Equilibrium Level Of Output Research Articles

R. Lucas's Research Program: Far Too Narrow with Too Many Special Assumptions

R. Lucas's Research Program: Far Too Narrow with Too Many Special Assumptions

Coordination through social learning in a general equilibrium model

This paper analyses coordination through social learning in a general equilibrium model. We use a fully decentralized economy, in which households and firms exchange labour and consumption goods in the corresponding markets with potential rationing. Their strategies are updated through an evolutionary learning process based on imitation and random experimenting. This learning process induces substantial coordination failures, especially between firms, which lead almost systematically to below equilibrium output levels and social welfare losses. The main underlying mechanism is a self-reinforcing uneven distribution of households’ income, which results in a lack of aggregate demand.

Retiring the Short-Run Aggregate Supply Curve

The author argues that the aggregate demand/aggregate supply (AD/AS) model is significantly improved—although certainly not perfected—by trimming it of the short-run aggregate supply (SRAS) curve. Problems with the SRAS curve are shown first for the AD/AS model that casts the AD curve as identifying the equilibrium level of output associated with each price level (as found in most intermediate macroeconomics textbooks). Problems are then shown for the AD/AS model in which the AD curve is more modestly assumed to capture the relationship between the price level and aggregate expenditures (as found in principles of economics textbooks).

Volatility, growth and cycles

The paper investigates the factors affecting the equilibrium level of output in a panel of European countries. Output depends on factor inputs and on the technology and the efficiency with which those factors are used. Efficiency may be driven by international conditions and institutional changes such as the Single Market Programme in Europe. The technology indicators used in this study depend upon research and development and also include the level of labour efficiency which is indexed on skills data. The level of the capital stock depends upon the user cost of capital, which may depend upon risk and hence on the volatility of the economy. Recent literature suggests that real exchange rate volatility is important in determining investment and therefore has an impact on equilibrium output. A link of this form is uncovered for the European economies. If policy can reduce these volatilities then it can also raise equilibrium output.

Export and Strategic Currency Hedging

This paper examines an international Cournot duopoly wherein a home firm and a foreign firm compete in the home market under exchange rate uncertainty. The foreign exporting firm, being risk averse, has incentives to hedge its exchange rate risk exposure. In a two-stage setting, we show that hedging via an unbiased currency futures market acts as a strategic device. In particular, under either constant or decreasing absolute risk aversion, an increase in the hedging volume of the foreign firm promotes its exports and deters the home firm’s output. In contrast to the well-known full-hedging result in a perfectly competitive environment, we find that the foreign firm over-hedges for strategic reasons. Furthermore, the separation result from the hedging literature under perfect competition no longer holds in our duopoly framework, i.e., equilibrium output levels depend on the risk attitude of the foreign firm as well as the probability distribution of the spot exchange rate.

Disclosing vs. Withholding Technology Knowledge in a Duopoly

We study firms incentives to transfer knowledge about production technology to a rival in a Cournot duopoly. In a setting where two technologies are available, a technology is characterized by its associated cost function and no single technology is strictly superior to the other. A firm has superior information if it knows both techniques and the other only one. Cost efficiency may be reversed after the voluntary disclosure, so that the rival's costs are improved at the equilibrium level of output. Adding R&D investments to the picture, we find that a firm can decide to invest just for the purpose of acquiring knowledge that will be transferred and not used. Furthermore, for the same point in the parameter space, the acquisition of full knowledge may occur or not as a function of the initial distribution of information.

DISCLOSING VERSUS WITHHOLDING TECHNOLOGY KNOWLEDGE IN A DUOPOLY*

We study firms’ incentives to transfer knowledge about production technology to a rival in a Cournot duopoly. In a setting where two technologies are available, a technology is characterized by its associated cost function and no single technology is strictly superior to the other. A firm has superior information if it knows both techniques and the other only one. Cost efficiency may be ‘reversed’ after the voluntary disclosure, so that the rival's costs are improved at the equilibrium level of output. Adding R&D investments to the picture, we find that a firm can decide to invest just for the purpose of acquiring knowledge that will be transferred and not used. Furthermore, for the same point in the parameter space, the acquisition of full knowledge may occur or not as a function of the initial distribution of information.

