income dispersion and counter cyclical markups recent advances in measuring cyclical changes in the income distribution raise new questions how might these distributional changes affect the business cycle itself we show how counter cyclical income dispersion can generate counter cyclical markups in the goods market without any preference shocks or price setting frictions in recessions idiosyncratic labor productivity shocks raise income dispersion lower the price elasticity of demand and increase imperfectly competitive firms optimal markups the calibrated model explains not only many cyclical features of markups but also cyclical and long run patterns of standard business cycle aggregates

privatisation in developing countries a review of the evidence and the policy lessons privatisation is widely promoted as a means of improving economic performance in developing countries however the policy remains controversial and the relative roles of ownership and other structural changes such as competition and regulation in promoting economic performance remain uncertain this article reviews the main empirical evidence on the impact of privatisation on economic performance in developing economies the evidence suggests that if privatisation is to improve performance over the longer term it needs to be complemented by policies that promote competition and effective state regulation and that privatisation works best in developing countries when it is integrated into a broader process of structural reform

the quantitative analytics of the basic neomonetarist model this paper constructs a dynamic macroeconomic model with less than perfect price flexibility which has a classical side consistent with real business cycle theory augmented by investment adjustment costs increasing returns to scale and a new flexible formalization of imperfect competition something akin to the classical dichotomy is justified by a mode of approximation appropriate for a model in which one state variable adjusts quickly while another state variable adjusts slowly even with investment adjustment costs monetary expansions are found to raise the real interest rate the determinants of real rigidity and the macroeconomic rate of price adjustment are investigated copyright 1995 by ohio state university press

pricing in a customer market in standard pricing models movements in demand are partially offset by price responses in a customer market however price markups may decrease with high demand thus price may magnify rather than stabilize demand movements i consider a monopolist selling a good of which first time consumers are uncertain repeat customers know that the product works the monopolist trades the objectives of exploiting past customers and attracting new ones in a period with many new potential customers the monopolist gives more weight to attracting and lowers its markup last i examine some evidence on whether expansions are periods with disproportionately many new customers

real rigidities and the non neutrality of money rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks and by themselves small frictions in nominal adjustment such as costs of changing prices create only small non neutralities but this paper shows that substantial nominal rigidity can arise from a combination of real rigidities and small nominal frictions the paper shows the connection between real and nominal rigidity given the presence of nominal frictions both in general and for two specific sources of real rigidity one arising from goods market imperfections and the other from labour market imperfections

cyclical dynamics in idiosyncratic labor market risk is individual labor income more risky in recessions this is a difficult question to answer because existing panel data sets are so short to address this problem we develop a generalized method of moments estimator that conditions on the macroeconomic history that each member of the panel has experienced variation in the cross sectional variance between households with differing macroeconomic histories allows us to incorporate business cycle information dating back to 1930 even though our data do not begin until 1968 we implement this estimator using household level labor earnings data from the panel study of income dynamics we estimate that idiosyncratic risk is i highly persistent with an annual autocorrelation coefficient of 0 95 and ii strongly countercyclical with a conditional standard deviation that increases by 75 percent from 0 12 to 0 21 as the macroeconomy moves from peak to trough

aggregate consequences of limited contract enforceability we study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts because of enforceability problems contracts are constrained efficient we show that limited enforceability amplifies the impact of technological innovations on aggregate output this implies that economies with lower enforceability of contracts are characterized by greater macroeconomic volatility a key assumption for the amplification result is that defaulting entrepreneurs are not excluded from the market

state divestiture as a policy instrument in developing countries abstract reducing the size and role of the public sector in developing countries and emphasizing prices and markets as allocative mechanisms has led to increased privatization measures of which divestiture has been the most common variant the paper examines this experience and indicates that ownership transfer is neither a necessary nor sufficient condition for achieving more efficient use of resources in the design of divestiture the weighting given to enhancing freedom of entry and intensity of competition remains critical at the same time the paper notes the existence of multiple constraints including profitability and capital market limitations that continue to impede the implementation of divestiture measures the conditions for divestiture to be both appropriate and successful are shown to be restrictive

