a two person dynamic equilibrium under ambiguity this paper describes a pure exchange continuous time economy with two heterogeneous agents and complete markets a novel feature of the economy is that agents perceive some security returns as ambiguous in the sense often attributed to frank knight the equilibrium is described completely in closed form after identifying agents as countries the model is applied to address the consumption home bias and equity home bias puzzles 2002 elsevier science b v all rights reserved jel classi cation d81 g11 g12 g15

if we knew ability how would we tax individuals abstract the suggestion to tax people on earnings capacity instead of earnings has been around for a long time and is attractive in terms of economic efficiency in this paper we reflect on the feasibility of such a system and give an exploratory empirical implementation we apply the leyden welfare function of income a survey based measure of an individual s welfare associated with income to derive implications for ability taxation under the assumption that iq and schooling reflect earnings capacity we derive the tax functions using different criteria to distribute the utility loss due to taxation

household cost functions and equivalence scales we describe a simple method to estimate household cost functions and family equivalence scales it is an alternative to standard methods as it does not assume strong postulates about utility maximization nor any functionally specified model equations the data requirements are extremely modest we assume interpersonal ordinal comparability in the sense of sen 1976 and use empirical evidence for eight european countries and the u s to show the feasibility of the method and the stability of its results we also show that subjective data like those provided by income evaluation questions may be used without adopting a cardinal utility framework

the estimation of welfare levels of a cardinal utility function in order to measure an individual s welfare function of income wfi van praag 1968 1971 the individual is confronted with various welfare levels and asked to associate income levels with them the welfare levels are given as verbal qualifications like good sufficient bad etc it is assumed that these verbal qualifications correspond to intervals of equal length of the range of the wfi here we want to test this assumption a first principal component model is applied the intervals of the range of the wfi associated with the verbal qualifications are estimated and a test of their equality is performed

could a monetary base rule have prevented the great depression abstract this paper continues an ongoing investigation of the properties of a policy rule that specifies settings of the monetary base that are designed to keep nominal gnp growing smoothly at a noninflationary rate counterfactual historical simulations for 1923 1941 are conducted with the rule and a small model of nominal gnp determination estimated with u s quarterly data with residuals fed in as estimates of the behavioral shocks that occurred the simulation results indicate that nominal gnp would have been kept reasonably close to a steady three percent path over 1923 1941 if the rule had been in effect

global warming and the energy efficiency of spanish industry this paper uses a stochastic frontier production function model to analyze the energy efficiency of spanish industry we used minimum cost input demand equations as the reference in order to calculate the demand for electricity gas and other fuels on this basis we found that there is no inherent conflict between the objectives of achieving productive efficiency and reducing energy consumption indeed it is possible to reduce the industrial emissions of co2 by up to 29 4 by means of a bottom up energy efficiency policy however if the government wants firms to reduce their emissions even further then it would be necessary to implement some form of energy regulatory policy in this respect we estimate the cost of reducing co2 emissions by 20

analytical solutions to a structural signal extraction model lucas 1972 revisited abstract i construct in this article a simple adaptation of lucas 1972 article on the neutrality of money a closed form solution is derived which allows to understand a number of positive and normative properties of the model

home bias in equity portfolios inflation hedging and international capital market equilibrium we test whether the home bias in equity portfolios is caused by investors trying to hedge inflation risk the empirical evidence is consistent with this motive only if investors have very high levels of risk tolerance and equity returns are negatively correlated with domestic inflation we then develop a model of international portfolio choice and equity market equilibrium that integrates inflation risk and deadweight costs using this model we estimate the levels of costs required to generate the observed home bias in portfolios consistent with different levels of risk aversion for a level of risk aversion consistent with standard estimates of the domestic equity market risk premium these costs are about a few percent per annum greater than observable costs such as withholding taxes thus the home bias cannot be explained by either inflation hedging or direct observable costs of international investment unless investors have very low levels of risk aversion article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

how sensible is the leyden individual welfare function of income abstract the leyden economists contend that the individual welfare function utility function of income is best represented by a lognormal distribution function they have presented ample data to document the good empirical fit of the lognormal hypothesis this paper presents reexamines and criticises the theoretical foundations of the lognormal hypothesis and finds that this edifice is not built on solid ground neither from the point of view of economic theory nor of experimental psychology moreover it investigates the paradox of the good empirical fit of the lognormal hypothesis in spite of its theoretical deficiencies it is shown that the lognormal hypothesis is observationally equivalent to the logarithmic power welfare function when respondents evaluate welfare according to a normal lognormal distribution function

