Waterloo economics series | 1996

Abstracts of working papers

# 9616 -- Charles Blackorby, Walter Bossert and David Donaldson

Immigration control and the welfare state


We examine the possibilities of extending Sen's taxonomy of fixed-population information assumptions regarding the measurability and interpersonal comparability of individual utilities to social-choice problems where the population may vary. It is shown that in order to avoid impossibility results, more restrictive assumptions than in the fixed-population framework are required. We provide characterizations of variable-population social-welfare orderings based on information assumptions, and we suggest a way of generating the required informational environment by means of norms which impose a domain restriction on the set of possible utility profiles.

Journal of Economic Literature (JEL) classification



Population, social choice, information invariance

#9615 -- Ed Nosal

Optimal at-will contracts


The theory of optimal labour contracts has been criticized because it yields conclusions that are not robust and, in some cases, counter-intuitive. These unfortunate features of the theory can be removed if a simple modification is made in terms of the way in which contracts are enforced. In the labour contracting literature, it is standard to assume that contracts are enforced by a method that can best be described as specific performance, which effectively guarantees that contracts will be implemented as they are written. In practice, labour contracts are not enforced by specific performance, but instead are enforced by an at-will rule. In this paper, a stylized labour contract model is constructed where it is shown that when contracts are enforced by a specific performance rule, then above mentioned unfortunate features emerge. These features 'disappear' when the environment is amended by assuming that the court uses an at-will rule to enforce contracts.

#9614 -- Ed Nosal

Contract renegotiation in a continuous state space


When players are unable to write complete state contingent contracts, it is shown, within the context of a non-cooperative contracting-renegotiation game, that the only subgame perfect equilibrium allocations are those that correspond to the set of first- best allocations. Players are able to implement this set of allocations by signing an initial contract that is subsequently renegotiated in all states of the world. The contracting-renegotiation problem is complicated in an interesting way by assuming that the state space is continuous. The issue of the existence of an initial contract, that is subsequently renegotiated to the set of first-best allocations, must be resolved. Unlike Aghion, Dewatripont and Rey (1994), the results here do not require nor depend upon the comonotonicity of the objective functions.


Principal-agent model, incomplete contracts, renegotiation, continuous state space, subgame perfect equilibrium

#9613 -- Michael K. Y. Fung, Wai-Ming Ho and Lijing Zhu

Macroeconomic control in the transforming Chinese economy: an analysis of long-run effect


The purpose of this paper is to study the issue of macroeconomic control in China. The investigation is conducted within the context of an endogenous growth model that incorporates the major institutional features of the transforming Chinese economy. Using this framework, we evaluate the long-run effects of changes in the policy instruments available to the Chinese government on the economy and identify the transmission mechanisms through which the policy instruments affect the key macroeconomic aggregates. Some policy recommendations concerning how to maintain macroeconomic stability in China are assessed in the light of the results derived.

#9612 -- Wai-Ming Ho

Government spending, credit market imperfections, and economic growth


This paper presents an endogenous growth model in which there is an explicit treatment of the informational asymmetries giving rise to finance constraints in the credit market. The model is used to study the impact of government spending policies on econo mic growth, and to examine the role of informational imperfections in the determination of both transitional dynamics and balanced growth paths. Although changes in government spending have qualitatively similar effects on the balanced growth paths of eco nomies with and without private information, these effects differ quantitively. Moreover, the dynamic adjustment paths of these two economies are markedly different.

#9611 -- Wai-Ming Ho

Credit market imperfections and nominal exchange rate regimes


This paper presents a two-country, two-good, two-currency overlapping generations model that features limited participation and costly state verification in the credit markets. The model is used to study the role of financial factors in the international transmission of business fluctuations, and to analyze whether the presence of credit market imperfections may have an important impact on the relative desirability of alternative exchange rate regimes. In the presence of informational frictions in credit markets, shocks to productivity are shown to have different channels of influence on the world economy under alternative exchange rate regimes. It is also shown that although a flexible exchange rate regime may insulate a country from the real shocks of other countries, such shocks may lead the country to attain higher expected welfare levels under a fixed exchange rate regime.

