Ceteris Paribus Assumption Research Articles

Comment on ‘Industry, corporate and business-segment effects and business performance: a non-parametric approach’ by Ruefli and Wiggins

The Strategic Management Journal has published a series of articles on variation in business-segment performance. This comment addresses the insights and potential sources of confusion in the decomposition literature, with a particular focus on Ruefli and Wiggins (2003). We review the basic purpose of descriptive decomposition techniques and argue that they offer no information about the drivers of business performance or the mechanisms by which performance is generated. The techniques in the literature do not rely on ceteris paribus assumptions or a mapping between managerial influence and corporate effects. The estimated effects of industry, business segments, and corporate parents need not be independent to be modeled using variance decomposition. The comment also focuses on the distortions in estimates that can arise when the underlying sample of data does not represent the population accurately. Copyright © 2005 John Wiley & Sons, Ltd.

A Comment on “Does the Aggregate Demand Curve Suffer from the Fallacy of Composition”

A recent article in this journal by Professors Saltz, Cantrell, and Horton questioned validity and existence of aggregate demand curve in macroeconomics.1 More specifically, authors contend that the aggregate demand problem ... is a classic example of fallacy of composition and proceed to investigate this contention within each of four theoretical arguments that have typi cally been used to support negative slope of aggregate demand curve. The purpose and assertion of this comment is that Saltz, et. al., have commit ted several methodological errors in attempting to establish potential ambiguities contained within traditional conceptualization and derivation of aggregate demand curve. When these errors are cor rected and ambiguities cleared, it seems quite logical that an aggregate demand curve should exist and that there should be an inverse relationship between general price level and aggregate quan tity of goods demanded. Perhaps most fundamental and obvious error occurs in analysis of international price level effect. The authors begin by noting that validity of this effect is tenuous because of a number of questionable assumptions that underlie it. They write, First this argument assumes a constant for eign price This assumption is not a weakness but rather a methodological inevitability stemming from ceteris paribus assumption that anchors all formal models in economic theory, both microeco nomic and macroeconomic. Indeed, authors rec ognize this critical assumption explicitly in their definition of aggregate demand. The implication of this assumption, of course, is that a change in any non-price level determinant of aggregate demand, such as foreign price level, only shifts a given aggregate demand curve. Changes of variables other than price level are irrelevant to fun damental issue of existence and logical consis tency implicit within aggregate demand curve derivation. With respect to Pigou effect, Saltz et. al. con tends unexpected changes in price level cause a redistribution of wealth or income, but not a loss of net income. Absent from analysis however, is acknowledgment that a price-level induced change in distribution of income per se can affect aggregate demand. Therefore, if distribu tion of aggregate income were endogenized, higher price level would redistribute income from lowerto higher-income individuals in authors' scenario, leading to a decrease in consumption spending and aggregate demand. This conclusion is supported by income studies, which have consis tently shown that families with lower incomes have higher average propensities to consume and likely have higher marginal propensities to consume than families with higher incomes. At least two problems are present with authors' analysis of Keynes effect. First, they appear to confuse a movement of money demand curve with movements along it when they write . .we can also expect a fall in real money demand as people reduce their holdings of mone tary assets in response to an increase in oppor tunity cost of holding money. As interest rate or opportunity cost of money increases from a high er price level reducing real money supply, resulting adjustment in money market is not a movement of money demand curve but rather a movement northwest along a given money demand curve, such that interest rate rises unambiguous ly with a corresponding reduction in investment spending and aggregate demand. Second, authors again violate ceteris paribus assumption in their analysis of Keynes effect when they permit inflationary expectations to change endogenously and simultaneously with respect to a change in price level. The end result is then blurred since it doesn't allow a clear delin eation of how an increase in price level alone leads to a decrease in real money balances and an

Wartime Paris, cirrhosis mortality, and the ceteris paribus assumption.

This article critiques the ceteris paribus assumption, which tacitly sustains the epidemiologic literature's inference that the sharp decline in cirrhosis mortality observed in Paris during the Second World War derived from a sharp constriction in wine consumption. Paris's wartime circumstances deviate substantially from the "all else being equal" assumption, and at least three other hypotheses for the cirrhosis decline may be contemplated. Historical and statistical review. Wartime Paris underwent tumultuous changes. Wine consumption did decline, but there were, as well, a myriad of other changes in diet and life experience, many involving new or heightened hardships, nutritional, experiential, institutional, health and mortality risks. Three competing hypotheses are presented: (1) A fraction of the candidates for cirrhosis mortality may have fallen to more sudden forms of death; (2) alcoholics, heavy drinkers and Paris's clochard subpopulation may have been differentially likely to become removed from the city's wartime population, whether by self-initiated departure, arrest and deportation, or death from other causes, even murder; and (3) there was mismeasurement in the cirrhosis mortality decline. The alcohol-cirrhosis connection provided the template for the alcohol research effort (now more than 20 years old) aimed at re-establishing scientific recognition of alcohol's direct alcohol-problems-generating associations and causal responsibilities. In a time given to reports of weaker associations of the alcohol-cirrhosis connection, the place and importance of the Paris curve in the wider literature, as regards that connection, remains. For this reason, the Paris findings should be subjected to as much research scrutiny as they undoubtedly deserve.

