the price of pollution a dual approach to valuing so2 allowances under the 1990 clean air act amendments a market based scheme to reduce u s sulfur dioxide emissions takes effect in 1995 indications are that participation in the market will be light and allowance prices will be lower than was once expected using an output distance function approach for wisconsin coal burning utility plants we estimate the shadow price of so2abatement which should approximate the allowance price the estimated average shadow price is above the prices at which the few observed allowance trades have occurred wisconsin s stringent state so2legislation may explain a portion of this divergence

skilled labor unskilled labor and economic growth abstract we study a growth model in which workers with different skill levels are imperfect substitutes we show that economies with high substitutability between skilled and unskilled workers have high levels of capital output and a high proportion of skilled workers

stochastic dominance and mean variance measures of profit and loss for business planning and investment in this paper we first extend the stochastic dominance sd theory by introducing the first three orders of both ascending sd asd and descending sd dsd to decisions in business planning and investment to risk averse and risk loving decision makers so that they can compare both return and loss we provide investors with more tools for empirical analysis with which they can identify the first order asd and dsd prospects and discern arbitrage opportunities that could increase his her utility as well as wealth and set up a zero dollar portfolio to make huge profit our tools also enable investors and business planners to identify the third order asd and dsd prospects and make better choices to complement the stochastic dominance approach we also introduce an improved mean variance criterion to decisions in business planning or investment on both return and loss for risk averse and riskloving investors we then illustrate the superiority of the present approaches with well known examples in the literature and discuss the relationship between the improved stochastic dominance and mean variance criteria

aging population retirement and risk taking the increase in life expectancy spells disaster at retirement one can solve this problem by investing in the maximum geometric mean mgm portfolio which is empirically composed from equity for a t 30 year horizon or more the mgm portfolio dominates other investment strategies by almost first degree stochastic dominance the mgm portfolio also maximizes the expected value of the commonly employed preferences and prospect theory value function for various loss aversion parameters and various reference points for t 10 life cycle funds would increase virtually all investors welfare by shifting to the mgm portfolio so long as the investment horizon is at least 10 years this paper was accepted by amit seru finance

social capital and household welfare in south africa 1993 98 the aim in this study is to determine the nature of the causal relationship if any between social capital as measured by household membership in formal and informal groups and household welfare in south africa using a recently collected panel data set in south africa s largest province we estimate per capita expenditure functions including measures of social capital after controlling for fixed effects and simultaneity we find social capital has no effect in 1993 but a positive and significant effect in 1998

ces production functions and economic growth we examine inconsistencies and controversies related to the use of ces production functions in growth models first we show that not all variants of ces functions commonly used are consistently specified second using a simple growth model we find that a higher elasticity of substitution leads to a higher steady state and makes the emergence of permanent growth more probable it is also pointed out that the effect of a higher elasticity of substitution on the speed of convergence depends on the relative scarcity of the factors of production finally we discuss possible explanations of variations in the elasticity of substitution jel classification o41 o11

almost stochastic dominance and stocks for the long run abstract the geometric mean argument and the recently developed almost stochastic dominance criterion have been employed to make the case for stocks for the long run we show that almost stochastic dominance and the geometric mean argument do not necessarily support long run investment in equities in fact for standard preferences bonds may be preferred to stocks for the long run while stocks are preferred for shorter horizons

intertemporal and intratemporal substitution and the speed of convergence in the neoclassical growth model abstract this paper re examines the speed of convergence in a one sector growth model under fairly general conditions with respect to both production and preferences we investigate the response of the rate of convergence to the intratemporal elasticity of substitution in production and to the intertemporal and intratemporal elasticities of substitution in consumption the speed of convergence is highly sensitive to the first two elasticities but not to the third which is reflected primarily in the agent s labor leisure choice small deviations in the elasticities from standard benchmark parameters can lead to significant variations in the rate of convergence encompassing the range of typical empirical estimates