do price earnings ratios explain investment decisions better than tobin s q evidence from german firm level data abstractthis article tests the additional information content of price earnings ratios with respect to tobin s q in explaining firms investment behaviour while tobin s q describes the expected future earnings related to those projected by the book value the price earnings ratio compares future growth of earnings based on the projection of current earnings in other words a high price earnings ratio might indicate that investors are willing to rely on future earnings growth even though current earnings are low by using an unbalanced panel of about 500 listed firms from germany over the period 1987 2007 we find that including the price earnings ratio in the investment equation does not change the explanatory power of tobin s q most notably the price earnings ratio exerts a positive and significant impact on investment these results are robust to the inclusion of a measure of the firm s internal funds and of fixed effects and also to the use of different estimators

the creation and capture of rents wages and innovation in a panel of u k companies this paper examines the impact of technological innovation on wages using a panel of british firms a head count measure of major innovations between 1945 and 1983 is combined with share price and accounting information innovating firms are found to have higher average wages but rival innovation tends to depress own wages this appears consistent with a model where wages are partly determined by a sharing in the rents generated by innovation in other words innovation may be a good instrument for proxies for rents such as profitability quasi rents or tobin s average q instrumental variable estimates of the elasticity between wages and quasi rents are about 0 29

requiem for the representative consumer aggregate implications of microeconomic consumption behavior macroeconomists pursuing microfoundations for aggregate consumption have generally adopted one of two approaches either to model microeconomic consumption behavior carefully and then to aggregate or to thoroughly understand the behavior of a representative consumer in general equilibrium then to introduce microeconomic risk and heterogeneity the broad conclusion from the bottom up approach has been that precautionary saving and microeconomic heterogeneity can profoundly change behavior stephen p zeldes 1989 angus s deaton 1991 christopher d carroll 1992 the broad conclusion from the top down approach has been that precautionary saving is of little importance in determining the aggregate capital stock s rao aiyagari 1994 per krusell and anthony a smith 1998 leading some economists to conclude that heterogeneity is unimportant for macroeconomic purposes this paper shows that while general equilibrium effects do imply that the aggregate magnitude of precautionary saving is modest nevertheless when a model with uninsurable idiosyncratic risk is modified so that it can match the key micro facts it produces behavior very different in important respects from that produced by the representative agent economy this leads to the conclusion that for many purposes the representative consumer model should be abandoned in favor of a model which matches key microeconomic facts this abstract was borrowed from another version of this item

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

testing the limits of privatization argentine railroads abstract just how far can privatization be pushed and with what consequences based on a study of argentine railroads this paper concludes that even large unprofitable firms in developing countries faced with market failures can be privatized but the gains from doing so depend on how badly the state enterprise was performing to begin with and the potential for introducing competition in the market and for the market the broader lesson is that when both market failures and government failures are present a public private solution is preferable to a purely private or a purely public solution privatization is not a panacea but potentially a palliative when it comes to reducing subsidies or coping with regulatory failures

monopolistic competition business cycles and the composition of aggregate demand abstract we develop a dynamic general equilibrium model with monopolistically competitive firms and endogenous markups and show the possibility of equilibria with persistent fluctuations driven by self fulfilling revisions of expectations for some parameter values such fluctuations are characterized by time series properties similar to those observed in u s postwar business cycles in contrast with the existing literature our results do not rely on the presence of increasing returns or nominal rigidities a key ingredient of the model is the link between markups and the composition of aggregate demand some econometric evidence on the latter is also reported journal of economic literature classification number d43 d58 e32

measuring market power in the ready to eat cereal industry the ready to eat cereal industry is characterized by high concentration high price cost margins large advertising to sales ratios and numerous introductions of new products previous researchers have concluded that the ready to eat cereal industry is a classic example of an industry with nearly collusive pricing behavior and intense nonprice competition this paper empirically examines this conclusion in particular i estimate price cost margins but more importantly i am able empirically to separate these margins into three sources i that which is due to product differentiation ii that which is due to multi product firm pricing and iii that due to potential price collusion the results suggest that given the demand for different brands of cereal the first two effects explain most of the observed price cost margins i conclude that prices in the industry are consistent with noncollusive pricing behavior despite the high price cost margins leading firms are able to maintain a portfolio of differentiated products and influence the perceived product quality it is these two factors that lead to high price cost margins

dealer price discrimination in new car purchases evidence from the consumer expenditure survey this paper documents the variation in dealer discounts for new cars using transactions price data from the consumer expenditure survey consumer specific characteristics fail to explain dealer discounts whereas model market specific and purchase transaction variables e g first time purchase trade in and financing through dealer do explain them the results contradict earlier findings of race and gender discrimination based on a controlled experiment this contradiction is reconciled by examining the higher moments of the empirical discount distribution while mean and median markups do not vary by race and gender minority purchases are characterized by higher dispersion this may rationalize the disparate treatment of minorities by dealers documented in the controlled experiment

on money as a medium of exchange we analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo nash equilibria in trading strategies are characterized certain goods emerge endogenously as media of exchange or commodity money depending both on their intrinsic properties and on extrinsic beliefs there are also equilibria with genuine fiat currency circulating as the general medium of exchange we find that equilibria are not generally pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare velocity acceptability and liquidity are discussed

