contract enforcement and trade liberalization in mexico s footwear industry abstract the wave of formal legal system reforms sweeping developing countries provides only a partial solution to the problem of enforcing agreements between firms informal institutions govern the majority of interfirm transactions economic reform also necessitates changes in these institutions this paper examines the evolution of contract enforcement in the mexican footwear industry as trade barriers were removed in the closed economy geographic agglomeration of manufacturing allowed the manufacturers trade associations to maintain information about the behavior of retailers and gave retailers strong incentives to maintain reputations by providing an alternative source for procurement trade liberalization weakened the power of manufacturers

an energy efficient future a strategy for the uk abstract this article examines the national and international energy context within which a uk energy efficiency strategy would need to be formulated and also highlights the broader macroeconomic rationale for a more concerted approach it focuses particular attention upon the crucial role of the public sector including both the energy demand and supply sides and the need to review investment appraisal criteria in the energy sector

support systems for the diffusion of renewable energy technologies an investor perspective concern over climate change impacts and the projected depletion of fossil fuels has urged more governments to adopt policies that stimulate the diffusion of renewable energy technologies ret with an increasingly diverse suite of support instruments the question emerges as to which instruments or combinations are able to achieve faster more substantial diffusion results although various support instruments were extensively addressed in policy studies there is still no consensus this is partly because many policy studies take a policy maker approach in comparing support instruments leaving relationships between policy design and policy results as a black box this paper proposes an investor oriented perspective to analyze the diffusion potential of support systems for ret the main argument is that it is not the type of support instrument but rather its risk profitability characteristics that influence investor behavior and the rate of diffusion the two instruments most frequently discussed and compared are the feed in tariff and the quota model the analysis in this paper concludes that policy design is crucial while often feed in tariffs are applauded and quota system feared feed in tariffs may also bring about disappointing diffusion results when poorly designed while quota systems may be also conceived as attractive instruments for independent power producers

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

an axiomatic approach to compensated demand abstract starting with hypotheses on functions which can be interpreted as income compensation functions a theory of consumer behaviour is developed if people act rationally they will behave according to these hypotheses from these axioms many propositions well known from traditional neoclassical consumer theory can be deduced in particular shephard s lemma can be proved within this theory

in the aftermath of the energy crisis new zealand s energy policy in the 1970s and 1980s abstract the past decade of energy policy in new zealand is analysed with respect to the country s dependence on imported oil energy conservation programmes and the use of renewable energy resources in all cases the country has failed to meet the objectives continually set forth in energy policy documents the recent corporatization strategy of the government with respect to energy planning and management makes the possibility of achieving integrated energy planning quite dubious even recent studies calling for resilient energy plans have only added ambiguity to this situation it is only through a coordinated and centralized strategy that these deficiencies can be overcome which is quite the opposite of the present policy focus

booming sector economic activity in paraguay 1973 86 a case of dutch disease the primary purpose of this study is to investigate the applicability of the dutch disease model as a means of explaining the changing sectoral composition of output for paraguay in the period 1973 86 the consequences of booming sector activity for 1 the distribution of income as it affects wages and 2 the in stability of export earnings for paraguay are examined the dutch disease model predicts that the consequences of booming activity will include a contraction of non booming sector activity as well as a real appreciation of the exchange rate these outcomes are tested in several single and multiple equation estimable models for the case of paraguay

indices of household welfare and the value of leisure time i introduction a true leisure inclusive welfare index indicates the compensatory change in wage rates goods consumption or nonlabor income required to enable the household to attain some reference period utility given an exogenous change in wage rates and prices although these indices are theoretical constructs for the measurement of individual or household welfare changes empirical analyses of these indices have relied upon aggregate time series data these data provide information on national average changes in wage rates goods consumption and hours worked but do not capture changes in hours worked at the household level due to increased labor market participation while the entry of many new part time workers into the labor market may decrease the national average of hours worked per week there may be a decrease in leisure for many households in addition the aggregate time series approach ignores differences across households in demographic attributes and the occupations and industries in which household members are employed to address these issues two large cross sections of household data the 1972 and 1980 bls consumer expenditure surveys u s bureau of labor statistics 1978 were used to calculate three types of leisure inclusive welfare indices the real wage index goods consumption and nonlabor income indices for each of six household demographic groups households comprising a husband and wife with zero or more dependent non working children were considered as the basic decisionmaking units in this household approach two real wage indices could be constructed that of the husband and that of the wife since the labor services of the two individuals may be valued differently the remainder of the paper is organized as follows in section ii the leisure inclusive welfare indices are developed theoretically the fixed weight bounds on the true indices and the limitations of these indices in the context of a more general but as yet undeveloped intertemporal behavior framework is discussed in section iii the data and empirical results are discussed and analyzed a summary and conclusions follow in section iv along with suggestions for future research

