cost uncertainty and the rate of investment abstract this paper examines the effect of cost and price uncertainty on the optimal rate of investment by firms within a general equilibrium framework former works which have studied this issue like hartman 1972 and abel 1983 1984 1985 have come to the conclusion that this effect is positive since increased price uncertainty raises expected profitability but these studies assume a fixed discount rate which is equivalent to assuming that consumers are risk neutral this paper shows that if consumers are risk averse the effect of uncertainty may be reversed and investment may be depressed when price or cost uncertainty is increased

the effect of unions on productivity u s surface mining of coal the purpose of this paper is to compare the abilities of two competing analytical techniques mathematical programming and statistical regression to shed light on the union nonunion productivity differential in u s surface coal mining the programming approach has the virtues of being nonparametric and thus extremely flexible and of being able to provide a decomposition of productivity differentials into three components differences in technical efficiency differences in scale efficiency and differences in congestion identification of these three components provides an aid to management in its search for the sources of and remedies for productivity gaps the econometric approach on the other hand is neither flexible nor does it provide such a decomposition its chief virtue lies in the fact that being stochastic it allows for the presence of noise and measurement error that plagues most if not all empirical data thus the two approaches have complementary virtues the two techniques are used to investigate productivity in two samples of u s surface coal mines the programming approach finds a large and significant positive union nonunion productivity differential this differential is due primarily to greater congestion occurring in the smaller nonunion mines in one sample and to scale inefficiency in the smaller nonunion mines in the other sample the econometric analysis finds nearly the same union nonunion productivity differential but sheds no light on the composition of and thus the cure for the differential

unions in a general equilibrium model of firm formation unions are introduced into a general equilibrium model of firm formation i find under reasonable conditions that large firms are more likely to be unionized and that unionized firms are more productive and better managed than nonunion firms of the same size as well unions reduce economic efficiency by distorting the occupation choice decision between managing a firm and working in one perhaps surprisingly this distortion persists even when individual union contracts set both wages and employment in a fully efficient manner but can disappear when the mechanism that allocates property rights to union jobs is changed in certain ways

the effects of uncertainty on investment and the expected long run capital stock abstract this paper examines the effects of output price uncertainty on the optimal investment behavior of a risk neutral competitive firm with a constant returns to scale production function in the presence of convex costs of adjustment investment is an increasing function of q the shadow price of capital given the current price of output we find that increased uncertainty will raise the current rate of investment increased uncertainty will also increase the expected long run capital stock if the price of output is serially uncorrelated however if the price of output is serially correlated then the direction of the effect of increased uncertainty on the expected long run capital stock depends on the curvature of the marginal adjustment cost function in this case we obtain results which are directly opposite of the results in the literature and we locate the flaw in the existing analysis

a stochastic model of investment marginal q and the market value of the firm this paper presents closed form solutions for the investment and valuation of a competitive firm with a cobb douglas production function and a constant elasticity adjustment cost function in the presence of stochastic prices for output and inputs the value of the firm is a linear function of the capital stock the optimal rate of investmentis an increasing function of the slope of the value function with respect to the capital stock marginal q a mean preserving spread of the distribution of future price increases investment an increase in the scale of the random component of a price can increase decrease or not affect the rate of investment depending on the sign of the covariance of this price with a weighted average of all prices this abstract was borrowed from another version of this item

multiperiod sales production decisions under uncertainty abstract this paper studies the behavior of an expected profit maximizing multiperiod firm under uncertainty in output and demand the firm s problem is to determine in each period the level of sales and inventory and the expected output for the coming period the optimal policy is derived in an explicit closed form and is proved to be myopic it is shown that the observed phenomenon of downward price inflexibility can be explained and further specified by using the results of our model

a farm firm model of machinery investment decisions this article presents a multiperiod mixed integer programming mmip model of optimal machinery decisions infinite horizon valuation models of replacement and other investment situations are conceptualized in the context of a finite programming model dual properties of the mmip model are used to identify and value opportunity costs involved in investment decisions of farm machinery the interdependent nature of investment and production relationships necessary for solving these values emphasizes the importance of a holistic firm perspective in analyzing farm machinery investment strategies an empirical situation is used to demonstrate model application

uncertainty in the theory of renewable resource markets the natural growth rate of most renewable resource stocks is in part stochastic this paper examines the implications of such ecological uncertainty for competitive equilibrium in a market with property rights we show that stochastic fluctuations add a risk premium to the rate of return required to keep a unit of stock in situ and we examine the effects of fluctuations on resource rent examples are used to show that extraction can increase decrease or be left unchanged as the variance of the fluctuations increases depending on the extent of market self correction regulatory implications are also discussed renewable resource economics has traditionally been concerned with the study of dynamically optimal harvesting policies given a deterministic function for the natural growth of the resource stock issues have included the existence and characteristics of steady state equilibria for the optimally managed resource the need for and design of regulatory policies to prevent over exploitation and conditions under which as a social optimum or otherwise the resource will be exploited to extinction 1 much of this work has been based on the assumption of a fixed and exogenous price for the harvested resource typically resulting in bang bang solutions for the harvesting policy however some recent papers make price endogenous and thereby describe how the extraction rate and the rate of return and asset value of the resource behave in a competitive market with property rights 2

