Harvard Economic Studies – serie

The current debate over the economics of advertising has long focused on two questions. The first concerns the impact of advertising on the relative positions of large and small firms in an industry and thereby on the state of competition. The second examines the role of advertising on consumer purchasing decisions over broad consumption categories. Comanor and Wilson use the modern tools of economic theory and statistics to build and test their hypotheses, and contribute important analytical and empirical evidence on the key issues.The authors find that consumer decisions are affected substantially by the volume of advertising. Indeed, advertising is a weightier factor than relative prices. Their conclusions surely contribute to the nervousness long felt by economists over the use of consumer preferences to evaluate the welfare implications of resource allocation.

In his study of Canada, John A. Stovel examines the changes in that country’s balance of payments and balance of trade from confederation to the present day, including as part of his examination historical, statistical, and theoretical points of view. The author also reexamines critically—and finds himself in sharp disagreement with—Jacob Viner’s classic in the field, Canada’s Balance of International Indebtedness, 1900-1913, which has long been considered the definitive analysis of the subject.Developing in Part I an eclectic theory of international balance of payments, and in Part II concentrating on the Canadian balance of trade and balance of payments in relation to economic developments preceding World War I, Stovel carefully prepares the foundation for a critique of Viner’s analysis of the period 1900-1913. Discussing the inadequacy of the Mill-Taussig theory and its empirical verification, and observing the extent to which the newer theoretical developments have afforded increased understanding, Stovel criticizes Viner’s statistics and the use to which they were put. He delineates with telling clarity the mutual interaction of many elements in cyclical growth development, as opposed to the oversimplified and inadequate causal links of the earlier theory.In addition to the wealth of analysis of the earlier period, the author investigates the interwar period, with the postwar boom and the depression of the thirties, presenting a careful analysis of the structural changes in the balance of payments during this period as well as indicating the change in Canada’s relation to the United States and Great Britain. The concluding section of the book deals with the period following World War II, and the author indicates the possible lessons to be learned from Canada’s experiences and the improvements in government policy that have taken place, especially with respect to exchange rates.

Between 1951 and 1962 nearly ten billion dollars in long-term capital (both direct investment and purchase of securities) flowed into Canada. This massive amount represented one third of all long-term capital moving among industrial nations. Its transfer marked the first time since before World War I that the world witnessed such a large-scale international movement of capital motivated primarily by a prospect of higher rates of return.In Capital Transfers and Economic Policy the authors test the theory of the causes and effects of international capital movements against the evidence drawn from Canada's experience. They explore Canada's adjustment to capital flows and show how the operation of her economic policy is affected by the sensitivity of capital flows to the country's interest rates and foreign-exchange rate. Their brilliant analysis is particularly valuable in light of current trends in capital flows among industrial nations and the June 1970 return of the Canadian dollar to a flexible exchange rate, which put the economy in a working situation similar to that of the fifties.

In this vigorous and well-documented "current view" of competition in the mid-western coal industry, Reed Moyer has set himself two tasks: to bring up to date existing economic analyses and to correct a "distortion which arises from generalizing about an industry composed of several diverse parts."Most previous economic analyses have become obsolete, partly because of the shifting picture within the industry. Moyer’s detailed study of the economic behavior of the midwestern coal industry focuses on the transformation in the mining operation. Contrary to popular opinion, the bituminous coal industry in the Midwest is not "chronically depressed"; instead, it is successfully surmounting years of stagnation dating back to the 1920s, the effects of strikes, and the stiff competition offered coal by other fuels in the recent past. Concerned primarily with the coal producing regions of Illinois, Indiana, and western Kentucky, the author considers not only the economic factors touching the industry, but the geologic and geographic as well. In a framework of market structure, conduct, and performance Moyer analyzes in detail the "geographically isolated position of the midwestern coal industry," which "limits interdistrict competition."Ample discussion is devoted to factors which influence the structural characteristics and the economic behavior of the industry: seller concentration, the importance of freight rates in determining delivery costs, price competition, entry barriers, and the effect of mining techniques on resource conservation, to name a few. The book includes an extensive treatment of the mining methods, strip and underground, common to the region, and their influence on its economic picture. This crisply written technical study searches thoroughly into the many facets of a leading component of a still lively major industry. The author has drawn on a supply of unpublished material as well as on information from confidential sources.

