Should unemployment caused by the government closing non-essential businesses during quarantine be counted as structrural unemployment? I have following definition of structural unemployment (taken from "Modern principles of economics" by Tyler Cowen and Alex Tabarrok):

  Long-term unemployment caused by shocks or permanent features of economy making it harder for certain workers to find a job

So the answer to the question in the title would seem to be "No, because quarantine won't last so long that prices of wages and other factors of production would fully adjust to inflation. So unemployment wouldn't be long-term, thus it wouldn't be structrual unemployment".

But on the other hand, other three types of unemployment (seasonal, frictional, cyclical) don't seem to fit the bill. An example: Suppose prostituion is legal and I'm a prostitute. Due to pandemic the government decides that prostitution isn't an essential business and because it's not something that can be done online brothels are forced to be closed, including my brothel. My brothel is also a small business with very thin profit margins (consequence of very competitive market caused by low price of entering the market). In short, without its workers working it's unable to pay its rent and is kicked out by its landlord, spelling end to it. I try to find another job, but due to many other businesses closing down competition for very few vacant jobs is crazy and they disappear with speed of light. Is my unemployment seasonal? No, we don't have seasonal nationwide quarantines. Is it cyclical? No, because even if economy was booming nationwide quarantine and ban on non-essential businesses would still leave me and many other people without job. Is it frictional? No, I'm fairly certain that there is no a vacant job that is waiting for me to find it. Structrual unemployment seems to be closest to that I experience by its sprit. So, maybe the definition is too narrow and it's possible for unemployment be both short-run and structrual?

There are lots of different people unemployed, and the answer will be different depending on the person. In your prostitute example, if you left your medical assistant job because prostitution paid more, then it's frictional, because there are lots of medical assistant jobs, but it might take you time to go through the interview process and be onboarded. If you have no marketable skills other than sex work, then it's structural unemployment. If there is another job that you're qualified, but you don't get the job because there are so many other people competing for it, then it's cyclical (which is a bit of a misleading term, since there it's not like there's a "quarantine/no quarantine" cycle, at least not yet, fingers crossed).


Moral and economic development paradox? I have often listen to the old man who criticized the lack of morality in the Chinese people nowadays: "To get more money, break through to the bottom line to get more money!"

Is there a contradiction between economic development and morality? Are there any countries that are highly ethical standards that develop very well?

Yes, there is some evidence that immoral behavior, as exemplified though political corruption, is bad for economic development. The body of literature is large and to the extent that I am familiar with it, some corruption can "grease the wheels" and hasten development. In general, massive amounts of corruption is seen as a serious hinderence to development.

https://scholar.google.com/scholar?q=corruption+and+economic+development&hl=en&as_sdt=0&as_vis=1&oi=scholart&sa=X&ei=8YxkVbyICYqzoQT5moKIBA&ved=0CBoQgQMwAA

Also, I think that the utilitarian ideal suggests that all else being equal, more wealth and consumption is better. This implies that economic development carries a moral weight. That is to say, an ethical society should develop economically, to raise the standard of living and reduce suffering.


Sign of income effect is ambiguous When discussing the standard neoclassical model of labor supply, I have seen it is assumed that the sign of the income effect is ambiguous. Could anyone please explain this assumption, and more generally, how to think about the substitution effect and the income effect in this model?

Kind regards.

Welcome to SE.

The two goods that the consumer consumes in this model are leisure and consumption. If the agent works more, he can consume more, but he has to give up leisure. Similarly, if he undertakes more leisure, he must consume less. All this assumes the wage rate is unchanged.

However, consider an increase in the wage rate. The opportunity cost of lying in the sun (leisure) has increased, as the agent could have worked instead, earned a higher wage as compared to before, and consumed more. Thus, the relative price of leisure has gone up, and the agent substitutes towards consumption, and this is the substitution effect.

Consider the income effect now. A standard model would assume that consumption and leisure are both normal goods, that is, as your wealth increases, you have more of both. At the current optimum point, as the wage has increased, your wealth has increased, and thus you undertake more leisure and also consume more. This is the income effect.

So, what I think you were asking was more about the total effect on working hours, that is, the cumulative result of both the substitution and income effects on the number of hours worked. Because in this example, the substitution effect pushes leisure up and the income effect pushes leisure down, the total effect is indeed ambiguous.

However, just in case you were actually asking about the income effect per se, the ambiguity may be due to letting go of the normality assumption. If leisure isn't normal, but is inferior instead, then the income effect pushes leisure downwards. Here, the total effect isn't ambiguous however, as the total number of hours worked unambiguously increases.


What's the term for the debt you have to pay today? Say that a company has a debt of 10 million $US

But from that debt, the company has to pay 2 million $US today. The rest of the debt has to be payed next year and later.

Is there a term for the debt that has to be paid today?


Is Capitalism dying or will it prevail? During the last decades there has been an increase of anti-capitalistic movements around the world which are fundamentally different from those of the XIX-th and XX-th centuries in the sense that they do not belong to a "working class", but rather to a "middle class" who has had high levels of education.

By capitalism I mean any exchange market economy (with private property, one currency, representative democracy, competitive markets,...), i.e. in a broad sense and not referring to regional particularities (for example US vs Europe).

I agree that this question is too broad, but here's a perspective: much of the criticism of modern capitalism is from people who've been in the system.  What about people who haven't been in the system, like in Vietnam or China, where they haven't been under capitalism in the past?  Do they tell us what we're missing out on?

One study I've seen all over:

  A world-topping 95 percent of Vietnamese say that most people are
  better off in free-market economies, and 76 percent of Chinese agree,
  according to a Pew survey of nearly 49,000 people worldwide that might
  have astonished Ho Chi Minh and Mao Zedong. Seventy percent of
  Americans and 65 percent of those in the UK expressed support for a
  free-market economic system.

This is part of the reason why this question is too broad.  We could say that while some systems abandon it, others will use it.  I also don't know if a capitalist-like system didn't exist before Adam Smith, as from reading some Roman history, there seems to be times where there was a merchant class featuring open markets with entrepreneurs where they would meet the needs of those they traded with and while they certainly didn't call it capitalism (I assume), like we do, seems very similar.

I believe Plato pointed out that civilizations often move from one system to another, like Oligarchy to Democracy, before reverting, so the very nature of a Meritocracy may be a transitional stage in a civilization's history.


Question on uncertainity Please imagine that Nicole is uncertain of her future wealth. Her wealth in the bad state of the world is zero. Her wealth in the good state is $w>0$.  Each state is initially equally likely. However nikole can purchase technology (such as safety equipment) that will make the good state more likely. If she buys $x>0$ units, the probability of the good state becomes $q(x)>1/2$ where $q(x)$is strictly increasing and strictly concave in x, with $q(x)<1$ for all x. To purchase x units, Nichole commits to pay $t(x)<w$ if the good state materialized. She doesn’t pay anything in the bad state Nicole is risk natural. Andrew faces the exact same problem however Andrew is risk averse. Normalize andrew’s utility in the bad state to $u(0)=0$. Assume that $q(x) $ and $t(x)$ are such that both Nichole and Andrew would like to buy a strictly positive quantity f the technology.
So thinking of x as a choice variable formulate Nicole ‘s and Andrew ‘s maximization problem. How can I prove who buys the larger quantity of the technology? And what does this result tells to me intuitively? And secondly how can I prove how the optimal quantity for ether agents depends on $w$?
In the second case, I assume that the technology is provided by a risk national firm whose costs of supplying x units of the technology is $kx$ where $k>0$. The firm knows Nichole ‘s and Andrew ‘s preferences and is allowed to make different offers to them. If we imagine that the firm decides to offer Nichole a fixed quantity of $x_N>0$ and Andrew a fixed quantity of $x_A>0$. Let  $t_N(x_N)$  and  $t_A(x_A)$ denote the optimal price to charge Nichole and Andrew respectively (where I should remember this is allocated only in the good state).
Given a fixed $x_N$ , I need to derive  $t_N(x_N)$and the implicit expression of  $t_A(x_A)$ for a fixed $x_A$. If $x_N=x_A$, can I say that  $t_N(x_N)$  is greater than  $t_A(x_A)$? Or not?  I want to prove it and what can I say about this intuitively? And I want to derive  $t_N’(x_N)$ and  $t_A’(x_A)$. Finally how can I derive an implicit characterization of the optimal quantity to offer to Nichole $x_N$. And how can prove whether the optimal value of $x_A$ is greater than the optimal value of $x_N$ or not?

What is only done as a solution is
For Nichole
$$\max_{x} \ \ q(x) u(w-xt(x))+(1-q(x))u(0)$$
FOCs
$$q’(x) u(w-xt(x))+q(x) u’(w-xt(x))-(w-xt(x))’+(1-q’(x))’u(0)=0$$
$$q’(x) u(w-xt(x))+q(x) (-t(x)-x)u’(w-xt(x))=u(0)q’(x)$$
$$q’(x) u(w-xt(x))-q’(x) u(0)=q( x )u’(w-xt(x))(t(x)+x)$$
$$q’(x)[ u(w-xt(x))- u(0)]=q( x )u’(w-xt(x))(t(x)+x)$$
$$q’(x)[(1/q(x))[u(q(x)(w-xt(x)))- u(0)]]=q( x )u’(w-xt(x))(t(x)+x)$$
$$(q’(x)/q(x))[u(q(x)(w-xt(x)))- u(0)]=q( x )u’(w-xt(x))(t(x)+x)$$
Risk natural
$$q(x)(w-xt(x)+(1-q(x))u(0)=u(q(x)(w-xt(x))$$
$$[u(w-xt(x))-u(0)]=(1/q(x))[u(q(x)(w-xt(x))-u(0)]$$
Risk averse
$$q(x)u(w-xt(x))\le u(q(x)(w-xt(x))$$
Any help is appreciated. Thank you.

