Factor Price Ratios Research Articles

Market access, agro-ecological conditions, and Boserupian agricultural intensification patterns in Kenya: Implications for agricultural programs and research

Abstract While Boserupian intensification processes have been documented in many parts of Africa, there is regional variation in the trends in relative prices of land, labor, and capital inputs such as fertilizer. Some rural areas are experiencing unprecedented spikes in land values associated with growing land scarcity, improved market access, and agricultural commercialization potential, while others remain economically isolated and less influenced by the transformational changes occurring elsewhere in the region. This study uses a panel spanning 13 years of 1208 smallholders in Kenya to assess whether households’ response to changes in relative factor prices varies by agro-ecological potential and market access. In areas of low agro-ecological potential, households respond to rising land prices by cultivating less land and applying fertilizer more intensively but do not appear to adjust fertilizer use in response to changing fertilizer prices. By contrast, households in areas of high agro-ecological potential do not appear to adjust the quantity of land under cultivation in response to changing input prices but increase fertilizer use as land prices rise and fertilizer prices fall. Finally, households with better market access conditions appear slightly more responsive to land price changes than do those with poor market access. Given anticipated trends in factor price ratios, this heterogeneity suggests that sustainable forms of agricultural productivity growth will require anticipating the kinds of farm management technologies that will be suitable for farmers in different conditions. This highlights the need for agricultural technology generation and diffusion programs that assist smallholders to overcome the constraints that may prevent them from adapting sufficiently on their own.

A Quantal Response Statistical Equilibrium Model of Induced Technical Change in an Interactive Factor Market: Firm-Level Evidence in the EU Economies.

This paper studies the pattern of technical change at the firm level by applying and extending the Quantal Response Statistical Equilibrium model (QRSE). The model assumes that a large number of cost minimizing firms decide whether to adopt a new technology based on the potential rate of cost reduction. The firm in the model is assumed to have a limited capacity to process market signals so there is a positive degree of uncertainty in adopting a new technology. The adoption decision by the firm, in turn, makes an impact on the whole market through changes in the factor-price ratio. The equilibrium distribution of the model is a unimodal probability distribution with four parameters, which is qualitatively different from the Walrasian notion of equilibrium in so far as the state of equilibrium is not a single state but a probability distribution of multiple states. This paper applies Bayesian inference to estimate the unknown parameters of the model using the firm-level data of seven advanced OECD countries over eight years and shows that the mentioned equilibrium distribution from the model can satisfactorily recover the observed pattern of technical change.

Testing Stolper-Samuelson Theorem in the Indian Context

The purpose of this paper is to examine the Stolper-Samuelson Theorem in the context of India which is one of the central results of Heckscher-Ohlin theory. This theorem provides a definite way of analysing the effect of change in the prices of goods on the prices of factors of production due to tariffs. Since the theorem has been couched in terms of increasing tariffs however, the paper attempts to look for obverse of this theorem by emphasising on a certain issue. Since tariffs are declining, then it is argued that import-substituting industries would suffer at the cost of export-promoting industries. The study deals with three variables-Factor Price Ratio (FPR), Terms of Trade (TOT) and Wholesale Price Index (WPI) covering period 1992-2010. Year has been taken as the exogenous variable. The methodology has been developed for the construction of semi-log and multiple regression models to analyse the impact of Terms of Trade on Factor Price Ratio. The paper shows that Stolper-Samuelson Theorem does not hold good in the case of India and it is the Wholesale Price Index which actually shows a favourable impact on FPR.

Resource Scarcity Gradients and Agricultural Technologies

The green revolution converted the Indo-Gangetic Plains (IGP) into South Asia's cereal basket. The recent slowdown in cereal productivity growth and continuing poverty in the IGP pose a major challenge to agricultural research and development. In addressing this challenge, it is useful to revisit the resource scarcities that farmers face across the vast IGP. A scoping study using village surveys in 12 clusters along an agro-ecological gradient in the Indian IGP and secondary data suggest some marked gradients in factor ratios and factor prices. Labour–land factor ratios and price ratios alone, however, can be misleading as they fail to capture the increasingly important role of capital in the post-green revolution setting. Relative to other IGP regions, the green revolution heartland is relatively capital-abundant, explaining the advent of both land-saving and labour-saving technologies in the north-western IGP. Further downstream, the densely populated eastern IGP are particularly capital-scarce. Agricultural innovations emerging from either area are unlikely to be directly adequate for the other, calling for more investment in adaptive agricultural research to develop innovations in line with the prevailing resource scarcities.

