Profitable Speculation and Linear Excess Demand

Since Friedman maintained that profitable speculation necessarily stabilizes prices, there had been many debates. Farrell concluded these debates by showing that (i) for a two-period model, any continuous negatively sloped non-speculative excess demand function would validate Friedman's conjecture if there is no lag structure, and (ii) for a T-period model with T≥3, negatively sloped linear non-speculative excess demand is necessary and sufficient for Friedman's conjecture to be true if there is no lag structure. Later, Schimmler generalized Farrell's results to lag-responsive nonspeculative excess demand cases. However, there are some problems in Farell's and Schimmler's approaches which invalidate their proofs. In this paper, we will point out these problems and show that after correcting these slips, Farrell's two results are in fact correct. Also, we will redo Schimmler's problem for time-independent non-speculative excess demand functions. The conclusions derived are (i) for two-period models, any continuously differentiable non-speculative excess demand f(P_t,P_(t-1)) with f_1 (P_t,P_(t-1) )<0,f_2 (P_t,P_(t-1) )≤0 [where f_(t-s+1) (P_t,P_(t-1) )=∂f(P_t,P_(t-1) )/〖∂P〗_s , s=t-1, t] will validate Friedman's conjecture; (ii) for T-period models (T≥3), within the class of twice-continuously differentiable functions, linear non-speculative excess demand functions f(P_t,P_(t-1),⋯P_(t-T+1)) satisfying f_1<0,f_2=f_3=⋯= f_(t-T+1)=0 represent necessary and sufficient conditions for Friedman's conjecture to be true

Speculation and Price Stability Under Uncertainty: A Generalization

Since Friedman maintained that profitable speculation necessarily stabilizes prices, the necessary and sufficient conditions for his conjecture to hold have been derived following ex post analyses. However, within these frameworks, no uncertainty is involved. In this paper we assume the nonspeculative excess demand functions are always linear but with random slopes and intercepts (i. i. d. across time). Employing dynamic programming approaches, the optimal complete speculation sequence for a monopolistic speculator (which maximizes his long-run expected profits) can be characterized. Furthermore, Friedman's conjecture holds under this sequence. As for competitive speculation cases, we consider three variants arising from deviations of the monopolistic case. Of these, two models establish the property that Friedman's conjecture holds for optimal speculation sequences. However, since this conjecture might be falsified for the other model, a necessary condition is derived. Also, an example is given which shows that, if uncertainties are involved, a destabilizing optimal speculation sequence exists even with linear nonspeculative excess demand functions

Speculative Holdings under Linear Expectation Processes---A Mean-Variance Approach

In this paper, we considered a discrete time abstract market model where the associated commodity is storable. Also, instead of assuming expected profit maximizing speculators, we assumed they employed mean-variance approaches. Within this framework, given a non-degenerate quadratic inventory cost function and a linear expectation process, the optimal speculative carryover may be decomposed into four components of which two are special features arising from mean-variance considerations. Furthermore, assuming a linear non-speculative excess demand function, Friedman's conjecture (i.e., profitable speculation necessarily stabilizes prices) holds from an ex ante point of view

Political Power in the International Coffee Organization: A Research Note

In recent decades, international commodity agreements have been proposed as a way of promoting “development." Behrman, McNicol and others have analyzed them from a purely economic point of view. Fisher, Krasner, and others have adopted a more political perspective. In this article, we seek to advance the political analysis of such agreements. We do so by studying the allocation of export entitlements in the International Coffee Organization (ICO). In the ICO, as in other international organizations, political processes replace markets in the allocation of source resources. In the case of the ICO, allocational decisions are made by majority rule. Given the possibility of strategic behavior in such political environments, game theory should provide a useful set of tools for the analysis of such institutions. A particular interest of this article is the appropriateness of a specific solution concept--the Shapley value--to the analysis of politically contrived allocations under the ICO

A Note on the International Coffee Agreement

This research note develops a model of the institutional features of the international coffee agreement and analyzes the allocation of export quotas under the terms of the agreement in 1982. It suggests that the agreement can be viewed as a weighted majority voting game. It employs the assumption of rationality to predict how allocations should be made given the rules of the agreement and tests the model by determining whether the allocations which passed (failed) fell within (outside) of the solution of the game

Parameterization and Two-Stage Conditional Maximum Likelihood Estimation

This paper considers the case where, after appropriate reparameterization, the probability density function can be factorized into a marginal density function and a conditional density function such that one of them involves fewer parameters. Then, two types of two-stage conditional maximum-likelihood estimators, 2SCMLEI and 2SCMLEII, can be considered according to whether the marginal or the conditional density has fewer parameters. Our first result indicates that, under some identification assumptions, there is a connection between the number of parameters in the marginal (or conditional) density functions under the two reparameterizations. Moreover, conditions for asymptotic equivalence and numerical equivalence between these two-stage estimators and the FIML estimator are obtained. Finally, examples are provided to illustrate our results

Speculative Holdings under Linear Expectation Processes---A Mean-Variance Approach

In this paper, we considered a discrete time abstract market model where the associated commodity is storable. Also, instead of assuming expected profit maximizing speculators, we assumed they employed mean-variance approaches. Within this framework, given a non-degenerate quadratic inventory cost function and a linear expectation process, the optimal speculative carryover may be decomposed into four components of which two are special features arising from mean-variance considerations. Furthermore, assuming a linear non-speculative excess demand function, Friedman's conjecture (i.e., profitable speculation necessarily stabilizes prices) holds from an ex ante point of view

Profitable Speculation and Linear Excess Demand

Since Friedman maintained that profitable speculation necessarily stabilizes prices, there had been many debates. Farrell concluded these debates by showing that (i) for a two-period model, any continuous negatively sloped non-speculative excess demand function would validate Friedman's conjecture if there is no lag structure, and (ii) for a T-period model with T≥3, negatively sloped linear non-speculative excess demand is necessary and sufficient for Friedman's conjecture to be true if there is no lag structure. Later, Schimmler generalized Farrell's results to lag-responsive nonspeculative excess demand cases. However, there are some problems in Farell's and Schimmler's approaches which invalidate their proofs. In this paper, we will point out these problems and show that after correcting these slips, Farrell's two results are in fact correct. Also, we will redo Schimmler's problem for time-independent non-speculative excess demand functions. The conclusions derived are (i) for two-period models, any continuously differentiable non-speculative excess demand f(P_t,P_(t-1)) with f_1 (P_t,P_(t-1) )<0,f_2 (P_t,P_(t-1) )≤0 [where f_(t-s+1) (P_t,P_(t-1) )=∂f(P_t,P_(t-1) )/〖∂P〗_s , s=t-1, t] will validate Friedman's conjecture; (ii) for T-period models (T≥3), within the class of twice-continuously differentiable functions, linear non-speculative excess demand functions f(P_t,P_(t-1),⋯P_(t-T+1)) satisfying f_1<0,f_2=f_3=⋯= f_(t-T+1)=0 represent necessary and sufficient conditions for Friedman's conjecture to be true