legislative district configurations and fiscal policy in american states in accordance with the median voter theorem the median legislator is decisive in representative democracy if the preferences of the median legislator differ from the preferences of the median voter in the polity fiscal policy choices will predictably diverge from those favored by the median voter this paper seeks to identify the median district and therein the preferences driving the median legislator in american state legislatures using economic characteristics of constituents we find substantial differences between the median district and the statewide median as the income of the median district rises above the median income of the polity government expenditures increase in addition the degree to which income is skewed across legislative districts affects spending for redistribution programs finally we find that direct democracy procedures which allow the statewide median voter to check legislative decisions limit the impact of differences between the district and polity medians

optimal policies for a capacitated two echelon inventory system this paper demonstrates optimal policies for capacitated serial multiechelon production inventory systems extending the clark and scarf 1960 model to include installations with production capacity limits we demonstrate that a modified echelon base stock policy is optimal in a two stage system when there is a smaller capacity at the downstream facility this is shown by decomposing the dynamic programming value function into value functions dependent upon individual echelon stock variables we show that the optimal structure holds for both stationary and nonstationary stochastic customer demand finite horizon and infinite horizon results are included under discounted cost and average cost criteria

does it matter if growth is imported via terms of trade or trade volume increases abstract this paper shows that to import growth via terms of trade or trade volume increases does matter when determining the degree of competition in the export sector that allows an economy to fully exploit its export market power

time preference and international lending and borrowing in an overlapping generations model two economies represented by diamond type overlapping generations models and differing only in their pure rates of time preference are joined together capital formation balance of payments behavior and welfare are compared under autarky and openness with a positive natural rate of growth the low time preference country runs a current account surplus in the steady state but not necessarily outside it if preexisting capital is not shiftable between countries integration in the world economy makes the high time preference country worse off in the short run the ranking of stationary utility levels under autarky and openness is ambiguous

order quantity and timing flexibility in supply chains the role of demand characteristics we study how differences in product demand characteristics affect the strategic value of different types of supply chain flexibility for accurate response we propose a single period inventory modelling framework with two ordering opportunities the second order reflects updated demand information and potentially capitalizes on supply chain flexibility we consider two complementary forms of flexibility quantity flexibility in production and timing flexibility in scheduling in this framework we analyze the total inventory cost of a firm for alternate demand types we model functional products through the standard assumption of independent demand over the period fashion driven innovative products through a bayesian model and innovative products with evolving demand through a martingale process the three demand processes exhibit very different behavior with respect to the value of the alternate forms of flexibility we observe that quantity flexibility is of moderate value for functional goods and of high value for fashion driven products for all lead times quantity flexibility is of low value for goods with evolving demand with long lead times but of high value for short lead times alternately we observe timing flexibility is of highest value for functional goods especially for cases of high holding cost and is of lesser value for fashion driven goods it is of least value for goods with evolving demand both quantity and timing flexibility capabilities are required to significantly reduce the relevant supply chain costs for evolving demand innovative goods when the lead times are long

integrating replenishment decisions with advance demand information there is a growing consensus that a portfolio of customers with different demand lead times can lead to higher more regular revenues and better capacity utilization customers with positive demand lead times place orders in advance of their needs resulting inadvance demand information this gives rise to the problem of finding effective inventory control policies under advance demand information we show that state dependent s s and base stock policies are optimal for stochastic inventory systems with and without fixed costs the state of the system reflects our knowledge of advance demand information we also determine conditions under which advance demand information has no operational value a numerical study allows us to obtain additional insights and to evaluate strategies to induce advance demand information

critical number policies for inventory models with periodic data we consider an infinite horizon in problem with stochastic demands where the data vary periodically karlin karlin s 1960a dynamic inventory policy with varying stochastic demands management sci 6 231 258 karlin s 1960b optimal policy for dynamic inventory process with stochastic demands subject to seasonal variations j siam8 611 629 shows that a periodic critical number policy is optimal and presents an algorithm for computing the critical numbers assuming discounted costs here we develop an alternative conceptually simpler approach to these problems the results include a proof of the optimality of such policies for the average cost case and a qualitative description of the behavior of the optimal policy as smoothing fluctuations in the data

the effects of volatility in the terms of trade on output growth new evidence abstract this paper examines the empirical evidence for the hypothesis that there is a negative relationship between terms of trade volatility and output growth it finds a statistically significant link between income terms of trade volatility and lower growth rates when the degree of volatility in the income terms of trade is decomposed into its components fluctuations in real exports are of a magnitude similar to those in the relative price of tradables similarly the volatility in the net barter terms of trade is equally affected by variations in the price of exports and of imports any policies aimed at stabilizing the terms of trade or any of its components need to take account of this

government growth in the twenty first century public choice explanations of government growth fall into three main categories budget maximization theories rational choice models and path dependent models like the ratchet hypothesis the strengths and weaknesses of these theories as explanations for government growth are considered along with some facts about the actual growth of government to conjecture about its trajectory in the twenty first century government size seems to have been constrained in the past primarily by its ability to raise revenue growth rates in the new century thus appear to depend on factors constraining government s ability to continue to expand the tax base

modelling imperfect advance demand information and analysis of optimal inventory policies we consider an inventory control problem where it is possible to collect some imperfect information on future demand we refer to such information as imperfect advance demand information adi which may occur in different forms of applications a simple example is a company that uses sales representatives to market its products in which case the collection of sales representatives information as to the number of customers interested in a product can generate an indication about the future sales of that product hence it constitutes imperfect adi other applications include internet retailing vendor managed inventory vmi applications and collaborative planning forecasting and replenishment cpfr environments we develop a model that incorporates imperfect adi with ordering decisions under our system settings we show that the optimal policy is of order up to type where the order level is a function of imperfect adi we also provide some characterizations of the optimal solution we develop an expression for the expected cost benefits of imperfect adi for the myopic problem our analytical and empirical findings reveal the conditions under which imperfect adi is more valuable

growth and trade vs trade and growth in the traditional trade literature there is a well developed area analyzing the effect of growth on trade and its reflection on income growth this literature developed already in the 1950s and 1960s generally speaking an interest in the effects of trade on growth has also existed for many years where trade has often been viewed as an engine of growth cases in point are the east asian tigers and japan which have especially benefited from outward looking policies in this paper we analyze the relationship between economic growth and growth in income terms of trade arguing that income terms of trade is a useful concept in analyses of the link between trade and growth our results suggest that fast growing countries have either specialized in sectors with a relatively favorable development with regard to world market prices or they have managed to successively improve quality within sectors thereby avoiding falling terms of trade in spite of large increases in export volumes

