Still More On Why We Should Bury The Marginal Productivity Theory Of The Price Of Capital: A Supplementary Note

The purpose of this note is to supplement the author’s earlier remarks on the unsatisfactory nature of the neoclassical account of how the return on capital is determined. (See Strathclyde Discussion Paper 12-03: “The Marginal Productivity Theory of the Price of Capital: An Historical Perspective on the Origins of the Codswallop”). The point is made via a simple illustration that certain matters which are problematical in neoclassical terms are perfectly straightforward when viewed from a classical perspective. Basically, the marginalist model of the nature of an economic system is not fit for purpose in that it fails to comprehend the essential features of a surplus-producing economic system as distinct from one merely of exchange.

Human capital, social mobility and the skill premium

This paper develops a dynamic general equilibrium model to highlight the role of human capital accumulation of agents differentiated by skill type in the joint determination of social mobility and the skill premium. We first show that our model captures the empirical co-movement of the skill premium, the relative supply of skilled to unskilled workers and aggregate output in the U.S. data from 1970-2000. We next show that endogenous social mobility and human capital accumulation are key channels through which the effects of capital tax cuts and increases in public spending on both pre- and post-college education are transmitted. In particular, social mobility creates additional incentives for the agents which enhance the beneficial effects of policy reforms. Moreover, the dynamics of human capital accumulation imply that, post reform, the skill premium is higher in the short- to medium-run than in the long-run.

The Optimal Distribution of the Tax Burden over the Business Cycle

This paper analyses optimal income taxes over the business cycle under a balanced-budget restriction, for low, middle and high income households. A model incorporating capital-skill complementarity in production and differential access to capital and labour markets is developed to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We .nd that the tax rate for high income agents is optimally the least volatile and the tax rate for low income agents the least countercyclical. In contrast, the path of optimal taxes for the middle income group is found to be very volatile and counter-cyclical. We further find that the optimal response to output-enhancing capital equipment technology and spending cuts is to increase the progressivity of income taxes. Finally, in response to positive TFP shocks, taxation becomes more progressive after about two years.

Complete Markets Strikes Back: Revisiting Risk Sharing Tests under Discount Rate Heterogeneity

Recent risk sharing tests strongly reject the hypothesis of complete markets, because in the data: (1) the individual consumption comoves with income and (2) the consumption dispersion increases over the life cycle. In this paper, I revisit the implications of these risk sharing tests in the context of a complete market model with discount rate heterogeneity, which is extended to introduce the individual choices of effort in education. I .nd that a complete market model with discount rate heterogeneity can pass both types of the risk sharing tests. The endogenous positive correlation between income growth rate and patience makes the individual consumption comove with income, even if the markets are complete. I also show that this model is quantitatively admissible to account for both the observed comovement of consumption and income and the increase of consumption dispersion over the life cycle.

Tax smoothing in a business cycle model with capital-skill complementarity

This paper undertakes a normative investigation of the quantitative properties of optimal tax smoothing in a business cycle model with state contingent debt, capital-skill complementarity, endogenous skill formation and stochastic shocks to public consumption as well as total factor and capital equipment productivity. Our main finding is that an empirically relevant restriction which does not allow the relative supply of skilled labour to adjust in response to aggregate shocks, signi cantly changes the cyclical properties of optimal labour taxes. Under a restricted relative skill supply, the government fi nds it optimal to adjust labour income tax rates so that the average net returns to skilled and unskilled labour hours exhibit the same dynamic behaviour as under fl exible skill supply.

