Welfare effects of energy subsidy reform in developing countries

We analyze the potential welfare effect of energy subsidy reforms. The income distributions of eleven developing countries from different geographical regions are simulated using the assumption that income is lognormally distributed. We use the concept of the compensating variation to measure how much compensation is required to compensate consumers for a price increase in formerly subsidized goods. The behavior of consumers is modeled by a standard Cobb–Douglas and a quasilinear utility function. In the Cobb–Douglas case, a fixed fraction of income is spent on the subsidized good, which does not change after a price increase. With quasilinear preferences, the optimal amount of the subsidized good does not vary with income, but does change as prices change. We show theoretically and empirically that the required compensating variation can be set below the saved expenditures on subsidies, so a budget neutral reform can have a positive effect on social welfare.     

NEOCLASSICAL GROWTH AND THE DISTRIBUTION OF CONSUMPTION

Abstract.  The neoclassical growth model is used to compare an economy with growing per capita income with an economy with stationary per capita income, in terms of equity in distribution of consumption. The economies have the same initial conditions including the same initial wealth distribution. The outcome of the comparison depends on the nature of structural differences between the economies. Even with convergence in wealth distribution in the growing economy, the consumption distribution there may be less equitable and dynasties with least initial levels of wealth may be worse off than dynasties with same initial wealth levels in the stationary economy.     

Politically Determined Income Inequality and the Provision of Public Goods

Political processes may bring about Pareto improvements by increasing income inequality in a society that produces a public good by voluntary contributions. Proportional taxation funds a “governing agent.” The most endowed agent is the Condorcet winner for governing agent. When the tax rate can also be chosen by a vote, the ideal point of the agent with median initial endowment is the Condorcet winner under Cobb–Douglas utility. If Pareto improvements are possible, this ideal point corresponds to Pareto improvement. Pareto improvement may also be possible, even when a Leviathan set taxes, if there is deadweight loss from taxation. Pareto improvements are indeed always possible in “large” societies. On the other hand, no improvements may be possible if the initial distribution of wealth is very unequal in a “small” society, and Condorcet winners may not exist for other utility functions.     

Tax policy and aggregate stability in an overlapping generations model

In the context of a two-period non-monetary overlapping generations model with Cobb–Douglas preference and technological specifications, this paper explores the theoretical as well as quantitative interrelations between equilibrium (in)determinacy versus (i) a progressive tax schedule on wage income and (ii) a balanced-budget rule with endogenous labour taxation. In sharp contrast to previous studies on a one-sector representative-agent macroeconomy, we find that both fiscal formulations can possibly operate as stabilizing instruments against cyclical fluctuations driven by agents' self-fulfilling beliefs. The key policy implication of our no-indeterminacy result is that depending on what is the underlying analytical environment, countercyclical income taxation may stabilize or destabilize the business cycle.     

Asset price fluctuations without aggregate shocks

We analyze the pricing of a productive asset in a class of dynamic exchange economies with heterogeneous, infinitely-lived agents, and self-enforcing intertemporal trades. Individual incomes fluctuate and are correlated; preferences, dividends and aggregate income are fixed. Almost all economies in this class have a unique stationary Markovian equilibrium with fluctuations in asset prices. As the set of unrationed households changes over time and states, excess demand functions shift, asset returns fluctuate, and some households are shut out of asset markets. Examples suggest that the amplitude of these movements is negatively correlated with the productivity of the asset and with the penalty for default.     

On the Frequency of Interior Cournot–Nash Equilibria in a Public Good Economy

In a public good economy the distribution of initial income is an important determinant of how many individuals contribute to the public good in Cournot–Nash equilibrium. In this paper, first a simple formula is derived that provides a measure for the size of the set of income distributions leading to an interior Cournot–Nash equilibrium in which all individuals contribute to the public good. Furthermore, we give an estimate for the frequency that all members of a certain subgroup of the population are contributors.     

ENDOGENOUS FLUCTUATIONS IN TWO‐COUNTRY MODELS*

This paper investigates the interlinkage in the business cycles of large‐country economies in a free‐trade equilibrium. We consider a two‐country, two‐good, two‐factor general equilibrium model with Cobb‐Douglas technologies and linear preferences. We also assume decreasing returns to scale in the consumption good sector. We first identify the determinants of each country's global accumulation pattern in autarky equilibrium, and secondly we show how a country's business cycles may spread throughout the world once trade opens. We thus give capital intensity conditions for local and global stability of competitive equilibrium paths.     

