the relation between price and marginal cost in u s industry a contradiction in a recent article in this journal hall 1988 examined productivity shocks at the industry level derived from constant returns to scale production functions in which firms were assumed to be competitive hall had two important conclusions first he showed that productivity shocks i e solow residuals were correlated with aggregate demand variables implying that the former are not exogenous impulses second his results implied that firms persistently charge prices above marginal costs making inappropriate the constant returns to scale competitive production function assumed in many theoretical frameworks because of the importance of hall s findings the article has led to many extensions evans 1992 confirms the empirical finding of significant correlations between productivity shocks and aggregate demand variables burnside eichenbaum and rebelo 1993 show that this correlation can be explained by introducing labor hoarding into a theoretical model with competitive firms and constant returns to scale production functions the markups above marginal cost are explained by eden and griliches 1991 and galeotti and schiantarelli 1991 by modifying the theoretical production function caballero and lyons 1992 using the hall data and methodology examine the possibility of external economies in the aggregate manufacturing production finally waldmann 199 1 argues in this journal that the

a characterization of erratic dynamics in the overlapping generations model abstract in this paper we characterize and give examples o wide classes of utility functions which generate erratic dynamics in the standard deterministic overlapping generations model erratic dynamics refers to feasible trajectories which are bounded but which do not converge to stationary points or periodic orbits we show that such trajectories are pareto efficient we introduce credit into the model and show how a constant credit expansion rate can result in erratic trajectories in prices and the real value of credit finally we briefly discuss certain technical aspects of the mathematics used and the statistical nature of the dynamics that can arise from deterministic dynamical systems

stationary sunspot equilibria in a finance constrained economy abstract stationary sunspot equilibria are shown to exist in a production economy with infinite lived agents when it is not possible to borrow against future wage income equilibrium fluctuations exhibit persistence over time scales of the same order of magnitude as observed business cycles an active fiscal policy that stabilizes aggregate money expenditures can prevent such fluctuations

output inflation cycles in an economy with staggered wage setting abstract the question whether increased price flexibility is stabilizing in macromodels of the business cycle has been recently questioned by de long and summers 1986 the present paper is an attempt to reconsider the question by applying some methods from the theory of nonlinear dynamics especially bifurcation theory to the analysis of a dynamic model with sluggish price adjustment it is argued that when inflation plays a destabilizing role through the mundell effect a stable closed orbit representing the perfect foresight dynamics of the output inflation pair may appear in the vicinity of a stationary state moreover bifurcation theory is applied to find analytical results about the relation between the amplitude of the cycles and the degree of flexibility of prices this relation is shown to be positive in a variety of cases

market structure and the empirical specification of profit margins we present evidence from a panel of u k manufacturing industries to test the sensitivity of the margins concentration relationship to specification changes in the dependent variable instrumental variable estimates demonstrate that a positive association between profit margins and concentration is contingent on how the margin is formulated

stability of cycles and expectations the actual dynamics of an economy depends on how agents forecast the future at every date as a function of their information on the past while possibly learning the structure of their environment we show in the case of a one dimensional state variable that under mild conditions on expectations functions a given cycle with perfect foresight that is stable in the actual dynamics is stable in a fictitious backward perfect foresight dynamics we exhibit a restricted class of expectations functions for which the converse is true

the fragility of sunspots and bubbles abstract expectational stability e stability is used to examine the multiplicity of solutions in a range of rational expectations models of interest including muth s inventory model and an overlapping generations model in these model it is found that sunspot and other rational bubble solutions are either e unstable or weakly but not strongly e stable

