Trade theorems with search unemployment

Abstract We revisit the Heckscher‐Ohlin‐Samuelson model in the presence of labour market frictions à la Mortensen‐Pissarides. Relaxing the assumption of the one‐worker‐one‐firm matching rule, we show that the Stolper‐Samuelson theorem and the Rybczynski theorem may not hold in specific circumstances. We also demonstrate that the Factor Price Equalization theorem is valid only for capital and unemployed labour across countries, but not for employed labour. In equilibrium, trade patterns are determined by countries’ factor endowments and relative factor intensities in sectors (independent of factor intensities in production). Finally, our results suggest an additional explanation for the ‘missing trade’ phenomenon.     

Social Welfare Analysis in a Financial Economy with Risk Regulation

In the last years, regulating agencies of many countries in the world have adopted VaR‐based risk regulation to control market risk of financial institutions. This paper investigates the consequences of such kind of regulation to social welfare and soundness of financial institutions through an equilibrium model. We show that the optimum level of regulation for each financial institution (the level that maximizes its utility) depends on its appetite for risk and that some of them can perform better in a regulated economy. In addition, another important result asserts that under certain market conditions the financial fragility of an institution can be greater in a regulated economy than in an unregulated one.     

MONEY,SOCIAL STATUS AND ENDOGENOUS GROWTH IN A GENERALIZED CASH‐IN‐ADVANCE MODEL

This paper analytically examines the equilibrium growth effect of money/inflation in a standard one‐sector AK model of endogenous growth with the most generalized cash‐in‐advance constraint and relative wealth‐induced preferences for social status. We show that on the economy's unique balanced growth equilibrium path, the sign of the correlation between money and output growth depends crucially on: (i) the intertemporal elasticity of substitution in consumption; and (ii) the liquidity‐constrained ratio of consumption to investment expenditure. Moreover, our model economy always exhibits a positive output–growth effect in response to changes of the strength for social status. We also undertake numerical experiments to assess the quantitative importance of our theoretical results under an empirically plausible set of parameters.     

The Dynamic Efficiency Gains from Introducing Capacity Payments in the National Electricity Market

Australia's National Electricity Market (NEM) has been a beacon for governments around the world considering power industry reform. However, while the energy‐only NEM has served Australia well since 1998, deep structural supply‐side faults exist. Competitive energy‐only markets do not have a stable equilibrium solution unless reliability constraints are violated, market power is exercised, or scarcity pricing operates unabated. But the political economy of electricity means none of this is likely. This research finds that by reducing the NEM price cap and introducing a ‘capacity payments pool’, a tractable and politically acceptable equilibrium can be established to facilitate timely plant entry.     

Labor Mobility, Trade, and Social Capital

Labor market integration raises welfare in the absence of distortions. This paper examines labor and goods market integration in a general‐equilibrium model with social capital. The findings are: (i) labor market integration has an ambiguous impact on welfare, and raises it if the goods and labor skills are sufficiently different; (ii) compared to Pareto optimum, labor mobility (social capital) is excessively large (depleted); (iii) trade is superior to labor market integration if trading costs are no higher than private migration costs, otherwise the outcome is ambiguous; and (iv) the creation of new institutions in response to labor market integration has an ambiguous impact on welfare.     

Regular Distributive Efficiency and the Distributive Liberal Social Contract

We consider abstract social systems of private property, made of n individuals endowed with nonpaternalistic interdependent preferences, who interact through exchanges on competitive markets and Pareto‐improving lump‐sum transfers. The transfers follow from a distributive liberal social contract defined as a redistribution of initial endowments such that the resulting market equilibrium allocation is both: (i) a distributive optimum (i.e., is Pareto‐efficient relative to individual interdependent preferences) and (ii) unanimously weakly preferred to the initial market equilibrium. We elicit minimal conditions for meaningful social contract redistribution in this setup, namely, the weighted sums of individual interdependent utility functions, built from arbitrary positive weights, have suitable properties of nonsatiation and inequality aversion; individuals have diverging views on redistribution, in some suitable sense, at (inclusive) distributive optima; and the initial market equilibrium is not a distributive optimum. We show that the relative interior of the set of social contract allocations is then a simply connected smooth manifold of dimension n ? 1. We also show that the distributive liberal social contract rules out transfer paradoxes in Arrow–Debreu social systems. We show, finally, that the liberal social contract yields a norm of collective action for the optimal provision of any pure public good.     

Economic Performance, Trade Restrictiveness, and Efficiency

The paper addresses the question of whether trade restrictiveness impacts economic performance, via a trade restrictiveness index that is decomposable into a trade distortion and a domestic distortion component. The paper builds on the Anderson and Neary price index measure of trade distortion, in evaluating trade restrictiveness via a distance function approach. This is accomplished by adding a “dual” version to their trade restrictiveness price index, based on distance functions that scale output quantities. The authors compute the trade restrictiveness quantity index (TRQI) using a parametric frontier approach to model the production side of the economy, and a panel of information on the agricultural sector of a set of European Community countries. The results suggest that the use of TRQI makes a considerable difference to interpretations of the efficiency impact of agricultural trade policies in EC countries, as compared to policy‐oriented aggregates or result‐oriented measures of trade restrictiveness.     

