Distortions In Allocation Research Articles

Transaction Costs of Collusion and Organizational Design

This paper discusses the origins of the transaction costs in side-contracting. In Tirole (1986)'s model of collusion with a risk averse supervisor, the optimal collusion-proof contract trades-off coalitional incentives against an insurance motive. We characterize the corresponding agency cost and allocative distortions. Identifying this contractual outcome with Tirole (1992)'s model of collusion with exogenous transaction costs provides foundations for those transaction costs. Transaction costs of collusion are stake-dependent, linked to the economic environment and function of the colluding agents' degrees of risk preferences. We provide several applications of this theory of transaction costs for organizational design (vertical integration, design of supervisory structures and side-contracting under uncertainty).

Les limites à la discrimination par les prix

In this paper, we propose a unified framework allowing to report the most recent developments in price discrimination literature. These latest developments share the common feature of relaxing the assumptions underlying the canonical model of monopolistic price discri- mination. Our unified framework allows us to compare allocative distortions from the canonical model with those obtained when the basic assumptions are relaxed, and to estimate in which measure the fundamental principles of price discrimination are modified.

A Walrasian Theory of Commodity Money: Paradoxical Results

The objective of this note is to analyze some implications of the model of commodity money described in Banerjee and Maskin (1996) which may seem paradoxical. In order to do this, we incorporate a general production cost structure into the model. We focus on two different results. First, the existence of technologies that make counterfeiting a commodity more difficult may exclude it from being used as medium of exchange. Second, allocative distortions due to problems of asymmetric information may become larger in the presence of such technologies.

Does inflation lower productivity? Time series evidence on the impact of inflation on labor productivity in 12 OECD nations

According to proponents of zero-inflation policies, even low rates of inflation create distortions in capital allocation and in price signals, which result in lower rates of productivity growth. This paper tests the hypothesis that inflation has a causal impact (in the Granger sense) on labor productivity growth in manufacturing for 12 countries of the Organization for Economic Cooperation and Development (OECD). In bivariate tests of inflation and productivity and in multivariate tests using controls for cyclical effects, there is no evidence of a consistent relationship between inflation and productivity growth with regard to either sign or magnitude. Therefore, the present analysis does not support the view that further reductions in inflation from already low single-digit levels would have a positive impact on labor productivity growth for major industrial countries.

A Walrasian Theory of Commodity Money: Paradoxical Results

This note analyses some implications of the model of commodity money described by Banerjee and Maskin (Quarterly Journal of Economics, vol. 111, 1996, pp. 955‐1005) which may seem paradoxical. In order to do this, a general production cost structure is incorporated into the model. Two different results are highlighted. First, the existence of technologies that make counterfeiting a commodity more difficult may exclude it from being used as a medium of exchange. Second, allocative distortions due to problems of asymmetric information may become larger in the presence of such technologies.

The drama revisited

Capital-based business cycle theory identifies monetary mismanagement as a major source of economy-wide distortions in the intertemporal allocation of resources by focusing on the relative-price effects - and the corresponding quantity adjustments - of a monetary disturbance, as compared to tracking the movements in macroeconomic aggregates that conceal those relative-price effects. It thus gives us a superior understanding of the real coupling between the short-run and the long-run macroeconomic pictures and of the nature of business cycles.

Ein Ansatz für mehr Dynamik und mehr Beschäftigung: Zum Jahresgutachten 1999/2000 des Sachverständigenrates

Abstract The paper discusses the economic policy concept of the annual report of the German Council of Economic Advisers 1999/2000 and the major structural problems in Germany. Addressed are the long-run allocative distortions of the tax reform, solutions to the issue of pension and to the institutional arrangement of the labor market. The paper describes the necessary steps to generate a more dynamic economy.

Effects of Externality-Corrective Taxation on the Extent of the Market and Network Size of Division of Labor

Applying the inframarginal analysis of specialization and the effects of external costs in production and their control through taxation, this paper shows that, on top of the allocational inefficiency on the input and/or output mix caused and alleviated, there is the organizational inefficiency on the level of division of labor and extent of the market. External costs may lead to either too high or too low a level of division of labor or a mixture of efficient and inefficient structures. Low-cost taxes directly on the variables causing external costs may remove the inefficiency but may not be feasible, as, e.g., home production may be difficult to observe. Sales taxes/subsidies are completely useless as the general-equilibrium adjustments yields zero effects. A tax cum income transfer scheme may be effective in alleviating the allocational and organizational inefficiencies within certain ranges of parametric values. With the other range of parameter values, the optimum tax rate is 0 since a positive Pigovian tax generates organization distortion that outweighs corrective effect of allocative distortion.

Easing Countries' Transitions From Price Controls and Subsidies

In transitional economies, initial popular support of market reforms is often followed by disillusionment and repudiation of the reform program. To facilitate economic transition, this paper proposes a marketable discount coupon system (DCS) that reassures the public, even as an economy moves from nonmarket to market prices. Unlike price controls, subsidies, or ration coupons, DCS involves no queuing or allocative distortions. Unlike vouchers, DCS would not be negated by inflation. To avoid distortions, discount coupons would be marketable and redeemable, even without purchase of specific products. This procedure permits efficient adjustment of domestic prices to international levels.