investment demand when economic depreciation is stochastic the neoclassical model of investment by a risk neutral firm is generalized to include uncertainty about the rate of depreciation by replacing the deterministic capital accumulation identity with a stochastic variant ito s stochastic dynamic optimization is used to derive conditions for optimal investment a nondegenerate steady state distribution of the capital stock is shown to exist and is derived for the empirically important case of a normalized quadratic profit function and static price expectations it is demonstrated for this case that uncertainty about the rate of depreciation decreases the expected steady state capital stock and investment

real exchange rates and real interest rate differentials a present value interpretation although the real exchange rate real interest rate reri relationship is central to most open economy macroeconomic models empirical support for the relationship is generally found to be rather weak in this paper we re investigate the reri relationship using bilateral us real exchange rate data spanning the period 1978 2007 instead of testing one particular model we build on campbell and shiller 1987 cointegration tests of present value models journal of political economy 95 1062 1088 to propose a metric of the economic significance of the relationship our empirical results provide robust evidence that the reri link is economically significant and that the real interest rate differential is a reasonable approximation of the expected rate of depreciation over longer horizons

a two country natrex model for the euro dollar this paper develops a natrex natural real exchange rate model for two large economies the eurozone and the united states the natrex approach has already been adopted to explain the medium long term dynamics of the real exchange rate in a number of industrial countries so far however it has been applied to a one country framework where the rest of the world is treated as given in this paper we build a natrex model where the two economies are fully specified and allowed to interact our theoretical model offers the basis for empirical estimation of the euro dollar equilibrium exchange rate that will be carried out in future research jel classification f31 f36 f47

technical change uncertainty and investment the expected investment dynamics of the risk neutral firm is examined in the presence of uncertainty in the future evolution of the real wage and the stock of technical knowledge a model of the adjustment cost firm is developed that is characterized by quasi fixed factor augmenting technical change that is taken exogenously by the firm the effect of wage and technical change uncertainty on investment behavior is assessed using comparative stochastic dynamic analysis

a nonlinear mixed integer multiperiod firm model abstract we formulate and test an advanced multiperiod model for strategic firm planning this has not been previously considered as a mixed integer nonlinear problem minlp our approach is to show the differences between a linear and a nonlinear mixed integer approach the key property of our model is the simplicity and efficiency of generating optimal firm strategies a cornerstone for managerial acceptance our purpose is to maximize the discounted value of net income and return on investment roi our model has been tested on some major finnish firms and it seems to give reliable results with the data of our sample firm for this paper optimal roi and optimal net income presuppose different strategies when optimizing roi the model balances between cash and fixed assets while optimizing net income results in an intensive investment program even if our sample firm is but one case the results are indicative of some fundamental principles governing managerial decision making

labour taxes and unemployment evidence from a panel unobserved component model abstract this paper estimates the impact of labour taxes on unemployment using a panel of yearly observations 1970 2005 for 16 oecd countries possible heterogeneity of the unemployment incidence of taxes is taken into account by grouping countries according to their wage setting institutions panel data unit root and cointegration tests show that unemployment and labour tax rates are non stationary but not cointegrated as this finding may be induced by missing non stationary variables we set up a panel unobserved component model labour taxes are found to have a positive impact on unemployment only in countries characterised by strong but decentralised unions

international order flows explaining equity and exchange rate returns macroeconomic models of equity and exchange rate returns perform poorly at high frequencies the proportion of daily returns that these models explain is essentially zero instead of relying on macroeconomic determinants we model equity price and exchange rate behavior based on a concept from microstructure order flow the international order flows are derived from belief changes of different investor groups in a two country setting we obtain a structural relationship between equity returns exchange rate returns and their relationship to home and foreign equity market order flow to test the model we construct daily aggregate order flow data from 800 million equity trades in the u s and france from 1999 to 2003 almost 60 of the daily returns in the s p100 index are explained jointly by exchange rate returns and aggregate order flows in both markets as predicted by the model daily exchange rate returns and order flow into the french market have significant incremental explanatory power for the daily s p returns the model implications are also validated for intraday returns

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

dynamic input demand functions and resource adjustment for us agriculture state evidence abstract the paper presents an econometric model of dynamic agricultural input demand functions that include research based technical change and autoregressive disturbances and fits the model to annual data for a set of state aggregates pooled over 1950 1982 the methodological approach is one of developing a theoretical foundation for a dynamic input demand system and accepting state aggreage behavior as approximated by nonlinear adjustment costs and long term profit maximization although other studies have largely ignored autocorrelation in dynamic input demand systems the results show shorter adjustment lags with autocorrelation than without dynamic input demand own price elasticities for the six input groups are inelastic and the demand functions possess significant cross price and research effects

the impact of perceived expectations and uncertainty on firm investment this paper analyses the differential impact of perceived expectations and uncertainty on investment spending in small and large firms we analyse two types of investment viz aggregate investment and investment in energy saving technologies using dutch firm level data the results show that expectations and uncertainty about input and output prices and domestic demand have sub stantial but different effects on investment spending in firms of different sizes furthermore we find evidence at least for small firms that there are important differences between the effects of uncertainty about input and output variables