the dynamics of hours worked and technology the response of hours worked to technology shocks in the postwar us economy has increased over time we offer a structural interpretation of this important time varying macroeconomic moment the time varying patterns captured by a structural var are consistent with those obtained from a parsimonious rbc model with a less than unitary elasticity of substitution between capital and labour the observed changes in the response of hours are attributable to increases in the magnitude of the degree of capital labour substitution finally we conjecture that the observed time variation in is related to changes in the skill composition of the work force and biases in technological change

two level ces production technology in the solow and diamond growth models the two level ces aggregate production function that nests a ces into another ces function has recently been used extensively in theoretical and empirical applications of macroeconomics this paper examines its theoretical properties and establishes existence and stability conditions of equilibria under the solow and diamond growth models in addition it examines the efiect of changes in substitution parameters on transitional growth and steady states it is shown that in the solow model the su cient condition for a steady state is fulfllled for a larger range of substitution parameter values than with the basic ces function in the diamond model an increase in substitution parameters results in higher transitional growth under weaker conditions than with the basic ces function

the normalized ces production function theory and empirics abstract the elasticity of substitution between capital and labor and in turn the direction of technical change are critical parameters in many fields of economics until recently though the application of production functions with specifically non unitary substitution elasticities i e non cobb douglas was hampered by empirical and theoretical uncertainties as recently revealed normalization of production technology systems holds out the promise of resolving many of those uncertainties we survey and assess the intrinsic links between production as conceptualized in a production function factor substitution as made most explicit in constant elasticity of substitution functions and normalization defined by the fixing of baseline values for relevant variables first we recall how the normalized constant elasticity of substitution function came into existence and what normalization implies for its formal properties then we deal with the key role of normalization in recent advances in the theory of business cycles and of economic growth next we discuss the benefits normalization brings for empirical estimation and empirical growth research finally we identify promising areas of future research

an economic approach to social capital a standard optimal investment model can be used to analyse an individual s decision to accumulate social capital we analyse six facts that support the predictions of this individual based approach 1 social capital first rises and then falls with age 2 social capital declines with expected mobility 3 social capital rises in occupations with greater returns to social skills 4 social capital is higher among homeowners 5 social connections fall sharply with physical distance 6 people who invest in human capital also invest in social capital we fail to find robust evidence that social capital investments fall with the value of time or that geographic religious groups generate social capital complementarities

economic growth and the elasticity of substitution two theorems and some suggestions at the beginning of the twentieth century the work of the swedish economist knut wicksell 1901 marked an important advance in our understanding of the relationship between the structure of production functions and income distribution wicksell had asked the following question among many others suppose that the marginal productivities are equal to the remuneration rates of each factor what then should be the form of the corresponding production function he pointed out p 125 that the general integral of the partial differential equation implied by this relationship was of the form y lf kil which meant in turn that the product y was necessarily a homogeneous of degree one function of capital k and labor l as an example he gave a function where the shares of k and l in y were constant and wrote down the function which would be rediscovered decades later by charles w cobb and paul h douglas 1928 however it is only half a century later in robert m solow s nobel prize winning 1956 essay that implications between the structure of the production function and long run equilibrium or disequilibrium of the economy were drawn in his classic article a contribution to the theory of economic growth solow had considered three cases analytically other cases were also discussed geometrically using a phase diagram he had labeled the two first cases 1hlarrod domar and cobb douglas respectively and he referred to the third type of production function as offering a bit of variety it was y ak 2 l 2 2 a particular case of y akp lp 1p in those early days solow had not pointed out to the reader that his cases could have been numbered 0 1 and 2 following the elasticity of substitution of the corresponding production function it would be only five years later in 1961 that with his coauthors kenneth j arrow et al he would find the general form of the two factor constant elasticity of substitution ces production function by integrating the differential equation corresponding to the observed relationship between output per capita and the wage rate solow s third case was indeed highly interesting since it allowed the possibility of everincreasing income per head even without any technical progress indeed solow showed that due to the efficiency of the system entailed by the particular production function he had chosen there existed a threshold for the savings rates s to generate investment per head large enough for income per head to grow forever that threshold was s nla2 where n is the growth rate of the population it was then natural to ask whether one could express that threshold in terms of the elasticity of substitution a the value of that threshold was determined by de la grandville 1989 to be equal to s no3 or where a is k s coefficient in a normalized ces function equal to a in solow s third case where u 2 for any s and n values this relationship gives also the threshold value in implicit form by the solution of ao1 1 log 3q or ilog nls by totally differentiating the last relationship one could observe that the threshold for the elasticity of substitution to entail ever sustained growth was an in klump faculty of mathematics and economics university of ulm helmholtzstrasse 20 d 89081 ulm germany de la grandville department of economics university of geneva 102 boulevard carl vogt ch 1211 geneva 4 switzerland we gratefully acknowledge the comments of seminar participants at stanford university and at the universities of stuttgart hohenheim and munich where parts of the paper were presented also we would like to thank without implicating in any way robert solow for his insightful remarks and an anonymous referee for very helnfuil supgestions wicksell cobb and douglas would no doubt burst with pride if they knew that one of our first year students wrote in a paper of his of course we recognize here a kirk douglas production function