an empirical example of the condorcet paradox of voting in a large electorate social choice theory suggests that the occurrence of cyclical collective preferences should be a widespread phenomenon especially in large groups of decision makers however empirical research has so far failed to produce evidence of the existence of many real world examples of such and none in large electorates this paper demonstrates the existence of a real cyclical majority in a poll of danish voters preferred prime minister using pair wise comparisons this result is compared with those of a similar poll but by using different voting methods each resulting in different choices the example demonstrates the empirical reality of cyclical collective preferences and the importance of the choice of institutions

the power of the proposal maker in a model of endogenous agenda formation in a distributive setting this study examines a voting procedure for which agenda formation is endogenous it is found not surprisingly that agenda formation is another avenue for strategic manipulation of the voting process and provides the member to first take the floor an asymmetric advantage what is surprising is the degree of this advantage we find that the initial proposal maker earns a share of the fixed resource exceeding 1 for an majority rule and this is regardless of the number of members the voting rule is found to be an effective instrument in at least partially offsetting the power of the proposal maker while maintaining the stability of the voting process

fiscal deficits and relative prices in a growing world economy abstract this paper studies the transmission of fiscal disturbances between countries and the effect of those disturbances on worldwide capital intensity in a context of growth the model developed to address these issues allows for the production of both nontradable and relatively capital intensive tradable goods a central finding is that factor markets can be a major channel for the communication of fiscal policy shocks to world interest rates to private saving decisions and ultimately to global asset supplies and their distribution among countries particular predictions of the model illustrate how changes in public debt ratios and shifts in government spending patterns affect resource allocation and the welfare of various generations both at home and abroad

optimal policies and approximations for a serial multiechelon inventory system with time correlated demand since clark and scarf s pioneering work most advances in multiechelon inventory systems have been based on demand processes that are time independent this paper revisits the serial multiechelon inventory system of clark and scarf and develops three key results first we provide a simple lower bound approximation to the optimal echelon inventory levels and an upper bound to the total system cost for the basic model of clark and scarf second we show that the structure of the optimal stocking policy of clark and scarf holds under time correlated demand processes using a martingale model of forecast evolution third we extend the approximation to the time correlated demand process and study in particular for an autoregressive demand model the impact of lead times and autocorrelation on the performance of the serial inventory system

do supermajority rules limit or enhance majority tyranny evidence from the us states 1960 1997 buchanan and tullock 1962 demonstrates that supermajority rules can reduce tyranny of majority problems in a democracy however recent theoretical work by dixit grossman and gul 2000 postulates that this static analysis of supermajority rules may be inadequate to explain political decisions in a dynamic setting in fact supermajority rules may increase the incidence of majority tyranny because of rotating political representation using data from us state legislatures we examine the effect of supermajority rules on different categories of government expenditures and tax revenues during the latter half of the 20th century we find supermajority rules have little effect on general government expenditures and tax revenues however supermajority rules are associated with lower public welfare transfers which supports the traditional analysis of the fiscal effects of supermajority rules

optimal policies for multiechelon inventory problems with markov modulated demand this paper considers a multistage serial inventory system with markov modulated demand random demand arises at stage 1 stage 1 orders from stage 2 etc and stage n orders from an outside supplier with unlimited stock the demand distribution in each period is determined by the current state of an exogenous markov chain excess demand is backlogged linear holding costs are incurred at every stage and linear backorder costs are incurred at stage 1 the ordering costs are also linear the objective is to minimize the long run average costs in the system the paper shows that the optimal policy is an echelon base stock policy with state dependent order up to levels an efficient algorithm is also provided for determining the optimal base stock levels the results can be extended to serial systems in which there is a fixed ordering cost at stage n and to assembly systems with linear ordering costs

commodity and developing country terms of trade what does the long run show recently the debate surrounding the commodity net barter terms of trade and the terms of trade of developing countries has entered a new phase in this journal spraos i980 presents evidence of a stable declining commodity terms of trade and sapsford i985 although fl nding instability in the work of spraos argues in support of the stable declining terms of trade hypothesis grilli and yang i988 henceforth gy also provide evidence supporting this view and state the implications of this finding for developing country terms of trade a major contribution of gy is a published set of data on the main price indices with a high degree of consistency for the whole century 1 however cuddington and urzua i989 in thisjournal illustrate that the hypothesis of a secular deterioration in the commodity terms of trade is not robust to the alternative claim that there was a once and for all shift in commodity prices in the period i920 i after taking this shift into account these authors find little evidence to support the view of a secular decline 2 this debate has important implications for the prebisch singer hypothesis of a stable declining commodity terms of trade see for instance prebisch i 950 it also has implications for both development and stabilisation strategies adopted by commodity dependent developing countries a central issue in this analysis is the order of integration of the commodity terms of trade a time series is said to be integrated of order o i o if its mean and variance are constant or roughly speaking if the series is stationary a time series is said to be i n if the series requires first differencing n times before a stationary series is obtained alternatively if adding a time trend is sufficient to induce stationarity the series is termed trend stationary a trend stationary series implies that the variable in question simply adjusts around a constant growth path but an i i series is truly non stationary and displays very different properties a commonly cited example of an 1 i series is the random walk the order of integration of a single time series is related to the idea of cointegration of a number of time series consider two variables x and y that are not themselves i o but are of the same order of integration if the residuals from regressing x on y or vice versa are i o or roughly speaking if the residuals are stationary it can be concluded that the two variables are cointegrated in turn this implies that there is some form of equilibrium

the stabilizing effect of inventory in supply chains this paper presents a hierarchical model framework for the analysis of the stabilizing effect of inventories in multiechelon manufacturing distribution supply chains this framework is used to compare the variance of demand to the variance of replenishment orders at different echelons of the system e g retailer wholesaler empirical data and experience with management games suggest that in most industries inventory management policies can have a destabilizing effect by increasing the volatility of demand as it passes up through the chain the bullwhip effect our model helps to explain these observations and indicates mechanisms that can promote stabilization the analysis results also define sufficient conditions for the existence of stabilization and relate these conditions to the optimality of myopic control policies

