Fiscal Stimulus and Endogenous Firm Entry in a Monopolistic Competition Macroeconomic Model

This paper sets up a monopolistic competition model featuring the returns to production specialization. Some novel results are derived from the analysis. First, the effect of a fiscal stimulus on consumption may be positive or negative, depending crucially upon whether the production function is characterized by increasing or decreasing returns to production specialization. Second, following a fiscal expansion, increasing returns to specialization lead to a positive linkage between real wages and aggregate output, while decreasing returns to specialization result in a negative relationship between real wages and aggregate output. Third, a fiscal expansion may raise social welfare, provided that the degree of increasing returns to production specialization is sufficiently large.     

Government Spending and Welfare with Returns to Specialization

We explore a novel channel through which government spending can stimulate consumption and welfare through its effects on aggregate productivity, without directly affecting either utility or production possibilities. In the presence of monopolistic competition and increasing returns to specialization, it is shown that government spending can partly alleviate the inefficiencies of monopolistic competition. This is because government spending generates an endogenous increase in total factor productivity by increasing the variety of intermediate goods. If the degree of increasing returns to variety is large enough, a rise in such wasteful government spending may increase consumption levels enough to increase welfare.
JEL classification : E 60     

Market, Trade and Welfare in General Equilibrium

This paper develops a tractable general equilibrium model of an economy with an arbitrary number of industries under increasing returns to scale and imperfect competition. The market structure of the model economy is expressed by two basic sets of parameters: the degree of competition, and the markup ratio prevailing in each industry. The government is supposed to control the degree of competition through antitrust policy and the markup ratio through entry policy. Using this model, I re-examine the results of traditional competitive equilibrium analysis and explore the effects of competition policies on economic welfare and international trade.
JEL Classification Numbers: D43, D50, F11, F12, L13, L41.     

Jack of All Trades or a Master of One? Specialization,Trade, and Money*

We consider a model of decentralized exchange where individuals choose the set of goods they produce. Specialization involves producing a smaller set of goods and doing it more proficiently. In doing so, agents reduce production costs, but also reduce the ease of trading their output. We derive the equilibrium degree of specialization and examine how it is affected by underlying fundamentals. Due to the existence of a hold‐up problem, individuals specialize too little relative to the social optimum. Introducing money leads to more specialization relative to barter and increases welfare.     

Increasing Returns, Learning, and Beneficial Tax Competition

We analyze the welfare impact of entrepreneur mobility in a two‐country overlapping generations model. Increasing returns in production yield multiple equilibria that are stable under adaptive learning. Governments compete for the mobile resource by setting income taxes. We show that large welfare gains can arise from noncooperative taxation. If expectational barriers prevent the realization of high output equilibria, tax competition can sufficiently perturb expectations so that high steady states become attainable. Once in a high production regime, governments may institute cooperative tax increases or reductions so as to bring the economy to the global joint optimum without disturbing the regime.     

Commercial policy and international factor mobility in the presence of monopolistic competition

This paper utilizes a well-known specification of returns to specialization (a variation of the Spence-Dixit-Stiglitz model) to explore the implications of local agglomeration effects for commercial policy and restricted factor mobility. The paper initially considers a small open economy where it is shown that a tariff reduces the degree of specialization and hence the size of the external economies to the producers. An inflow of labor increases the degree of specialization while a capital inflow decreases it. The paper then considers a two-country world where both countries are large and deals with the pattern of trade and factor mobility.     

International Factor Mobility, Government Size and Welfare

An examination of the available data reveals that the size of government varies considerably across time and countries. By making use of a simple general equilibrium model, this paper demonstrates that size of government is affected by the availability of capital and labour within an economy. Specifically, this paper utilises a model of a closed economy that produces one-private and one-public good. Both goods are produced by means of capital and labour. Production functions are subject to constant returns to scale and perfect competition prevails in all markets. The elasticity of substitution between the public and the private good is greater than unity and there is no international factor mobility in the initial equilibrium. The size of government is measured by total spending on the public good as a proportion of the total expenditure on the private and public goods. It is shown that capital (labour) inflow can decrease (increase) the size of government. Capital inflow increases welfare if the private good is relatively capital intensive whereas labour inflow increases welfare if the public good is relatively capital intensive.     

