special issue: part 1 || editor's introduction to part 1

Editor's Introduction to Part 1Author(s): Alice NakamuraSource: The Canadian Journal of Economics / Revue canadienne d'Economique, Vol. 29, SpecialIssue: Part 1 (Apr., 1996), pp. i-xvPublished by: Wiley on behalf of the Canadian Economics AssociationStable URL: http://www.jstor.org/stable/135948 .

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Editor's introduction to Part 1

ALICE NAKAMURA University of Alberta

This two-part special issue of the Canadian Journal of Economics contains short papers developed from those originally presented at the 28th annual meeting of the Canadian Economics Association held June 10-13, 1994 at the University of Calgary in Alberta. Some of the papers are extended abstracts of the full papers. In other cases, the available space has been used to more fully present selected portions of the original papers. Many have been updated since the Calgary meetings. All were subjected to a selective referee process. It should be noted, however, that the Editorial Board of the CJE is not responsible for the contents of this issue.

The authors were requested to present their findings so that they can be understood by readers with training in economics, but who are not specialists. It is hoped that this special issue will increase awareness of the types of economic research underway at different locations across the country and will assist decision makers in business and government, as well as research economists, in locating others working on topics of immediate interest and relevance for them. It is also hoped that this issue will prove useful for students of economics. The papers provide a wealth of information, much of which is directly relevant for Canada.

Because of the large number of included papers, in addition to the contents at the front of Part 1 and Part 2 of this issue, there is also an index of authors of papers at the back of Part 2.

The papers have been grouped under topic headings. The topic headings for sections I-VI which make up Part 1 are labour economics; fisheries economics; fiscal considerations; economic fluctuations and money; regulation and pricing; and national and regional economic development in Canada. The topic headings for sections VII-XI in Part 2 are trade; development, growth and productivity; consumer choice and real estate economics; econometric methods and measurement; and political economy. In addition, the concluding section XII contains two papers and a comment in the taxation area and a biographical sketch of one of Canada's leading economists, W. Erwin Diewert.

What follows are brief introductions for the papers in Part 1 written in collaboration with Thomas Lemieux. These take the place of the English language abstracts for the papers in regular issues of the CJE, while also providing a reader's road map for the 67 papers in Part 1. In the introductory remarks for the empirical papers, mention is made of the main data sources used so as to aid other researchers interested in locating and using these data bases.



Part 1 - ii Alice Nakamura

The English language introduction to Part 1 is followed by a companion French language introduction for which Thomas. Lemieux is the author but which draws heavily on the English language introduction. Similarly, in Part 2 there is an English language introduction which was written in collaboration with Thomas Lemieux followed by a companion introduction in French for which he is the author and which draws on the English language introduction. The French language introductions take the place of the French language abstracts for papers in regular CJE issues.

This issue would not have been possible without substantial financial support from the Faculty of Business and the Office of the Vice-President for Research of the University of Alberta, as well as from the Winspear Foundation through support to me as the Winspear Professor of Business. And this issue would not have been worth producing without the outstanding papers from the Calgary CEA meeting. Robert McRae, who was in charge of local arrangements for that meeting, and Chris Green, who was the CEA secretary-treasurer, deserve considerable credit for their help in pulling together an outstanding program. Credit is due as well to those who organized individual sessions for the Calgary meeting, and those who assisted with refereeing papers for this issue. Their names are listed at the back of Part 2. Finally, a special thanks is due to Louise Hebert, my secretary, who struggled with everything from unfamiliar word processing commands to computer viruses that came in on the diskettes for the 128 papers for this issue; and to Masao Nakamura, my husband, who has had to compensate for things I let slide for our joint research and at home while I was working on this issue. I would like to dedicate this special issue to Sam Ho of the Economics Department at the University of British Columbia who, in a multiplicity of ways, was the catalyst for this undertaking.