The original version of question

Edit: for adding my solution for remaining parts
Take that Nichole is risk neutral. I end up.
$${\partial u \over \partial x}[q’(x)(w-t(x))-q(x)t’(x)]=0$$
$$q’(x)(w-5(x))-q(x)t’(x )=0$$ and differentiate this w.r.t. w.
$${\partial q’(x) \over \partial x}{\partial x \over \partial w}(w-t(x))+q’(x)[{\partial w \over \partial w}-{\partial t \over \partial x}{\partial x \over \partial w}-\frac{\partial q(x)}{\partial x}{\partial x \over \partial w}t’(x)-q(x){\partial t’(x) \over \partial x}{\partial x \over \partial w}=0$$
After calculations
$${\partial x \over \partial w}=+{q’(x)\over -q”( x)(w-t(x)+2q’(x)t’(x)+q(x)t”(x)}>0$$

Another part’s solution:
$$\text{profit}=t_N(x_N)k-Nx_N$$
Subject to $q(x)u(w-t_N(x_N))\ge 0$
But again for this part I couldn’t set up the equation.
What I thought is
$$max_{(t_N(x_N), t_A(x_A))} \ \ q(x_A)[t_A(x_A)-kx_A]+q(x_N)[t_N(x_N)-kx_N]$$
First order conditions
W.r.t. $(t_N(x_N)$
$$q’(x_N)(t_N(x_N)-kx_N)+q(x_N)[t’_N(x_N)-k]=0$$
$$t_N(x_N)={q’(x_N)kx_N-q(x_N)[t’_N(x_N)-k]\over q’(x_N)}$$
Similar for Andrew
$$t_A(x_A)={q’(x_A)kx_A-q(x_A)[t’_A(x_A)-k]\over q’(x_A)}$$

We are given that $u$ is increasing and concave, and $u(0) = 0$. This implies that $\dfrac{u(t)}{t}$ is decreasing in $t$, and also, $\dfrac{u(t)}{t} >  u'(t)$ for all $t$.

Nicole's maximization problem :
\begin{eqnarray*} \max_{x} \  q(x)(w-t(x))\end{eqnarray*}

FOC :
$q'(x)(w-t(x)) = q(x)t'(x)$

Suppose $x_N$ solves Nicole's problem. Therefore, it satisfy

$q'(x_N)(w-t(x_N)) = q(x_N)t'(x_N)$
or equivalently,

$\dfrac{q'(x_N)}{q(x_N)t'(x_N)} = \dfrac{1}{w-t(x_N)} \tag{1}$

Andrew's maximization problem :
\begin{eqnarray*} \max_{x} \  q(x)u(w-t(x))\end{eqnarray*}

FOC :
$q'(x)u(w-t(x)) = q(x)t'(x)u'(w-t(x))$

or equivalently,

$\dfrac{q'(x)u(w-t(x))}{q(x)t'(x)} = u'(w-t(x)) \tag{2}$

Let us compare the two sides of the above FOC (2) at $x = x_N$,

LHS  = $\dfrac{q'(x_N)u(w-t(x_N))}{q(x_N)t'(x_N)} = \dfrac{u(w-t(x_N))}{w-t(x_N)} > u'(w-t(x_N)) =$ RHS

Since at $x = x_N$ LHS of (2) is greater than RHS of (2), we need to reduce the value of $x$ to make them equal. So, there is $x_A < x_N$ such that

$\dfrac{q'(x_A)u(w-t(x_A))}{q(x_A)t'(x_A)} = u'(w-t(x_A)) \tag{3}$

Therefore, Nicole buys larger quantity of technology.

Observing the FOCs, we can also conclude that increase in $w$ lead to increase in optimal quantity chosen by both.

Now try to solve the remaining two parts.


Flat AD curve - policy effects Suppose the AD curve is relatively flat because the Fed wants a stable price level.

Which policy (monetary or fiscal) is ineffective?

A flat AD-curve is not the result of the desire of a central bank to stabilize the price level, it is determined by the behaviour of the aggreggate economy (such as  elasticities and taxes). Stabilizing the price level by using monetary or fiscal policy can be done by shifting the AD-curve (or influencing the slope of the curve, but that is a less standard option). In this context the effectiveness of monetary and fiscal policy depends on how easily policymakers can shift the AD-curve. If you have an equation for AD, this can be easily calculated as $\frac{\partial Y}{\partial X }$, $X$ being the variable in the AD-equation used to implement the policy.

The effectiveness of monetary or fiscal policy also depends on the slope of the AS-curve, possible shifts in the (short run) AS-curve in response to the policy (such as inflation expectations), and the objective of the policy: price stabilization or outputstabilization.


Does analysis at two points in time count as 'longitudinal'? According to whatever norms and expectations exist in the econometrics literature - if an analysis looks at two points in time can this be described as longitudinal, or would more time slices generally be expected for work that describes itself as such?

Yes,  A longitudinal study involves repeated observations of the same variables (e.g., people) over short or long periods of time.   You can have more than two points in time for your project.  It really depends on your study's converge (time periods under analysis).


Homothetic preferences from indirect utility Consider an indirect utility function on the form

$v^{i}(\textbf{p},w^{i}) = a^{i}(\textbf{p}) + b^{i}(\textbf{p})w^{i}$

Where $\textbf{p}$ is a vector of prices and $w$ denotes income of individual $i$. I want to find the restrictions on $a^{i}(\textbf{p})$ and $b^{i}(\textbf{p})$ such that the preferences are homothetic.

I start by using Roy's identity to find the Marshallian demand for good $j$:

$x_{j}(\textbf{p},w^{i}) = -(\frac{\partial a^{i}}{\partial p_{j}} + \frac{\partial b^{i}(\textbf{p})}{\partial p_{j}} w^{i})/b^{i}(\textbf{p})$

To check for homothetic preferences I find an expression for $\frac{x_{j}}{x_{k}}$ such that it is independent of income. I find that $\frac{x_{j}}{x_{k}} = \frac{(\frac{\partial a^{i}(\textbf{p})}{\partial p_{j}}+\frac{\partial b^{i}(\textbf{p})}{\partial p_{j}}w^{i})}{(\frac{\partial a^{i}(\textbf{p})}{\partial p_{k}}+\frac{\partial b^{i}(\textbf{p})}{\partial p_{k}}w^{i})}$

So (assuming I have not made an error differentiating), the expression is independent of income as long as $\frac{\partial b^{i}(\textbf{p})}{\partial p_{k}} = \frac{\partial b^{i}(\textbf{p})}{\partial p_{j}} = 0$ and there is no restriction needed on $a^{i}(\textbf{p})$ other than it needs to be differentiable.

Your conclusion is a bit hasty:
(i) why did you implicitly exclude the case $a^i(\textbf{p})=0$?
(ii) if your individual is rational then $v^i$ is homogeneous of degree zero in $(\textbf{p},w^i)$ which has implications on $a^i$ and $b^i$... Your demand system should also satisfy the budget constraint (adding-up).


How is the Euler Equation for Consumption derived from from intertemporal budget constraint and lifetime utility function in basic macroeconomics I suspect that what I'm actually asking here is just a basic calculus question, which I have overwrought, but I wanted to ask it here to make sure before taking it to SEMaths.

In the Jones Introductory Macroeconomics textbook, he says that we don't really need to know the calculus for HOW Euler's Equation is derived, which is true, but I'm having a hard time moving on without it.

We start with the lifetime utility function:

$U= u(c_{today}) + \beta u(c_{future})$

$c$ is a quantity consumed, $u()$ is a utility function, $\beta$ is a ratio parameter to account for impatience.

Then we use the intertemporal budget constraint to express $c_{future}$ in terms of $c_{today}$.

$U= u(c_{today}) + \beta u[(1 + R)(\bar{X} - c_{today})]$

$R$ is real interest rate, $\bar{X}$ is total lifetime wealth

The next step is the one I don't understand, and probably just comes down to my own poor calculus. We are told to take the derivative of the previous equation with respect to $c_{today}$ in order to arrive at

$u'(c_{today}) + \beta u(c_{future})(1+R)(-1)=0$ OR
$u'(c_{today}) = \beta (1+R)u'(c_{future})$

I understand that we've applied the sum rule of differentiation, meaning we take the derivative of $u(c_{today})$ and $\beta u[(1 + R)(\bar{X} - c_{today})]$ separately. And since in the context of this problem the utiltiy function is a black box, we just express it as $u'(c_{today})$. No problem.

However, when I look at the second part, $\beta u[(1 + R)(\bar{X} - c_{today})]$, I do not understand what rule has been applied. It appears to be the chain rule, but if I'm reading it correctly, then $(1 + R)(\bar{X} - c_{today})$ is the argument of the utility function. The chain rule, as I understand it, would only apply to the value of the function. After performing the differentiation, some values have somehow moved from being arguments of a function to being part of the equation. Considering that, for this exercise, the utility funciton is a black box with an unknown relationship, how are we allowed to apply any of our differentiation rules to the arguments?

It is simply the chain rule, or you could see it from the total differential.

Let $C_1$ be consumption today and $C_2$ be future consumption.

In the second part you have $U(C_2 (C_1) )$, i.e. a utility function dependending on $C_2$, which is itself (through the budget constraint you used) a function of $C_1$. You take the derivative of U with respect to $C_1$, which equals:

$d U/d C_1 = \partial U(C_2)/ \partial C_2 * d C_2 / d C_1$.

The first part is just $ \partial U(C_2)/ \partial C_2 = U'(C_2)$.

From what you have written, it seems that you understand that $C_2(C_1)=(1 + R)(\bar{X} - C_1)$.

Taking the derivative of that for the second factor in the multiplication above yields the result.


Econometrics: Omitting a significant variable Im currently doing a project to construct a demand function for Meat & Fish. My data indicates that Price of Fruit & Veg is individually statistically significant.
However, after a omitting this variable (as well as 3 other insignificant variables) the F-test result highlighted the failure to reject the Null (these four variables are jointly insignificant).

Should I therefore omit Fruit & Veg variable, despite it being individually significant and also making intuitive sense for inclusion into my demand function.

You should do none of the above.  This is an invalid decision-making process.

In the best of all possible worlds, create a series of do loops and go through the set of all possible combinations of variables.  Calculate the AIC or the BIC.  If you know nothing about either, just pick one as they usually give the same result.

The model with the lowest AIC or BIC is the model that is probably the closest to the true model in nature.  Statistical significance does not matter at all.  If the best model is also not significant, then it is not significant.  It could just mean the other models have a spurious significance.  Likewise, if the model chosen is significant under the F-test, but has non-significant variables, then you cannot change them.