Comparative advantage and strategic specialization

This paper shows that a strong comparative advantage is necessary for free trade and specialization in a 2 × 2 symmetric Ricardian model to be achieved in a Nash equilibrium. Governments strategically control labor distribution across industries, and representative agents maximize Cobb–Douglas utilities. A Nash equilibrium with complete specialization is achieved if and only if relative productivity exceeds a key value of 3, which is considered a very large number based on previous empirical studies. This paper also introduces a two‐stage game where each government chooses labor distribution first and then tariffs. In this two‐stage game, complete specialization is never achieved for any relative productivity level. Finally, by generalizing the Cobb–Douglas model into constant elasticity of substitution (CES) preferences, I show that if immiserizing growth effects exist, complete specialization could not be achieved for any level of relative productivity.     

Monetary and fiscal policies in a heterogeneous‐agent economy

We study the effects of long‐run inflation and income taxation in an economy where households face uninsurable idiosyncratic risks. We construct a tractable competitive‐search framework that generates dispersion of prices, income and wealth. We analytically characterize the stationary equilibrium and the policy effects on individual choices. Quantitative analysis finds that monetary and fiscal policies have distinct effects on macro aggregates, such as output, savings and wealth, income and consumption inequalities. There is a hump‐shaped relationship between welfare and the respective policies. Overall, welfare is maximized by a deviation from the Friedman rule, paired with distortionary income taxation.     

Optimal growth with many consumers

A method is described for constructing all Pareto-optimal allocations for a dynamic economy with many heterogeneous consumers, under certainty, in which both the technology and consumer preferences are recursive but preferences need not be additively separable over time. Optimal (perfect foresight competitive equilibrium) allocations are obtained through the study of a dynamic program. For an economy with one consumption good, sufficient conditions are given for the existence of a unique interior stationary distribution of consumption and wealth. For a two-person exchange economy, sufficient conditions are given for the global asymptotic stability of the unique interior stationary point.     

International Tax Competition: There is No Need for Cooperation in Information Sharing

A model is investigated in which small open economies choose the degree of information exchange among tax authorities and an unrestricted set of capital income taxes. The author shows that cooperation in information sharing does not matter in equilibrium outcomes. This comes in striking contrast to existing results and the common belief among policy practitioners. The reason for this result is that if the set of distortionary taxes is unrestricted then, depending on the characteristics of the economy, either information sharing becomes redundant or the non‐cooperative equilibrium is characterized by zero information exchange and overprovision of information.     

Growth in economies with non convexities: sunspots and lottery equilibria

Summary. We investigate the relation between lotteries and sunspot allocations in a dynamic economy where the utility functions are not concave. In an intertemporal competitive economy, the household consumption set is identified with the set of lotteries, while in the intertemporal sunspot economy it is the set of measurable allocations in the given probability space of sunspots. Sunspot intertemporal equilibria whenever they exist are efficient, independently of the sunspot space specification. If feasibility is, at each point in time, a restriction over the average value of the lotteries, competitive equilibrium prices are linear in basic commodities and intertemporal sunspot and competitive equilibria are equivalent. Two models have this feature: Large economies and economies with semi-linear technologies. We provide examples showing that in general, intertemporal competitive equilibrium prices are non-linear in basic commodities and, hence, intertemporal sunspot equilibria do not exist. The competitive static equilibrium allocations are stationary, intertemporal equilibrium allocations, but the static sunspot equilibria need not to be stationary, intertemporal sunspot equilibria. We construct examples of non-convex economies with indeterminate and Pareto ranked static sunspot equilibrium allocations associated to distinct specifications of the sunspot probability space.Received: 25 August 2003, Revised: 16 March 2004, JEL Classification Numbers: D84, D90.Correspondence to: Paolo SiconolfiWe thank Herakles Polemarchakis for helpful conversations on the topic. The research of Aldo Rustichini was supported by the NSF grant NSF/SES-0136556.     

Economic structure and factor payments

There is a growing body of evidence that the labour payment share in national income varies across countries and over time, suggesting that the popular aggregate Cobb–Douglas production function may not capture income share dynamics. There remains conflicting evidence on the importance of natural resource rents among low income economies and on estimates of the rate of return to produced capital. This paper focuses on the structural differences among countries, confirming the importance of the agriculture sector in estimates of labour and land’s share of factor income based on 81 countries at diverse levels of economic development in the year 2005. I find that cross-country data are best modelled by a CES production function with an elasticity of substitution of 0.8 and that many low income countries have a higher return to capital than the United States.     

