Aging population and education finance

Conventional wisdom suggests that aging of population will increase political pressure to tilt the composition of social spending in favor of the elderly, while potentially sacrificing other publicly provided goods such as education. This view seems to be supported by recent empirical findings that per child public education spending tends to be lower in US jurisdictions with higher fraction of elderly residents. Do these cross-sectional findings also carry the dynamic implication that longevity will lead over time to waning political support for funding of public education? This paper challenges such implication. We present a model that is consistent with the aforementioned cross-sectional regressions yet predicts an overall positive impact of increasing longevity on public education funding and economic growth.     

Unemployment dynamics in an OLG economy with public pensions

Pension benefits in old age establish a disincentive to save in youth, thereby yielding lower levels of capital stock and the wage rate. As a result, the trade union has an incentive to change the composition of its two targets: employment and the wage rate. This paper develops a model that includes employment effects of public pensions via capital accumulation and union wage setting. Within this framework, we consider how contribution rates to the pension system influence the level and time path of the unemployment rate. It is demonstrated that (1) a higher contribution rate results in a lower unemployment rate, and (2) the economy with a high (low) contribution rate experiences monotone convergence towards (oscillatory convergence towards or a period-2 cycle around) the steady state. The author would like to thank an anonymous referee, Kazutoshi Miyazawa, and seminar participants at Osaka University for their useful comments and suggestions, and Masako Ikefuji and Hiroaki Yamagami for their research assistance. Financial support from the Japan Society for the Promotion of Science (JSPS) through a Grant-in-Aid for Young Scientists (B) (No.17730131), the Asahi Glass Foundation, the Japan Economic Research Foundation and the 21st Century COE Program (Osaka University) is gratefully acknowledged. All remaining errors are mine.     

Capital taxation, long-run growth, and bequests

It has been shown that higher capital taxes can have a growth-enhancing effect when combined with a revenue-compensating cut in wage taxes or with an expansion in productivity-increasing public services. The present paper demonstrates that these results critically hinge on the existence of a bequest motive. It is shown that a wage-tax cut is no longer growth-enhancing when bequests are operative. By way of contrast, increasing productive public services may well boost growth. The theoretical findings are illustrated by numerical simulations based on US data.     

Local Sunspot Equilibria Reconsidered

We generalize the usual notion of local sunspot equilibria. We say such equilibria exist around a steady state of an OLG economy whenever stationary sunspot equilibria of arbitrarily close economies exist within any neighborhood of the steady state. Unlike the usual notion, this generalization allows to address the following identification problem: Can an analyst distinguish empirically small fluctuations due to small shocks to the fundamentals from pure expectations-driven fluctuations? We study conditions under which these generalized local sunspot equilibria exist in OLG economies, and show that they may exist around not only indeterminate but also determinate steady states.     

Pollution and life expectancy: How environmental policy can promote growth

This article investigates the influence of environmental policy (EP) on growth in an AK-type growth model, when finite lifetime is introduced and the link between pollution and life expectancy (through the detrimental impact of pollution on health) is taken into account.Using an overlapping generations model à la Blanchard [Blanchard, O. (1985). Debt, deficits and finite horizon. Journal of Political Economy, 93:223-247], we demonstrate that finite lifetime introduces a “generational turnover effect” which modifies the influence of the EP on growth. Thus, when lifetime is finite and independent from pollution, we show that the “generational turnover effect” limits the detrimental impact of the EP on growth, if agents smooth their consumption over time. When pollution negatively influences life expectancy through health, we demonstrate that the “generational turnover effect” is magnified and that the EP and growth have an inverted U-shaped relationship in the steady-state. In this case, we show that the environmental policy is more likely to promote growth (i.e. it stimulates growth for a wider range of environmental taxes) when the impact of pollution on health is important and/or public expenditures in health are low. Finally, using numerical simulations, we find that for the value of parameters that we have chosen, the EP will be more likely to promote growth when agents smooth consumption over time.     

The effect of corruption on capital accumulation

This paper examines the effect of corruption in infrastructure development as well as in capital and labor markets, on capital accumulation and output in an overlapping generations model. Corruption affects income redistribution, government expenditures on infrastructure, firms’ incentive to invest, and workers’ incentive to supply labor. An increase in corruption in infrastructure development decreases capital accumulation and output if the decrease in the savings of ordinary workers is sufficiently large. An increase in corruption in the capital market decreases capital accumulation and output. An increase in corruption in labor market decreases capital accumulation and output when labor supply is completely inelastic. Simulation results based on plausible parameter values indicate that an increase in corruption in the labor market will also reduce labor supply, capital accumulation and output.      

Steady states in the OLG model with seignorage and long-lived agents

This note provides a direct proof of the fact that in a particular version of the overlapping generations model with long-lived agents and fiat money, there can be at most two stationary states. A simple argument showing the Pareto superiority of the low inflation steady state is also given.     