targeting the poor in mexico an evaluation of the selection of households into progresa abstract in this paper we conduct an evaluation of the targeting method used by health education and nutrition program progresa of mexico to identify beneficiary households we address two key questions a how well does progresa s targeting perform and b how does the program perform in terms of its impact on poverty alleviation relative to other feasible methods and transfer schemes the first question is accomplished by comparing progresa s method to an alternative selection method based on household consumption which is our preferred measure of welfare we employ the concepts of undercoverage and leakage and find that progresa selection method is more effective in identifying the extremely poor localities or households but less so when it comes to distinguishing among localities or households in the middle of the scale to address the second question we compare the potential impact of progresa on poverty alleviation against uniform transfers that involve no targeting at all targeting based on consumption and geographic targeting i e targeting at the locality level rather than at the household level we find that progresa s method of targeting households outperforms uniform coverage and targeting at the locality level in terms of reducing the poverty gap and severity of poverty indices even after taking into account the economic costs of targeting but the closeness of progresa s performance to what could be achieved by geographic targeting alone raises some serious questions about the costs and benefits associated with the practice of household targeting within poor localities

risk aversion and expected utility theory a calibration theorem within the expected utility framework the only explanation for risk aversion is that the utility function for wealth is concave a person has lower marginal utility for additional wealth when she is wealthy than when she is poor this paper provides a theorem showing that expected utility theory is an utterly implausible explanation for appreciable risk aversion over modest stakes within expected utility theory for any concave utility function even very little risk aversion over modest stakes implies an absurd degree of risk aversion over large stakes illustrative calibrations are provided

capital skill complementarity and balanced growth we construct a general equilibrium version of the krusell et al econometrica 68 1029 2000 model with capital skill complementarity we assume several sources of growth simultaneously exogenous growth of skilled and unskilled labour equipment specific technological progress skilled and unskilled labouraugmenting technological progress and hicks neutral technological progress we derive restrictions that make our model consistent with balanced growth a calibrated version of our model can account for the key growth patterns in the us data including those for capital equipment and structures skilled and unskilled labour and output but it fails to explain the long run behaviour of skilled labour wages and consequently the skill premium

steady state growth and the elasticity of substitution in a neoclassical economy with endogenous capital and labor augmenting technical change the steady state growth rate of output per worker is shown to increase in the elasticity of substitution between capital and labor this confirms the assessment of klump and de la grandville 2000 that the elasticity of substitution is a powerful engine of economic growth however unlike their findings my result applies to the steady state growth rate moreover it does not hinge on particular assumptions on how aggregate savings come about it holds for any household sector allowing savings to grow at the same rate as aggregate output

data envelopment analysis of mutual funds based on second order stochastic dominance abstract although data envelopment analysis dea has been extensively used to assess the performance of mutual funds mf most of the approaches overestimate the risk associated to the endogenous benchmark portfolio this is because in the conventional dea technology the risk of the target portfolio is computed as a linear combination of the risk of the assessed mf this neglects the important effects of portfolio diversification other approaches based on mean variance or mean variance skewness are non linear we propose to combine dea with stochastic dominance criteria thus in this paper six distinct dea like linear programming lp models are proposed for computing relative efficiency scores consistent in the sense of necessity with second order stochastic dominance ssd the aim is that being ssd efficient the obtained target portfolio should be an optimal benchmark for any rational risk averse investor the proposed models are compared with several related approaches from the literature