growth entry and exit of firms a dynamic model of industry equilibrium is presented which shows how growth entry and exit of firms are interrelated by taking into account the fact that a firm s profitability is to some degree subject to random shocks the simultaneous occurrence of entry and exit can be explained formally in addition by also taking internal growth costs into account it is shown that excess profits can persist in long run equilibrium even in perfect competition and with constant returns to scale the model is consistent with the facts that industry growth comes mainly from existing firms and that most firms grow at rates which do not systematically depend on their scale of operations i introduction

investment and disinvestment principles with nonconstant prices and varying firm size applied to beef breeding herds variable beef breeding herd sizes are found to be optimal given cyclical beef prices traditional replacement theory does not allow variable firm size because unequal investment replacement and disinvestment culling rates are not possible if firm size changes cost of production per unit endogenously changes given a u shaped cost curve optimal investment and disinvestment rules for variable firm size are developed based upon the firm s cost curve and discounted net revenue flows for a finite rolling planning horizon current and future investment and disinvestment decisions are linked by their mutual effect on firm size and hence production cost per unit

productivity growth in u s agriculture under dynamic adjustment a dynamic measure of productivity growth adjusted for deviations from the long run equilibrium is established within an adjustment cost framework an empirical application to u s agriculture is presented which permits identifying the dynamic linkages between technical change and productivity growth in u s agriculture total factor productivity as dynamically measured grew at 1 50 per annum the combined effect of scale quality adjusted input growth and long run disequilibrium input use contributes only 3 44 of the growth while technical change dominates the growth of total factor productivity

the euro dollar exchange rate chaotic or non chaotic a continuous time model with heterogeneous beliefs abstract the aim of this paper is to develop a continuous time exchange rate model that allows for heterogeneity of the agents beliefs in order to explore non linearities and possible chaotic behaviour the theoretical model contains an intrinsic non linearity that gives rise to a jerk differential equation which is in principle capable of generating chaos the model is econometrically estimated in continuous time with euro dollar data and examined for the possible presence of chaotic motion our results indicate that the possibility of chaotic dynamics in our model is rejected

measuring the dollar euro permanent equilibrium exchange rate using the unobserved components model this paper employs an unobserved component model that incorporates a set of economic fundamentals to obtain the euro dollar permanent equilibrium exchange rates peer for the period 1975q1 to 2008q4 the results show that for most of the sample period the euro dollar exchange rate closely followed the values implied by the peer the only significant deviations from the peer occurred in the years immediately before and after the introduction of the single european currency the forecasting exercise shows that incorporating economic fundamentals provides a better long run exchange rate forecasting performance than a random walk process

the effect of unionization on productivity evidence from a long panel of coal mines the author measures the effect of unionization on productivity based on a panel of west virginia coal mines from 1897 to 1928 output and inputs are measured in physical terms and most of the mine

risk aversion indivisible timing options and gambling in this paper we model the behavior of a risk averse agent who seeks to maximize expected utility and who has an indivisible asset and a timing option over when to sell this asset our main contribution is to show that contrary to intuition optimal behavior for such a risk averse agent can include risk increasing gambles for example a manager with a choice over when to disinvest from a project a private homeowner with a property to sell or an employee with a grant of american style stock options may be better off taking positions in other assets with zero sharpe ratio that are uncorrelated with the underlying project house or stock price risk the results have wider implications for the modeling and interpretation of portfolio optimization problems involving american style timing decisions

investment under alternative return assumptions comparing random walks and mean reversion abstract many recent theoretical papers have come under attack for modeling prices as geometric brownian motion this process can diverge over time implying that firms facing this price process can earn infinite profits we explore the significance of this attack and contrast investment under geometric brownian motion with investment assuming mean reversion while analytically more complex mean reversion in many cases is a more plausible assumption allowing for supply responses to increasing prices we show that cumulative investment is generally unaffected by the use of a mean reversion process rather than geometric brownian motion and provide an explanation for this result

the effects of uncertainty and adjustment costs on investment in the almond industry a neoclassical model of investment behavior is developed wherein firms are assumed to maximize the expected present value of net revenue under leontief technology prices and yields are assumed to be stochastic this framework yields investment as a function of the expected present value of the output from one unit of capital and the variance of the expected value this theory is applied to investment in the almond industry the model outperforms both a model without uncertainty and one with neither uncertainty nor adjustment costs using in sample and out of sample tests copyright 1989 by mit press