The efficiency of government promotion of inbound tourism: The case of Australia

This paper examines the effect of tax-funded promotion of inbound tourism on domestic welfare in an open economy setting with increasing returns in the tourism industry. As inbound tourism is a way of extending the market and getting more demand to realize the implication of increasing returns, promotion can help overcome the underproduction of tourism goods. However, taxation leads to a decline in domestic residents' consumption of tourism and non-tourism goods and reduces the competitiveness of the non-tourism industry in the host country. An important result obtained is that government promotion of inbound tourism will not improve welfare unless the degree of increasing returns in the tourism industry is high enough and the national income of the foreign country multiplied by the parameter of marketing effectiveness is larger than the national income of the home country. This finding is supported by a simulation with the case of Australia.     

Factor Supplies, Welfare and Output When Non-traded Intermediate Production Has Increasing Returns

This paper considers the impact of an exogenous change in the supply of primary factors on output levels, relative prices and welfare in the presence of output generated increasing returns to scale. Unlike the existing studies, this paper utilises a model of a small open economy where increasing returns do not occur in the production of a traded final good but in the production of a non-traded intermediate good. Within the context of the present study, it is shown that the Rybczynski theorem is unlikely to hold and an increase in the supply of either primary factor can harm welfare.     

Back to the BOG, Austrian-style

Robust political economy begins with assumptions of self-interested planners who lack perfect information. In such a world, the social planner does not necessarily outperform the decentralized outcome. Crampton and Farrant (2005) argue that the inability to engage in economic calculation reduces the ability of social planner to extract consumer surplus. Thus, the lack of calculation improves the welfare of the median citizen which contrasts with conventional wisdom. We argue that they overstate their results. First, the calculation argument fails because of its underdevelopment, not because of the empirical record. Second, the welfare implications cannot be adequately addressed by assuming diminishing marginal utility of income or using the median welfare standard. Third, robust political economy has not developed a model that yields meaningful welfare comparisons. Thus, robust political economy remains in its early stages. JEL Code P0, P16, P50 With apologies to Gordon Tullock     

Sector specific foreign investment,labour inflow,economies of scale and welfare

This paper argues that the impact of foreign investment on welfare depends on the sector that attracts the investment and certain characteristics of the economy. It is shown that, as long as the intermediate good is non-traded, foreign investment in a sector that is subject to economies of scale increases welfare by increasing the size of the intermediate good sector. On the other hand, foreign investment in a sector that is subject to constant returns to scale decreases welfare by decreasing the size of the intermediate good sector. The impact of foreign investment (in either sector) on welfare depends on relative factor intensities when the intermediate good is traded.     

地方专业化、技术进步和产业升级:来自长三角的证据

以长三角制造业为对象,利用长三角区域内16个城市1998-2003年的相关数据进行的分析和计算表明:地方专业化能促进产业从劳动密集型向资本密集型升级,推动行业的技术进步;地方专业化行业的技术进步增长率和技术对经济的贡献率都明显高于非地方专业化行业,地方专业化有弱化垄断而强化竞争的倾向。     

Location choice,competition, and welfare in non-tradable service FDI

We investigate whether non-tradable service FDI is efficient from a welfare point of view. A fixed number of firms strategically decide which markets to locate in and then compete in quasi-Cournot fashion. Considering firm location in two symmetric markets, non-tradable service FDI may or may not be efficient for the source country, depending on the total number of firms, competition in markets and the curvature of the demand function. In contrast, non-tradable service FDI is always efficient for the host country and the overall economy. This implies that any policy that affects firm location between two symmetric markets will not be beneficial from a welfare viewpoint.     

The Decentralization of Information Processing in the Presence of Interactions

We propose a model of organizational decision making, in which information processing is decentralized. Our model incorporates two features of many actual organizations: aggregation entails a loss of useful information, and the decision problems of different agents interact. We assume that an organization forms a portfolio of risky assets, following a hierarchical procedure. Agents' decision rules and the organization's hierarchical structure are derived endogenously. Typically, in the optimal hierarchical structure, all agents have one subordinate, and returns to ability are at least as high at the bottom as at the top. However, these results can be reversed in the presence of returns to specialization.     