how small enterprises in ghana have responded to adjustment ghana is often cited as an african country that has undertaken major macroeconomic reforms with generally positive results for economic growth within ghana s industrial sector the effects of structural adjustment policies have differed among subsectors and firms little is known however about the impact of adjustment on smaller firms a survey of small scale enterprises sses was carried out in november 1989 to learn more about the impact of the adjustment program on their operations to evaluate their potential contribution to dynamic industrial recovery and to identify appropriate measures that would accelerate the growth of sses in numbers size and productivity specific objectives of the survey were to 1 learn more about the characteristics of small firms and their owners 2 analyze how policy changes have affected small firms highlighting entrepreneurs strategies for adapting to their new environments and 3 identify constraints to the future growth of small firms results show that adjustment policies have forced the sses to become more competitive to survive and that significant structural changes are taking place across subsectors and within firms the overall business environment has generally improved during the adjustment program although shortcomings remain uncertainty about political and economic stability and lack of finance appear to be the most immediate restraints on investment

a model of political competition in the underlying space of ideology this study makes use of the concept of ideology to answerimportant questions of political competition i develop amulticandidate model in which voters use ideology as asimplifying device that helps them to choose a candidate in anoisy environment three important results arise for thehomogeneous polity case first the candidate with moreresources is the one more likely to win the election second a merger between two parties might yield to a higher expectedplurality for the candidate of the newly formed party third political convulsion yields to a decrease in the expectedplurality for the incumbent candidate

optimal policy for a two stage assembly system under random demand this paper considers an inventory system in which an end product is assembled from two components each of which is ordered from an external supplier only the end product has final demand which is assumed to be random using the functional equation approach of dynamic programming we characterize the forms of both the optimal order policy for the components and the optimal assembly policy of the end product for a multiperiod problem of arbitrary but finite length we believe that this work represents the only exact analysis of an mrp type assembly system when demand is stochastic

capital income taxation in growing open economies abstract this paper studies how alternative capital mobility assumptions affect the incidence and efficiency of capital income taxation the study uses a two country intertemporal equilibrium model in which imperfectly elastic investment captures the notion of imperfectly mobile physical capital if home goods and foreign goods are perfect substitutes and investment is inelastic the tax effects in open and closed economies are similar only if physical capital is perfectly mobile are capital income taxes completely shifted in small open economies only then and if significant terms of trade effects are absent do open economy efficiency losses substantially exceed the closed economy losses

risk sharing in supply chains using order bands analytical results and managerial insights abstract this work generalizes and extends a number of basic production inventory models we study a periodic review non stationary markovian production inventory model with stochastic demand and holding and penalty costs all state dependent where goods can be procured from up to two suppliers each supplier quotes a state dependent minimum order quantity moq order capacity c and unit price we concentrate on a base stock policy that is defined by a vector of numbers one for each lead time indexed by the states of the markov chain in certain cases our policy is optimal for the general case we show that there is no simple optimal policy we use infinitesimal perturbation analysis to compute inventory levels within this class for an application motivated by international trade for this application we find that the imposition of minimum and or maximum order quantities provides an effective mechanism for risk sharing the customer guarantees the supplier a minimum order every period at an increased unit price and in exchange the supplier grants an increase in capacity this can more effectively match supply with demand making the entire supply chain more profitable

large deviations based asymptotics for inventory control in supply chains we consider a model of a capacitated single class supply chain consisting of production facilities stages in tandem external demand is met from the available finished goods inventory maintained in front of the most downstream facility unsatisfied demand is backlogged every stage orders from its upstream facility thus production is constrained by the local production capacity and the availability of upstream inventory we propose production policies in two separate cases 1 when each facility has information about its local inventory only and 2 when each facility has knowledge of the total downstream inventory in case 1 the proposed policy guarantees that stockout probabilities at each stage stay bounded below given constants service level constraints in case 2 the proposed policy minimizes total expected inventory cost subject to desirable service level constraints in both cases the parameters of the proposed policies are obtained analytically based on large deviations asymptotics which leads to drastic computational savings compared to simulation an important feature of our model is that it accommodates autocorrelated demand and service processes both critical features of modern failure prone manufacturing systems we demonstrate that detailed distributional information on demand and service processes which is incorporated into large deviations asymptotics is critical in inventory control decisions we discuss extensions to a multiclass setting and to a model where unsatisfied demand is lost instead of backordered

lower bounds for multi echelon stochastic inventory systems we establish lower bounds on the minimum cost of managing certain production distribution networks with setup costs at all stages and stochastic demands these networks include serial assembly and one warehouse multi retailer systems we obtain the bounds through novel cost allocation schemes we evaluate the bounds performance for one warehouse multi retailer systems by comparing them with simple heuristic policies the bounds are quite tight for systems with a small number of retailers we also present simplified proof of known optimality results for serial and assembly systems

current account dynamics and the terms of trade harberger laursen metzler two generations later this is a study of the current account dynamics resulting from the savings and investment dynamics in a small open economy which is subject to exogenous changes in its terms of trade and in world interest rates anticipated and unanticipated as well as temporary and permanent terms of trade changes have very different effects there is however a general tendency towards cycles in both savings and investment which gives rise to cycles in the current account it is shown that the classic harberger laursen metzler effect on saving of a terms of trade deterioration can have any sign for plausible parameter values both for temporary and permanent disturbances

trends and cycles in the net barter terms of trade a new approach this study has two objectives first it uses time series techniques including unit root tests to reexamine the classic prebisch singer hypothesis that the relative prices of primary commodities in terms of manufactured goods are characterized by secular deterioration second commodity price movements are decomposed into permanent and cyclical components using the beveridge and nelson 1981 technique the latter information is valuable when assessing the viability of commodity stabilization funds and formulating countercyclical macroeconomic policy responses to commodity booms and busts copyright 1989 by royal economic society

terms of trade disturbances and fiscal policy in a small open economy this paper examines the dynamic and steady state effects of shifts in the terms of trade and the level of government debt in a small open economy the study is based on a simulation model that is loosely calibrated to the canadian economy there are three goods in the model nontradables importables and exportables consumers optimize over their expected lifetime and do not care about the well being of future generations so ricardian equivalence does not hold profit maximizing firms use inputs of capital labor and an intermediate good and face costly adjustment of capital copyright 1993 by royal economic society