adjustment costs uncertainty and the behavior of the firm this paper examines the effects of demand and cost uncertainty on a firm s investment output and pricing decisions but unlike most earlier studies in which demand and cost are simply not known at the time an output or pricing decision is made here i consider uncertainties over future demand and costs it will be seen that the effects of such uncertainties depend critically on the characteristics of the firm s adjustment costs i treat demand uncertainty in a dynamic context by letting the market demand function shift randomly but continuously through time according to a stochastic process this means that today s demand is known exactly but future demand may be larger or smaller and has a variance that increases with the time horizon likewise uncertainty over factor costs is characterized by treating those variables as stochastic processes i combine this characterization of uncertainty with a dynamic model of the firm in which some factor inputs can be adjusted freely in response to stochastic demand changes but other factors are quasi fixed in that adjustment costs are incurred when they are changed in this model the firm s price and output are random processes but we can examine the firm s behavior in expected value terms of interest is whether the presence of uncertainty should cause competitive or monopolistic firms to invest and produce more or less than they would otherwise how the effects of uncertainty are influenced by the presence of risk aversion and how the use of inventories can alter the impact of uncertainty on capacity and sales of course these questions have been addressed by others in the past among the earliest studies of demand uncertainty are those of edwin mills 1959 1962 and samuel karlin and charles carr 1962 mills examined a single period monopolistic firm that sets both output and price and showed that additive demand uncertainty i e the demand function is of the form q q p u where u is a random variable leads to a lower price if marginal cost is constant so that the firm reduces the expected loss from discarding unsold production karlin and carr confirmed for both the static case and the multiperiod case with inventory carryover that additive uncertainty tends to reduce the price and increase the output of a risk neutral firm while multiplicative uncertainty does the opposite other papers have been concerned with the way in which the error term enters the demand function additively multiplicatively or nonlinearly the implications of choosing price ex ante instead of output the implications of risk aversion and the use of inventories for example agnar sandmo 1971 and david baron 1970 showed that a risk averse competitive firm will produce less when the price is a random variable or subject to an additive error term but a riskneutral firm will not alter its production hayne leland 1972 extended these results to a monopolistic firm whose demand can depend in a general way on a random error term for example q q p u and showed that uncertainty reduces the production of a

scarf s state reduction method flexibility and a dependent demand inventory model we consider a finite horizon inventory model with linear holding shortage and ordering costs the demand random variables are dependent and average demand is described by an exponential smoothing formula this model can be formulated as a two state variable inventory level weighted past demands dynamic program using a procedure first developed by scarf for a bayesian inventory model we are able to reformulate the model as a one state variable dynamic program resulting in a considerable computational saving over the two state variable formulation we also show that this dependent demand model orders less than or equal the amount ordered by a comparable independent demand model we establish this result under the assumption that demand represents failures that are repaired by the beginning of the next period

investment and disinvestment principles with nonconstant prices and varying firm size applied to beef breeding herds comment optimal investment and disinvestment principles have received considerable attention in both general and agricultural economics for over two centuries notable are the works of faustmann samuelson 1937 hirschleifer burt and perrin which establish the basic replacement principle recently trapp presented a reformulation of this basic replacement principle by relaxing the assumptions of constant prices and firm size the purpose of this comment is to discuss a possible misinterpretation of the replacement principle underlying trapp s model specifically the link between trapp s article and previous literature is established with the hope of clarifying any misunderstandings of optimal investment principles trapp states that his equations 3 and 4 which are derived from the discrete time form of the net present value formula for a single asset constitute the appropriate addition and culling investment and disinvestment decision rules for a firm with nonconstant size trapp p 694 this formulation is analogous to perrin s equation 2 which maximizes the returns from an asset over a single rotation in contrast chavas kliebenstein and crenshaw present the asset replacement decision as an optimal control problem with an infinite planning horizon transversality conditions for optimal asset rotation as given in chavas kliebenstein and crenshaw s equation 12 correspond to perrin s equation 4 2 which maximizes the returns from an asset over an infinite horizon reid and bradford in an investigation of investment and disinvestment in farm machinery also derive optimal rotation criteria analogous to perrin s formulation thus it appears that an inconsistency exists in the journal associated with the appropriate replacement rule when expansion and contraction of an operation is endogenously determined should replacement rules be derived from an infinite horizon specification or from a single asset specification the merits of an investment decision must be based not only on earnings from the next production period but also on the rents which can be extracted from the firm s fixed factors failure to consider future assets in a replacement decision implies that changes in replacement costs have absolutely no effect on the optimal life of assets up to the point where it is no longer profitable to operate specifically maximizing over a single asset rotation corresponds to maximizing the internal rate of return of an investment decision with a discount rate quivalent to the internal rate of return samuelson 1976 the quantitative effects of considering only a single asset specification are minimal depending on the length of the asset rotation and the discount rate employed as the rotation length increases or a larger discount rate is employed representation of the optimal replacement rule will converge to perrin s equation 2 samuelson 1976 the turnpike theorem states that if the asset rotation is of sufficient length where the end of the horizon has o influence on period decisions the system then converges towards the von neumann path boussard too short a length may result in the system never converging toward the von neumann path alternatively if the salvage and acquisition values are equal at any point in time then the von neumann path will be reached at the beginning of the last period however in general asset replacement is costly and thus access to the von neumann path is not instantaneous the apparent inconsistent use of a single asset specification in contrast to basic replacement principles associated with an infinite horizon may be resolved by investigating the theoretical results in chavas and klemme employing an optimal control methodology with a finite planning horizon t a distinction among rules derived from alternative specifications is evident using perrin s terminology chavas and klemme generalize the replacement criteria for a system with multiple constraints