The Role of Consumer's Risk Aversion on Price Rigidity

This paper aims at contributing to the research agenda on the sources of price stickiness, showing that the adoption of nominal price rigidity may be an optimal firms' reaction to the consumers' behavior, even if firms have no adjustment costs. With regular broadly accepted assumptions on economic agents behavior, we show that firms' competition can lead to the adoption of sticky prices as an (sub-game perfect) equilibrium strategy. We introduce the concept of a consumption centers model economy in which there are several complete markets. Moreover, we weaken some traditional assumptions used in standard monetary policy models, by assuming that households have imperfect information about the inefficient time-varying cost shocks faced by the firms, e.g. the ones regarding to inefficient equilibrium output levels under flexible prices. Moreover, the timing of events are assumed in such a way that, at every period, consumers have access to the actual prices prevailing in the market only after choosing a particular consumption center. Since such choices under uncertainty may decrease the expected utilities of risk averse consumers, competitive firms adopt some degree of price stickiness in order to minimize the price uncertainty and attract more customers.

Predation, Protection, and Accumulation: Endogenous Property Rights in an Overlapping Generations Growth Model

We study a simple growth model with overlapping generations in which property rights are insecure. Insecurity of property rights leads to predation. Due to predation some of the resources are used for protection purposes. Both predation and protection remove resources from the accumulation process. In the model individuals allocate their labor between working for firms and appropriating output from them. Firms allocate their capital between production and protection. Without government, the model generates a unique but inefficient equilibrium. We show that in this equilibrium the level of output is increasing in the rate of effectiveness of protection, the relative utility of honesty, and the discount rate. Further, the equilibrium level of output is dynamically inefficient. We then extend the model to include a government as the sole provider of the public good “protection”. Protection is assumed to be financed by a capital tax imposed on firms. The model then yields multiple equilibria, with both a stable high-protection low-predation equilibrium, and a stable low-protection high-predation equilibrium. Which equilibrium a country is most likely to achieve, and how difficult it is for a country to move to the more desirable low-predation high-protection equilibrium, depend crucially on the parameters of the model describing the economy’s institutional structure. Hence, the results of the model support the emphasis placed by the World Bank on the importance for growth of strengthening institutional structures in developing countries.

Distributional effects of generic dairy advertising throughout the marketing channel

AbstractIf generic advertising is effective at increasing the demand for the advertised product, then there will not only be direct effects on the sponsors of the advertising, but also indirect effects on other market participants. This article addresses two such distributional issues using the U.S. dairy industry as a case study. First, how are fluid milk and cheese processors impacted by cheese and milk advertising conducted by farmers? We find that the welfare of both processor classes is improved due to the dairy farmer advertising program for fluid milk and cheese products. Second, how are fluid milk (or cheese) processors impacted by the other product's farmer‐funded advertising? As expected, own‐product advertising increased equilibrium output levels, while cross‐advertising impacts slightly reduced supply levels. Generic advertising, regardless of product, positively affected fluid milk processor gross margins, while increases in cheese advertising reduced the price margin for cheese processors. In general, own‐product advertising had larger price margin impacts for fluid milk processors, while cheese processors benefited more from larger supply gains. These larger supply effects translated further into larger increases in raw milk costs tightening cheese price margins. Because changes in cheese supplies affect both Class I and Class III prices, input prices to processors are affected relatively more by increases in cheese advertising, as opposed to fluid milk advertising. The relatively larger gains in output prices, combined with lower relative increases in input class prices contributed to higher producer welfare impacts for fluid milk processors than cheese processors when confronted with equivalent increases in their own‐product advertising. [EconLit citations: Q130, Q180]. © 2003 Wiley Periodicals, Inc. Agribusiness 19: 289–300, 2003.