The Elasticity of Substitution and Characteristics of New Investments

Changes in the interest rate and the capital cost will influence important characteristics of investments, such as the expected life time, the factor intensity and the factor productivity of new capital goods. When Harrod-neutral technical progress is endogenous and variable, an increased interest rate will lower the lifetime as well as the factor intensity of the capital good in the Cobb-Douglas case, while there will be a reversed outcome when the substitutability between factor inputs is low. The latter outcome can be interpreted in terms of a reswitching process, that is, one identical factor intensity can arise at two different factor price ratios.

An error correction model of induced innovation in UK agriculture

Cointegration techniques are applied to a model of induced innovation based on the two-stage Constant Elasticity of Substitution (CES) production function. This approach results in direct tests of the inducement hypothesis, which are applied to agricultural data for the United Kingdom from 1953 to 2000. The time series properties of the variables are checked, cointegration is established and an Error Correction Model (ECM) constructed, which attempts to separate factor substitution from technological change. Finally, the ECM formulation is subjected to causality tests, which show that the factor price ratio for chemicals and land is Granger-prior to the factor-saving bias of technological change. However, long-run relative prices are not causally prior to the machinery/labour ratio. This results from perturbations in the user cost of machinery, caused by oil price shocks. Thus, the Induced Innovation Hypothesis (IIH) may explain long-run transformations like the mechanical and fertilizer revolutions that dominated the twentieth century, but not reflect short-run price volatility.

Occupational choice and development

Abstract The rise in world trade since 1970 has been accompanied by a rise in the geographic span of control of management and, hence, also a rise in the effective international mobility of labor services. We study the effect of such a globalization of the worldʼs labor markets. The worldʼs welfare gains depend positively on the skill-heterogeneity of the worldʼs labor force. We find that when people can choose between wage work and managerial work, the worldwide labor market raises output by more in the rich and the poor countries, and by less in the middle-income countries. This is because the middle-income countries experience the smallest change in the factor-price ratio, and where the option to choose between wage work and managerial work has the least value in the integrated economy. Our theory also establishes that after economic integration, the high skill countries see a disproportionate increase in managerial occupations. Using aggregate data on GDP, openness and occupations from 115 countries, we find evidence for these patterns of occupational choice.

Evidence of Induced Innovation in US Sectoral Capital’s Shares

We use annual data on capital’s share and relative factor prices from 35 US industries from 1960 to 2005 to test the induced innovation hypothesis. We derive, from a production function framework, testable implications for the effect of contemporaneous and lagged factor price ratios on capital’s share of production. The predicted effect is positive or negative depending on the elasticity of substitution between labor and capital. From panel regressions, the estimated effect of the contemporaneous factor price ratio implies an elasticity of substitution that is less than unity, consistent with the consensus from the literature. Based on this, our negative estimated effects for lagged price ratios are both statistically significant and consistent with the induced innovation hypothesis.

Evidence of Induced Innovation in US Sectoral Capital’s Shares

We use annual data on capital´s share and relative factor prices from 35 US industriesfrom 1960 to 2005 to test the induced innovation hypothesis. We derive, from a productionfunction framework, testable implications for the effect of contemporaneous and lagged factorprice ratios on capital´s share of production. The predicted effect is positive or negativedepending on the elasticity of substitution between labor and capital. From panel regressions, theestimated effect of the contemporaneous factor price ratio implies an elasticity of substitutionthat is less than unity, consistent with the consensus from the literature. Based on this, ournegative estimated effects for lagged price ratios are both statistically significant and consistentwith the induced innovation hypothesis.

The aggregate elasticity of factor substitution with middle products

The elasticity of substitution between factors in production relates the change in the ratio of factors used in a production process to a given change in the factor price ratio. An aggregate concept of such an elasticity relates a change in overall factor endowments to the resulting change in factor prices. For a closed economy the behavior of consumers is an important part of such an aggregate elasticity, since endowment changes can bring about changes in commodity prices and resulting adjustments to factor prices. For a small open economy, commodity prices in typical models are exogenous. In the model with middle products, all final consumer goods are non-traded, so that local consumer behavior can affect factor prices. The aggregate elasticity of substitution is shown to be an average of production elasticities and demand elasticity even for a small open economy.

Specialization Patterns and the Factor Bias of Technology

Development accounting exercises based on an aggregate production function find technology is biased in favor of a country's abundant production factors. We provide an explanation for this finding based on the Heckscher-Ohlin model. Countries trade and specialize in the industries that use intensively the production factors they are abundantly endowed with. For given factor endowment ratios, this implies smaller international differences in factor price ratios than under autarky. Thus, when measuring the factor bias of technology with the same aggregate production function for all countries, they appear to have an abundant-factor bias in their technologies.

