Long-run Competitive Equilibrium Research Articles

Does subsidized crop insurance affect farm industry structure? Lessons from the U.S.

Farm policies have unintended consequences and subsidized crop insurance is no different. We draw on the theory of long-run competitive equilibrium to estimate the effect of subsidized crop insurance on farm output and number of farms in the U.S. Results show that the subsidy led to fewer and larger farms. To the extent that larger farms benefit disproportionately from other farm subsidies, known to increase farm size, subsidized crop insurance can only contribute to further farm consolidation, with consequences for sustainability and depopulation of rural communities. These unintended effects could make the case for reverting to ad-hoc disaster payment programs.

The industry supply function and the long-run competitive equilibrium with heterogeneous firms

In developing the theory of long-run competitive equilibrium (LRCE), Marshall (1890) used the notion of a representative firm. The identity of this firm, however, remained unclear. Subsequent theory either focused on the case where all firms are identical or else incorporated heterogeneity but disregarded the notion of a representative firm. Using Hopenhayn's (1992) model of competitive industry dynamics, we extend the theory of LRCE to account for heterogeneous firms and show that the long-run supply function can indeed be characterized as the solution to the minimization of a representative average cost function.

An Econometric Analysis of the Nebraska Livestock Friendly County Program

This article examines whether the Nebraska Livestock Friendly County Program (LFCP) has resulted in cattle and hog expansion in the state as intended. The analysis draws on the theory of long-run competitive equilibrium to specify econometric models that identify the determinants of cattle and hog farm numbers. Using county level census data, the econometric models were estimated with heteroscedasticity-consistent standard errors and corrected for multicollinearity using the variance inflation factor procedure. Results show an effect of LFCP on both cattle and hog expansion.

A DYNAMIC ENTRY AND PRICE GAME WITH CAPACITY INDIVISIBILITY

Strategic market interaction is here modelled as a two-stage game in which potential entrants choose capacities and next active firms compete in prices. Due to capital indivisibility, the capacity choice is made from a finite grid and there are economies of scale. In the simplest version of the model with a single production technique, the equilibrium turns out to depend on the ratio between the level of total output at the long-run competitive equilibrium and the firm's minimum efficient scale: if that ratio is sufficiently large (the market is sufficiently ‘large’), then the competitive price emerges at a subgame-perfect equilibrium of the capacity and price game; if not, then the firms randomize in prices on the equilibrium path. The role of the market size for the competitive outcome is shown to be even more important if there are several available production techniques.

A theory of the firm's demand for HRM practices

Empirical data are presented that reveal a large variation in the pattern of HRM practice adoption across firms. The paper then develops an economics-based theory that explains this pattern. The model broadens the HRM concept; models the linkage between HRM practices and firm performance (the ‘black box’); generates an HRM input demand function and demand curve; formalizes the concept of strategic HRM; suggests a new empirical tool for HRM research; generates new hypotheses and insights on the nature of the HRM–firm performance relationship; suggests that existing theories of the HRM–firm performance relationship are seriously mis-specified; and posits that on theoretical grounds the effect of more HRM on firm performance in long-run competitive equilibrium is not positive but zero.

Ownership Dynamics of REITs

This paper studies the effects that benefits of control and moral hazard have on the evolution of large stakes in REITs. A large risk-averse shareholder trades off the net benefits of REIT business monitoring and control with the cost of bearing risk beyond the level compensated by the REIT return premium. In equilibrium, the large shareholder gradually adjusts his ownership shares level (as long as his marginal benefits from holding shares increase in his REIT stake) towards the long-run competitive equilibrium in which his marginal share valuation coincides with that of the market. Because of the moral hazard, such level of ownership (and monitoring) is, in general, inefficient. The speed of adjustment is positively correlated with the agent’s risk aversion and company volatility, and negatively correlated with his marginal benefits of control and beneficial monitoring effects.

The Competitive Outcome of the Entry-Capacity and Pricing Game in a Large Market

We model long-run price competition as a two-stage entry-capacity and pricing game among many potential entrants. Each solution of the game is found to reproduce a long-run competitive equilibrium provided the latter is characterized by a sufficiently large market. This result extends to the long run the oligopolistic foundation of perfect competition provided for the short run by Allen and Hellwig (1986a, 1986b) and Vives (1986a).

Factor Dominance and Long-Run Equilibrium Scale

Hirshleifer (1988, 325) contrasts the normal case, in which the short-run equilibrium scale of a competitive firm increases when the price of a factor decreases, to the regressive case, in which the scale decreases with the price of the factor. We extend Hirshleifer's analysis to the long-run competitive equilibrium. We explain the relationship between long-run equilibrium scale and the relative prices of two factors of production by first definingfactor dominance. That factor for which the elasticity of the firm's output with respect to the quantity of input is larger is called the dominant factor. We examine two classes of production functions in which the long-run equilibrium scale of the firm increases when the relative price of the dominant factor decreases and a third class in which scale remains constant even though the relative price of the dominant factor decreases. All three classes of production functions exhibit increasing and then decreasing returns to scale with positive cross-products at the point of locally constant returns to scale.

