EFFICIENCY EFFECTS OF CHANGES IN COMMONWEALTH GRANTS TO THE STATES: A CGE ANALYSIS*

This paper describes CSF, a general equilibrium model encompassing factors of relevance to economic efficiency in Federal/State funding including: interstate differences in tax bases and unit costs of State‐provided goods; factor mobility; congestion; State‐government behaviour incorporating the possibility that governments in subsidised States embark on expenditures with low benefit/cost ratios (flypaper effects); fiscal externalities; and non‐discretionary expenditures in each State associated with special national responsibilities. The model is applied to Australia where Federal/State funding is a major political and economic issue. Welfare effects of moving from the present Australian funding system based on fiscal equalisation to a system of equal‐per‐capita grants are calculated. CSF implies that the welfare gain from this move would be small. The most important source of potential welfare gain is a reduction in flypaper effects. The recognition of congestion externalities can eliminate the small welfare gain, but only under seemingly extreme assumptions. The results are not very sensitive to variations in assumptions concerning population mobility and fiscal externalities.     

Consumer preferences,the demand for Divisia money,and the welfare costs of inflation

This paper uses neoclassical demand theory to calculate the welfare costs of inflation. It considers the demand interactions between money, consumption goods, and leisure, relaxes the assumption of fixed consumer preferences, and addresses the inter-related problems of estimation of money demand functions, instability of money demand relations, and monetary aggregation. It makes full use of the relevant economic theory and econometrics and generates inference in terms of long-run welfare costs of inflation that is internally consistent with the data and models used.     

Decentralization and local pollution activities: New quasi evidence from China

Traditional fiscal federalism theory holds that decentralization may improve the provision of public goods and services. However, the social welfare field with strong externalities may face different incentives and behavioural logics. This paper provides novel empirical evidence for the causal relationship between decentralization and local pollution. In this paper, we focussed on China's widely spread decentralization reform, which substantially expanded the economic and social management autonomy of county governments. Using the difference-in-differences method and a panel dataset from 1998 to 2007, we found that the reform would compel affected counties to loosen environmental regulation, adopt financial and fiscal policies that would actually support heavy-pollution industries' rapid economic growth. Overall, the reform led to a significant increase in local pollution, thus worsening the overall environmental quality. Moreover, cost-benefit analysis indicated that the reforms generated net gains in social welfare, but the substantial environmental costs cannot be ignored.     

Trade and the governance of ecosystem services

We work with a basic general equilibrium model of an economy with an industrial good and a rural good. Industrial good production results in pollution that affects the provision of ecosystem services and thereby the production of the rural good. The assignment of ecosystem rights to the industrial polluters or to the rural pollutees results in differential transaction costs that affect production possibilities between the two goods. Ecosystem rights are assigned to maximize social welfare. Over time, technological change and differences in income superiority affect the choice of the assignment of rights. Opening to trade affects the choice of the assignment of ecosystem rights depending on the nature of technological change, but the relative income superiority of goods no longer affects the assignment of ecosystem rights in a small economy. Thus, among other findings, we demonstrate that the phenomena known as the environmental Kuznets curve does not hold for the protection of ecosystem services in production, or production externalities generally, because trade separates consumption from production.     

POLLUTION AND POLLUTION ABATEMENT IN THE NATIONAL ACCOUNTS

Building on the approach of Weitzman, as extended by Hartwick and Mäler, five models of national accounts in a dynamic competitive economy with pollution externalities are constructed: flow pollutants, stock pollutants, fossil fuels and CO₂, living resources and acid rain, and household defensive expenditures. The results measure welfare rather than national product per se . The general conclusions are that abatement expenditures should be treated as intermediate consumption, that adjustments need to be made for both pollution emissions and natural pollution dissipation processes, that marginal social costs should be used to value emissions, and that the level of environmental services must be valued in measuring welfare. Not only should household defensive expenditures not be subtracted from the welfare measure, under plausible assumptions the adjustment to welfare (as opposed to NNP) includes a value greater than the level of household defensive expenditure.     

SUBSIDIES AS OPTIMAL FISCAL STIMULI

Theoretical macroeconomic models typically take fiscal policy to mean tax‐and‐spend by a ‘benevolent government’ that exploits potential aggregate demand externalities inherent in the imperfectly competitive nature of goods markets. Whilst shown to raise aggregate output and employment, these policies crowd‐out private consumption and typically reduce welfare. On account of their widespread use to stimulate economic activity, we consider the use of ‘tax‐and‐subsidize’ instead of ‘tax‐and‐spend’ policies. Within a static general equilibrium macro‐model with imperfectly competitive goods markets, we examine the effects of wage and output subsidies and show that, for a small open economy, positive tax and subsidy rates exist which maximize welfare, rendering no intervention suboptimal. We also show that, within a two‐country setting, a Nash non‐cooperative symmetric equilibrium with positive tax and subsidy rates exists, and that cooperation between governments in setting these rates is more expansionary and leads to an improvement upon the non‐cooperative solution.     

