The Desirability of Price Instability Under Perfect Competition

Oi, Walter Y.

doi:10.2307/1907687

Cited by 503 publications

(237 citation statements)

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“…Initially, Oi (1961), Hartman (1972Hartman ( , 1976, and Abel (1983) advocated that uncertainty amplifies the incentive to invest. In this setup, which is considered as a point of departure, it is assumed that the environment within which investment decisions are made is characterised by perfect competition, constant returns-to-scale, fully reversible capital, symmetric convex adjustment costs, and risk-neutral behaviour by the firm.…”

Section: Review Of the Theoretical Literaturementioning

confidence: 99%

Investment in Greek manufacturing under irreversibility and uncertainty: the message in used capital expenditures

Δράκος

Goulas

2010

Applied Economics

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This article contributes to the existing literature by showing that uncertainty produces a nonuniform impact to the extent that different types of capital goods exhibit heterogeneous irreversibility, which we define as asset-specific irreversibility. Hence, asset-specific irreversibility is responsible for asymmetries in responses across types of capital goods to uncertainty. We also show that for a given type of capital good, uncertainty produces a variety of responses across sectors, which we define sector-specific irreversibility. In other words, sectoral differences in terms of the ability to substitute a given type of capital with labour, introduce a second-order effect of uncertainty on investment.

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Section: Review Of the Theoretical Literaturementioning

confidence: 99%

Investment in Greek manufacturing under irreversibility and uncertainty: the message in used capital expenditures

Δράκος

Goulas

2010

Applied Economics

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“…For example Mirman (1971) shows that, if there is a precautionary motive for savings, then higher volatility would lead to higher investments. Oi (1961), Hartman (1976) and Abel (1983) show that if labor can be freely adjusted, the marginal revenue product of capital is convex in price; in this case, uncertainty may increase the level of the capital stock and, therefore, investment. However, these theories are not consistent with the countercyclical nature of uncertainty measures.…”

Section: Correlationmentioning

confidence: 99%

Uncertainty and Economic Activity: A Multi-Country Perspective

2018

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Measures of economic uncertainty are countercyclical, but economic theory does not provide definite guidance on the direction of causation between uncertainty and the business cycle. This paper proposes a new multi-country approach to the analysis of the interaction between uncertainty and economic activity, without a priori restricting the direction of causality. We develop a multi-country version of the Lucas tree model with time-varying volatility and show that in addition to common technology shocks that affect output growth, higher-order moments of technology shocks are also required to explain the cross country variations of realized volatility. Using this theoretical insight, two common factors, a 'real' and a 'financial' one, are identified in the empirical analysis assuming different patterns of cross-country correlations of country-specific innovations to real GDP growth and realized stock market volatility. We then quantify the absolute and the relative importance of the common factor shocks as well as country-specific volatility and GDP growth shocks. The paper highlights three main empirical findings. First, it is shown that most of the unconditional correlation between volatility and growth can be accounted for by the real common factor, which is proportional to world growth in our empirical model and linked to the risk-free rate. Second, the share of volatility forecast error variance explained by the real common factor and by country-specific growth shocks amounts to less than 5 percent. Third, shocks to the common financial factor explain about 10 percent of the growth forecast error variance, but when such shocks occur, their negative impact on growth is large and persistent. In contrast, country-specific volatility shocks account for less than 1-2 percent of the growth forecast error variance. Terms of use: Documents inJEL-Codes: E440, F440, G150.

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“…Indeed, price variability can even increase when price stabilization measures are used by both countries relative to when they are completely absent, thereby making such measures counter-productive. 31 As Turnovsky (1974) notes, the classical argument in favor of price variability in competitive markets formalized by Oi (1961), Massell (1969), and Waugh (1966) rests on an important 30 Nevertheless, it is worth emphasizing that price stabilization schemes often end up lowering not just the volatility of domestic prices but also alter the average price level, which in turn implies that such schemes invariably transfer income between domestic groups --something that is captured rather sharply by Figure 1. 31 See Devadoss (1992).…”

Section: Some Other Relevant Economic Considerationsmentioning

confidence: 99%

Understanding Agricultural Price Range Systems as Trade Restraints: Peru–Agricultural Products

Saggi

Wu²

2016

World Trade Review

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An agricultural price range system (PRS) aims to stabilize local prices in an open economy via the use of import duties that vary with international prices. The policy is inherently distortionary and welfare-reducing for a small open economy, at least according to the canonical economic model. We offer an explanation for why a government concerned with national welfare may nevertheless implement such a policy when faced with risk aversion and imperfect insurance markets. We also highlight open questions arising out of the Peru -Agricultural Products dispute for the WTO's Appellate Body to address in order to clarify how a PRS consistent with WTO rules could be designed. Finally, we discuss the possibility that a WTO member might resort to a free trade agreement (FTA) to preserve its flexibility to implement a PRS and how an FTA provision of this sort ought to be treated in WTO litigation.

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The Desirability of Price Instability Under Perfect Competition

Cited by 503 publications

References 0 publications

Investment in Greek manufacturing under irreversibility and uncertainty: the message in used capital expenditures

Investment in Greek manufacturing under irreversibility and uncertainty: the message in used capital expenditures

Uncertainty and Economic Activity: A Multi-Country Perspective

Understanding Agricultural Price Range Systems as Trade Restraints: Peru–Agricultural Products

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