Suppose Smith enters into a contract selling a unique antique chair to Brown for $500. Along comes Jones who was totally unaware of the contract with Brown. Jones offers Smith $800. Note that this is a case in which the subject matter of the contract is unique and the contract is one “to give,” both of these being conditions that most commentators say favor granting of specific performance.

1. 1.1. Should Brown be granted an injunction?

2. 1.2. If Jones gave Smith the $800 and took the chair home with him, should Brown be granted specific performance? What would that entail? Would it require voiding the Jones-Smith transaction? Or would Smith have to buy back the chair from Jones?

3. 1.3. If he were denied specific performance, what would Brown's damage remedy be? How would the market price be measured?

4. 1.4. If specific performance is infeasible after Jones has taken possession, the only circumstances in which the remedy would be feasible would be when Brown learned of a not-yet-executed substitute contract that he could then enjoin. Notice that Brown could have easily gotten a stronger remedy than specific performance by taking title instead of simply entering into a contract.

5. […]

Suppose that a customer agrees to buy a boat and before it is delivered, he reneges. The dealer subsequently resells the boat to another customer at the same price. Has the seller suffered damages (aside from incidental damages) and, if so, should he be compensated? This question, dubbed the lost-volume seller problem, has been the subject of considerable legal analysis, usually in the context of explicating section 2–708(2) of the Uniform Commercial Code (U.C.C.). …

[I will use the case of Neri v. Retail Marine Corp. as a vehicle for analysis.] Professors Goetz and Scott [1979, p. 332] … summarize the Neri facts and decision concisely:

Forms of precaution

Even when necessary or unavoidable, an accident, breach of contract, taking, or nuisance causes harm. The affected parties, however, can usually take steps to reduce the probability or magnitude of the harm. The parties to a tortious accident can take precautions to reduce the frequency or destructiveness of accidents. In contract, the promisor can take steps to avoid breach, and the promisee, by placing less reliance on the promise, can reduce the harm caused by the promisor's breach. Similarly, for governmental takings of private property, the condemnor can conserve on its need for private property, while property owners can reduce the harm they suffer by avoiding improvements whose value would be destroyed by the taking. Finally, the party responsible for a nuisance can abate; furthermore, the victim can reduce his exposure to harm by avoiding the nuisance.

Generalizing these behaviors, I extend the ordinary meaning of the word “precaution” and use it as a term of art … to refer to any action that reduces harm. Thus the term “precaution” includes, for example, prevention of breach and reduced reliance on promises, conservation of the public need for private property and limited improvement of private property exposed to the risk of a taking, and abatement and avoidance of nuisances. These examples are, of course, illustrative, not exhaustive.

The paradox of compensation

When each individual bears the full benefits and costs of his precaution, economists say that social value is internalized. When an individual bears part of the benefits or part of the costs of his precaution, economists say that some social value is externalized.

1. The analysis in the last part of the preceding paper invokes a variation on the Coase Theorem. This argument is extremely important in both tort and contract analysis and the reader should reflect upon it carefully. The central point is this: If the law changes so that the seller bears a particular cost instead of the buyer, sellers will in the long run have to charge a price to cover the higher cost. At the same time, buyers, who no longer bear the cost, will be willing to pay more for the good in question. Under idealized conditions, the final outcome is the same. The argument is developed in Demsetz (1973). The invariance of the outcome to the legal rule is not, however, the moral one should draw from the exercise. Rather, it suggests the factors one should consider when analyzing the impact of legal rules.

2. Suppose that Mr. Heery placed orders for delivery of a boat (that is, he signed a contract) at six different dealers. When the first boat came in, he immediately canceled the other orders (that is, he breached the contracts). Should he be able to cancel without penalty, or should the law discipline such breachers? Should the law distinguish between such a breacher and an innocent breacher, like Mr. Neri, who was hospitalized after signing his contract and no longer wanted the boat?

