Tariffs versus quotas in the presence of imperfect competition and cross‐border externalities

Abstract.  We consider trade policies intended to affect the production of a foreign monopolist that generates negative externalities. We derive the optimal tariff and optimal import quota and examine which policy measure should be used to maximize domestic welfare. We find that if the domestic government does not have full information on the foreign firm's production method and if cross‐border externalities exist, import quotas are in some cases preferable to tariffs. Otherwise, however, tariffs are preferable to quotas. JEL Classification: F13, F18     

Multiproduct tariffs

Necessary conditions characterizing optimal nonlinear multiproduct tariffs are derived from aggregate data about customers' responses to linear tariffs. These conditions are amenable to numerical solution with standard software by using a discrete formulation of an associated nonlinear optimization problem cast in terms of the marginal prices charged for incremental bundles. This approach avoids integrability restrictions that otherwise encumber the computations. However, this method does not ensure that customers' second-order conditions for optimality of their demands are satisfied. Some numerical examples are provided, and the extension of the method to Ramsey pricing is also demonstrated.     

Optimal redistributive capital taxation in a neoclassical growth model

This paper provides a counterexample to the simplest version of the redistribution models considered by Judd (1985) in which the government chooses an optimal distortionary tax on capitalists to finance a lump-sum payment to workers. I show that the steady-state optimal tax on capital income is generally non-zero when the capitalists’ utility is logarithmic and the government faces a balanced-budget constraint. With log utility, agents’ optimal decisions depend solely on the current rate of return, not any future rates of return or tax rates. This feature of the economy effectively deprives the government of a useful policy instrument because promises about future tax rates can no longer influence current allocations. When combined with a lack of other suitable policy instruments (such as government bonds), the result is an inability to decentralize the allocations that are consistent with a zero-limiting capital tax. I show that the standard approach to solving the dynamic optimal tax problem yields the wrong answer in this (knife-edge) case because it fails to properly enforce the constraints associated with the competitive equilibrium. Specifically, the standard approach lets in an additional policy instrument through the back door.     

Self-selecting tariffs under pure preferences among tariffs

The behavioral assumptions for welfare analysis of self-selecting tariffs are generalized to be consistent with those maintained in empirical models of tariff choice. When customers have pure preferences among tariffs, it is shown that the optimal self-selecting tariffs provide strictly greater welfare than mandatory marginal cost prices, contain marginal prices that do not equal marginal cost, and can Pareto dominate an existing tariff. As an illustration of the theoretical results, optimal self-selecting tariffs are calculated empirically for a local telephone company.     

Policy consequences of limited cognitive ability

This paper analyses the welfare effects of price restrictions on private contracting in a world where agents have a limited cognitive ability. We deal with that by assuming that people compute the costs and benefits of entering a transaction with an error. We first discuss an example of an auction that will attract the least efficient buyers, because these are those who have made the largest mistake. We then study the case for government intervention when the government knows the distribution of true costs and benefits as well as that of errors. By imposing constraints on transaction prices, the government eliminates some that are on average inefficient - because the price signals that one of the parties has typically grossly overestimated its benefit from participation. This policy may increase aggregate welfare even though some of the transactions being blocked are actually efficient.JEL Classification: D81, J38, K31Gilles Saint-Paul: This paper is based on my Spanish Economic Review lecture at the Spanish Economic Association meeting, Salamanca, December 2002. I am grateful to the organizers for inviting me, and to participants and especially Juan Dolado for their useful comments.     

A Stackelberg Game Model of Trade in Renewable Resources with Competitive Sellers*

We model international trade in renewable resources between a single buyer and competitive sellers as a Stackelberg differential game. The buyer uses unit and ad valorem tariffs to indirectly encourage conservation of the renewable resource under study. First, we show that the efficacy of these trade policy instruments in promoting conservation depends fundamentally on whether harvesting costs are stock dependent or independent. When harvesting costs are stock independent, the optimal open‐loop tariffs are dynamically consistent. In contrast, when harvesting costs are stock dependent, the optimal open‐loop tariffs are dynamically inconsistent. Secondly, we point out that whether the terminal value of the resource stock is higher with the stock independent or the stock dependent cost function cannot be resolved unambiguously. Thirdly, we show that it does not make sense for the buyer to use both tariffs simultaneously. Finally, we discuss the implications of these and other findings for renewable resource conservation in general.     