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

mrs thatcher s economic policies 1979 1987 mrs thatcher s economic policies 1979 87 kent matthews and patrick minford mrs thatcher inherited a weak economy whose poor performance she attributed to policies of cosy consensus lax discipline high inflation and pervasive inefficiency these she sought to banish forever the authors stress the astuteness with which this radical programme was pursued rather than launching an immediate and grand assault on all fronts mrs thatcher picked off enemies one by one each victory consolidating her position for the next attack only when inflation was clearly under control could more radical supply side measures be introduced matthews and minford argue that the recession of 1980 81 was caused not by tight domestic demand but by external and supply side shocks subsequently tight monetary and fiscal policy did have powerful effects both in achieving rapid inflation reduction and in holding unemployment above its equilibrium level once serious supply side policies were introduced they had a significant effect on productivity growth and on the equilibrium rate of unemployment matthews and minford conclude that the latter was halved between 1981 and 1986 by which date it stood at 1 6 million or roughly half of actual unemployment whilst unemployment may slowly fall towards its equilibrium level the authors do not recommend fiscal or monetary expansion to accelerate this adjustment rather they advocate further supply side measures and deregulation to help markets achieve this transition

the cyclical behavior of marginal cost and price the author examines the cyclical behavior of price marginal cost margins for u s manufac turing after 1956 short run marginal cost is markedly procyclical this is primarily due to procyclical overtime payments incurred beca use employment is not perfectly flexible in most industries output price fails to respond to the cyclical movement in marginal cost so price marginal cost margins are markedly countercyclical the res ults contradict business cycle theories that explain low production i n a recession by a high real cost of producing they support theories that explain low production in a recession by the inability of firms to sell their output copyright 1987 by american economic association

entrepreneurial activity risk and the business cycle abstract this paper analyzes a model in which the risk associated with entrepreneurial activity implies that the amount of such activity is procyclical and results in amplification and intertemporal propagation of productivity shocks in the model risk averse agents choose between a riskless project and a risky project with higher expected output the entrepreneurial activity agents who become entrepreneurs need to bear part of the project specific risk for incentive reasons more agents become entrepreneurs when productivity is high because agents are more willing to bear risk and need to bear less risk for incentive reasons furthermore cross sectional heterogeneity can be countercyclical

a survey of new keynesian theories of aggregate supply and their relation to industrial organization i survey the recent literature on the phillips curve along the way i will try to relate this literature to topics of interest to industrial organization i will also point out the gaps in our understanding and places where more careful micro economic analysis would be helpful to macroeconomists in the conclusion i summarize what an industrial organization economist might take away from this literature

earnings inequality and the business cycle abstract economists have long viewed recessions as contributing to increasing inequality however this conclusion is largely based on data from a period in which inequality was increasing over time this paper examines the connection between long run trends and cyclical variation in earnings inequality we develop a model in which cyclical and trend inequality are related and find that in our model recessions tend to amplify long run trends i e they involve more rapidly increasing inequality when long run inequality is increasing and more rapidly decreasing inequality when long run inequality is decreasing in support of this prediction we present evidence that during the first half of the 20th century when earnings inequality was generally declining earnings disparities indeed appeared to fall more rapidly in downturns at least among workers at the top of the earnings distribution

privatization and the logic of coalition building a comparative analysis of state divestiture in turkey and the united kingdom privatization has emerged as a global phenomenon during the 1980s rather paradoxically however the extent of privatization both in terms of the scale of divestitures as well as the pace of implementation has with notable exceptions remained quite restricted this article seeks to develop a framework for explaining the pattern of limited privatization the central argument is that the possibilities for utilizing privatization as an instrument for mobilizing an electoral coalition and establishing a form of popular capitalism are rather remote in the context of most developing countries alternative forms of privatization involving direct sale to domestic or foreign corporations are either not feasible or politically unattractive the u k experiment is in many ways unique the conditions that facilitated extensive privatization in the united kingdom are not likely to be reproduced in other national contexts in the third world the author attempts to demonstrate the validity of this argument via