With the nations of the world becoming more interdependent, it is imperative to take international influences into account in understanding the organization of industry within a country. This book extends the structure/conduct/performance framework of analysis to present a fully specified simultaneous equation model of an open economy—Canada.By estimating a system of equations of all the major variables, the authors can identify which variables are dependent and which are independent. They are thus able to assess the relative importance of such factors as seller concentration, import competition, retailing structure, advertising expenditure, research and development spending, and technical and allocative efficiency in shaping the organization of industry in Canada. In addition, using both industry-level and firm-level data, the authors develop methods for assessing the effect of structural variables on diversification strategies and the consequences for market performance. They also study the effects of such variables on firms’ access to capital markets. The book concludes with a discussion of the implications of the findings for government policy.

In Consumption Behavior and the Effects of Government Fiscal Policies, Randall Mariger explores how people make decisions about how much to consume and save over their lifetimes. An understanding of these issues illuminates not only individual behavior but important properties of the macro economy as well. The most popular framework for analyzing consumption has been the life-cycle theory. Mariger tests two fundamental, and controversial, assumptions underlying the theory—that there are no planned bequests and that human capital is marketable. To do this, he fits a structural consumption model that incorporates endogenous liquidity constraints (non-marketability of human capital), but no planned bequests, to data on a cross-section of U. S. families. This estimated model, in conjunction with estimates of alternative models, enables him to make inferences about the respective effects of liquidity constraints and social security wealth on consumption. This latter effect yields indirect evidence concerning planned bequests. Mariger also presents direct evidence concerning bequest behavior.Among his findings are that the model fits the data very well in spite of its tight theoretical structure; that liquidity constraints are prevalent and have important effects on consumption behavior; that planned bequests appear not to be common among families in the lower 99.1% of the wealth distribution; and that families in the upper 0.9% of the wealth distribution appear to plan substantial bequests. Mariger devotes the latter part of his book to studying the implications of his estimated consumption model for the effects of government fiscal policies. More specifically, he simulates the model to infer the effects of government tax/debt policy, as well as those of the social security system, on aggregate savings.

One of the most striking features of contemporary industrial economies is their ability to offer an ever-expanding and improving range of products. Personal computers, tiny pacemakers, digital watches, and VCRs simply did not exist, and were not even dreamt of, only a few decades ago. Such product innovations play an increasingly important role in modern economic growth, and it is therefore imperative that economists come to grips with them, just as they have done with traditional economic phenomena.In this skillfully crafted and imaginative study, Manuel Trajtenberg develops the tools to quantify and analyze the notion of product innovation. He argues persuasively that the magnitude of an innovation should be equated with the social benefits that it generates. Drawing from the "characteristics approach" to demand theory and the econometrics of discrete choice, he presents an ingenious method to estimate the benefits from product innovations that accrue to the consumer over time. His method centers on consumer preferences for different product attributes -such as speed and size of memory in computers-and then uses those preferences to evaluate the changes in attributes.Trajtenberg applies his approach to the study of one of the most remarkable innovations in medical technology--Computed Tomography (CT) scanners. He assembled for that purpose an impressive set of data on every aspect of the new technology, from qualities and prices, patents and research, to details on virtually every sale in the United States during the decade following the introduction of CT in 1973. This close-up view of an innovation, quite rare in economic literature, offers valuable insights on the nature of the innovative process, the interaction between innovation and diffusion, the effects of uncertainty about quality, and the implications of changing preferences.

Why should manufacturing firms in many national industries maintain multiple small scale plants when they might produce the same output at a lower unit cost in a single large establishment? What specific benefits are attained through the operation of multiple plants? To address these questions, the authors conducted 125 in-depth interviews with businessmen actively involved in plant size and multi-plant operating decisions. They investigated the experience of twelve industries in six countries (West Germany, France, the United Kingdom, Sweden, Canada, and the United States).The authors develop an economic theory of plant size and multi-plant decisions and apply it to analyze the statistical and qualitative evidence on factors affecting plant size choices. They then examine the extent of multi-plant operation, its statistical correlate, and the economy actually or potentially realizable from various modes of multi-plant operation. Implications are drawn from antitrust and foreign trade policy, the evolution of scientific business management, and the development of industrial organization knowledge.