political preferences for the pork barrel a generalization this paper provides a rational explanation for the observation of oversized coalitions often approaching unanimous size in the realm of distributive policies distributive policies are those which concentrate benefits in specific geographic areas states congressional districts while spreading costs through general taxation the explanation offered here that legislators may rationally prefer universalism to hard ball coalition politics generalizes earlier work of weingast and fiorina in particular it extends their results to pork barrel politics i e projects that are economically inefficient and demonstrates how packages of economically inefficient projects can nevertheless be politically popular the main theoretical feature that induces preferences for universalism is uncertainty over the composition of winning coalitions and consequently the desire for the political insurance that universalism provides

a capacitated production inventory model with periodic demand for a single product single stage capacitated production inventory model with stochastic periodic cyclic demand we find the optimal policy and characterize some of its properties we study the finite horizon the discounted infinite horizon and the infinite horizon average cases a simulation based optimization method is provided to compute the optimal parameters based on a numerical study several insights into the model are also provided

inventory control in a fluctuating demand environment we present an inventory model where the demand rate varies with an underlying state of the world variable this variable can represent economic fluctuations or stages in the product life cycle for example we derive some basic characteristics of optimal policies and develop algorithms for computing them in addition we show that certain monotonicity patterns in the problem data are reflected in the optimal policies

a multiechelon inventory problem with secondary market sales we consider a finite horizon multiechelon inventory system in which the surplus of stock can be sold i e disposed in the secondary markets at each stage in the system what are called nested echelon order up to policies are shown to be optimal for jointly managing inventory replenishments and secondary market sales under a general restriction on model parameters we establish that it is optimal not to both sell off excess stock and replenish inventory secondary market sales complicate the structure of the system so that the classical clark and scarf echelon reformulation no longer allows for the decomposition of the objective function under the optimal policy we introduce a novel class of policies referred to as the disposal saturation policies and show that there exists a disposal saturation policy determined recursively by a single base stock level at each echelon that achieves the decomposition of this problem the resulting optimal replenishment policy is shown to be the echelon base stock policy we demonstrate the heuristic performance of this disposal saturation policy through a series of numerical studies except at extreme ranges of model parameters the policy provides a very good approximation to the optimal policy while avoiding the curse of dimensionality we also conduct numerical studies to determine the value of the secondary markets for multistage supply chains and assess its sensitivity to model parameters the results provide potentially useful insights for companies seeking to enter or develop secondary markets for supply chains this paper was accepted by martin lariviere operations management

the stability of logrolling an expectations approach this essay provides an explanation for the existence of stable logrolling arrangements the model presented assumes that issues are voted on one at a time that people are risk averse and that each person forecasts future issue decisions with a random variable whose mean is linear in the alternatives of the present issue we show that under this model the expectation that logrolling will take place stabilizes the logrolling process for this expectation to be stable it must be symmetric which means that revoting of issues must be possible since revoting is possible in institutions such as congress we conclude that an important set of real world voting bodies satisfies the conditions for stable logrolling

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

benefits of leadtime information and of its combination with demand forecast information abstract this paper studies both the benefits of leadtime information and the interrelationships among demand forecast information leadtime uncertainty and leadtime information for improving inventory control performance to this end it explicitly incorporates both leadtime information and demand forecast information into an inventory model although they have conventionally been dealt with individually in the literature specifically it considers a periodic review inventory model with uncertain leadtimes in which both leadtime information and demand forecast information are available the leadtime information is modeled as the information of the arrival of outstanding orders and the demand forecast information as the martingale model of forecast evolution mmfe the paper analyzes the way to use both leadtime information and demand forecast information for inventory control operations specifically under certain conditions the optimality of the state dependent base stock policy is shown and an effective heuristic policy is developed it also derives some managerial insights for exploiting both leadtime information and demand forecast information in the case where leadtimes are uncertain for instance while leadtime information itself significantly improves inventory control performance it also enhances the benefits of demand forecast information specifically the benefits of demand forecast information may significantly decrease as leadtime uncertainty increases however the decrease of the benefits of demand forecast information may be alleviated with leadtime information

tax shares and government spending in a median voter model pear as a part of political platforms and the manipulation of tax shares through changes in progressivity loopholes writeoffs and deductions is common the purpose of this paper is to analyze the effects of including tax shares as a part of a candidate s platform within a median voter model in downs depiction of the median voter model two candidates with platforms on opposite sides of the median compete for the median voter s vote by moving their platforms toward the median if tax shares can be included in the platforms another method of competition would be to offer the me

on the difficulty of eliminating deficits with higher taxes some canadian evidence government budget deficits have increased along with government revenues from direct and indirect taxation both in absolute amounts and as a share of national income in canada as well as in several other countries especially since the 1960s this phenomenon also has coincided particularly since 1980 with skepticism over the notion that government deficit spending stimulates economic growth and employment instead many now expect deficits to produce negative effects on economic activity including high real interest rates reduced real capital formation and production increased unemployment and possible long term inflation 2 these expectations have produced a near concensus on the need to reduce government budget deficits but not on the means of achieving that goal some advocate reductions in government spending as the optimal solution while others call for increases in taxation to raise revenue although either policy in principle may achieve the same result for the deficit they arise from different theories of the determinants of government spending in particular those who advocate expenditure cuts suggest that increased taxation would increase government spending more than it would reduce the deficit arguing that there is a causal direction from increased tax revenues to increased government expenditures although the taxation spending causality hypothesis has assumed increased prominence over the last decade 3 little statistical testing has been done for canada studies by manage and marlow 18 and ram 21 lend support to the argument that expenditures are more responsive to revenues than the reverse on the basis of u s data indeed ram s work contradicts the earlier conclu

a general constitutional possibility theorem arrow s impossibility theorem shows that there exist no transitive social preferences in nonoligarchic societies for all possible profiles of individual preference orderings similarly a generalization of sen s theorem of the impossibility of a paretian liberal implies under the same conditions that non pareto optimal outcomes may be present in the resulting cyclical preference relations this essay changes the customary perspective it demonstrates that for any profile of individual preferences we can always find a nonoligarchic assignment of rights to different subsets of society to decide between pairs of outcomes together with adequate decision rules which escapes these problems this assignment of rights can be a purely liberal one even for each profile but not one in which everybody participates in all decisions and which uses simple or qualified majority voting total direct democracy the adequate purely liberal constitution on the other hand may imply an oligarchy if too few outcomes are present