I. LABOUR ECONOMICS

The first group of papers -- 25 in all -- are on labour economics. The first paper by MILES CORAK looks at how expectations of job recall

and actual recall outcomes relate to the length of the benefit claim period for workers on Unemployment Insurance. Ul administrative data for 1986-88 are used. The estimated effects of recall expectations on the duration of spells on UI dwarf the effects of all other characteristics considered.

The second paper by LOUIS N. CHRISTOFIDES and CHRIS J. MCKENNA examines possible employment duration effects of the Variable Entrance Requirement (VER) for the Ul program. The data used are from the 1988- 90 survey waves of the Canadian Labour Market Activity Survey (LMAS).



Introduction Part 1 - iii

The main question addressed is whether, after conditioning on personal and job characteristics, the probability of job termination is significantly higher at the point that the VER is met.

In 1989, the VER was 10 to 14 weeks, depending on the regional unemployment rate (with less weeks required in regions with higher unemployment rates). The VER changed to 10-20 weeks in 1991 with Bill C-2 1, and then to 12-20 weeks under the 1994 Budget. MICHAE1L KIDD and MICHAEL SHANNON use panel data from the 1988-89 waves of the LMAS to measure the direct impacts on the proportion of workers eligible for Ul benefits and on the average weeks of benefit entitlement of the Bill C-21 and the 1994 Budget changes in the VER.

The next four papers are on public programs that interface with UI. BERNARD FORTIN, PAUL LANOIE and CHRISTINE LAPORTE investigate

interactions between the provincial Workers' Compensation (WC) programns and UI. They use micro level panel data for more than 30,000 workers in the Quebec construction industry for the period of 1976-86, and a hazard function estimation approach. Their results underline the importance of considering interactions among social programs.

The Canadian provinces run welfare programs, just as there is welfare in the United States. However, there are vast Canadian-U.S. differences in the welfare program area. Many Canadians have erroneous ideas about welfare in Canada that come from media reporting on welfare in the United States. Based on administrative data, MICHAEL I. CRAGG provides basic factual and hazard analysis findings on the patterns of welfare use in British Columbia.

The paper by ROB BRUCE, NICK BAILEY, WILLIAM P. WARBURTON, JOHN G.

CRAGG and ALICE NAKAMURA presents descriptive information about returnees to Income Assistance -- that is welfare -- in the province of British Columbia. Although quite a bit is known about repeat use of Ul in Canada, little is known about repeat use of welfare. The data for this project are administrative records for British Columbia.

LOUIS ASCAH critically assesses the retirement income system in Canada. He notes that public pension plans provide a large portion of the total income of older persons, and questions the adequacy of coverage. He also questions the current trend toward clawing back more of what is paid out, he argues for better indexation of public and private pensions, and he notes that changes in the tax treatment of savings for old age have been costly in terms of lost tax revenues and primarily benefitted higher income persons.

The next eight papers have to do with the measurement and the general nature of unemployment and employment behaviour.

MILES CORAK discusses the problem of characterizing the duration of spells



Part 1 - iv Alice Nakamura

of unemployment. Based on Labour Force Survey (LFS) data, Statistics Canada regularly publishes estimates of the average duration of unemployment for those currently unemployed. Since the unemployment spells of the unemployed are in progress when they are surveyed, the Statistics Canada measure is for the average incomplete (or interrupted) duration of unemployment. Corak has derived a measure of the average complete duration of unemployment spells that he uses to characterize the unemployment associated with the 1981-82 recession versus the recession of the early 1990s.

ANTHONY E. MYATT uses annual data for 1966-90 to study the correlates of provincial unemployment rate disparities. His methodology is designed to minimize the chances of inappropriate behavioural inferences due to the potential endogeneity of the measure of UI generosity. JANICE SHUK-LIN KAN and SHMUEL SHARIR attempt to empirically measure minimum wage effects on employment taking account of associated effects on labour force participation. They use pooled annual observations for nine Canadian provinces for 1975-91, and struggle with some of the same problems of endogeneity and collinear aggregate data that Myatt does.

