Income Distribution and Demand-Induced Innovations

We introduce non-homothetic preferences into an innovation-based growth model and study how income and wealth inequality affect economic growth. We identify a (positive) price effect—where increasing inequality allows innovators to charge higher prices and (negative) market-size effects—with higher inequality implying smaller markets for new goods and/or a slower transition of new goods into mass markets. It turns out that price effects dominate market-size effects. We also show that a redistribution from the poor to the rich may be Pareto improving for low levels of inequality.     

A Reexamination of the Wealth Effect and Uncertainty Effect

In an influential article, [Romer, C. “The Great Crash and the Onset of the Great Depression,” Quarterly Journal of Economics, 105, 1990, pp. 597–624.] estimates the magnitudes of the uncertainty and wealth effects. She reports that before and after the Great Depression, the uncertainty effect has a large and statistically significant influence on durable good production, while the wealth effect is negative but negligible. When the authors of this paper change the specification of the model with respect to the amount of time necessary for stock returns to translate into changes in consumption, they reach the exact opposite conclusions that Romer does. Specifically, when the authors allow consumers 12 or more months to alter consumption behavior, rather than Romer's three, stock price uncertainty did not significantly affect the durable goods production before, during, or after the Great Depression. The authors also find that stock market returns from the previous year have a positive and statistically significant impact on the durable goods production, indicating the importance of the wealth effect.     

The Austrian theory of relational goods

In modern rich societies, the traditional positive correlation between income and happiness seems to have disappeared: even though their income keeps rising, people do not declare themselves to be happier. This problem, which is known in literature as the “paradox of happiness”, has been thoroughly studied. One of the possible explanations is based on the observation that an income increase can sometimes entail the destruction of those relational goods on which happiness largely relies: relationships of family, friendship, love and fellowship. This research aims to show how, in the age of Marginalism, the most important attempt at establishing if and in which sense relational goods are economic goods is carried out by the very Austrian economists who led Robbins to write the epistemological statute of modern economic science.     

Social Organization in an Endogenous Growth Model

We develop an endogenous growth model in which individuals form matches in order to consume goods that are not explicitly traded. The matching process endogenously generates a concern for relative wealth and is thereby beneficial for capital accumulation and economic growth. We then study how social segmentation in the matching process affects economic growth. Under strong segmentation, social competition over mates occurs inside homogeneous groups. This homogeneity increases the severity of the "rat race" of wealth accumulation and fosters economic growth.     

HOUSING WEALTH AND U.S. MONEY DEMAND: A PANEL ESTIMATION

This article estimates a panel model for U.S. money demand using annual state‐level data for the period from 1977 to 2008. We incorporate housing wealth in the demand‐for‐money function and find strong evidence of a relationship between a broad monetary aggregate and housing wealth. This finding is robust to the inclusion of variables measuring financial heterogeneity across U.S. regions. Breaking up the sample in two subperiods shows that panel estimates including housing wealth yield more stable coefficients than both time‐series estimates and panel estimates excluding housing wealth. We also show that the link between money and housing wealth predates the recent boom‐and‐bust cycle. (JEL E41, E52)     

What you export matters

When local cost discovery generates knowledge spillovers, specialization patterns become partly indeterminate and the mix of goods that a country produces may have important implications for economic growth. We demonstrate this proposition formally and adduce some empirical support for it. We construct an index of the “income level of a country’s exports,” document its properties, and show that it predicts subsequent economic growth.     

The Law of Primogeniture and the Transition from Landed Aristocracy to Industrial Democracy

We study the connection between inheritance systems and the historical evolution of the relationship between a society’s economic structure and its political system, with a focus on Europe from feudal times. The model predicts that, in an early agrarian phase, aristocratic political systems prevail, while democracies tend to emerge with industrialization. At the same time, as indivisible landed estates are replaced by capital as the primary source of wealth, the inheritance system evolves endogenously from primogeniture to partition. The dynamics of output, distribution, class structure and political participation are in turn reinforced by the system of intergenerational wealth transmission, with primogeniture tending to concentration and partition to equalization. “But the law of inheritance was the last step to equality.” Alexis de Tocqueville, Democracy in America (1835).     

The progressivity of equalization payments in federations

We investigate the conditions under which an inequality averse and additively separable welfarist central government would choose to set up a progressive equalization payments scheme in a federation with local public goods. A progressive equalization payments scheme is a list of per capita net (possibly negative) subsidies – one such net subsidy for every jurisdiction – that are decreasing with respect to jurisdictions per capita wealth. We examine this question in a setting where the case for progressivity is a priori the strongest, namely: all citizens have the same utility function, inhabitants of a given jurisdiction have the same wealth and are not able to move across jurisdictions and there is no cross-jurisdiction competition in the setting of tax rates. We show that the central government favors a progressive equalization payments scheme for all distributions of wealth and population sizes if and only if its objective function is additively separable between each jurisdiction's per capita wealth and number of inhabitants. When interpreted for a mean of order r social welfare function, and assuming the absence of congestion in the local public good, this condition is shown to be equivalent to the requirement that the individual indirect utility function be additively separable between wealth public good price and be raised at the power 1/r before its agregation by means of the mean-of-order r social welfare function. Some implications of this restriction to the case where the individual's direct utility function is additively separable are also derived.     

