price leadership and welfare losses in u s manufacturing comment do economists have to worry about the efficiency losses of imperfect competition textbooks especially tend to conclude that the answer is negative the truth is however that the relevant literature can be divided in two opposing parts of roughly equal size that is clearly an unsatisfactory state and novel contributions employing improved methods are therefore welcome this decade has witnessed an enormous upswing in oligopoly theory the deadweight loss literature has been influenced by that to a minor extent only avinash dixit s and nicholas stern s 1982 algorithms are however notable exceptions another valuable exception is micha gisser s 1986 attempt to apply a price leadership model for predicting the order of magnitude of the loss of consumer surplus in the united states our intention is however to show that a couple of quite reasonable modifications challenge the conclusion of small deadweight losses implied by the latter approach we do not suggest any improvement allowing for the influence of product differentiation and concentration of local markets we only note that the deadweight losses are under rather than overestimated by those omissions our contribution is to show that two other assumptions that appear in gisser s analysis are crucial for the results we find that the ideas of unitary demand elasticity and equal supply elasticity for the leaders and the price taking fringe are questionable we also point out that the output distortion percentage loss of output may be quite large even if the percentage loss of consumer surplus is small this fact seems to be ignored in the literature consider first demand elasticity gisser assumes it to be unity like arnold c harberger 1954 empirical estimates are not necessarily reliable but the fact that they are often below unity should in our opinion be taken seriously see for example m s houthakker and lester p taylor 1966 and for the u s food and tobacco industries emilio pagoulatos and robert sorensen 1986 gisser s technique of predicting welfare losses means that realistic values of demand elasticity and concentration are inserted in a formula that is derived from a theoretical model it is therefore inadequate to limit its applicability to the case of unitary elasticity which appears dubious from an empirical standpoint consider then supply elasticity gisser assumes that both the leading group and the fringe of price taking firms have the same supply elasticity our intention is not to discuss the behavior of firms in detail but we nevertheless find it questionable that firms assume the roles as either active leaders or passive price takers if their technologies are more or less identical why do firms not dominate because they have a larger supply elasticity it could even be considered a styl acting professor department of economics abo akademi the swedish university of turku fanriksgatan 3 sf 20500 turku finland participants in the department s research seminars have delivered useful criticism i thank leila stahl for research assistance remaining errors are my own losses that are less than 1 percent of gnp are reported by arnold c harberger 1954 david schwartzman 1960 frederick w bell 1968 dean worcester 1973 john siegfried and thomas k tiemann 1974 bjmrn wahlroos 1984 and outside the united states wahlroos 1984 finland losses that are larger than 1 percent and usually larger than 3 percent are reported by david kamerschen 1966 and keith cowling and dennis c mueller 1978 for the united states the losses may be large in the uk according to cowling and mueller 1978 and malcolm c sawyer 1980 and in france according to frederick jenny and andre paul weber 1983 simulations in different types of models by abram bergson 1973 j a kay 1983 and g k yarrow 1986 suggest losses that are at least potentially large

a comparison of oligopoly welfare loss estimates for u s food manufacturing capitalizing on theoretical advances in calculating deadweight welfare losses due to imperfect competition we compare eight empirical estimates for the u s food manufacturing industries the estimates incorporate varying theoretical assumptions about demand supply and firm pricing behavior and utilize various data sources time periods and assumptions about the proper competitive benchmark while the estimates of average allocative losses range widely there is a high degree of congruence in the rankings of economic losses due to market power thus from the perspective of efficient antitrust enforcement the newer theoretical oligopoly approaches and the traditional structure conduct performance models would target similar industries

fractionalization and the size of government i study the effect of voters with a group based social conscience voters care more about the well being of those belonging to their own group than the rest of the population within a model of political tax determination both fractionalization and group antagonism reduce the support for redistribution whereas within group inequality increases support for redistribution inequality between groups has the opposite effect these results hold even if a poor group forms a majority using a panel constructed from us micro data i find support for the hypothesis that within race inequality increases redistribution while between race inequality decreases redistribution

the behavior of forward looking firms in the very short run the study develops a theory of very short run forward looking behavior allowing for forward trading and storage of final good and material input production and storage are separable from hedging decisions and depend only upon current forward and cash prices comparative statics are derived regarding production purchases and sales the hypotheses advanced are tested with monthly data pertaining to the u s soybean processing industry results suggest that in short run equilibrium futures prices of the soybean complex have had little influence on crushings or production but they have been important determinants of inventory levels

deadweight loss in oligopoly a new approach ever since harberger s 18 pioneering article researchers have attempted to estimate the welfare loss resulting from the exercise of market power despite nearly four decades of work in this area however surprisingly few researchers disagree with harberger s finding that deadweight loss is quite small while many dispute his claim that deadweight loss in manufacturing amounts to only about 0 1 of gnp few estimates exceed more than 1 3 of the value of output some of the higher estimates moreover include losses of a broader nature than the purely allocative losses on which harberger focuses in this paper i use a generalization of a recent model of oligopoly to estimate the magnitude of deadweight loss in the u s manufacturing sector while the exact magnitude of the losses depends on several parameters the estimates indicate that deadweight loss may be considerably higher than earlier work suggests ranging from roughly 6 10 of the value of shipments if demand is inelastic to over 20 if demand is elastic