an opportunity cost view of fixed asset theory and the overproduction trap comment in a 1981 ajae article johnson and pasour criticize the works of edwards and glenn johnson 1972 and earlier publications for attributing persistent excess production in agriculture to an asset fixity theory which at its crux relies on divergences between asset acquisition costs and asset salvage values johnson and pasour mjp pinpoint their critique of edwards and johnson ej when they state p 3 the conclusion of fixed asset theory that excess resources are trapped in production can be traced directly to selection of acquisition prices of resources as a benchmark for equilibrium production but there is no reason to expect the opportunity cost of a resource once acquired to equal its historical acquisition price in his 1982 ajae reply to mjp glenn johnson contends that the ej formulation does contrary to the mjp assertion allocate resources on the basis of opportunity costs including the cases where opportunity cost is equal to current not historical acquisition cost or ourrent not historical salvage value the primary purpose of this paper is to discuss briefly how mjp s article is lacking in a key respect it ignores intertemporal opportunity costs of durable resources to achieve brevity and expositional clarity other aspects of differences between mjp and ej are avoided insofar as the specifics of this paper allows conventional resource adjustment theory is reviewed by mjp their equations 1 4 pp 1 2 stress is placed on the usual hypothesis that the equilibrium use of durable resources similar to nondurables occurs when each durable s value of marginal product just equals its marginal factor cost this equilibrium relation is hypothesized for a profit maximization firm to hold for each durable resource or asset in each production or planning period t but this engine of analysis while acceptable for nondurable resources lacks crucial detail for dealing with the multiperiodicity of durable resources essentially it is a monoperiodic engine or at best it is a sequential monoperiodic engine it avoids defining the time horizon the finite or infinite span of t hence it avoids a precise definition of the relevant set of investment disinvestment and production activities to be considered by the decision maker more specifically even if t can be limited to a finite number of periods s intertemporal opportunity costs associated with each durable resource are ignored assumed by implication to not exist or assumed to equal zero to paraphrase perrin who mjp acknowledge as having reviewed their paper these are the costs of postponing the earnings which will be forthcoming from the series of replacement or new investment durable assets for the currently owned or currently considered asset moreover if the appropriate span of t is infinite it becomes even more important not to ignore intertemporal opportunity costs this point was illustrated conceptually by perrin in his figure 1 p 61 when considering optimal investment disinvestment in and use of durables multiperiod models which explicitly account for time money relationships are judged by most economic analysts to be preferable to conventional static monoperiodic models wealth maximization becomes the norm as opposed to one period profit maximization present value equations which model flows of acquisition prices ensuing quasi rents and salvage values of durables or their derived first order marginal optimizing inequalities take over the role of simple static vmp mfc equalities in what follows the resource adjustment rule hypothesized by mjp is compared with the marginal rules derived by perrin rules and logic which are presented in various earlier and subsequent texts and other publications on capital investment equation 3 in mjp p 2 summarizes their durable resource adjustment rule as follows

productivity shocks the real exchange rate and the euro puzzle abstract this paper utilizes a large country open economy intertemporal model to obtain the effects of alternative types of productivity shocks on the real exchange rate it then explores the conditions under which the model is consistent with the large swings in the real value of the euro the main theoretical conclusion is that the effect of a productivity shock on the real exchange rate can change signs depending on whether the shock applies to the productivity of new capital or old existing capital the growth accounting literature suggests that the underlying reason s for us productivity growth changed abruptly between the 1995 2001 and 2002 2004 intervals in the earlier period increases in the productivity of new capital were relatively more important while increases in the productivity of old capital completely dominated in the later period thus the model appears to be consistent with the abrupt switch from negative to positive around 2002 in the correlation between the real value of the euro vis a vis the dollar and the us minus eu productivity growth differential

the intensity and timing of investment the case of land the authors model the decision to replace durable capital when intensity is variable decisions of this type include land redevelopment decisions where the density of residential or commercial development is a choice variable as well as capital replacement decisions where capacity is variable the authors provide a general yet simple formation of the problem using an optimal stopping framework they characterize the value of the project the timing of investment and the intensity of development the authors show that intensity interacts in important ways with timing taxes and project values the ability to vary intensity raises hurdle rents and delays development decisions copyright 1994 by american economic association

risky business the allocation of capital abstract in models of the firm a mean preserving spread in the price of output increases the expected value of profits and frequently the firm s demand for capital these results seem to contradict the conventional wisdom from financial asset pricing models where an increase in an asset s risk decreases the demand for that asset this paper shows that in general equilibrium an increase in exogenous risk usually increases expected output in that technology the result from the theory of the firm but it may also increase the risk of that technology the results from finance an increase in exogenous risk always reallocates capital toward less risky businesses

a model of industrial pollution in a stochastic environment abstract standard models of pollution abatement assume that pollution accumulation occurs in a deterministic pattern as a by product of the production process governmental intervention often occurs in the form of taxation or mandatory abatement controls to reduce inefficiency caused by incomplete markets in this paper we assume that the accumulation effect of pollution may be stochastic due for instance to the random absorption capacity of the ecosystem furthermore we assume that the level of pollution may vary with input use as well as output level we proceed to analyze properties of a policy for efficient social management of competitive firms which generate pollution

bayesian estimation of the output gap for a small open economy the case of canada abstract we introduce a novel approach for estimating output gaps for small open economies identification is based on a multivariate trend cycle decomposition in which transitory exchange rate movements are linked to the output gap and inflation the model is then applied to canadian data

on equilibrium in resource markets with scale economies and stochastic prices abstract in this paper i show the existence and the characteristics of equilibrium in a non renewable resource market where extraction costs are non convex and market price is subject to stochastic shocks an empirically relevant setting in my model firms may be motivated to hold inventories to facilitate production smoothing which allows them to continue producing at a smooth pace at any instant when extraction ceases e g when reserves are exhausted this aspect of the model then supports a competitive equilibrium in the presence of non convex costs casual empirical evidence is provided that supports the central features of my model for a variety of non renewable resources lending credence to the explanation for equilibrium i propose