The United States is a Small Country in World Trade*

Despite being the largest country in world trade and thus presumably having high optimal tariffs, the United States has long had low and declining levels of protection. This paradox suggests that the United States is failing to exploit its monopsony power by levying optimal tariffs. Using data on world output and trade flows, we find that the United States is a small country in world trade in that its trade policies have negligible impacts on world prices. In the median manufacturing industry, US tariffs reduce world prices by only 0.12%. United States optimal tariffs are also typically small (3.6% in the median industry) and are lower than existing US tariffs in most industries. It is no puzzle that the United States has been a champion of free trade since the 1930s—the United States, like other small countries, benefits economically from tariff reductions.     

Optimal fiscal and monetary policy with sticky wages and sticky prices

We determine the optimal degree of price inflation volatility when nominal wages are sticky and the government uses state-contingent inflation to finance government spending. We address this question in a well-understood Ramsey model of fiscal and monetary policy, in which the benevolent planner has access to labor income taxes, nominally risk-free debt, and money creation. Our main result is that sticky wages alone make price stability optimal in the face of shocks to the government budget, to a degree quantitatively similar as sticky prices alone. Key for our results is an equilibrium restriction between nominal price inflation and nominal wage inflation that holds trivially in a Ramsey model featuring only sticky prices. Our results thus show that when nominal wages are sticky, setting real wages as close as possible to their efficient path is a more important goal of optimal monetary policy than is financing innovations in the government budget via state-contingent inflation. A second important result is that the nominal interest rate can be used to indirectly tax the rents of monopolistic labor suppliers. Taken together, our results uncover features of Ramsey fiscal and monetary policy in the presence of a type of labor market imperfection that is widely-believed to be important.     

OPTIMAL TAX POLICY IN A STOCHASTICALLY GROWING ECONOMY

This paper analyses the optimal taxation of capital in a stochastically growing small open economy in which there is a perfect market for a traded bond. The analysis emphasizes the dependence of the optimal tax structure upon the policy rule guiding the growth of government expenditure, and its impact on the behaviour of private agents. In general three taxes, reflecting three required conditions, are necessary to attain the first-best optimum. The first is to correct for any externality caused by government expenditure; the second is to attain the optimal portfolio share; the third is to ensure that the government budget constraint is met.     

Research and development and trade policies for product innovation in the presence of foreign competition

This paper examines two policy instruments — a matching grant and import tariffs — for encouraging research and development (R&D) in product innovation by a domestic firm when it faces foreign competition. We do so by developing a theoretical model of product innovation where R&D effort is endogenous and its outcome uncertain. We examine the effects of a reduction in import tariffs on private expenditure on R&D, on public support for such R&D, and on total R&D expenditure. We find that in response to a reduction in import tariffs, the domestic firm always reduces its private R&D investments, but the total level of R&D expenditure (i.e., including public support) might go up depending on the level of tariffs. In particular, we find that it will go up if the initial level of tariff is higher than a critical level. When tariff is endogenous, we find that the socially optimal level of tariffs is positive. One finding that is of particular interest is that supporting private attempts to product innovate in the form of a matching grant program leads to a socially optimal level of product R&D.     