Quality Competition and Social Welfare in Markets with Partial Coverage: New Results*

We use a vertical product differentiation model under partial market coverage to study the social welfare optimum and duopoly equilibrium when convex costs of quality provision are either fixed or variable in terms of production. We show the following new results. First, under fixed costs, the social planner charges a uniform price for the single variant that just covers costs of quality provision. Like the duopoly equilibrium, this socially optimal pricing entails a partially uncovered market, but a smaller share of the market is served compared with the duopoly equilibrium. Second, for the variable cost case, it is socially optimal to provide both high‐ and low‐quality variants, but market shares need not be equal. This differs from the result in fully covered markets. Third, in the duopoly equilibrium, the quality spread is too wide under variable costs relative to the social optimum. Under fixed costs, the duopoly produces two variants, but quality is too low relative to the social optimum, which has only one variant.     

Efficiency in an Economy with Fixed Costs

It is by now well known that in an economy with increasing returns, first-best efficiency may be impossible to attain through an equilibrium concept based on market prices, even if firms are regulated to follow marginal cost pricing. We examine the efficiency issue in a special but important class of economies in which the only source of nonconvexities is the presence of fixed costs. Even in this context, it is possible that none of the equilibria based on marginal cost pricing are efficient (unless additional, strong assumptions are made). We argue that available results on the existence of an efficient two-part tariff equilibrium rely on very strong assumptions, and we provide a positive result using a weak surplus condition. Our approach can also be used to establish the existence of an efficient marginal cost pricing equilibrium with endogenously chosen lump-sum taxes if the initial endowment is efficient in the economy without the production technology.     

The Role of Foreign Bond Issuance: The Case of Australia

We examined the recent development of the foreign bond—termed Kangaroo bond—market in Australia. Overwhelmingly, issuers in this market are of high credit quality and comprise sovereign, supranational and major international financial institutions. Local institutional investors have a preference for simple, fixed‐rate pricing structures, with foreign issuers reliant upon converting their Australian dollar‐denominated bond proceeds into the currency and coupon type of choice using cross‐currency swaps. The Kangaroo bond issuers provide a natural counterparty to Australian residents issuing in foreign currency in offshore markets, where cross‐currency swaps allow them to easily convert their proceeds into Australian dollars.     

SOCIAL ASSETS*

We present a model incorporating both social and economic components and analyze their interaction. The notion of a social asset, an attribute that has value only because of the social institutions governing society, is introduced. In the basic model, agents match on the basis of income and unproductive attributes. An attribute has value in some equilibrium social institutions (matching patterns), but not in others. We then show that productive attributes (such as education) can have their value increased above their inherent productive value by some social institutions, leading to the notion of the social value of an asset.     

Endogenous Specialisation and Endogenous Principal-agent Relationship

The paper develops a general equilibrium model with endogenous principal-agent relationship within a framework of consumer-producer, economies of specialisation, and transaction costs. It is shown that if transaction efficiency is low, then autarky is chosen as the general equilibrium where no market and principal-agent relationship exists. As transaction efficiency is improved, the equilibrium level of division of labour increases, comparative advantage between ex ante identical individuals emerges from the division of labour, and the number of principal-agent relationships increases. The following features of the model distinguish it from other principal-agent models in the literature. The principal-agent relationships are not only endogenous, but also reciprocal between different specialists. In a general equilibrium environment, choice between pure pricing and contingent pricing is endogenised. In the paper, the implications of endogenous transaction costs caused by moral hazard for the equilibrium extent of the market and related degrees of market integration, production concentration, trade dependence, diversity of economic structure, and productivity are explored. The model predicts two interesting phenomena: a man might work harder for the market with moral hazard than working for himself in the absence of moral hazard; a market with moral hazard might be Pareto superior to autarky with no moral hazard.     

THE POLITICAL ECONOMY OF PUBLIC‐PRIVATE PARTNERSHIPS AND ANALYSIS OF THEIR SOCIAL VALUE*

ABSTRACT: This article applies political economy theory to public‐private partnerships (PPPs). First, we propose that social welfare is the appropriate normative evaluation criterion to evaluate the social value of PPPs. Second, we specify the goals of PPP participants, including private‐sector partners and governments. Third, we review the observed outcomes of PPPs and analyze them from both a political economy perspective and a social welfare perspective. Fourth, based on a comparison of the actual outcomes of PPPs to normatively desirable social welfare outcomes, we propose some ‘rules for governments’ concerning the design of government PPP institutions and the management of PPPs. We argue that if governments were to adopt these rules there would be fewer PPPs in total, they would be more like traditional government contracts and there would be a greater likelihood of improved social welfare. However, political economy theory also explains why implementation of any reform will be difficult.     

