Two-attribute risk and return models are very popular in the economics and finance literature for analyzing decisions under uncertainty. Their popularity stems primarily from the intuitive appeal of the dichotomy into risk and return, and from the ease with which the concepts can be diagrammed in two dimensions. The most commonly used risk-return model is the mean-variance model in which risk is measured as the variance and return by the mean of the probability distribution over outcomes. The mean-variance model has a number of shortcomings which are widely known, but of particular concern here are the facts that 1) mean-variance dominance is neither necessary nor sufficient for second-degree stochastic dominance; 2) unless the form of the probability distribution is restricted, mean-variance is consistent with von Neumann-Morgenstern utility theory only if the utility function is quadratic; and 3) as Peter Fishburn has noted,
This paper discusses some trade and welfare implications of the two-sector model based on increasing returns to scale (IRS) in one industry and decreasing returns to scale (DRS) in the other. It has been shown by Horst Herberg and Murray Kemp that, given homothetic production functions with IRS in one industry and DRS in the other, the production-possibilities frontier (PPF) is strictly concave to the origin near the IRS axis and strictly convex to the origin near the DRS axis. While this result constitutes an important finding and is contrary to the general impression among economists, even twelve years after the publication of Herberg and Kemp's paper, no attempt has been made to analyze its implications for welfare and patterns of specialization.' In this paper, I consider a simple twocommodity model with IRS in one industry and DRS in the other, and discuss some interesting implications of variable returns to scale (VRS). First, I demonstrate that, in this model, if a small, open economy specializes completely in production, it will do so in the DRS commodity and not in the IRS commodity as is generally believed. Second, if, at a given price ratio, an internal production equilibrium exists, a welfaremaximizing small, open economy will never specialize completely in production even though the PPF exhibits decreasing opportunity costs over a part of its range. Third, given output-generated economies and diseconomies of scale, welfare maximization for a small country requires a permanent tax subsidy scheme encouraging expansion of the IRS industry and contraction of the DRS industry. Finally, in a two-country model with identical tastes and technology across the countries, free trade equilibrium may result in incomplete specialization by the exporter of the IRS commodity and complete specialization by the exporter of the DRS commodity. In the course of the analysis, I argue that Tinbergen's formulation of Frank Graham's case for protecting the IRS industry is incorrect. I then present a possible reformulation of it. In Section I, the basic production model is introduced; in Section II, the model is analyzed; and in Section III, it is argued that all the results continue to hold in the multifactor case.
A time-series regression model of the US manufacturing sector is developed to estimate the direct and indirect relationships of public regulations and productivity for the 1973 to 1977 period. Preliminary results show that 12 to 21% of the productivity slowdown is blamed on regulation. Other contributing factors are a reduced non-labor to labor input (15%), average cyclical impact (0 to 15%), and a combination of changes in labor composition, expenses for research and development, and shifts in sectoral output. The study focuses on measured productivity, and the results have little implication to true productivity growth. 14 references, 24 tables. (DCK)
This paper considers a firm whose marginal (revenue) product of labor is a random variable. We derive the form of an optimal long-term contract between workers and the firm under the assumption that labor's marginal product is observed by the firm but not by the workers. We show that the existence of asymmetric information causes unemployment to be greater than in a situation where information about labor's marginal product is public, or where employment is determined in spot markets. In particular, unemployment can occur when the marginal product of labor exceeds the reservation wage.
During the past decade and a half, an important part of the literature on customs unions has dealt with the question of whether a country might obtain the gains it would achieve from a customs union (CU) in an alternative way, by a unilateral tariff reduction (UTR). (UTR may involve a partial reduction in tariffs, or a reduction all the way to zero.) A widely accepted conclusion (see Eitan Berglas, p. 329; C. A. Cooper and B. F. Massell, 1965b, pp. 745-47; Roma Dauphin, ch. 2; Harry Johnson, p. 280; Melvyn Krauss, pp. 417-19; and Peter Robson)' is that UTR does indeed hold out the prospect for all the gains from a CUwithout the disadvantagesif two important simplifying assumptions are made; namely, that we ignore economies of scale and the effects of a customs union on the terms of trade.2 In the words of Berglas: It is important to note that if a [preferential] trade agreement does not affect the terms of trade, then it does not allow for any mutually beneficial policy opportunities which are not open to each of the member countries separately [through UTR] (p. 329). If this conclusion is correct, it is very important, in that it undercuts the earlier literature on customs unions. The question asked by Jacob Viner in his pioneering work whether a CU represents a net gain or a net loss in economic efficiencybecomes unimportant, except insofar as a customs union is based on terms-of-trade effects3 or economies of scale,4 since a CU can be summarily rejected in favor of UTR. The UTR case would mean that, for economists, the puzzle is not to identify the efficiency gains (or losses) from a CU, but rather to explain why countries form customs unions in the first place (Berglas, p. 329; Cooper and Massell, 1965b, p. 247; and Johnson, p. 270). Indeed, in his survey of CU theory, Krauss identifies the problem raised by Cooper and Massellof why countries form customs unionsas . . . the theoretical issue of the past decade [the 1960's] just as in the prior one the major issue, as explicitly defined by Jacob Viner (1950), was whether a customs union represented a movement towards freer trade or greater protection (p. 413). The typical reply to the Cooper-Massell question is: Countries tend to form a CU for noneconomic reasons (Berglas, pp. 329-30).5