The safety of the work place is now a highly visible public issue. Many are calling for tighter regulation to reduce worker risk, while others feel government intervention is ineffective and costly. Here Kip Viscusi explores how well markets for hazardous jobs actually work. According to classical economics, other things being equal, a worker will demand more pay for a hazardous job than a safe one. However, this assumes that job related hazards are known, when often they are not. Using recent advances in the economics of information, Viscusi develops a theory of individual responses to job hazards under conditions of uncertainty.His assumptions are that hazards are uncertain events and that learning about them is a process that takes place over time. He then employs this analysis to study the performance of job markets in matching persons and jobs and in compensating persons for exposure to hazards. Finally he tests his adaptive model of the decision to quit and finds substantial evidence that risks are indeed reflected in wage differentials and quit behavior.

These three elegant essays develop principles central to the understanding of the diverse ways in which imperfect information affects the distribution of resources, incentives, and the evaluation of economic policy. The first concerns the special role that information plays in the allocation process when it is possible to improve accuracy through private investment. The common practice of hiring “experts” whose information is presumably much better than their clients' is analyzed. Issues of cooperative behavior when potential group members possess diverse pieces of information are addressed. Emphasis is placed on the adaptation of the “core” concept from game theory to the resource allocation model with differential information.The second essay deals with the extent to which agents can influence the random events they face. This is known as moral hazard, and in its presence there is a potential inefficiency in the economic system. Two special models are studied: the role of moral hazard in a monetary economy, and the role of an outside adjudicatory agency that has the power to enforce fines and compensation.The final essay discusses the problem of certainty equivalence in economic policy. Conditions under which a full stochastic optimization can be calculated by solving a related, much simpler “certainty equivalence” problem are developed. The reduction in the complexity of calculation involved is very great compared with the potential loss of efficiency.

Perhaps the most important economic development of recent years has been the integration process engaged in by European countries. Today other groups of countries throughout the world either contemplate or have already undertaken similar courses of action. Although professional economists have already devoted much attention to the subject, considerable work remains to be done. The present study represents an attempt to advance our scientific knowledge in this direction.This work is entirely theoretical and fully deductive. Its contribution lies both in the method used and in the conclusions reached. In contrast to most previous studies of customs unions and economic integration, exclusive use is made of general-equilibrium analysis. Because interpretation of mathematical results bearing on comparative statistics of suboptimal situations was found impossible, the author has depended wholly upon geometry. While the geometrical method does not allow inclusion of large numbers of variables, it often leads to, or at least intuitively suggests, important generalizations.The findings, summarized in 107 points at the end of the study, can be classified in two distinct categories. On the one hand, a number of results are derived concerning the trade effects of international discrimination and customs unions—that is, the effects on the volumes of exports and imports and on relative international values. On the other hand, the more important portions of this work study the effects of customs unions on the welfare of the union, the welfare of the rest of the world, and the global efficiency of resource allocation in the world as a whole. Inter-country welfare comparisons and the use of cardinal utility indexes are entirely avoided. Rather, the author uses the concept of ordinal utility, and makes extensive use of utility-possibility analysis. With respect to the latter, the study of customs unions actually suggests a new method applicable to a wide range of other suboptimal situations in general equilibrium.

The redistribution of income has been a key element in Peruvian governmental policy. Both the Belaunde and Velasco regimes professed a deep concern with economic injustice, and they have been regarded as models of peaceful progress toward social justice. Despite its good intentions, Richard Webb shows, the government has had little impact on the rigid imbalance of wealth in Peru. The rich have continued to get richer faster than the poor have got less poor. Inequality has grown, and those most in need of improvement have benefited least. The tax structure has actually become more regressive. with taxes raised most on middle-income groups and least on the very rich.Overall, the Peruvian government's economic policy has been mildly progressive, but not progressive enough to have an appreciable effect on the widespread poverty. What is needed, Webb argues, are movements of capital from the modern sector of the economy to the traditional sector to create new jobs for the poor. "Finally, substantial redistribution seems to require changes in attitude. The elimination of poverty must precede a concern for equity per se, and the needs of the very poor must acquire the status of rights rather than claims to compassion."