If you do not know how to write do loops or for-next loops, then find a package with step-wise regression.  It will not cover all the models, but it will cover many.  Use the same criterion either the AIC or the BIC.

Because you are asserting the null is true, you cannot have more than one null.  It means nothing if you add or subtract variables because you are changing the null every time and you cannot do that.  The AIC or BIC are non-Frequentist methods of estimating the true model and so the solution of using either bypasses the question of significance until after the model is chosen.

EDIT

I thought I would provide an edit to cover the statements in the comment.

For starters, I agree with the comment.  I thought I should ground the above statement better as to the logic behind it.

The various information criteria, the AIC, the BIC, the DIC and so forth, can either be grounded in information theory or in Bayesian theory.

From an information theoretic perspective, if you have outside information about which models should be included or excluded either from theory or experience then that information needs to be incorporated.  Since there is no direct method to merge them together, you should use judgment in which models to look at.

From a Bayesian perspective, the various information criteria are stylized point approximations of the Bayesian posterior under somewhat restrictive assumptions.  In many respects, they are not good proxies because the smaller the posterior density, the less likely it is to be true, whereas the reverse is true in the criterion.  It is best to think of them as both being rankings and they would provide the same ordering of rankings.

Now there are two Bayesian issues present.  First comes from the fact that you can construct Bayesian theory from Cox's axioms.  Cox's axioms are built around Aristotelian logic.  You would use Bayesian methods to assess logical statements.  If some statements do not need assessing or could be excluded by logic, then they should be excluded from consideration.

The second comes from the nature of the prior density.  If you have prior knowledge that some cases cannot be true, then you should give them zero prior weight.  This would exclude them from consideration at all.

Nonetheless, the combinatoric method should be considered because it maps to a Bayesian argument and the information criterion are non-Frequentist constructions and so you shouldn't be using Frequentist criteria in making this type of decision.

Bayesian hypotheses are combinatoric.  If you are testing the model $$y=\beta_0+\beta_1x_1+\beta_2x_2+\beta_3x_3+\varepsilon$$ and you have no logical reason to exclude any case, then you are going to have to test eight hypotheses, removing one, two or three variables at a time.  This is the practical equivalent to the Frequentist hypothesis that $\beta_i=0$ which cannot be tested in Bayesian methods because it is a sharp null hypothesis and of measure zero.  Removing a variable and assuming its coefficient is zero is the same thing.

Because Bayesian methods lack a null hypothesis, which is both a strength and a shortcoming, no one hypothesis gets special treatment or special weight, absent material external information.  You test the posterior probability of each possible model as part of your process.

Now, this is where a legitimate objection does come in.  Information criteria are stylized approximations of the actual posterior.  In some cases, they are perfect approximations but they can be poor approximations in other cases.  In the perfect approximation case, you should be using the information criterion that is appropriate for your problem and your worry is not about the criterion, but rather the representativeness of your data.  In the poor approximation case, close differences could, in fact, be reversed if the posterior was actually computed.  As you multiply your combinations, the greater the probability of a single pairwise mistake will happen.  Nonetheless, since you are not doing model averaging, but model selection it will probably not be the highest two pairs.

Using tools like the information criterion does highlight a problem in data-based measures over a true null hypothesis based methods, the combinations show how little independent data that you may have.  If you are not model hunting, but instead testing the one true model, then you will lose a few degrees of freedom and unless you have collinearity problems, then you are fine if your sample is of reasonable size.  In my example above, it is quite like dividing your sample by eight.  It isn't a subtractive process as one would see with degrees of freedom, it is more like a process of division.  Add into that the internal correlations and there may not be much in the way of independent information in your set.

Still, it didn't seem to me like you felt you had a mental model of how the relationships should be, so I would still recommend either the combinatoric or the step-wise solution.


Why unemployment quantity can be larger than the market employment based on this price ceiling supply/demand chart? Why unemployment quantity can be larger than the market employment based on this price ceiling supply/demand chart?

Also, Isn't that (quantity demanded at minimum wage + unemployment = market employment)?

First of all, think about the definition of unemployment as it is used in this example. An unemployed person is someone that wants to work, but who cannot, because he can't find a job - as labor supply is not high enough. The crucial point is that people may want to work in some situations, but in others they may not.

With this in mind, the reason that the equation you postulate is incorrect, is due to the fact that the labor supply in your example is elastic. That means, the higher the wage, the higher is the labor supply. You can see this in the upward shape of the labor supply function. To answer your question: The unemployment quantity under minimum wage becomes larger than the market employment, because after the wage increases more people want to work, and hence the quantity of

  employed people + unemployed  people

increases - as compared to the market equilibrium before where the wage was lower.

It is also interesting to think about a case in which your initial thought would be correct. This would be the case if labor supply was completely inelastic. This situation is reached as the labor supply curve rotates to the left (staying in the initial market equilibrium) until the labor supply curve is a vertical line. In this situation your equation

  quantity demanded at minimum wage + unemployment = market employment

holds. This is how it would look like:


Newly discovered (by mainstream investors) asset chart/theory I was reading an article about bitcoin in which a description was given of a chart/theory related to investor hype when an investment is first discovered by the mainstream. I've been unable to locate the article a second time. The phenomenon is as follows. There is an initial hype period during which the price soars, followed by a resounding crash, and finally a much more sustainably trajectory of growth. I'm looking for any information on this phenomenon. Who's work it is, article, paper, etc?


If a game admits a unique Nash equilibirum, does common knowledge of rationality implies Nash equilibirum? In a highly controversial paper by Robert Aumann(see here), it is stated as a theorem:

  In PI games, common knowledge of rationality implies backward induction.

If we stick to the strong and controversial definition of rationality in the paper

  Rationality of a player means that he is a habitual payoff maximizer:
  that no matter where he finds himself,
  at which vertex,he will
  not knowingly continue with a strategy that yields him less than he could
  have gotten with a different strategy.

Can we have some other implication, like, If a game admits a unique Nash equilibirum, does common knowledge of rationality implies Nash equilibirum?

No. In static games, common knowledge of rationality is equivalent to rationalizability. Bernheim, in "Rationalizable Strategic Behavior" (Econometrica, July 1984) gives an example on page 1012 in Figure 1 of a normalform game in which there is a unique Nash equilibrium, yet multiple strategies are rationalizable.


Imperfect substitute Perfect substitute- Pepsi and Coca-Cola and Imperfect substitute- Tea and Coffee . Here why tea and coffee considered imperfect substitute?

Any two specific goods can be perfect substitutes, imperfect substitutes or even complements depending on the preferences. It's not goods themselves, but our preferences towards them what make them substitutes or complements.

However, when many people have similar preferences towards those goods, it is common to characterize goods as being, for instance imperfect substitutes. Apparently, you have no qualms about Pepsi and Coca-Cola being imperfect substitutes, and I guess that's because it agrees with your own preferences towards them. Tea and Coffee are imperfect substitutes for many people, who may drink sometimes one and sometimes the other. Of course, they're not substitutes at all for people who only drink Tea or only drink Coffee. The fact that we colloquially say that they are imperfect substitutes should be understood as most people thinking of them as such.


Reasons for the recent rise in long-term unemployment Kroft et al document the raise of long-term unemployed in the US during the recent crises. This is an impressive figure from their paper:

They show that the raise does not come from compositional effects. However, they cannot find the reason for this phenomenon. For some reason, apparently, long-term unemployed are less likely to find a job, and hence their stock accumulates.

Potential reasons I could think of are

Human capital deterioration
Discrimination of employers
Shrinking motivation of searching

What other reasons does the literature find? Is there empirical support for any of this?

I would "advise" to wait... a few more years! From the figure you provided, there is a perhaps slow but visible rising trend (with business-cycles-like "seasonality") for both the long-term and the mid-term unemployment rate, a fairly stable trend in terms of steepness over 60 years. The sudden peak of long term unemployment in 2009 is impressive but it also fell sharply in the next three years. To me, it appears critical to know the unemployment rates for the next four-five years, in order to decide whether we have a structural break with the historical rising trend becoming more steep, or just a few-years-incident due to the crisis.


Why are the Fed's goals often described as the "dual mandate" and not the "triple mandate"? The Federal Reserve Act Section 2A states:

  The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

Three goals are given, namely:

Maximum employment;
Stable prices; and
Moderate long-term interest rates.

So why is it that many (or even most) writings* usually refer only to the dual mandate, i.e. the first two goals of maximum employment and stable prices? Why do they seem to ignore the third goal of moderate long-term interest rates?

Is it because the third goal is less important? Or perhaps because the third goal somehow follows automatically if the first two are fulfilled?

*Examples: Chicago Fed, Richmond Fed, St. Louis Fed. Indeed, the last says the following but gives no explanation:

  But wait a minute: None of this sounds like a dual mandate. Rather, it sounds as if Congress has given the Fed three mandates—if not four. Over the years, the mandates were boiled down to two: maximum employment and price stability. And now, some say the central bank can focus on price stability.

The textbook answer is that the interest-rate objective is considered redundant (implied by) price stability, in the long run, i.e. low inflation is expected to bring down interest rates anyway.

It's interesting that Congress actually added the (3rd) interest rate objective in 1975-1977. Maybe there's some historical context that explains their insistence on it. I don't know more.

As for "some say the central bank can focus on price stability" that's an allusion to ECB's primary mandate (sometimes/unofficially called "single mandate"), no doubt.

And hat-tip to BKay for bringing this up, there are indeed more similarities between the Fed and ECB; even though not by law...

  As
  explained in the 9th edition of the Federal Reserve’s Purposes and Functions, published in
  2005: “Stable prices in the long run are a precondition for maximum sustainable output
  growth and employment as well as moderate long-term interest rates.” In 2004, Chairman
  Greenspan pointed to the primacy of price stability in explaining the success of Federal
  Reserve policy since 1979. As he explained, this resulted from “maximizing the probabilities
  of achieving our goals of price stability and the maximum sustainable growth that we
  associate with it” (Greenspan, 2004).
  With this interpretation of the Federal Reserve’s mandate, closer comparison with that of
  the ECB suggests more similarities than differences. This is because while the mandate of
  the ECB explicitly recognizes the primacy of price stability, it does not ignore other
  objectives.