Reconsidering Heterogeneity and Aggregation Issues in Environmental Valuation: A Multi-attribute Approach

The economic valuation of complex environmental goods (composed of multiple attributes) is an expanding field of research in ecological and environmental economics. However, several issues are still subjects of debate. This paper focuses on three of them: the linearity of the valuation function in the attributes; aggregation criteria for obtaining social values; and the heterogeneity of individuals’ utility functions. A methodological approach based on Multi-attribute Utility Theory, which enables us to contrast the impact of these concerns on the valuation of environmental goods, is proposed. We employ the methodology to value a protected natural area and, from the results obtained, we can conclude that the non-linearity and the heterogeneity of the individual utility function are relevant aspects of environmental valuation that need to be taken into account when valuing environmental goods.     

How does wealth distribution affect firm's incentive to innovate better quality goods?

The paper contributes to the literature relating to inequality and economic growth, in particular, we investigate the effects of wealth distribution on the kind of growth driven by innovation, i.e. Schumpeterian growth. Since two types of individuals are assumed, the poor and the rich, Gini-coefficient is treated in two variables, namely the relative wealth of the poor and the population share of the poor, each having a different effect on economic performance. Particularly in the separating equilibrium, an improvement in the relative wealth of the poor impedes economic growth, but a decline in the population share of the poor enhances economic growth. Furthermore, the current paper combines the Schumpeterian quality improvement model and the neoclassic production function. Thus, the impact of wealth inequality on economic growth is through the supply of human capital as well as the demand for better quality goods. Our results suggest that empirical research on the base of Gini-coefficient cannot generate a general relationship between wealth inequality and economic growth.     

Consumption,wealth and business cycles in Germany

This paper studies the long-run relationship between consumption, asset wealth and income—the consumption–wealth ratio—based on German data from 1980 to 2003. We find that departures from this long-run relationship mainly predict adjustments in income. The German consumption–wealth ratio also contains considerable forecasting power for a range of business cycle indicators, including the unemployment rate. This finding is in contrast to earlier studies for some of the Anglo-Saxon economies that have shown that the consumption–wealth ratio reverts to its long-run mean mainly through subsequent adjustments in asset prices. While the German consumption wealth ratio contains little information about future changes in German asset prices, we report that the U.S. consumption–wealth ratio has considerable forecasting power for the German stock market. One explanation of these findings is that in Germany—due to structural differences in the financial and pension systems—the share of publicly traded equity in aggregate household wealth is much smaller than in the Anglo-Saxon countries. We discuss the implications of our results for the measurement of a potential wealth effect on consumption. The views expressed in this paper are those of the authors and do not reflect the position of the Deutsche Bundesbank. We gratefully acknowledge comments and suggestions from an anonymous referee as well as from Heinz Herrmann, Helmut Lütkepohl, the editor, Baldev Raj, Burkhard Raunig, Monika Schnitzer, Harald Uhlig and Christian Upper. We also benefitted from comments by seminar participants at the ECB, the Deutsche Bundesbank, the CESifo Macro, Money and International Finance Area Conference 2005, the EEA 2005 annual congress and at the 2005 IAEA Meetings. Last but not least, we would like to thank Mark Weth for very useful information concerning the construction of the financial wealth data. Hoffmann’s work on this paper is also part of the project The International Allocation of Risk funded by Deutsche Forschungsgemeinschaft in the framework of SFB 475. Responsibility for any remaining errors and shortcomings is entirely our own.     

Exploitation,international taxation,and global justice

Abstract

I investigate the central principle that underlies the OECDs tax base erosion and profit shifting initiative. The principle claims that (corporate) profits should be taxed where economic activities deriving the profits are performed and where value is created. First, I argue that its plausibility depends on establishing that states have an entitlement to the productive factors in their territory, and therefore to a share of the value created by employing those factors. Second, I maintain that this cannot presently be established. If states fail to discharge duties requiring wealth redistribution, they do not have an unqualified right to the productive factors in their territory. Even if they are not subject to such duties, states can only legitimately claim a share in the fair value of the goods created. I show that given widespread exploitation in global value chains, the market prices of (intermediary) goods do not reflect their fair value.     

The evolution of portfolio rules and the capital asset pricing model

The aim of this paper is to test the performance of capital asset pricing model (CAPM) in an evolutionary framework. We model an economy where a heterogeneous population of long-lived agents invest their wealth according to different portfolio rules, and prove that traders who either “believe” in CAPM and use it as a rule of thumb, or are endowed with genuine mean-variance preferences, under some very weak conditions, vanish in the long run.We show that a sufficient condition to drive CAPM or mean-variance traders’ wealth shares to zero is that an investor endowed with a logarithmic utility function enters the market.     

