The Effect of Customs Unions Among Specialized Countries on International Capital Flows*

This paper examines the effect on international capital flows of a customs union formed by specialized countries. We assume no economies of scale, and use a general equilibrium model with internationally mobile capital. It is shown that integration among countries with characteristics generally associated with having specialized economies will lead to a flow of capital into the union. These characteristics specifically concern the types of goods they trade among themselves, and with the rest of the world, and their ability to absorb capital inflows.     

Time‐consistent optimal fiscal policy*

This article studies the properties of optimal fiscal policy in a stochastic growth model when the government cannot commit itself beyond the next period's capital income tax rate. We find that the results contrast markedly with those under full commitment. First, capital income tax rates are very high (65% on average versus close to zero on average under full commitment). Second, labor income taxes are rather low on average (about 12% versus a value of around 31% under full commitment). Finally, labor income taxes are quite volatile, whereas under full commitment their standard deviation is essentially zero.     

Maximum‐revenue versus Optimum‐welfare Export Taxes: a Delegation Game*

In the Eaton and Grossman (1986 ) Bertrand duopoly model of strategic export taxes, both countries may be better off if they both delegate to policymakers who maximize tax revenue rather than welfare. However, both countries delegating to policymakers who maximize tax revenue is not a Nash equilibrium unless the degree of product substitutability is sufficiently high. For a wide range of values for the degree of product substitutability, the game is a prisoner's dilemma where both countries are better off delegating to policymakers who maximize tax revenue but both will delegate to policymakers who maximize welfare in the Nash equilibrium.     

Pareto‐improving pension reform through technological implementation

We present a standard OLG model where a pension reform promotes the adoption of a new technology by lowering the interest rates that discount the future profit gains. This then leads to a rise in total factor productivity, which, for some parameter values, renders the reform Pareto‐improving. The analysis adds to the existing literature, concluding that a supply‐side response is necessary for any such improvement, and presents a rise in total factor productivity as another possible mechanism.     

Incentives to Form Customs Unions and Quotas

This paper extends the well known Kemp–Wang proposition regarding customs unions and tariffs to the case of import quotas. It is shown that a customs union in the presence of import quotas will leave each country, whether a member of the customs union or not, not worse off than before the formation of the customs union. The partial-equilibrium approach is used in this study.     

Computation and the Theory of Customs Unions

This paper reports on research that uses computational techniquesto assess whether or not various propositions that have beenadvanced as plausible in the literature on the theory of customsunions actually hold. This research blends theory and numericalsimulation to get insights into the likelihood that\ varioustheoretical propositions proposed in the customs union literaturehold. (JEL F10, F13, F15}     

On the Evolution of Pareto‐Optimal Behavior in Repeated Coordination Problems

I characterize the asymptotic behavior of a society facing a repeated‐common‐interest game. In this society, new individuals enter to replace their “parents” at random times. Each entrant has possibly different beliefs about others' behavior than his or her predecessor. A self‐confirming equilibrium (SCE) belief process describes an evolution of beliefs in this society consistent with a self‐confirming equilibrium of the repeated game. The main result shows that for any common‐interest game, the Pareto‐dominant equilibrium is a globally absorbing state of the behavioral dynamics when the SCE beliefs of new entrants satisfy certain independence and full‐support properties. This result does not involve either of the usual assumptions of myopia or large inertia common in evolutionary models, nor is this result possible if only Nash rather than self‐confirming equilibria are considered.     

A Second Elementary Proposition Concerning the Formation of Customs Unions

The conclusions of the 1976 Kemp–Wan proposition are shown to be valid even if, after the formation of a customs union, the tariff vectors of some non-member countries are optimally chosen.
JEL Classification Numbers: F02, F12, F13, F15.     

Welfare Comparisons of Customs Unions and Other Free Trade Associations

The main purpose of this note is to establish a precise version of the proposition that, in the context of a worldwide constituency, a customs union is more beneficial or less harmful than a comparable but distinct free trade association. It is shown that, corresponding to each feasible tariff-ridden world trading equilibrium, there is a Pareto-preferred and feasible free trade association; and, corresponding to each free trade association, there is a Pareto-preferred and feasible Kemp–Wan customs union.     

Transaction Falsification and the Difficulty of Achieving Pareto‐improving Gains from Trade through Lump‐sum Transfers

Lump‐sum transfer rules to redistribute the gains from free trade are examined. When individuals anticipate that free trade policy will come with a lump‐sum transfer, they are going to change their behaviors under autarky in order to get larger transfers. In spite of this falsification, can a lump‐sum transfer still make everyone enjoy the gains from free trade? In a model of simple exchange economy, a condition under which a lump‐sum transfer can make it was found, but in general it is difficult to achieve Pareto‐improving gains from free trade.     

Trade Unions, Collective Voice and Fringe Benefits*

The exit/voice model of the labour market predicts that unionized workers will enjoy a greater level of fringe benefits, both absolutely and as a share of total compensation, than non-unionists. This is because unions can, through the medium of collective voice, communicate to management a picture of the preferences of the median worker. In non-union settings, however, management responds to the perceived preferences of the young, mobile workers at the hiring margin and these typically place a low priority on fringe benefits relative to money wages. Using data from the A ustralian Longitudinal Survey it is found that the hypothesis is supported by the evidence for Australia.     