Furthermore, analysis of actual macro models used by the ECB and the Fed (as they were in 2008 anyway) points to a number of "real" similarities, including the fact that neither is strictly IT (Inflation Targeting) in the sense of NCM (New Consensus Macroeconomics)... unlike that of the Bank of England, which was found to be IT.


My Challenge in Econ 101 explanation of Marginal Benefit = Marginal Cost In Econ 101 textbooks, there are lots of examples and emphasis on marginal analysis leading to the greatest equation of all, $MB=MC$.

My challenge is the following and wonder if anyone had a similar issue or a way to get over it:

One of the textbooks examples use consuming pizza or water. First unit brings you the biggest joy. Then it diminishes. So student would understand each additional unit of pizza wouldn't bring the same amount (e.g. initial v. when you are full) utility. But then there comes a time where you are quite full and feel satisfied. At this point, additional unit of consumption would probably make you feel sick or vomit, so it is not "worth the money" to spend on.

  The trouble with this example is that it illustrates at margin, benefit is not constant. There comes a time when you would stop consuming. But this doesn't really shed light on why $MB=MC$? How can I do a better job explaining that this "equality" is embedded in all these stories? Is it perhaps the stuffed/eat-until-vomit is a corner solution example?

For pedagogical reason, if you are better at explaining these concepts, please share how you would go about this with an example both interor and corner solution in ECON 101 textbook situation.

My strategy was from example to the graph and to show why the equality should hold leading to connecting the dots on the first order conditions of utility maximization... But this equality is hard to really spell it out on 101 level, that's my challenge.

Thanks!

So, you assume a finite stock of money units and also that the only thing any consumer desires is units of happiness. That is, consumers are utility maximizers and they have utilities that are functions of happiness only.

Now, if you impose some arbitrary value - say, one unit of money - for one unit of happiness you could construct any silly example. Say, a frat guy loves beautiful women. He can win the affection of a beautiful woman by taking her on a date that costs 10 units of money. The first day late with a beautiful girl gives him 20 units of happiness. Clearly, the date is worth it! This is beacause he is getting 2 units of happiness per unit of money which has, more or less, doubled the value of his money. Suppose he keeps dating beautiful women and that the 5th date - that costs 10 units - gives him exactly ten units of happiness. Now, suppose he knows date 6 will only give 8 units of happiness. The marginal benefit of the date is too low. He keeps his money and instead trades his units of money 1-1 for units of happiness until he depletes his remaining stock of money.

.

Something like that. Any arbitrary example where you can clearly demonstrate that if $MB<MC$, you're "losing" something by continuing to consume that good and $MB>MC$ means you're "gaining" something by continuing to consume that good.

Also - I have no graphing tools (typing from phone) but this example makes use of constant MC and so gives a good visual for what happens when MB is above and/or below MC by presenting two very easily identified regions where the MC curve partitions the graph. Above the curve is "good" and below is "bad".

This usually works well for me.


Forward Guidance - What happens when the FED unloads its balance sheet Please Excuse my ignorance.

The US Federal Reserve has issued forward guidance telling the world that it is going to start to sell its (well a little less) 4.5 trillion dollars worth of securities that it purchased in 2008.

When the fed purchased bonds from the market this was considered open market operations. When the fed spent dollars to purchase securities it expanded the money supply. Correct?

So now that they are going to unload the securities.

When the fed sells bonds to the market this is also considered open market operations. This type of open market operation contracts the money supply as the fed will sell securities to the market and accept dollars for them. Correct?

As there is such a large amount of securities on their balance sheet, these open market operations are going to have global effects. What could some of the effects be? ( I realize they will do it slowly )

( Effect on Non-US real estate ( the bubbles around the world ))
( US Dollar value ( US Dollar Index ))
( China )
( Other Central Banks )

The direct effect of changes in the money supply on the economy (and other variables) is not clear. The Fed purchases of assets created excess reserves in the banking system (which the banks cannot offset by themselves). The presence of excess reserves does not greatly affect the ability of banks to lend. Hence, there is limited evidence of direct effects on the real economy. (I am unaware of any such studies, but that does not mean that they do not exist.)

The usual argument is that the effect of the large scale asset purchase program was that it reduced bond and mortgage yields. This note by Bonis, Ihrig, and Wei (link to note) gives a recent estimate of its effect. The effectiveness of the program to lower bond yields is questioned. (As a disclaimer, I see little evidence that bond yields are measurably lower as a result of the asset purchases.)

If we grant that the large scale asset purchases lowered bond (and mortgage) yields, the effects on the economy are indirect. The precise impact of lower bond yields on the economy is uncertain (it depends upon which econometric studies on the effects of bond yields on economic activity you believe). Presumably, the effect of a gradual unwind of the Fed's purchases would reverse those effects.

Returning to your question, the linkages to the areas you ask about (the value of the U.S. dollar, bubbles, etc.) would be even more controversial. For example, in my opinion, the Canadian real estate bubble was entirely driven by Canadian policy changes; it is very hard to see how the size of the Fed's balance sheet had a measurable effect. I am certainly unaware of any studies finding such a linkage, and there is no reliable rule for relating changes to American bond yields to Canadian bond yields (and mortgage rates). (If such a rule existed, it would imply that it was easy to make money on cross-currency spread trades.)

Obviously, very rapid sales of securities by the Federal Reserve would be disruptive for the bond market, which presumably would cause contagion in other financial asset markets.


Is there any confliction in dataset and sample period description here? Dasgupta,2019, p.2598 documented that they

consider all nonfinancial firms in Worldscope, Compustat Global, and
Compustat North America data sets from 1990 to 2012

However, they used the [-2;+5] event window (page 2600) around the law implementation day to examine the impact of laws on dependent variables. In their country list on Table 2 page 2599, the last countries that passed the law are Ukraine, Taiwan in 2012. Therefore, based on their identification, their data sample should be from 1991 to 2017 rather than 1990-2012.
Apart from that, the first country applied this law is US in 1993, therefore, the data source should start from 1991 (two years before the implementation day).

Dasgupta in the study says he is using also other event windows in dynamic estimations:

To  explore the  dynamics  of  the issuance  activities  and leverage  change,  we  create  dummy variables corresponding to the following windows around the treatment  year:  from 1 to 4 years before the  treatment; the  treatment  year  and  the 2 years  after  treatment; the  next 3 years; and  the years beyond.

with window 1 to 4 years before treatment it makes sense.
Dasgupta also uses diff-in-diff and for that you need to test for pre-treatment trends so that also can be a reason.
Dasgupta also says that cartel data are from some 2013 publication so probably there was no point in getting more data from compustat. If they miss any data for their main variable of interest after 2012 then they can't run regression on longer than 2012.


Double counting because of gross mixed income I was learning the income method of calculating GDP when I stumbled upon this doubt.

As per the definition given in the book

GDP = GDI (Gross Domestic Income) = Compensation of employees + Gross Operating Surplus + Gross Mixed Income + Taxes less subsidies on production + Taxes less subsidies on products and imports.

My doubt here is as follows:

Gross mixed income encompasses incomes of incorporated businesses (for instance sole proprietorship). However, if we consider one scenario that Mr. X is an employee of XYZ corporation. He gets his compensation as $ \$100.$ He pays $\$50$ for his fever treatment to Dr. Y. Now, as per the above definition, Dr. Y's $ \$50 $ will be added with Mr. X's $ \$100$ leading to double counting of the country's income.

How do we deal with such situations? Any help will be appreciated.

According to the scenario Mr. X is an employee of XYZ and not the owner of the business (sole proprietorship).  So his $50 dollars won’t get count towards his own earnings.  It should get counted toward Gross Operating Surplus.

If he was the owner of the business then it still wouldn’t be counted under compensation of employee for Mr. X because at that point he would not be an employee.  It would be counted toward Dr. Y's earnings.


Ben Bernanke Portfolio Balance Effect I have a question based on reading some speeches and research papers, mainly by Ben Bernanke, on the portfolio balance effect. Here is Bernanke in a recent paper he authored where he describes the portfolio-balance effect as one of the two principal channels of large-scale asset purchases:

  "The portfolio balance channel depends on the premise that securities are  imperfect substitutes in investors’ portfolios, reflecting differences in liquidity, transactions costs, information, regulatory restrictions, and the like. Imperfect substitutability implies that changes in the net supply of a security affect asset prices and yields, as investors must be induced to rebalance their portfolios (Bonis et al., 2017). In principle, the two channels of QE can be distinguished by the fact that the signaling channel operates by affecting expectations of future policy rates while the portfolio balance channel works by changing term and risk premiums."- Bernanke (2017), in a paper that can be located here: https://www.brookings.edu/wp-content/uploads/2017/10/bernanke_rethinking_macro_final.pdf

I'm having some trouble here understanding the finance of this. In particular, how does this channel necessitate imperfect substitutability? I understand that the argument hinges on 'habitat preferences' -- certain investors prefer, say, a specific type of security -- but I haven't been able to put the pieces together.

As a potential example: let's say that we have an investor who will only deal with 5-year Treasury bonds due to either preference, risk appetitive, liquidity requirements, and so forth. The Federal Reserve then purchases 5-year Treasury bonds. Bernanke seems to suggest that the reason that reductions in the supply of these securities will increase their prices and reduce their yields is that investors don't view other securities as perfect substitutes. Is the argument perhaps that, if our investor considered 7-year bonds a perfect substitute, the increase in the price of the 5-year bond would cause him to sell off his supply of 5-years for a significant capital gain and purchase some other security? Or, for that matter, his portfolio would consist of such a wide array of different maturities that buying 5-year bonds wouldn't impact his behavior at all, as he would just replace it with any other bond.

I know this has something to do with elasticity of demand, but I just haven't been able to piece together the logistics of imperfect substitutability, hopefully, leading to a rebalancing of investor portfolios and a decline in interest rates across asset classes in a broad-based way.

I'd appreciate any insights people might have on this.

My argument is that he is just looking to find a justification for a policy choice he made, and so there is no reason to believe that his arguments are completely coherent.