energy efficiency vs economic efficiency new zealand electricity sector reform in the context of the national energy policy objective abstract in this article i review the diverse commentaries on new zealand s ongoing electricity sector reform process within the context of the government s energy policy objective in doing so my purpose is to highlight the interactions between the concepts of energy efficiency and economic efficiency in particular i ask how do the various commentators on reform define these concepts what indicators do they use to measure them and what level of each do they prescribe as appropriate my main objective is not to decide whether any commentator is right or wrong rather i seek to identify the distinct world views or paradigms underlying the commentaries with respect to both energy efficiency and economic efficiency i conclude that economic efficiency is consistent with a supply side paradigm valuing economic growth whereas those who value energy efficiency over economic efficiency subscribe to a demand side paradigm recognising the limits to growth such a paradigm derives from the ethic of sustainability i close by posing the as yet unanswered question are these paradigms mutually exclusive

indexing government programs for changes in the cost of living this article presents social cost of living indexes constructed from an econometric model of aggregate consumer behavior the econometric price index has the same average inflation rate as a tornqvist price index over the period 1947 1995 but rises less rapidly after 1973 group cost of living indexes are presented for white and nonwhite male and female headed and elderly and nonelderly households elderly households have experienced a slightly higher rate of inflation than the nonelderly since 1980 we recommend indexing government programs such as social security by social and group cost of living indexes rather that the consumer price index

trade liberalisation and plant exit in new zealand manufacturing data on new zealand manufacturing plants are used to examine the impact of trade liberalization on plant exit recent theories suggest that the prospect of a declining market might cause firms to adopt strategic behavior that causes low cost plants to exit first this hypothesis is generally unsupported surviving plants were larger lower cost and were owned by specialized firms with few plants plant costs were more important than firm size for explaining the plant closing behavior of single plant firms diversified multiplant firms were more likely to close plants and were influenced by plant size but not plant costs copyright 1996 by mit press

models of export instability and empirical tests for less developed countries abstract alternative models are developed in which export earnings instability is generated by domestic supply domestic demand or foreign demand fluctuations their relative merits over the 1957 1972 period are examined through multiple regression analysis for a sample of 50 ldcs with breakdown into sub samples based on the type of commodity exported and the nature of foreign markets the results suggest that export instability originates mainly from foreign sources especially variations of market shares in foreign markets and commodity groups however domestic supply and demand fluctuations are the dominant factors for countries highly dependent on food exports geographic concentration is an important factor for countries dependent on food exports and developed country markets

learning and capacity expansion under demand uncertainty a competitive dynamic model of entry into a new industry is set up and both its positive and normative aspects are studied the main assumptions are that entry is sequential that it occurs under imperfect information on the size of the market and that better information becomes available as time goes on the gradual improvement in information is due to the fact that later waves of entrants are able to observe the profitability of earlier entrants the major results reported here under suitable restrictions are that the equilibrium rate of entry is monotonically decreasing over time and that at any given point in time it is smaller than the socially optimal one when a new market opens as a result of a product being newly invented for instance or when an existing market starts to expand uncertainty with respect to its size is likely to prevail as a result of this uncertainty entry of firms into such markets typically will occur in waves some firms will enter initially while others will wait to see the consequences of that initial entry if the experience of early entrants is favourable entry will continue otherwise entry will cease hence with the introduction of a new product two phases are associated the growth phase typified by positive operating profits for existing firms and expansion of productive capacity due to entry of new firms and the mature phase typified by erosion of profits and fixed total productive capacity empiricists estimating the time pattern of investments during the growth phase have found an s shaped diffusion curve see mansfield 1986 and gort and klepper 1982 the purpose of the present paper is to theoretically characterize these time patterns and to investigate their welfare properties any attempt to model the type of entry described above must account for differences in both entry dates and resultant earnings in other words the theory must explain why the realized earnings of different cohorts of firms are not equal often such ex post differences are reconciled by assuming heterogeneity with respect to some latent underlying characteristic managerial ability for instance and attributing differences in earnings to differences in that characteristic in this paper instead earning differentials are attributable to luck only ex ante all firms are technologically identical and equally capable of forecasting market prospects and rationally acting upon those forecasts ex post some firms turn out to have entered at the right time and are for that reason more profitable the model developed in this paper analyzes a parametric example of a sequential entry problem in which the uncertainty over market size is gradually resolved over time in a bayesian setting in an environment of perfect competition and constant returns toscale a free entry equilibrium concept is introduced and the aggregate implications of the time path of investments are derived i then compare this actual time path to the optimum this comparison is interesting because the equilibrium is analysed under the