are union productivity effects overestimated evidence from coal mining the empirical literature of the influence of unions on productivity is extended by considering the effect in an industry with heterogeneous firms recent theoretical papers suggest that in such an industry unions will tend to organize the exogenously more productive firms thus a spurious correlation between unions and productivity may emerge we test this hypothesis by estimating production functions for coal with data from eastern kentucky underground coal mines the aspect of mine heterogeneity that we focus on is the width of the mine s seam of coal wider seams increase productivity empirically we find that unions disproportionately organize mines with wider seams and this accounts for the positive relationship between unions and productivity observed in our data in fact once seam thickness is accounted for the estimated effect of unions on productivity is negative

passive firm learning and employment projection error this paper analyzes establishment error in estimating employment targets in business startups and expansions passive firm learning models provide a testable hypothesis that other things being equal old establishments more accurately predict future employment targets than young businesses empirical evidence from 442 ohio establishments implies that an increase of ten years in establishment age is associated with a decrease in employment projection error rate of between 11 and 13 percentage points

the effect of real exchange rate uncertainty on exports empirical evidence unless very specific assumptions are made theory alone cannot determine the sign of the relation between real exchange rate uncertainty and exports on the one hand convexity of the profit function with respect to prices implies that an increase in price uncertainty raises the expected returns in the export sector on the other potential asymmetries in the cost of adjusting factors of production for example investment irreversibility and risk aversion tend to make the uncertainty exports relation negative this article examines these issues using a simple risk aversion model export equations allowing for uncertainty are then estimated for six developing countries contrary to the ambiguity of the theory the empirical relation is strongly negative estimates indicate that a 5 percent increase in the annual standard deviation of the real exchange rate can reduce exports by 2 to 30 percent in the short run these effects are substantially magnified in the long run

export instability and the economic performance of developing countries abstract this paper explores the economic consequences of export instability by developing a stochastic optimal control model that is based on the maximizing behavior of a risk averse representative agent the model offers an analytical framework that can predict the consequences of export instability for the intertemporal choices of consumption saving and investment the model s results are then used to interpret the large existing body of empirical findings on the relation between export instability and savings investment and output growth rates

returns to scale adjustment costs and the optimal investment of the mining firm abstract this paper analyses the optimal investment programme of a competitive mining firm for two different technologies and capital adjustment costs in the first part the case of a variable proportions technology with decreasing returns to scale is studied and it is concluded that under the assumption of a constant mineral price a first stage in the exploitation period of the deposit will occur in which capital stock is increasing in the second part the optimal investment programme is determined when there are constant returns to scale and hotelling s rule governs the dynamics of the mineral price

a dynamic model of the firm with uncertain earnings and adjustment costs abstract in this paper a stochastic dynamic model of the firm developed by bensoussan and lesourne is extended to allow for adjustment costs the optimal solution is derived for different scenarios dependent on the shapes of the expected earnings function and the adjustment cost function and on the different parameters of the model it turns out that besides pure investment dividend and saving policies mixed policies can also be optimal for the firm the latter do not occur in the solution of the bensoussan and lesourne model and therefore the solutions derived in this paper come closer to reality

optimal replacement policies for rejuvenated assets the faustmann samuelson solution for optimal asset rotation is extended to consider both asset rejuvenation and nonconstant prices a dynamic theoretical model is developed in terms of an optimal control problem with discontinuous control variables and numerical solution procedures are outlined the model is applied to layer hen replacement where hen rejuvenation by forced molting is a common industrial practice results indicate a sensitivity between the decision to rejuvenate or replace a hen and the egg price cycle suggesting a mixed rotation strategy

exchange rates and traded goods prices abstract this paper presents a partial equilibrium model of the determination of domestic and export prices by a monopolistic competitive firm the model stresses the role of exchange rate uncertainty and expectations the most important result of the analysis is that the stochastic properties of deviations from the law of one price are crucially affected by the currency of denomination of export prices using data on domestic and dollar export prices of japanese goods i find that deviations from the law of one price are due to exchange rate surprises but also to price staggering and ex ante price discrimination

investment as a process of search this paper analyzes optimal capital accumulation in the face of structural uncertainty in which the firm does not fully know its own profit function and can discover it only through further investment it is shown that under structural uncertainty capital accumulation is gradual even when adjustment costs are linear and not convex it is further shown that structural uncertainty creates an incentive to market research the paper also presents an example of structural uncertainty in which an additional price uncertainty has a negative effect on investment contrary to the standard models

adjustment costs uncertainty and the theory of investment the case of non renewable natural resources abstract this paper examines the effects of mineral price and extraction cost uncertainty on the investment program of a competitive resource extracting industry that faces convex costs of adjustment the results show that depletion of mineral reserves will slow down if the marginal adjustment cost function is concave or linear whereas the effect will be ambiguous if the function is convex