What determines the rate of growth, the distribution of income, and the structure of relative prices under capitalism? What, in short, makes capitalist economies tick? This watershed treatise analyzes the answers to these questions provided by three major theoretical traditions: neoclassical, neo-Marxian, and neo-Keynesian. Until now, the mutual criticism exchanged by partisans of the different traditions has focused disproportionately on the logical shortcomings of rival theories, or on such questions as whether or not input–output relationships can be described by a continuous-substitution production function.In this book, these are at best secondary issues. The real distinguishing features of the theories, for Stephen Marglin, are their characterization of labor markets and capital accumulation. For clarity, Marglin first sets out the essential features of each theory in the context of a common production model with a single good and a fixed-coefficient technology. He then formalizes the different theories as alternative ways of closing the model. In subsequent chapters he examines the effects of relaxing key simplifying assumptions, in particular the characterization of technology and the homogeneity of output and capital. And although his primary emphasis is theoretical, he does not ignore the problem of empirically testing the theories. Finally, he synthesizes the insights of the neo-Marxian and neo-Keynesian models into a single model that transcends the shortcomings of each taken separately.Marglin anticipates that partisans of the different traditions will agree on one point: each will allow that the book reveals the shortcomings of the other theories but will insist that it fails utterly to reflect the power and majesty of one’s own particular brand of truth. Growth, Distribution, and Prices will be controversial, but it will not be ignored.

This book assesses the effects of spatially concentrated programs for housing and neighborhood improvement. These programs provide direct assistance to low–income property owners in an attempt to arrest neighborhood decline and encourage revitalization. The authors used the Harvard Urban Development Simulation Model (HUDS) in evaluating these programs. HUDS, a large–scale computer model, represents the process of housing rehabilitation, the production and consumption of housing services, household moving decisions, and other determinant of neighborhood change. The model simulates the behavior of approximately 80,000 individual households in two hundred residential neighborhoods of various quality levels. Unlike more aggregate models of urban development, HUDS has the capacity to identify how specific housing policies affect individual households as well as particular neighborhoods. Since program evaluations are no better than the models on which they are based, the authors provide sufficient detail to permit those readers primarily interested in the policy analysis to assess the methodology and to understandhow the policies are represented in the model; a more technical discussion of the model is then presented in appendixes.Although the simulations focus on policies that induce central–city property owners to upgrade their properties and thus stimulate revitalization, many of the authors' findings are relevant to larger issues of urban development. For example, the analysis of how housing rehabilitation subsidies affect the investment behavior of nonsubsidized property owners provides insights about the link between initial upgrading and sustained neighborhood improvement. The analysis also demonstrates how differences in location, household, and housing stock characteristics affect a particular neighborhood’s responsiveness to a common policy initiative.

Developing a unified theory of production and investment, Vernon L. Smith explores the empirical and theoretical nature of the interdependence between “short-run” current account production decisions and “long-run” investment planning, taking into account such technological factors as equipment replacement. The book builds an explicit theory of production planning by integrating production, investment, and equipment replacement policy, derives the decision implications of the use of durable capital goods, and examines the production function concept and the production decision process in engineering design and in general business practice.

This book develops an original theory of group and organizational behavior that cuts across disciplinary lines and illustrates the theory with empirical and historical studies of particular organizations. Applying economic analysis to the subjects of the political scientist, sociologist, and economist, Mancur Olson examines the extent to which the individuals that share a common interest find it in their individual interest to bear the costs of the organizational effort.The theory shows that most organizations produce what the economist calls “public goods”—goods or services that are available to every member, whether or not he has borne any of the costs of providing them. Economists have long understood that defense, law, and order were public goods that could not be marketed to individuals, and that taxation was necessary. They have not, however, taken account of the fact that private as well as governmental organizations produce public goods.The services the labor union provides for the worker it represents, or the benefits a lobby obtains for the group it represents, are public goods: they automatically go to every individual in the group, whether or not he helped bear the costs. It follows that, just as governments require compulsory taxation, many large private organizations require special (and sometimes coercive) devices to obtain the resources they need. This is not true of smaller organizations for, as this book shows, small and large organizations support themselves in entirely different ways. The theory indicates that, though small groups can act to further their interest much more easily than large ones, they will tend to devote too few resources to the satisfaction of their common interests, and that there is a surprising tendency for the “lesser” members of the small group to exploit the “greater” members by making them bear a disproportionate share of the burden of any group action.All of the theory in the book is in Chapter 1; the remaining chapters contain empirical and historical evidence of the theory’s relevance to labor unions, pressure groups, corporations, and Marxian class action.