Zur Wahlzyklik wirtschaftspolitischer Maßnahmen

Summary Election cycles of economic policy measures: An empirical test of the votemaximizing hypothesis.A special characteristic of the economic theory of democracy lies in the assumption of the behaviour of politicians: they are not as much striving for the advancement of public interest but display much rather a behaviour of utility maximization. It is their goal to win the next elections. Public preferences are taken into consideration only because voters seem to favour the political party whose election pledge most closely corresponds to their own ideas. Assuming further that voters are forgetful, we can derive the hypothesis that governments set popular (i.e. vote capturing) economic policy measures ahead of elections and unpopular ones right afterwards. In this paper we test this hypothesis using the increase of political prices and the development of certain categories of public expenditure as explanatory variables.Administered prices and public tariffs proved greatly dependent upon the timing of elections. For all of the tariffs under examination a statistically significant predominance of increases (unpopular) could be observed shortly after elections. The extent of the increase, however, does not appear to have any correlation with the election date.As to popular government expenditures, only subsidies have been paid clearly in line with election cycles in the period under consideration.As to further spending categories, our hypothesis appears to be directionally confirmed, yet the data available is infufficient for a statistically significant proof. Besides, especially in the case of Austria, other factors seem to be important in the determination of economic policy measures as well. Some reasons are given in this paper.     

Optimal time-consistent fiscal policy under endogenous growth with elastic labor supply

We explore the implications of incorporating an elastic labor supply in an endogenous growth economy when characterizing the time-consistent Markov policy. We consider two policy instruments: an income tax rate and the split of government spending between consumption and production services. The Markov-perfect policy implies a higher income tax rate and a larger proportion of government spending allocated to consumption than those chosen under a commitment constraint on the part of the government. As a consequence, economic growth is slightly lower under the Markov-perfect policy than under the Ramsey policy. Under the Markov and Ramsey optimal policies, a higher weight of leisure in households' preferences leads to a lower optimal income tax rate and a lower proportion of public resources devoted to consumption. We also show that the policy bias that would arise when imposing a Markov policy designed ignoring the presence of leisure in the utility function would lead to a significant welfare loss.     

Estate taxation with warm-glow altruism

This article examines the properties of the optimal fiscal policy in an economy with warm-glow altruism (utility interdependence) and heterogeneous individuals. We propose a new efficiency concept, D-efficiency, that considers an implicit constraint in the act of giving: Donors cannot bequeath to donees more than their existing resources. Considering this constraint, we show that the market equilibrium is not socially efficient. The efficient level of bequest transfers can be implemented by the market with estate and labor-income subsidies and a capital-income tax. In the absence of lump-sum taxation, the government faces a trade-off between minimizing distortions and eliminating external effects. The implied tax policy differs from Pigovian taxation since the government’s ability to correct the external effects is limited. Finally, we show that the efficiency-equity trade-off does not affect the qualitative features of the optimal distortionary fiscal policy.

Optimal mixed taxation,credit constraints,and the timing of income tax reporting

We study optimal income and commodity tax policy with credit‐constrained low‐income households. Workers receive an even flow of income during the tax year, but report their incomes and make tax payments (receive transfers) at the end of the year. They spend their disposable income on multiple commodities over the year. We show that differentiated subsidies on commodities can be optimal even if the Atkinson–Stiglitz Theorem conditions apply. When the optimal policy leaves low‐income households with binding credit constraints, it may be optimal to subsidize differentially the good that they consume in higher proportion. Uniform subsidies would also relax the credit constraint, but would be more costly to the government since they would equally benefit unconstrained households. Numerical examples suggest that commodity tax differentiation increases with basic needs and with the interest rate at which government borrows.     

增加土地供应能抑制房价过快上涨吗?

政府抑制房价过快上涨所采用的常用的政策之一是增加土地供应的数量,但这一措施在现实中并不总是有效的。笔者构建了一个简化的房价与地价的决定模型,分析了政府的土地供应数量对房价和地价的影响。笔者认为,政府调控措施的效果依赖于具体的市场条件,特别是投机现象的严重程度和预期房价对地价变动的敏感程度。如果一个房地产市场中存在着比较严重的投机现象,则增加土地供应的政策有可能会进一步提高而不是降低房价。     

Is the relationship between monetary policy and house prices asymmetric across bull and bear markets in South Africa? Evidence from a Markov-switching vector autoregressive model