income taxation labor supply and the theory of income based cost of living indices abstract this paper derives theoretically exact formulas for income and expenditure based cost of living indices that are implied by a model of utility maximization in the presence of taxation and a goods leisure decision the derived income based cost of living indices not only allow for substitutions among goods and leisure as the incentives to consume them change as do the expenditure based indices but also explicitly incorporate the effects of bracket creep and the tax deductibility of leisure into the value of the indices numerical estimates of three income based measures of the cost of living suggest that bracket creep eroded substantially the purchasing power of u s households during the 1970s

approximate equilibria with bounds independent of preferences authors prove the existence of approximate equilibria in exchange economies giving bounds on the excess demand in terms of the number of traders and norms of the endowments but independent of the preferences

power privatization and the uk coal industry abstract this article considers the impact of power privatization on the uk coal industry it notes the key importance of fuel costs in determining the profit levels of private generators and concludes that privatization will result in a premature closure of uk coal capacity which would otherwise be competitive with imported coal after 1990 it suggests that the basis of power privatization is essentially irrational and ideological

the privatization programme and the consumer interest abstract the uk government s privatization programme has sought to free the managers of the industries from interference in the day to day running of their businesses three related assumptions seem to underly the extension of this approach to the utility industries first that the products of utility industries should as far as possible be treated as a commodity like any other second that the overriding purpose of public policy towards the utilities is to promote efficiency not equity for example third that managerially independent shareholder owned industries will be more efficient than regulated centrally planned industries consumer organizations are sceptical about these assumptions

economics in action ideas institutions policies when i left the university of chicago to become secretary of labor about a quarter century ago i recognized that i was leaving the role of professional economist and taking on the responsibilities of a player in the public policy process but i quickly discovered that i could not get away from economics habits of thinking stay with you so i have found myself to be still an economist but responsible for action i had some helpful tutorials along the way i recall a session with the ways and means committee and its chairman wilbur mills not long after i started as secretary of labor the subject was unemployment compensation i was invited to take part in the committee s deliberations and did so vigorously the chairman interrupted me mr secretary when you are in your classroom you are accustomed to getting your way but down here we compromise but i also learned that the real task is to know when to compromise and when to hold firm how to move tactically while maintaining your strategy late one night some two years later when i was budget director and we were at the end of the long annual struggle to contain spending i asked a veteran civil servant sam cohen if there was really any difference between republicans and democrats when it came to the budget they both spend money he replied but the democrats enjoy it so cuts in government spending are easier to advocate than to execute that is the part that takes real conviction in the congress as well as in the executive branch i have also realized increasingly that my training in economics has had a major influence on the way i think about public policy tasks even when they have no particular relationship to economics our discipline makes one think ahead ask about indirect consequences take note of variables that may not be directly under consideration economics deals with markets and how they work and seeks out the wide ramifications of policies and events across industries and over time economic policies are partially anticipated before enactment and continue to affect the economy often in ways not anticipated long after they have been put in place results occur but with a lag the key to a successful policy is often to get the right process going while the economist is accustomed to the concept of lags the politician likes instant results the tension comes because as i have seen on many occasions the economist s lag is the politician s nightmare so my training as an economist has taught me also to be a strategist who tries to understand the constellation of forces present in a situation and to arrange them to point toward a desirable result a kind of patient impatience is required with this in mind i address you about some opportunities and problems facing us today

geographic concentration and china s agricultural export instability this paper investigates the impacts of geographic concentration on china s agricultural export instability with a multiple region variance decomposition approach the decomposition results suggest that china s agricultural export concentration into the japanese market greatly lowers agricultural export instability while concentration into the hong kong south korea asean the us and russian federation markets increases export instability china s exports to the eu also lower its agricultural export instability further decomposition results indicate that the impacts of geographic concentration on different agricultural product export instabilities are different

economic growth and emissions reconsidering the empirical basis of environmental kuznets curves abstract recent empirical research indicates that certain types of emissions follow an inverted u or environmental kuznets curve ekc as income grows this regularity has been interpreted as a possible de linking of economic growth and patterns of certain pollutants for developed economies in this paper the empirical basis of this result is investigated by considering some statistical particularities of the various ekc studies performed it is argued that the inverted u relationship between income and emissions estimated from panel data need not hold for specific individual countries over time based on insights from intensity of use analysis in resource economics an alternative growth model is specified and estimated for three types of emissions co2 nox and so2 in four countries netherlands uk usa and western germany it is found that the time patterns of these emissions correlate positively with economic growth and that emission reductions may have been achieved as a result of structural and technological changes in the economy sustainable growth is defined as the rate of economic growth that does not lead to growth in emissions its rate is calculated for each type of emission and country based on estimated parameter values the resulting indicators reflect a balance between the positive influence of growth and negative influence of structural change and technological progress on emission levels