risk aversion and land allocation between annual and perennial crops in semisubsistence farming a stochastic optimization approach this article analyzes the effect of production uncertainty on farmland allocation decisions between perennial and annual crops focusing on a representative farmer s attitude toward risk a dynamic stochastic optimization model that considers net planting the difference between new plantings and removals of perennial crops that achieve full production cycle is used the effect of uncertainty on the representative farmer s decisions to increase or decrease perennial crops acreage on the optimal path is examined our results reveal that the response of optimal path of net planting to uncertainty related to perennial crop production is highly affected by the farmer s attitude toward risk a risk averse or a low risk loving farmer tends to reduce land allocation to perennial crops under uncertainty while a high risk loving farmer will do exactly the opposite also due to disutility of farming the farmer tends to reduce land allocation to perennial crops when prices are high enough for him to attain a desired income level expectation one implication of this research is the need for mechanization in sub saharan countries in particular that increases per acreage yield and output in semisubsistence agriculture

banking on currency forecasts how predictable is change in money abstract the paper examines the predictive performance of four structural exchange rate models using both parametric and nonparametric techniques error correction versions of the models are fit so that plausible long run elasticities can be imposed on the fundamental variables of each model a variety of model evaluation statistics are reported our findings confirm that fundamental exchange rate models forecast no better than a random walk model for short term prediction horizons for longer horizons error correction terms can explain exchange rate movements significantly better than a no change forecast for a subset of the models and currencies we consider

adjusting to climate change implications of increased variability and asymmetric adjustment costs for investment in water reserves abstract in this paper we study the determination of optimal water storage capacity in a region taking into account that the supply of the resource the flow into the reserve is uncertain that a measure of the uncertainty the variance is likely to increase with climate change that building capacity is costly and that the development of water resources may entail alsoenvironmental costs we find that water storage capacity in the long run ispositivelyrelated to increases in uncertainty if the marginal benefit of water withdrawal isconvexand that for the case of costly reversibility of investment a range of inaction for investment appears and the stability of water storage capacity with respect to changes in variance increases

price volatility and risk exposure on the interaction of quota and product markets we consider an industry with firms that produce a final good emitting pollution to different degree as a side effect pollution is regulated by a tradable quota system where some quotas may have been allocated at the outset i e before the quota market is opened we study how volatility in quota price affects firm behaviour taking into account the impact of quota price on final good price the impact on the individual firm differs depending on how polluting it is whether it is clean or dirty and whether it has been allocated quotas at the outset in the absence of long term or forward contracting a grandfathering regime where clean firms are allocated no quotas and dirty firms are allocated quotas for a part of their emissions minimizes the impact on firm behavior relative to a risk neutral benchmark with forward contracts and in the absence of wealth effects initial quota allocation has no effect on firm behaviour allowing for abatement does not change the qualitative nature of our results

behaviour of non renewable natural resource firms under uncertainty optimizing or ad hoc abstract this paper tests the assumption of optimizing behaviour by natural resource firms in the framework of an intertemporal model of non renewable resource development and production using data from the petroleum industry it is argued that the presence of geological and price uncertainty presents a situation in which standard objections to non optimizing behaviour may not hold as an alternative it is proposed that firms use an ad hoc rule of thumb to update decisions as the values of variables change econometric results support ad hoc behaviour as opposed to intertemporal profit maximization

asymmetric information option to wait to invest and the optimal level of investment abstract this paper analyzes equilibrium rationing on credit markets in the case of gains from waiting to acquire information about the future profitability of investment we compare the competitive outcome with the socially optimal level of investment we show that the opportunity to postpone investment changes the nature of the inefficiencies of the competitive outcome fundamentally without the option to wait high risk firms tend to invest and the outcome is characterized by a situation of underinvestment if firms can wait high risk firms benefit the most from waiting in this case low risk firms tend to invest immediately and a situation of overinvestment will result since from the banks point of view firms do not delay enough

external wealth the trade balance and the real exchange rate abstract we examine the link between the net foreign asset position the trade balance and the real exchange rate in particular we decompose the impact of a country s net foreign asset position external wealth on its long run real exchange rate into two mechanisms the relation between external wealth and the trade balance and holding fixed other determinants a negative relation between the trade balance and the real exchange rate we also provide additional evidence that the relative price of nontradables is an important channel linking the trade balance and the real exchange rate

unionized construction workers are more productive this paper presents evidence on the effect of unionism on productivity in construction the linkages are distinct from those studied previously in industrial settings apprenticeship training and hiring halls probably raise union productivity while jurisdictional disputes and restrictive work rules lower it using brown and medoff s methodology union productivity measured by value added per employee is 44 to 52 percent higher than nonunion the estimate declines to 17 to 22 percent when estimates of interarea construction price differences are used to deflate value added occupational mix differences and possibly apprenticeship training account for 15 to 27 percent of this difference

adjustment costs and investment in a stochastic endogenous growth model abstract this paper introduces costly investment into a stochastic equilibrium macro model investment is determined by an endogenously determined tobin q that depends upon the structural parameters of the economy the model permits a sequence of economies allowing for an increasing role of government to be studied the effects of both a structural change taking the form of a higher variance of productivity shocks and fiscal policy on the equilibrium is analyzed paying particular attention to the impact on the growth rate and its variability the role of the tobin q in determining the response of the mean growth rate and its variance is emphasized

