Knowledge that Transforms

Yasushi Toda, Estimation of a Cost Function When the Cost Is Not Minimum: The Case of Soviet Manufacturing Industries, 1958-1971, The Review of Economics and Statistics, Vol. 58, No. 3 (Aug., 1976), pp. 259-268

A LTHOUGH there are many differences I between planned and market economies, both with respect to the locus of decisionmaking power and the institutions designed to allocate resoturces, household behavior in the two economies may be quite similar. Both Soviet and Western households determine the allocation of their time between work and leisure in response to their preferences and the real wage. Although the Soviet worker does have a limited ability to choose the number of hours he works in his primary place of employment, he can choose to increase or decrease his work effort in response to bonus schemes. He may also get a second job or allocate some time to quasi-legal, free-market activities. Once this choice is made, each household has a certain money income that it may devote to present consumption or save for future consumption. Making the assumption that Soviet households, like their Western counterparts, wish to maximize the utility derived from consumption over their lifetime, we may observe them transferring income from the present to the future, or in the reverse direction, depending upon their present and expected future money income, the current and expected future price of commodities, the interest rate, and their rate of time preference, restricted, of course, by the limited availability of consumer credit. Although the motives for saving may be similar for Soviet and Western households, the significance of saving behavior in the two contexts is quite different. A main concern of those investigating saving behavior in developed market economies has been the relationship between aggregate demand and the level of output and employment. The investigation of saving behavior in developing market economies focuses on the need for increased savings in the household sector to finance ambitious investment programs.1 In the Soviet Union the significance of household saving behavior is different from the two cases above. The resources for the planned level of investment are determined by the central planners independently of household saving decisions, and the remainder of the resources, after subtracting such items as defense and the costs of government administration, are made available for the production of public and private consumer goods. A sales tax on consumer goods is set by the planners to equate the supply of, and demand for, these goods. Thus, in theory the saving decisions of Soviet households do not influence either the total level of output or the share of output devoted to consumption and investment. The above analysis of the Soviet economy, however, is an oversimplification and ignores the impact that Soviet household saving behavior can have on the outcome of the plan. If households are saving at their desired rate, but this rate is greater than anticipated by the planners, a part of the planned output of consumer goods will not be sold and unplanned increases in inventories will result, given that prices are not responsive to excess supply. Assuming the planned level of inventories is considered optimal, these unplanned inventory increases represent a waste of resources, and when they occur they are, and ought to be, of considerable concern to Soviet planners. On the other hand, if money wages are rising rapidly and households find that they are saving at a rate faster than desired, they will attempt to buy more goods and services with the excess savings. To the extent that prices and the supply of consumer goods are completely determined by the planners, and both are unresponsive to consumer demand, households will be unsuccessful in their attempt to purchase goods and to reduce their saving rate, and may choose to reduce their work effort instead. In fact, Soviet planners do not completely determine the price and supply of consumer Received for publication September 30, 1974. Revision accepted for publication June 9, 1975. 1 There is a substantial literature on the effect of rising incomes on savings in developing economies. For a survey of this literature see Mikesell and Zinser (1973).

THE recent focus of radical economists such as Thomas Weisskopf (1972) and Keith Griffin (1970) on the possible reduction in domestic savings caused by aid inflow has raised an important issue: How much does this matter?' A characteristic answer by orthodox economists would be that increased current consumption is also welfare-improving. Hence, the evidence of reduced domestic savings following on the influx of foreign capital -or, what is the same thing, the evidence that aid is only partially used for investment -may be dismissed as interesting but irrelevant to the discussion of the benefits of aid programmes.2 But, while the radical economists have not systematically spelled out an argument to sustain the thesis that a reduction of domestic savings by foreign capital is harmful, it is clear that their concern arises from the notion of dependence: in particular, that reduced savings would somehow increase on the aid-giving country (which is likely to be part of the imperialist or the social-revisionist bloc). This dependence argument can indeed be formalised. Take a typical Harrod-Domar type model and define the capital-recipient country's objective as reaching a Millikan-RosensteinRodan-Rostow self-reliant growth rate by raising its domestic savings rate to a target level. The radical case can then be constructed by examining whether, in reducing domestic savings, an influx of foreign capital postpones, or renders infeasible, the reaching of self-reliance. (Needless to say, dependence can only be one dimension out of many that would enter a complete social welfare function; but it is certainly one that has to be formalised, as here, before it can be usefully discussed.) Two things are clear as soon as the problem of dependence is defined in this way. First, whether capital inflow creates will depend on the assumed parameters of the model as well as the targeted level of the savings rate and the time by which it must be achieved. Contrary to the radical notions, an aid programme may achieve a targeted increase in the savings rate earlier than in the absence of aid, or may make an infeasible target a feasible one. Second, it is therefore useful to take estimates of the parameters involved and to examine simulation runs to see whether the radical concerns are worth bothering about. It is our intention to derive the logical implications of such savings behavior in a dynamic framework to see where it can lead. This paper constructs a simple version of the Harrod-Domar model and discusses the simulation runs of savings and the savings ratio, with and without aid, for a number of less developed countries (LDCs). These countries are those for which Weisskopf (1972) has fitted savings functions, using time series analysis, so that we have had to add only plausible Received for publication March 19, 1975. Revision accepted for publication November 10, 1975. * The research underlying this paper was financed by the National Science Foundation. The facilities provided by the Institute for International Economic Studies, Stockholm, are also gratefully acknowledged. A companion paper by Bhagwati and Grinols (1975) which examines a different argument linking foreign capital inflow to and hence to the feasibility of transition to socialism has been published separately in the Journal of Development Economics. 1 The precise line of arguments developed below may be considered to be implicit in the concerns and writings of the radical economists, though we have not seen them carefully developed and stated. The focus in many of the radical writings is rather on the inadequacy of the early aid-requirements estimates, where the analyst assumed a Harrod-Domar model and a realistic capital-output ratio, fixed a target rate of growth to get a target rate of investment, then made a Keynesian savings assumption and came out with the estimate of aid or capital inflow required to fill the gap between the required investment and the available domestic savings. This method, along with alternative approaches, is reviewed in Bhagwati (1971). If the aid inflow itself affects domestic savings, the model is clearly specified incorrectly. To be fair, however, to the economists (such as Rosenstein-Rodan) who used the approach being criticised, they thought of the Keynesian domestic savings function as one which the economy would adhere to (via tax effort, for example) as part of its matching effort while receiving the capital inflow, so that it was a policy function rather than a behavioral function as implied by the radical writings. 2 Following this line of argument, the radicals should focus on the distribution of benefits from additional consumption instead of on whether such additional consumption follows on the capital inflow.