real wage indices this paper examines real wage measures that include leisure and nonlabor income in consumption decisions with respect to the advantages and disadvantages of partial versus complete welfare orderings and of utility based versus utility free wage indices in addition we argue that the usefulness of a real wage measure beyond welfare comparison has been ignored to test the robustness of utility based indices these real wage measures are calculated for two different utility function specifications the indirect addilog system and the linear expenditure system further comparisons are made against index bounds that are independent of the functional form for preferences

on lionel mckenzie s 1957 intrusion into 20th century demand theory in this essay we read mckenzie s 17 paragraphs of 1957 on demand theory without a utility index as an opening to the narrative of 20th century demand theory and as a lever for the understanding of what has now reached culmination as the neoclassical theory of demand in tracking the influence of these paragraphs on both theoretical and applied work we also use them as a foothold for reflection on the process of theorizing to argue for the view that one cannot neglect the changing problematic that the theory is adduced to address that the historical narrative behind a particular theorem is indispensable in understanding the theorem itself this implicit theorizing of the process of theorizing then forces us to consider stigler s distinction between textual and scientific exegesis and confront it to a second order level of theorizing and thereby bring out the continuity possibly not quite seamless between a theorem and its history

developments in the throughput income relationship theoretical and empirical observations abstract it has been suggested that the relationship between income and the associated environmental pressure in terms of derived materials inputs and pollution levels may take an inverted u shape indicating a delinking of environmental pressure from economic growth in relation to rising per capita incomes the likelihood of such a relationship being persistent is discussed in the context of a simple macro model of industrial metabolism and the possibility of relinking clearly emerges data on specific indicators of environmental pressure i e the throughput of materials energy and the volume of transport in 19 countries have been used to investigate patterns of delinking the results suggest that delinking may not be persistent already some advanced economies may be entering a new period of relinking the relationships between environmental pressure and welfare in the medium long term may be n shaped rather than inverted u shaped

surplus maximization and optimality i identify assumptions under which policies that maximize expected surplus are pareto optimal even when expected consumer surplus does not even locally represent preferences over price income lotteries besides the oft made partial equilibrium assumptions that only one price varies and that income changes do not aect demand the two other assumptions are that every consumer s indirect utility function is supermodular in price and income and policies order prices by a single crossing property supermodularity holds precisely if relative risk aversion exceeds the income elasticity of demand a mild condition the single crossing property appears strong but holds in many applications that use expected surplus

consumer s surplus without apology reply i began my article consumer s surplus without apology henceforth cswa with the words the purpose of this paper is to settle the controversy surrounding consumer s surplus p 589 that is my purpose here as well however george mckenzie s published comments have taught me that if articles and careful analyses settle controversies they only do so very slowly mckenzie makes sweeping and attacking statements about cswa but fails to substantiate them he scatters birdshot criticisms at cswa that are based on misreadings of rather clear material he offers an example in which he miscalculates multiproduct consumer s surplus finally he contends that his own with ivor f pearce approach to welfare analysis is preferable to the consumer s surplus approach in this reply to keep the record straight i show in section i that each of mckenzie s strongly worded attacks is unsubstantiated and invalid and that each of his more technical sounding criticisms rests only on misreadings of cswa more interestingly in section ii i summarize some of the theory of multiproduct consumer s surplus that is needed to understand the calculatiop error in and proper interpretation of the example that mckenzie proffers in section iii i argue that the approach to welfare analysis advocated by mckenzie and pearce is far less useful than the consumer s surplus methodology

approximate equilibria in markets with indivisible commodities abstract this paper presents results on the existence of approximate equilibria in large but finite exchange economies in which all the traders have non convex consumption sets as such the paper gives a natural extension to the finite economy of mas colell s results on existence with indivisible commodities and a continuum of agents it also presents an approximate equilibrium theorem without any assumption of compactness or bounded non convexity of preferences

consumer behaviour theory and empirical evidence a survey this survey is designed to emphasize the relationship between empirical a nd theoretical considerations in the analysis of consumer behavior a lthough it focuses primarily on analysis at the individual or micro l evel it tries where possible to draw implications for the estimati on of aggregate relationships the importance of micro level analysis stems from the rapid expansion in available panel and survey data se ts this development has generated its own theoretical and empirical issues many of which are raised in this survey copyright 1988 by royal economic society

economic reform in new zealand 1984 95 the pursuit of efficiency between 1984 and 1995 new zealand changed from a closed and centrally controlled economy to one of the most open countries in the oecd the reforms liberalizing the economy were notable for their very comprehensive coverage and innovations that included performance contracts for senior civil servants and the central bank legislated constraints on fiscal expenditure decisions backed by accrual accounting tax neutrality subsidy free agriculture and no industry specific regulation of competition modern microeconomics contributed much to policy design economic growth has been vigorous since 1991 but a different sequencing of reforms may have enhanced outcomes

a differential measure of the real wage index abstract in this paper we derive an approximation of the real wage index that does not require the estimation of preferences the major advantage of this approach is that the measure is extremely easy to compute and provides a first order approximation of the rate of change in the real wage index