Terms‐of‐Trade Shocks and Exchange Rate Regimes in a Small Open Economy*

We examine the impact of terms‐of‐trade shocks on key macroeconomic variables by numerically solving a dynamic stochastic general equilibrium model of a small open economy. The model considers nominal price rigidity under different exchange rate regimes. The numerical solutions obtained are consistent with the empirical regularities documented by Broda (2004), in which output responses to shocks are smoother in floats than in pegs; in moving from pegs to floats, the rise in nominal exchange rate volatility is coupled by the rise in real exchange rate volatility; and in both exchange rate regimes, net foreign assets is the most volatile variable.     

Designing the optimal public pension system

This paper uses a two‐period overlapping generations model in order to provide a theoretical design for the optimal public pension system based on a partial equilibrium analysis. Household preferences depend on two periods' consumption and leisure and are positively homogeneous of degree m with respect to consumption in the working and retired periods. We present characteristic features of the optimal public pension system in this paper. First, differences in the population growth rate do not affect the large/small relation between the optimal net lifetime burden rates of generations. Second, we present the optimal public pension system explicitly if m < 1 and m ≠ 0. Third, the difference between the market time‐preference rate and the social time‐preference rate provides a crucial insight into the optimal burden rate of each generation.     

Trade,Growth, and Increasing Returns to Infrastructure: The Role of the Sophisticated Monopolist*

Equilibrium in international trade with increasing returns in infrastructure depends on whether the infrastructure provider is “naïve” or sophisticated. A monopolist produces infrastructure under decreasing cost using fixed equipment. Unlike similar work, we derive a unique closed‐economy equilibrium. In a small open economy, with “naïve” infrastructure provider(s), multiple equilibria obtain. The industrial export potential of the economy depends on unexhausted economies of scale, and equilibria are possible where manufactures are exported despite an autarky price higher than the world price. With a sophisticated infrastructure provider, even an open economy has a unique equilibrium, which, at least as long as economies of scale are unexhausted, also involves more industrialization than the “naïve” equilibria. Access to the unlimited world market is necessary for significant industrialization but is not sufficient: one may also require “Schumpeterian” entrepreneurs, monopolists with a panoramic vision of the economy and of their catalytic role in it.     

TIME‐VARYING UNCERTAINTY AND THE CREDIT CHANNEL

We extend the Carlstrom and Fuerst (American Economic Review, 1997, 87, pp. 893–910) agency cost model of business cycles by including time‐varying uncertainty in the technology shocks that affect capital production. We first demonstrate that standard linearization methods can be used to solve the model yet second moments enter the economy's equilibrium policy functions. We then demonstrate that an increase in uncertainty causes, ceteris paribus, a fall in investment supply. We also show that persistence of uncertainty affects both quantitatively and qualitatively the behaviour of the economy.     

RESTRICTING EMPLOYMENT OF LOW‐PAID IMMIGRANTS: A GENERAL EQUILIBRIUM ASSESSMENT OF THE SOCIAL WELFARE IMPLICATIONS FOR LEGAL U.S. WAGE‐EARNERS

This paper builds on earlier work that used a general‐equilibrium model to show that reducing employment of unauthorized immigrants in the United States through a tighter border‐security policy lowers the average income of legal residents. Here we exploit further the detail available in the general‐equilibrium model to look at distributional effects, recognizing that the policy increases wage rates for low‐paid legal workers. We assess the social welfare effect on legal workers using a constant elasticity of substitution social welfare function. We contrast our general‐equilibrium approach to immigration analysis with the more commonly used partial‐equilibrium, econometric approach. (JEL D63, J61, C68)     

Economic Progress,Social Regress?

A central issue in the debate regarding the relevance of social capital is whether the decline in social embeddedness that has attended modernization over the last 40 years in the United States is as harmful as Putnam, among others, claim it to be. Critics of Putnam's thesis argue that various arms‐length institutions fulfil the roles performed by social capital thereby mitigating the negative impact of its recent decline. We develop a framework that provides insight into when such institutions may be adequate and when they might not. We find that if market (economic) and non‐market (social) interactions differ in their payoffs but are interlinked through the modernization of the economy, the optimal level of modernization in market interactions will be higher than that in non‐market interactions. Further, market supporting institutions are likely to increase the divergence between economic and social interactions since analogs for market institutions that constrain opportunistic behavior are usually nonexistent in social contexts. In this sense, economic progress may be accompanied by social regress.     

Trade, inequality, and the political economy of institutions

This paper investigates the relationship between international trade and the quality of economic institutions. We model institutions as fixed costs of entry, in a framework that has two key features. First, preferences over entry costs differ across firms and depend on firm size. Larger firms prefer to set higher costs of entry, in order to reduce competition. Second, these costs are endogenously determined in a political economy equilibrium. Trade opening can lead to higher entry costs when it changes the political power in favor of a small elite of large exporters, who in turn prefer to install high entry barriers.