technical inefficiency in manufacturing industries this article examines technical inefficiency of manufacturing industry in the united kingdom based on data for 19 023 establishments in 151 industries these data drawn from the annual census of production for 1977 have been used to estimate technical inefficiency in each industry by fitting translog stochastic frontier production functions and decomposing the residuals into two components one measuring inefficiency and the other unobservable random factors the work is the first step in a larger project to explain the sources of technical inefficiency and to compare efficiency between countries similar studies are currently taking place in australia the united states canada japan south korea and norway the first phase of estimation has been completed for the united states caves 1988 for the united kingdom green and mayes 1989 and australia harris 1989

on low frequency estimates of long run relationships in macroeconomics abstract a number of recent studies have attempted to test propositions concerning long run economic relationships by means of frequency domain time series techniques that concentrate attention on low frequency comovements of variables the present paper emphasizes that many of these propositions involve expectational relationships that are not inherently related to specific frequencies or periodicities thus the association of low frequency time series test statistics with long run economic propositions is not generally warranted that such an association can be misleading is demonstrated by analysis of examples taken from notable papers by geweke lucas and summers

asymmetric information and the lack of portfolio diversification there is pervasive evidence that individuals invest primarily in local stocks and thus hold poorly diversified portfolios the present article develops a theoretical model in which the presence of informational asymmetries introduces home equity bias the main departure from previous theoretical work is the assumption that local investors outperform nonlocal investors in identifying the correct ranking of local investment opportunities instead of possessing superior information about the aggregate performance of the local stock market the second key assumption is based on the evidence that short selling is a costly activity

estimation of technical inefficiency in manufacturing industry an extension of the method of estimation of technical ineficiency is presented based on the stochastic production frontier approach a derivation of the estimation procedure is given and the technique applied at the industry level the choice of production function is considered and empirical results pertaining to australia and the uk are presented

inverse productivity or inverse efficiency evidence from mexico abstractusing a unique panel data set from rural mexico we find strong evidence of a negative relationship between farm size and both productivity and technical efficiency large farms not only have a lower value of output per hectare than small farms they also produce further from the efficiency frontier our findings suggest that in spite of the ongoing transformation of agricultural supply chains and economists recommendations for small farmers to exit crop production there may be sustained advantages for smallholder farms our analysis offers new insights into inverse farm size relationship the productivity efficiency relationship and the use of stochastic frontier techniques

measuring enterprise efficiency in the soviet union a stochastic frontier analysis western economists of diverse persuasions broadly concur that in pursuit of full employment sustained growth and macroecdnomic stability the soviets have built an economic system that imposes sundry constraints on enterprise management and substitutes centralized resource allocation for the automatic market mechanism these expedients to the extent that they have prevented resources from being directed to their best use have imposed efficiency losses on the economy of unknown but perhaps significant dimensions numerous western scholars have inferred from this command economy paradigm as well as from international productivity comparisons that these efficiency losses are large however the proper attribution of these efficiency losses to microlevel sources i e inefficient enterprise operation and to higher level sources i e resource misallocation among enterprises branches etc has been the subject of more speculation than evidence this is because until recently requisite micro level data on enterprise operations were unavailable in a form suitable for empirical analysis of enterprise efficiency this deficiency now has been partially remedied for one sub sector of the soviet economy the cotton refining industry estimates of technical efficiency reported in this study computed using stochastic frontier techniques with a sample of 151 cotton refining enterprises suggest that productive efficiency is high relative to the estimated frontier and exhibits little dispersion this finding in turn suggests that soviet planning administrative procedures and managerial incentive systems may be reasonably effective in controlling overt technical inefficiency by inducing cotton refining enterprises to operate close to the standards established by the most technically efficient enterprises in the industry although these domestic best practice standards may be absolutely high or absolutely low by international standards and may not fully reflect engineering potential our finding of high modal efficiency relative to these standards together with little dispersion does constitute an important piece of evidence bearing on the sources of efficiency loss in the soviet economy this finding suggests that inter enterprise efficiency variation may not be a promising place to look for sources of efficiency loss

information acquisition in an incomplete information model of business cycle abstract this paper studies the consequences of allowing information acquisition in a version of lucas barro incomplete information model of business cycle we apply the information equilibrium concept to show that an agent s information acquisition is not invariant to fluctuations of price level and that it has a significant effect on the size of output inflation tradeoff using the optimality criteria developed by muench we find that a change in mean money growth rate does not have any real consequences and that a constant money growth rule is superior to any monetary policy that induces all the agents to be fully informed

lucas s signal extraction model abstract this is a version of lucas s 1972 expectations and the neutrality of money with finite supports for the exogenous random variables and with aggregate real shocks the finite supports simplify the proofs and permit solutions for examples to be computed the presence of aggregate shocks permits the model to display output aggregate demand and output inflation correlations that more closely duplicate those found in some data sets correlations that have been interpreted as evidence against the model