taxing fossil fuels under speculative storage long term environmental consequences of taxing fossil fuel usage have been extensively studied in the literature however these taxes may also impose several short run macroeconomic policy challenges the nature of which remains underexplored this paper investigates the mechanisms through which environmental taxes on fossil fuel usage can affect the main macroeconomic variables in the short run we concentrate on a particular mechanism speculative storage formulating and using a dynamic stochastic general equilibrium dsge model calibrated for the united states with an explicit storage facility and nominal rigidities we show that in designing environmental tax policies it is crucial to account for the fact that fossil fuel prices are subject to speculation the existence of forward looking speculators in the model improves the effectiveness of tax policies in reducing fossil fuel usage improved policy effectiveness however is costly it drives inflation and interest rates up while impeding output based on this tradeoff we seek an answer to the question how monetary policy should interact with environmental tax policies in our dsge model of fossil fuel storage we show that in an environment with no speculative storers monetary policy should respond to output along with cpi inflation in order to minimize the welfare losses brought by taxes however when the storage facility is activated responding to output in the monetary policy rule becomes less desirable

the welfare effects of the introduction of storage this paper examines the welfare effects of introducing storage into a market with stochastic supply in which all agents are competitive profit maximizers with rational expectations these welfare effects are the net result of the initial increase in demand for stock building and the partial and asymmetric reduction in the dispersion of consumption brought about by storage the distributional impacts depend crucially on the information available to producers before storage is introduced the elasticity of supply the specification of the consumption demand curve and the cost of storage

dynamic programming models and algorithms for the mutual fund cash balance problem fund managers have to decide the amount of a fund s assets that should be kept in cash considering the trade off between being able to meet shareholder redemptions and minimizing the opportunity cost from lost investment opportunities in addition they have to consider redemptions by individuals as well as institutional investors the current performance of the stock market and interest rates and the pattern of investments and redemptions that are correlated with market performance we formulate the problem as a dynamic program but this encounters the classic curse of dimensionality to overcome this problem we propose a provably convergent approximate dynamic programming algorithm we also adapt the algorithm to an online environment requiring no knowledge of the probability distributions for rates of return and interest rates we use actual data for market performance and interest rates and demonstrate the quality of the solution compared to the optimal for the top 10 mutual funds in each of nine fund categories we show that our results closely match the optimal solution in considerably less time and outperform two static newsvendor models the result is a simple policy that describes when money should be moved into and out of cash based on market performance

on the interaction of real and financial decisions of the firm under uncertainty this study analyzes the interaction between the optimal level of investment and debt financing for this purpose a model is structured in which a firm facing an uncertain price has to decide on its optimal level of investment and debt the amount of investment sets a limit on output whose optimal level is determined after price is realized the debt involved is risky there exists a possibility of bankruptcy the analysis proves that investment and its optimal financing have to be simultaneously determined and that a negative relationship exists between operating and financial leverage we also demonstrate that as the tax rate increases optimal capacity decreases and optimal leverage increases an analysis of the impact of changes in the expected price shows that under some conditions an increase in expected price would lead to an increase in optimal investment firm size and a decrease in optimal debt

price leadership and welfare losses in u s manufacturing reply a model of price leadership is used to estimate the welfare losses dueto monopoly in u s manufacturing given that the leaders behave independently an hypothesis confirmed empirically the deadweight lossis estimated at 0 114 percent of gnp based on a sample of 445 four digit industries this estimate lends strong support to arnold c harberger s finding of thirty years ago copyright 1986 by american economic association

the relevance of the invoicing currency in intra firm trade transactions abstract this paper extends the invoicing currency literature to the theory of multinational firms even with strong tax credit provisions net payments and receipts associated with intra firm trade usually do not consolidate to zero the statistical behavior of the resulting transactional value is affected by the decision on the invoicing currency thus a carefully chosen invoicing currency can create foreign exchange exposure which offsets some other risks of the firm the paper examines how and under what conditions this insight is relevant to a risk averse multinational enterprise a preliminary empirical study generates evidence which supports our ideas

looking at the cost side of monopoly welfare loss under oligopoly is defined as that part of consumer surplus which is lost and not regained by higher profits in a model with asymmetric firms this implies that the total welfare loss consists of the deadweight loss triangle plus a cost side inefficiency effect due to the fact that in imperfect markets not all firms utilize the lowest cost technique using a flexible cv model we calculate these effects empirically for two relatively homogeneous industries pulp paper and cement the deadweight loss triangles are shown to be smaller than the cost difference effect the staircase for these industries

the empirical merit of structural explanations of commodity price volatility review and perspectives this paper presents both the history of and state of the art in empirical modeling approaches to the world commodity price volatility the analysis builds on the storage model and key milestones in its development specifically it is intended to offer a reader unfamiliar with the relevant literature an insight into the modeling issues at stake from both a historical and speculative viewpoint the review considers primarily the empirical techniques designed to assess the merits of the storage theory it does not address purely statistical approaches that do not rely on storage theory and that have been studied in depth in other streams of the commodity price literature the paper concludes with some suggestions for future research to try to resolve some of the existing empirical flaws and hopefully to increase the explanatory power of the storage model