The Effects of Capital Controls on Exchange Rate Volatility and Output*

This paper extends the Dornbusch model of overshooting exchange rates to discuss both exchange rate and output effects of capital controls that involve additional costs for International asset transactions.We show that, on the one hand, such capital controls have the merit of reducing the volatility of exchange rate volatility in the sort run and induces costs for the real sector in the form of lower equilibrium output levels. [F32, F41]

The Effects of Capital Controls on Exchange Rate Volatility and Output

This paper extends the Dornbusch model of overshooting exchange rates to discuss both exchange rate and output effects of capital controls that involve additional costs for international asset transactions. We show that, on the one hand, such capital controls have the merit of reducing the volatility of exchange rates following a monetary shock. On the other hand, the implementation increases exchange rate volatility in the short run and induces costs for the real sector in the form of lower equilibrium output levels.

Causal graphs and unconfoundedness

For a Cournot duopoly with a foreign firm exporting to the home firm's market hedging against unfavorable shifts in the stochastic spot exchange rate is analyzed. In a two-stage setting with product market and hedging decisions we show that hedging can be used as a strategic device. Under constant and decreasing absolute risk aversion an increase in hedging volume by the foreign firm promotes its exports and lowers the equilibrium output of the home firm. In contrast to the well-known full-hedging result in a perfectly competitive environment, we find that the foreign firm will over-hedge for strategic reasons. Furthermore, the separation result from the literature on hedging under perfect competition no longer holds in the duopoly framework, i.e., equilibrium output levels depend on the preference of the foreign firm and the probability distribution of the spot exchange rate.

Insider trading and managerial incentives

We derive conditions under which permitting manager “insiders” to trade on personal account increases the equilibrium level of output and the welfare of shareholders. These increases are produced by two effects of insider trading. First, insider trading impounds information about hidden managerial actions into asset prices. This impounding of information allows shareholders to make better personal portfolio-allocation decisions. Second, allowing insider trading can induce managers to increase, on average, the correlation between their personal wealth and firm value beyond the level dictated by the employment relationship alone. This increased correlation increases managerial incentives. When these two effects are only weakly present, permitting insider trading harms shareholders, because insider trading reduces shareholder control over the performance–compensation relationship. In addition, when managerial effort incentives are high and corporate governance costs are low, managers may prefer insider-trading restrictions because such restrictions force shareholders to offer them a larger fraction of output through the employment relationship.

The Effects of Capital Controlson Exchange Rate Volatility and Output

This paper extends the Dornbusch model of overshooting exchange rates to discuss both exchange rate and output effects of capital controls that involve additional costs for international asset transactions. We show that, on the one hand, such capital controls have the merit of reducing the volatility of exchange rates following a monetary shock. On the other hand, the implementation increases exchange rate volatility in the short run and induces costs for the real sector in the form of lower equilibrium output levels.

The Effects of Capital Controls on Exchange Rate Volatility and Output

This paper extends the Dornbusch model of overshooting exchange rates to discuss both exchange rate and output effects of capital controls that involve additional costs for international asset transactions. We show that, on the one hand, such capital controls have the merit of reducing the volatility of exchange rates following a monetary shock. On the other hand, the implementation increases exchange rate volatility in the short run and induces costs for the real sector in the form of lower equilibrium output levels.

Strategic Trade Policy Design with Asymmetric Information and Public Contracts

This paper examines strategic trade policy under asymmetric information with publicly observable contracts. We analyse both the cases of unilateral and bilateral intervention. We find that the requirement of incentive compatibility undermines the strategic precommitment effect when public funds are costly, even with no restrictions on the form of the policies. Second, when firms sell substitute goods, the introduction of a rival interventionist government may reduce the cost of informational rents to each government. Third, it turns out that under bilateral intervention there exists a continuum of symmetric equilibria with levels of output and corresponding levels of welfare in the exporting countries which can be ranked. The requirement of ex post participation constraints for the firm limits the set of subsidies which can be offered to the firm. In particular, under bilateral intervention, the equilibrium levels of output which are implemented under adverse selection are below their values under ex ante uncertainty, i.e., below the equilibrium levels of output which are achieved when firms sign their contracts before the realization of their costs.