Wealth inequality and collective action

We study the effect of inequality in the distribution of endowments of private inputs (e.g., land, wealth) that are complementary in production with collective inputs (e.g., contribution to public goods such as irrigation and extraction from common-property resources) on efficiency in a class of collective action problems. We focus on characterizing the joint surplus maximizing level of inequality, making due distinction between contributors and non-contributors, in a framework that allows us to consider a wide variety of collective action problems ranging from pure public goods to impure public goods to commons. We show that while efficiency increases with greater equality within the groups of contributors and non-contributors, so long the externalities (positive or negative) are significant, there is an optimal degree of inequality between these groups.     

Economic structural reform and China’s financial security

The authors believe that the financial operation based on the issuance of paper money in excess of economic capacity resulting from dependence on the state investment is the central manifestation of factors of China’s financial insecurity. The financial support for the economic reform, the financial reform and the impact of globalization constitute the major logic of its formation. The fundamentals to safeguard financial security lie in the persistence of the state’s comprehensive development strategy, so as to maintain long-term accumulation of the state’s net wealth and the stability of faith in markets. Translated from Jingji Lilun yu Jingji Guanli 经济理论与经济맜理 (Economic Theory and Business Management), 2006, (7): 5–12     

Household wealth, public consumption and economic well-being in the United States

Standard official measures of household economic well-beingin several countries are based on money income. The generalconsensus is that such measures are limited because they ignorecertain crucial determinants of well-being. We examine two suchdeterminants—household wealth and public consumption—inthe context of the US. Our findings suggest that the level anddistribution of economic well-being is substantially alteredwhen money income is adjusted for wealth or public consumption.Over the 1989–2000 period, median well-being appears toincrease faster when these adjustments are made than when standardmoney income is used. Adding imputed rent and annuity from householdwealth to household income increases measured inequality, whileadding public consumption reduces it. However, all three measuresshow about the same rise in inequality over the period.     

Informal Institutions, Consumption Custom, and Assumption of OLG Model—A Theoretical Analysis on Households’ Consumption Decisions in the Oriental Culture and Belief

Orthodox consumption theories have not incorporated the overlapping-generations (OLG) model and wealth-stock model, whereas this article explains households’ characters in consumption and savings in countries such as China and some other regions from the viewpoints of social convention, moral formation, ethics, and other informal institutions. The authors exploit and extend the OLG model, introduce the concepts of bequest, gift, and wealth preference to the economic agent’s utility function, then apply optimal conditions to analyzing the characters and problems concerning consumption and savings behavior. Furthermore, they deliberate on the effects of this analysis on government macroeconomic policies and suggest some relevant theoretical thinking and solutions. Translated from Economic Research Journal, 2005, 4 (in Chinese)     

Do price-tags influence consumers’ willingness to pay? On the external validity of using auctions for measuring value

This paper considers the external validity of the growing corpus of literature that reports the use of laboratory auctions to reveal consumers’ willingness to pay for consumer goods, when the concerned goods are sold in retail stores through posted price procedures. The quality of the parallel between the field and the lab crucially depends on whether being informed of the actual field price influences a consumer’s willingness to pay for a good or not. We show that the elasticity of the WTP revision according to the field price estimation error is significant, positive, and can be roughly approximate to one quarter of the error. We then discuss the normative implications of these results for future experiments aimed at eliciting private valuations through auctions.     

Happiness and relational goods: well-being and interpersonal relations in the economic sphere

The present paper provides an introduction to this special issue devoted to Happiness and Relational Goods. We start by presenting a few concepts that have recently appeared in the economic literature with the aim of capturing some of the peculiarities of personalised interactions. We claim that these concepts can be subsumed fairly well under the concept of ‘relational goods’. We then review the recent empirical literature on happiness and relational goods. Finally, we briefly introduce the papers contained in this special issue by outlining their respective contributions.     

Environment,Directed Technical Change and Economic Policy

We study the effects of an economic policy in an endogenous growth general equilibrium framework where production of consumption goods requires two resource inputs: a polluting non-renewable resource and a non-polluting labour resource. The use of the former contributes to the accumulation of pollution in the atmosphere, which affects welfare. There is a specific research sector associated with each of those resources. We provide a full welfare analysis, and we describe the equilibrium paths in a decentralized economy. We go on to study the effects of three associated economic policy tools: a tax on the polluting resource, and two research subsidies. We show that the optimal environmental policy has two main effects; it delays the extraction of the resource and with it the level of polluting emissions and it reallocates research efforts, decreasing the amount put into “grey” research to the benefit of “green” research. We also show that the environmental policy is grey-biased in the short-term, and green-biased in the long-term. Finally, we compute the optimal values for these tools.