Opportunity Cost Approach Research Articles

Central banks and seigniorage: A study of three economies in transition

The paper examines the relations between central banks and other macro sectors in the Czech Republic, Hungary, Romania, with respect to the creation and distribution of seigniorage, taking Austria and Germany as a reference. In economies in transition, transfers of seigniorage from the central bank to the government and to the banking sector may appear as a natural way to soften the financial constraints of both sectors. We propose a simple framework for the analysis of central bank seigniorage, based on the opportunity cost approach, and measure both the amount and allocation of seigniorage for the five countries in 1993. We find central bank seigniorage to be approximately four times our benchmark value in Hungary, and thirty times in Romania (the latter due to the high level of the inflation tax). In Hungary and Romania most seigniorage is appropriated (as an interest rate subsidy) by the government; in Romania a large part also goes as a subsidy to the financial sector. In none of the five countries we find that central banks retain an excessive amount of seigniorage for reserve accumulation or for current expenditures. In the last part of the paper we discuss the implications of our findings on seigniorage for the evaluation of central bank independence vis-à-vis the government.

Examination of the Equivalent Relationship between the Two Credit Policy Decision Approaches: The Opportunity Cost and NPV Approaches

AbstractThe net benefits resulting from credit policy decisions can be evaluated based on either the opportunity cost approach or the net present value (NPV) approach. It is known that the two approaches are equivalent in that they provide the same accept/reject decision. Consequently, most text books cover the opportunity cost approach which is much simpler to formulate. This paper reexamines the equivalent relationship based on the NPV models formulated under a capital budgeting framework, and shows that the equivalent relationship only holds for very restrictive conditions. Also, the discount rate for the NPV models is examined along with other models.

The economic contribution of volunteerism toward the value of our cultural inventory

Scholars for centuries have been investigating and debating what determines the value of a good or service. However, the market has chosen to ignore what has been categorized as nonmarket transactions such as volunteerism. This paper will examine the economic contribution of volunteerism and its impact on our cultural inventory. Economic literature reveals three possible alternative methods to calculating the dollar figure for non-compensated volunteerism. They are Opportunity Cost Approach, Value-Added Approach, and Market Price Equivalency Model. Has cultural volunteerism contributed to cultural inventory by providing an expansion of our knowledge of the past and understanding the future?

Age and Gender Differences in the Value of Productive Activities

The definition of personal productivity based on paid work is expanded to include many forms of unpaid work. The productivity of these forms of unpaid work is estimated empirically, using several economic approaches (an opportunity cost approach, a market price approach, and a value-added approach) and one noneconomic approach. Additionally, two methods of dealing with selection bias when estimating opportunity costs for nonemployed persons are compared. These different approaches all document the extent to which many of the activities (such as housework, formal volunteer work, or informal help to relatives and friends) that are often performed without pay by older Americans or women are actually productive because they produce goods and services to which a market value can be imputed. Using this expanded definition to describe the productive contribution of men and women at different ages provides a much needed correction to existing social statistics: Women contribute in major ways to U.S. productivity, as do older adults, although to a lesser degree. These findings challenge the stereotypic view of older Americans as unproductive and mere burdens on society. Data were from a 1986 cross-sectional survey of 3,617 adults representative of those 25 years old and older living in the coterminous United States.

Evaluating Lost Vacation Benefits: A Note on the Opportunity Cost Approach

Abstract No abstract available.

Which Estimates of Household Production are Best?

Abstract No abstract available.

Bank Entry and the Low Issue of National Bank Notes: A Re-examination

Economic historians have long been puzzled by the low issue of national bank notes between 1882 and 1891. Circulation fell over 50 percent from $360 million in 1882 to $171 million in 1891 (see Table 1). Yet over that same period the number of national banks more than doubled. In 1890, when circulation had almost reached its lowest point, a confused Comptroller of the Currency wrote that new banks now being organized with greater rapidity than in any time for the past twenty-five years.1 Since bank note issue was the major privilege associated with a national bank charter, the anomaly of record numbers entering the system and ignoring note issue has puzzled historians. There are two long-standing theories explaining low note issue. The comptroller's theory links bank note profitability to the price of U.S. government bonds used as collateral to back note issue. Bond prices began rising in the mid-1880s, making note issue less profitable. Banks sold their bonds at a premium and circulation contracted. Note issue rebounded when the bond premiums disappeared after the treasury ran deficits for four consecutive years following the Panic of 1893. This theory was unchallenged until John James focused on the local lending rate as the key variable in determining profitability.3 James argued that a national bank faced two options after accepting a deposit: loan the deposit directly or purchase U.S. bonds as collateral and issue notes. The wider the spread between the loan rate and the bond rate, the more likely a bank would loan the deposit directly rather than tie up funds in low earning bonds. This opportunity-cost approach predicts that note issue should have been lower in regions with higher local lending rates (the South, Midwest, and Pacific). As regional interest rate differentials narrowed, around the turn of the century, note issue became more profitable in the South and West and circulation increased. Local lending rates and bond prices were important variables in determining profitability, but they ignored bank entry and have not adequately explained changes in circulation. I argue that changes in the regulatory environment help greatly to explain the movements in circulation and increased bank entry. The reduction in circulation can be traced to an 1882 change in the law that allowed banks to divest their bond holdings. The law also reduced barriers to entry and made national banking attractive to potential entrants. Circulation rebounded in 1900 when another change in the law made note issue more profitable and induced new banks to enter the system.4

