Stephen T. Easton

Factor intensities and factor substitution in general equilibrium

Abstract This article examines how factor intensity rankings between industries and the economy-wide asymmetry in the degree of factor substitution combine to influence the manner in which changes in relative commodity prices affect the factoral distribution of income. (The reciprocal influence of factor endowment changes on the composition of outputs is also discussed.) The analysis is undertaken in a general three-factor, two-commodity framework, the minimal sized model that allows both influences to affect factor prices and admits of the possibility of complementarity between factors. Factors which are good substitutes find their returns behave somewhat similarly when commodity prices change while factors which are complements experience strongly asymmetrical fortunes. A crucial role is played by a comparison of the share of the ‘middle’ factor in each sector.

The theory of international factor flows: The basic model

Abstract The basic model used to discuss the simultaneous international flow of labor and capital is a one-commodity model in which a common technology is shared between countries. The Ramaswami result, wherein an optimal restriction of labor inflows is superior to an optimal restriction on capital outflows for a capital abundant country, is extended to reveal that optimality requires inflows of both factors. Box diagrams and iso-welfare contours are used to show how optimal policy rankings are reversed if foreign labor must be paid higher home wages.

Revenue Sharing, Conjectures, and Scarce Talent in a Sports League Model

This article develops a model of a representative professional sports club operating in a league that has the option of adopting one of two different forms of revenue sharing: traditional revenue sharing or central-pool-type revenue sharing. To adopt either form of revenue sharing, the league requires tehat a majority of clubs increase their profit with adoption of the plan. We derive necessary conditions for either plan to garner enough support for a majority vote. The likelihood of forming a majority depends on the distribution of team revenues and the conjectures on acquiring talent that clubs possess. Competitive conjectures make the adoption of revenue sharing more likely, whereas cartel conjectures make its adoption less likely. This may partly explain why salary caps and revenue sharing tend to be used together in some leagues.

Overtime! Rules and Incentives in the National Hockey League

We construct a simple 2-period game model to determine the effects of recent National Hockey League rule changes on team incentives to win. The effects differ depending on the relative quality of the contestants and whether the contestants compete in the same conference. The model predicts that the average number of points during a season will rise, yet the average point differential among clubs within the same conference will fall. The model also predicts that the expected value of points per contest will be higher when playing nonconference opponents but lower when playing conference opponents. Because only a small percentage of contests are nonconference, we predict that more effort will be devoted to conference contests, particularly by lesser-talented clubs. The result is more competitive and exciting conference games requiring fewer overtime periods and potential ties. Empirical data support these hypotheses.

What's in a Default? Lending to LDCs in the Face of Default Risk

This paper develops an expected profit maximizing framework for characterizing the default risk associated with international lending during the early and mid-1980s. We identify the risk of default as associated with arrears in payments rather than rescheduling of principal or interest.

Perspectives on ‘buy-outs’ and the Ramaswami effect☆

Abstract In a simple two-factor, one commodity model in which foreign labor can be hired at low foreign wage rates and technology is common to both countries, optimal strategy at home involves hiring almost all factors abroad at their autarky prices — a ‘buy-out’ strategy. This paper shows that when technologies differ, partial or, times, complete buy-out of factors from the technologically superior country may still be optimal. Alternatively, a partial buy-out may be appropriate when there exists a third internationally immobile productive factor.

Understanding optimal criminal networks

We develop a theory of optimal networks in the context of criminal organizations. In this framework the criminals choose their network links with others according to a set of specified costs and benefits to participation. The optimal number and configuration of links within each network is solved for a set of 10,000 parameter simulations specifying the direct cost of links between agents, the benefit to connections, and the cost of being in the network with others. In addition, agents determine the size of the optimal network. This framework allows consideration of a variety of crime policy scenarios. In particular, removing the ‘key player’, the best strategy when the network is exogenous, may not be the optimal strategy in an environment in which the agents can change the size and structure of the network endogenously. More generally, optimal crime policy may be different if the criminals are aware of the policing strategy and can alter their network.

Does IMF Conditionality Benefit Lenders

The purpose of this paper has been to assess whether official and private lenders benefit from IMF participation in rescheduling sovereign LDC debt via the Paris Club. If IMF participation increases the expected value of any existing or newly rescheduled official or private debt contracts, then lenders benefit. The transmission process can be via the immediate liquidity the IMF provides through various loan facilities, which allows for debt service payments to be met in a timely fashion, and/or through the increased ability of the sovereign to meet future debt service payments due to the conditions attached to IMF liquidity. The results from this paper suggest that the provision of immediate IMF liquidity provides a benefit to lenders but that the attached conditions do not. These results were obtained for a large sample of 84 LDCs over the sample period 1978-1987 and may differ when specific cases are considered. IMF participation reduced the average spread over LIBOR by 155 to 179 basis points, based on a simple model relating interest spreads to default probabilities. Heavily indebted sovereign borrowers may have experienced larger reductions. The design and implementation of IMF conditions has been criticized in the literature because they confer little benefit on the sovereign borrower. Our results support the consensus view that the conditions themselves have little effect. However, our contribution results from seeing the issue from the perspective of rational lenders who expend resources to evaluate IMF conditionality programs.

Tariffs and growth: The dales hypothesis

Abstract The impact of Canadian tariff policy on economic growth has been a source of conjecture among economic historians for decades. The dominant model of this interaction has been devised by John Dales (1966) . Dales has argued that although the tariff reduced real per capita income in Canada, it stimulated extensive economic growth. This follows directly from three assertions: (1) The tariff caused the aggregate demand for labor in Canada to rise. (2) Per capita income was not an argument in the Canadian immigration function, and therefore, the tariff did not cause the supply of foreign labor (immigrants) to decrease. (3) Immigration was instead determined by the policies of Canadian immigration authorities who regulated the flow of immigrants in an effort to maintain a constant money wage level. This paper examines these assertions. We conclude that the effect of the tariff on aggregate labor demand depends upon untested assumptions about the nature of production technology, and that, on the basis of regression results, we fail to reject per capita income as a significant determinant of Canadian immigration. We find only limited statistical evidence to support the proposition that the Canadian authorities allocated immigration on the basis of a wage rule.

Optimal Government Subsidies to Universities in the Face of Tuition and Enrollment Constraints

This paper develops a simple static model of an imperfectly competitive university operating under government‐imposed constraints on the ability to raise tuition fees and increase enrollments. The model has particular applicability to Canadian universities. Assuming an average cost pricing rule, rules for adequate government subsidies (operating grants) are derived under conditions of a forced reduction in tuition fees and limiting the increase in tuition fees in the face of increasing demand. These rules are simple to operationalize and interpret.