life cycle economies and aggregate fluctuations do the implications for business cycle issues change when we switch from studying infinitely lived representative agent models to more sophisticated demographic structures with finitely lived agents this article addresses that question by using a large overlapping generations model that is calibrated to u s demographic properties microeconomic evidence and national income and product accounts the finding is that the answers obtained are basically the same for the two kinds of models the article also explores the relative volatility of hours across age groups an issue that cannot be addressed by using the infinitely lived representative agent abstraction

the cleansing effect of recessions the authors investigate industry response to cyclical variations in demand production units that embody the newest process and product innovations are continuously being created and outdated units are being destroyed although outdated units are the most likely to turn unprofitable and be scrapped in a recession they can be insulated from the fall in demand by a reduction in creation the structure of adjustment costs plays a determinant role in the responsiveness of those two margins the calibrated model matches the relative volatilities of the observed manufacturing job creation and destruction series and their asymmetries over the cycle copyright 1994 by american economic association

privatization and economic growth an empirical investigation from a sample of developing market economies this paper explores the economic determinants of privatization programmes and the macroeconomic impact of this institutional reform on the growth rate of the gdp a sample of thirty five developing market economies is considered over the 1988 92 period probit and tobit models are used to identify the determinants of successful privatization programmes then regressions are run where probabilities probit and expected values tobit are successively included as additional regressors beside the potential influence of other economic policy variables a significant positive effect is highlighted giving evidence of the importance of divestiture the economic effect is found to be stronger when this institutional reform took place in industry or infrastructure

do women pay more for new vehicles evidence from transaction price data recently there has been a debate concerning whether price discrimination by new vehicle dealers results in systematically higher prices for minority and female buyers ian ayres and peter siegelman 1995 and pinelopi koujianoi goldberg 1996 use different methodologies and different data sets and come to different conclusions ayres and siegelman use testergenerated paired audits and find that black and female test buyers were quoted higher prices than white males goldberg uses consumer expenditure survey ces data and finds no systematic evidence of price discrimination in transaction price discounts by race or sex but greater variation in discounts for blacks our paper contributes to the debate on price discrimination in new car purchases using a new j d power and associates database that reports gross profit directly from dealer financial software systems although our data set does not distinguish the race of the buyer we do get direct evidence on dealer profit for male and female buyers in a sample reflecting over 4 000 new vehicle transactions our paper addresses the previously obtained contradictory results and differs from the previous studies in several ways the database we use permits us to measure directly dealers self reported gross profit per vehicle the best measure of differential treatment the database reflects contemporaneously collected dealer data it comes from the same financial software programs that are used to automatically report data to the franchiser manufacturer financial institutions and motor vehicle bureaus as well as being used to calculate sales tax liabilities further the data set allows us to test for price discrimination in the profit contributions of ancillary tie ins such as service contracts credit life insurance and dealer residuals from financing the vehicle purchase in the ayres and siegelman study black auditors received initial offers or negotiated prices that were much higher than those for the paired white male auditors at the same dealerships 400 more for black females and 1 060 more for black males white female auditors received offers or negotiated prices that were 55 to 129 more than those for white males but the effect was not statistically significant ayres 1995 combined the paired audit data with additional unpaired data gathered in the same study and finds that final offers to white women were 216 higher than to white men and with a p value 0 06 approaching conventional significance levels under the audit technique no tester ever consummated a transaction so ayres and siegelman have no measure of vehicle profit from any sale goldberg 1996 argues that the offers obtained by the auditors do not reflect transaction prices in part because the protocol for the ayres and siegelman study called for auditors to adopt one of two bargaining strategies seller behavior should be different across classes of consumers if the classes have different demands e g different variances of reservations prices or different bargaining strategies goldberg maintains that since different classes of buyers may use different bargaining strategies the offers obtained by the auditors reveal information about seller behavior but not about transaction prices goldberg 1996 uses ces data from 1983 to 1987 to test for price discrimination by new vehicle dealers controlling for a number of variables she was unable to find reliable evidence that blacks or white females received smaller discounts on the manufacturer s suggested retail price msrp than white males the estimation results suggested that white females received discounts that were 130 smaller than those received by white males but the effect was statistically insignificant the gold department of economics virginia commonwealth university box 844000 richmond va 23284 we thank glenn mercer of mckinsey and company for providing us with access to the j d power and associates database