Time Value and Its Impact on Household Food Expenditures Away From Home

Food away from home (FAFH) expenditure equations derived from household production theory stress the importance of of time constraint implicit in house hold decision making. Numerous methods have been suggested in the literature to quantify the value of time. The measure of time value developed in this study was based on the opportunity cost approach and indicates the importance of correcting for labor force participation selection bias when estimating potential wages for non-labor-force participants. In general, value of time, income, house hold size and composition, and other environmental variables significantly influ enced FAFH expenditures. The results also indicate the importance of distinguish ing between FAFH expenditures at different types of eating places.

An application of opportunity cost for a short-run pricing decision

This article illustrates how opportunity cost can be provided as an explicit information item for a manager's short-run pricing decision. By using an example of a special order decision situation, the article shows the merits of using an opportunity cost approach instead of using only a direct cost or an absorption cost approach.

Homemakers' Imputed Wages: Results of the Heckman Technique Compared with Women's Own Estimates

Three estimates of potential earnings of women not in the labor force, based on two data sets, were obtained (1) by using the coefficients from the regression of employed women with characteristics of the homemaker, (2) by using Heckman's adjustment for selection bias, and (3) by using the women's own views of potential earnings. The second approach yielded lower estimates than the first, as expected. The third estimate was found to be considerably higher than the second, suggesting that simple adjustment for selection bias may not be useful for the opportunity cost approach to valuation of housework.

HOUSEWORK VS. MARKETWORK: SOME EVIDENCE HOW THE DECISION IS MADE

Empirical research using the opportunity cost approach to estimating the value of non‐market work of women tends to focus on the value of actual or potential output produced at home and expected or actual earnings, and assume that a rational decision involves choosing the higher one. Evidence derived from data on young married women suggests that full‐time homemakers frequently are unable to provide estimates either of their potential earnings or of the lowest wage they would accept to enter the labor market, and that such estimates as they do provide are not soundly based. We also found that using wages of women in the labor market to estimate the value of the home time of full‐time homemakers involves upward bias. We conclude that there are good reasons for caution in using the opportunity cost approach.

Taxation and the value of nonmarket time

In this study, the value of nonmarket time is estimated for American families using the opportunity cost approach whereby the market wage is taken as a measure of the value of time and used to impute nonmarket income to each household. In cases where the market wage is not observed, a new estimation technique is used to obtain consistent estimates of the wage. It is shown that the nonmarket income of families increases with family money income and family size, but decreases with age and the number of job holders in the family. The implications for taxation are discussed.

HOUSEWORK: PRICELESS OR VALUELESS?

Two ways of estimating the value of housework are currently used. One is the opportunity cost approach, which sets the value of work done at home equal to the income the person could earn in the labor market. The other is the market cost approach, which uses the cost of hiring someone to do the housework to determine its value. In this study we use data on earnings of female clerical workers with various patterns of labor force participation to obtain estimates of the opportunity cost of hometime for such women. We find that potential market earnings do not provide an acceptable estimate of the value of housework, and suggest that using the wages of general household workers is a better approach.

Heat Cost in a Swedish Agrothermal Plant

Low-grade heat is of rapidly increasing importance in Sweden and, therefore, so is the economic evaluation of such heat. The present heat cost is based on a detailed feasibility study of large-scale heated horticulture combined with electricity production from a Swedish boiling water reactor power plant. To estimate judiciously the cost of heat from a dual-purpose plant--such as a large-scale horticultural installation combined with and using low-grade waste heat from an electric power plant--is an almost classical problem: a measure of arbitrarity is unavoidable. The opportunity cost approach shown has presumably some new features. It results in an estimated cost of heat delivered from the turbine condenser heater in the power plant of 1.4 $/GJ (or 6.1 Swedish Crwn/GJ) in 1980, which is less than one-third of the cost of fuel only with conventional oil-fired heaters.

Hydropower vs. Wilderness Waterway: The Economics of Project Justification Through the Sixties

ABSTRACTA joint study undertaken in the early 1960's by several bureaus in the Department of Interior and by the Army Corps of Engineers analyzed a set of alternatives for developing the last major natural reach of the Missouri River, 200 miles of outstanding scenic beauty and historic interest in Montana. At issue in this paper are the study's methods of presenting alternatives; its calculation of recreation benefits at reservoirs and at the wilderness waterway; the application of Senate Document 97, Supplement 1 to Senate Document 97, Federal Water Project Recreation Act of 1965; and the National Environmental Policy Act of 1969. Willingness to pay and opportunity cost approaches as alternative measures of the benefit of preservation are examined by the author, and the issues are reconsidered in terms of recent policies and changing social values.

The opportunity cost of displaced private spending and the social discount rate

The three purposes of this paper are: (1) to describe the major schools of thought regarding the meaning and calculation of the appropriate social discount rate, (2) to specify and defend a preferred opportunity cost approach, and (3) to present an empiric estimate of the appropriate discount rate under conditions prevailing in 1966. This rate was found to be 7.3% for 1966.