Identification and dimension of the NAIRU

In this paper, we have re-examined the identification of the NAIRU and presented a well-defined reduced form for analysing the equilibrium unemployment rate, using a cointegrated VAR model. We have stated that the NAIRU estimates using the conventional reduced form (or Phillips curve) models are misleading since the natural rate of unemployment cannot be considered as a fixed point calling for the ceteris paribus assumption for all the data involved. This implies that the NAIRU estimates are unable to provide valuable information on the labour market status.

The econometric consequences of the ceteris paribus condition in economic theory

The ceteris paribus condition in economic theory assumes that the world outside the environment described by the theoretical model does not change, so that it has no impact on the economic phenomena under review. In this paper, we examine the econometric consequences of the ceteris paribus assumption by introducing a `state of the world’ variable into a well specified stochastic economic theory, and we show that the difference between the conditional distribution implied by the theoretical model and the actual conditional distribution of the data is due to different ways of conditioning on the state of the world. We allow the `state of the world’ variable to be, alternatively and equivalently, an index variable representing omitted variables, or a discrete random parameter representing a sequence of models. We construct a probability that can be interpreted as the upperbound of the probability that the ceteris paribus condition is correct. The estimated upperbound can in turn be interpreted as a measure of the information about the data-generating process that is provided by a theoretical model which is constrained by a set of ceteris paribus assumptions. In order to illustrate our findings from both a theoretical and an empirical perspective, we examine a linearized version of the real business cycle model proposed by King Plosser, and Rebello (1988b. Journal of Monetary Economics 21, 309–341).

Social Structure and Competition in Interfirm Networks: The Paradox of Embeddedness

This chapter aims to develop one of perhaps multiple specifications of embeddedness, a concept that has been used to refer broadly to the contingent nature of economic action with respect to cognition, social structure, institutions, and culture. Research on embeddedness is an exciting area in sociology and economics because it advances understanding of how social structure affects economic life. The chapter addresses propositions about the operation and outcomes of interfirm networks that are guided implicitly by ceteris paribus assumptions. While economies of time due to embeddedness have obvious benefits for the individual firm, they also have important implications for allocative efficiency and the determination of prices. Under the conditions, social processes that increase integration combine with resource dependency problems to increase the vulnerability of networked organizations. The level of investment in an economy promotes positive changes in productivity, standards of living, mobility, and wealth generation.

The Effect on Optimal Portfolios of Changing the Return to a Risky Asset: The Case of Dependent Risky Returns

When the return to a risky asset is altered an investor's optimal portfolio is likely to change. In working out the details of these changes for expected utility maximizing investors previous research has focused on portfolios composed of one risky and one riskless asset or two independent risky assets. This research considers portfolios where the risky returns can be stochastically dependent. Existing comparative static theorems are extended to the case of dependent risky returns with the independence assumption replaced by weaker restrictions. An investor's optimal portfolio is likely to change when the return to a risky asset is altered. In working out the details of these changes for expected utility maximizing investors most research has focused on portfolios composed of one risky and one riskless asset. Recently, Hadar and Seo (1990) extend and generalize this literature by considering portfolios containing more than one risky asset. They assume, however, that the risky returns are independently distributed. This research focuses on removing this independence restriction, allowing the risky returns to be stochastically dependents Two implications of Hadar and Seo's independence restriction play an important role in their analysis. First, independence allows one risky return to be altered without changing the marginal or the conditional cumulative distribution functions (CDF) for the others. Hadar and Seo make this their ceteris paribus assumption. Second, when the return to a risky asset is independent of other risky returns, the marginal and each of the conditional CDFs for that return can be changed in exactly the same way. Hadar and Seo assume this when they require the risky returns to be independent both before and after one return is altered. An assumption replacing each of these implications of independence is needed in