the economics of quality this paper develops a model of quality determination where the usual competitive equilibrium conditions hold the explicit form of quality considered is the wait required to obtain the product the analysis however is much more general being valid for products that have a characteristic z such that 1 demand is a function of price and a measure defined on z 2 costs are a function of output and the measure on z and 3 z is a function of output and capacity expected profit maximizing firms in equilibrium look like monopolistic competitors once constant quality is imposed however the perfect competitive results obtain

what determines the elasticity of industry demand abstract this paper develops estimates of price elasticity of demand for a sample of u s food and tobacco manufacturing industries and tests a model explaining differences in interindustry elasticity the empirical results are consistent with the hypothesis that demand elasticity is in part determined by the competitive behavior of firms in an industry in particular high advertising expenditures result in lower elasticities of demand other important variables influencing demand elasticity are industry concentration the stage of production the existence of protection from domestic and foreign entry and the extent of new product introduction in a particular market

economic behavior under temporal uncertainty a considerable amount of research has focused on the effects of uncertainty on economic behavior in the absence of complete risk markets private risk bearing is widely believed to influence economic decisions arrow 1 sandmo 23 chavas 4 dalal 6 and others have investigated the role of uncertainty in resource allocation for example sandmo 23 has proposed a theory of the firm under risk he showed how risk and risk aversion can have a negative effect on production decisions

rice in asia is it becoming an inferior good empirical results using time series and cross sectional data indicate that rice in asia is becoming an inferior good income elasticities declined and in some cases became negative between 1961 and 1985 in most of the fourteen asian countries studied accordingly domestic demand for rice in these countries is not likely to grow as rapidly as it has in the past as a consequence there is a potential for excess supplies of rice to develop in asia putting downward pressure on rice prices while governments in asian countries may need to adjust their rice policies in the future world rice suppliers may need to develop new markets for rice

rising inequality changes in the distribution of income and consumption in the 1980s this paper examines changes in the distribution of income and consumption in the united states during the 1980s using data from the current population survey income and consumer expenditure survey consumption we reach three primary conclusions first changes in the distribution of consumption parallel changes in the distribution of income the lowest quintile of the consumption distribution received 0 9 percentage points less of total consumption in 1988 than in 1980 the corresponding decline for income was 0 6 percentage points second broad conclusions concerning recent changes in the consumption distribution are not very sensitive to the exact choice of a measure of family needs under a wide variety of alternative household equivalence scales there is a widening in the consumption distribution in the 1980s third the usc of consumption measures of well being in place of measures based on current money income docs change conclusions concerning the extent of poverty in the united stales using the official federal poverty thresholds we find that the overall consumption poverty rate was three percentage points below the income poverty rate in 1988 comparisons of the poverty rates of the elderly and the non elderly are substantially affected by the choice of poverty measure the consumption poverty rare for the elderly was only 60 percent of the rate for adults and one third of the rate for children in 1988 this abstract was borrowed from another version of this item

total price uncertainty and the theory of the competitive firm in the past ten years our understanding of the behaviour of the firm under uncertainty has developed rapidly 1 this has been due to research in two broad areas the sources of uncertainty in the firm s operations and the pricing of that uncertainty by the firm s stockholders in the first area baron 1968 sandmo 1971 leland 1972 and batra and ullah 1974 have all examined the impact of price uncertainty blair 1974 holthausen 1976 and hartman 1976 the impact of factor cost uncertainty and hartman 1972 turnovsky 1973 and epstein 1978 the extent to which technological flexibility affects the impact of price and cost uncertainty these original contributions have invariably assumed that the objective of the firm is to maximize a shareholder s expected utility function this approach implicitly assumes that the price of risk is affected by the firm s decision and thus that the firm is a monopolist in the financial market that allocates risk concurrent with this literature has been the development of theories of market valuation under uncertainty arrow 1971 debreu 1959 and hirshleifer 1970 have developed the time state preference model tsp and sharpe 1964 and lintner 1965 the capital asset pricing model cap to provide a specification of the firm s market value under uncertainty hence if the equilibrium assumptions of either model hold the managers of the firm can maximize shareholder utility by maximizing an objective market value of the firm then as hite 1978 and nielsen 1975 have shown the theory of the firm under uncertainty is formally identical to the theory of the firm under certainty the only difference is that the certainty value is replaced by the certainty equivalent value determined from the equilibrium valuation equation unfortunately it is not realistic to assume that markets are either complete or perfect the most obvious incompleteness is the lack of full commodity markets some commodity markets do exist however the firm cannot remove technology or wage risk the result is that stock markets exist to allocate residual income risk whereas in a complete market all of the components of that risk would have their own commodity market thus making the stock 2 market redundant hence this paper will consider the joint interaction of total price uncertainty that is product price and factor cost uncertainty in a model where there is only a stock market to allocate residual income risk moreover we will allow the completeness of this residual income market to vary to examine its impact on the firm s operating decisions this paper can therefore be considered a synthesis and generalization of previous work in this area

