WELFARE AND MONETARY PRECOMMITMENT IN AN ECONOMY WITH MENU COSTS AND UNIONIZED WAGE SETTING

The paper shows that monetary precommitment can be advantageous to the government in a macroeconomic policy game where (i) the government's objectives are explicitly derived from those of the citizens, (ii) inflation has a real cost and (iii) the suboptimality of the output level arises from the structure of the private sector rather than from fiscal policy. It suggests that, to this extent, welfare interpretations of game theoretic monetary policy models are coherent.     

SOME WELFARE IMPLICATIONS OF OPTIMAL STABILISATION POLICY IN AN ECONOMY WITH CAPITAL AND STICKY PRICES

In this paper we review and extend some of the key lessons that seem to be emerging from the Ramsey‐inspired theory of dynamic optimal monetary and fiscal policies. We construct measures of the key distortions in our economy; we label these ‘dynamic wedges’. Inflation, actual or anticipated, distorts these wedges in the present period, shrinks the tax base and increases the deadweight loss. We show that, if possible, labour as well as capital ought to be subsidised in steady state. We point to a number of extensions to the Ramsey literature that may help in the formulation of actual policy.     

WAGE SUBSIDY AND WELFARE IN DEVELOPING COUNTRIES

This paper seeks to answer if wage subsidy to workers displaced due to trade reform raises welfare in a developing country. We use a general equilibrium model with non‐specific factor inputs and trade liberalization as a policy variable. A combination of wage subsidy and tariff rate obtains the second‐best welfare level. The theoretical result is new, policy‐relevant and important in view of political‐economy aspects of free trade in developing and transition countries.     

TOURISM,DUTCH DISEASE AND WELFARE IN AN OPEN DYNAMIC ECONOMY*

This paper examines the effects of an expansion in tourism on capital accumulation, sectoral output and resident welfare in an open economy with an externality in the traded good sector. An expansion of tourism increases the relative price of the nontraded good, improves the tertiary terms of trade and hence yields a gain in revenue. However, this increase in the relative price of nontraded goods results in a lowering of the demand for capital used in the traded sector. The subsequent de‐industrialization in the traded good sector may lower resident welfare. This result is supported by numerical simulations.     

TASTE FOR VARIETY AND OPTIMUM PRODUCT DIVERSITY IN AN OPEN ECONOMY

We extend the Benassy 'taste for variety' model to an open economy setting. With the Benassy effect, the market equilibrium is inefficient, openness reduces the varieties provided in the unconstrained optimum and there are potential gains from international coordination.     

ARE CHINESE STOCK MARKETS INCREASING INTEGRATION WITH OTHER MARKETS IN THE GREATER CHINA REGION AND OTHER MAJOR MARKETS?

This paper investigates the cointegrating and long-term causal relationships between the Shanghai A and B-share market, and between these two markets and the Hong Kong, the Taiwanese, the Japanese and the US market of two sub periods between July 1993 and March 2007. On the basis of a new Granger non-causality test procedure developed by Toda-Yamamoto (1995) and Johansen's (1988) cointegration test, my results suggest that a long-term equilibrium relationship measured by cointegration has been merged between the Chinese A-share market and the other markets in greater China region as well as the US market during the post-crisis period which covers the period since Chinese A-share market was opened to the Qualified Foreign Institutional Investors (QFII) in 2002. I also found that the Shanghai A-share market uni-directionally Granger-causes the other regional markets after the Asian financial crisis, while the A-share market and Hong Kong H-share market have had a significant feedback relationship since then. However, I found no evidence there has been cointegrating relationship between Shanghai B-share market and any other market ever since the B-share market was opened to the local retail investors in 2001.     

SYNCHRONISING DEREGULATION IN PRODUCT AND LABOUR MARKETS

Deregulation typically comes with redistribution of rents and thus with opposition from the losing interest groups. We show that, by exploiting complementarities, synchronising deregulation across markets makes this opposition lower. Indeed, a particular deregulation may reduce rents for one interest group, but may result in gains for another interest group. Synchronising reforms can therefore offer a way out of the ‘sclerosis’ of especially European markets. For this effect, we build a microeconomic model based on two assumptions: Cournot competition à la Vives in the product markets and firms hiring workers in accordance with an efficiency wage in the labour markets. As being particularly relevant for European economies, we focus on product market regulation that determines the degree of market integration and labour market regulation that determines the degree of employment protection.     

WELFARE EFFECTS OF STRATEGIC PRICE SETTING IN ANTICIPATION OF PRICE REGULATION

A single product monopolist with constant unit costs, in a simple two-period model, is aware that price regulation will be imposed in the second period. The form of the regulation is such that price in period 2 may not exceed 100 ; per cent of price in period 1, where 0 < < 1. The period 1 price will be set higher than it would be in the absence of anticipated regulation. However, it is not always the case that pre-regulation price will be raised as falls. The welfare effects are crucially dependent on the form of the demand function. Under constant elasticity of demand a reduction in will reduce both consumers' and the producer's welfare. Under linear demand, consumers benefit and the producer loses as is reduced and the resultant effect on aggregate welfare is ambiguous.     

PUBLIC DEBT AND PUBLIC INVESTMENT IN AN ENDOGENOUS GROWTH MODEL WITH REAL WAGE RIGIDITIES

We present an endogenous growth model with public capital, public debt and real wage rigidities due to labor market imperfections. Assuming that the primary surplus relative to gross domestic produce (GDP) is a positive function of the debt to GDP ratio, we study growth and employment effects of deficit‐financed public investment using simulations as well as how fiscal policy affects stability of the economy. Further, we contrast the growth rate and the unemployment rate in the deficit scenario with that of the balanced budget scenario. Finally, we compare our results with those obtained in case of flexible wages and full employment.     