General equilibrium in economies with adverse selection

We model economies of adverse selection as Arrow–Debreu economies. In the spirit of Prescott and Townsend (Econometrica 52(1), 21–45, 1984a), we identify the consumption set of the individuals with the set of lotteries over net transfers. Thus, prices are linear in lotteries, but they may be non linear in commodity bundles. First, we study a weak equilibrium notion by viewing the economy of adverse selection as a pure exchange economy. The weak equilibrium set is non empty, but some of the allocations may be inefficient, and the equilibria indeterminate. Second, following Prescott and Townsend (Econometrica 52(1), 21–45, 1984a), we introduce an intermediary (firm) supplying feasible and incentive compatible measures. Equilibria are constrained efficient, but the equilibrium set is empty for an open set of economies containing the Rothschild and Stiglitz insurance economies. The research of A. Rustichini was supported by the NSF grant NSF/SES-0136556.     

A two-factor learning model for private sector industrial firms

ABSTRACT

The Cobb–Douglas form of the two-factor learning curve model has been the conventional choice in empirical studies of the relative importance of R&D versus capacity expansion for cost reduction in energy technologies. Most empirical studies have focused on the role of public R&D in the context of renewable energy technologies. In this study, we provide a rationale for considering a different model formulation of the tradeoff between R&D and production capacity expansion when studying technology development in the private sector and we compare it to the conventional Cobb–Douglas model. We then apply our model formulation to a particular emerging technology case study.     

Consumption externalities: a representative consumer model when agents are heterogeneous

We examine a growth model with consumption externalities where agents differ in their initial capital endowment and their reference group. We show under which conditions the aggregate equilibrium with heterogeneous agents replicates that obtained with a representative consumer, despite the fact that different individuals have different consumption levels. Next we consider the implications of the presence of consumption externalities for the long-run distributions of income and wealth. We find that, in a growing economy, “keeping up with the Joneses” results in less inequality than would prevail in an economy with no consumption externalities.     

Aggregate investment expenditures on tradable and nontradable goods

This paper shows that aggregate investment expenditure shares on tradable and nontradable goods are very similar in rich and poor countries, as well as in different regions of the world. Furthermore, the two expenditure shares have remained close to constant over time, with the average expenditure share on nontradables varying between 0.54–0.62 over the 1960–2004 period. The results of this paper offer a new restriction for two-sector models of the aggregate economy. Combined with the fact that the relative price of nontradables correlates positively with income and exhibits large differences across space and time, our findings suggest that tradable and nontradable goods in investment can be modeled using the Cobb–Douglas aggregator.     

Economies of scale in the Australian tourism industry

The measurement of economies of scale in the tourism industry has not been done to this point, as tourism is not a specific industry according to international statistical standards. Among many industries related to tourism, four sectors (accommodation, transport, retail trade and recreational services) across six states and two territories from 1997 to 2007 are studied as they contribute nearly 70% of tourism output in Australia. By comparing regression results from the Cobb–Douglas (C–D) production function and the translog production function, we find that there is evidence of increasing returns in transport, retail trade and recreational services at the industry level. However, accommodation is characterized by constant returns to scale at the industry level. As accommodation is responsible for the biggest share of tourism output, this suggests that overall the tourism sector is not characterized by increasing returns. We also find that the degrees of returns to scale from the C–D and translog production functions are different and that the imposition of input share also influences the empirical results. Both of these factors stress the importance of model specification to the measurement of economies of scale.     

Exploitation,skills, and inequality

Abstract

This paper uses a computational framework to analyse the equilibrium dynamics of exploitation and inequality in accumulation economies with heterogeneous labour. A novel index is presented which measures the intensity of exploitation at the individual level and the dynamics of the distribution of exploitation intensity is analysed. Various taxation schemes are analysed which may reduce exploitation or inequalities in income and wealth. It is shown that relatively small taxation rates may have significant cumulative effects on wealth and income inequalities. Further, taxation schemes that eliminate exploitation also reduce disparities in income and wealth but in the presence of heterogeneous skills, do not necessarily eliminate them. The inegalitarian effects of different abilities need to be tackled with a progressive education policy that compensates for unfavourable circumstances.     

The structure of production in South Korea's manufacturing sector

This paper estimates a model of producer behavior for South Korean manufacturing that simultaneously identifies substitution elasticities and scale economies. A non-homothetic translog function is employed which takes on various other functional forms (i.e., Cobb–Douglas, Homothetic, Homogeneous) as special or limiting cases. Four significant conclusions are: (a) there is potential scale economies in each subsector of South Korean manufacturing, (b) the substitutabilities between factor inputs are relatively low, (c) factor demands are price elastic, (d) the scale economies are correlated with the factor intensity.