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

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

a theory of exit in duopoly we develop a duopoly model in which exit occurs because of the existence of fixed costs or opportunity costs each firm enters the market knowing its own cost but not that of its opponent as times goes on each firm becomes increasingly pessimistic about the cost of its remaining rival the time of exit is the only strategic variable so that our model is a war of attrition in contrast to the classic war of attrition however we assume that with positive probability each firm s costs may be low enough that staying in forever is a dominant strategy thus our model unlike the classic one has a unique equilibrium

compensating variation and hicksian choice probabilities in random utility models that are nonlinear in income in this paper we discuss hicksian demand and compensating variation in the context of discrete choice we first derive hicksian choice probabilities and the distribution of the random expenditure function in the general case when the utilities are nonlinear in income we subsequently derive exact and simple formulae for the expenditure and choice probabilities under price policy changes conditional on the initial utility level this is of particular interest for welfare measurement because it enables the researcher to compute the distribution of compensating variation in a simple way we also derive formulae for the joint distribution of expenditure the choice before and after a policy change has been introduced

costly search and recruiting a labor market model with costly search and recruiting is constructed it incorporates many features found in other models and provides new insights into the effects of externalities and transaction costs the model possesses a continuum of equilibria some of which may be pareto ranked with different rates of unemployment despite the multiplicity of equilibria comparative statics results are obtained copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

aggregate consumer behavior and the measurement of social welfare this paper describes a new approach to normative economics combining the theory of social choice with econometric modeling of aggregate consumer behavior we first derive a system of aggregate demand functions by exact aggregation over individual demand functions we then construct measures of individual welfare from systems of individual demand functions finally we incorporate these measures into a social welfare function introducing ethical assumptions based on horizontal and vertical equity to illustrate the application of this approach we consider the u s standard of living and its cost over the period 1947 1985 the purpose of this paper is to describe a remarkable convergence that has occurred between economic theory and econometrics over the past decade this conjunction has taken place between the theory of social choice and econometric modeling of aggregate consumer behavior the confluence of these two streams of research has produced a new approach to normative economics this approach has been successfully applied to the evaluation of economic policy the measurement of poverty and inequality and the assessment of the standard of living and its cost a common problem in the modeling of consumer behavior and social choice is the representation of individual preferences in the econometric modeling of aggregate consumer behavior the primary emphasis has been on simplifying aggregate demand functions the most familiar approach to this problem is the model of a representative consumer this model is required to justify applications of the theory of individual consumer behavior to aggregate data on prices and quantities consumed the simplest version of the model is based on identical homothetic preferences for all individuals under identical homothetic preferences aggregate quantities consumed are functions of aggregate expenditure and prices these functions have precisely the same properties as demand functions in the theory of individual consumer behavior the condition of identical homothetic preferences was weakened by gorman 1953 to permit displacements from the origin for individual demand functions gorman showed that a necessary and sufficient condition for aggregate demand functions to depend on aggregate expenditure is that all individu

long run scale adjustments of a perfectly competitive firm and industry an alternative approach the purpose of this note is to use the cost function technique to derive the results of the recent article in this review by c e ferguson and thomas saving hereafter f s our interest lies not so much in the results as in the simplicity and power of the technique itself in contrast to the rather cumbersome conventional apparatus of comparative statics micro theory 1 we shall not therefore discuss in detail the f s interpretations of their results although the technique should give the reader a more intuitive grasp of what is going on following f s we assume that the production function f x is increasing in each input strictly concave and twice continuously differentiable on the positive orthant all equilibrium input vectors are assumed strictly positive we start from the duality between production and cost functions demonstrated by shephard uzawa and mcfadden under our assumptions the production function may be uniquely characterized by its minimum total cost function defined for all p 0 by2 c min ptixi f x q

anatomy of a future energy crisis restructuring and the energy sector in new zealand abstract up until the mid 1980s new zealand had been characterized by an economy that was heavily protected extensively regulated and in which production was subsidized to a considerable extent in 1984 the government embarked upon a programme of extensive public sector and economic restructuring described by some as being among the most wide reaching and radical in new zealand s history for the energy sector the restructuring has meant a move away from an administrative infrastructure of the 1970s and 1980s that was strongly centralized and government led to one that is based much more on market forces energy development production and delivery have been corporatized and privatized the energy sector has been largely deregulated and government has disavowed itself of responsibility for energy resource management and policy the primary motivation that underlies all of the reform is economic efficiency concerns are widely held however for the implications that follow from this restructuring of the energy sector for the efficient management of energy resources security of supply long term management of the sector and for the maintenance of environmental quality it is possible that greater economic efficiencies might be achieved although this is by no means certain but it would seem that specific characteristics of the restructuring will militate strongly against the achievement of other objectives in the sector recommendations for amendment refer to the need to strike a sensible balance between market forces and government involvement