Noncooperative Oligopoly in Markets with a Continuum of Traders: A Limit Theorem µa la Cournot

In this paper, we consider an exchange economy µa la Shitovitz (1973), with atoms and an atomless set. We associate with it a strategic market game of the kind first proposed by Lloyd S. Shapley and known as the Shapley window model. We analyze the relationship between the set of the Cournot-Nash equilibrium allocations of the strategic market game and the Walras equilibrium allocations of the exchange economy with which it is associated. We show, with an example, that even when atoms are countably in¯nite, any Cournot-Nash equilibrium allocation of the game is not a Walras equilibrium of the underlying exchange economy. Accordingly, in the original spirit of Cournot (1838), we par- tially replicate the mixed exchange economy by increasing the number of atoms, without a®ecting the atomless part, and ensuring that the measure space of agents remains finite. We show that any sequence of Cournot-Nash equilibrium allocations of the strategic market games associated with the partially replicated exchange economies approximates a Walras equilibrium allocation of the original exchange economy.

Meeting technologies and optimal trading mechanisms in competitive search markets

In a market in which sellers compete by posting mechanisms, we study how the properties of the meeting technology affect the mechanism that sellers select. In general, sellers have incentive to use mechanisms that are socially efficient. In our environment, sellers achieve this by posting an auction with a reserve price equal to their own valuation, along with a transfer that is paid by (or to) all buyers with whom the seller meets. However, we define a novel condition on meeting technologies, which we call “invariance,” and show that the transfer is equal to zero if and only if the meeting technology satisfies this condition.

Debunking Mill’s “Fourth Fundamental Proposition on Capital”

J S Mill’s enigmatic "Fourth Proposition on Capital" has been brought to our notice by Steven Kates (2015). Kates takes a positive view of the proposition. Our focus is not, however, on Kates, but on the aforesaid proposition. The purpose of this paper is to demonstrate, via close examination of Mill’s explanatory examples, just how unsatisfactory are its foundations. We conclude that the doubters are justified: Mill’s Fourth Proposition is, demonstrably, a muddle.

The response of the external finance premium in Asian corporate bond markets to financial characteristics, financial constraints and two financial crises

Empirical investigation of the external finance premium has been conducted on the margin between internal finance and bank borrowing or equities but little attention has been given to corporate bonds, especially for the emerging Asian market. In this paper, we hypothesize that balance sheet indicators of creditworthiness could affect the external finance premium for bonds as they do for premia in other markets. Using bond-specific and firm-specific data for China, Hong Kong, Indonesia, Korea, Philippines, Singapore and Thailand during 1995-2009 we find that firms with better financial health face lower external finance premia in all countries. When we introduce firm-level heterogeneity, we show that financial variables appear to be both statistically and quantitatively more important for financially constrained firms. Finally, when we examine the effects of the 1997-98 Asian crisis and the 2007-09 global financial crisis, we find that the sensitivity of the premium is greater for constrained firms during the Asian crisis compared to other times.

Monetary policy strategies, financial institutions and financial markets in the Middle East and North Africa: an overview

Three polar types of monetary architecture are identified together with the institutional and market infrastructure required for each type and the kinds of monetary policy feasible in each case: a ‘basic’ architecture where there is little or no financial system as such but an elementary central bank which is able to fix the exchange rate, as a substitute for a proper monetary policy; a ‘modern’ monetary architecture with developed banks, financial markets and central bank where policy choices include types of inflation targeting; and an ‘intermediate’ monetary architecture where less market-based monetary policies involving less discretion are feasible. A range of data is used to locate the various MENA countries with respect to these polar types. Five countries (Iran, Libya, Sudan, Syria and Yemen) are identified as those with the least developed monetary architecture, while Bahrain and Jordan are identified as the group at the other end of the spectrum, reaching beyond the intermediate polar type in some dimensions but not others. The countries in between vary on different dimensions but all lie between basic and intermediate architectures. The key general findings are that the MENA countries are both less differentiated and less ‘developed’ than might have been expected. The paper ends by calling for research on the costs and benefits of different types of monetary architecture.

