Knowledge that Transforms

Conditions necessary and sufficient for shareholders to express unanimity with respect to firm decisions have been recently developed by Harry DeAngelo (1981). In a model economy where firms are properly relative to the market, Louis Makowski (1983) has subsequently found DeAngelo's requirement that existing securities span the opportunity set to be unnecessary for unanimity. At issue in this difference is what is meant by necessity in propositions relating to model economies: is Makowski's small relative to the market condition of interest, or is it, like the Giffen good, only a curiousity? While Makowski's case initially appears implausible, I shall here argue that the specification of an economy with markets is a reasonable instance of his analysis and qualifies as an interesting complement to the general propositions of DeAngelo.' In Section I some basic notation and the structure of the model economy are set out. Following that, the distinction between the unanimity proofs of DeAngelo and Makowski is drawn and the issue of reasonableness in necessary conditions is addressed. Conditions under which equivalently complete markets arise are then described, and the reasonableness of these are considered along with their implications for unanimity.

Optimal policv in the presence of international trade and investment, which has been previouslIN analyzed by Murray Kemp and Ronald Jones (1967) in the context of a twofactor, two-good general equiilibrium model, constitutes the subject of analysis in a recent article in this Review byT Franz Gehrels. Gehrels' framework, which postulates a three-factor, two-good economy, differs from that of Kemp and Jones in format but not in substance. Nevertheless, Gehrels has made an important contribution by providing a more complete discussion of partial optimization and by deriving optimal tariffs and taxes in the presence of the interindustrv wage differential that characterizes factor markets in the underdeveloped countries. The objective of this note is to show that Gehrels' optimal policy in the presence of the wage differential is incomplete and that his modification of the optimum tariff formula is not always valid. The assumptions and notations used in this note are the same as those introduced bv Gehrels. The problem is to maximize the social utilitv function

International trade theory has traditionally been cast in an idealized setting, with numerous assumptions, where the flow of goods is determined by static comparative advantage. In the Ricardo-Torrens theory, differences in technology across countries affect labor productivities, pretrade prices, and thus determine comparative advantage and trade. In the Heckscher-Ohlin theory, differences in relative factor endowments affect pretrade relative factor prices, relative costs of production, and thus determine comparative advantage and trade. Originally, such models were formulated for a two-country world, but with the addition of a third country it became clear that under certain circumstances multilateral comparisons may be appropriate (see Ronald Jones; Anne Krueger). Empirical verifications of both theories have been quite extensive. Most of the tests have been bilateral, one country to another or one country trading with the rest of the world. In general the results have been, at best, very mixed. The explanations for the unexpected results have involved such theoretical modifications as the need to introduce natural resources explicitly, to distinguish between new and standard commodities, to account for heterogeneity of factors and products, to include barriers to trade and so on. In all this work, the basic existence of competitive markets has been an accepted assumption: that is, a country will face one import price for a homogeneous product because competition will drive out inefficient exporters. However this is a testable proposition; specifically, does a country buy its imports from the low cost producer and, if not, is the overpayment significant? The a priori reasons for the existence of any such trade inefficiencies in import prices or price divergences are many. One possible explanation is that there exist variations in unit export prices for an exporter. Gary Hufbauer and J. P. O'Neill in examining unit values of U.S. machinery exports suggested several explanations for export price differences for a given exporter:

Lawrence Weiser and Keith Jay have made an important contribution to our efforts to sort out the relative significance of innovational activities, different types of labor skills, and economies of scale as determinants of the commodity structure of international trade. In particular, they provide new evidence substantiating the importance of technological progress as a basis for the U.S. comparative advantage position as well as support for the view that scale economies should be given greater weight than my study indicated. However, there are still a number of questions and problems to be answered before very firm conclusions can be drawn on these matters. In an effort to disentangle the relative importance of the innovational and skill factors, the authors calculate a measure of technical progress for various U.S. manufacturing industries between 1961 and 1967. However, their estimate of technical progress does not take explicit account of changes in the skill levels of industries during that period. Consequently, one still cannot be sure of the extent to which the measure represents innovational activity versus changes in the quality of labor. Although my study indicates that the size of plants in export industries is considerably larger than in import-competing industries, the scale variable did not show up as significant in the various multiple regressions that included such variables as capital/ labor ratios by industry, proportions of various skill groups, and R&D efforts. However, Weiser and Jay do obtain significant multiple regression results for the scale factor when they use Gary Htifbauer's measure of the scale variable and a different dependent variable than the one I uised. Their dependent variable is the ratio of U.S. exports of each industry to the industry exports of eleven leading exporting countries whereas my dependent variable was adjusted U.S. exports minus adjusted U.S. imports. It should be noted that when they used Hufbauer's scale variable and exports minus imports as the dependent variable, they failed to obtain a significant result for the scale variable. To a considerable extent, therefore, the issue seems to come down to what is the best dependent variable to use. Clearly, if one is interested in the best indicator of export performance (as they are), a variable including imports is not appropriate. However, trade theory should, I think, generally focus on net trade flows rather than just exports or imports since the policy variables in which we usually are concerned are framed in net terms, for example, balance-of-trade or net employment effects of trade policy changes. As the authors are aware, it might well be that their scale variable would not show up as significant if they in some way also included the U.S. world import share by industry as part of their dependent variable. It would be interesting, to extend their analysis of trade patterns along these lines as well as by taking account of skill changes in calculating a measure of technical progress.

In the June 1976 issue of this Review, Larry Orr provided a theoretical framework for ascertaining the optimum level of transfer payments. Building on the foundations of the theory of public goods, he demonstrates that the optimum level of such transfers is a unique function of the (diminishing) marginal utility to taxpayers of improved income support for the poor and the (increasing) marginal cost to taxpayers of larger transfer payments. A unique feature of Orr's approach is his recognition of differences among individuals (taxpayers and recipients alike) in their perceived marginal utilities and costs and his resolution of such differences by simple majority rule. Thus, the optimum level of transfer payments emerges from his model as a unique manifestation of both democratic and economic principles. Orr utilizes this theoretical framework to rationalize the disparity in welfare benefits available in the different states. The focus of his empirical application is on the Aid to Families with Dependent Children (AFDC) program, for the years 1963-67 and 1968-72. In seeking to apply his theoretical framework, Orr must of course identify empirical approximations for his basic arguments. In so doing, I believe he has obscured a critical distinction between racism and classism, and exaggerated the significance of racial prejudices for transfer policy.' Although this in no way detracts from the completeness of his model, it is an issue of sufficient concern to merit some further consideration.

A central problem in organization of society is to choose rules for making choices when people's interests conflict. Economists have had much to say about such problems when compensating payments are possible. In practice, however, such payments are often not made, and decisions are either rigidly imposed by a central authority or taken unilaterally by one of parties concerned, who we say has the to choose outcome. In this paper, without asking why these rules are common, I ask which is most efficient. I assume that interested parties know more about their preferences than does central authority (the government). This is a reason to give one of them right to decide outcome: in this model, rights are a decentralization device (see Partha Dasgupta, 1980), and since I assume a benevolent government, there is no role for decentralization without private information. But, while this private information can make delegated decision more efficient than an undelegated and rigid central decision, there is a countervailing problem: an interested party chooses selfishly and ignores even what is common knowledge about others' preferences, which benevolent though ignorant government would take into account. Thus we find that giving an interested party right to choose is more desirable when he has important private information, but less desirable when he and others are very much in conflict.