a one line proof of the slutsky equation one focus of the usual classroom discussion of consumer theory is the demonstration that the individual consumer s reaction to a change in the market price of a commodity can be usefully broken down into vectors of substitution effects and income effects the slutskv equation relating the price effect to the substitution and income effects can be simply nmotivated by j r hicks graphical presentation p 31 but the usual proof see paul samuelson is very tedious and nonintuitive if the instructor includes a discussion of the expenditure function in his curriculum however he has available a concise intuitively appealing proof of the slutsky equation 1 suppose a consumer with income y faces a vector of commoditv prices p his marshallian demand curve for commodity j is given by xj dj y p the minimum expenditure necessary for the consumer to achieve any utility level u is given by his expenditure function y m u p here y is in units of the jth good his hicksian income compensated demand for commodity j is represented xj hi u p if m is differentiable we have the well known result that

market failure and energy policy a rationale for selective conservation abstract appropriate activities for the government in the energy sector of the us economy are suggested on the basis of market failures in this sector alleged market failures are explored and specifically targeted remedies proposed where indicated the resulting government policies can be characterized as selectively conservationist designed to induce lower levels of use of particular fuels sometimes in particular industries

information technology and the use of energy abstract this paper assesses the potential impact of information technology on energy use in advanced economies irrespective of energy price movements information technology is expected to raise the energy efficiency of economic activity through its direct application to reducing energy consumption in products and processes and through the productivity improvements and structural changes it initiates which will not involve substantial increases in energy use economic growth will thus be less tied dynamically to the expansion of energy supply and demand than in previous phases of industrialization while overall energy demand may not rise strongly information technology will however tend to increase electricity s importance in the economy

a new test for manufacturing industry efficiency an analysis of the results of import licence tendering in new zealand abstract one test of the relative productive inefficiency of the protected manufacturing industries found in many newly industrialising countries is the percentage by which domestic prices exceed world prices it is suggested that these price differentials are reflected in the premiums paid for import licences under the public sealed bid tendering scheme currently operating in new zealand the premium results for 22 roughly compiled industries suggest that nearly three quarters 15 have estimated unit costs 40 percent or more above those of efficient overseas producers evidently the long term policy of industrial diversification through protection has produced substantial resource misallocation in the economy

efficient intra household allocations a general characterization and empirical tests the neoclassical theory of demand applies to individuals yet in empirical work it is usually taken as valid for households with many members this paper explores what the theory of individuals implies for households that have more than one member we make minimal assumptions about how the individual members of the household resolve conflicts all we assume is that however decisions are made outcomes are efficient we refer to this as the collective setting we show that in the collective setting household demands must satisfy a symmetry and rank condition on the slutsky matrix we also present some further results on the effects on demands of variables that do not modify preferences but that do affect how decisions are made we apply our theory to a series of surveys of household expenditures from canada the tests of the usual symmetry conditions are rejected for two person households but not for one person households we also show that income pooling is rejected for two person households we then test for our collective setting conditions on the couples data none of the collective setting restrictions are rejected we conclude that the collective setting is a plausible and tractable next step to take in the analysis of household behavior

least cost energy strategies for power system expansion abstract this paper describes a theoretical framework and practical procedure for identifying least cost energy strategies for power system expansion under such a strategy the socially optimal decision is defined by a least cost combination of not only conventional supply side generating options but also conservation and renewable resource options such that the cost of providing an incremental unit of electricity from all resources is the same in addition under a least cost energy strategy the reliability of electricity supply is determined on an economically optimal basis results of an actual case study of the pacific northwest region of the usa are presented

measuring consumer welfare with mean demands the welfare change from a price increase for example the compensating variation cv is often calculated using the expenditure function from an estimated demand if there is unobserved preference heterogeneity then the estimated demand is an average over households with different preferences and the cv from the mean demand does not generally equal the mean cv we give conditions ensuring that the cv from the mean demand equals the mean cv is less than the mean cv and approximates the mean cv better than the change in consumers surplus a necessary condition is that demands become more dispersed as income rises

commodity decomposition of export import instability new zealand abstract this study examines instability of a country s income terms of trade in preference to its export receipts and uses a two step decomposition first the normalised variance of the income terms of trade is explained in terms of the variance of its two components the commodity terms of trade and the export quantity index then the variance of these indices is explained in terms of the variance of the individual commodity components the model is applied to the new zealand economy during 1962 1963 to 1978 1979 interaction terms account for a large part of the total variance indicating that the structure of the domestic economy is an important determinant of trade instability