Fiscal multipliers in a two-sector search and matching model

This paper evaluates the effects of policy interventions on sectoral labour markets and the aggregate economy in a business cycle model with search and matching frictions. We extend the canonical model by including capital-skill complementarity in production, labour markets with skilled and unskilled workers and on-the-job-learning (OJL) within and across skill types. We first find that, the model does a good job at matching the cyclical properties of sectoral employment and the wage-skill premium. We next find that vacancy subsidies for skilled and unskilled jobs lead to output multipliers which are greater than unity with OJL and less than unity without OJL. In contrast, the positive output effects from cutting skilled and unskilled income taxes are close to zero. Finally, we find that the sectoral and aggregate effects of vacancy subsidies do not depend on whether they are financed via public debt or distorting taxes.

Co-Movement, Spillovers and Excess Returns in Global Bond Markets

This paper investigates global term structure dynamics using a Bayesian hierarchical factor model augmented with macroeconomic fundamentals. More than half of the variation in bond yields of seven advanced economies is due to global co-movement, which is mainly attributed to shocks to non-fundamentals. Global fundamentals, especially global inflation, affect yields through a ‘policy channel’ and a ‘risk compensation channel’, but the effects through two channels are offset. This evidence explains the unsatisfactory performance of fundamentals-driven term structure models. Our approach delineates asymmetric spillovers in global bond markets connected to diverging monetary policies. The proposed model is robust as identified factors has significant explanatory power of excess returns. The finding that global inflation uncertainty is useful in explaining realized excess returns does not rule out regime changing as a source of non-fundamental fluctuations.

Private Governance of Financial Markets: the US Regulatory Regime on Hedge Funds

The article investigates the private governance of financial markets by looking at the evolution of the regulatory debate on hedge funds in the US market. It starts from the premise that the privatization of regulation is always the result of a political decision and analyzes how this decision came about and was implemented in the case of hedge funds. The starting point is the failure of two initiatives on hedge funds that US regulators launched between 1999 an 2004, which the analysis explains by elaborating the concept of self-capture. Facing a trade off between the need to tackle publicly demonized issues and the difficulty of monitoring increasingly sophisticated and powerful private markets, regulators purposefully designed initiatives that were not meant to succeed, that is, they “self-captured” their own activity. By formulating initiatives that were inherently flawed, regulators saved their public role and at the same time paved the way for the privatization of hedge fund regulation. This explanation identifies a link between the failure of public initiatives and the success of private ones. It illustrates a specific case of formation of private authority in financial markets that points to a more general practice emerging in the regulation of finance.

Natural Capital's perception by Kodagu communities: a comparative study (Karnataka, India)

When we ask ourselves about a concrete definition of “Natural Capital” we can find a large and wide range of conceptions, which are attached to it. These can turn out to be confusing and contradictory in some cases. In theory, through books and different studies we know natural resources are composed by all the natural actives originated by the nature itself. Besides, these conform a patrimony for society as them are translated into a path towards economy: The Natural Capital. May not the Natural Capital be an easy conception to put in terms of economy it turns out to be an important capacitor for economy growth in most countries. In any case, we can clearly distinguish two ways as Natural Capital can be seen. One may elaborate a definition about it by reading what others have previously written, those who usually are quite far from the direct use of natural resources. On the other hand it would also be interesting to conform a definition of it by asking people who are constantly in contact with natural resources and consequently contribute to form the Natural Capital.

Markets and linguistic diversity

The choice of language is a crucial decision for firms competing in cultural goods and media markets with a bilingual or multilingual consumer base. To the extent that multilingual consumers have preferences over the intrinsic characteristics (content) as well as over the language of the product, we can examine the efficiency of market outcomes regarding linguistic diversity. In this paper, I extend the spokes model and introduce language as an additional dimension of product differentiation. I show that: (i) if firms supply their product in a single language (the adoption model) then the degree of linguistic diversity is inefficiently low, and (ii) if some firms supply more than one linguistic version (the translation model) then in principle the market outcome may exhibit insufficient or excessive linguistic diversity. However, excessive diversity is associated to markets where the fraction of products in the minority language is disproportionately high with respect to the relative size of the linguistic minority.