managing an available to promise assembly system with dynamic short term pseudo order forecast we study an order promising problem in a multiclass available to promise atp assembly system in the presence of pseudo orders a pseudo order refers to a tentative customer order whose attributes such as the likelihood of an actual order order quantity and confirmation timing can change dynamically over time a unit demand from any class is assembled from one manufactured unit and one inventory unit where the manufactured unit takes one unit of capacity and needs a single period to produce an accepted order must be filled before a positive delivery lead time the underlying order acceptance decisions involve trade offs between committing resources production capacity and component inventory to low reward firm orders and reserving resources for high reward orders we develop a markov chain model that captures the key characteristics of pseudo orders including demand lumpiness nonstationarity and volatility we then formulate a stochastic dynamic program for the atp assembly system that embeds the markov chain model as a short term forecast for pseudo orders we show that the optimal order acceptance policy is characterized by class prioritization resource imbalance based rationing and capacity inventory demand matching in particular the rationing level for each class is determined by a critical value that depends on the resource imbalance level defined as the net difference between the production capacity and component inventory levels extensive numerical tests underscore the importance of the key properties of the optimal policy and provide operational and managerial insights on the value of the short term demand forecast and the robustness of the optimal policy this paper was accepted by martin lariviere operations management

domestic saving and international capital movements in the long run and the short run the evidence and analysis in this paper support the earlier findings of feldstein and horioka 1980 that sustained increases in domestic savings rates induce approximately equal increases in domestic rates of investment new estimates for the post opec period 1974 79 imply that each extra dollar of domestic saving increases domestic investment by approximately 85 cents in a sample of 17 oecd countries an explicit analysis of the problems of identification and simultaneous equations bias suggests that the regression estimates are more relevant as a guide to the long run response of international capital flows than to their short run behavior coefficient estimates based on annual variations in savings and investment are subject to potentially severe simultaneous equations bias that is not present when annual observations are averaged over a decade or more and the regression is estimated with a cross country sample of these averages a portfolio model of international capital allocation that is presented in the paper indicates that the short run change in the rate of net foreign investment in response to a sustained increase in domestic saving is likely to be substantially greater than the ultimate steady state response this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

a direct test of direct democracy new england town meetings representative democracies govern most locales in the us making it difficult to compare performance relative to direct democracy new england states however provide an opportunity to test both direct and representative democracy at the local level this article uses revealed preference axioms to compare spending patterns in new england towns and cities against median voter hypothesis benchmarks contrary to previous evidence we find no differences between direct and representative democracy the results suggest that horizontal competition arising from local fragmentation minimize differences between direct and representative local government providing support for wider applicability of median voter based empirical models of local government behaviour in the us

competition and cooperation in a two stage supply chain with demand forecasts we consider a serial supply chain with one supplier and one retailer each obtains some demand forecast information which may be shared or not we investigate the members benefits from sharing information the forecasts follow a variant of the martingale model of forecast evolution mmfe we construct a simple transfer payment scheme to align the players incentives with that of the overall system the main finding is that unless the players incentives are aligned in this way sharing information makes little sense it might hurt one or the other player and the system as a whole

recontracting trustworthiness and the stability of vote exchanges tullock 1981 has recently restated a discrepancy between theory and observation that exists in collective decisions and made a start toward explaining the discrepancy the discrepancy stated simply is this the theory of rational action in collective decisions implies that any outcome which requires vote exchanges to be achieved is unstable in that it can be overturned by a coalition all of whom find it their interest to do so yet a high degree of stability is observed in legislation despite the fact that much of this legislation required vote exchanges in order to be passed tullock accounts for this stability in part by pointing out that defections necessary to create the instability e g a defector induced to become an aristocrat in an inegalitarian coalition create an exposed position for the defector and the possible instability is likely to inhibit the defection in the first place tullock looks at two extreme forms that a winning coalition could take given a set of bills each of which has a special interest for one legislator a logrolling form which encompasses all of nearly all the legislature and a minimal winning coalition although the latter dominates the former in a game theoretic sense tullock argues that the latter will be unstable because of the power of enticement held by the excluded minority logrolling which includes nearly all the legislature is although formally dominated stable because of the absence of this potential enticement thus for tullock if i understand correctly his argument the potential instability of minimal winning coalitions leads any one of them to be succeeded not by another minimal winning coalition but by a non minimal winning coalition that it formally dominates shepsle and weingast in a subsequent paper argue that the institutional structure of actual legislatures restricts the richness of logrolling and coalition possibilities that under pure majority rule without such institutions could overturn a proto coalition or reverse an outcome shepsle and weingast 1981 511 thus they explain stability by stability inducing institutions

stability and centrality of legislative choice in the spatial context majority rule spatial voting games lacking a core still always present a near core outcome more commonly known as the copeland winner this is the alternative that defeats or ties the greatest number of alternatives in the space previous research has not tested the copeland winner as a solution concept for spatial voting games without a core lacking a way to calculate where the copeland winner was with an infinite number of alternatives we provide a straightforward algorithm to find the copeland winner and show that it corresponds well to experimental outcomes in an important set of experimental legislative voting games we also provide an intuitive motivation for why legislative outcomes in the spatial context may be expected to lie close to the copeland winner finally we show a connection between the copeland winner and the shapley value and provide a simple but powerful algorithm to calculate the copeland scores of all points in the space in terms of the modified power values of each of the voters and their locations in the space

public choice theory some items for a research agenda to write about the expected development of public choice during the next twenty years is of course impossible for in order to predict the development of the field it would be necessary to know already today the results of future research but then the latter would be unnecessary thus i shall turn to a more modest and rather subjective endeavor namely to sketch some items which might prove fruitful for future research by filling gaps by integrating already existing insights and by extending the domain of public choice i will especially take up in the next section the relationship of public choice theory with constitutional economics law and economics institutional economics and social choice theory following this the relationship of public choice with the analysis of the international system will be discussed section 3 section 4 will take up public choice ideology and information and nondemocratic regimes finally section 5 offers some remarks on the evolution transformation and reform of political economic regimes

differences in income elasticities and trends in real exchange rates abstract one might expect that differences in income elasticities in trade and or differences in growth rates among countries would give rise to strong secular trends in real exchange rates for example fast growing countries might need steady depreciation to get the world to accept their growing exports in fact however income elasticities are systematically related to growth rates by the 45 degree rule under which fast growing countries appear to face high income elasticities of demand for their exports while having low income elasticities of import demand the net effect of this relationship between elasticities and growth rates is that secular trends in real exchange rates are much smaller than one might otherwise have expected relative ppp holds fairly well this paper documents the existence of a 45 degree rule and suggests an explanation in terms of increasing returns and product differentiation