[Excerpt] In this paper, we show how labor turnover considerations can be integrated into the human investment theory of migration and demonstrate that such a model provides a much better explanation for migration rates into major metropolitan areas than the conventionally-used unemployment rate. The method used here may be of interest as well to researchers working on other human investment problems that also have a multi-period dimension.

D UE to Sharpe (1964), Lintner (1965) and Mossin (1966), the Capital Asset Pricing Model (CAPM) has been employed to estimate systematic and performance measure and to predict the risk-return relationship. The predictive ability of this model has been examined by Friend and Blume (FB) (1973), Black, and Scholes (BJS) (1972) and Blume and Friend (BF) (1970). They have concluded that the empirical results obtained from the CAPM are significantly different from the ex ante expectation of this model. The effects of investment horizon on the estimate of the systematic were first investigated by (1969). Based upon the instantaneous systematic concept, he concluded that the logarithmic linear form of the CAPM can be used to eliminate the effects of time horizon on the estimated systematic risk; in other words, the basic specification for the CAPM is a Cobb-Douglas type functional form. Levy (1972) has shown that the assumption of a holding period that is different from the true investment horizon will lead to systematic bias of the performance measure index. Recently, Cheng and Deets (CD) (1973) have shown that the logarithmic linear form of the CAPM not only implies a linear relationship but produces an instantaneous risk, dependent upon the length of observed horizon.' In addition, they proposed a new instantaneous systematic entitled the Cheng-Deets instantaneous systematic risk to substitute for the Jensen instantaneous Neither nor CD has ever investigated the effects of finite investment horizon when market equilibrium is not instantaneous. The main purposes of this paper are to derive two alternative functional forms for the CAPM, which will explicitly include the investment horizon parameter, to improve the explanatory power of the CAPM, and to reduce the bias of the estimated systematic risk. In the second section the risk-return relationship is reexamined under the assumptions that true investment horizon is either observable or not observable. In the third section both likelihood ratio and constant elasticity of substitution (CES) function methods are proposed to derive a testable generalized CAPM in accordance with the assumption that all investors have identical investment horizons.2 In the fourth section models derived in the third section are related to Merton's (1970, 1973) continuous time models and Fama and Macbeth's (1973, 1974) empirical work, which supports the linearity of CAPM. In the fifth section, a set of sample data from the New York Stock Exchange (NYSE) during 19671972 will be employed to estimate the related parameters of the nonlinear CAPM being derived in this paper. In addition, the results obtained from nonlinear CAPM will be compared with those obtained from the linear CAPM. Finally, in the last section, the results of this paper will be summarized.

i vt= it yjtyjtV(( ) where viVi is nominal value added in industry i and yjYj the nominal GNE on good j. We have vitVit qitQ t mitMit (2) where qQ is the value of gross product and mM the cost of materials.' We wish to maintain the fundamental national-income identity (1) in constant prices, too. This is possible when we evaluate both outputs and inputs in uniform prices, say, of the base year. Then, we have

ONE question that arises following recent I attempts to introduce economic theory in explaining income distribution is to what extent schooling can be used as a policy instrument to promote equality in our society. Although the link between the size of individual earnings and education has been rather well established, the change in the distribution of income among individuals resulting from a change in the level of schooling is not yet settled. In this paper we elaborate on the relationship between schooling and income distribution based on human capital theory. In order to answer the question we need an expression relating a measure of income distribution to a measure of education. It would be convenient in this respect to start from the work of what we will call the Becker-MincerChiswick (B-M-C) group,1 as perhaps the best known of those providing such an expression. In their work the level of earnings (Y) of an individual with S years of schooling is determined by an earnings generating function of the form