Towards a Symmetric Treatment of the Marshallian Demand Curve in the Product and Factor Market Analyses

where qd is the quantity demanded, X! is the own price of a good and the bars above the other included variables (such as prices of related goods, income, and taste) show that they are being held constant. The well established distinction between a change in quantity de manded and a change in demand is based on the above ceteris paribus assumption included in the definition of a demand curve: If a change in qd is due to a change in its own price, it is a change in quantity demanded; if it is due to a change in some other variables that were held constant, it

THE IMPORTANCE OF PRODUCED MEANS OF PRODUCTION IN UK AGRICULTURE

Neoclassical production theory assumes that outputs and inputs can be separated into two distinct commodity groups. However, this fails to take account of the presence of produced means of production in agriculture which undermine the ceteris paribus assumption on which partial equilibrium analysis is based‐a criticism identified as part of the broader Sraffian critique of neoclassical economics. A simulation exercise designed to investigate the importance of produced inputs in UK agriculture found evidence of perverse aggregate supply response resulting from the use of feedgrain, an output from the cereal sector, as a produced input in the livestock sectors. This empirical result lends some support to the Sraffian analysis; however, it is suggested that the perversity arises from failure to take account of the produced input, and that computing ‘net output’

HUMAN CAPITAL, PROPERTY RIGHTS, AND LABOUR MANAGED FIRMS

Since competition implies the elimination of surplus, firms will behave the same whether they are profit maximizing (PM-) firms, labour-managed income-permember-maximizing (LM-) firms, etc.; there is no surplus over which discretion can be exercised. Dreze (1976) elegantly demonstrates this 'equivalence' result. Most of the interest in this result in fact focuses on its baseline character. Thus Grossman and Hart (1986) argue that the allocation of residual rights may have efficiency consequences, when complete ex ante contracts are impossible, since the existence of ex post renegotiation may lead to opportunistic behaviour to improve bargaining positions. Such interaction will have implications for the determination of an optimal ownership structure. Similarly, it is interesting to ask how PM- and LM-systems will differ if the ceteris paribus assumption is relaxed in one or more respects. Ireland and Law (1982) survey a number of such causes of deviation from equivalence. Among these are 'utility bonuses' from self management (Ireland, 1981) and the well-known Furubotn-Pejovich effect or horizon problem (Furubotn and Pejovich, 1970; Jensen and Meckling, 1979). The horizon problem has received considerable attention. Essentially, a worker is less likely to contribute to an investment project than an entrepreneur since the worker can only fully enjoy the returns to the investment while remaining in the firm. The worker might leave the firm before all the returns to the investment have been earned or new workers might join the firm, having the right to share in the proceeds from former investments. The entrepreneur on the other hand has full property rights in the project and can sell these or not as he wishes. It is argued that the appropriate discount rate will thus be higher for the LM-firm. Since this difference in evaluating future returns leads to some investments which would be undertaken in an economy of PM-firms not being undertaken in an economy of LM-firms, asymmetric technology develops and destroys the equivalence property. The horizon problem is often seen as representing a considerable disadvantage for systems based on the labour-managed principle. In this paper we intend to address the question of human capital investment; in particular the kind of training that can only be accomplished within the workplace. It will be assumed that this training is costly, and that skills learnt in one firm are partly or wholly transferable to other firms. We distinguish between specific and general skill (see Becker, 1962): the former cannot be

Some Notes on Marshallian Supply Functions

This paper argues, in opposition to P. A. Samuelson, that Piero Sraffa's 1920s contribution to the cost controversy pleaded for abandoning the Marshallian approach in favor of a simultaneous determination of all prices. His critique distinguished those Marshallian supply functions lacking rigorous foundations from those based on sound arguments, pointing out the validity of some nonconstant cases and focusing on the analysis of the conditions that make the ceteris paribus assumption legitimate when the effects of variable returns cannot be neglected, rather than on the negligible size of these returns or on pure rhetoric, as Samuelson suggests. Sraffa's critique was soon misinterpreted along lines similar to those followed by Samuelson. Copyright 1991 by Royal Economic Society.

Electricity Demand in Multi-Family, Renter-Occupied Residences

This paper focuses on multi-family, renter-occupied housing where the landlord provides major appliances, a large residential sector that has not received widespread attention in the literature. Experimental data are used from a test where one group of households was billed directly for the electricity they consumed, while a control group had unlimited electric service included as part of the monthly rent. The empirical analysis yields short-run demand estimates that satisfy to a remarkable extent the ceteris paribus assumptions of demand analysis. This is the case for two reasons: (1) the households did not individually execute the appliance choice decision at various (unknown) times in the past, and (2) the stock of appliances upon which the derived short-run demand is conditional is identical for all households in the sample. A second important feature is emphasis on functional form. Examined in some detail is the question of the appropriate functional form for residential electricity demand. Finally, empirical results of the analysis are used to investigate the cost-effectiveness and welfare effects of installing submeters in existing multi-family residences.