why so much stability an optimistic view of the possibility of rational legislative decisionmaking recent formal models of legislatures have proved that equilibrium outcomes are extremely unlikely without either 1 extreme restrictions upon preferences or 2 constraints upon the agenda the implication is that constant instability or dictatorial manipulation is the norm in politics

the median voter model in public choice theory the changing perception by public choice theorists about the relevance of the median voter model is a result of excessive extrapolation of the conclusions of theoretical models to the real world early in the 1970s the median voter model was often accepted as implying that the output produced in the public sector was what was most preferred by the median voter this claim is excessive because the median voter model is only a model of demand aggregation under majority rule and has little to say about the supply side of the public sector in the late 1970s many scholars identified several circumstances under which the model would not apply in theory but these critiques of the model were often viewed as reasons to abandon the median voter model altogether the model went from having excessive claims that made the model appear to be more powerful than it really is to excessive claims that made the model appear to be less powerful than it really is these latter claims were often in response to the earlier claims rather than to the model appropriately applied

inventory decisions for emergency supplies based on hurricane count predictions abstract this paper addresses a stochastic inventory control problem for manufacturing and retail firms who face challenging procurement and production decisions associated with hurricane seasons specifically the paper presents a control policy in which stocking decisions are based on a hurricane forecast model that predicts the number of landfall hurricanes for an ensuing hurricane season the multi period inventory control problem is formulated as a stochastic programming model with recourse where demand during each pre hurricane season period is represented as a convolution of the current period s demand and an updated estimate of demand for the ensuing hurricane season due to the computational challenges associated with solving stochastic programming problems recent scenario reduction techniques are discussed and illustrated through an example problem the proposed model specifies cost minimizing inventory strategies for simultaneously meeting stochastic demands that occur prior to the hurricane season while proactively preparing for potential demand surge during the season

optimal policies for multi echelon inventory problems with batch ordering in many production distribution systems materials flow from one stage to another in fixed lot sizes for example a retailer orders a full truckload from a manufacturer to qualify for a quantity discount a factory has a material handling system that moves full containers of parts from one production stage to the next in this paper we derive optimal policies for multi stage serial and assembly systems where materials flow in fixed batches the optimal policies have a simple structure and their parameters can be easily determined this research extends the multi echelon inventory theory in several ways it generalizes the clark scarf model by allowing batch transfers of inventories rosling 1989 shows that assembly systems can be interpreted as serial systems under the assumption that there are no setup costs we show that the series interpretation still holds when materials flow in fixed batches which satisfy a certain regularity condition finally veinott 1965 identifies an optimal policy for a single location inventory system with batch ordering this paper generalizes his result to multi echelon settings

why so much stability one of duncan black s 1958 more important contributions was a classically simple proof that with complex issues and majority voting a stable outcome is unlikely this very simple proof that there would normally be no motion which can get a majority against all others and hence that any possible outcome is dominated by another has been elaborated and made more precise by later work without most improbable conditions endless cycling would be expected this is particularly true when logrolling is present as it normally is if we look at the real world however we observe not only is there no endless cycling but acts are passed with reasonable dispatch and then remain unchanged for very long periods of time thus theory and reality seem to be not only out of contact but actually in sharp conflict it is the purpose of this article to demonstrate that our existing theory when properly looked at does indeed imply a relatively stable outcome to voting in some cases however this stability will not be a true equilibrium because a random member of a large set will be chosen and then that random outcome will be left unchanged for long periods of time it does not dominate all other outcomes but is retained merely because of its particular history there are already several possible explanations for the observed stability in the literature we will take them up as they become relevant to the general line of reasoning i should however warn the reader that my own previous work including joint work with buchanan will play a major role here this may simply reflect egotism but i think that some of the early work which is now partially forgotten can provide solutions for more modern problems much recent public choice work has involved spatial models and these models frequently ignore logrolling the reason presumably is that it is very hard to put logrolling in a two dimensional diagram we shall begin considering such special models and assume that the issues are the sort that does not lead to logrolling and then turn to more complex logrolling problems with respect to the first situation in which logrolling does not occur there is already one possible explanation for the observed stability in the literature

non optimal unanimous agreement in collective decision making unanimous agreement is accepted as a benchmark for economic efficiency because with everyone in agreement on an issue a pareto superior move will result from the issue s approval 1 this view of unanimous agreement is not completely accurate though because when unanimous agreement occurs under a less than unanimous decision rule a situation could arise in which individuals could agree with a majority in order to avoid being in the minority there is an important distinction to be made between a decision rule of unanimity and unanimous agreement under a less than unanimous decision rule under a unanimous decision making rule every voter has veto power and so can vote against an issue to keep it from being approved this means that under a unanimous decision rule nobody will approve an issue unless approval makes the individual better off that the status quo under a less inclusive rule like simple majority rule an issue can be approved without the vote of any particular voter as long as a majority of the voters approve typically the voter s single vote will not affect the outcome of a majority rule election thus the voter faces the more complex choice of being in the majority coalition or in the minority coalition sometimes a voter will be better off in the majority coalition than in the minority coalition even if changes proposed by the majority coalition make the voter worse off than the status quo therefore one would not be justified in concluding that because there is unanimous agreement on an issue everyone is made better off unanimous agreement under majority rule may result from all voters in a majority rule system being better off in the majority rather than the minority even if the change that is unanimously approved is not a pareto superior move 2 the general idea behind non optimal unanimous agreement is relatively straightforward under majority rule a majority has the power to exploit the minority 3 therefore under some situations everybody joins the majority on an issue even though some find themselves worse off when the

fiscal deficits and intergenerational welfare in almost small open economies the intergenerational welfare effects of government deficits are examined in a simple life cycle economy which can borrow at given interest rates and import at given prices but has unexploited market power in exports despite perfect capital market integration a deficit financed tax cut to the current young causes an immediate real exchange rate of return on domestic assets subsequently the real exchange rate depreciates to a lower steady state value and the after tax wage decreases by more than the tax increase needed to service the larger deficit