why u s wage and employment behavior differs from that in britain and japan if a poll were to be conducted among american academic economists to select the most mystifying economic phenomenon of our time surely the sticky nominal wage rate would emerge at or near the top of the list the slow and partial response of the nominal wage rate to changes in aggregate nominal spending has been a central postulate of macroeconomic theory for the past 45 years from keynes general theory down to the standard postwar textbook keynesian paradigm to the more modern fixed wage price models of robert barro and herschel grossman i976 and edmond malinvaud i977 unwilling passively to accept nominal wage rigidity as an unexplained assumption many labour market theorists have followed the lead of costas azariadis i975 and martin baily i974 in building models to explain rigid wages and layoff unemployment as the rational outcome of a profit maximising calculus as i pointed out in an early critique of the azariadis baily model i976a their assumptions cannot explain cycles in employment but rather why workers would want fixed incomes i e a fixed wage rate and fixed employment soon thereafter barro i977 went one step further and argued that contract theory is a facade which cannot explain why workers would choose a rigid wage and variable employment in preference to the classical equilibrium quantity of employment that equates the marginal product of labour with the marginal value of time now an examination of the evidence has led me to the realisation that rigid wages cannot provide the underpinnings for a universally valid theory of the business cycle simply because wages are not universally rigid i document below with postwar quarterly data that the share of fluctuations in the manufacturing wage bill taking the form of nominal wage changes as compared to changes in hours worked is five to ten times greater in britain and japan than in

trends in unemployment wages and productivity the case of japan along with the high savings ratio the functioning of the labour market is one of the most important factors behind the macroeconomic performance of the postwar japan which foreign observers have christened the miracle of the rising sun in the first place the nature of the japanese labour market is important for the long run trend of japanese economic growth because labour and its quality are crucial factors for economic development the high quality of a well disciplined workforce as well as the migration of labour from rural to urban areas has contributed much to the rapid growth of the japanese economy second the nature of the labour market has influenced the pattern of japanese business cycles by buffering demand fluctuations the slow response of firms demand for labour combined with the fast response of the labour force participation ratio has prevented a sharp increase in the unemployment rate during recessions relatively flexible nominal and real wages have also enabled the japanese economy to adjust quite smoothly to supply shocks notably after the second oil crisis in this paper we shall review trends in unemployment wages and productivity in the postwar japanese economy and relate them to its macroeconomic performance we shall also summarize the current literature concerning features of the labour market evaluate quantitative estimates of trends in labour statistics and explore future prospects

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

stabilizing competitive business cycles abstract we study how stylized monetary proportional money transfers fiscal lump sum money transfers and public expenditure policies may eliminate endogenous deterministic cycles and stationary markov sunspot equilibria in a simple version of the overlapping generations model we also present new constructive methods for analyzing stationary markov sunspot equilibria in such a framework

input contracts market structure and the empirical specification of price cost margins abstract we examine the implications for the empirical specification of the margins concentration relationship of different forms of contracting for intermediate inputs we offer an alternative explanation why the results of profit margin regressions depend on whether the margin is deflated by gross output or net output 1997 elsevier science s a

inflation and unemployment the world economy today is vastly different from the 1930s when seymour harris the chairman of this meeting infected me with his boundless enthusiasm for economics and his steadfast confidence in its capacity for good works economics is very different too both the science and its subject have changed and for the better since world war ii but there are some notable constants unemployment and inflation still preoccupy and perplex economists statesmen journalists housewives and everyone else the connection between them is the principal domestic economic burden of presidents and prime ministers and the major area of controversy and ignorance in macroeconomics i have chosen to review economic thought on this topic on this occasion partly because of its inevitable timeliness partly because of a personal interest reaching back to my first published work in 1941

market structure and cyclical fluctuations in u s manufacturing the relevance of imperfect competition for models of economic fluctuations has received increased attention from researchers in both macroeconomics and industrial organization the authors outline a new methodology for estimating industry markups of price over marginal cost and the influence of market structure on cyclical movements in total factor productivity measures of industry concentration import competition and unionization are important for explaining markups in some industry groups much of the estimated markup of price over marginal cost is accounted for by noncapital fixed costs finally the authors show that their estimated margins fluctuate substantially over the cycle in particular markups are countercyclical especially in concentrated durable goods industries copyright 1988 by mit press