behavior of the firm under regulatory constraint a recent article by akira takayama discusses an earlier paper by harvey averch and leland l johnson on fair rate of return regulation of public utilities although takayama p 255 agrees with averch and johnson s general conclusions that a firm will tend to increase its investment with the introduction of an active constraint on its rate of return he criticizes the a j argument as being confusing ambiguous and in error takayama then attempts a clarification and presents a new formulation which leads to the a j result quoted above this comment will discuss several of takayama s criticisms in addition to showing that the so called a j effect cannot be derived from the basic assumptions made by both averch and johnson and takayama 1 we will show that the very assumptions used to prove the a j effect by defining the region of x require an assumption that the a j effect exists in the first place

taking prices seriously in the measurement of inequality abstract in the measurement of inequality adjustments for differences across households in their demographic composition and in the price regimes they face are usually very simple often nominal expenditure or income is adjusted with an expenditure independent price deflator and a price independent equivalence scale i show that using more flexible expenditure dependent price deflators and price dependent equivalence scales affects the level of and trend in measured family expenditure inequality in canada over 1969 1997 for example standard methods show a significant decrease in inequality between 1969 and 1978 but more flexible methods show a significant increase in inequality over this period

monopoly welfare losses under uncertainty with the publication of the harberger 10 estimates of the welfare losses due to monopolistic misallocation of resources in the united states came a series of articles purporting to explain a downward bias allegedly contained in these estimates 24 13 since then a wide variety of estimates have been produced some of which fall short of the original ones of approximately a tenth of a percent of gdp but most of which indicate clearly higher losses the estimates now range from siegfried and tiemann s 23 07 percent to kamerschen s six percent of national income the wide variation can mainly be attributed to differences in two of the assumptions on which estimation is based namely 1 the method of determining demand elasticities and 2 the definition of the competitive rate of return where studies reporting high welfare losses in the one to six percent regionmostly assume price elasticities given by the inverse of the price cost margin and low competitive rates of return studies reporting losses of fractions of a percent usually assume elasticity constant and mostly unitary while setting the competitive rate of return equal to the average return 2 in a recent article commenting on a paper by cowling and mueller 7 littlechild 16 noted that within their framework all profit is due to monoply and necessary implies a serious welfare loss the equilibrium model precludes any neutral or socially beneficial interpretation of profit the same is to a lesser degree true for all papers based on the harberger methodology irrespective of how the competitive rate of return is defined

adjustment to production uncertainty and the theory of the firm this paper considers the behavior of the firm which faces uncertainty in its production process but can adjust its output once the uncertainty is resolved ex post adjustment unlike previous treatments involves a marginal cost penalty if more output is required and a lowering of price if too much is produced with ex post adjustment allowed in this fashion it is found that nonlinear risk preferences do not affect the sign of the firm s marginal risk premium at optimum ex ante output the firm will produce less output than under certainty whether it is risk averse risk neutral or prefers risk

when more poor means less poverty on income inequality and purchasing power we show theoretically that the poor can benefit from price changes induced by higher income inequality as the number of poor increases the market for products aimed toward the poor grows and such products become more profitable as a result there are circumstances where an increase in income inequality associates with higher purchasing power of the poor using cross country data on the price of one kilogram of rice and the price of a big mac hamburger we confirm a negative association between income inequality and the price of inferior goods robust to the inclusion of a large set of control variables results are also robust to a first difference specification and to a two stage instrumental variables approach examining economic well being it is thus important to analyze not only the incomes of households but also the prices of the products and services that they buy

oligopoly power in the food and tobacco industries in this article we estimate and test for the degree of oligopoly power and economies of scale in forty food and tobacco industries using the new empirical industrial organization neio framework and four digit sic data lerner indices and elasticities of scale are compared throughout the entire food and tobacco industries t tests verify that all but three of these industries exert statistically significant degrees of oligopoly power and that over 82 of these industries exhibit nonconstant returns to scale the empirical results also provide estimates of the price elasticities of demand for each industry

heterogeneity under competition a standard prediction of neoclassical microeconomics is that with perfect competition free entry and atomistic firms producing a homogeneous product equilibrium finds all firms employing that technology which has minimum average cost that competition drives out inefficient producers and reduces heterogeneity within industries is consequently a commonplace rule of thumb in economic thinking this paper demonstrates that demand uncertainty is sufficient to produce heterogeneity in the equilibrium employment of production technologies and to permit the coexistence of producers exhibiting different minimum average costs this heterogeneity is ubiquitous because the conditions for its presence are not stringent

input choices and uncertain demand the theory of the firm under demand uncertainty has to date assumed that the firm s input decisions are unaffected by the stochastic nature of demand this assumption is not usually made explicitly but it is implied by the assumption that the firm s cost function presumably derived by finding the minimum cost combination of inputs for any given level of output is unaffected by the uncertainty however if firms must choose some of their inputs before the uncertainty regarding demand is resolved then different input decisions may involve different levels of risk since firms decisions regarding price and output are affected by demand uncertainty and non linear risk preferences as previous authors have shown it seems reasonable to suspect that their input decisions will also be affected but if input decisions are affected then firms cost functions are not invariant to uncertainty and the results of previous studies must be reexamined three different types of firms are considered in this paper the competitive firm the quantity setting imperfect competitor and the price setting imperfect competitor input decisions of the competitive firm and the quantity setting imperfect competitor are shown to be unaffected by demand uncertainty and hence the assumption of an unchanging cost function is appropriate in these cases for the price setting imperfect competitor however input decisions are influenced by demand uncertainty and an unchanging cost function is therefore not appropriate this case is considered in some detail and conditions under which results can differ from those previously reported in the literature are examined