Allocating a ‘Scarce’ Resource, Water in the West: More Market‐like Incentives Can Extend Supply, But Constraints Demand Equitable Policies

Abstract. The issue of water marketing in the western United States has generated much discussion in recent years. This is due, in part, to the commonly accepted notion that western water has become “dangerously” scarce. The nature and extent of this scarcity are examined in detail. While water may not be scarce in the West, cheap water certainly is. The optimality of water marketing is also dependent upon various ceteris paribus assumptions. These assumptions are questioned due to certain bydrologic uncertainties and external costs associated with the use and development of western water. Considerable benefit, particularly in expanding residential supply, can be achieved from more market‐like incentives to conserve in use. But the resource's social value about rights argues for policies based on equitable sharing.

ECONOMICS AND IMPACT ASSESSMENT: CETERIS PARIBUS OR MUTATIS MUTANDIS

Economic theory frequently uses ceteris paribus assumptions to hold complicating variables constant to analyze the effect of one variable on another. Policy‐makers must consider effects of policies with other things changing as they will (i.e., mutatis mutandis). Impact assessment can recon‐ cile the often narrow approach of economic analysis and the need for broad consideration of implications. The methods of impact assessment can pro‐ vide a proper place for economic analysis in policy assessment and help to assure that a broad range of impacts are included to determine the economic effects of events and decisions.

The determinants of international creditworthiness and their policy implications

The present paper utilizes an empirical measure of creditworthiness based on bankers' perceptions to estimate the effect of various variables hypothesized to influence assessments of countries' debt-servicing capacity. The data pertain to a cross section of countries within the period 1979–1983. Such estimates necessarily employ a ceteris paribus assumption, which prevents a realistic assessment of the effects generated by policy changes. The second part of the paper develops, therefore, a dynamic simulation model of a hypothetical average economy. The simulations allow analysis of changes in macroeconomic variables and creditworthiness over time within a system that maintains accounting identities and behavioral constraints. Several changes in policy variables are considered that highlight the importance of export expansion. The latter is, of course, an often suggested policy objective, but the present paper demonstrates its effectiveness in terms of a somewhat nonstandard criterion.

The implications of demographic changes for publicly funded medical insurance costs

This paper explores the changes in public expenditures for Medicare and Medicaid that would result between 1980 and 2040 under the ceteris paribus assumption, under the age, sex, and family structure projections of John Wilkin of the Social Security Administration. Inflation aside, costs are shown to approximately double as a percent of the payroll of active workers. The most dramatic increases occur in nursing home costs: Costs for welfare recipients under age 65 change little except for medical care inflation. This latter results from the assumed low birth rates assumed in the population forecast.

Comments on "Shadow Pricing and Macroeconomic Analysis: Some Illustrations from Pakistan" by Squire et al.

The paper is too long for conveying the message that shadow pricing used as a method of analysis in micro-economic issues of project selection is also useful for analysing macro-economic issues, such as foreign and domestic borrowing by the government, emigration, etc. Much of the methodological discussion in the paper is available in a readily accessible form in several publications of each of the coauthors; In contrast, the specific application of the methodology to Pakistani problems is much too cavalier. While it is hard to disagree with the authors' claim that shadow pricing "constitutes a relatively informal attempt to capture general equilibrium effects" (p. 89, emphasis added), their depiction of traditional analysis is a bit of a caricature: essentially it sets up a strawman to knock down. After all in the traditional partial equilibrium analysis, the caveat is always entered that the results are possibly sensitive to violation of the ceteris paribus assumptions of the analysis, though often the analysts will claim that extreme sensitivity is unlikely. Analogously, the shadow pricing method presumes "stationarity" of shadow prices in the sense that they are “independent of policy changes under review" (p. 90). The essential point to be noted is that the validity of this assertion or of the "not too extreme sensitivity" assertion of partial equilibrium analysts can be tested only with a full scale general equilibrium model! At any rate this reviewer would not pose the issue as one of traditional partial equilibrium macro-analysis versus shadow pricing as an approximate general equilibrium analysis, but would prefer a description of project analysis as an approach in which a macro-general equilibrium model of a manageable size (implicit or explicit) is used to derive a set of key shadow prices which are then used in a detailed micro-analysis of projects.