Openness and inequality in developing countries: A review of theory and recent evidence

Summary Increased openness affects income inequalities within developing countries by affecting factor price ratios, asset inequalities, spatial inequalities, gender inequalities, and the amount of income redistribution. Most time-series studies find that greater openness has increased the relative demand for skilled labor, but most cross-country studies find that greater openness has had little impact on overall income inequality. One possible explanation is that countries selected for time-series analysis are not representative of all developing countries. Another is that the effects of openness on income inequality via the relative demand for skilled labor have been offset by its effects via other channels.

Testing the induced innovation hypothesis: an error correction model of South African agriculture

Abstract This paper applies cointegration techniques to a model of induced innovation based on the two-stage constant elasticity of substitution (CES) production function. This approach results in direct tests of the inducement hypothesis, which are applied to data for South African commercial agriculture for the period 1947–1991. South African data is used because the policy changes have been substantial enough that the factor and price ratios have turning-points, rather than being monotonic. The time series properties of the variables are checked, cointegration is established, and an error correction model (ECM) constructed, allowing factor substitution to be separated from technological change. Finally, the ECM formulation is subjected to causality tests, which show that both the factor price ratios and R&D and extension expenditures are Granger-prior to the factor-saving biases of technological change. Thus, each stage of the analysis corroborates the inducement hypothesis. However, straightforward price-inducement is only part of the explanation of changes in factor ratios. Policy-induced innovation, in response to tax concessions and subsidised credit, is also present.

Testing the induced innovation hypothesis: an error correction model of South African agriculture

AbstractThis paper applies cointegration techniques to a model of induced innovation based on the two‐stage constant elasticity of substitution (CES) production function. This approach results in direct tests of the inducement hypothesis, which are applied to data for South African commercial agriculture for the period 1947–1991. South African data is used because the policy changes have been substantial enough that the factor and price ratios have turning‐points, rather than being monotonie. The time series properties of the variables are checked, cointegration is established, and an error correction model (ECM) constructed, allowing factor substitution to be separated from technological change. Finally, the ECM formulation is subjected to causality tests, which show that both the factor price ratios and R&D and extension expenditures are Granger‐prior to the factor‐saving biases of technological change. Thus, each stage of the analysis corroborates the inducement hypothesis. However, straightforward price‐inducement is only part of the explanation of changes in factor ratios. Policy‐induced innovation, in response to tax concessions and subsidised credit, is also present.

POLICY INDUCED INNOVATION IN SOUTH AFRICAN AGRICULTURE

This paper examines whether the development path of South African agriculture has been consistent with its resource endowments. Within an induced innovation framework the two stage constant elasticity of substitution (CES) production function is used and results in a direct test of the inducement hypothesis which are applied to data for South African commercial agriculture for the period 1947–91. Cointegration is established, and an error correction model (ECM) constructed. The results indicate that factor price ratios are not the sole cause of factor-saving biases of technological change. Public choice and macroeconomic incentives played a significant role resulting in a distorted development path.

Shadow Factor Price Convergence and the Response of Chinese State-Owned Construction Enterprises to Reform

A generalized (nonminimum or shadow) cost function is used to evaluate the response of Chinese state-owned construction enterprises to economic reforms from 1985 to 1991. Generalized cost function estimates are used to calculate the variances of the shadow factor price ratios that characterize price efficiency, and these variances are regressed against reform variables to determine whether convergence took place. There is some evidence of improved technical efficiency, and competitive bidding reforms appear to have had some effect in improving factor price efficiency. However, there is no general evidence for the convergence of factor price inefficiency, and the general response to reform is either negative, insignificant, or inconsistent. J. Comp. Econom., August 1995, 21(1), pp.54-81. University of Nevada, Reno, Nevada 89557-0016.

Tax incidence in a two-sector growing economy with perfect foresight: Long-run analysis

The purpose of this paper is to re-examine the long-run incidence of taxation. In so doing, we shall employ a two-sector perfect foresight equilibrium model with either a constant and variable discount rate. In the former a change in a personal income tax or any selective tax (e.g. a commodity, payroll, or profit tax) on the investment goods sector affects either the factor price or factor income ratio. All selective taxes on the consumption goods sector are neutral in the sense that they do not affect either ratio. In the latter only the commodity tax on the consumption goods is still neutral.