consumer s surplus without apology the purpose of this paper is to settle the controversy surrounding consumer s surplus and by so doing to validate its use as a tool of welfare economics i will show that observed consumer s surplus can be rigorously utilized to estimate the unobservable compensating and equivalent variations the correct theoretical measures of the welfare impact of changes in prices and income on an individual i derive precise upper and lower bounds on the percentage errors of approximating the compensating and equivalent variations with consumer s surplus these bounds can be explicitly calculated from observable demand data and it is clear that in most applications the error of approximation will be very small in fact the error will often be overshadowed by the errors involved in estimating the demand curve the results in no way depend upon arguments about the constancy of the marginal utility of income consequently this paper supplies specific empirical criteria which can replace the apologetic caveats frequently employed by those who presently apply consumer s surplus moreover the results imply that consumer s surplus is usually a very good approximation to the appropriate welfare measures to preview below i establish the validity of these rules of thumb for a

avoided cost contracts can undermine least cost planning abstract utilities and regulatory agencies are increasingly turning to non utility sources of electric power in the usa many contracts with independent power producers ipps contain indexing terms under which an ipp s energy rates vary in response to energy cost changes on the purchasing utility system such indexing is often used to ensure that ipp rates track utility avoided costs unfortunately such indexing can undermine least cost planning if utility decisions can alter established ipp rates such indexing can also cause ratepayer interests to conflict with those of society the use of regional cost indices can solve the utility planning problem preventing the conflict between ratepayers and society however may require some use of cost based rather than value based ratemaking for ipps

enhancing energy price stability through consistent and balanced energy technology r d abstract despite the significant decline in energy prices and the large budget deficit the us government must maintain a well balanced energy technology development programme ranging from basic science through to the demonstration of technical feasibility and technology transfer having technology in technical readiness before an energy price shock will moderate economic problems due to the price shock and thereby promote economic stability based on evolving knowledge about the relationships among energy prices technology commercialization and recessions and depressions development of efficient energy technologies must be far better managed by government and the private sector during both normal economic growth and energy crisis

the theory of real wage indices recently in this review john pencavel and p j lloyd have given insights into the measurement of real wages their work is an application of the concepts of true cost of living indices to a joint labor supply and commodity demand decision pencavel 1977 and lloyd 1979 offer several forms of real wage indices which are derived from explicit functional forms for utility this paper examines the theory of real wage indices in a more general setting and derives bounding indices which are independent of the functional form for utility

the optimality of nominal income targeting when wages are indexed to price in the last decade there has been renewed interest in alternative monetary regimes institutions and policy procedures one policy proposal that has received increased attention is nominal income targeting this proposal has been suggested for instance by feldstein 9 gordon 13 hall 16 meade 21 and tobin 25 26 taylor 24 discusses this proposal in some detail and mccallum 20 presents a statistical analysis of a particular nominal income targeting rule in a variety of contexts bean 3 presents a theoretical analysis of nominal income targeting examining the properties of such a policy in a stochastic macro model in which rational agents sign nominal wage contracts given that the monetary authority s objective is to minimize the divergence of output from its full information level nominal income targeting is the optimal policy if labor supply is perfectly inelastic with an elastic labor supply however nominal income targeting provides the optimal response to demand side shocks but not to supply side shocks the problem of designing optimal policy in the face of both demand and supply side shocks is not new authors such as benavie and froyen 4 craine and havenner 8 parkin 22 and turnovsky 27 have stressed that pure policy rules such as a strict money rule or an interest rate peg are generally not the optimal policy response to both demand and supply shocks thus bean s result that nominal income targeting provides the optimal policy response to all shocks as long as labor supply is perfectly inelastic is rather impressive one avenue of research that attempts to provide a partial solution to the problem of suboptimal policy rules in the face of demand and supply shocks is the investigation of wage indexing work by gray 14 15 drew attention to the properties of nominal wage contracts indexed to the price level the relation between the monetary authority s choice of policy rule and the degree of indexing in the labor market has been investigated by fethke and policano 11 fethke and

terms of trade fluctuations and stabilization of producer prices by compensatory taxation abstract a small general equilibrium model is presented which highlights the role of the real exchange rate in the south in determining the terms of trade between the south and the north the dynamics of the model may generate terms of trade instability for some values of the parameters of the system compensatory taxation of export earnings by a stabilization fund in the south is shown to increase the likelihood of instability

the effect of conservation programmes on electric utility earnings results of two case studies abstract this paper develops methods to measure the impact of conservation programmes on electric utility earnings the methods are applied to two case studies detroit edison represents a case where impacts are unfavourable this utility has excess capacity which is only made worse by conservation pacific gas and electric represents a case where conservation helps defer the need for new capacity even in this case programmes targeted at summer peak demand are more beneficial than those which save baseload energy conditions determining the earnings impact of conservation are complex involving regulatory factors that are specific to individual utilities