Industrial applications of cross-impact analysis

The implicit or explicit ceteris paribus assumption usually made in the planning of economic systems (e.g. industries) is acceptable and accepted during periods of regular economic development; in this context, sensitivity analysis around the central projection is often used in order to measure effective elasticities to unexpected small perturbations of the system. In periods of structural change, unpredictable major events greatly reduce the value of any trend projection, and the ceteris paribus assumption has to be replaced by ‘scenarios’ of the future environment. The causal structure which generates these events is unknown; in such a situation, it seems reasonable to rely upon ‘opinions’ in order to assess the a priori probabilities of these events. Cross-impact analysis is one of the methods developed in order to improve human probability judgments of single and pairs of events and in order to deal explicitly with higher order interactions; in particular, cross-impact allows for the computation of the most probable combination of the events considered, or ‘most probable scenario’. In the industrial planning process, this ‘most probable scenario’ can be used as the set of exogeneous conditions for the central projection.

REVEALED PREFERENCE METHODS AND THE PURE THEORY OF THE COST OF CAPITAL

IN A CLASSIC 1958 PAPER Professors Modigliani and Miller (MM) [6] showed, given assumptions of 1) existence of equivalent return classes, 2) perfect capital markets (i.e. no taxes, transactions costs, etc.) with atomistic competition prevailing and 3) existence of a bond market in which both firms and investors can borrow at same certain rate of interest, that the market value of any firm is independent of its capital structure From this it directly follows that . average cost of capital to any firm is completely independent of its capital structure The equivalent return or were deemed to be closely related to industry groupings, identifiable only by resort to empirical methods (footnote 9). The conclusions reached by authors in paper are substantiated by invoking arguments within these classes. Needless to say, a part of literature subsequently generated dealt with rationality of assumption of risk classes and effectiveness of process in establishing desired relations. Unfortunately arguments made along these lines are empty ones. The very same authors, some years later in a footnote to an equally prominent paper [5, footnote 26], recognize (in discussion of dividend policy) that and arbitrage are unnecessary. But it wasn't until some years later that theorists took up challenge to prove propositions set forth in original work sans arbitrage and, in fact, this original method of proof is reproduced in virtually all corporate finance texts. Hirshleifer [2], [3], [4] was apparently first on record to show that MM holds without arbitrage. He employed state-preference approach to analyze investor choice under risk. Robichek and Myers [9] extend analysis of capital structure in state-preference framework and find that with respect to Proposition I, no restrictions are necessary concerning possible growth patterns in operating income. In addition an original assumption of homogeneous expectations [6, p. 129] is unnecessary. However, riskless borrowing assumption is required since costly bankruptcy will lead to a violation of Proposition I. An additional ceteris paribus assumption is required since it is possible for changes in future investment and financing decisions made in conjunction with (current) capital structure decision to result in a deviation from market value invariance.

A Dynamic Long-Run Model of the Livestock-Feed Sector

NECESSITY, it has been said, is the mother of invention. In this paper we present a dynamic recursive model for the livestock-feed sector designed for the specific purpose of making long-run projections. The commodities analyzed are cattle and calves, hogs, sheep and lambs, chickens, turkeys, eggs, milk, and feed grains and other concentrates. While this model is not an invention in the theoretical sense [see, for example, 9, pp. 12-15] it may qualify in the practical sense. Numerous questions are asked that require an integrated supply-and-demand model for adequate solutions or answers. This is especially true in macro and long-run analysis where the ceteris paribus assumption is inappropriate. For example, such questions as What will happen to farm income if beef production expands 20 percent?, If exports of wheat are cut 50 percent, what kind of impact will this have on the price of feed?, and How much beef will be consumed in the U.S. in 1970? require an integrated supply-and-demand analysis to provide satisfactory answers. It is not very realistic to assume that production of beef does not affect the price of pork, that wheat supply does not affect the price of feed grains, or that we can estimate the consumption of beef in the future by assuming that prices will be the same then as they are today. Of course, economists know that these interdependences exist and they have theoretical ideas of how to deal with them. But the real problem, as demonstrated in earlier studies by Hildreth and Jarrett [6], Cromarty [3], Hasseler [5], and Brandow [2], lies in estimating or developing a supply-anddemand structure of the agricultural sector or agricultural subsectors that is adequate for answering such questions as those posed above. 5l Since most economists are more familiar with short-run predictions work, it is useful to point out where research methods applicable to long-run projections differ. Here, we define the long run as being a period of inore than one year. This is quite arbitrary, of course. It is often convenient and reasonably sufficient to base short-run forecasts on a single equation. That is, one may assume that a given variable,