product market competition and the financing of new ventures this paper examines the interaction between venture risk product market competition and the entrepreneur s choice between bank financing and venture capital vc financing under bank financing a debt type contract emerges as optimal which allows the entrepreneur to retain full control of the venture and thus yields strong effort incentives as long as the entrepreneur can service the debt repayment however this leads to liquidation in the case of default making the venture s success quite sensitive to exogenous even temporary shocks that may hinder debt repayment under vc financing an equity type contract emerges as optimal although it is not sensitive to exogenous shocks this contract requires the entrepreneur to share a fraction of the rents with the financier thus yielding lower effort incentives for the entrepreneur there exists a threshold level of venture risk such that bank financing is optimal if and only if venture risk is below that threshold product market competition increases the value of stronger entrepreneurial incentives and thus increases the maximum level of risk the entrepreneur is willing to take before switching from bank financing to vc financing this is a robust result that is shown to hold in various models of competition including the hotelling salop dixit stiglitz and cournot to bertrand switch this paper was accepted by lee fleming entrepreneurship and innovation

do domestic investors have an information advantage evidence from indonesia using transaction data from the jakarta stock exchange i find three pieces of evidence which indicate that domestic investors have an information advantage over foreign investors first foreign investors systematically buy at higher and sell at lower intra day prices than domestic investors second foreign investors tend to sell prior to large positive returns finally the permanent impact of foreign purchases is smaller than that of domestic purchases over time prices at which foreign investors trade have worsened while foreign selling prior to positive returns has disappeared

a linearized version of lucas s neutrality model the model developed in robert lucas s influential expectations and the neutrality of money has not been widely used for extensions or modifications of the original analysis in part because of its difficulty of manipulation the present paper describes a linearized version that unlike other models prominent in the rational expectations literature retains the original s mainfeatures yet is comparatively easy to manipulate two examples of modifications facilitated by this linearization are included these involve an autoregressive money growth specification and the assumption of lump sum rather than proportional monetary transfers this abstract was borrowed from another version of this item

technological inefficiency and the skewness of the error component in stochastic frontier analysis this paper concentrates on negatively skewed one sided distributions as an explanation of the occurrence of positive negative skewness in the case of stochastic production cost frontier analysis it takes as an example the binomial distribution that can have negative or positive skew and derives the method of moments estimators

the efficiency of firms what difference does competition make in cournot oligopoly the efficiency of a firm relative to others determines its market share this relationship gives an incentive to improve efficiency the incentives are greater in markets where firm behaviour is more competitive components of firm efficiency are identified by frontier production function techniques in 19 uk manufacturing sectors technical change average efficiency of each firm relative to the frontier and the efficiency of each firm relative to its own best practice in each period short run declines in market shares and profits induce the firm to improve efficiency relative to its best practice long run differences in efficiency are correlated with differences in gross investment

fdi trade and spillover efficiency evidence from china s manufacturing sector using firm data from the 1995 third industrial census of china this paper finds that the presence of foreign ownership has a positive and significant effect on domestic firms productivity moreover trading with more advanced countries helps china gain access to new technology and information which improves its productivity and enables it to compete in international markets it is found that china s imports from oecd and the four asian tigers and exports to oecd have positive effects on domestic firms productivity by dividing industries into high technology gap and low technology gap groups it is found that the spillover effects of fdi are larger for the low technology gap group than for the high technology gap group however the estimation results of the trade induced technology spillover effect support the technology gap learning theory and the significance of importing appropriate technology

the estimation of the quantities in the ieq regression abstract the maintained hypothesis that the evaluation question in the measurement of individual welfare functions is answered according to equal intervals of the 0 1 scale is tested under the assumption that the welfare function can be approximated by a lognormal distribution function the quantiles corresponding to the intervals are estimated jointly with the individual parameters of the welfare function the estimation results for the quantiles reject the equal interval hypothesis

rational expectations and loss aversion potential output and welfare implications abstract we add some elements of prospect theory to an analytically tractable version of lucas s islands model and show that the inclusion of reference dependence declining sensitivity and loss aversion into the agents utility function leads to four main results first the presence of behavioral elements negatively affects the natural level of output second loss aversion reduces output variance third the expected utility of a representative agent is generally lower than that obtained when loss aversion is absent fourth the presence of loss aversion eliminates the paradoxical increase in expected utility that may be generated in the standard model by an increase in monetary policy uncertainty

productive performance in west german manufacturing industry 1970 80 a farrell frontier characterisation some measure of the success with which economic resources are utilised lies at the heart of any meaningful indicator of economic performance a traditional and obvious point of departure is to say that for a given state of technical knowledge and initial endowments of factor inputs resource allocation depends on the degree of ability to transform inputs into outputs and the relative returns which these resources can earn in this paper the more recent productive performance of the west german manufacturing sector is appraised from one particular viewpoint whilst remaining firmly within what might be called the conventional framework of relating outputs to the factor inputs labour and capital section ii provides an initial brief overview of the west german manufacturing sector over the period i 970 80 in which some of the more interesting trends are noted for a more detailed analysis in later sections section iii sets out the approach used again this is not very extensive given the relatively well documented nature of the methodology section iv takes the form of some notes on the data used with a more substantial section v containing the major analysis some more general observations and concluding comments are brought together in a final section vi

