Ludo Peeters

Incorporating Price-Induced Innovation in a Symmetric Generalised McFadden Cost Function with Several Outputs

This paper proposes a multiple-output Symmetric Generalised McFadden (SGM) cost function, incorporating both exogenous and endogenous technological change. Whilst exogenous technological change is captured by the usual time trend, endogenous or price-induced technological change is cast within a partial-adjustment framework involving lagged input prices. The study points to various dimensions or components of technological change, and allows to disentangle “pure” factor substitution, given the state of the technology, from factor substitution due to price-induced changes in technology. Under the conditions of non-jointness in input quantities, the model further allows to identify technological change biases for each output separately. An empirical application is presented in which the proposed model is applied to time-series data on the feed manufacturing industry in Belgium. To improve on the econometrics, the SGM cost function also incorporates linear splines.

GRAVITY AND SPATIAL STRUCTURE: THE CASE OF INTERSTATE MIGRATION IN MEXICO*

The estimation of gravity models of internal (aggregate) place‐to‐place migration is plagued with endogeneity (omitted‐variable) biases if the unobserved effects of spatial structure are not accounted for. To address this econometric problem, this paper presents a more general specification of the gravity model, which allows for (bilateral) parameter heterogeneity across individual migration paths — along with (unilateral) origin‐ and destination‐specific effects. The resultant “three‐way fixed‐effects” (3FE) model is applied for an analysis of interstate migration in Mexico based on cross‐sectional data. To overcome parameter‐dimensionality problems (due to limited or incomplete information), the 3FE model is estimated using the Generalized Maximum Entropy (GME) estimator. The empirical implications of this new modeling strategy are illustrated by contrasting the 3FE‐GME estimates with those for the traditional and two‐way fixed‐effects (2FE) models. The former are far more plausible and intuitively interpretable than their traditional and 2FE counterparts, with parameter estimates changing in expected directions. The (average) effect of the migrant stock is markedly smaller than usually estimated, providing a more realistic measure of network‐induced migration. Migration outflows from centrally located origins have significantly steeper distance decay. Path‐specific distance effects exhibit directional asymmetries and spatial similarities.

Estimating feed utilisation matrices using a cost function approach

In this paper a multiple-output cost function framework is proposed to construct national feed balances or feed utilisation matrices (FUMs). The framework is applied to the Belgian compound feed industry. For estimation purposes a Symmetric Generalised McFadden (SGM) cost function is selected. The cost function is estimated using readily available time-series data for the period 1962-88. Unlike previous studies based on duality theory, this study exploits the properties of nonjointness in animal feed production to establish a complete FUM. The allocation of feed ingredients among different livestock categories as well as the composition of various compound feeds are identified. Also own- and cross-price elasticities of demand for feed ingredients by type of livestock are reported.

Testing alternative dynamic specifications: an application to meat demand in Belgium

This letter examines alternative specifications of dynamic adjustment in the context of a linear approximate AIDS model of the demand for meat in Belgium. The model also incorporates demographic variables to account for structural changes in consumer preferences. Using a general first-order ECM specification as a unifying analytical framework, several tests are performed in an attempt to validate the preferred dynamic model specification. The results indicate that the widely-used dynamic model with one adjustment parameter (diagonal adjustment matrix) as well as the autoregressive and static models are strongly rejected by the data. The proposed symmetric specification of dynamic adjustment presents a viable alternative.

Do Investment-Cash Flow Sensitivities Measure Financial Constraints? New Evidence from Unpacking the Black Box

The relationship between investment and cash flow has been a subject of considerable empirical debate. In this paper, our aim is to shed a new light on this relationship. It is argued that a firm’s observed investment and financing decisions are endogenous, in an ex-post behavioral sense, and that, therefore, investment-cash flow sensitivity (when estimated in a reduced-form, linear investment equation) is likely to be an ambiguous, and possibly misleading, measure of (current and expected future) financial constraints. Empirical evidence is provided in support of our case, based on a two-stage estimation strategy. In the first stage, allowance is made for unobserved firm heterogeneity as related to cash flow; we generalize the Q-investment equation and estimate individual, firm-specific investment-cash flow sensitivities by applying an entropy-based fixed-effect estimator. In the second stage, we look inside the black box and investigate how and to what extent these sensitivities are “driven” by important underlying factors. A number of striking ceteris-paribus results emerge: a) investment-cash flow sensitivity is monotonically decreasing in the level of cash flow; b) cutting back on investment, hoarding more cash, taking less on debt, building up debt capacity, and paying low or zero dividends (actions that are typically associated with the presence of tighter financial constraints) tend to produce a smaller value of investment-cash flow sensitivity; c) investment-cash flow sensitivity is negatively related to cash-flow volatility and positively related to investment volatility; and d) firm size and asset tangibility do not contribute to explaining the variation in investment-cash flow sensitivities across firms. From these results, it follows that the relation between the investment-cash flow sensitivity’s magnitude and the degree of financial constraints is indeterminate a priori. While such results call into question conventional wisdom, they help to explain the many contradictory findings encountered in the literature.