Public investment,taxation, and long-run output in economies with multi-level governments

This paper examines the dynamic effects of taxation and investment on the steady state output level of an economy. A simple neoclassical growth model with different tiers of government is developed. The initial focus is on governments that aim to maximise their citizens' welfare and economic performance by providing consumption goods for private consumption and public capital for private production. It is shown that a long-run per capita output maximising tax rate can be derived and that there also exists an optimal degree of fiscal decentralisation. The analysis then extends to the case where governments attempt instead to maximise their own tax revenue to fund expenditures which do not contribute to the utility of their citizens. Three different cases of taxation arrangement are considered: tax competition, tax sharing, and tax coordination. The modeling shows that intensifying tax competition will lead to an increase in the aggregate tax rate as compared to the cases of sharing and coordination amongst governments. These tax rates are both higher than the long-run per capita output maximising rate that was implied under the welfare maximising government scenario.     

CONSUMPTION AND LEISURE EXTERNALITIES, ECONOMIC GROWTH AND EQUILIBRIUM EFFICIENCY

This paper analyzes the effects of consumption and leisure externalities on growth and welfare in a two‐sector endogenous growth model with human capital accumulation. Both types of externalities are shown to affect the long‐run equilibrium and optimal growth rates in a rather different way. The relationship between the steady state of the market and the centrally planned economy is also analyzed. The optimal growth path can be decentralized by resorting to consumption or labor income taxation, whereas capital income should be untaxed. Numerical simulations suggest that growth and welfare effects of mild consumption and leisure externalities may be quantitatively important.     

Competition,economies of scale,and diversity of firm sizes

This paper presents an empirical example in which small firms are able to compete by specializing, without monopolistic conduct, despite economies of scale. The viability of small commercial banks in Illinois is established both by casual observation and by a finding of constant returns to scale, not correcting for specialization. A second specification of the cost function, correcting for specialization, exhibits economies of scale, suggesting that specialization is the means by which small banks survive. Monopoly conduct is ruled out by a Rosse–Panzar test, rejecting the alternative hypothesis that monopoly power has allowed inefficient banks to survive.     

A TRACTABLE CITY MODEL FOR AGGREGATIVE ANALYSIS

An analytically tractable city model with external increasing returns is presented. The equilibrium city structure is either monocentric or decentralized. Regardless of which structure prevails, intracity variation in endogenous variables displays exponential decay from the city center, where the decay rates depend only on parameters. Given population, the equilibrium of the model is generically unique. Tractability permits explicit expressions for when a central business district (CBD) will emerge in equilibrium, how external increasing returns affect the steepness of downtown rent gradients, and how wages and welfare vary with population. An application to urban growth boundary is presented.     

Intermediation costs and capital flows

In this paper, we modify the standard neoclassical model by incorporating financial intermediation in order to deliver returns consistent with the observation that capital primarily flows to middle income countries. We build a static contracting framework where costly intermediation together with an adverse selection problem have quantitatively important effects on capital flows. When intermediation costs are ignored, the model behaves like the neoclassical model in terms of capital returns. However, when intermediation costs are considered, returns to capital in middle income countries could exceed those in poor and rich countries—high costs of intermediation cause poor countries to concentrate their investments in projects with low returns, while the standard neoclassical effect lowers returns in capital-rich countries. When we embed the return function from the static analysis in a two-country dynamic model, there is capital outflow from a poor country that removes capital controls and becomes open. Even though the closed economy dominates in terms of capital employed in production, it is the open economy that dominates in terms of income, consumption and welfare.     

Technical progress,urban unemployment,outputs, and welfare under variable returns to scale

This paper analyzes the implications of technical progress for a small Harris–Todaro (H–T) economy under variable returns to scale (VRS). It is shown that under VRS, technical progress occurring either in the agriculture or the manufacturing may be immiserizing; the effects of technical progress on sectoral outputs, factor prices, urban unemployment, and welfare crucially depend on the signs and the relative magnitudes of sectoral elasticities of returns to scale and the employment effect; the Corden–Findlay type of ultrabiased output effect of technical progress in the constant returns to scale (CRS) H–T model carries over to the case of VRS, but with much more stringent conditions than the CRS case.