Jobs are being created and destroyed throughout both booms and recessions; it is the relative balance that shifts. RANDALL GOUGE and IAN KING argue that in order to understand the nature of employment dynamics and changes in unemployment levels we need labour market theories that allow for heterogeneity in productivity and for simultaneous job creation and destruction.

As PADMA RAO SAHIB explains, in a standard job search model, it is optimal for a worker to follow a reservation wage policy. This involves the worker accepting wage offers above a cut-off reservation wage and rejecting others. The reservation wage is defined by an implicit "optimality constraint." Using data from the U.S. 1986 Panel of the Survey of Income and Program Participation (SIPP), Sahib explores consequences of estimating a job search model with and without an optimality constraint.

Whereas the theories of unemployment that are most popular focus attention on real wage rigidities, JAVID TAHERI argues that the long-term downward rigidity of nominal wages is more important. He bases his argument on the fact that the outstanding financial obligations of workers (and firms too) are usually denominated in nominal terms. He also provides estimation results for a wage-adjustment Phillips-type curve based on annual pooled data for 1960-91 for 10 OECD countries.

SHULAMIT KAHN and KEVIN LANG report that Canadian and U.S. surveys reveal that about half of all workers would like to work a different number



Introduction Part 1 - v

of hours per week. Hours constraints are the presumed reason for this. Kahn and Lang use data from the Canadian Survey of Work Reductions to explore the wages of workers and their desired and actual hours of work. The Survey of Work Reductions provides information on the hours that workers would like to work if they were paid their usual hourly wages.

ALAN HARRISON describes and compares the Wage Chronologies File, the Wage File, and the Work Stoppage File, making these important data sets on wage agreements and work stoppages in Canada more accessible. He discusses how he has combined information from these data sets. The combined sample is used to examine changes over 1952-88 in strike behaviour and contract length.

Retraining programs for unemployed workers, and the evaluation of retraining programs, are the topics dealt with in the next five papers.

DAVID GRAY examines sectoral patterns in the lengths of interrupted jobless spells for displaced French workers. His estimates are based on data for 1983-91 from the French National File of Beneficiaries. He finds that workers who have been displaced from manufacturing industries tend to have considerably longer jobless spells: enough longer to warrant more research on sector-specific factors affecting employment prospects following permanent layoff.

Employers may not find it worthwhile to hire some workers even at the minimum wage because of their lack of qualifications for the available work. But without jobs, workers cannot get on-the-job experience. Employment subsidizes may help to break this vicious cycle. There is considerable interest in employment subsidies in both Canada and the United States, but also concern about the potential displacement of workers not covered by wage subsidy programs. WILLIAM P. WARBURTON and CAROL L. FRKETICH discuss alternative strategies for estimating the net benefits of employment subsidy programs. They outline an innovative approach which they have used to evaluate a B.C. employment subsidy program.

Government-sponsored training for those who are out of work and who are dependent on public income support is provided in the hope that this will help the recipients find jobs and regain economic self sufficiency. There is intense interest in evaluating the gains from alternative types of training programs, since the costs differ greatly. NORM PARK, BOB POWER, W. CRAIG RIDDELL and GING WONG report on such an evaluation of five government- sponsored training programs carried out in Canada between 1988 and 1991. The pre-program usual average earnings of the participants differ systematically by program. Failure to account for this could bias evaluation findings. The difference-in-differences methodology the authors adopt



Part 1 - vi Alice Nakamura

appears to largely solve this problem, lending confidence to the strong positive evaluation results reported in this paper for some of the programs considered.

Publicly subsidized training programs tend -- perhaps inevitably -- to be targeted toward those dependent on public income support programs, however, in Canada as in the United States, access to training is not an entitlement for those on UI or welfare. Eligibility does not ensure access; nor are there comprehensive rules for who will get which sorts of training and job search assistance. THERESA J. DEVINE and JAMES J. HECKMAN study the equity and efficiency implications of factors affecting who gets publicly subsidized training under the U.S. Job Training Partnership Act (JTPA). The empirical portion of their analysis uses data from the 1986 SIPP.