Introduction

Modelling the demand for consumer durables is not one of the easiest topics in applied economics. Much of the most creative work in the field was done in Cambridge in the 1950s in the group around Stone. Thus the classic paper by Farrell (1954) was the first systematic application of discrete choice theory to the problem and made a notable contribution also in analysing the interaction of the markets for new and used cars. Under the direct influence of Stone, Cramer (1957), in another classic, first put forward a neoclassical model integrating the demand for durable and non-durable goods with the life cycle theory of Ramsey (1928), Fisher (1930), Tintner (1938) and Modigliani and Brumberg (1955). The essence of the model lies in the assumptions that the budget constraint is linear and known with confidence and that, in efficiency-corrected units, new and used durables are perfect substitutes. Stone and Rowe (1957) simultaneously with Chow (1957) first applied the stock adjustment model to the demand for durables. The latter remains the most popular tool of analysis for aggregate time-series data though more recently Smith (1974; 1975) and Westin (1975) have put forward the ‘discretionary replacement’ model as a simple alternative. Though the neoclassical model of investment has been widely applied since Haavelmo (1960) and Jorgenson (1963), application to consumer durables have been less frequent. Diewert (1974) is one and contains a useful discussion of the theory.

In the USSR, consumption and demand undergo both constant growth in volume and qualitative structural change. The total growth of consumption and demand may be illustrated by the data on retail sales which by 1978 had increased 2.4-fold over the 1965 level. In addition, consumption and demand patterns constantly undergo considerable qualitative changes due to increases in the consumption of, and demand for, high-calorific food, for non-foods that satisfy developing needs, and for products that make house-keeping easier and save time. Thus the total sale of meat and meat products increased 2.1 times between 1965 and 1977. For the same period the corresponding figure for milk and milk products was 2.1, for eggs 3.7, and for fruit 2.2. At the same time, the consumption of bread and potatoes per capita has decreased and the level of sugar and vegetable oil consumption has been constant, in accordance with physiological standards.

Among non-foods the demand for knitted garments and carpets had the highest rate of growth during this period (i.e. 1965–77) increasing 3.3-fold and 5.7 respectively. Furniture sales increased 2.3-fold, articles for cultural and domestic needs 2.4-fold and so on. The provision of most durable goods has also been improved. Thus the supply of TV sets increased 3.3 times during the period, refrigerators by 6.5 times, washing machines by 3.3 times, vacuum cleaners by 3.1 times and so on.

It is a matter of common observation that the quantities consumed of many goods and services are not directly under the control of those who consume them. The level of provision of public goods cannot be varied to taste by any single consumer: shortages or formal rationing of market goods may place an upper limit on consumption: transactions costs or market imperfections, particularly in asset markets, may prevent the short-run adjustment of stocks to their optimum levels so that consumers may have to consume too much as well as too little. Perhaps most importantly, involuntary unemployment in the labour market can be thought of as an enforced consumption of an undesirably large amount of leisure. All these situations involve quantity constraints on consumer behaviour, and although rationing is only one possibility, we shall use the term to deal with all, including those situations where more is consumed than would be freely bought.

As one might expect, much of the early work on rationing was done during and immediately after the second world war. This work is surveyed in the classic paper by Tobin (1952). For a considerable period subsequently, there appeared to be little interest in the subject and little was published, although see the two papers by Pollak (1969; 1971). In the last few years, however, rationing has once again become a major focus of attention.

In a volume dedicated to Sir Richard Stone, it is appropriate that first consideration should be given to the theory and measurement of commodity demands. Sir Richard's own great monograph, The Measurement of Consumers' Expenditure and Behaviour in the United Kingdom [51] retains its classic status in applied econometrics to this day. The research programme established there and in the 1954 Economic Journal article [48] on the linear expenditure system is still flourishing and the five papers in part one represent several aspects of it.

The first set of topics concern the appropriate choice of functional form for empirical demand equations. In [51], Sir Richard and his coworkers adopted a largely pragmatic approach using a loglinear constant elasticity form. This has great advantages in computation and allows a much more flexible research strategy than is possible with more complex non-linear equations in which all commodities are dealt with simultaneously. However, as has been known for a long time, loglinear demand functions for all commodities are inconsistent with utility theory in that they cannot permit the predicted demands to add up to the predetermined sum of expenditures. This reflects a quite general problem: how do we choose functional forms which are convenient to work with, which allow the easy incorporation of such information as we possess about the nature of individual demands, and which are consistent with the theory? The first two papers in this section are addressed to that question.

Introduction

The impetus for our work on the timing and spacing of children has come from two surveys done by the University of Montreal in 1971 (Henripin and Lapierre-Adamcyk, 1974 and 1975). These surveys are unusual in that they contain questions on work experience before marriage, after marriage but before the birth of the first child, at the time of the interview, and the number of years worked after marriage. The questions enable one to reconstruct the proportion of a woman's time spent working during the child-rearing period. The usual questions are asked concerning socioeconomic background and pregnancy history. Because the time of the mother spent with her children is thought to be an important determinant of child ‘quality’ – begging the question of just what that is – and because female labour force participation is known to be greatly inhibited by the presence of young children (Sweet, 1973), it was clear to us that we had an almost unique opportunity to explore the joint relationship among the timing and the spacing of children and female labour force participation. In addition, the surveys contained an impressiveset of questions related to the couple's preferences for children. These questions included not only the usual inquiry concerning the ideal number of children and the number of children wanted by the couple, but also more abstract questions concerning couples in general, and questions related to preferences about the timing and spacing of children.