We need to understand why he is making such arguments in the first place. If interest rates are purely the result of expectations (term premium equal to zero), the purchases themselves have no direct effect on yields, only as the result of signalling what the Fed will do (the first channel). However, the Fed could achieve the exact same effect by just saying that the economy stinks, and they will not raise rates for a really long time.

In order to find a justification for the decision to purchase bonds (instead of just talking), he needs to argue that the change in supply affects bond yields. The problem with that argument is that the front end of the yield curve does a pretty good job of tracking expectations, regardless of the state of supply and demand in the bond market. (One can look at how market participants use front end pricing as an estimate of what the central bank will do in the next few rate setting meetings across all the major markets as an empirical validation of that assertion.)

Therefore, we need some reason to believe that the short maturity bonds are somehow different from long maturity bonds, i.e., there is some form of segmentation. This way, one can hope that supply and demand affects long-term bond risk premia more than short-term premia (which would sound plausible to most bond market analysts). What matters is that the term structure of the term premia is changing due to the supply effect. One can come up with different verbal explanations for why term premia move, they will end up being indistinguishable in practice. That said, we need to ignore the possibility that other factor affect term premia, such as returns volatility (which would be suggested by portfolio theory).

The obvious issue with this argument is that Fed purchases are not the only factor affecting supply and demand in the bond market. Why are those other factors being ignored?


On trade, What justificaion does the USA have to accuse China of 'selling too much not buying enough from USA' There's a trade war (dispute) going on between USA and China, and it boils down to the USA accusing China of not buying enough American products, relative to what they sell to America.

Putting aside other accusations such as currency manipulation, cyber security hacking, etc. If we just focus on this central accusation of 'You are not buying enough of my stuff, while selling too much stuff here!"

I don't understand how that can be a valid 'accusation'. Buying and selling are willing actions taken by market participants, made as a result of their own economic situation. China has total freedom to decide what and how much to buy (import) from any country, as does the USA. If China decides not to buy certain products it probably means either it thinks those products are too expensive, too low quality, or maybe China doesn't need them. Same with USA - it decides to buy certain products from China at certain amount because it has decided it is the right product at the right price and amount. My point is, USA can decide to buy however much from China and vice versa. These are willing market participants.

If so, how can any country 'accuse' of another of not buying enough or selling too much? Whatever China sells is agreed to be bought by USA, it's not like China forces USA buy its stuff. And whatever China buys from USA is its own decision.

The US president see’s trade as a zero-sum game, where there is always a winner and a loser, being the winner the one who sells more to the other. This view is not shared by most economists, as the mainstream opinion is that international trade is beneficial for both parties (see Ricardo or Krugman for examples).

In the US’s president mind, “to win the game” they must restrict the sales of Chinese goods, using tarifs or quotas. The US can either produce these goods or import them elsewhere. The Chinese, however, are expected to have no other alternative but to keep importing advanced goods, critical for their economy, such as aeroplanes parts from Boeing.

The expected outcome from this policy is less competition for national producers, potentially resulting in more jobs and higher profits. However, end consumers might end up facing higher prices for several goods, resulting in lower real incomes.


Measuring productivity with the Törnqvist index I have a sample of companies, of which I want to calculate the productivity of each individual firm relative to a hypothetical firm in the industry.

Choosing the measurement method was not easy, but I ended up using the Törnqvist index number approach. I am aware of the assumptions of the method and the difficulties in measuring productivity. My questions therefore relate to the actual calculation of the index. Although the formula seems straight-forward, I experience some problems when calculating it.

The basic formula is given below:
$$ \ln A_{it}^{IN} - \overline{\ln A_{t}^{IN}}  = \left(  \ln Q_{it} - \overline{\ln Q_{t}} - \tilde{s}_{it} \left(\ln L_{it} - \overline{\ln L_{t}} \right) \right)  - ( 1-\tilde{s}_{it}) \left(\ln K_{it} - \overline{\ln K_t} \right)$$

$$ \tilde{s}_{it} = \left(s_{it}^L + \overline{s_t^L} \right) / 2$$

This is how I defined the variables:
1. Q is the output of the firm. I defined it as sales or revenue. I know its shortcomings, but given the data I cannot make extensive corrections. Based this on research of Melitz (2000).
2. L is the labour productivity, which I defined as the total hours worked. According to Ahmad et al. (2003) this is the best proxy.
3. K is the physical capital, which I defined as Plant, machinery and equipment. Excluding buildings and land (Land should not be included, while buildings should, but I don't have information separately).

Please note that the data I have is limited for each company. I have a sample of companies of which I can access global lines from the income statement and balance sheet. I therefore have to make a trade-off between the size of the sample (more and detailed data means a smaller sample) and the quality of the proxy for productivity.

Problems

First of all, to calculate the productivity of a specific firm, I first have to calculate the productivity of the hypothetical firm (the geometric mean of the industry), but how do I need to do this? The formula says on the left I need the productivity of the hypothetical firm in order to find the firm-specific productivity. Or do I just need to calculate the geometric mean of my variables for each industry and omit the second term of the left part of the formula? I am confused because I would need to calculate the productivity of the hypothetical firm but how? The first one is always needed for the calculation of the second one and vice versa.

Second, for the calculation of the term ~s, I calculate the share of labour in the total input. But as I said before I calculate labour using total hours worked and capital using balance sheet lines (in €euro). These two are therefore measured in different units. I should multiply the hours worked with an average base wage to get the labour in monetary units. It is therefore better to just use total employment costs, right? I can find this cost in the income statements.

Third, I have a question related to determining capital. This should reflect all physical assets used in production. So should I include leasing (on the balance sheet). As of know I only include plant, machinery and equipment.

The formula you have above to solve for multifactor productivity (or total factor productivity) is correct; however, after reading your post, you are interpreting it differently.

The terms with the natural logs in the formula is asking you to obtain the rate of change (growth rates) [same as the difference in logs seen in formula] of a particular period for capital, labor , and output and the average cost shares for labor and capital.     The term on the left indicates the log difference of MFP which is the same as the rate of change (growth rate) of MFP.

To answer your first question:
 If you are calculating firm level productivity you should be using firm level labor input (number of hours worked of all persons), capital input , output data.

For your second question:
The number of hours should not be used as labor input cost share. That term would be labor compensation or total wages.

The term ~s is actually the two period average cost share of labor input [cost share of labor input is the labor cost (or labor compensation) divided by the cost of both labor and capital (which should be the same as total revenue/output/sales)].

-**So your statement is correct; you should multiply the hours worked with an average base wage to get the labor cost in monetary units. total employment costs should also be the same and work. **-

For average capital cost share, the formula provided is actually showing you a shortcut in coming up with average capital cost share.   Just take the average labor cost share and subtract it by 1.

For your third question:
Capital should reflect the real value all physical assets related to the firm’s final output which should include the use of:

Equipment

Structures

Inventory- items that are in the process of being prepared for sale

Intellectual property products (software, R&D, artistic originals)

Land

These fixed production assets costs should include depreciation.

To calculate MFP growth in 1987-1988 (or 1988%)

Real output % = 4.3

Labor input% = 3.2

Capital input%= 3.9

Average labor cost share =  ( .663 + .671) /2  = .667

Average capital cost share= (1- .667) = .333 [shortcut]

4.3 – (.667*3.2) – (.333*3.9) = .87

Actual value of MFP% is  =  .8

*note that doing it this way in few periods will cause rounding issues that may show a .1 (tenth decimal) difference.  But in most periods you will be right on target.


Non-Constant Elasticity of Substitution What's the literature on Non-Constant elasticities of substitution? Say, I'm interested in the elasticity between $c_1$ and $c_2$ increasing/decreasing in income/wealth.

CES utility functions with equal spending weights are similar to

$$ \left(\sum_i c_i^\frac{\epsilon-1}{\epsilon}\right)^\frac{\epsilon}{1-\epsilon}$$

A simple way of getting non-constant elasticities would be to let $\epsilon = \epsilon(Y)$. Then the elasticity of substitution would vary with income:

$$\frac{d \log \frac{c_i}{c_j}}{d \log \frac{p_j}{p_i}} = \epsilon(Y)$$

But I feel that this mixture of preference-parameters and outcome variables is suboptimal.

Is there a common way of modeling these preferences?

Eichenbaum and Fisher (2005) follow Kimball (1995) in allowing for the possibility that the elasticity of demand is increasing in a firm’s price. Which is not exactly what I was looking for, but it's a start.


Low interest rates - who benefits, rich or poor? I just heard Andy Haldane, chief economist at the Bank of England make the following statement about the bank's ultra low interest rate policy and accusations that it disproportionately benefited the rich:

  "on average those that have debts tend to be poorer than those that
  have savings which has meant that our monetary policy actions with
  interest rates have if anything shrunk the the degree of inequality in
  incomes between rich and poor."

This struck me as being wrong because its the rich home-owners that may borrow four or five times annual income, whereas the poor (non-home owners) would be hard pressed to ever borrow more than half a years wages.

Is there any published analysis that would justify (or refute) the Bank of England's claim?

https://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Monthly_Report_Articles/2016/2016_09_effects.pdf?__blob=publicationFile

That should fit your question.

Imho we have never seen these kind of interest rates, and It will be very entertaining to see how this works out.

Could lead to another black swan event, which is nothing you can calculate/prepare for.


An index of the The Economist's Schools Brief series I was wondering whether anyone might have an index of the articles that made up the The Economist's Schools Brief series that ran from 1975 to 1999 (with a brief refresh in 2013)?

They were an interesting set of articles that explained economic concepts (with a free market slant, of course, being The Economist) in an easy and accessible form.