WILLIAM P. WARBURTON considers the evaluation of another group of U.S. publicly subsidized training programs: the Comprehensive Employment Training Act (CETA) programs. Different research teams have produced very different evaluation results for the CETA programs. Warburton advances a hypothesis for why, and demonstrates the plausibility of his hypothesis using data from a B.C. wage subsidy program.

Income distribution issues are the subject of the next three papers. RICHARD P. CHAYKOWSKI and GEORGE A. SLOTSVE examine the earnings

of unionized versus nonunionized male workers in the United States over the period of 1982-90 using data from the March Current Population Survey. The dramatic decline in unionism in the United States in the 1970s and 1980s is viewed by many as a factor contributing to the observed changes in earnings inequality in the United States over this same period. Chaykowski and Slotsve study earnings distribution changes for full-time, full-year male workers who were covered by a collective agreement, and also for those who were not covered by a collective agreement. Rank dominance, Generalized Lorenz dominance, and Lorenz dominance criteria are utilized in their empirical analysis.

ROSS FINNIE and TED WANNELL study the changes over time in the gender earnings gap in Canada for B.A. level university graduates of 1982, 1986 and 1990. Their data are from the National Graduates Survey databases.

MICHAEL P. KIDD and MICHAEL SHANNON provide a cross-country analysis of the gender wage gap in Australia and Canada based on 1989 data from the Canadian LMAS and 1989-90 data from the Australian Income Distribution Survey. They decompose the inter-country differences in the gender wage gap into gender specific effects and the impact of the wage structure in each country, since the gender wage differential can differ between countries for reasons not specifically tied to gender.



Introduction Part 1 - vii

Proponents of more vigorous enforcement of equal opportunity for women often note that expanding women's occupational opportunities should eventually help to raise women's wages in traditionally female occupations. The argument is that employers will have to offer more to attract and hold their female employees. In accord with this view, there is political pressure in the United States for higher wages for nurses to help solve the growing nursing shortage. But how much higher would nurses wages need to be to end the shortage? DENNIS A. AHLBURG and CHRISTINE BROWN MAHONEY provide some partial evidence on this using data from a 1988 survey of a sample of 8,000 RNs licensed by the Minnesota State Board of Nursing.

In the final paper in this labour economics section, HARRIET ORCUTT DULEEP and MARK C. REGETS investigate U.S. immigrant earnings convergence. To study the effect of admission criteria, they matched 1980 U.S. Census data on immigrant men to Immigration and Naturalization data on admission criteria by year of admission and country of origin. In a second part of their analysis, Duleep and Regets use 1960-80 decennial U.S. Census microdata to investigate how the effects of the country of origin on earnings change with time in the United States. Their results are relevant to current Canadian immigration policy concerns.

II. FISHERIES ECONOMICS

The seasonal nature of fisheries employment, the longstanding importance of the fisheries in Atlantic Canada, and the near collapse of the Atlantic Canada groundfish stocks have made the fisheries an important focus of economic research and of the current UI reform debate in Canada.

R. QUENTIN GRAFTON discusses the concept and practicalities of rights based management for fisheries, and of individual transferable quotas (ITQs) for allocating the designated allowable catch among fishers. Grafton selectively surveys and comments on evidence for Canada, Iceland, Australia and New Zealand on the apparent effects of ITQ programmes on capital employed in fishing, profitability, employment, and harvest shares.

NOEL ROY reviews a series of possible reasons for the fisheries collapse in Atlantic Canada. In so doing, he provides a context for some of the other papers in this section. Roy also draws out some general lessons for fisheries economics and management, such as the importance of explicitly allowirng for uncertainties associated with stock assessment.

EUGENE TSOA presents evidence suggesting that the collapse of the northern cod stock may be due, in part, to specific overlooked events and predator-prey interrelationships. He focuses, in particular, on the timing of



Part 1 - viii Alice Nakamura

periods of heavy fishing of capelin by the Russians and then the Japanese, and changes in the size of the harp seal population.