UNEMPLOYMENT POLICIES IN AN ECONOMY WITH ADVERSE SELECTION

This paper studies the effects of unemployment policies in a simple static general equilibrium model with adverse selection in the labour market. Firms offer a contract that induces the self‐selection of workers. In equilibrium, all unskilled workers are screened out and some skilled workers are rationed out. It is shown that the provision of unemployment insurance raises involuntary unemployment by encouraging adverse selection, while unemployment assistance – or subsidy to unemployment – reduces involuntary unemployment. A simple efficiency wage model is also presented to show that either of the two policies reduces employment by taxing effort and subsidizing shirking. The key is whether the social role of unemployment is a sorting device or a worker discipline device.     

TARIFF POLICY AND WELFARE IN AN INTERNATIONAL DUOPOLY WITH CONSUMER‐FRIENDLY INITIATIVE

The purpose of this paper is to explore how strategic tariff policy and welfare are affected by the consumer‐friendly initiative of foreign exporting firms. We define a firm that is consumer‐friendly or non‐profit‐based if it considers both its own profit and consumer surplus. This paper extends Brander and Spencer by taking the consideration of consumer‐friendly firms into an international duopoly, and within such context examining the tariff policy and welfare. The consumer‐friendly initiative that leads to trade liberalization is a ‘Win‐Win‐Win’ solution in the sense that it is not only beneficial for foreign exporting firms, but also for the government and consumers of the importing country.     

WELFARE COSTS OF SHIFTING TREND INFLATION: STAGGERED WAGE AND PRICE CONTRACTS

We develop a New Keynesian model featuring staggered price and wage contracts to study welfare costs of exogenous variations in trend inflation. The analyses show that the consequences of constant positive trend inflation and shifting trend inflation are severe, especially when trend inflation is high. Among two channels, staggered wage contracts play a vital role in transmitting adverse impacts of constant and shifting trend inflation into the economy. Without the staggered wage channel, these costs are modest. We also conduct exercises to examine the sensitivity of welfare costs to a wide range of plausible parameters. The results show that if the price and wage friction are sufficiently large, the price and wage indexation level are sufficiently small, or there is upward biased trend inflation process, the welfare costs become larger.     

TAXATION AND CENTRALISED WAGE SETTING: THE CASE OF ENDOGENOUS LABOUR SUPPLY

The implications of centralised wage setting for the relationship between taxation, wages and employment are studied allowing for endogenous adjustment in work hours. We show that centralisation promotes wage moderation, makes wages and employment less sensitive to changes in wage taxation and reduces the hours worked. With an individual supply of working hours, a wage tax can even improve employment if wage setting is centralised and marginal utility from a public good is sufficiently high. Moreover, if a profit tax is used to finance public expenditure, higher tax reduces wages and improves employment.     

A NOTE ON PRODUCT DIFFERENTIATION IN A LINEAR CITY AND WAGE BARGAINING

Economides (Economics Letters, 1986, 21, pp. 67–71) has shown that within a linear city an equilibrium exists in a two‐stage location–price game when the curvature of the transportation cost function is sufficiently high. One important point is that not all of these equilibria are at maximal differentiation. In this paper, we include an additional stage with decentralized wage bargaining. This intensifies price competition resulting in locations that are nearer to the extremes of the city. The magnitude of this effect depends on the bargaining power of the unions. Contrary to the model with exogenously given costs, if unions are sufficient strong all price equilibria in pure strategies are at maximal differentiation. With a low parameter for the curvature of the transportation cost function unions can improve the location decision from a social viewpoint.     

ETHNIC ENCLAVES AND LABOR MARKETS: AN ANALYSIS OF IMMIGRANT OUTCOMES IN CALIFORNIA

The goal of this article is to examine how immigrant enclaves influence labor market outcomes. We examine the effect of ethnic concentrations on earnings in the state of California. Individual-level wage equations that control for several observable human capital and demographic characteristics are estimated. In addition, we introduce a measure that captures an ethnic group's proportion of the metropolitan area population. In general, we find that any potentially positive enclave effects are likely to be offset by negative labor market competition effects. In particular, most enclave effects become insignificant after controlling for metro area–specific effects . ( JEL J61, J31)     

THE SOLOW CONDITION IN AN EFFICIENCY WAGE MODEL WITH OVERTIME WORK*

A simple synthesis of an efficiency wage model and a conventional labour supply model is used to investigate the validity of the Solow condition which holds that the effort-wage elasticity is unity. The key feature of the model is its consideration of the possibility that workers may work in excess of standard working hours. It is found that when employees are free to choose the number of working hours and actually work more than the standard hours, the effort-wage elasticity is less than unity. This result proposes a possible explanation to support Akerlof and Yellen's criticism that the unitary effort-wage elasticity is too high.     

BUBBLES,CRASHES, AND ENDOGENOUS UNCERTAINTY IN LINKED ASSET AND PRODUCT MARKETS*

In laboratory asset markets, subjects trade shares of a firm whose profits in a linked product market determine dividends. Treatments vary whether dividend information is revealed once per period or in real time and whether the firm is controlled by a profit‐maximizing robot or human subject. The latter variation induces uncertainty about firm behavior, bridging the gap between laboratory and field markets. Our data replicate well‐known features of laboratory asset markets (e.g., bubbles), suggesting these are robust to a market‐based dividend process. Compared to a sample of previous experiments, both real‐time information revelation and endogenous uncertainty impede the bubble‐mitigating impact of experience.