The Economist has some articles online from 1999 onwards: this is a partial selection of some which seemed interesting, though not quite what you are looking for
1999

https://www.economist.com/unknown/1999/10/21/finance-trick-or-treat
https://www.economist.com/unknown/1999/11/04/moneyed-men-in-institutions
https://www.economist.com/unknown/1999/11/11/stocks-in-trade
https://www.economist.com/unknown/1999/11/18/monopoly-power-over-money
https://www.economist.com/unknown/1999/12/09/the-future-of-finance

2013

https://www.economist.com/schools-brief/2013/09/05/explaining-the-schools-briefs
https://www.economist.com/schools-brief/2013/09/07/crash-course
https://www.economist.com/schools-brief/2013/09/14/lending-weight
https://www.economist.com/schools-brief/2013/09/21/controlling-interest
https://www.economist.com/schools-brief/2013/09/28/sovereign-doubts
https://www.economist.com/schools-brief/2013/10/03/calling-to-accounts

2016

https://www.economist.com/leaders/2016/07/21/breakthroughs-and-brickbats
https://www.economist.com/news/2016/08/04/which-economists-have-had-the-greatest-impact
https://www.economist.com/economics-brief/2016/07/23/secrets-and-agents
https://www.economist.com/economics-brief/2016/07/30/minskys-moment
https://www.economist.com/economics-brief/2017/08/03/gary-beckers-concept-of-human-capital
https://www.economist.com/economics-brief/2016/08/06/an-inconvenient-iota-of-truth
https://www.economist.com/economics-brief/2016/08/11/where-does-the-buck-stop
https://www.economist.com/economics-brief/2016/08/20/prison-breakthrough
https://www.economist.com/economics-brief/2016/08/27/two-out-of-three-aint-bad
https://www.economist.com/sites/default/files/econbriefs.pdf

2018

https://www.economist.com/finance-and-economics/2018/04/12/economists-understand-little-about-the-causes-of-growth
https://www.economist.com/finance-and-economics/2018/04/19/economists-still-lack-a-proper-understanding-of-business-cycles
https://www.economist.com/finance-and-economics/2018/04/26/many-results-in-microeconomics-are-shaky
https://www.economist.com/finance-and-economics/2018/05/03/economists-focus-too-little-on-what-people-really-care-about
https://www.economist.com/finance-and-economics/2018/05/10/barriers-to-entry

This clearly misses the older articles.  Google turned up

http://marshallinside.usc.edu/joines/549/articles_pdf/ec901103.txt.pdf (Paradigm Lost, November 3, 1990
http://people.tamu.edu/~aglass/econ452/Economist2a.pdf (The Miracle of Trade, 27 January 1996)
http://walkerd.people.cofc.edu/Readings/Markets/schoolsbrief.pdf (Feb 17 1996 - State and Market)

Added: The Economist relaunched the series in 2020, which (including some of those listed above) can be found at

https://www.economist.com/schools-brief/


External Financing and Corporate Growth In a book on Corporate Finance, the author writes that 'all other things constant' the higher the rate of growth in sales or assets, the greater will be the need for external financing(bank loans, debt securities, or equity). His reasoning is based on the $\text{Assets}=\text{Liabilities} + \text{Equity}$ equation. My question is why can't a company manager use his cash, in the current-assets, to drive the growth in sales or assets? And why should this equality be maintained in this situation? To answer just that by def. of equity, i.e. assets minus liabilities, in this last question seems to be not answering at all...

Any help would be appreciated

The assertion of the book is based on the phenomenon of commercial credit - the fact that business-to-business sales almost always are on credit, and the differences between terms-of-credit that a company gives to its customers, compared to the terms of credit that enjoys from its suppliers. It describes the (short-term) phenomenon, peculiar to some, that "the higher the sales and the profits, the lower the cash available".

A simplified bottom-up unfolding of how this can happen is as follows: Assume that a company has steady monthly sales $S$ for the years 2013 and 2014. Assume that the terms-of-credit that extends to its customers is "60 days/two months". Roughly, this means that the Accounts Receivables at the end of, say, year 2013 equal the amount of two months of sales (assume away any seasonality), denote it $AR_{2014} =2S$. On the other side, the company has only a "1 month" period to pay its suppliers. Assume the monthly Costs of Sales is $cS$.

So during year 2014 the Cash flow from the Customers-Suppliers loop has been

$$CF_{2014}=12\cdot S - 12\cdot cS = 12(1-c)S$$.

Now assume that starting from January 2015, Sales go up 20%.

During the year 2015  the Collections will be $2S + 10\cdot 1.2\cdot S$: November-December 2014 Sales collected in January-February 2015, and 10 months of collecting the increased sales amount.

As for Accounts Payable, during 2015 the company will have to pay $CSpay = cS + 111\cdot 1.2\cdot cS$ (we keep Inventories constant in value for simplicity).

So for 2015 we will have

$$CF_{2015}=2S + 1.2\cdot 10\cdot S - cS - 1.2\cdot11\cdot cS$$

$$=[14 - 14.2c]S$$

Depending on the value of $c$ we may have $CF_{2015} < CF_{2014}$ (in the specific example, we will need to have $c >0.91$ , i.e. a very small mixed profit margin $1-c$).

Namely, the combination of sales growth with the gap in the terms of credit, may result in the company having less cash available to cover its other, operational expenses like salaries etc. But even if this is not the case, the increase in Cash Flow may not be enough to cover the increase in other Assets that accompany an increase in Sales: an increase of the value of Inventories, but also possibly investments. Both will require increased cash. Also, operational expenses, like marketing or labor cost may have to increase. If the terms-of-credit gap is large and the sales growth aggressive, the company will require a Cash injection from shareholders or a bank loan to be able to pay all its obligations, even though its Sales has gone up.

The above are compacted nicely into a Balance-Sheet-point of view (where the equality $\text{Assets}=\text{Liabilities} + \text{Equity}$ holds always by construction, given how the terms involved are defined and measured). In fact, the Balance Sheet approach is the way many Finance Directors use to get a quick taste of what kind of financing will the company need next year. Essentially, the increased funds "automatically" injected by increased suppliers credit (due to increased purchases), plus any projected increased retained profits, may not be enough to cover the increase in the Current Assets due to the increase in Accounts Receivable (and possibly the increase in Inventories and in Fixed Assets that accompany the growth of Sales growth).
It may be the case that such an expansion may be profitable in terms of "Profit & Loss" while at the  same time having a negative effect on the Cash Flow, in the short-term.

Indeed, the difference could be covered by running down the cash reserves of the company, but in many cases, companies do not hold so much cash to do that. Then, one has to close the gap by for example, increasing Liabilities, say, taking a loan.


Is there a serious forum/chat (not Q&A like StackExchange) on Economics? I am looking for a:

Serious forum/chat (like so many math and physics forums I know in the net)
Where I may able to chat about economics foundations & hypotheses, theory and empiria, and so on, with people who have some knowledge about it.
Which is NOT a Q&A forum.

Thank you very much!

This could be useful: https://groups.google.com/forum/#!forum/decision_theory_forum

Also, in econjobrumors sometimes there are interesting discussions...


Bayesian Nash Equilibria: Strong and Weak Types I need a little help with the question. I understand that since both players have two types each, there will be 4 different payoff matrices to be considered, $(S,S)$,$(S,W)$,$(W,S)$,$(W,W)$, each type occuring with equal probability.
I found that in each of these four payoff matrices, $(A,NA),(NA,A),(N,N)$ will have the respective payoffs: $(10,0),(0,10),(0,0)$.
The $(A,A)$ action will have payoffs $(-6,-6),(4,-8),(-8,4),(-8,-8)$ respectively.
Have I modelled the question correctly? Also, please help me with the BNE as well. I understand that we need to check for deviations, using prior beliefs; however, it seems too tedious to work out. How do I find all Pure Startegy BNE?

Modeling the game as four separate matrices does not capture the fact that each general knows his army strength but not the strength of the other army.

Given the small action space, it may help if you could first visualize the game in an extensive form, with Nature deciding army strengths at the beginning, and each army general observing their type before making the attack or not decisions. (Of course, this step is not necessary if you have a good mental image of what the game looks like.)

You can then try to convert the extensive form game into its Bayesian normal form. Hint: each general has four pure strategies: attack or not when their army is strong and attack or not when their army is weak. The BNE can then be solved easily in the Bayesian normal form.


What would mortgage payments be if monthly payments were constant in real terms? From the Wikipedia:

The fixed monthly payment for a fixed rate mortgage is the amount paid
by the borrower every month that ensures that the loan is paid off in
full with interest at the end of its term. The monthly payment formula
is based on the annuity formula. The monthly payment c depends upon:
r - the monthly interest rate, expressed as a decimal, not a percentage. Since the quoted yearly percentage rate is not a
compounded rate, the monthly percentage rate is simply the yearly
percentage rate divided by 12; dividing the monthly percentage rate by 100 gives r, the monthly rate expressed as a decimal.
N - the number of monthly payments, called the loan's term, and
P - the amount borrowed, known as the loan's principal.
In the standardized calculations used in the United States, c is given by the formula:
$$c = \begin{cases}
  \frac{r P}{1-(1+r)^{-N}} = \frac {rP(1+r)^N}{(1+r)^N-1}, & r\ne 0; \\
  \frac{P}{N}, & r = 0.
\end{cases}$$

The "issue" with this monthly payment schedule is that, if inflation is positive, the amount you pay in real terms the first year is more than the amount you pay the last year. Assuming constant inflation $\pi$, what would the monthly payment formula look like if it had to be constant in real terms?

Note most of the argumentation adapts off the standard derivation for constant nominal payments from Wikipedia.

Let us assume $c$ is a yearly payment for the sake of simplicity. Consider how much is left to be repaid after each year. The principal remaining after the first year is $P_1=(1+r)P-c$. That is, the initial amount plus interest less the payment. After the second year $P_2=(1+r) P_1 - c$ is left, so $P_2=(1+r)((1+r)P-c)-c(1+\pi)$. Note we need to pay $c(1+\pi)$ instead of $c$ so that we are still paying $c$ in real terms for the second year. If the whole loan was repaid after two years, $P_2=0$, so $P = \frac{c}{1+r}+\frac{c(1+\pi)}{(1+r)^2}$.

This equation generalizes for a term of $n$ years, $$P = \frac{c}{1+r} \sum_{k=0}^{n-1} \frac{(1+\pi)^k}{(1+r)^k}$$. This is a geometric series which has the sum
$P=\frac{c}{1+r}\left(\frac{1-\frac{1+\pi}{1+r}^n}{1-\frac{1+\pi}{1+r}}\right)$
which can be rearranged to give $$c=\frac{P(1+r)}{\left(\frac{1-\frac{1+\pi}{1+r}^n}{1-\frac{1+\pi}{1+r}}\right)}$$. The nominal payment for year $n$ will be $c(1+\pi)^{(n-1)}$.