Quantifying the impact of services liberalization in a developing country

We compare goods versus services liberalization in terms of welfare, outputs, and factor prices in Tunisia using a CGE model with multiple products, services and trading partners. Restraints on services trade involve both cross-border supply (tariff-equivalent price wedges) and on foreign ownership (monopoly-rent distortions and inefficiency costs). Goods-trade liberalization yields a modest gain in aggregate welfare. Reducing service barriers generate relatively large welfare gains and low adjustment costs. Services liberalization increases economic activity in all sectors and raise the real returns to both capital and labor. The results point to the potential importance of deregulating services provision for economic development.     

Public Procurement, Market Integration, and Income Inequalities

Aggregate demand externalities are the source of the cumulative processes of the new economic geography. In this paper these externalities drive the endogenous emergence of the pattern of international specialization in integrating economies. A distinguishing feature of this work is that it considers two aspects of market integration simultaneously: reduction of trade costs, and liberalization of the public procurement market. The first dimension has been widely studied. Adding the second dimension, which is on the policy agenda of the WTO and the EU, yields insights concerning the pattern of international specialization, income inequalities, and welfare.     

Information externalities and intermediaries in frictional search markets

In frictional matching markets with heterogeneous buyers and sellers, sellers incur discrete showing costs to show goods to buyers who incur discrete inspection costs to assess the suitability of the goods on offer. We study how brokers can help reduce these costs by managing the level and mix of goods in their inventory. Intermediaries emerge and improve social welfare when there is sufficient heterogeneity in the types of goods and preferences. Learning and inventory management enable search intermediaries to internalize information externalities generated in unintermediated private search.     

DO “CAPITALIZATION EFFECTS” FOR PUBLIC GOODS REVEAL THE PUBLIC'S WILLINGNESS TO PAY?

This article develops a welfare theoretic framework for interpreting evidence on the impacts of public programs on housing markets. We extend Rosen's hedonic model to explain how housing prices capitalize exogenous shocks to public goods and externalities. The model predicts that trading between heterogeneous buyers and sellers will drive a wedge between these “capitalization effects” and welfare changes. We test this hypothesis in the context of changes in measures of school quality in five metropolitan areas. Results from boundary discontinuity designs suggest that capitalization effects understate parents’ willingness to pay for public school improvements by as much as 75%.     

Computerization and immigration: Theory and evidence from the United States

Recent technological changes have been characterized as “routine-substituting” because they reduce demand for routine tasks and increase demand for analytical and service tasks. Little is known about how these changes have impacted immigration, or task specialization between immigrants and native-born individuals. In this paper, we show that such technological progress has attracted immigrants who increasingly specialize in manual-service occupations. We also suggest that openness to immigration attenuated the job and wage polarization faced by native-born from technological changes. We explain these facts with a model of technological progress and endogenous immigration. Simulations show that unskilled immigration attenuates the drop in routine employment proceeding from technological change, enhances skill upgrading for native-born and raises economy-wide productivity and welfare.     

Global welfare comparisons

Abstract To provide a normative foundation for transfers between different economies, one needs information on their ‘per capita welfare.’ This paper considers various methods for doing this and reaches the following conclusions: (i) Such global welfare comparisons are more demanding than usually thought. (ii) The ranking of methods differs from that of local (over‐time) comparisons, with real comprehensive per capita NNP being the least impractical method. The lesson is that global welfare comparisons should be performed with great care. The comparisons must be made in local real prices calculated according to ‘purchasing‐power‐parity,’ where non‐traded environmental amenities play an important role.     

Trade and Endogenous Formation of Regions in a Developing Country

The authors present a model of regional catching‐up and development without scale effects. Regional growth is driven by technological imitation which is determined by positive externalities from international trade, the regions’ geography, and regional institutions. For the two regions considered, factor endowments are immobile land and human capital which is perfectly mobile between the two regions. Endogenous formation of regions is analyzed by introducing a non‐symmetric decrease in international transaction costs, reflecting the different geography and institutions in the two regions. Using panel data from 354 South African magisterial districts over the period 1996 to 2000, we find that geography is important in explaining trade patterns. As predicted, regions that are larger in terms of economic size, with good foreign market access and know‐how of foreign markets, competitive transport costs and a good local institutional support framework will be more successful in exporting manufactured goods than other regions.     

Endogenous growth through investment-specific technological change

This paper examines a model in which growth takes place through investment-specific technological change, which in turn is determined endogenously through research spending. In particular, the role of the degree of substitutability between research spending and new capital construction is explored. It is shown that the effect of a change in the capital tax rate on the growth rate can depend on the degree of substitutability between research spending and new capital construction. Research subsidies tend to have a larger impact on the growth rate than would an investment tax credit of the same magnitude. Increases in the capital tax rate can increase the growth rate of the economy, even in the absence of externalities. In contrast to the existing literature, the welfare cost of capital taxation in this model can be negligible. There may be multiple tax rates on capital that achieve the same growth rate. It is demonstrated that in the presence of certain types of positive externalities, the optimal growth rate can be attained through the use of capital taxes—rather than subsidies.     

