Jim Turnure Principal, Energy Group

Capital Investment and Growth Models (III)

• Using an analytic framework based on the concepts advanced in this tradition will generally lead to a macroeconomic or industry-level model and to very broad, aggregate indicators of technological change.
• Most models in this tradition would begin with aggregate productivity functions using some variant of the capital-labor-materials (KLM) or capital-labor-energy-materials (KLEM) specification. These production functions define the available production possibilities and can be used to estimate the optimal mix of inputs to production.
• Productivity improvements can be though of as a ‘wild card’ multiplier for components of the productivity functions. Some theories treat all productivity improvements together as a single term while others attempt to distinguish multiple sources of productivity improvement such as technological change.
• While very large R&D benefits (operating through the multiplier on production functions) are often estimated using this approach, the level of aggregation makes program-specific assessments difficult.

Option Value and Principal-Agent Models (I)

• Coase (1960) considered the welfare tradeoffs introduced by entities whose economic activities cause harm to others, but who would in turn be harmed if their activities were limited. When transaction costs are present, the legal allocation of property rights can affect the efficiency outcome as well as the equity outcome. In such cases government intervention can raise total production and efficiency, particularly if large numbers of actors are involved.
• Williamson (1979) introduced more specific concepts that apply to transaction costs and offered a framework in which the most economical structure for a given transaction can be evaluated. He defined three relevant attributes of transactions: uncertainty, frequency of exchange, and the degree to which investments are transaction-specific.
• Dybvig and Spratt (1983) treated the benefits of adopting innovation or standards as a positive externality, i.e. a public good, showing that improvements in outcomes (Pareto optimality) will generally be available if government intervenes to encourage innovation. The degree of such sub-optimal outcomes depends on the private cost of the innovation and the amount of social benefit that can be gained.