liability management of financial intermediaries in a dynamic and uncertain perspective this paper examines the effect of rate uncertainty first for the loan rate alone next for both asset and liability rates on the liability funding decisions of a risk neutral intermediary in this model a la pindyck rates evolve according to stochastic processes convex adjustment costs arise from the dichotomy of existing core deposits and new savings balances and the intermediary s cash flow is embedded into capital market theory then we show that the stationary equilibrium obtains at the intersection of the locus of no change in deposit holdings with the isocline of zero change in savings balances loan rate uncertainty alone shifts the savings isocline outward when marginal adjustment costs are rising at an increasing rate but when asset and liability rates are uncertain their impact on the mean intermediation spread core deposit holdings and adjustment costs depends on whether they are correlated or not

equilibrium exchange rates in transition economies taking stock of the issues in this paper we present an overview of a number of issues relating to the equilibrium exchange rates of transition economies of the former soviet bloc in particular we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the transition economies amongst our findings is the result that the trend appreciation usually observed for the exchange rates of these economies is affected by factors other than the usual balassa samuelson effect such as the behaviour of the real exchange rate of the open sector and regulated prices we then consider three main sources of uncertainty relating to the implementation of an equilibrium exchange rate model namely differences in the theoretical underpinnings differences in the econometric estimation techniques and differences relating to the time series and cross sectional dimensions of the data the ensuing three dimensional space of real misalignments is probably a useful tool in determining the direction of a possible misalignment rather than its precise size copyright blackwell publishers ltd 2006

technology as an agricultural pollution control policy in this paper we consider the market level impacts of factor augmenting innovations designed to reduce the use of fertilizers and pesticides first within the context of a simple two factor model and then through a simulation model of the u s corn market in both models the impacts depend on the output demand elasticity and input substitution elasticities the principal conclusion of the simulation analysis is that the potential for new techniques to reduce the use of agricultural chemicals is limited capital augmenting innovations would actually raise fertilizer and pesticide usage land augmenting innovations would also tend to increase pesticide usage

the monetary model of the exchange rate long run relationships short run dynamics and how to beat a random walk abstract the monetary model is re examined for the sterling dollar exchange rate first it is demonstrated using a multivariate cointegration technique that an unrestricted monetary model is a valid framework for analyzing the long run exchange rate second we find once proper account has been taken of the short run data dynamics that an unrestricted monetary model outperforms the random walk and other models in an out of sample forecasting contest jel f31

price adjustment process for rental office space abstract this paper analyzes the price adjustment process for rental office space in 17 cities across the united states over the time period 1960 to 1975 the results confirm much of what economic theory suggests landlords react to fluctuations in demand by building up or drawing down inventories of unlet or vacant office space other things equal higher levels of vacant office space mean that landlords lower their rents and reduce the difference between desired and actual vacancies empirical evidence is also presented on the normal vacancy rate across different cities

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

the dispersion hypothesis in macroeconomics macroeconomics has always rested on the fiction that the behavior of aggregates was stable and therefore individual market phenomena could be safely ignored in an important recent contribution david m lilien challenged this fiction and argued that a large component of fluctuations in unemployment could be explained by the dispersion of employment growth across industries this paper develops models of consumption and investment paper in which the dispersion of economic activity can play a role the econometric evidence suggests an important role for the dispersion of economic activity in explaining aggregate consumption and investment

dynamic decisions under risk application of ito stochastic control in agriculture in agricultural economics most studies of dynamic decisions under risk have been empirical with less emphasis on theory in finance resource economics and general economics however ito stochastic control is popular for theoretical work optimal decisions can be characterized using the powerful ito stochastic calculus this paper describes the assumptions and methods of ito control constructs a dynamic model of agricultural decisions under risk and illustrates with four examples

a dynamic q model of investment financing and asset pricing an empirical test for the agricultural sector the u s agricultural sector is experiencing a financial crisis this crisis has been brought about by a decline in the real price of farm products and rising real interest rates since 1980 declining incomes have eroded farmers ability to service debt and falling land values have reduced the collateral necessary to support the debt the relationship between farm income and real estate values has recently been described by melichar 9 11 he argued that increases in income and capital gain or losses are capitalized into land values using national aggregate data from the u s agricultural sector he demonstrated that the rate of return to investment was relatively stable over time because land values respond within a short period of time to changes in income and capital gains or losses the purpose of this paper is to develop and test a model incorporating this capitalization process in order to explain the evolution of asset values in agriculture over time this explanation is important in understanding the nature of the current financial crisis in the agricultural sector and its relation to past cyclical behavior a present value model of the growing firm is developed that incorporates both investment and financing decisions it is an extension of the well known dynamic q model developed by uzawa 20 yoshikawa 22 hayashi 5 pappas 16 pindyck 17 and abel 1 the original q model was developed by tobin 18 dynamic q models rely on an adjustment or growth cost function to limit the firm s rate of investment the major innovation of the model developed here is to extend the previous work to include the financing decision this involves

a programming model with stochastic technology and prices the case of australian agriculture risk associated with stochastic input output coefficients and prices is modeled in a programming specification based upon mean variance analysis and chance constrained programming the algorithm which exploits the features of minos a commercially available computer program is developed and applied to australian agriculture convergence of the algorithm is discussed with the data used the thirty runs of this problem achieved a fast convergence with no more than five cycles the model was used to derive supply response functions of export commodities of australian agriculture the relevant information was generated via parametric variations of prices selected according to a suitable experimental design