Sir Richard Stone retired from his chair in Cambridge in September 1980. To mark the occasion, this volume has been written in his honour. It is not a festschrift after the usual mould, where friends and colleagues contribute a diverse collection of papers. Sir Richard's achievements have been too broad and his disciples too many to permit a single collection along such lines. Instead, I have taken one single field in which Sir Richard has been preeminent, and attempted to bring together a first-rate collection of papers in that field. Many of the authors are close friends or ex-colleagues of Sir Richard's, but several have had little more than professional contact. However, all are indebted to him through his scientific work, and in contributing to this volume are united in their wish to honour him and to acknowledge their indebtedness. In editing the volume it is my hope that the best way of honouring Sir Richard and commemorating his retirement is the preparation of a volume of the best current work in the economics of consumer behaviour. The papers published here are representative of a wide range of contemporary research in the field and only a few important topics are not covered at some point. They provide a good indication not only of the state of the art but also of the extraordinary area over which Sir Richard's own work has been an influence.

Introduction

A price index refers to a pair of consumption periods, and price-index formulae usually involve demand data from the reference periods alone. When there are many periods, a price index can be determined from any one period to any other, in each case using the data from just those two periods. But then consistency questions arise for the set of price indices so obtained. Especially, they must have the consistency that would follow from their being ratios of ‘price levels’. The well-known tests of Irving Fisher have their origin in such questions. When these tests are regarded as giving identities to be satisfied by a standard formula and are taken in combination, it is impossible to satisfy them. Such impossibility remains even with partial combinations. Eichhorn and Voeller (1976) have given a full account of the inconsistencies between Fisher's tests. Reference is made there for their results and for the history of the matter.

Fisher recognizes the consistency question also in his idea of the ‘rectification of pair comparisons’. In this the price indices are all calculated, as usual, separately and regardless of any consistency they should have together, and then they are all adjusted in some manner so that they can form a consistent set. For instance, by ‘crossing’ a formula with its ‘antithesis’ you got one that satisfied the ‘reversal’ test. Here he takes one of the tests separately as if any one could mean anything on its own, and contrives a formula to satisfy it.

The theory and measurement of economic index numbers presents side by side some of the most difficult and abstruse theory with the most immediately practical issues of everyday measurement. The construction of index numbers is an essential part of all social accounting; without compression and aggregation the mass of quantities and prices thrown up by the economic system would be incomprehensible. Yet from the outset such aggregation has been known to be meaningful only in the context of welfare measurement. But to what extent are welfare-based index numbers practical? In his book on index numbers [56] written for the OEEC (now OECD), Sir Richard Stone addressed the question of whether practical international standards for index number construction could be established in line with his earlier standardized system of national accounts. Sir Richard gives the following reasons why the welfare approach is useful:

Introduction

The objective of this chapter is to discuss the relationship between the technique of principal components, first applied to economic data in the pioneering paper by Stone (1947), and the analysis of consumer demand.

The purpose of principal component analysis in statistics is to formulate a set of variables that are in some way ‘more basic’ than the observed variables. Factor analysis has a similar objective. Starting in 1956, Gorman and his associates (Boyle et al., 1977; Gorman, 1956; 1959; 1976b) applied these statistical techniques to consumer demand in order to assess the consumer's basic wants, while Lancaster (1966, 1971) and Becker (1965) pursued similar goals by extending the economic theory of the consumer rather than using statistical tools. The independence transformation, which originated with Theil (1967; 1975–76; 1977), Brooks (1970), and Laitinen and Theil (1978), is related to both approaches and is in fact ‘between’ them. The transformation requires no extension of the theory of the utility-maximizing consumer, although it can handle such extensions without difficulty (see the example on leisure in section 2). At the same time, the transformation has a simple statistical interpretation, viz., that of a constrained principal component transformation.

To provide adequate motivation, we discuss some examples in section 2. Sections 3 and 4 describe the preference independence transformation and the underlying differential approach to consumption theory. Section 5 gives a brief discussion of similar results in the theory of the firm.