Strategic Environmental Policy Under Incomplete Information

This paper introduces incomplete information into recent analyses of strategic environmental policy. It is shown how asymmetric information between planners and producers affects national incentives to impose strategic environmental standards on domestic industries in international oligopolistic competition. Relative to the full-information case, incomplete information is likely to mitigate allocative distortions originating from strategic behaviour. A countervailing effect, tending to raise distortion, is however revealed from the analysis. This effect is absent when governments intervene in free trade through direct production subsidies. The results suggest that incentives to capture foreign rents are less reduced due to private information, when environmental standards, rather than direct production subsidies, are the strategic instrument.

Enterprise Productivity and Efficiency: When Is Up Really Down?

A substantial body of literature has documented impressive total factor productivity (TFP) growth in China's state-owned enterprises (SOEs) during the period of China's enterprise reform. Such growth rates have been used to support the view that China's reforms of SOEs have been highly successful. In this paper, we question the validity of using TFP growth rates as a “bottom line” measure of performance. In the spirit of a counterexample, we use a simple model to show that when firms are not profit maximizers for whatever reason, higher productivity may actually lead to greater allocative distortion, lower profits, and lower economic efficiency. On the basis of existing evidence, we argue that these conditions held for many Chinese state enterprises during the reform.J. Comp. Econom.,June 1997,24(3), pp. 265–280. Boston College, Chestnut Hill, Massachusetts 02167; University of Michigan, Ann Arbor, Michigan 48109-1220; and Industrial Relations Center, Carlson School of Management, University of Minnesota, 271 19th Ave. S., Minneapolis, Minnesota 55455.

Investing in Emerging Markets: Emerging Issues and Trends

Emerging markets present differences in structural characteristics, yet exhibit commonalities of melancholy evidence of varying degrees of economic and political under‐development. There is a greater consensus in the finance literature on what the characteristics of emerging markets are than there is on their meaning. Some perceive the financial markets in terms of the mix of financial institutions and the level of development of the national economy. In this respect, popular reference relates to the dichotomy between developed and developing countries. This view of the emerging markets is flawed on the grounds that some countries within the developed countries' group are regarded as emerging markets (e.g. Portugal, Greece and former USSR) (see for example, Todaro, 1989, p.16). Narrow conceptions then focus on the level of development (and efficiency) of the national stock market and financial system, hence the appellation ‘emerging stock markets of developing countries’. These markets are thought to suffer from the small numbers market condition (Williamson, 1975), allocative efficiency distortion, and a range of market imperfections and externalities, including transaction costs. Yet others cast these markets in terms of their high levels of political risk, involving essentially military interregnums or what the international investor regards as unwarranted government intervention in exchange transactions.

Estimating Distortions in the Chinese Economy: A General Equilibrium Approach

A computable general equilibrium model is constructed to simulate the Chinese economy under a system of free markets, and is estimated using a calibration procedure coupled with econometric estimation for key parameters. The equilibrium solution of the model indicates substantial distortions in prices and resource allocation in the 1983 Chinese economy. Labour was found to be overpaid and capital underpaid in most non-agricultural sectors. Two-fifths of the agricultural labour force would have been employed by the non-agricultural sectors had China been a market economy. The elimination of these distortions would imply a significant improvement in allocative efficiency and a redistribution of income from labour to capital, from households to the state, and from urban to rural households. China embarked upon its economic reform programme in the late 1970s. Over the period 1979-83 there were dramatic reforms in the rural agricultural sector, including the dismantling of the 'three-level' ownership of communes, the dis- tribution of land to peasant households and the relaxation of controls over labour transfer from the agricultural sector to the rural non-agricultural sector. In contrast, in the urban economy, and especially in the state industrial sector, reforms were confined to modest improvements in incentives for enterprises and workers, notably through the introduction of profit retention schemes and bonus systems. In 1983, much of the traditional mechanism of resource alloca- tion remained essentially intact. The problem of distortions in the price system and in resource allocation in centrally planned economies (CPEs) has long been a concern of economists, and there has been a considerable interest in empirical modelling of distortions in CPEs. Thornton (1971) estimated potential efficiency gains from equalizing the return to capital for different branches of Soviet industry in the early 1960s. Desai and Martin (1983) provided similar estimates using econometrically esti- mated production functions. Portes and Winter (1980) estimated excess demand in the aggregated consumption goods market for a number of pre- reform Eastern European economies using the technique of econometric dis- equilibrium modelling. Podkamine (1988) calculated free market demands and prices in the absence of rationing for consumption goods markets in Poland during 1965-86 by transplanting demand systems estimated for market econ- omies into the quantity-constrained Polish economy. Chow (1985) investigated the efficiency of labour allocation in Chinese state industry by comparing the average wage rate with the value of the marginal product of labour. All these studies, however, involve 'partial equilibrium analysis', in the sense that they are concerned only with examining the distortion in a specific market and therefore have tended to ignore distortions in the rest of the economy and a

