaches under the gatt and wto regulations regarding rtas their stance against regionalism has mainly been for the following reasons i relative predominance of interregional trade and investment relations overintraregional transactions ii historical animosities stemming from the legaciesof japanese colonialism iii lack of central leadership and iv diversities inculture race language and level of economic development within the region in recent years however the region s support has shifted from multilateraltrade arrangements to rtas a turning point was the outbreak of the east asian nancial crisis in 1997 besides triggering massive economic unrest in east asia the crisis revitalised the demand for regional economic cooperation which calledfor more cooperation and policy coordination among neighbouring economies

input choices under price uncertainty theory shows that depending on risk preferences and technological parameters price uncertainty may alter firms choice of capital intensity this paper presents an empirical analysis of the effect of price uncertainty on firms choices of capital and labor stocks empirical results from a cross section of manufacturing industries as well as within industries over time show that greater price uncertainty increases an industry s capital labor ratio it appears that risk aversion does not dominate firms decision making these empirical findings have implications for the analysis of factor demand and productivity and capacity utilization rates

are regional trading partners natural a central statement of the theory of natural trading partners is that preferential trading with regional trading partners is less likely to be trade diverting and therefore geographically proximate partners are to be considered natural partners for preferential arrangements this paper examines this question empirically the analytical framework involves a general equilibrium model of preferential trade and an econometric model with tight links to this theory this framework is used to implement tests of the natural trading partners hypothesis using u s trade data for the years 1964 95 welfare changes that would result from preferential tariff reductions by the united states against various trading partners are first estimated and correlations with bilateral distance measures with and without controls for income levels are then examined since the argument for natural trading partners is based on the greater likelihood of geographically proximate countries to be more significant trading partner

the dispersion hypothesis in macroeconomics macroeconomics has always rested on the fiction that the behavior of aggregates was stable and therefore individual market phenomena could be safely ignored in an important recent contribution david m lilien challenged this fiction and argued that a large component of fluctuations in unemployment could be explained by the dispersion of employment growth across industries this paper develops models of consumption and investment paper in which the dispersion of economic activity can play a role the econometric evidence suggests an important role for the dispersion of economic activity in explaining aggregate consumption and investment

dynamic decisions under risk application of ito stochastic control in agriculture in agricultural economics most studies of dynamic decisions under risk have been empirical with less emphasis on theory in finance resource economics and general economics however ito stochastic control is popular for theoretical work optimal decisions can be characterized using the powerful ito stochastic calculus this paper describes the assumptions and methods of ito control constructs a dynamic model of agricultural decisions under risk and illustrates with four examples

effects of hub and spoke free trade agreements on trade a panel data analysis summary we use panel data consisting of 96 countries and covering the period 1960 2000 to investigate the effects of free trade agreements ftas and hub and spoke systems of fta on exports our empirical results imply an annual growth rate of 5 57 in exports and hence a doubling of exports after 12 4 years between fta partners non overlapping ftas account for 4 12 while hub and spoke ftas account for 1 45 of the estimated export growth rate this indicates that in addition to the direct trade liberalizing effect of ftas the hub and spoke nature of ftas has an additional positive effect on trade

a dynamic q model of investment financing and asset pricing an empirical test for the agricultural sector the u s agricultural sector is experiencing a financial crisis this crisis has been brought about by a decline in the real price of farm products and rising real interest rates since 1980 declining incomes have eroded farmers ability to service debt and falling land values have reduced the collateral necessary to support the debt the relationship between farm income and real estate values has recently been described by melichar 9 11 he argued that increases in income and capital gain or losses are capitalized into land values using national aggregate data from the u s agricultural sector he demonstrated that the rate of return to investment was relatively stable over time because land values respond within a short period of time to changes in income and capital gains or losses the purpose of this paper is to develop and test a model incorporating this capitalization process in order to explain the evolution of asset values in agriculture over time this explanation is important in understanding the nature of the current financial crisis in the agricultural sector and its relation to past cyclical behavior a present value model of the growing firm is developed that incorporates both investment and financing decisions it is an extension of the well known dynamic q model developed by uzawa 20 yoshikawa 22 hayashi 5 pappas 16 pindyck 17 and abel 1 the original q model was developed by tobin 18 dynamic q models rely on an adjustment or growth cost function to limit the firm s rate of investment the major innovation of the model developed here is to extend the previous work to include the financing decision this involves

rules of origin as commercial policy instruments this article examines the role of rules of origin as a commercial policy instrument that targets the input composition of imports using a three country partial equilibrium structure we demonstrate conditions under which the imposition of a binding rule will be welfare improving for an importer facing competitive export suppliers we further show that employing rules of origin in this way would be complementary to rather than a substitute for conventional optimal tariffs copyright economics department of the university of pennsylvania and the osaka university institute of social and economic research association

a programming model with stochastic technology and prices the case of australian agriculture risk associated with stochastic input output coefficients and prices is modeled in a programming specification based upon mean variance analysis and chance constrained programming the algorithm which exploits the features of minos a commercially available computer program is developed and applied to australian agriculture convergence of the algorithm is discussed with the data used the thirty runs of this problem achieved a fast convergence with no more than five cycles the model was used to derive supply response functions of export commodities of australian agriculture the relevant information was generated via parametric variations of prices selected according to a suitable experimental design