DANIEL E. LANE and HALLDOR P. PALSSON provide brief histories of the four major cod stocks in the North Atlantic, and suspected reasons for their declines. They also note that continuation of a very limited fishery rather than complete closure would help provide information on the changing state of the cod stocks. They use a simulation model to explore the biological and economic consequences of alternative fisheries management scenarios.

GORDON R. MUNRO was the organizer of the fisheries sessions in the Calgary CEA meeting. The interactive way in which he carried out this duty is evident in all of the fisheries papers in this special issue. His own paper focuses on the "straddling" fish stocks that extend beyond the boundary of Canada's Exclusive Economic Zone (EEZ), where they are subject to exploitation by distant water fishing nations. He reports on progress in developing the economics of management for "straddling" fish stocks, and policy insights. In an Addendum, Munro notes that the recent Canada-Spain "turbot war" is a real world example of the sort of non-cooperative transboundary fishery games developed in the academic literature: an example that demonstrates the practical usefulness of game theory.

III. FISCAL CONSIDERATIONS

High levels of unemployment have swelled UI and welfare caseloads and program costs. There are calls for stimulative spending and job creation programs, including special programs for fisheries workers in Atlantic Canada. At the same time, there is concern about the impacts of government borrowing and taxation on income inequality, on incentives to work, on the underground economy, on aggregate savings, and on economic growth. The papers in this section and in the final section of Part 2 deal with some of these conflicting interests and concerns.

JEAN-YVES DUCLOS and MARTIN TABI propose a general method for the measurement of tax progressivity that is normatively consistent with the measurement of inequality and social welfare. Their approach makes use of the method of residual progression (RP) which measures the local elasticity of net income with respect to gross income. They illustrate their approach using data from the Canadian 1991 Survey of Consumer Finances.

PETER S. SPIRO presents empirical evidence that he argues demonstrates that raising tax rates has a positive effect on currency demand. According to Spiro, this is due, in part at least, to the use of cash in the underground economy, which is presumed to grow in response to higher tax rates. He



Introduction Part 1 - ix

uses what he terms to be "excess currency" in circulation as a measure of the size of the underground economy.

SAMAD AMIRKHALKHALI, ATUL DAR and SALEH AMIRKHALKHALI contrast three theoretical perspectives on the macroeconomic implications of fiscal deficits: the Keynesian, the neo-classical, and the Ricardian Equivalence Theorem (RET). The authors investigate the dynamics of the interrelationships among fiscal deficits, private saving, investment and other macroeconomic aggregates in Canada over the period of 1961-90 using vector autoregressions, cointegration tests and error-correction models.

The paper by GUY H. ORCUTT also focuses on trying to empirically unravel the dynamic causal interrelationships among fiscal deficits and other macroeconomic variables. Orcutt pays special attention to the monetary base and the consumer price index. Like the previous paper, rather than imposing theoretical implications prior to estimation, or structuring the research as tests of preexisting theoretical implications, Orcutt's empirical work is aimed at generating theoretical concepts and hypotheses. He uses monthly U.S. time series data for 1946-90 from the Citibank Economic Database. Among other findings, his work suggests a policy role for the federal deficit which differs radically from previous thinking on this subject.

ESTHER ALEXANDER and SHLOMO ALEXANDER present an economic model for Israel which also embeds unconventional ideas about the functioning of the macroeconomy. Based on earlier research by the first author, in this model inflation redistributes income, and demand increases in the market where the majority of buyers are those who have enjoyed real income gains as a consequence of the inflation but decreases in the market where the majority of buyers have suffered real income losses with inflation. In this model, prices and unemployment move together, and austerity policy measures which have the unintended consequence of making the income distribution more inequitable will worsen, rather than counteract, inflation problems.

