AFFINE COST SHARE EQUILIBRIA FOR ECONOMIES WITH PUBLIC GOODS*

In this paper we propose the concept of an affine cost-share equilibrium and show that under natural assumptions any optimal allocation corresponds to an affine cost-share equilibrium. With linear cost functions and under mild regularity assumptions we show that an optimal allocation is a ratio equilibrium with redistribution.     

Piecemeal Multilateral Environmental Policy Reforms under Asymmetric Oligopoly

We develop a general two‐country model with oligopolistic interdependence in which a fixed number of firms make their output and emission decisions simultaneously. We examine the effect of multilateral reforms of emission taxes on global emission levels. With sufficient asymmetry in pollution intensities between the two countries, a proportional multilateral increase in emission tax rates can increase global emission levels. However, a multilateral equal increase of emission tax rates unambiguously reduces global emission levels. We also consider the case of free entry and exit of firms, and find a rule of multilateral reforms which unambiguously lowers total emission levels.     

POLITICAL ASYMMETRY AND COMMON EXTERNAL TARIFFS IN A CUSTOMS UNION

This paper examines the effect of political and economic asymmetries in the formation of common external tariffs (CETs) in a customs union (CU). We do so by introducing possible cross‐border lobbying and by endogenizing tariff formation in a political economic model for the determination of CETs. The latter allows us to consider asymmetries among the member nations in their susceptibilities to lobbying. We also consider asymmetries in the influence of the member nations in CU‐wide decision‐making. A central finding of this paper is that, in the absence of economic asymmetry, the CET rises monotonically with the degree of asymmetry in country influences if the two countries are equally susceptible to lobbying. If influences are the same, the CET also rises monotonically with the degree of asymmetry in susceptibilities. These results hold irrespective of whether the lobby groups in the two member countries cooperate or work non‐cooperatively.     

The Allocation of Aggregate Risk,Secondary Market Trades,and Financial Boom–Bust Cycles

The financial crisis of 2007–08 started with the collapse of the market for collateralized debt obligations backed by subprime mortgages. In this paper we present a mechanism aimed at explaining how a freeze in a secondary debt market can be amplified and propagated to the real economy, and thereby cause a recession. Moreover, we show why such a process is likely to be especially strong after a prolonged expansion based on the growth of consumer credit and endogenously low risk premia. Hence, our model offers a new perspective on the links between the real and financial sectors, and we show how it can help make sense of several macro‐economic features of the 2001–09 period. The key elements of the model are heterogeneity across agents in terms of risk tolerance, a financial sector that allocates systematic risk efficiently across agents, and real decisions that depend on the price of risk.     

Piecemeal Reform of Domestic Indirect Taxes toward Uniformity in the Presence of Pollution: with and without a Revenue Constraint

The literature on indirect tax reforms in pollution‐ridden economies is quite limited. This paper, using a general equilibrium model of a perfectly competitive small open economy with both production‐ and consumption‐generated pollution, considers the welfare implications of tax reforms that take the structure of consumption and production taxes toward uniformity. Specifically, both in the presence and absence of a binding government revenue constraint, we derive sufficient conditions for welfare improvement in the case where we implement (i) reforms in either production or consumption taxes, and (ii) reforms in both consumption and production taxes.     

Terms of Trade and Welfare: A General Analysis*

We develop a necessary and a sufficient condition for an improvement in terms of trade to reduce welfare under a general setting, which can accommodate various types of market stucture and trade distortions. We also apply the conditions to two specific cases, viz export subsidies and the existence of monopoly in a non-tradeable sector. It is found that a rise in price for an exportable commodity which is subsidized may well reduce welfare. Also, improvements in terms of trade may well harm the economy if there is a non-tradeable monopoly sector.     

AN OLIGOPOLISTIC HECKSCHER–OHLIN MODEL OF FOREIGN DIRECT INVESTMENT*

We develop a 2 × 2 × 2 trade model in which one of the two sectors is perfectly competitive and the other is oligopolistic. The oligopoly sector consists of a given number of identical firms for each country, but they are free to locate in either country. The allocation of the firms between the two countries is endogenously determined, and changes in factor prices play a crucial role in establishing this equilibrium. Under this framework we examine the validity of factor price equalization, patterns of trade and gains from trade. Effects of technological progress and preference changes on firm locations are also analysed.     

DEVELOPING COUNTRY BORROWING FROM A MONOPOLISTIC LENDER: STRATEGIC INTERACTIONS AND ENDOGENOUS LEADERSHIP*

We develop a two‐period model with endogenous investment and credit flows. Credit is subject to quantitative restrictions. With an exogenous restriction, we analyse the welfare effects of a temporary consumption tax. We then consider three scenarios under which a monopoly lender optimally decides the level of credit and a borrower country chooses a consumption tax: one in which the two parties act simultaneously and two scenarios where one of them is a Stackleberg leader. The equilibrium under the leadership of the borrower country is Pareto superior to the simultaneous move equilibrium but may or may not be to that under the leadership of the lender. If the sequence of moves is itself chosen strategically, leadership by the borrower emerges as the unique equilibrium.     

Are Some Forecasters Really Better than Others? A Note*

In this paper, we use bootstrap approach to test the null hypothesis that all forecasters in the U.S. Surveys of Professional Forecasters (SPF) have equal ability. Our bootstrap procedure captures any potential cross-sectional and serial correlation in the forecast errors while preserving the unbalanced nature of the panel data. Once we account for the presence of cross-sectional and serial correlation in the forecast errors while resampling, we find convincing evidence that some individuals really are better than others—this is in sharp contrast to the findings of D'Agostino et al. (2012).