Knowledge that Transforms

The model of this paper generalizes the classical theory of consumer behavior to the more general case of prices that are not necessarily market-clearing. Suppose that, in addition to the money cost, some sort of search, waiting, or other quasi-fixed "effort cost" is needed to obtain goods. The presence of this quasi-fixed cost element will trigger an inventory policy. A shortage equilibrium occurs when effort costs are such that, in the corresponding inventory policy, the flow of desired consumption does not exceed the available supply flow. Stock hoarding, a critical phenomenon in the economics of shortage, emerges as a natural component of this model. A complete characterization of a stationary shortage equilibrium is given. Comparative statics and welfare analysis are performed. The dynamic transition between steady states is analyzed to give insight into the mechanics of how shortages develop.

Czechoslovakia provides a unique example of a country that became underdeveloped as a result of an externally imposed system. Before World War II, Czechoslovakia was a democracy, with GNP per capita similar to that of Belgium and Austria. Its industries were on the technological edge and its products were known worldwide for their superb workmanship. By 1990, Czechoslovak GNP per capita is estimated by the World Bank at $3,300, thus being comparable to that of Venezuela, Gabon, and Yugoslavia, but only slightly above one-fifth of that of Austria and Belgium.1 Most Czechoslovak products are now of mediocre quality and selling at a discount, if at all, in the West. This remarkable transition occurred over approximately 40 years. During the postWorld War II reconstruction, the country was still run as a market economy, although major parts of industry, banking, and insurance were already nationalized. After the 1948 Communist takeover, Soviet-type economic planning was imposed, the remaining private enterprises were nationalized,2 and priority was given to heavy industry. Czechoslovak foreign trade was reoriented from world markets toward Soviet bloc countries. The Czechoslovak government adhered to the Soviet-type planning system faithfully throughout the 1950's. The economic slowdown in the early 1960's led to a series of reform attempts, that culminated during the Prague Spring of 1968 with a short-lived and partial program of price liberalization, separation of economic policy from political decision making, enterprise autonomy, and workers' participation in enterprise management. However, central planning was reimposed after the 1968 invasion and remained virtually intact until the late 1980's.

Joseph Farrell and Carl Shapiro (1990a) present an interesting and elegant analysis of horizontal mergers in the context of a Cournot model under quite general demand and cost conditions. One section of their paper deals with the effects of mergers on price or consumer welfare. In it they show that, in a Cournot model, mergers that do not lower costs always raise price and that mergers that lower costs still raise price unless they lower costs quite a lot. These results are much more general than anything in the prior literature. Another section of the paper deals with the effects of mergers on nonmerging firms and consumers, which Farrell and Shapiro term external. With some minor additional assumptions, they show that a merger is externally welfare-enhancing if (but not only if)

This paper...[explores] the extent and causes of the decline in immigrant skills [in the United States] during the postwar period. Prior to 1965 immigration to the United States was guided by the national-origins quota system. This visa allocation system awarded visas to countries based on the representation of the national origin group in the U.S. population as of 1920. The 1965 Amendments abolished the national-origins formula thus redistributing visas across source countries and established a system where visas are mainly given to relatives of U.S. citizens or residents. The empirical analysis shows that a single factor the changing national origin mix of the immigrant flow is mainly responsible for the decline in immigrant skills. (EXCERPT)