As noted in the above Amirkhalkhali, Dar and Amirkhalkhali paper, the extent of international capital mobility is believed to have implications for the macroeconomic effects of government deficits. This is one of many reasons for interest in the post World War II internationalization of banking. JIXIN xu reports that Canadian banks' foreign currency assets increased at an average annual rate of 1.8 percent during the 1960s, 23 percent in the 1970s, and 13 percent in the first half of the 1980s. Using data for 1978-85 for the five major Canadian banks, Xu finds no significant difference between the rates of return for domestic and international lending. He finds, however, that the major Canadian banks have succeeded in diversifying their



Part 1 - x Alice Nakamura

portfolios and in reducing risk through international lending. In the final paper in this section, GEORGE W.L. HUI theoritically explains

the optimal choice between two monetary instruments -- the money stock and the interest rate -- in a stylized two-country world with floating exchange rates, perfectly mobile capital, and where the objective for each country is minimization of income instability. He interprets his results as lending support to the idea that governments should specialize in monetary policies that build on their comparative advantages.

IV. ECONOMIC FLUCTUATIONS AND MONEY

BRENDA L. SPOTTON applies the methodology of comparative financial history to the study of financial instability and speculative bubbles. She argues that financially unstable periods are most likely in the wake of an innovation leading to speculation in some asset via the trading of highly- liquid claims on that asset. Having settled on this description of the practical conditions under which financial instability is most likely, she examines historical episodes that are characterized by the stated conditions.

MUHONG WANG and LINYAN SUN describe a new estimation approach they have developed which combines spectral and regression methods. They recommend the use of this approach for studying business cycles and demonstrate it using GNP data for the United States for 1969-88. APOSTOLOS SERLETIS explains the concept of chaos and its potential use for the study of business cycles and economic time series. He summarizes findings from applied studies that use the concept of chaos.

PAULINE M. SHUM reports on how the TSE 300 stock index responded to the 1992 constitutional referendum on the Charlottetown accord. In particular, she analyzes results for a model relating changes in the closing values of the TSE 300 to the changes in public opinion poll indicators for the probability of a YES vote over the 37 trading days in the campaign. The paper is interesting partly because it has often been suggested that recessionary forces, or even financial collapse, might be set in motion by political events like a negative vote on the Charlottetown accord.

The last four papers in this section are history of thought discussions of theories that have figured prominently in the efforts of economists to explain business cycles.

CHRISTOF RUHL considers the reconciliation of business cycle and general equilibrium theory, and, more generally, the link between short run economic fluctuations and the long run theory of growth. He argues that a reinterpretation of Hayek's theory as an attempt to model short run



Introduction Part 1 - xi

fluctuations where rationality is bounded provides a potentially useful alternative starting point for modeling path dependent behaviour. HANS- MICHAEL TRAUTWEIN calls attention to, and seeks to rectify, the modern neglect of endogenous money. He outlines alternative lines of thinking extending from Wicksell to Hayek to the early Stockholm School. He also discusses certain modern difficulties with the general micro foundations of endogenous money. JOHN SMITHIN critically assesses the claim of Hicks that Henry Thornton should be regarded as an important precursor of Keynes. In so doing, Smithin considers relevant aspects of the contributions of Keynes as well as the work of Thornton. His analysis serves to draw attention to and clarify important issues in monetary economics.

In the final paper in this section, EMMANUEL NYAHOHO examines Hayek's perspectives on the monopoly that national governments have regarding the issue of money. Hayek's proposals for implementing free trade in monies are critically assessed, along with his view that adoption of these policies would eliminate the need for central banks.

V. REGULATION AND PRICING

Government influence on firm behaviour is often achieved by interventions that affect the prices that firms face. This is one of many reasons for interest in how firms adjust their pricing and output behaviour, and other aspects of their operations, in response to price signals. The first four papers in this section have to do with different approahes to influencing firm behaviour. The remaining papers focus on the pricing behaviour and responses of firms.