stopped myopic policies in some inventory models with generalized demand processes this paper considers single item inventory systems with immediate delivery and no economies of scale bounds are provided on the value loss relative to optimal cost for restricting attention to the class of inventory stocking policies that behave myopically up to a specified stopping time the stopping time may be random and may depend on demand histories as well as information exogenous to the firm the bounds are robust to the nature of the demand process faced after the stopping time so are applicable when the statistics of demand after the stopping time are unknown stopping times that are large with high probability imply that near term decisions are completely specified with high probability the general bounding results allow one to consider demand processes that may otherwise be analytically intractable it is shown that the class of demand models for which the assumption of additive i i d shocks is appropriate is the same class admitting effective myopic stocking policies the bounds also make rigorous the intuitive notion that myopic policies are least effective in systems with precipitous drops in demand coupled with an inability to recover cash invested in inventory the option of selling inventory at discount is a reality in many real systems and enhances the attractiveness of the myopic stocking policy in numerical examples the myopic policy is shown to be an effective competitor in a range of systems for which optimal policies are not known the results suggest that for systems with immediate delivery no economies of scale and no currently known optimal policy the myopic stocking rule is a reasonable default policy to adopt

on the stability of legislative outcomes this paper argues that by arranging vote trades in the face of information costs legislative committees contribute to the stability of legislative outcomes a structure of permanent committees and subcommittees facilitates informational specialization and helps legislators acquire experience in their specializations committees arrange vote trades by adjusting amounts of recommended spending on separate items in bills that receive majority support each legislator is allotted a roughly equal amount of legislative spending that he can influence plus an additional amount that depends on his skill and experience as a committee member

what should government do problems of social cost externalities and all that public choice as a field introduced the framework for a methodical economic analysis of political markets the output of these markets of course is reflected by the role that government plays that is specifically true with respect to the organization of economic activity gordon tullock has studied a myriad of aspects of this topic for more than half a century we examine his answers to the question of what should government do and how they have influenced and are still impacting the discussion on the proper role of government in the economy

a decomposition approach for a class of capacitated serial systems we study a class of two echelon serial systems with identical ordering production capacities or limits for both echelons demands are assumed to be integer valued for the case where the lead time to the upstream echelon is one period the optimality of state dependent modified echelon base stock policies is proved using a decomposition approach for the case where the upstream lead time is two periods we introduce a new class of policies called two tier base stock policies and prove their optimality some insight about the inventory control problem in n echelon serial systems with identical capacities at all stages and arbitrary lead times everywhere is also provided we argue that a generalization of two tier base stock policies which we call multitier base stock policies are optimal for these systems we also provide a bound on the number of parameters required to specify the optimal policy

optimal control and equilibrium behavior of production inventory systems the relationship between commodity inventory and short term price variations has received considerable attention but the understanding has been limited to single stage cross sectional relation in this paper we aim to deepen our understanding of the inventory price relationship in two dimensions across time and across production stages we first examine an individual firm controlling production and two stages of inventory under uncertain input and output prices and operating costs we next establish and characterize the rational expectations equilibrium for an economy in which competitive production firms link a raw material market and a finished goods market with uncertain and price sensitive supply and demand we characterize the dynamics of inventory market price and gross margin based on theoretical analysis simulation and empirical evidence from the petroleum industry we find that inventory fluctuations lag behind price variations and the length of the lags depend on how far the inventory is from the source of the supply or demand shocks we also find that shocks are both dampened and delayed when propagating through the production stages and that shocks have a prolonged effect on inventories and prices at both stages

transaction costs and coalition stability under majority rule 1 introduction under a majority voting rule representatives of specific political districts must bargain with representatives of other districts to build a coalition for enacting legislation that benefits their narrow constituencies but the theoretical public choice literature warns of potential for unstable majorities minimum winning coalitions divide program benefits just among their members creating incentives for those left out to entice defection by offering rewards to those who leave and form a different coalition as noted in mueller 1989 new coalitions emerge undermining the old ones leading to cyclical majorities short term programs and highly skewed distributions of program benefits 1 despite these dire predictions there is a general consensus in the literature such as tullock 1981 that programs are more stable and allocations more equal than the theory suggests 2 in an effort to explain the discrepancy between prediction and observation researchers have pointed to institutional rules and practices in congress for example as stated in shepsle and weingast 1981a and weingast and marshall 1988 the committee system provides a structure induced equilibrium that limits the possible range of vote trading and thereby helps maintain coalitions further shepsle and weingast 1981b miller and oppenheimer 1982 and collie 1988 argue that universalist sharing of program benefits enlarges the winning coalition and extends its political support 3 in this article we offer additional evidence of broad stable sharing in many programs enacted by congress by describing interstate distributions from the federal highway trusts fund htf the allocation formula for the htf was initiated in 1916 but despite wide divergence across the states in growth of various economic factors over the rest of the twentieth century such as vehicle registration and population that might have led to redirection of highway funds there were comparatively limited htf allocation adjustments analysis of state receipts from the htf relative to tax payments into the fund reveals that some states collect much more than they contribute whereas others pay in more than they receive even so interstate ratios of htf apportionments to payments have remained stable across the years varying less than changes in highway use measures would suggest going beyond this specific program we examine overall federal expenditure and tax shares among the states from 1975 to 1997 and show that there has been a similar continuity in the interstate distribution of federal funds and taxes 4 as with the highway program there is broad stable sharing of federal expenditures across the states with some receiving more than they contribute in taxes to the federal government to better understand this observed stability and use of relatively egalitarian sharing rules and to go beyond existing explanations we emphasize the desire of politicians to minimize the high transaction costs of negotiating and enforcing political coalitions politicians have incentive to prevent unraveling of political agreements to avoid the costs of searching for new coalition partners reaching agreement on the nature and distribution of program benefits and costs and verifying compliance these activities detract from a legislator s ability to address other voter concerns moreover legislators seek to protect constituent benefits accruing from long term programs that would be lost if coalitions unraveled 5 accordingly we argue that politicians assemble greater than minimum sized coalitions to build broad political support for their legislative programs offering benefits to a larger constituency in exchange for additional votes considerable negotiation over the distribution of program benefits a nd costs may be required so that once agreements are reached politicians will be loath to consider a major reallocation that could undermine the coalition

optimal centralized ordering policies in multi echelon inventory systems with correlated demands this paper treats a depot warehouse system in which demand occurs at the warehouse or retail level this work differs from a number of other studies in that we allow item demands to be correlated both across warehouses and also correlated in time our motivation for this generalization arises from our experience with an actual system of this type used by a major national producer and distributor of consumer products we observed both high correlations between successive monthly demands around 0 7 and correlations between demands for an item at different locations also about 0 7 in a given time period we derive an explicit expression for the optimal safety stock as a function of the level of correlation through time the analysis requires two assumptions 1 the allocation assumption and 2 the equal coefficient of variation assumption similar assumptions have been used by other researchers finally numerical evaluations are included to illustrate the impact of the various magnitudes of correlation