keynesian issues and economic theory recent research helped in clarifying the nature of short run price and quantity adjustments in keynesian macroeconomic models and the possible causes of a persistent excess labour supply it is argued however that theories involving imperfect competition and real wage rigidities generate classical unemployment where multipliers act through supply side effects while nominal inertia seems to be at the root of truly keynesian multipliers the appraisal also contains a nontechnical presentation of recent models of endogenous expectations driven business fluctuations cycles sunspots monetary policy can then have persistent real effects under complete information money as a sunspot

a near rational model of the business cycle with wage and price inertia this paper presents a model in which insignificantly suboptimal behavior causes aggregate demand shocks to have significant real effects the individual loss to agents with inertial price wage behavior is second order in terms of the parameter describing the shock while the effect on real economic variables is first order thus significant changes in business activity can be generated by anticipated money supply changes provided that some agents are willing to engage in nonmaximizing behavior which results in small losses

the determination of profit margins in uk manufacturing this paper examines the determinants of profit margins in 91 u k manufacturing industries over the period 1983 86 it considers how the inclusion of labor market characteristics in empirical industrial organization specifications affects the estimated concentration margins relationship the empirical work pays detailed attention to the endogenous nature of variables derived from structural industrial organization models the authors report instrumental variables estimates of margins equations in which there emerges a significant role for labor market characteristics indeed both unionization and industrywide unemployment are found to depress profit margins the impact of concentration is seen to be biased downward when these variables are omitted

on endogenous competitive business cycles the belief that the long run equilibrium of a competitive monetary economy that does not experience any exogeneous shocks whether originating from the external environment or from policy should be modelled as a state that is stationary or perhaps growing at a constant rate seems to be deeply rooted in the mind of some economists

cooperation harassment and involuntary unemployment an insider outsider approach the authors present a theory of involuntary unemployment which explains why the unemployed workers outsiders are unable or unwilling to find jobs even though they are prepared to work for less than the prevailing wages of incumbent workers in siders the outsiders do not underbid the insiders since were the y to do so the insiders would withdraw cooperation from them making their work unpleasant with harassment and thereby reducing the prod uctivity and increasing the reservation wages of the underbidders th e resulting labor turnover costs create economic rent which the insid ers tap in wage setting and as a result involuntary unemployment ma y arise copyright 1988 by american economic association

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

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

sticky goods prices flexible asset prices monopolistic competition and monetary policy a monetary general equilibrium asset pricing model with sticky goods prices is developed goods prices are set by monopolistically competitive firms that maximize stock market value equilibria with underutilization of resources excess capacity in some states result in contrast to previous monetary asset pricing models the degree of competition affects capacity utilization monetary policy can affect output and resource utilization in addition to real asset prices depending upon the amount of information available to the monetary authority

the relationship between production and unemployment in japan okun s law in comparative perspective abstract this paper studies the question whether the celebrated okun s law a relation between excess capacity and unemployment applies to the postwar japanese economy though the fitness of estimation is weak the coefficient that measures the responsiveness of the output gap to the unemployment rate is very large reaching 28 this large coefficient can be attributed to the elastic response in the female participation ratio to flexible working hours to the slow adjustment in employment and to changes in industrial structures the results are compared with those in the united states

vertical integration input contracts and the margins concentration relationship in recent years it has become common when specifying empirical price cost margins to use net output as opposed to the more usual gross output in the denominator it has been noted that with gross output as the denominator the point estimate on concentration from a regression of margins on concentration is lower than with net output as the denominator and the estimate is frequently insignificant the possible explanations that have been put forward to explain this empirical phenomenon are discussed and evidence is presented using data from the uk census of production and the uk input output tables neither theoretical nor empirical justification is found for the use of the adjusted margin but instead it is suggested that the empirical phenomenon is caused by the omission of appropriate variables to control for contracting relations in purchasing intermediate inputs

equilibrium cycles in an overlapping generations economy with production abstract perfect foresight equilibrium trajectories of an overlapping generations model with production may include stable or unstable invariant closed curves these orbits are detected using the hopf bifurcation theorem where the parameter of bifurcation is purely technological the paper also proves that there is a stabilization policy that completely eliminates the cycle finally using a c e s production function it is shown that the range of values of the elasticity of substitution between capital and labor for which cycles may exist is bounded above