uncertain demand the structure of hospital costs and the cost of empty hospital beds abstract in this paper we reformulate the theory of cost and production to take account of uncertain demand facing a firm in the reformulated theory the duality between cost and production no longer obtains and demand distribution parameters enter the cost function as well as the traditional outputs and input prices we then estimate a short run cost function for a hospital facing uncertain demand using data from a national sample of over 5000 hospitals for the years 1983 1987 the traditional cost model is strongly rejected in favor of the reformulated model this model is used to calculate the cost of empty hospital beds controlling for the effect of uncertain demand on the structure of hospital costs the cost of an empty hospital bed is calculated as 36 443 in 1987 dollars we estimate that a one percent decrease in the number of hospital beds would decrease hospital costs by slightly over one third of one percent increasing the occupancy rate from the average 1992 level 65 percent back to the average 1980 level 76 percent is estimated to save the average hospital over 2 million or 9 5 percent of costs

welfare losses due to market power hicksian versus marshallian measurement this paper warns against the use of marshallian welfare loss in applied analysis of market power we show how to compute the hicksian deadweight loss from an ordinary demand then from an experiment using real data on twenty one sectors of the french food industry we find that the marshallian deadweight loss poorly approximates the exact hicksian measure hence it is advisable to use the latter in applied welfare analysis copyright 2001 oxford university press

exporting firm and forward markets the multiperiod case abstract we consider a model with a competitive risk averse exporting firm who faces uncertain exchanges rates in a multiperiod analysis the capital stock or fixed input has to be determined at the outset while the variable input labor is chosen optimally at the beginning of each period but before the realization of the exchange rate we show that introducing unbiased currency forward markets decreases the capital labor ratio in all periods we also show that such a firm tends to overhedge compared to the one period cases in some cases the introduction of unbiased forward markets results in higher investments and production in all dates

four approaches to commodity market stabilization a comparative analysis the effects of four alternative price stabilization programs for soybeans are compared using a rational expectations model and simulation for a given government expenditure subsidized private storage is the most efficient way to stabilize market price for a given deadweight loss a program of direct payments is the most efficient stabilizer of the effective farm price this program does not stabilize market price all four programs including a buffer stock program and one involving both direct payments and buffer stocks tend to destabilize quasi rent programs that involve an initial build up of stocks increase producer benefits and hurt consumers

ex ante and ex post long run average cost functions the traditional neoclassical derivation of the long run average cost lac function is based on minimizing the cost of a given output however there are a number of reasons why the theoretical concept of this ex ante lac function is likely to differ significantly from ex post cost output observations when output is stochastic in agriculture the farmer s decision making criterion is assumed to be one of minimizing the cost of producing some planned output level average cost is then a function inter alia of planned output rather than realized output it is argued that there is no operational significance in the cost realized output relationship in practice the farmer s concern is with the cost planned output relationship this paper proposes a two stage procedure to estimate the latter relationship cross section data on uk dairy farms for 1980 1 are used to show significant differences in the ex ante and ex post relationships

the economic role of commodity storage one of the earliest and most successful exainples of economic policy is the oftquoted biblical account of joseph s interpretation of the pharoah s dream joseph foretold that seven years of abundant harvests would precede seven years of drought and recommended that the pharoah accumulate grain during the good years since that time the central role of storage in stabilising the economy in the face of exogenous disturbances has been obvious but our understanding of the nature of that role has not greatly advanced without divine assistance in forecasting stochastic production the storage decision is considerably more complex than the one joseph faced and the role of storage quite different in fact several commonly held impressions about the role of storage of commodities such as grains are incorrect rather than stabilising production storage actually accentuates its variability rather than causing a mean price preserving decrease or a mean output preserving decrease in the dispersion of price storage generally causes a more complex modification of the distribution of price rather than being most effective at eliminating short falls in consumption storage actually is more effective at eliminating the incidence of exceedingly high consumption in this paper we explore the role of storage in a model where production is stochastic and both production and storage are performed by competitive profitmaximisers who form rational expectations about the returns to their activities we derive the subtle but very important interactions among production price expectations and storage which simpler models cannot capture finally we make a comparative statics assessment of the distributional implications of storage these results while confirming the importance of the specification of the demand function and the supply elasticity identified in recent analytical studies e g wright i979 and newbery and stiglitz i979 are surprisingly favourable to consumers considering the asymmetric nature of the effects of storage on consumption and price storage is simply a productive activity one that transfers a commodity from one period to the next like other forms of production it is costly the total cost of storing an amount st from period t to period t i is as of period t i

the forward looking competitive firm under uncertainty under realistic circumstances forward looking risk averse firms will produce more than risk neutral firms and a mean preserving spread of the price distribution will increase risk averse firms production these results depend on firms realizing that prices of inputs required for production in subsequent periods are contemporaneously correlated with output prices this study rationalizes previously unexplained real world behavior such as the spreading of sales over time and short run production or storage at an expected loss the present findings imply that empirical work should not assume nor should it find a monotonic relationship between output and the level of risk or of risk aversion