#9610 -- Robert R. Kerton

Appropriate products in sustainable development: two major policies of the United Nations


International trade can increase both beneficial and harmful choices available to consumers and to firms. The debate about appropriate technology warned us to pay attention to pre-consumption choices. Later work on sustainable development alerted us to be equally prudent about post-consumption effects. While it is agreed that the product life cycle approach is highly useful for sustainable development, explicit attention must also be given to the consumer, to the consumption period, and to the appropriate ness of the product itself. Information on inappropriate products, especially on pharmaceutical exports, demonstrates that emerging markets provide special opportunities for those who sell dangerous or useless products. International action is required. This paper assesses two initiatives of the United Nations evaluating them as methods for implementing the Appropriate Products concept.

#9609 -- Walter Bossert

Uncertainty aversion in nonprobabilistic decision models


This paper proposes a definition of uncertainty aversion for nonprobabilistic decision models and characterizes the decision rules that are uncertainty averse in that sense. Dual results are obtained for uncertainty appeal, and it is shown that imposing an uncertainty neutrality condition leads to an impossibility result.

JEL classification



Decision theory, uncertainty aversion

#9608 -- Charles Blackorby, Walter Bossert and David Donaldson

Foreign aid and population policy: some ethical considerations


This paper analyzes a two-period foreign-aid model where assistance can be given in the form of consumption or population-control aid. Population size in period two is endogenous. Using the family of ethical principles called Critical-Level Utilitarianism, we examine the properties of ethically optimal resource allocations. Two variants of the basic model, in which production may or may not be endogenous, are discussed. Our results show that direction of the ethical response of population size to changes in the cost of population control and the size of the grant depends on the relationship between the critical level of well-being, an ethical parameter, and the standard of living in the recipient country.

JEL classification

D63, O15


Social evaluation, foreign aid, population growth

#9607 -- Ramesh C. Kumar

On optimal capacity expansion for domestic processing of an exhaustible, natural resource


The issue of optimal capacity expansion for domestic processing of exhaustible, natural resource exports in a small open economy is analyzed in the context of non-malleable capital. A complete qualitative characterization of the optimal dynamic paths for resource extraction, domestic processing and capacity expansion is obtained. It is shown that the inclusion of capital-stock adjustment costs, which vary directly with the rate of capacity expansion in the resource processing sector, implies a presumption in favour of a policy of domestic processing, and that the optimal pattern of capacity expansion is of the front-end loading variety.

#9606 -- Michael A. Busseri, Robert R. Kerton and Herbert M. Lefcourt

Beyond control? Predicting consumer behaviour using a measure for consumer locus of control


Does a consumer always have the "control" over the purchase decision assumed by traditional economic theory? Kahneman, Tversky and others, in some well known work, give explicit attention to cognitive limitations facing ordinary consumers. And research in psychology has made successful use of a personality construct known as "locus of control", a method which has held an important position in personality research since its introduction by Rotter in the mid-1960s. Studies now number in the thousands. Locus of control addresses beliefs about one's role in determining personal life outcomes (not specifically in the domain of the consumer). An individual holds 'internal' locus of control beliefs if s/he believes her- or himself to be an active agent in determining life's outcomes. Another individual is described as 'external' if s/he believes that what happens is determined by forces such as luck, fate, or powerful outsiders.
We apply locus of control specifically to consumer decisions. To do so, a measurement device, the Consumer Locus Of Control, (CLOC) is constructed and tested (N=369). The method makes use of a set of interview questions to collect information on the degree of control the respondent believes to be in force in specific consumer circumstances. The results are highly encouraging and superior, in the consumer domain, to two extant measures of locus of control.
How does control affect outcomes? When shopping, an "external" may be less likely to seek the help of knowledgeable sources or to search out information about characteristics of a product before buying it. An external might also simplify the shopping task by letting outside sources (television advertisements or domineering salespeople) influence decisions. Our measure is successful in identifying different groups by degree of control. The concept has obvious importance to marketing and is every bit as significant for consumer welfare.
The analysis sharply increases the importance of competition policies. Other policy implications differ sharply from what is recommended by well-intended leaders who do not take account of the CLOC distinction. One troubling example concerns certain "deregulation" measures which give governance of redress to interest groups dominated by industry. A second example deals with information programs which are broadly supported by researchers and policy-makers alike. This confidence may be excessive if consumers exhibiting low control scores have no intention of ever using informational material. More useful would be policies designed to enhance control.