In the first study in depth of this subject by an economist, the author focuses on a major problem—common to all planned economies—that has confronted the Chinese Communists: whether to centralize all controls in the hands of the planners, or to allow factory and farm managers some degree of autonomy regulated only by the indirect pressures of the market. Because the finding of a satisfactory solution has been of highest importance to Peking, this study of the issue throws light on the shifts and turns of Chinese economic policy in general and on the underlying nature and significance of the broad trends in China's economy and society since 1949.

This book examines, in rigorous, quantitative detail, the structure of trade between Japan and the United States, tracing the evolution of trade interdependence and the causes of its increasing intensity. It also looks at sectoral differences in interdependence—at the patterns behind changes in the composition of trade and the complex factors that determine how individual sectors of each economy respond to economic change in all the others.In the first part, the author designs and estimates a multicountry, multisectoral general equilibrium model. The model is operationalized with careful estimates of the parameters that govern demand, production, and trade in both economies. In the second part, the model is employed to explore various aspects of interdependence and commercial policy. Peter Petri's findings indicate, among other things, that the American and Japanese economies are more closely related than one might judge from the size of their trade. As a result of differences in the structures of the two economies, their interdependence is sharply asymmetric, with economic events in the United States having a greater impact on Japan than vice versa. The study also shows that the roots of bilateral conflict can be traced to structural causes, and suggests that recent structural changes may have increased the incentives for protectionism.

The Law of the Sea (LOS) treaty resulted from some of the most complicated multilateral negotiations ever conducted. Difficult bargaining produced a remarkably sophisticated agreement on the financial aspects of deep ocean mining and on the financing of a new international mining entity. This book analyzes those negotiations along with the abrupt U.S. rejection of their results. Building from this episode, it derives important and subtle general rules and propositions for reaching superior, sustainable agreements in complex bargaining situations.James Sebenius shows how agreements were possible among the parties because and not in spite of differences in their values, expectations, and attitudes toward time and risk. He shows how linking separately intractable issues can generate a zone of possible agreement. He analyzes the extensive role of a computer model in the LOS talks. Finally, he argues that in many negotiations neither the issues nor the parties are fixed and develops analytic techniques that predict how the addition or deletion of either issues or parties may affect the process of reaching agreement.

The service sector represents a smaller share of the national economy in the Soviet Union than in other countries at similar levels. This gap is found in trade, in private and business services, and, surprisingly, in public administration. Gur Ofer provides a twofold examination of this phenomenon. He uses cross country comparisons to study the “normal” relationships between the size of the service institutions and economic development. At the same time he investigates specific factors operating in Socialist and Soviet countries, thus uniting the special Soviet case with general development theory.

In 1965, a group of economists at Harvard University established the Project for Quantitative Research in Economic Development in the Center for International Affairs. Brought together by a common background of fieldwork in developing countries and a desire to apply modern techniques of quantitative analysis to the policy problems of these countries, they produced this volume, which represents that part of their research devoted to formulating operational ways of thinking about development problems.The seventeen essays are organized into four sections: General Planning Models, International Trade and External Resources, Sectoral Planning, and Empirical Bases for Development Programs. They raise some central questions: To what extent can capital and labor substitute for each other? Does development require fixed inputs of engineers and other specialists in each sector or are skills highly substitutable? Is the trade gap a structural phenomenon or merely evidence of an overvalued exchange rate? To what extent do consumers respond to changes in relative prices?

