Shadow Profit Maximization and a Generalized Measure of Inefficiency

Determining the profit maximizing input-output bundle of a firm requires data on prices. This paper shows how endogenously determined shadow prices can be used in place of actual prices to obtain the optimal input-output bundle where the firm.s shadow profit is maximized. This approach amounts to an application of the Weak Axiom of Profit Maximization (WAPM) formulated by Varian (1984) based on shadow prices rather than actual prices. At these prices the shadow profit of a firm is zero. Thus, the maximum profit that could have been attained at some other input-output bundle is a measure of the inefficiency of the firm. Because the benchmark input-output bundle is always an observed bundle from the data, it can be determined without having to solve any elaborate programming problem. An empirical application to U.S. airlines data illustrates the proposed methodology.

Efficiency and Continuity in Public Finance: The Ottoman System of Taxation

Economic historians have recently emphasized the importance of integrating economic and historical approaches in studying institutions. The literature on the Ottoman system of taxation, however, has continued to adopt a primarily historical approach, using ad hoc categories of classification and explaining the system through its continuities with the historical precedent. This paper integrates economic and historical approaches to examine the structure, efficiency, and regional diversity of the tax system. The structure of the system made it possible for the Ottomans to economize on the transaction cost of measuring the tax base. Regional variations resulted from both efficient adaptations and institutional rigidities.

Marriage Matching and Intercorrelation of Preferences

Men's and women's preferences are intercorrelated to the extent that men rank highly those women who rank them highly. Intercorrelation plays an important but overlooked role in determining outcomes of matching mechanisms. We study via simulation the effect of intercorrelated preferences on men's and women's aggregate satisfaction with the outcome of the Gale-Shapley matching mechanism. We conclude with an application of our results to the student admission matching problem.

Input Price Variation Across Locations and a Generalized Measure of Cost Efficiency

We propose a nonparametric model for global cost minimization as a framework for optimal allocation of a firm's output target across multiple locations, taking account of differences in input prices and technologies across locations. This should be useful for firms planning production sites within a country and for foreign direct investment decisions by multi-national firms. Two illustrative examples are included. The first example considers the production location decision of a manufacturing firm across a number of adjacent states of the US. In the other example, we consider the optimal allocation of US and Canadian automobile manufacturers across the two countries.