revisiting corporate growth options in the presence of state dependent cashflow risk abstract given a non trivial market price of risk we study the impact of state dependent cashflow risk on the optimal investment policy and on the ensuing value of an unlevered firm that holds the option of scaling up cashflows from its assets in place upon incurring an irreversible cost the firm s investment decision and value are studied as a function of the market price of risk and of the degree of state dependence in cashflow risk

a microeconomic analysis of decentralized small scale biomass based chp plants the case of germany alternative energy sources such as biomass chp plants have recently gained significantly in importance and action is due both on the large scale corporate level and on the small scale hence making the scope and economic outline of such projects easily intelligible without losing relevant details seems a key factor to further promote the necessary developments the model setup presented in this paper may therefore serve as a starting point for generating numerical results based on real life cases or scenarios its focus lies on the economic analysis of decentralized biomass chp plants it presents a new approach to analyzing the economic aspects of biomass chp plants implementing a formal microeconomic approach as germany claims a leading role in the market for renewable energy production the paper also takes a closer look on the effects of german energy policy with respect to biomass chp plants

shadow prices of social capital in rural india a nonparametric approach this article studies the role of social capital on cotton production efficiency and productivity for a sample of small farms in maharashtra india using data envelopment analysis input shadow prices are computed as an indicator of the importance of social capital relative to other inputs results suggest social capital to be the input with the highest contribution to production efficiency after land the luenberger indicator is used to assess the productivity improvement associated to an investment in social capital which is found to be on the order of 12 undertaking collective production activities is found to play an important role in improving productivity this is especially relevant to agricultural households facing important economic and institutional restrictions that make it difficult to increase conventional expensive inputs

shadow prices of environmental outputs and production efficiency of household level paper recycling units in vietnam abstract the production efficiency and shadow prices of three environmental outputs bod cod and ss of 63 household level paper recycling units from a recycling craft village in vietnam are assessed a two stage procedure linear programming and stochastic estimation is used to estimate output distance function social capital as a production factor and environmental outputs are included in the output distance function results indicate that production efficiencies could potentially be improved by 28 there is a substantial variation in the shadow prices of environmental outputs among the production units of different types of paper products furthermore the average shadow prices of the three environmental outputs are all positive this indicates a potential for improving environmental quality though introducing pollution prevention methods to paper recycling production processes in vietnam e g recirculation of wastewater and suggests that it may be inappropriate to restrict the shadow prices of environmental outputs to be non positive for the analysis of some production processes

endogenous aggregate elasticity of substitution abstract in the literature studying aggregate economies the aggregate elasticity of substitution aes between capital and labor is often treated as a constant or deep parameter this view contrasts with the conjecture put forward by arrow et al 1961 capital labor substitution and economic efficiency review of economics and statistics 43 225 250 that aes evolves over time and changes with the process of economic development this paper evaluates this conjecture in a simple dynamic multi sector growth model in which aes is endogenously determined our findings support the conjecture and in particular demonstrate that aes tends to be positively related to the state of economic development a result consistent with recent empirical findings

bonds versus stocks investors age and risk taking abstract it has become increasingly popular to advise investors to relocate their funds from a primarily stock portfolio to a primarily bond portfolio as they get older however the well known decision rules such as mean variance or stochastic dominance rules are unable to explain this common practice almost stochastic dominance asd and almost mean variance amv approaches are used to examine the dominance of stock and bond portfolios asd and amv rules unambiguously support the popular practice of advising higher stock to bond ratio for long investment horizons hence we provide an explanation to the practitioners recommendation within the expected utility paradigm