Are sales taxes regressive? There are competing definitions of regressive taxes out there:

On Wikipedia:

  A regressive tax is a tax imposed in such a manner
  that the tax rate decreases as the amount subject to taxation
  increases.

In a textbook I use (Case, Fair, and Oster's Principles of Economics):

  A regressive tax is a tax whose burden, expressed as a percentage of income, decreases as income increases.

By the Wikipedia definition, a sales tax would technically be a proportional tax as the rate is fixed regardless of how the base (consumption) changes.

However, by the textbook definition, and assuming that households with lower income consume a greater percentage of that income than households with higher income (i.e. have lower savings rates), a sales tax with a fixed rate would be regressive.

You might be inclined to suggest that the textbook was defining it specifically for income taxes where the Wikipedia article is defining it generally. Actually, though, the authors of the text make it clear they mean their definition to be general. They say that they define it in terms of income because "all taxes are ultimately paid out of income." I think that statement is a bit imprecise, but whatever. They go on to show an example that demonstrates that sales taxes are regressive (conditional on lower-income households saving less).

I agree with them on an intuitive level that sales taxes are regressive. But then why has Wikipedia decided on a definition that is independent of income, with one consequence being that sales taxes are proportional?

It depends on the definition you want to use. You can define a regressive tax as the wiki says, in which case a sale tax would not match.

But the goal of definition of different class of taxation is to assess the impact on person being taxed. Without considering income the above definition becomes moot. Sure the tax is proportional (fixed share of tax on any price) but it's effect on those who pay it is different.

The first definition is derived , I believe, in the context of income taxes in which the income is being taxed and the definition matches it's intuitive notion.
Some taxation system are subject to the requirement that the system as a whole should be progressive, I.e the total tax burden should increase with income. In this context is natural to think that sale taxes are regressive, while they don't match the formal definition.


What would happen if a company bought back of all of its stock? Would it own 100% of itself? Companies occasionally own some of their own stock. A company owning its own stock is actually pretty weird when you think about it. If I own 1% of a business's stock (and therefore own 1% of the business's assets), and the company owns 50% of its own stock, I as a stockholder of the business, indirectly control 0.5% of the business. Through the 0.5%, I own 0.25%. Through the 0.25%, I own 0.125%, and ad infinitum. This adds up to 2% (which makes sense, since if I own 1% out of 50% of the stock, I would own 2% of the business.)

What happens though if a company controls all of its stock. This would mean that the company owns itself. In particular, it isn't really owned by any individuals anymore. The purpose of a public company is to create value for its shareholders, but what does that mean if it owns itself?

Practically, how would this affect things like voting and bankruptcy?

The New York Stock Exchange has a continued listing requirement of 300 shareholders and 200,000 shares. A company will want to consider whether continuing to be traded on a stock exchange is desirable before approaching these limits.

LINK to a NYSE reference document.

If a company buys back almost all of its shares the last individual or institutional owner (who ever owns the last outstanding share yet to be bought back) will will own all of the equity. This person or institution will control the company. The seller of the last outstanding share will want the highest possible price. If this trade must be done via the company buying it's own shares, because that is the premise of your question, the owner will direct the company to pay the maximum cash amount. The company will generate the maximum cash by liquidating the company.

Definition from Wikipedia...

  Liquidation is the process in accounting by which a company is brought
  to an end

LINK to Wikipedia article about liquidation.

If the last outstanding share can trade for more than liquidation value, there is no reason to liquidate the company. The owner can sell the share to a different investor in order to get the highest possible price.


Who has the unspent money? I want to know why we don't talk about the money that people have saved because they are not going to restaurants, barbershops, flying, traveling, etc.  I have heard the restaurant business is in the billions for revenue.  Wouldn't that mean that the ones that don't go the restaurant during the pandemic have that money?  So does that mean the banks have the money?  Just wondering.  Thank you.

While people are spending less, they are also earning less, especially the many millions who have lost their jobs. It is very possible that the earnings lost are much greater then the money saved on reduced spending, and so net savings will decrease. It will take time before we really know either way.

Here is a study which looks at the increase in savings at the start of the so-called Great Recession (2007-2008):

  As the crisis began, households cut spending and the saving rate shot
  up to about six percent within a year. During recessions or other
  periods of economic weakness, when any engine of growth is needed, an
  increase in the household saving rate could slow the pace of recovery
  because, by definition, when a household saves more it consumes less.

Increased savings could potentially be good for growth in the long run if it allows for greater investment in the near future, and of course saving is good from the perspective of individual households that are able to save. But for the overall good of the economy as a whole, we need spending right now much more than we need savings.


Why does average variable cost = marginal cost for this function? I was hoping someone could explain the following. Suppose the short-run total cost function is TC = 50 + 12Q. Which of the following statements is true at all levels of production?

The correct answer given was that MC = AVC

Could someone explain to me why please?

So using your above statements in the comments it should be relatively clear how to find that $MC = AVC$.
$$MC = \frac{\partial TC}{\partial Q} = 12$$
and then using the fact that variable cost is $12Q$
$$AVC = \frac{VC}{Q} = 12$$


What are the advantages of using euro for Greece? Theoretical benefits of using unified currency are well known and described in many places like
https://www.economicshelp.org/europe/benefits-euro/
However, reality (or more comprehensive analysis) shows that euro gives advantage to countries with strong economy like Germany and creates additional difficulties for countries with weak economy like Greece.
Quick description is here https://www.investopedia.com/ask/answers/09/euro-introduction-debut.asp

The German economy was relatively prosperous by 2012, and European
monetary policy was far too tight for weaker economies. Portugal,
Italy, Ireland, Greece, and Spain all faced high debt, high interest
rates, and high unemployment. This time, monetary policy was too tight
rather than too loose. The only constant was that the euro continued
to work in favor of Germany.

There is clear answer how leaving euro may help Greece -
https://www.quora.com/How-would-leaving-the-euro-for-the-drachma-benefit-Greece
However no clear explanation how Greece benefited from EURO.
My understding was that Greece replaced national currency with euro because of some kind of euphoria rather than argumeted decision. And I can't see any clear evidence that it was wise. Maybe I'm missing something.
The question is about using EURO instead of national currency [for Greece]. Not about pros/cons of being part of EU. Countries like Sweden or Polad being part of EU use their own currencies and do not have plans to replace them with EURO.
More generic question why whould goverment of a country with weak economy want to lose control on monetary policy and replace (or link to) national currency with external currency.

The main argument for joining (and then remaining) in the Euro for Greece was to limit inflation.
Before Greece joined the Euro, the inflation was almost always in double digits, often exceeding 20% or event 30%. The reason for this was that the Government was running a huge budget deficit, which caused an over-supply of Drachmas. The expectation of inflation was also a factor causing inflation, since people were expecting the value of the Drachma to fall quickly, so they converted any extra funds into other "strong" currencies (mainly US dollars, Deutschmarks, or Swiss Francs), causing the value to fall further as a positive feedback loop.
The introduction of the Euro was indeed successful in limiting inflation, since now:

people now stopped converting their money to foreign currencies
The value of the currency was determined by the entire eurozone economy, so that the local deficit wasn't immediately reflected in higher currency supply and inflation directly (but still did indirectly).
The rules of the eurozone in theory required all countries to run a deficit of only up to 3%.

Of course as we all now the third point wasn't followed by Greece, which meant that the money supply in the Country was increasing more quickly than in the rest of the eurozone, which meant that the inflation in Greece was still much higher that the rest of the eurozone.
Since the value of the Euro itself was stable, this inflation was mischaracterised as "economic growth". But the reality was that the costs for people and business were still increasing year-on-year (though much slower than before), which meant the economy was becoming less and less competitive, so the balance of payments was very negative. Since the currency was no longer floating, this could only be paid by continually increasing the national debt.
After the fail of Lehman Brother Bank, there was increased scrutiny in the underlying fundamentals for new loans by the internation money markets, so Greece became insolvent. The eurozone then created a so-called "rescue package" that allowed Greece to pay the eurozone banks the money they had lent, by loaning new money to the Greek government. All this money didn't benefit Greece at all, the only purpose was for the big eurozone banks to not go also insolvent due to an imminent Greek default. The Greek people are and will be paying back this money for more than 50 years.
So the argument for joining and staying in the Euro was almost entirely driven by the desire to limit inflation. Whether that is actually a good or a bad thing is debatable. As always there are winners and losers with both high and low inflation.
The people that benefit from high inflation are:

Workers with high bargaining power (both public and private sector), that could demand pay-rises to match the inflation.
People with access to the banking system, since they could borrow drachmas and convert them to real estate, and then pay back the loans with currency that had much reduced value. The instability of the currency also made real-estate attractive, since its value tends to follow inflation, so it was a no-lose proposition. As a personal anecdote, when my parents took a loan for their house in the early 80's, they paid about 60% of their income for the monthly loan payment. When they eventually paid back the loan in early 2000's it was less than 5% of their monthly income, despite high interest rates.
People that had income or capital abroad where able to retain the value of their assets, whereas everybody else was losing money due to inflation, so their relative purchasing power was increasing quickly.

The losers with high inflation are all the rest of the people who couldn't benefit from the above bullet points:

Workers with low bargaining power saw their income be reduced year on year since it didn't follow inflation (Pay cuts are always much tougher to swallow than pay increases below inflation)
People that could not get a loan saw their rent become higher and higher every year, while their income didn't catch up to the increase.
People that had money in Drachmas were losing money year on year (This is a huge amount of money, just consider the amount of currency in peoples pockets for an entire country).

Finally, although in the question you mention that being in the eurozone is not synonymous with being in the EU, politically there was the argument to be in the "center" of Europe, being involved in as many EU projects as possible, since EU membership was seen as beneficial both politically and economically.


Reference Request - Dynamic Optimization with More Than One State Variable I would like to understand how to solve dynamic optimization problems involving more than one state variable and state equation (to apply to long-term economic models with more than one capital good).  Searching the web I found this chapter which seems helpful.

Does anyone know which book the chapter is from (it seems unlikely that it's by Peter Thompson whose website it's on as he lists his specialisms as strategy and innovation)?

