On the Revisiting Illyrian Model and Perversity: The Case of the Long-Run

Nava Kahana and Avi Weiss

Bulletin of Economic Research, 1994, vol. 46, issue 2, 131-37

Abstract: 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. Copyright 1994 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

Date: 1994
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