quality premiums and the firm s production decision in real world production processes the price taking firm often produces a stream of products having varying quality the firm may have limited control over the quality distribution and may only observe quality after production decisions have been made often the marketplace can and does price output according to quality examples of the situations in question are beef vegetable fruit and flower production diamond mining craft industries and any production process where factory seconds exist another though less apparent example is where there is a minimum quality standard a common practice in the production of branded goods in this case the price for production with quality below the standard is zero while production under uncertainty 3 5 6 10 11 and hedonic pricing 1 8 have received considerable attention the issue of production when faced with a price quality schedule has not in this paper we adapt the stochastic dominance approach 6 430 9 227 to determine the effect of price quality schedule changes on the optimal input choice of the firm these stochastic dominance results are then extended by relaxing some dominance constraints that have little meaning in the context of price schedule dominance then the theory of monotonic functions 2 13 7 197 is applied to study the effect of a global change from a constant price contract to a price quality schedule contract we also consider in detail the impacts of the commonly used minimum quality standard price quality schedule on production the paper is then summarized and conclusions are drawn

does the wage tax system cause budget deficits a macro economic experiment in this paper we investigate experimentally the economic functioning of a wage tax system for financing unemployment benefits in an international economy in particular in reaction to budget deficits and tax adjustment our results support the hypothesis that due to out of equilibrium price uncertainty producers are reluctant to employ inputs we also observe a downward pressure on wages exacerbated by an over supply of labor by consumers these observations can explain the budget deficits found furthermore we find that tax adjustments in order to facilitate a balancing of the budget has strong adverse effects on unemployment and real gdp

an examination on the cost efficiency of the banking industry under multiple output prices uncertainty this article formulates a behavioural model of profit maximization which explicitly incorporates both multiple output prices risk and safety first practice this theoretical model is specifically suitable for investigating financial institutions whose output prices frequently encounter a variety of risks such as loan defaults arrears the sample banks are empirically found to be highly risk averse furthermore risk preferences exert little effect on the technical efficiency estimates whereas the same estimates obtained by the standard fixed effect model under certainty tend to be overestimated evidence is found that a specialized bank offering a single product with a larger scale of production will be preferable in an uncertain atmosphere

uncertainty the theory of production and optimal operating leverage a firm s operating leverage decision involves choice among alternative production arrangements which differ in terms of fixed and variable cost components higher operating leverage is generally associated with higher levels of fixed costs and correspondingly higher levels of expected operating profit and higher variability or volatility in operating profit while some attempts to define the association between operating leverage and firms risk positions have been made they are incomplete in the sense that they do not constitute a theory of optimal operating leverage but treat it as a given technical parameter this paper models the firm s operating leverage decision in the context of the standard theory of production the development of the model borrows heavily from a body of literature which might best be described as the theory of the firm under uncertainty yet provides important clarification and extension of this literature 1 2 3 6 7 8 11 12 15 16 18 19 23 25 the following section of the paper reviews the relevant methodology and conclusions of recent related developments in the theory of the firm under uncertainty section iii develops a model of optimal operating leverage uncertainty is introduced via the demand for the firm s product implications for absolute and relative productive resource allocation and hence operating leverage are drawn the risk return frontier faced by the firm and its relationship to the fixed variable cost structure chosen by the firm is presented this risk return analysis is carried out in the context of a market environment in which the capital asset pricing model capm provides the

price uncertainty and the price discriminating firm in international trade the firm operating in an uncertain environment was initially analyzed in detail by sandmo 1971 and by leland 1972 since these early papers many extensions to the analysis have been explored by such writers as batra and ullah 1974 mayer 1975 hartman 1976 holthausen 1976 stewart 1978 paroush and kahana 1979 anid katz and paroush 1979 this paper investigates the optimal policy of a pr ice discriminating firm which operates under pr ice uncertainty in one of two markets the main motivation for the analysis comes from the problems of a firm which sells its output both domestically and abroad such a firm often has nearly full information about the domestic market b ut faces uncertainty in foreign markets in particular the firm which has its utility defined over profits denominated in terms of domestic currency will regard the profits on its foreign sales as uncertain given excha nge rate variability even if it has full information about all other conditions in the foreign market hence the paper may be regarded both as an extension to the above mentioned analyses of the firm under uncertainty and as an attempt to throw light on the activities of firms involved in international trade the treatment being essentially of a mricroeconomic nature is clearly different from that of such writers as batra 1 975 and helpman and razin 1979 which are essentially macroeconomic treatments