RANDALL K. MORCK and DAVID A. STANGELAND note that state ownership and regulation are alternative ways of trying to control enterprise behaviour. Using financial data for firms from InfoGlobe for Canada and Compustat for the United States, they compute and compare profit rates by industry for state-owned and for private sector enterprises in Canada and for private sector firms in the United States. Their findings raise questions concerning the purposes of state ownership in Canada.

ROBERT W. JEFFERSON considers alternative government control instruments for influencing the amount and time profile of revenue flows from the exploitation of publicly owned natural resources. The control instruments considered include fixed taxes per period on firms granted exploitation rights, activity-based extraction taxes, and license renewal rules that take account of past firm performance.

ROSE ANNE DEVLIN and R. QUENTIN GRAFTON explore two basic questions regarding the use of marketable emission rights as a mechanism for



Part 1 - xii Alice Nakamura

controlling pollutants. The first is whether the permits should be sold -- perhaps by auction -- or given away. The second is what substances should be covered by the permits. They outline the advantages of gratis allocation of transferable permits coupled with rent capture provisions. Their work also underscores the importance of having regulators who understand pollution technology. Of course, almost any sort of government pollution control policies will be ineffectual without surveillance and enforcement. XIAOHANG H. SUMNER theoretically explores alternative possibilities and pitfalls concerning the behaviour of regulatory enforcement officials.

When rationing is carried out by governments, often it is motivated by distributional or price control considerations. For-profit firms also face rationing problems in some circumstances and may benefit from exploring rationing alternatives. JOSEPH A. DOUCET, K. JO MIN, MICHEL ROLAND and TODD STRAUSS propose a two-stage rationing mechanism for electric power at times of potential excess demand.

Theoretical treatments of prices, and the supply behaviour of firms and demand responses of consumers, are anchored in assumptions about trading activity and the conditions under which this is equilibrating. LARRY LEVINE discusses "quasi" non-tatonnement trading processes, which are not necessarily equilibrating. His paper critically reviews related concepts developed by Marshall, Arrow and Hahn.

A different perspective on market processes emerges from the paper of ASHA B. SADANAND: one which explicitly allows for possible differences in outcomes depending on which side in a bargaining process makes the first offer or if there are simultaneous offers, and which incorporates waiting times between offers that are endogenously determined and involve consequences for both sides. DENNIS LU extends the research of Milgrom and Roberts on limit pricing by incorporating a third player within a vertical bargaining structure. Lu finds conditions under which welfare may be lower in a separating equilibrium and higher in a pooling equilibrium. In the real world, vertical relationships of the sort Lu considers are common, so his results could have a wide range of application including possible extensions to predatory pricing. Newcomers to this research area will appreciate the way in which Lu introduces concepts -such as limit pricing, separating equilibria and pooling equilibria which play important roles in his analysis.

GREG LEBLANC shows that the real life phenomenon of price wars could arise even under equilibrium conditions with firms that are identical except for access to financing. And PIERRE-PASCAL GENDRON shows that price and also output behaviour under imperfect competition could be greatly affected by corporate tax policy changes. His results have implications for studies of



Introduction Part 1 - xiii

tax effects as well as of the pricing and output behaviour of firms under conditions of imperfect competition in product markets.

JAMES VERCAMMEN and MURRAY FULTON note that the pricing problem faced by a marketing co-operative is the mirror image of the case of a public firm selling to consumers. In North America, co-operatives are especially important in the agri-food industry. The authors demonstrate the efficiency gains for a co-operative that can result from moving from a linear to a non- linear pricing scheme, and how the inequity drawbacks of the latter could be overcome with a discontinuous non-linear pricing scheme.

LEONARD A. COAD and CORNELIS VAN DE PANNE point out that extreme simplifications are necessary in models of market behaviour that are to be studied analytically. They describe a menu-based APL computer simulation package they have developed that facilitates convenient exploration of the adjustment processes and equilibrium properties of models incorporating a wide variety of choices about multiple demand agents, multiple supply agents, search characteristics, transaction closing conditions, incumbency effects, and reservation or acceptance price thresholds and their adjustment.