deficits and cycles abstract this paper shows that periodic equilibria may arise in a simple overlapping generations model with capital if the government follows a policy of fixing the value of the deficit rather than fixing the value of government debt then the difference equation that describes competitive equilibria may posses complex roots in the neighborhood of the golden rule stationary state one may show that if there exist parametric families of economies for which these roots change stability then locally there exists an invariant closed curve the paper provides two simple examples that generate such equilibria and it solves these examples numerically

capacity and competition empirical evidence on uk panel data following d kreps and j scheinkman 1983 it is common to view the difference between cournot and bertrand competition as depending on production capacity bertrand undercutting is only feasible if firms have capacity to serve the market gained if firms are capacity constrained the cournot model is more appropriate this paper tests the capacity and competition idea by looking at the relationship between profits and capacity constraints if capacity constrained firms become more cournot like it should be positive using survey data on capacity constraints merged into a panel industry data set for the united kingdom the authors find a robust positive relationship copyright 1994 by blackwell publishing ltd

wage rigidity and unemployment in oecd countries real wage rigidity is often blamed for causing unemployment in the wake of adverse real shocks like changes in productivity or the terms of trade likewise nominal wage rigidity is blamed for causing unemployment in the wake of adverse nominal shocks like falls in nominal demand 1 however there has been relatively little systematic discussion of how these concepts should be defined some authors e g sachs 1979 have defined real wage rigidity as the opposite of nominal wage rigidity with the us nominally rigid and europe really rigid 2 the rigidity of european real wages has then been used to explain why europe has experienced a greater increase in unemployment since 1973 than the us but in this discussion real wage rigidity has not been measured in a way which would in fact predict how much unemployment would result from a given real shock the discussion has focused on the degree of nominal inertia in the system but the unemployment cost of real shocks does not depend primarily on the degree of nominal inertia but rather on the effect of unemployment in the phillips curve

a model of imperfect competition with keynesian features the recent literature on the reappraisal of keynes has viewed keynesian equilibria as arising when prices are fixed and effective demands and supplies are equilibrated through the adjustment of quantities one problem with this approach is that it lacks a theory of price determination in particular of why prices are fixed in the present paper we show that a number of keynesian features arise in a model in which prices are fully flexible but where agents have some monopoly power one advantage of this approach is that it provides a theory of the determination of both prices and quantities

income distribution efficient bargaining and market structure we present an efficient bargaining model in which wage share is negatively associated with product market structure and varies positively with union bargaining strength the model is tested using data from a panel of u k manufacturing industries instrumental variables estimates corroborate a positive negative union bargaining strength concentration effect on labour s income share

the empirical specification of price cost margins abstract this paper examines why results for profit margin regressions may depend on whether the margin is deflated by industry sales or value added it attributes disparate results to stage of production effects which occur because the price elasticity of demand is an omitted variable

organizational adjustment and institutional factors in japanese labour market adjustment an empirical evaluation abstract this paper examines the importance of institutional factors in the mechanism of japanese labour market adjustment the commonly held view suggests that transfers of employees both between and within firms have enhanced flexibility while contributing to the maintenance of low unemployment rates the paper produces evidence in support of the importance of transfers as an adjustment device limited to a subset of large manufacturing enterprises however the direct macroeconomic contribution of these institutional factors is marginal and the common view may have overestimated their importance

a non walrasian model of the business cycle abstract this paper shows how the dynamic evolution of a short run non walrasian equilibrium can generate cycles the cyclic behavior of the system results from the combination of an unstable accelerator and of stabilizing price effects the novelties of the model presented in this paper with respect to previous contributions in non linear cycle theory are the use of a non walrasian equilibrium structure in the short run and the fact that a cycle is obtained without having to assume any ad hoc shape for the various functions involved moreover the model bridges the gap between cycle theory and the traditional short run is lm analysis