the substitution bias of the laspeyres price index an analysis using estimated cost of living indexes the most commonly used measure of the cost of living the consumer price index cpi published by the bureau of labor statistics is essentially a laspeyres price index it is well known however that a laspeyres price index provides an upward biased estimate of the cost of living because in keeping the same base period basket of goods as weights it does not take into account substitution among commodities induced by relative price changes the magnitude of the bias is an empirical question which is the focus of this study an estimate of the substitution bias may be obtained by taking the difference between the laspeyres price index and an estimated true cost of living index the true cost of living index cli is based on the theory of consumer demand it is the ratio of the minimum expenditures under two different price regimes necessary to maintain a constant level of utility as opposed to the constant basket of goods in the laspeyres index the size of the bias depends on two factors 1 the size of consumption substitution elasticities if there is no commodity substitution then the cli and laspeyres index coincide regardless of changes in relative prices and 2 the magnitude of relative price changes if all prices move together then the cli and laspeyres index again coincide regardless of the size of substitution elasticities in order to compute a true cli it is necessary to specify a particular utility function and estimate the parameters of the resulting system of demand equations see for example louis phlips p 135 several estimates of the magnitude of the substitution bias have appeared in the literature but all previous studies suffer from a common weakness they are all based on a very small number of commodities essentially because of econometric problems involved in estimating large systems of demand equations in one group of studies demand models have been estimated using highly aggregated data in which total consumption is grouped into four to nine aggregate commodites such as housing durables or clothing arthur goldberger and theodore gamaletsos for example estimate the linear expenditure system les demand model using data on five aggregate goods for several european countries and compare the resulting cli for one of the countries greece to the corresponding laspeyres price index tran van hoa estimates costof living indexes for six australian provinces using data on nine aggregate goods phlips cites work by r sanz ferrer who computed a cli for belgium from data on eight aggregate commodities in such studies using highly aggregated data the estimate of the substitution bias may be understated because the aggregation obscures substitution in consumption within categories which is perhaps more prevalent than substitution between gross aggregates another shortcoming of these three aggregate studies is the fact that they use only a single demand system and hence do not explore the sensitivity of the cli to a priori u s bureau of labor statistics the groundwork for this study was my dissertation i would like to thank the chairman and members of my committee r robert russell llad phillips and robert deacon for their support and helpful suggestions and jack triplett robert pollak richard j mcdonald and a referee for valuable comments on an earlier version the views expressed are my own and do not necessarily reflect the policies of the bureau of labor statistics for a theoretical discussion of cost of living indexes see robert pollak 1971b and paul samuelson and subramanian swamy

diversified consumption characteristics and conditionally dispersed endowment distribution regularizing effect and existence of equilibria the paper introduces the concept of a conditionally dispersed endowment distribution given the consumption set in the study of regularizing effect of aggregation and existence of equilibria in an exchange economy with an atomless measure space of consumers it is shown that there is a regularizing effect of aggregation whenever the endowment distribution of an economy is conditionally dispersed on the basis of this regularizing effect the existence of a competitive equilibrium is proved in a very general setting where some of the commodities are indivisible and where different consumers may have different consumption sets general equilibrium theory saw in recent years explicit formulation of models with indivisible commodities in which existence of competitive equilibria was discussed references are henry 12 e dierker 10 broome 7 and mas colell 19 a pathbreaking paper by mas colell 19 clearly reconfirmed the power of a continuum of traders model introduced by aumann 1 and it emphasized for the first time in the literature of the equilibrium existence problem the importance of a condition relating to the form of distribution of agents characteristics more specifically a competitive equilibrium was shown to exist in an economy with indivisible commodities where a single perfectly divisible commodity exists and the distribution of its initial holdings among agents is dispersed in the sense that it is absolutely continuous with respect to the lebesgue measure see 19 theorem 1 p 446 this development in the existence literature is of much interest to equilibrium theory and coincides with the way in which the analysis of a certain aggregation problem is being pursued in equilibrium theory see e g sonderman 33 mas colell 20 and hildenbrand 18 in both of these problems elaboration of the concept of dispersedness in the distribution of agents characteristics is required 3 the work of mas colell 19 was followed by 35 in which the concept of a dispersed endowment distribution was introduced in the study of existence of equilibria in an exchange economy with an atomless measure space of consumers where no convexity assumptions on preferences and consumption sets were

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

privatization of the esi broadening the debate abstract the debate over the privatization of electricity in the uk has been conducted across too narrow a terrain being primarily concerned with regulation for optimality in the context of static if uncertain conditions of supply and demand insufficient account has been taken of dynamic agencies in formulating and bringing about progressive industrial change something of great importance in the light of their weakness in the uk context consequently a number of deficiencies in the uk esi have been neglected in the debate over privatization and are not liable to be rectified by it in practice