Government Interventions, Market Imperfections, and Technical Inefficiency in a Mixed Economy: A Case Study of Indian Agriculture

This paper uses an output-maximizing framework in the presence of expenditure constraint to measure output loss and input misallocation resulting from market distortions and technical inefficiency. A generalized indirect production function accommodating allocative distortions and technical inefficiency is used. Allocative distortions are captured in terms of effective (shadow) prices in which distortion parameters are both farm- and input-specific. The stochastic frontier approach is used to model technical inefficiency. Using farm-level data on 105 jute growers from West Bengal, India, we find that average output losses due to allocative distortions and technical inefficiency are 6.3% and 14%, respectively.

ALLOCATIVE EFFICIENCY OF RURAL NEVADA WATER SYSTEMS: A HEDONIC SHADOW COST FUNCTION APPROACH*

ABSTRACT. The efficiency of the water utility firms in rural Nevada and their input optimization are examined in this study. The empirical methodology incorporates a hedonic specification of the nonminimum globally concave cost function in estimating the effect of the regulatory environment and the quality of water services on the optimum utilization of inputs. Allocative distortions are introduced through shadow prices and are specified as functions of regressors which make distortion factors firmand input‐specific. The results show that 76 percent of the water utilities of rural Nevada in the sample overutilize energy relative to labor. The impact of allocative distortions on each firm's cost is also computed.

South African land policy: The legacy of history and current options

The highly dualistic farm structure of South Africa and the low productivity of native African farmers have been the result of systematic distortions in land allocation, output markets, the provision of infrastructure, agricultural credit, and services. The dualistic structure did not emerge because of genuine economies of scale in the large commercial sector. Other countries in Latin America and Africa that once supported a dualistic farm size structure through similar distortions have either implemented large-scale land reforms or have experienced decades of peasant revolts and civil war. The paper compares these international experiences to South Africa, and outlines judicial and market-assisted approaches to South African land reform.

Allocative Distortions, Technical Progress, and Input Demand in U.S. Airlines: 1970-1984

This paper generalizes a globally concave and flexible cost function to accommodate allocative distortions. These distortions are introduced through shadow prices and are specified as functions of regressors that make distortion factors firm, input, and time specific. The estimated model, based on a panel of nineteen U.S. airlines observed during 1970-84, rejects the hypothesis of no allocative distortions. Increase in costs due to allocative distortions are calculated for each airline over the entire period. The rate of technical progress and economies of scale are also estimated based on models with and without allocative distortions. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Regulation, competition, and asymmetric information

This article studies a model of regulation under asymmetric information when there exists a competitive fringe of unregulated alternative producers. The correlation between the unknown cost parameters of the fringe and of the regulated firm allows the regulator to use the threat of entry by the fringe to reduce the informational cost of regulation. The presence of the fringe is welfare enhancing. The allocative distortions can be larger or smaller than those in the no-fringe case, and the optimal contract sometimes allows inefficient entry. The optimal contract can exhibit non-standard bunching phenomena and discontinuities.

EC agricultural reform policy—The beginning of a new form of protectionism?

The European Community regards its current agricultural policy “reforms” as an adjustment to the reality of the market and hence as a contribution to easing the strains in world agricultural trade and reducing worldwide distortions in resource allocation. A detailed analysis gives ground for scepticism.

La réorientation du système fiscal britannique (1979-1986)

The reorientation of the british tax system (1979-1986), by Jean-Jacques Santini. A number of studies carried out in the United Kingdom in the 1970s seemed to indicate that the British tax system led to distortions in resource allocation which were prejudicial to the operations of the economic system. In the light of these findings, when Mrs Thatcher's government came to power in 1979 it immediately brought in a tax reform policy. The measures included in this policy, which were numerous and often far- reaching, affected taxes on households as well as company taxation. The study presented here describes the various measures complemented and attempts to judge their possible impact on the British economic system. Although it is still difficult to draw up a conclusive report on the results of this tax reform policy (which is not yet complete, several of the projected reforms having not yet been implemented, and which includes structural alterations which are slow to alter behaviour), three conclusions seem to stand out: the réorientation of the fiscal system since 1979 has been a major one, as can be seen from the change in the spread of taxation over households and companies on the one hand and the respective weight of direct and indirect taxation on the other; the short-term impact of the reforms introduced has sometimes been quite marked, whether positive (as in the case of the investment tax reform carried out between 1984 and 1986) or negative (the increase in direct taxation introduced in 1979); generally speaking, the British tax system seems better oriented now than in 1979 with regard to the achievement of economic policy objectives: the incentive to work has been increased, financial savings should progress and be better oriented towards productive investment, the quality of investment should improve and employment should be encouraged. JEL: 321