Any other recommendations on this topic would also be appreciated.

As pointed out by mark leeds, the chapter appears to be part of an incomplete text by Peter Thompson - see here.


How do I change the base year from multiple years to one with monthly data? I have a Consumer Price Index series in monthly frequency from January 1947 to September 2017 with base year 1982-1984 (units are: Index 1982-1984=100), which, I think, means that the simple average of CPI values from January 1982 to December 1984 is equal to 100. I calculated the average of those monthly values and found that it is equal to 100.01667, which may be due to the rounding errors because the data are rounded to one decimal place. The problem is that I would like to have (still monthly) CPI with base year 2009, so that the average of its values in 2009 would be equal to 100, and I don't know how to do that. Does anyone have the idea how to shift a base year of those monthly data from 1982-1984 to 2009? It would be much appreciated. Thank you very much.

One possible approach

Take the average of the original values for the 12 months of 2009. Call this "the original 2009 average"
Divide all the original values by "the original 2009 average"
Multiply by 100
Round


Leontief utility with producer goods This question may require some explanation. Also, I'm way out of my depths so please let me know if this question is misguided.

The standard Leontief utility seems to assume the goods are consumed in order to create the output (think tires and wheels to create a car). For comparison, producer goods are not consumed to create the output and the time to create the output becomes interesting. Considering the time with the producer goods seems an interesting extension of Leontief utility. Specifically, if an agent has a bundle of goods for a time less than it takes to produce the output than the bundle should provide low utility and if the agent has a bundle of goods for more than the time to produce the good than the utility should be flat (until it could produce another output).

Are you aware of any work that considers Leontief utility in reference to producer goods or that considers the time to produce the output as part of the utility?

In microeconomics it is common to model utility decision between consumption and leisure. The latter refers to the time of a day the individual is not producing goods himself (if a yeoman producer) or to sell his labour in the market (a waged labourer). The productivity of the individual will affect how much it can produce (and earn) per unit of time. Therefore, time is directly incorporated into the model via productivity, which then affects the balance between consumption and leisure an individual will choose.

For example, consider a yeoman producer with the following utility function (yes, no Leontief, but makes the point):

$$ U(C,1-L) = C + a(1-L) $$

where $L$ refers to the proportion of the day the individual is working ($L \in [0,1]$).

He can produce with the following technology:

$$ Y = bL^h $$

and consumes all what he produces:

$$C = Y$$

Assuming the yeoman farmer is interested in maximising his utility, the unidimensional optimisation problem is:

$$ \text{max}_{_L} U(L) = bL^h + a(1-L) $$

The first order condition is:

$$ \frac{\mathrm{d}U}{\mathrm{d} L} = bhL^{h-1} - a = 0 $$

Thus, optimal proportion of time allocated to work is:

$$ L^* = b^{\dfrac{1}{1-h}}\left(\frac{h}{a}\right)^{\dfrac{1}{1-h}} $$

Optimal consumption is:

$$ C^* = b^{\dfrac{1}{1-h}}\left(\frac{h}{a}\right)^{\dfrac{h}{1-h}} $$

The effect of (labour) productivity on hours of work depending on the returns to scale of technology ($h$). You have that:

if $h \in (0,1)$, a ceteris paribus increase in $b$ means the individual works and consumes more.
if $h > 1$, a ceteris paribus increase in $b$ means the individual works and consumes less.
if $h = 1$, productivity might not affect labour at all (but does affect consumption). In this case, there is a corner solution for labour ($L^*=1$ or $L^*=0$). I leave this as an exercise.

So, you are concerned about  "the time to produce output". Well, think of $b$ as an indication of how much time you can spend to produce a given amount of output with a fixed amount of labour. As I indicate above, variations in $b$ have important consequences for $L^*$, $C^*$, and ultimately for maximum utility $U(C^*,L^*)$.

Note: The specification I chose means the income and substitution effect arising from an increase in productivity ($b$) do not cancel each other. Other utility function (e.g. with $\ln C$) will mean $b$ does not affect $L$. I also leave this exercise to you.


Why is bargaining more common in poor countries? In poor countries, one might bargain over even say a bottle of water. This is unthinkable in most rich countries. (And in countries that develop rapidly, one can actually notice the steady movement from bargaining to fixed prices.)

The "obvious" explanation is that time is less valuable in poorer countries and so people (both buyers and sellers) are willing to spend some time bargaining.

But I wonder if there have been more in-depth attempts to understand this matter (empirical and theoretical).

In first world countries, the price of a bottle of water is set by a well-established market. There are millions of prospective buyers of a bottle of water and thousands of prospective suppliers, and while many suppliers are able to achieve brand differentiation, for the most part their water is fungible. Moreover, the supply and demand curves of water are reasonably stable, and water companies have the excess capital to hold inventory stockpiles that further reduce the volatility of prices. There is little information asymmetry. Customers can easily comparison shop, and price discrimination is very difficult. Suppliers are generally large corporations, which means that allowing bargaining would introduce massive headaches, such as agent-principal issues. There's also a feedback effect: once an economy and culture are built around fixed prices, it's more difficult to introduce bargaining. Water companies are in a low-margin business where their money comes from high volume. Spending resources bargaining would destroy those margins.


Are there theories that invalidate the "tragedy of the commons"? Wikipedia states:

  The tragedy of the commons is an economics theory by Garrett Hardin, according to which individuals, acting independently and rationally according to each one's self-interest, behave contrary to the whole group's long-term best interests by depleting some common resource.

Intuitively, this seems correct that self-interest would lead to over use under the assumption that others would do the same.

Have there been any strong counter theories that argue that people would act in a "sub-optimal" way for the betterment of the community?

As you implied, the tragedy of the commons was the standard theory in Economics. This is no longer the case. However--and this is an important point--rejection of this one-size-fits-all approach to public resource management did not come from the emergence of new theories; rather, it resulted from actually studying real-world outcomes. In fact, it's for her work doing exactly this that Elinor Ostrom won the Nobel Prize in Economics. As described by the Nobel committee:

  [B]ased on numerous empirical studies of natural-resource management, Elinor Ostrom has concluded that common property is often surprisingly well managed. Thus, the standard theoretical argument against common property is overly simplistic. It neglects the fact that users themselves can both create and enforce rules that mitigate overexploitation. The standard argument also neglects the practical difficulties associated with privatization and government regulation.

Since these case studies there has been theoretical work--some of it by Ostrom herself--in order to reconcile the discrepancies between the previous theory and the observed outcomes (developed using the theory of repeated games in Non-Cooperative Game Theory).

However, what's most interesting to me is that this theory was rooted in actual observations and not the other way around (i.e. first the theorized behavior followed by real-life observations).

Did this answer your question?


Production function involving profit maximisation Hi, I don't get how the answer of d is deduced in this question because I don't think I made any mistakes in my calculation and have also used all the information given. After knowing L is 800, I found out the did 200*Q which gives me 5656 and I worked out the profit to be negative but it is not -15000. What did I do wrong in my calculation?

Thanks

Max

Then you have: Max

Which gives you:

So L = 100, and you have a loss of 15000


Multi dimensional Auction in economics I am following this paper . They have different suppliers and one buyer and They are using auction to select best suppliers Suppliers will submit. suppliers offer a multidimensional bidding on quality Q and price p. The “quality” Q includes not only the quality of the product or service but also all its nonmonetary characteristics. The buyer derives utility from a contract
U(Q,p)= V(Q)− p
where V(.) is the buyer's valuation function of quality Q
The best suppliers will be selected using a scoring rule
S(Q,p)= V(Q)− p
I am confused there . Is this scoring rule is any standard in economics to calculate bet suppliers? Or this concept comes from? any one here to help
https://onlinelibrary.wiley.com/doi/epdf/10.1002/mde.3237

From the buyer's point of view, the "best" supplier is the one who offers them the highest utility. Using the utility function for scoring suppliers seems quite natural then. (In this paper the utility function is assumed to be quasilinear in money, which is just for simplicity.)


Synthetic control question on donors I'm using synthetic control methods.
The treatment group has covariates that are the extrema of the values across itself and all potential donor units.
So, say, on covariate $x_1$, the treatment unit has the lowest value of the group over time, and on $x_2$ the treatment unit has the highest and so on.
In such a case can you really find a donor group, or does the method break down? Or in using several covariates can we use those that provide a good synthetic control in some cases which compensates for poor balance for other (important and we believe important)covariates?
Is there a literature on this issue?

Welcome.
Do you mean: if $x^*_{k,it}$ are the panel variables, then $x_{1,i} = \min_t x^*_{1,it}$, $x_{2,i} = \max_t x^*_{2,it}$, etc.? Usually people use averages over time or values at certain points of time, while you mean the smallest (or largest) value during a period of time.
Computationally I do not see any differences. They are just numbers.
I am more curious (or doubtful) about interpretation, though. SCM balances on $\mathbf{x}_i$, where $\mathbf{x}_i = (x_{1,i}, x_{2,i}, ..., x_{k,i})$, i.e., SCM tries to find $w_2, \ldots, w_{J+1}$ such that $\mathbf{x}_1 - \sum_{j=2}^{J+1} w_j \mathbf{x}_j$ is close to zero (in terms of $v_j$-weighted sum of squares). But then what's the meaning of balancing on $x_{1,i}$? The treatment group may attain the minimum value in year 1960, while one donor in year 2000 and another in year 1990. Then what would it mean that $x^*_{1,1,1960}$ is close to $w_1 x^*_{1,2,2000} + w_2 x^*_{1,3,1990}$?
On the other hand, if it's the smallest during one business cycle, for example, that can make sense. If you have good reasons to use those min/max values, I think that's fine. I am very curious about what kind of min/max variables you have in mind.
Edit
If the treatment group's $x_1$ value is the smallest of $i=1,2,...,J+1$, then it is not possible to have $w_j$ such that $w_j\ge 0$, $\sum_j w_j=1$, and $x_{1,1} = \sum_{j=2}^{J+1} w_j x_{1,j}$. The convexity assumption (nonnegativity & add-up) is violated and you cannot use AG (2003) or ADH's (2010 and after) SCM. If you still use their SCM, you will be harshly criticized, I am afraid.