Monetary Union and Pegging in the Presence of Labor Unions*

As the European Economic and Monetary Union grows, power over monetary policy is shifting away from the original founders. Previously, researchers have analyzed the impact of replacing an exchange‐rate peg with a monetary union in the presence of labor unions. In these studies, the authors have consistently concluded that unemployment in the country that originally controlled monetary policy will rise, although they cite very different reasons. In this paper, we present a more general model that reproduces the previous results in special cases and clarifies the relations across the results. In addition, the more general model shows that the results are reversed in certain conditions.     

Self‐Fulfilling Early‐Contracting Rush*

In markets for entry‐level professionals, the insurance motive drives some participants to sign early contracts. The rush to early contracting can be self‐fulfilling, as both its effect on expectations about demand–supply balance in the subsequent spot market and the effect on it from changes in the demand–supply balance can be nonmonotone. Matching markets with more risk‐averse participants, a greater uncertainty regarding relative supply of positions, or a more polarized distribution of applicant qualities are more vulnerable to self‐fulfilling early‐contracting rushes. Employers can have a collective interest in preventing early offers to a few promising applicants from starting the rushes.     

THE BROTHER‐IN‐LAW EFFECT*

When a firm is forced to pay abnormally high wages, hiring transfers rents. This effectively endows the employer with the ability to grant favors, and he may wish to do so even at some cost to efficient production. We refer to this as the brother‐in‐law effect. This article analyzes its consequences. When the brother‐in‐law effect is due to unionization, decisions regarding both the number and type of workers employed could be inefficient; overemployment could obtain even relative to the workforce that would be employed without unionization. We also identify cases in which nepotism improves efficiency.     

Long‐run Specialization*

Constructing a dynamic Heckscher–Ohlin model, we examine long‐run specialization patterns in the presence of international technological differences. Even a slight difference in technology causes at least one country to specialize. Either the case of perfect specialization in both countries or the case of perfect specialization in one country and imperfect specialization in the other occurs, depending on the subjective discount rate, relative preference for two commodities, labor endowments, and technological conditions. A necessary and sufficient condition for each case to hold is provided. Structural differences between the Ricardian model and ours are also emphasized.     

Trade Unions in an Open Economy: A General Equilibrium Analysis*

This paper derives a general equilibrium demand-for-labour schedule within the Heckscher-Ohlin-Samuelson model of a large open economy, and then introduces an economy-wide labour union that maximizes its utility subject to this demand schedule, thereby determining the real wage and hence total employment A parametric shift's comparative-static effects on the equilibrium levels of unemployment and welfare are analyzed within this fully unionized economy.     

Rate‐of‐return Parity in Experimental Asset Markets*

This paper applies experimental methods to evaluate the completeness of arbitrage and rate‐of‐return parity in simultaneous asset markets in which the assets are denominated in different currencies. Two assets, which return uncertain, but known, dividends in each trading period, are traded over 20 periods, after which the asset has no value. Results indicate that risk‐neutral rate‐of‐return parity is a strong predictor of relative asset prices when assets have common expected dividends and the expected dividends have common variances. The predictive power of risk‐neutral rate‐of‐return parity is reduced as the assets become differentiated.     

Multilateralism and Hub‐and‐Spoke Bilateralism*

This paper studies sequential negotiations of bilateral free‐trade agreements in an oligopoly model. The expansion of trading blocs through overlapping trade agreements allows the option of hub‐and‐spoke systems and achieves multilateral free trade as the equilibrium path, even if the expansion of trading blocs through the acceptance of new members is not feasible. The results suggest that free‐trade areas (FTAs) tend to expand more than customs unions (CUs). Lobbying by a producer can either promote or undermine the achievement of multilateral free trade through overlapping FTAs.     

Life‐Cycle Patterns of Interest‐Rate Mark‐Ups in Small‐Firm Finance*

We derive empirical implications from a theoretical model of bank–borrower relationships. The interest‐rate mark‐ups of banks are predicted to follow a life‐cycle pattern over the age of the borrowing firms. Because of endogenous bank monitoring by competing banks, borrowing firms initially face a low mark‐up, and thereafter an increasing mark‐up as a result of informational lock‐in, until it falls for older firms when the lock‐in is resolved. By applying a large sample of predominantly small unlisted firms and a new measure of asymmetric information, we find that firms with significant asymmetric‐information problems have a more pronounced life‐cycle pattern of interest‐rate mark‐ups. Additionally, we examine the effects of concentrated banking markets on interest‐rate mark‐ups. The results indicate that the life cycle of mark‐ups is mainly driven by asymmetric‐information problems and not by concentration. However, we find evidence that bank market concentration matters for older firms ? 2 Correction added after online publication on 20^th February 2012; the original text read ‘However, we find evidence that bank market concentration for older firms’, omitting the word ‘matters’.