myopic policies for some inventory models with uncertain demand distributions the majority of papers on stochastic inventory theory make the assumption that the distribution of consumer demand in each time period is known with certainty while this assumption is unsupported in many applied contexts it is conventionally held that more realistic models are more difficult to solve and will not yield simple operational policies this paper shows that a simple inventory policy based upon a critical fractile can be optimal or near optimal in some inventory models with parameter adaptive demand processes in these some parameter of the demand distribution is not known with certainty and estimates of the parameter are updated in a statistical fashion as demand is observed through time examples include exponentially smoothed forecasts and bayesian updating of parameter estimates bounds on the value loss relative to optimal cost when using the critical fractile policy can be calculated directly from the problem data some numerical examples illustrate the technique

vignettes on the world capital market this paper is motivated by a sense that we as a profession need to understand much better than we now do how the world capital market works we seem to be genuinely schizophrenic in the ways we build models many of them are closedeconomy models in which the rest of the world does not even appear yet others of them are models of the small open economy in which hardly any degree of freedom is left for economic policy to influence events lying behind the schizophrenia is i believe a genuine ignorance on our collective part of how the world capital market

are we witnessing a paradigm shift in the analysis of political competition this presidential address assesses the crisis of the downsian model of political competition in light of the mounting evidence on policy divergence and evaluates the possibility that the new theories of politicians quality and political selection provide an alternative theoretical conceptualization of political competition based on a critical review of the literature and on the author s works on content analysis of policy speeches income redistribution politicians quality and political legislation cycles this address concludes that multidimensional downsian models of political competition are adequate to explain policy divergence and points out the serious theoretical and empirical problems that models of political selection have to solve

terms of trade fluctuations and economic growth in developing economies abstract the effect of terms of trade fluctuations on capital accumulation is investigated in a simple open economy stochastic growth model imported inputs make domestic capital more productive but export prices are uncertain the model s output process has a random walk component so even transient price shocks have permanent effects on output levels the size of the random walk component depends on the country s trade share the supply response of exports and other structural parameters also more variable export prices generally reduce expected domestic investment these results are consistent with the estimated variance ratios and impulse response functions for a number of ldcs

optimal policy for a two facility inventory problem with storage constraints and two freight modes this paper considers a two facility supply chain for a single product in which facility 1 orders the product from facility 2 and facility 2 orders the product from a supplier in each period the orders placed by each facility are delivered in two possible nonnegative integer numbers of periods the difference between them is one period random demands in each period arise only at facility 1 there are physical storage constraints at both facilities in each period the objective of the supply chain is to find an ordering policy that minimizes the expected cost over a finite horizon and the discounted stationary expected cost over an infinite horizon we characterize the structure of the minimum expected cost and the optimal ordering policy for both the finite and the discounted stationary infinite horizon problems

the intellectual legacy of gordon tullock gordon tullock is one of the world s leading economists even more so than chicago s gary becker tullock has extended the rational choice model into areas previously judged to lie outside the realm of economics this essay identifies tullock s contributions to constitutional political economy public choice bureaucracy the law and bio economics the essay focuses attention most especially on tullock s pioneering contributions to public choice including his twenty year editorship of public choice

time phased safety stocks planning and its financial impacts empirical evidence based on european econometric data abstract this paper explores the rationale for planning time phased safety stocks we assert that a single safety stock vector for the entire planning horizon typically based on stationary demand forecast errors and stationary replenishment lead times may be insufficient for hedging against uncertainties we argue that planning time phased safety stocks is prudent when faced with non stationary demand and or non stationary supply we scrutinize particularly whenever non stationarity is due to heteroscedastic demand and resulting heteroscedastic demand forecast errors consequently an empirical evidence on a wide basis is provided that such errors for manufactured products are highly heteroscedastic to test the phenomenon and to estimate its impact at stock keeping unit level we have conducted an econometric analysis using the eurostat data from 1985 onwards specifically we analyze new industrial orders across various industries and types of goods manufactured in the five largest european economies by using eviews 7 0 to demonstrate which inventory savings can accrue when safety stock levels are deliberately planned to vary in accordance with the observed heteroscedasticity we estimate potential safety stock savings reusing the same data sets our findings indicate that one realization of non stationarity i e heteroscedastic demand is indeed pervasive in the european industry thus recognition of this demand nature may add to effective inventory management policies reducing unnecessary safety stocks improving service or both relative to a single valued safety stock regimen

amend the old or address the new broad based legislation when proposing policies is costly if each legislator wishes to encourage other legislators to address new problems in future periods then a subgame perfect nash equilibrium can exist with the following properties 1 no legislator finds it worthwhile to make a narrow proposal that appeals to a minimum majority 2 instead legislators propose policies that appeal to all members not for fear of retaliation but rather to encourage other members to work on new problems in succeeding periods 3 in succeeding periods no legislator amends the existing broad policy we find an equilibrium with these properties in finite as well as infinite period games

the constitutional political economy of gordon tullock this paper surveys gordon tullock s contributions to constitutional political economy his first major contribution was his joint project with james buchanan on liberal constitutional design the explicitly constitutional analysis of the calculus was followed by a series of papers and books that focused on the use of resources in conflict including tullock s contributions to the anarchy and rent seeking literatures tullock also pioneered the rational choice based analysis of dictatorships and the relative merits of alternative legal systems topics that has been neglected until fairly recently by most scholars working in the cpe tradition

a neoclassical perspective on budget deficits i n the 1988 presidential campaign virtually every serious candidate spoke of the urgent need to trim government budget deficits public opinion polls have identified federal deficits as a key economic issue second only to unemployment while many economists are relieved by what they perceive to be a long overdue political response to a critical economic problem others regard the fuss as much ado about nothing it is indeed remarkable that economists can disagree so severely over an issue which commands such a uniform reaction from laymen of widely different ideologies and political affiliations generally speaking there are three schools of thought concerning the economic effects of budget deficits neoclassical keynesian and ricardian before proceeding further it is useful to review the basic structure and implications of each paradigm the neoclassical paradigm envisions farsighted individuals planning consumption over their own life cycles budget deficits raise total lifetime consumption by shifting taxes to subsequent generations if economic resources are fully employed increased consumption necessarily implies decreased saving interest rates must then rise to bring capital markets into balance thus persistent deficits crowd out private capital accumulation in the current economic environment most economists would agree that these consequences would be highly detrimental