stocks for the log run and constant relative risk aversion preferences abstract almost stochastic dominance implies that stocks are preferred over bonds in the long run by all preferences with bounded marginal utility unfortunately this analysis excludes the very central constant relative risk aversion crra preferences which have unbounded marginal utility we derive a simple closed form solution for the portfolio choice problem of crra investors which with the empirical parameters implies that stocks are preferred over bonds for all crra investors with relative risk aversion smaller than 3 9 as a by product the analysis offers an alternative derivation of the continuous time capm that does not rely on dynamic programming and allows for ambiguous investment horizons

preferred by all and preferred by most decision makers almost stochastic dominance while most decision makers may prefer one uncertain prospect over another stochastic dominance rules as well as other investment criteria will not reveal this preference due to some extreme utility functions in the case of even a very small violation of these rules such strict rules relate to all utility functions in a given class including extreme ones which presumably rarely represents investors preference in this paper we establish almost stochastic dominance asd rules which formally reveal a preference for most decision makers but not for all of them the asd rules reveal that choices which probably conform with most decision makers also solve some debates e g showing as practitioners claim an asd preference for a higher proportion of stocks in the portfolio as the investment horizon increases a conclusion which is not implied by the well known stochastic dominance rules

trust membership in groups and household welfare evidence from kwazulu natal south africa unfortunately these two literatures have remained largely unconnected the group and network literature concludes that participation has important economic benefits even when the stated function of the group is noneconomic in most cases however the mechanisms by which groups and networks achieve this are unclear the determinants of trust and participation in groups literature highlights the importance of income and social homogeneity what remains less understood is whether and how trust can be generated for example via participation in groups this article links the empirical literatures referenced above by exploring the relationship between membership in groups and trust specifically using longitudinal data from kwazulu natal province south africa we examine 1 the importance of trust in the decision to join groups 2 the subsequent ability of groups to generate trust and 3 the effect of group membership and trust on a measure of well being per capita household income in addition we disaggregate groups into financial and nonfinancial and we categorize trust in people by agent or actor therefore we can explore whether trust in different kinds of actors is important for participation in different kinds of groups and whether participation in different kinds of groups is important for generating trust in different kinds of actors excerpt

environmentally sensitive productivity analysis of the canadian pulp and paper industry 1959 1994 an input distance function approach abstract this study employs a parametric input distance function that incorporates both desirable and undesirable outputs to provide a more complete representation of the production technology from which environmentally sensitive productivity and efficiency measures can be generated this framework also generates pollution abatement cost estimates that are useful for policy making an input based malmquist index of productivity growth that appropriately credits the producer not only for increases in marketable or desirable outputs but also for the production of improved environmental quality through pollution abatement activities is derived from the input distance function the method was applied to time series data from the canadian pulp and paper industry our shadow price estimates indicate that the marginal cost to producers of pollution control has been rising the main conclusion of this study is that productivity improvement from the social viewpoint has been stronger than conventional measures would suggest

relative shadow prices of social capital for household level paper recycling units in vietnam abstract this study employs a parametric deterministic input distance function for computing the relative shadow prices of social capital with respect to physical capital and labor for household level paper recycling units in vietnam the results indicate that social capital has positive effects on the production efficiency of paper recycling units more specifically the contribution of a 1 increase in social capital to production efficiency improvements is much greater than that of one million vietnamese dong of physical capital but less than that of 100 worker hours of labor furthermore associational activity and trust are the most valuable out of the four components of social capital and an increase of 1 in the measures of associational activity and trust is equal to an increase of us 364 936 and us 337 103 in the value of physical capital respectively the results also indicate that the relative shadow prices of the reciprocity and associational activity measures are highest for the lowest income group whereas those of trust and information sharing are highest among the higher income groups

should we fear the robot revolution the correct answer is yes abstract advances in artificial intelligence and robotics may be leading to a new industrial revolution this paper presents a model with the minimum necessary features to analyze the implications for inequality and output two assumptions are key robot capital is distinct from traditional capital in its degree of substitutability with human labor and only capitalists and skilled workers save we analyze a range of variants that reflect widely different views of how automation may transform the labor market our main results are surprisingly robust automation is good for growth and bad for equality in the benchmark model real wages fall in the short run and eventually rise but eventually can easily take generations