#9605 -- James Brox and Ramesh Kumar

Valuing camp-site characteristics: a generalized travel-cost model of demand for recreational camping


The multiple-site travel-cost demand model of Vaughan and Russell is extended to apply to recreational camping. Unlike previous applications, particular attention is paid to the detection and correction of groupwise heteroscedasticity which is likely to a rise in multiple-site models. A semi-log demand model estimated in the context of forty-eight provincial parks in the Province of Ontario, Canada, suggests that recreational camping is likely to be an inferior commodity. Also, the consistent significance of the substitute-site variable implies that the demand parameter estimates are likely to be biased in its absence. The model is also used to obtain estimates of the social values of various camp-site characteristics in terms of average and marginal consumer surplus.


Travel cost, recreational camping, demand modelling, consumer surplus

#9604 -- David Andolfatto, Paul Gomme and Paul Storer

U.S. labour market policy and the Canada-U.S. unemployment rate gap


In this paper, we investigate the extent to which changes in U.S. labour market policy in the 1980s may have contributed to the emergence of an unemployment rate gap between Canada and the United States. In that decade, unemployment insurance benefits became taxable, income tax rates fell substantially, and various administrative changes were made that effectively tightened unemployment insurance eligibility requirements. These policy changes are evaluated in the context of a computable equilibrium model of the labour market. Our estimates suggest that all of these reforms together can account for no more than a 0.4 percentage point decline in U.S. natural rate of unemployment; a combined effect which accounts for 20 percent of the unemployment rate gap.

#9603 -- James A. Brox and Christina Fader

The science of management and the art of flexibility: assessing the impact of Just-In-Time (JIT) using a CES-translog total cost function


This paper combines ideas that are well founded in the production and inventory management literature, with analytical approaches that have been long established in the economic theory literature, to reveal and explore production-function characteristic differences between JIT producers and non-JIT producers among electronic firms in Ontario, Canada. The methodology employed is the estimation of the CES-TL total cost system. Our primary conclusion is that JIT firms are more cost-efficient and appear to be distinct from the non-JIT group. This conclusion is supported by: (1) the fact that, in most cases, the elasticities calculated from the two groups of firms are significantly different; (2) the fact that the cost elasticity with respect to output is lower for the JIT firms than for the non-JIT firms, indicating that the former are better able to capture economies of scale and density; (3) the difference between the elasticities of factor productivity, with respect to output changes, shows the JIT firms as being more labour and materials saving than the non-JIT firms.


Just-in-time/kanban; economic analysis; empirical research

#9602 -- James A. Brox and Christina Fader

Public infrastructure, regional efficiency, and factor substitutability in Atlantic Canada manufacturing


In this paper, we seek to add to the understanding of the cost characteristics of Atlantic Canadian manufacturing. We examine the effects of public infrastructure on provincial manufacturing costs. The modelling technique employed is that of the CES-TL va riable cost system.
Atlantic manufacturing costs from 1961-1992 are characterized by economies of scale. As well, factor input demands are generally price inelastic and factors are pairwise substitutes. Our findings relating to public infrastructure are very strong. We find statistically significant infrastructure cost elasticities that indicate productivity effects for public capital in each province. We also find that infrastructure has an impact on manufacturing cost characteristics. The services of public capital are substitutes to the services of private capital in P.E.I. and New Brunswick, and have a neutral impact on the services of private capital in Newfoundland and Nova Scotia.

#9601 -- Walter Bossert, Marc Fleurbaey and Dirk Van de gaer

On second-best compensation


This paper examines how the first-best models of compensation based on the agents' talents and responsibilities analyzed in some recent contributions can be extended to a second-best context. A few social criteria are proposed and compared to alternative approaches by Roemer and Van de gaer.