Wage Uncertainty and Competitive Equilibrium in Labour Markets

This paper analyzes the effect of wage-rate uncertainty on long-run competitive equilibrium for a labor market made up of heterogeneous workers. The authors show that, if workers are risk-averse, an increase in wage rate uncertainty always lowers aggregate hours of work and increases the expected wage. They also characterize precisely the class of distribution changes that decrease (or increase) aggregate hours of work and use this result to construct a Pareto-improving negative income tax scheme. Finally, the authors demonstrate that an increase in risk aversion has the same qualitative effect on aggregate hours of work and the expected wage as an increase in wage risk. Copyright 1994 by The London School of Economics and Political Science.

Estimating total factor productivity using parametric, nonstochastic cost frontiers

The standard approach to measuring total factor productivity can produce biased results if the data are drawn from a market that is not in long-run competititve equilibrium. This article presents a methodology for adjusting data on output and variable inputs to the values they would have if the market were in long-run competitive equilibrium, given the fixed inputs and input prices. The method uses nonstochastic, parametric translog cost frontiers and calculates equilibrium values for output and varible inputs using an iterative linear programming procedure. Data from seven industries for 1970–1979 are used to illustrate the methodology.

A Moral Hazard Trap to Growth

This paper studies the consequences of asymmetric information in the investment sector upon economic growth. In this paper, the information asymmetry generates a moral hazard problem. This moral hazard problem restricts financial arrangements. It is shown that these restrictions make even the long-run competitive equilibrium income dependent upon history. This result also holds in case there is perfect capital mobility. However, when there is capital mobility, the government may be able to intervene in a Pareto improving way. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

COMPETITIVE EQUILIBRIUM AND THE WAGE‐PROFIT FRONTIER *

The wage-profit frontier is commonly used when the choice of technique is discussed. Though quite a few economists have explained why a point on the frontier is being chosen, the author has not found their explanations persuasive. He shows that the choice of technique, in terms of the wage-profit frontier, is characterized by the long-run competitive equilibrium as expressed by the von Neumann-Morishima formulation. Thus, a quantity system, as well as a price system, is fully taken into account. The author also explores how a Pasinetti equilibrium switches to an anti-Pasinetti equilibrium as the rate of profit changes. To the best of his knowledge, this switch has not been studied in a multisectoral model thus far. Copyright 1989 by Blackwell Publishers Ltd and The Victoria University of Manchester

Products liability and scale effects in a long-run competitive equilibrium

Products liability and scale effects in a long-run competitive equilibrium

Capital costs and profitability

The paper estimates a line-of-business (LB) cost-of-capital and derives explicitly its link — in long-run competitive equilibrium — to profitability measured as LB operating income to LB assets. The ways that observed profitability differs from what would obtain in competitive equilibrium are explored.

Predation and Cross-Subsidization in the Value Maximizing Multiproduct Firm

Predation occurs when a firm engages in the temporary strategy of setting prices below production costs to damage or destroy existing competitors. One form of predation occurs when a multiproduct or conglomerate firm obtains revenues in excess of production costs on goods sold in monopolized markets and uses these rents to subsidize the production of goods sold in competitive markets. Indeed, the fact that cross-subsidization is precluded in long-run, competitive equilibrium and is thus synonymous with predation has frequently been demonstrated in the literature.' Previous analyses of the relationship between cross-subsidization, as defined by the difference in the additional or incremental costs and revenues of producing a specific group of commodities, and predation have been conducted under the behavioral postulate of profit maximization. The purpose of this paper is to reexamine this relationship given the alternative assumption of value maximization. The assumption of value maximization leads to different results.2 Specifically, it is shown that for a multiproduct firm producing goods with different risk characteristics (e.g., cyclical and counter-cyclical stochastic demand), cross-subsidization can be both a value maximizing strategy and a characteristic of long-run competitive equilibrium. Thus, a multiproduct firm may give the appearance of engaging in cross-subsidization for the purpose of predatory pricing without ever having considered the effects of its decisions on actual or potential competition. The remainder of this paper is organized as follows. Section II presents the assumptions and model of the analysis. The main features of this model are the assumption of

Tenure Systems in Traditional China

I. A General Equilibrium Model of Tenure Preference Classical marginalists, at least after John Clark, provide an unequivocal solution for the conventional factor market where people sell the productive services of their resources to producers. The productexhaustion theorem says that if factors are priced according to their marginal products, incomes of all resource owners will exactly exhaust the value of total products in the long-run competitive equilibrium. This holds true regardless of which factor is variable and which is fixed, and regardless of which group of resource owners perform as producers who buy productive services of other resources in the market and claim residuals for themselves. In an agrarian economy with land and labor as the inputs, a land owner may cultivate his land and purchase the labor input from outside, paying a wage rate in accordance with labor's marginal product. The land owner is then the residual claimant. Alternatively, he may lease out his land and receive a fixed rental rate per unit of area equal to the marginal product of land. In this case the tenant is the producer and claims the residual. Income distribution between the two parties remains the same under each land arrangement. Wage and rent are, therefore, identical conceptually. The classical marginal analysis has not presented a satisfactory theory of share tenancy, which, instead of being a seller-buyer transaction in a conventional factor market, is essentially a partnership arrangement between two persons who own complementary factors (hence, the term land renting will hereafter denote the fixed-rent system exclusively). In fact, the direct application of marginal analysis to share tenancy has created considerable confusion in early economic literature. Only recently some general equilibrium models of land tenure systems have been developed for better understanding of the