This important contribution to tax analysis presents seven related theoretical essays that examine the effects of capital income taxation on the behavior of firms. It is divided into three sections, focusing on optimal tax design, firm financial policy, and inflation. Taken together, the essays demonstrate the powerful role taxes play in shaping the behavior of American corporations, and also provide insights into the difficult task of tax reform.Alan Auerbach’s results suggest policies the government might adopt to promote the optimal accumulation of capital. He examines the implications for capital taxation of discrepancies between nominal depreciation rates and real economic depreciation, and suggests appropriate rules of thumb for determining when capital taxation is neutral among alternative investment projects. He also makes important contributions to the debate over the integration of corporate and personal taxes on capital income and to the behavioral puzzle of why corporations pay dividends to their shareholders.

Concerned primarily with oligopoly, this work includes a general study of pricing in three different markets—perfect competition, perfect monopoly, and imperfect competition. The solutions of these markets offered by Cournot, Smithies, Chamberlin, Stackelberg, Fellner, and Robinson are presented mathematically, followed by the author’s own version of the theory of rational pricing in oligopoly.Previous authors have not allowed for all the variables arising from profit and price situations in the market. Here, more realistic assumptions and more complex analyses indicate that sellers in oligopoly situations do not always need to arrange specific agreements—hence, that “administered” pricing does not inevitably occur when the market is dominated by a few producers.

How much does a country's commercial policy affect its economic efficiency? How would free trade change the structure of a country’s economy and foreign trade? William Penfield Travis extends the Heckscher-Ohlin trade theory and addresses it to an empirical study of these and related questions. He argues that trade flows fail to reflect relative factor endowments because protection systematically nullifies their effects, and that therefore protection must be incorporated in any positive trade theory.The author begins by developing a new concept—the equalization region—which he uses to reexamine the assumptions and the logic of the Heckscher-Ohlin theory and of its principal part, the factor-price equalization theorem. This analysis produces a fundamental reinterpretation of Leontief’s scarce-factor paradox, one which justifies Leontief’s work as an empirical test of trade theory under free trade which indicates its necessary modifications under protection. These modifications are then used to show that Leontief in fact measured the effects of American and foreign tariffs and other trade restriction on relative factor prices here and abroad.To corroborate his theoretical analysis, Travis makes a detailed study of the commercial policies of five main industrial countries; he shows the common structure of protection and its systematic relationship to relative factor endowments. He shows also that protection, by distorting their relative prices, causes considerable substitution of raw materials for labor and capital inputs in manufacturing. The author concludes this important book by indicating some of the new forms which protection is taking throughout the world and by arguing that protection, past and present, is the main force preventing the spread of high living standards to the impoverished areas of the world.

This comprehensive discussion of international trade theories focuses on logically distinct models of international trade rather than on chronology or “schools of thought.” The author gives primary attention to the differences in the empirical implications derivable from the “Heckscher-Ohlin model” and from the simple classical comparative models of international trade. He also emphasizes the recurrence of controversy over matters of aggregation, due to the lack of a common criterion, and the rich variety of model types that result from dynamic theorizing, discrediting the search for an ultimate dynamic international trade model. This book is intended especially for teachers and graduate students who require a broad understanding of basic theories in the field.

Carl Kaysen offers a penetrating economic analysis of the issues in the civil antitrust suit brought by the United States Government against the United Shoe Machinery Corporation under Sections 1 and 2 of the Sherman Act. Kaysen, who served as clerk to Judge Charles E. Wyzanski, Jr. of the U.S. District Court of Massachusetts for this case, provides background material on the technique of shoe machinery and shoe manufacture, on the history of the United Shoe Machinery, and on the Anti-Trust Laws.

A consultant with McKinsey & Company surveys the international aluminum industry and asks why its various activities are divided among firms in the way that they are. These components include the minding of bauxite, its refining into alumina, aluminum smelting, fabrication, and manufacture of the final product. What is it about this industry that encourages joint ventures in some cases, long-term contracts in others, and vertical integration and merger in still others?The author identifies and analyzes the factors which motivate firms to adopt one or another of these patterns of doing business. He draws on and extends recent developments in theory relating to the operation of markets and organizations, and tests the power of theories to explain what is observed in the industry. He has assembled a great deal of empirical evidence, focusing on the United States, Japan, and Australia. The book should become the standard study of the aluminum industry.