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ON THE REVISITED ILLYRIAN MODEL AND PERVERSITY: THE CASE OF THE LONG‐RUN 1
Author(s) -
Kahava,
Weiss Avi
Publication year - 1994
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/j.1467-8586.1994.tb00583.x
Subject(s) - economics , production (economics) , short run , econometrics , mathematical economics , keynesian economics , microeconomics
The modified theory of the Illyrian firm was developed, in part, to correct a perversity exhibited by the traditional theory of the Illyrian firm — that output rises in response to a fall in output price or a rise in fixed costs. We show that while this revised model has solved the problem for the short‐run the problem remains in the long‐run, and this long‐run perversity may have important policy implications for the short‐run as well. We also show that the under‐production problem associated with the traditional LMF is mitigated (and perhaps even reversed) in the modified LMF.