This paper examines asymmetries in the impact of monetary policy on the middle segment of the South African housing market from 1966:M2 to 2011:M12. We use Markov-switching vector autoregressive (MS-VAR) model in which parameters change according to the phase of the housing cycle. The results suggest that monetary policy is not neutral as house price growth decreases substantially with a contractionary monetary policy. We find that the impact of monetary policy is larger in bear regime than in bull regime; indicating the role of information asymmetry in reinforcing the financial constraint of economic agents. As expected, monetary policy reaction to a positive house price shock is found to be stronger in the bull regime. This suggests that the central bank reacts more in bull regime in order to prevent potential crisis related to the subsequent bust in house prices bubbles which are more prominent in bull markets. These results substantiate important asymmetries in the dynamics of house prices in relation to monetary policy, vindicating the advantages of generating regime dependent impulse response functions.     

OPTIMAL MONETARY POLICY WITH THE STICKY INFORMATION MODEL OF PRICE ADJUSTMENT: INFLATION OR PRICE‐LEVEL TARGETING?

I investigate the optimal monetary policy in a New Keynesian macroeconomic framework with the sticky information model of price adjustment. The model is solved for optimal policy, and welfare implications of three alternative monetary policy regimes under this optimal policy are compared when there is a cost‐push shock to the economy. These monetary policy regimes are the unconstrained policy, price‐level targeting and inflation targeting regimes. The results illustrate that optimal policy depends on the degree of price stickiness and the persistence of the shock. Inflation targeting emerges as the optimal policy if prices are flexible enough or the shock is persistent enough. However, the unconstrained policy or price‐level targeting might be preferable to inflation targeting if prices are not very flexible and the shock is not very persistent. The results also show that as prices become more flexible, the welfare loss usually gets bigger.     

Bayesian–Walrasian equilibria: beyond the rational expectations equilibrium

In general rational expectations equilibrium (REE), as introduced in Radner (Econometrica 47:655–678, 1978) in an Arrow–Debreu–McKenzie setting with uncertainty, does not exist. Moreover, it fails to be fully Pareto optimal and incentive compatible and is also not implementable as a perfect Bayesian equilibrium of an extensive form game (Glycopantis et al. in Econ Theory 26:765–791, 2005). The lack of all the above properties is mainly due to the fact that the agents are supposed to predict the equilibrium market clearing price (as agent’s expected maximized utility is conditioned on the information that equilibrium prices reveal), which leads inevitably to the presumption that agents know all the primitives in the economy, i.e., random initial endowments, random utility functions and private information sets. To get around this problematic equilibrium notion, we introduce a new concept called Bayesian–Walrasian equilibrium (BWE) which has Bayesian features. In particular, agents try to predict the market-clearing prices using Bayesian updating and evaluate their consumption in terms of Bayesian price estimates, which are different for each individual. In this framework agents maximize expected utility conditioned on their own private information about the state of nature, subject to a Bayesian estimated budget constraint. Market clearing is not an intrinsic part of the definition of BWE. However, both in the case of perfect foresight and in the case of symmetric information BWE leads to a statewise market clearing; it then becomes an ex post Walrasian equilibrium allocation. This new BWE exists under standard assumptions, in contrast to the REE. In particular, we show that our new BWE exists in the well-known example in Kreps (J Econ Theory 14:32–43, 1977), where REE fails to exist. This work was done in the Spring of 2005, when EJB was a visiting professor at the University of Illinois.     

Probabilistic Voting and Accountability in Elections with Uncertain Policy Constraints

We consider accountability in repeated elections with two long‐lived parties that have distinct policy preferences and different levels of valence. In each period the government faces a privately observed feasibility constraint and selects a publicly observed policy vector. While pure strategy equilibria do not exhibit tight control on government policy making, complete control is possible in mixed strategies. In optimal equilibria voters use reelection functions which depend on policy in a manner that causes the governing party to internalize voter preferences. In these optimal equilibria the voters use different reelection functions for different parties.