Richard E. Ericson

Markov-Perfect Industry Dynamics: A Framework for Empirical Work

This paper provides a model of firm and industry dynamics that allows for entry, exit and firm-specific uncertainty generating variability in the fortunes of firms. It focuses on the impact of uncertainty arising from investment in research and exploration-type processes. It analyses the behaviour of individual firms exploring profit opportunities in an evolving market place and derives optimal policies, including exit, in this environment. Then it adds an entry process and aggregates the optimal behaviour of all firms, including potential entrants, into a rational expectations, Markov-perfect industry equilibrium, and proves ergodicity of the equilibrium process. Numerical examples are used to illustrate the more detailed characteristics of the stochastic process generating industry structures that result from this equilibrium.

Eurasian Natural Gas Pipelines: The Political Economy of Network Interdependence

A noted American economist and specialist on the economies of the former Soviet Union presents the results of his research on the Eurasian network of natural gas pipelines. While the focus is on the political economy of network interdependence, the author covers in considerable detail the political significance of Russias substantial market power and its efforts to enhance that power in 2007 and 2008. More specifically, he highlights Gazproms role both as a supplier of natural gas to Europe and as the core of a monopoly controlling exports of natural gas from Russia and Central Asia by expropriating and/or blocking foreign ownership of natural gas reserves as well as production and transportation facilities in Russia. Journal of Economic Literature, Classification Numbers: F100, F230, L950, P330, Q400. 11 figures, 1 table, 51 references.

A Model of Russia's 'Virtual Economy'

The Russian Economy has evolved into a hybrid form, a partially monetized quasi-market system that has been called the virtual economy. In the virtual economy, barter and non-monetary transactions play a key role in transferring value from productive activities to the loss-making sectors of the economy. We show how this transfer takes place, and how it can be consistent with the incentives of economic agents. We analyze a simple partial-equilibrium model of the virtual economy, and show how it might prove an obstacle to industrial restructuring and hence marketizing transition.

The Structural Barrier to Transition: A Note on Input- Output Tables of Centrally Planned Economies

The paper argues that a key legacy of the Soviet-type command economy is the highly inefficient, often value- destroying, structure of factor use and economic interaction. This structure was sustainable only by virtue of distorted prices and the force of command that maintained interactions necessary to its continued operation, but was as far from mutually beneficial for the agents involved. Yet, as illustrated in examples, Input-Output tables could be drawn up displaying sectoral average-cost covering in those prices, thereby hiding economic irrationality of the interactions. When liberalization frees prices and renders agents responsible for their own survival, the non-viability of the inherited structure of production is revealed, forcing a breakdown of economic interaction and spiralling price increases as each agent tries to cover true costs despite the inability of the technological structure to produce output valued above those costs, as again illustrated in a series of examples. This generates a cost-push inflation that can only be dealt with by substantial restructuring at both the firm and industry level, requiring an investable surplus which the inherited structure of production cannot produce.

Welfare Effect of Productivity Shocks and Policy Implications in a Small Open Economy

AbstractWe examine the welfare effect and policy implications of productivity shocks in a small open economy. With real business cycle models, productivity shocks are generally welfare improving. However, once we assign a big role to financial frictions, productivity shocks may become welfare deteriorating. These results are robust. Moreover, the policy implication hinges on preferences, policy specifications, and financial frictions.

Soviet numbers game threatens perestroika

The figures on the blackboard at a Moscow seminar were a shocking devaluation of the Soviet economy: a formerly outcast economist was implying that official statistics are worthless, and even CIA estimates are overly optimistic.

Ukraine Crisis 2014: A Study of Russian-Western Strategic Interaction

Abstract This paper presents an analysis of the Ukrainian crisis of 2014 through the lens of the Theory of Moves as formalized by [Willson, S.J., (1998), Long-term Behavior in the Theory of Moves, Theory and Decision, vol. 45, no. 3, pp. 201–240]. It derives the equilibrium (ultimate outcome) states under various assumptions about Western and Russian preferences over outcomes. The “paths” of their generation, i.e., the sequences of strategic choices made by each side, are also explored, casting light on the structure of incentives guiding behavior in the conflict, and perhaps predicting what the actual outcome will be when the world moves beyond this crisis. Incomplete information on preferences prevents derivation of a unique prediction of the outcome of the crisis, but the analysis enables us to substantially narrow the range of possibilities.

Preference Representations for Catastrophic Risk Analysis

This note surveys some behavioral models of preference relations applicable for analysis of decisions in the face of catastrophic risk. Catastrophic risk is characterized, and the implications of various representations explored in simple, illustrative examples. An argument is presented for the more general applicability of “variational preferences” for the analysis of behavior and decision making in the face of catastrophic risk.

Welfare effect of interest rate shocks and policy implications

This article studies the welfare effect of exogenous country spread shocks and policy implications. First, country spread shocks are welfare-improving, a finding holding for three widely used preference representations over a wide range of structural parameter values, both in a two-period model with fixed endowments and in a workhorse Dynamic Stochastic General Equilibrium (DSGE) model of a small open economy. Second, it is always optimal to have procyclical policy unless (i) financial frictions are strong, (ii) policy responds to country spread gaps, and (iii) the subjective discount factor is endogenous.