A DYNAMIC MODEL OF TOURISM, EMPLOYMENT AND WELFARE: THE CASE OF HONG KONG

Abstract.  The present paper uses a dynamic open-economy model with wage indexation to examine the impact of tourism on employment and welfare. Both short-run and long-run situations are analysed. It is well known that tourism converts non-traded goods into tradable goods. An increase in the demand for a non-traded good raises its relative price, which results in an expansion of the non-traded sector at the expense of the traded goods sector. This output shift raises labour employment in the short run. However, in the long run, the higher relative price leads to higher wages, resulting in a negative impact on labour employment. If the output effect is dominant, the expansion in tourism raises employment and welfare. However, under realistic conditions tourism may lower both labour employment and welfare due to rising costs. These results are demonstrated by simulating a dynamic model for the case of Hong Kong.     

Market entry and trade weighted import costs

Trade weighting is a common method of aggregating trade frictions. It will understate changes in these costs when there are non‐ad valorem trade costs and quality differences. Newly traded goods enter at higher trade costs than previously traded ones. Lower import costs shift trade to low‐quality goods with higher measured trade costs. These effects are quantitatively important. U.S. import costs fall more than twice as fast as trade weighted measures from 1974 to 2004 after the impact of shifting quality and newly traded goods is accounted for. Empirical estimates that use trade weighting will underestimate the welfare impact of trade costs.     

EQUILIBRIUM GROWTH IN A MONETARY ECONOMY WITH TRANSACTIONS COSTS*

The paper describes a dynamic general equilibrium monetary economy with technological primitives that are consistent with the possibility of asymptotic equilibrium growth. The paper focuses on the relationship between equilibrium financing constraints on investment goods, transaction costs and economic growth. A generalized growth condition is derived that involves both monetary growth rates and transaction costs. The condition is used to show that (i) although inflation taxes can potentially exert a negative influence on long-run economic growth, these growth effects cannot in general be arbitrarily large; and (ii) for some monetary growth rates, money is superneutral in contrast to the models of Stockman and Abel. Numerical work indicates that although the welfare and growth effects of decreasing nominal interest rates from a benchmark are large, the costs associated with raising nominal interest rates from benchmark are not.     

Unit versus Ad Valorem Taxes in Multiproduct Cournot Oligopoly

The welfare dominance of ad valorem taxes over unit taxes in a single‐market Cournot oligopoly is well known. This article extends the analysis to multimarket oligopoly. Provided all ad valorem taxes are equal and positive, unit costs are constant, firms are active in all considered markets, and a representative consumer has convex preferences, ad valorem taxes are shown to dominate in multiproduct equilibrium. Conditions exist, however, under which economic efficiency declines upon replacing specific taxes with ad valorem taxes that preserve output levels. We discuss the roles of unit cost covariances across multiproduct firms, and also of complementarity in demand, in determining the extent of cost efficiencies arising under ad valorem taxation. For goods that are complementary or independent in demand, conditions are found such that industry profits decline upon use of ad valorem taxes.     

专业化产业集聚、空间成本与区域工业化

本文扩展了贸易成本的范围，认为贸易成本不仅包括产品运输成本，而且也包括要素流动成本，并引入前后向产业联系，认为中间产品使用及种类的增加所创造的成本和需求联系效应有利于提高最终产品的生产效率。在此基础上文章发展了可解的中心一外围模型，并探讨了在各种条件下相应的经济学含义，认为在推动我国区域经济一体化的进程中，对落后地区的技术支持必不可少，重视区域间产业发展的互动，否则，我国区域经济一体化进程难以有效推进。     

DO INVESTMENT‐SPECIFIC TECHNOLOGICAL CHANGES MATTER FOR BUSINESS FLUCTUATIONS? EVIDENCE FROM JAPAN

The observed decline in the relative price of investment goods to consumption goods in Japan suggests the existence of investment‐specific technological (IST) changes. We examine whether IST changes are a major source of business fluctuations in Japan, by estimating a dynamic stochastic general equilibrium model using Bayesian methods. We show that IST changes are less important than neutral technological changes in explaining output fluctuations. We also demonstrate that investment fluctuations are mainly driven by shocks to investment adjustment costs. Such shocks represent variations of costs involved in changing investment spending, such as financial intermediation costs. We find that the estimated series of the investment adjustment cost shock correlates strongly with the diffusion index of firms' financial position in the Tankan (Short‐term Economic Survey of Enterprises in Japan). Therefore, we argue that the large decline in investment growth in the early 1990s was due to an increase in investment adjustment costs stemming from firms' financial constraints after the collapse of Japan's asset price bubble.