VARIABLE RETURNS TO SCALE AND REGIONAL RESOURCE ALLOCATION UNDER UNCERTAINTY*

ABSTRACT. This paper investigates the resource allocational implications of intra-industrial externalities, i.e., variable returns to scale (VRS), in a two-region general equilibrium model of production under uncertainty. It is shown that most standard results concerning changes in the goods price ratio with constant returns to scale (CRS) under uncertainty generalize to VRS. In contrast, standard results concerning changes in factor endowments extend from CRS to decreasing returns to scale, but not to all permissible levels of increasing returns to scale. Thus, such theorems as factor price equalization and Rybczynski do not generalize to all real-world levels of VRS.     

STATISTICAL PROPERTIES OF MATHEMATICAL PROGRAMMING MODELS OF STOCHASTIC NETWORK EQUILIBRIUM*

ABSTRACT. Boyce et al. (1981, 1983) have proposed and implementd the use of observed entropy levels to estimate the travel-cost coefficient in mathematical programming models of network equilibrium which involve logit route-choice probabilities. This so-called “dispersion-constrained” model is shown to give severely biased and statistically inefficient underestimates. A natural counterpart, the entropy-maximizing model, is proposed here and overestimates the travel-cost coefficient with much lower bias and much higher statistical efficiency. Even though the two models are mathematically homeomorphic in some respects, they have vastly different statistical properties. It follows that the use of observed entropy levels is undesirable and should be avoided, since maximizing entropy provides an unambiguously superior alternative.     

PRICE UNCERTAINTY AND PRODUCTION-LOCATION DECISIONS UNDER FREE ENTRY OLIGOPOLY*

ABSTRACT. This paper departs from earlier work on location theory under uncertainty by considering an oligopoly case where the symmetric Cournot-Nash equilibrium of imperfectly competitive and identical firms are examined. It will be shown that once a Cournot competitive equilibrium is introduced, the demand function plays a central role in the choice of location, and the effects of changes in fixed costs, mean product price and price variability on the firm's optimum location and output are independent of absolute and/or relative risk aversion. These striking results are in sharp contrast with the well-known results obtained in previous contributions to the location literature.     

A MIXED-FREQUENCY MODEL OF REGIONAL OUTPUT*

ABSTRACT. This paper proposes a new method for estimating a monthly regional production model. The technique involves treating the region's monthly industrial output as a latent variable, which is in turn a function of capital (prosed by energy usage) and labor inputs. Annual observations on regional value added correspond to the summation of the unobservable monthly series over the 12 months, while changes in the national Industrial Production index help infer the series' month-to-month fluctuations. The model is estimated using the Kalman filter and the method of maximum likelihood. The estimates are used to compute monthly indices of regional value added for 15 individual 2-digit industries, and for the aggregate manufacturing sector in the Seventh Federal Reserve District. In a comparison of out-of-sample forecasting accuracy, the mixed-frequency model outperforms both the traditional parametric Cobb-Douglas and nonparametric Atlanta methods over the 1988–89 forecasting horizon.     

A BENEFIT-COST ANALYSIS OF A REGIONAL DEVELOPMENT INCENTIVE: STATE LOANS*

The luster of economic growth, the existence of depressed regions, and the fear of competition from giveaway programs in other states have all resulted in state governments adopting a rash of programs designed to encourage a strong manufacturing base for their economy. Many economists feel uneasy about the rapid spread of such industrial incentive programs as tax breaks, government loans, and industrial revenue bonds.¹ The literature of public finance, development, and regional economics contains many interesting studies examining the wisdom of these undertakings. This paper hopes to contribute by developing a method of benefit-cost analysis for appraisal of industrial incentive programs. Even though the model is constructed for and applied to the analysis of state government industrial development loans, the principles formulated should be easily adaptable to the assessment of other types of regional development programs. A secondary objective of the paper is to discuss the first empirical application of a model which accounts for possible differences between the social opportunity cost of foregone investment and that of foregone consumption.²     

A STRUCTURAL DECOMPOSITION OF REGIONAL ECONOMIC INSTABILITY: A CONCEPTUAL FRAMEWORK*

ABSTRACT. Many rural regions are characterized by unstable economies. Studies that investigate economic instability in these regions, however, tend to examine the effects rather than causes of its occurrence. Efforts to diminish instability can only be successful if they address its sources. Using an input-output model, a conceptual decomposition of the variance of gross output is used as a means of identifying supply and demand sources of instability. This framework can be used for empirical investigations into the causes of economic instability, and for the design of stabilization policies. Data limitations, however, may preclude some applications of the technique.