location matters an examination of trading profits the electronic trading system xetra of the german security exchange provides a unique data source on the equity trades of 756 professional traders located in 23 different cities and eight european countries we explore informational asymmetries across the trader population traders located outside germany in non german speaking cities show lower proprietary trading profit their underperformance is not only statistically significant it is also of economically significant magnitude and occurs for the 11 largest german blue chip stocks we also examine whether a trader location in frankfurt as the financial center or local proximity of the trader to the corporate headquarters of the traded stock or affiliation with a large financial institution results in superior trading performance the data provide no evidence for a financial center advantage or of increasing institutional scale economies in proprietary trading however we find evidence for an information advantage due to corporate headquarters proximity for high frequency intraday trading

a bargaining model of farrell inefficiency abstract an enormous number of empirical papers have estimated technical efficiency the distance of firms inside a frontier following the model of farrell farrell 1957 the measurement of productive efficiency journal of the royal statistical society series a 120 3 253 290 we propose a theory that explains the distance these empirical papers seek to measure the theory is based on the idea that workers can bargain low effort high crew sizes etc if they and the firm have some monopoly power we provide simple theoretical expressions for the empirical measures of technical and allocative efficiency and compare them to those in the statistical literature we also consider the relation between competition and efficiency

poverty and the measurement of individual welfare a review article this review of hagenaars the perception of poverty gives a lengthy presentation and evaluation of the leyden approach of measuring the individual welfare function of income the key feature of the approach is the claim that welfare can be measured on a 0 1 scale the review discusses the book s wealth of material on poverty in europe within this theoretical framework

output and price level effects of monetary uncertainty in a matching model abstract monetary uncertainty and information lags are put into a random matching model so that the resulting setting has some meetings in which producers are relatively informed and others in which consumers are relatively informed for that setting the ex ante socially optimal way to conduct trade is characterized the optimum can display a variety of relationships between money and total output and the price level while the price level is always sticky even the direction of its response and that of total output depend on the magnitude of the lag and on subtle features of the serial correlation properties of the money supply

measuring market distortion international comparisons policy and competitiveness this paper develops a framework to simultaneously estimate production possibility frontiers and measure distortions in factor and product markets the econometric results based on a panel of 61 countries over the period 1970 through 1985 reveal very little distortion in factor markets but considerable distortion in product markets in addition the distortions tend to vary with the cyclical behaviour of economic activity further the results suggest that in order to improve efficiency commercial policy should aim at reducing product market distortions rather than factor market ones

the variation of productivity within british and german industries unweighted average labor productivities indicate an even larger german advantage over britain than the usual employment weighted averages the difference between these two averages is used to compare the dispersion of productivity within fifteen matched industries with positive correlations between productivity and size in eight of them the dispersion of productivity in britain appears to be higher which is consistent with a long tail of low productivity businesses vulnerable to the single european market british vulnerability in the remaining seven industries is even greater copyright 1992 by blackwell publishing ltd

hedging familiarity and portfolio choice we exploit the restrictions of intertemporal portfolio choice in the presence of non nancial income risk to design and implement tests of hedging that use the information contained in the actual portfolio of the investor we use a unique dataset of swedish investors with information broken down at the investor level and into various components of wealth investor income tax positions and investor demographic characteristics portfolio holdings are identi ed at the stock level we show that investors do not engage in hedging but invest in stocks closely related to their non nancial income we explain this with familiarity that is the tendency to concentrate holdings in stocks with which the investor is familiar in terms of geographical or professional proximity or that he has held for a long period we show that familiarity is not a behavioral bias but is information driven familiarity based investment allows investors to earn higher returns than they would have otherwise earned if they had hedged

the measurement and sources of technical inefficiency in the indonesian weaving industry production function models are estimated with a time series of cross section data on indonesian weaving establishments the sources of technical inefficiency are investigated three firm attributes are identified as being potentially related to firm efhciency tbey are firm ownership age and size the importance of these attributes as sources of inefficiency in the indonesian weaving industry is investigated and the implications of the find ings discussed

measurement of income inequality experimental test by questionnaire abstract we reconsider some of the basic assumptions of the literature on inequality analysis students views on the meaning of inequality comparisons were elicited by means of a questionnaire involving both numerical and verbal questions the responses suggest that two important axioms the principle of transfers and decomposability are not universally accepted