SOCIAL STATUS, CULTURE AND ECONOMIC PERFORMANCE*

In analysing the differences in productive capacity among economies it is usual to concentrate on the physical aspects of the population, the different attributes of capital, including human capital, and on the available production technologies. Societies also differ in culture in ways which are relevant for economic performance. The sociological literature recognises that different occupations have different social status and that workers benefit not only from the wage they receive but also from being associated with a particular occupation. Cultural differences among societies may translate into different status of occupations and can, therefore, affect the choice of education and occupation and, consequently, the equilibrium level of output and wages. conversely, the economic choices of individuals influence the social status of occupations. In particular, it is well established by sociological research that the social status of an occupation is influenced by economic attributes such as the average wage and the average level of education in the occupation. A major objective of our work is to illustrate that sociological and economic approaches can be combined within a unified framework. This is in contrast to some social scientists who view the two approaches as competing with each other (PhelpsBrown, I 977, ch. 4). In this paper we construct a simple general equilibrium model in which both wages and status are determined endogenously. We show that changes in the demand for status, triggered by changes in preferences or in income distribution, influence the wage structure, the level of aggregate output and economic welfare. The link between status and aggregate output is created by the fact that differences in occupational status imply occupational wage differences among workers of the same skill. The larger is the demand for status the larger is the wage gap and the lower is aggregate output. Our discussion of status is closely related to the economic analysis of discrimination against ethnic or racial groups (Becker, I 97 I ; Arrow, I 973).

Imperfect competition, price adjustment costs, and the long-run Philips curve

It is argued in this paper that when prices are costly to adjust, fully anticipated inflation will have aggregate real effects on equilibrium levels of output and employment. This non-neutrality of money is the result of fully optimizing behavior by individual firms. Sufficient conditions for strict monetary neutrality are developed. However, these are very restrictive, and most unlikely to be realized in practice. Inflation may cause equilibrium output levels to rise or fall depending on the shape of individual profit functions. Numerical simulations indicate that under certain conditions these effects can be quite significant.

Entry and Exit on the Competitive Fringe

Microeconomic theories of industry evolution reserve key roles for the entry and exit of firms. Competitive models of industry supply often assume that individual firms have Ushaped long run average cost curves; in consequence, an industry's output adjustment in movement from one long run equilibrium to another is entirely accomplished through the entry and exit of firms, rather than through changes in long-run equilibrium output of individual firms. In empirical applications, the speed of movement to new equilibrium levels of output and price (measured by the time it takes for profits to return to competitive levels following a demand shock) clearly depends upon the ease of entry and exit.' However, the simplest competitive models have a clear theoretical weakness: abundant evidence against U-shaped long run average cost curves precludes a simple identification of entry with industry expansion and exit with industry contraction. Expansion of industry supply can be met either by incumbents or entrants, and we have little empirical evidence of the division. Entry conditions are also a staple of oligopoly and monopoly models. Potential entry constrains the pricing options open to industry leaders and actual entry (of new firms and new products) erodes, at varying rates, the market power of incumbent firms. If actual entry responds rapidly to profit opportunities, then the persistent exercise of monopoly power will be rare. However, analyses of monopoly and oligopoly models typically approach entry indirectly, by inferring that persistent profit differentials reflect high barriers to entry. There are few direct tests of the effects of such barriers on actual entry. Despite their importance, very few empirical studies of entry and exit exist. Severe data limitations restrict both the number of studies and the scope of extant analyses. The research reported in this paper provides measures of entry and exit in 46 food manufacturing industries during the 1976-82 period. Measures of incidence (the number of firms), as well as extent (the size of firms), are provided. The analysis also distinguishes between diversified firms and specialist producers. Entry and exit rates vary considerably across industries, and the paper reports the results of statistical analyses that account for industry differences in entry and exit rates by specialist firms.