on output price uncertainty and the comparative statics of industry equilibrium the analysis of firm response to output price variability has until recently been incomplete due to a failure to consider explicitly the effect of firm response on the attainment of competitive equilibrium at the industry level a recent paper by appelbaum and katz 1 has addressed the issue of industry equilibrium under output price uncertainty they show how the optimal number of firms might change through the process of exit and entry and they characterize the collective influence of firms decisions on expected market price however their analysis focuses on firms with a single stage production process which allows no production flexibility in the form of adjustment of output levels after output price is revealed an earlier paper by hartman 3 has shown that at the firm level the optimal response to output price uncertainty will depend on whether production flexibility exists specifically if firms employ a two stage production process which is characterized by the presence of a quasi fixed factor then firm level output may increase or decrease in response to changes in output price variability even if firms are risk neutral the assumption that production flexibility exists changes those results initially developed by sandmo 7 and applied more recently by appelbaum and katz 1 which are based on a single stage production process this paper provides an extension of the appelbaum and katz analysis to admit production flexibility equivalently it extends the analysis of hartman to consider explicitly the effect of firm response on the attainment of competitive equilibrium at the industry level appelbaum and katz show that for an industry of identical risk averse firms with a singlestage production technology the effect of a mean preserving increase in price uncertainty is to decrease industry output and to raise market price a more recent comment by ishii 5 shows that output per firm will also fall yet none of these authors shows unambiguously whether the number of firms increases or decreases although not explicitly stated the analysis in appelbaum and katz suggests there would be no firm or industry response to a mean preserving change in price spread if firms were risk neutral expected profit maximizers the model employed in this paper is analogous to that of appelbaum and katz with two principal exceptions i here an industry is composed of firms all of which are either risk neutral

imperfect hedging and export production firms engaged in international operations are highly interested in developing ways to protect themselves from exchange rate risk the incentive for risk management comes from the enormous volatility of the floating foreign exchange rates our study shows that an exporting firm can benefit from hedging exchange rate risks even when no perfect hedge is possible since in reality not every currency is traded in a futures market 7 chap 15 the exporting firm uses futures contracts with other underlying assets whose spot prices are highly correlated with the foreign exchange spot rate in the real world hedging must often be accomplished by using futures contracts on different deliverable instruments such hedging may result in imperfect hedging as shown by anderson and danthine 1 eaker and grant 11 dellas and zilberfarb 9 broll wahl and zilcha 6 it has been shown in recent publications 12 8 15 13 23 16 2 14 5 18 22 that an international firm facing exchange rate risk can eliminate this risk altogether if it can use a currency forward market another financial asset or a portfolio of assets which is perfectly correlated to the exchange rate in the absence of such markets the firm can reduce its income risk by engaging in a hedging activity of assets correlated to the foreign exchange recent studies of firm behavior under exchange rate uncertainty examine the influence of futures markets on the export and hedging decision these papers derive two major theorems one is the separation theorem which states that when futures markets exist the firm s export production decision is determined solely by technology and input output prices including the futures prices this result holds if the gain from the futures contract is perfectly correlated with export revenue the other theorem is the full hedging theorem which asserts that with unbiased futures markets the firm completely avoids exchange rate risk by entering into optimum futures contracts

networks versus vertical integration we construct a theory to compare vertically integrated firms to networks of manufacturers and suppliers vertically integrated firms make their own specialized inputs in networks manufacturers procure specialized inputs from suppliers that in turn sell to several manufacturers the analysis shows that networks can yield greater social welfare when manufacturers experience large idiosyncratic demand shocks individual firms may also have the incentive to form networks despite the lack of long term contracts the analysis is supported by existing evidence and provides predictions as to the shape of different industries

the role of prices in measuring the poor s living standards in this paper we revisit two pieces of conventional wisdom in the current debate about poverty paying close attention to the price data underlying these findings that the poor pay more than households of higher income for the goods and services they purchase and that poverty rates at least as measured by the u s census have remained essentially flat since the late 1960s raising questions about the success of the policies implemented to reduce poverty by examining scanner data on thousands of household purchases we find that the poor pay less not more for the goods they purchase and by extending the advances on price measurement in the recent decade back to the 1970s we find that current poverty rates are less than half of the official numbers

the effects of price uncertainty on the factor choices of the competitive firm it is well known that if the price of a variable factor or of output is uncertain when the level of a quasi fixed factor must be chosen by a competitive firm the profit maximizing allocative choices differ from those made when all prices are fixed at their expected values the expected responses of input levels to price uncertainty depend on the characteristics of the production function but even their signs are difficult to determine empirically as they depend on among other parameters the third derivatives of the production function which are difficult to identify this paper shows that the response of the quasi fixed factor and the expected short run response of the variable factor are directly related to observable characteristics of the input demand and output supply functions but concentration on the responses of individual inputs provides only a partial view of the allocative effects of price uncertainty when the full effects on both factors are considered together both types of price uncertainty induce different biases in expected factor proportions relative to choices under certainty the directions of these biases cannot be inferred from results regarding the sign of the response of either factor viewed in isolation previous studies in this field include sandmo 11 batra and ullah 1 and holthausen 4 who showed that non neutral attitudes toward risk can affect the level of output and the amount of a quasi fixed input chosen by a firm faced with product price uncertainty stewart 12 showed a similar result for factor price uncertainty the above studies all assume explicitly or implicitly 6 4 that there is no reduction in price uncertainty between the time if any separating decisions on different inputs thus the usual distinction between short run and long run allocative decisions is ruled out turnovsky 13 showed that this assumption is crucial using a model which maintained an alternative assumption that firms could modify their planned output at additional cost after the selling price is known the effect of output price uncertainty on planned