BRENDAN J. RING and E. GRANT READ explore the type of pricing required to efficiently coordinate a competitive wholesale electricity market over unit time periods that are typically of the order of one hour. They outline physical characteristics and operational constraints of power systems that make it impossible in practice to define physically meaningful "bilateral" trades between suppliers and users. Ring and Read discuss the use of spot prices that vary across space to reflect the marginal costs of losses and of network congestion, and across time in response to changing demand and generator availability.

DAVID L. RYAN, YU WANG and ANDRE PLOURDE point out that many of the complexities of markets that may affect adjustments to price changes tend to be ignored in demand analyses. They examine residential energy demand in Ontario using data for 1962-89 from the National Energy Board and other sources, and allowing for real life complexities including price related inter- fuel substitution and asymmetric responses to price increases versus price decreases.

VI. NATIONAL AND REGIONAL ECONOMIC DEVELOPMENT IN CANADA

JOHN F. HELLIWELL opens the last group of papers in Part; 1 with the question, "Have regional disparities in Canada changed over the past thirty years?" His paper assesses and extends earlier findings of convergence in



Part 1 - xiv Alice Nakamura

the levels, and also the growth rates, of provincial per capita GDP. His empirical results put convergence among the provinces of Canada in a historical framework, with evidence dating back to 1926, and he explicitly examines the convergence-migration connection.

FRANK C. LEE summarizes his recent empirical findings on convergence in Canada from 1966 to 1992. In addition to noting the existence of migration effects (explored in the Helliwell paper), Lee uses a production function framework to consider the effects of other factors such as the proportion of workers with university degrees and the output shares of the manufacturing and construction sectors in each regional economy.

ATHER H. AKBARI raises the question of whether interprovincial differences in the quality of education (as opposed to the quantity, as education is measured in most studies) could be important in explaining provincial income disparities. Akbari focuses on immigrant versus native born differences in the estimated impacts. The underlying insight is that immigrants were educated elsewhere; hence the quality of their education is not determined by the provincial quality of education. The data used are from the 1991 Survey of Consumer Finances (SCF).

DANE ROWLANDS considers the Canadian federal government regional development programs (RDPs): their evolution, their current problems, and prospects for reform. Among other points, he argues that the bias in RDP assistance has shifted from factor related subsidies (primarily for capital investment) toward a pre-entrepreneurial perspective, and that the instruments used for delivering the RDP assistance have also evolved.

TONY WARD' S paper provides documentary evidence of historical problems with RDPs in Canada. He notes that unifying the country economically as well as politically was an explicit objective of the land and transportation components of Canada's National Policy in the late nineteenth century. However, just as the prairies were opened up by the construction of the Canadian Pacific Railway, there was a substantial downward fluctuation in the climate. According to the evidence Ward summarizes, climate conditions that were more favourable for agriculture did not return until the turn of the twentieth century.

MICHEL NOEL outlines his findings from a study of how the industrial specifics of regions affect the direct investment decisions of foreign and Canadian firms. His findings suggest that foreign direct investment, like migration, tends to work against regional convergence. PETER J. WYLIE selectively reviews Canadian public policy from the 1940s on with respect to the emphasis on infrastructure investment. This motivates a discussion of estimation results for two aggregate production function models: a Cobb-



Introduction Part 1 - xv

Douglas and a translog. Both were estimated along with a labour cost share equation using time series data for 1946-91.

Finally, the paper by PETER GEORGE, FIKRET. BERKES and RICHARD J. PRESTON reminds us that there are important nonmarket areas of economic activity in Canada and differences of opinion as to the desired direction of economic development. They report that the average Cree household cash income in the Mushkegowuk Region in 1990-91 was about $25,500 (including $10,000 in wage income, $13,000 in transfer income support, and $2,500 "other" income), while the traditional harvesting activities that do not go through markets provided the average household with food and other commodities such as fuelwood worth $8,420.



special issue: part 1 || editor's introduction to part 1

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