The Welfare Effect of Changes in Factor Intensities

This paper attempts to show the welfare effect of changes in factor intensities. The standard two output-two input trade model is used. The welfare of a country could increase, decrease or re main constant after a change in the factor intensities of an industry. The outcome depends on the factor prices which prevail in the country when the change in factor intensities takes place. It has been shown by Lizondo, Johnson and Yeh(1981) how changes in the factor intensities of industries affect the shape of the production possibility curve.1 The pur pose of this paper is to analyze geometrically how changes in the factor intensities of in dustries would affect the welfare of the country. The standard two factor, two output trade model will be used in this study. The factors are L(labor) and K(capital). The outputs are the capital intensive good X and the labor intensive good Y. All production functions are homogeneous of the first degree. It is also assumed that the country con cerned is a small country so that it faces a given international output price line. In Figure 1, TT is the initial production possibility Suppose that there is a de crease in the capital intensity of X industry. TT' will be the new production possibility curve after the change in factor intensities.2 In Figure 2, x is an isoquant of the capital intensive good X. After the decrease in the capital intensity of X industry, x ' is the new isoquant representing the same amount of X as x. Isoquants x and x' are tangent to line aa. Line aa is referred to as the factor price line. At the reference factor price ratio measured by line aa, the same amount of good X is produced with the same factor cost before and after the change in factor intensities. However, at any factor price ratio which is greater than * Mr. Yeong-Her Yeh is Professor in the Department of Economics, University of Hawaii at Manoa, Honolulu, Hawaii 96822, U.S.A. He is a graduate of National Taiwan University and received his . doctorate from the University of Minnesota in 1965. 1. Jose Saul Lizondo, Harry G. Johnson and Yeong-Her Yeh, Factor Intensities and the Shape of the Production Possibility Curve, Economica, May 1981, pp. 199~202. 2. Lizondo, Johnson and Yeh, op. cit., p. 201. This content downloaded from 157.55.39.220 on Fri, 02 Sep 2016 04:21:39 UTC All use subject to http://about.jstor.org/terms Journal of International Economic Integration

THE TWO-SECTOR MODEL AND PRODUCTION TECHNIQUE IN THE SHORT RUN AND THE LONG RUN *

IN the standard Heckscher-Ohlin model of international trade, capital moves instantly between sectors to equate rates of return. Doubts about the short run validity of this assumption led to the development of a literature which combined short run capital specificity with the standard two-sector inodel and examined its impact on factor prices and the composition of output. Examples of this analysis can be found in Mayer (1974), Lapan (1976), Mussa (1974, 1978, 1982), Neary (1978, 1982), and Schweinberger (1980). Less attention has been given in the literature to the HeckscherOhlin model's assumption of rapid factor substitutability. When physical capital is constructed, it is embedded with a particular production technique requiring the use of a specific ratio of capital to labour. Altering this technique in response to a change in relative factor prices requires an investment of resources and, therefore, may not be instantaneous. Econometric evidence on the degree to which the technique of production adjusts slowly is provided in two recent empirical studies. Helliwell and Chung (1986) estimate a macroeconomic model from which the speed of adjustment of the capital-energy ratio can be determined. They find that a change in relative factor prices results in 18 percent of the existing capital-energy bundle being adapted to the new optimum ratio each year. Sneessens and Dreze (1986) estimate a model in which the capital-labour ratio adjusts slowly to changes in the factor price ratio. (They assume that in the short run the technology of production is Leontief while in the long run it is Cobb-Douglas.) Their results indicate that only 27 percent of the change in the optimal technical coefficients . . . implied by a change in relative factor costs is realized within a year (p. S108). In contrast to the standard assumption of the Heckscher-Ohlin model, these two results suggest that the technique of production adjusts relatively slowly. The purpose of the analysis which follows is to incorporate this slow adjustment of the technique of production into a standard two-sector model and examine its impact on short run and long run factor prices and their adjustment paths. The slow adjustment of production technique and the slow movement of capital between sectors, though similar in motivation, yield quite different results. In the sector specific capital model, because labour is intersectorally mobile, a relative price change causes an immediate change in the factor use ratio and the composition of output. Furthermore, since labour can

The Long-Run Implications of a Hicks-Neutral Technical Progress

This paper analyzes the steady-state welfare implications of a Hicks-neutral technological progress, or alternatively, of an i nternational transfer of a Hicks-neutral superior technology within a n overlapping generations framework. The analysis indicates that prod ucers will be induced by profit motives to adopt the advanced technol ogy although its effect on factor prices and intertemporal consumptio n may reduce steady-state welfare. Morever, it is shown that in contr ast to the static results, a Hicks-neutral technical progress alters the long-run factor price ratio through the effect on capital formati on. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.