interest rate variability and economic performance some international evidence using data for short term and long term interest rates across a major group of industrial countries his paper studies the impact of interest rate variability on the cyclical behaviour of real output and the price level in these countries theory predicts that the increased variability of the interest rate stemming from a rise in the level of uncertainty has a negaive impact on he ouput demanded and supplied and in turn an ambiguous impact on the price level the empirical evidence is generally consistent with this prediction next the investigation attempts to shed some light on major sources of uncertainty underlying the interest rate variability focus in on he variability of monetary growth the exchange rate and the energy price some evidence on he relative contribution of these sources of uncertainty of the variability of the interest rate and in turn to the cyclical behaviour of real output and the price level across countries is provided

rent seeking and the welfare cost of trade barriers this paper estimates the potential social cost of trade barriers using the harberger and the tullock posner approaches for a sample of u s food and tobacco manufacturing industries in addition it tests the relationship between the computed welfare losses and special interest political activity pac contributions if all rents were dissipated through rent seeking the social cost of trade barriers would be about 12 5 percent of domestic consumption and would be particularly large for sugar and milk products where quotas are the main instrument of protection furthermore the results indicate that welfare losses are positively associated with industry lobbying but the strength of such association is strongly dependent on industry concentration

nominal contracting in a world of uncertainty abstract this paper evaluates corporate sensitivity to relative price risk and inflation risk and suggests how the existence of various nominal contracts particularly debt and forward contracts may modify firm behavior under uncertainty by differentiating between the two types of price risk this paper demonstrates the distinct risk reduction functions served by forward contracts and debt debt primarily protects against inflation risk whereas forward contracts can be used to protect against relative price risk complications arise however because forward contracts which are denominated in nominal terms also have an impact on the firm s degree of inflation risk

welfare losses in oligopoly and monopolistic competition estimates of the magnitudes of monopoly welfare losses mwl appearing in the economics literature have tended to differ quite widely at one end of the spectrum we find figures of the order of o i of gnp quoted by harberger i 954 in his pioneering study while at the other extreme cowling and mueller i 978 have derived estimates of around i o of gross corporate product from some of their measures two of the major sources of such differences lie in the treatment of a the general equilibrium aspects of deviations between prices and marginal costs and b the impact of market power on the cost levels of firms but unfortunately the tendency of writers to adopt rather different analytical frameworks often makes it difficult to accurately assign the variations in the estimates to specific factors in the present paper the issue of monopoly welfare loss is considered in the context of a differentiated goods model based upon work on monopolistic competition by spence i976 and by dixit and stiglitz i977 within a set of common assumptions about demand the effects of varying cost conditions and differing equilibria on the level of mwl are examined on this basis four major factors connected with suboptimal resource allocation can be identified a supernormal profits b product differentiation c suboptimal scale and d factor bias the first of these needs little explanation its association with welfare loss has been well explored in structure conduct performance theory and is used extensively in applied anti trust economics attention will therefore be focused upon the remaining three all of which can produce mwl in zeroprofit equilibria the paper is organised as follows section ii sets out and discusses the differentiated goods framework which will be used throughout the rest of the analysis it is also shown how a simple transformation of variables reduces the model to the homogeneous goods case and thereby makes immediately available a number of familiar results from the structure conduct performance literature in section iii the focus is on welfare analysis of monopolistic competition the results here are essentially restatements of earlier work although the transformation of variables helps to clarify their foundations section iv extends the analysis to incorporate additional decision variables such as advertising research and development etc while section v considers the case where market conditions will not sustain a large number of firms in equilibrium and suboptimal scale effects become important factor bias is analysed in

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

interest rate variability and economic performance further evidence evans 1984 argues that a policy induced rise in unanticipated interest rate volatility in 1980 82 substantially and significantly reduced output in the u s economy he concludes that stabilizing interest rates is probably sensible monetary policy p 204 a second hypothesis that increased volatility of money growth has contributed to stagnation is rejected by evans this comment raises some questions about the strength of evans s conclusions and about the implicit channels of influence for his results evans s conclusion that only past unanticipated volatility affects output is theoretically and empirically weak anticipated changes in volatility are shown to have similar effects on output second evans implies that in barro s 1981 output model the channel of the interest rate volatility effect on the economy is through an unanticipated decline in aggregate demand the price level effect of such an unanticipated reduction in aggregate demand is tested in barro s price equation in examining these issues an alternative measure of money

a two season agricultural household model of output and price uncertainty abstract this paper presents a two season model of a household s production consumption labor supply and storage decisions in an environment of output and price risk the analytical results in this study are markedly different from those of models prevalent in the mainstream of the agricultural household literature the empirical analysis that uses panel data from a village in india provides support for the theoretical results and underscores the seasonal dimension of the farmers choice problems the results also show that ignoring risk or risk averse preferences may introduce substantial downward bias in optimal response estimates

uncertainty over future environmental taxes impact on current investment in resource conservation besides static efficiency properties environmental policies should be evaluated in terms of their longer run impacts on investment and technological change to reduce pollution and degradation of natural resources using a stochastic dynamic programming approach this paper analyzes how uncertainty about a future environmental tax on a polluting input alters investment in resource conservation and how such investment affects future demand for the polluting input the impact on investment depends crucially on price elasticities of demand and on the manner in which investment shifts and rotates the demand schedule for the polluting input in the future the expectation of a higher tax does not necessarily create stronger incentives for investment in resource conservation more uncertainty about future policies does encourage investment if it makes a firm more responsive to future price changes and discourages investment if it makes a firm less responsive to price changes