Signal-extracting education in an overlapping generations model

Summary. In order to get good positions in companies, people try to enter highly-ranked universities. However, abilities vary greatly between individuals. High-ability individuals have an incentive to send signals to firms by obtaining a higher level of education in order to distinguish themselves from low-ability individuals. This paper constructs an overlapping generations model in order to examine the macroeconomic consequences of such sorting behavior of individuals. There are two kinds of possible equilibria in our model. In one equilibrium, only the high-ability agent can obtain higher education and thus an elite society emerges. In the other equilibrium, all ability types have the chance to obtain higher education and thus a society with mass higher education emerges. We also discuss the possibility of multiple equilibria of these different steady states and the dynamic change in wage differentials.Received: 9 October 2002, Revised: 15 July 2003, JEL Classification Numbers: D82, J31, O10.The authors acknowledge Osamu Hayashida, Noriyoshi Hemmi, Hideshi Itoh, Michihiro Kandori, Toshihiro Matsumura, Takuya Nakaizumi, Osamu Nishimura, Ryoji Ohdoi, Tadashi Yagi, Noriyuki Yanagawa, and seminar participants at Doshisha University, the University of Tokyo, and Contract Theory Workshop at Kyoto University for helpful comments and suggestions. We would also like to thank an anonymous referee for valuable comments. This paper is part of the academic Project on Intergenerational Equity (PIE), funded by a scientific grant from Japans Ministry of Education, Culture, Sports, Science and Technology (grant number 603).     

General equilibrium with trade balance and real interest rate parity

This paper demonstrates, in the context of a two-sector OLG neoclassical growth model, conditions under which international trade in consumption goods alone may be sufficient for the equalization of real returns to physical capital across countries; that is, under which commodity arbitrage is sufficient for real interest rate parity (RIRP). This role for repeated commodity arbitrage is established via a dynamic extension of the factor price equalization (FPE) theorem which is valid at all dates comprising the equilibrium path as well as its steady state. The results are at odds with the conventional view regarding RIRP which arises from open one-sector growth models, in which case steady state trade balance and RIRP are irreconcilable, and are also a contradiction to frequent assertions of lon-run specialization in two-sector frameworks. An equilibrium path for an integrated world economy yields an endogenous, time-variant cone of diversification which implies sufficient conditions for the dynamic paths of a cross-section of economies to exhibit FPE, and hence RIRP with trade balance, at all points in time. These conditions require that the savings rates and initial capital-labor ratios of individual countries do not deviate too significantly from world averages, and that both sectors absorb capital easily. The first of these requirements is sufficient to establish steady state FPE and RIRP in the general specification. The first two requirements are sufficient for the entire equilibrium path to be characterized by FPE and RIRP in a log-linear example. Received: September 22, 1998; revised version: February 10, 2000     

Intergenerational policy and the measurement of tax incidence

We evaluate the ability of generational accounting to assess the potential welfare implications of policy reforms. In an intergenerational context policy reforms usually have redistributive, efficiency, and general equilibrium implications. Our analysis shows that when the policy reform implies changes in economic efficiency, generational accounts can be misleading not only about the magnitude of welfare changes, but also about the identity of who wins and who losses. In contrast, the generational accounts correctly identify welfare changes when the policy reform has only a pure intergenerational redistribution component. We illustrate and quantify this issue in the context of widely considered policy reforms (substitution of consumption for labor taxation, and the increase of retirement age) and in a more general context of optimal policy.     

The principal difficulty: Besley’s neo-Rousseavian aspirations

The use of the “principal–agent” model makes an implicit assumption about the existence of an underlying global optimum or “general will.” This assumption is debatable, and Besley does not defend it sufficiently or even seem to realize how strong an assumption it is. Still, it is standard in the literature, and Besley’s book is a very strong contribution to that literature. Its two greatest strengths are its solid microfoundations, and its use of the classical “comparative statics” approach to analyze dynamics.      

The environmental Kuznets curve in a world of irreversibility

This paper develops an overlapping generations model where consumption is the source of polluting emissions. Pollution stock accumulates with emissions but is partially assimilated by nature at each period. The assimilation capacity of nature is limited and vanishes beyond a critical level of pollution. We first show that multiple equilibria exist. More importantly, some exhibit irreversible pollution levels although an abatement activity is operative. Thus, the simple engagement of maintenance does not necessarily suffice to protect an economy against convergence toward a steady state having the properties of an ecological and economic poverty trap. In contrast with earlier related studies, the emergence of the environmental Kuznets curve is no longer the rule. Instead, we detect a sort of degenerated environmental Kuznets curve that corresponds to the equilibrium trajectory leading to the irreversible solution. I would like to thank Alain Venditti, Mabel Tidball, Alain Jean-Marie and Thierry Bréchet for their helpfull comments and suggestions. I am deeply grateful to an anonymous referee whose comments have greatly improved the paper.     

Now or later? The political economy of public investment in democracies

This paper explores the impact of elections on public investment. Working with a sample of 67 presidential and parliamentary democracies between 1975 and 2012, we find that the growth rate of nominal public investment is higher at the beginning of electoral cycles and decelerates thereafter. The peak in public investment growth occurs 28 months before elections, and each month closer to the next election the growth rate of public investment declines by 0.7 percentage points. Other political variables, such as cabinet ideology and government fragmentation have less influence on short-term public investment dynamics. Fiscal rules and stronger institutions seem to attenuate the impact of elections on investment, but available information is insufficient to draw definitive conclusions. These results are robust to a number of controls, including for fixed elections.