The welfare costs of union wage compression

This paper calculates the quantitative significance of the welfare costs of union wage compression. This is done in a dynamic general equilibrium model with overlapping generations where agents choose both schooling (human capital) and assets (physical capital). The labor market in this model is characterized as a right-to-manage contract, which allows unions to compress wage differentials between high- and low-skilled workers, by implementing a binding minimum wage. This paper shows that when labor markets are competitive even low levels of wage compression lead to large welfare losses, since wage compression creates costly unemployment among low-skilled workers. The effect of wage compression on the supply of skilled labor, however, is rather small, since the disincentive effect of a lower, high-skilled wage is, to a large extent, offset by a lower opportunity cost of schooling due to higher unemployment.     

The welfare costs of unreliable water service

Throughout the developing world, many water distribution systems are unreliable. As a result, it becomes necessary for each household to store its own water as a hedge against this uncertainty. Since arrivals of water are not synchronized across households, serious distributional inefficiencies arise. We develop a model describing the optimal intertemporal depletion of each household's private water storage if it is uncertain when water will next arrive to replenish supplies. The model is calibrated using survey data from Mexico City, a city where many households store water in sealed rooftop tanks known as tinacos. The calibrated model is used to evaluate the potential welfare gains that would occur if alternative modes of water provision were implemented. We estimate that most of the potential distributional inefficiencies can be eliminated simply by making the frequency of deliveries the same across households which now face haphazard deliveries. This would require neither costly investments in infrastructure nor price increases.     

Dynamic welfare costs of the 1997 Asian crisis

This paper measures and investigates the welfare costs, other effects and recovery process of the 1997 Asian crisis, and evaluates the impact of the policy program supported by the International Monetary Fund (IMF). The main findings are as follows. First, the ratio of ‘whole cost’ to the level of consumption in a hypothetical economy is high: 50% for Indonesia, 39% for Hong Kong, 36% for Korea, 30% for Thailand and 18% for Malaysia. Second, the dynamic process of ‘cost at period t’ quickly converges to 40% immediately after the crisis, though the costs for Indonesia and Hong Kong gradually increase toward 100%. Third, the IMF-supported programs in Thailand, Indonesia and Korea were implemented straight after the peak cost. Finally, the cost of the IMF-supported program was relatively inexpensive compared with the welfare cost of the crisis. The authors would like to thank Kenneth S. Chan, Makoto Saito, Yum K. Kwan, Yong Wang, Eiji Ogawa, Yoshiro Tsutsui, Yuzo Honda, Shinsuke Ikeda, Soyoung Kim, Joshua Aizenman and an anonymous referee for helpful comments and useful suggestions. Earlier versions of this paper were presented in 2003 at Osaka University and Hitotsubashi University, in 2004 at the City University of Hong Kong, Tokyo University and the Western Regional Science Association Conference (Hawaii), Western Economic Association Conference (Vancouver) and East Asian Economic Association Conference (Hong Kong). Funding from a Grant-in-Aid 16530204 from the Ministry of Education, Culture, Sport, Science, Technology of Japan, the Nomura Foundation for Social Science 2005 and Kanpo Foundation 2002 supported the first-named author’s research.     

On the welfare costs of misspecified monetary policy objectives

This paper quantifies the effects on welfare of misspecified monetary policy objectives in a stylized DSGE model. We show that using inappropriate objectives generates relatively large welfare costs. When expressed in terms of ‘consumption equivalent’ units, these costs correspond to permanent decreases in steady-state consumption of up to two percent. The latter are generated by both the inappropriate choice of weights and the omission of variables. In particular, it is costly to assume an interest-rate smoothing incentive for central bankers when it is not socially optimal to do so. Finally, a parameter uncertainty decomposition indicates that uncertainty about the properties of markup shocks gives rise to the largest welfare costs.     

Industrial organization implications of QR trade regimes: Evidence and welfare costs

Evidence of the relationship between trade regimes, concentration and profitability in semi-industrial countries' manufacturing sectors is reviewed. This evidence is used to justify the formulation and simulation of a three sector general equilibrium model in which the manufacturing sectors's behavior is linked to the degree of restrictiveness of the QR regime. Simulations are conducted with several variants of the model to ascertain separately the effects of introducing economies of scale, firm entry/exit, departures from competitive pricing, and interactions between entry and pricing rules. Numerical results suggest that a 20 percent rationing rate of intermediates and consumption goods can have welfare costs of about 2.0 percent of national income in the absence of economies of scale and industrial organization interactions with the trade regime. When industrial organization features are included, the costs of the same 20 percent rationing quadruples.     

On monopoly welfare gains,scale efficiency and the costs of decentralization

Inside the neoclassical framework a monopoly produces an unambiguous loss of social welfare. In this article some dynamic efficiency aspects of monopoly in connection with economies of scale are discussed. Two different cases of the costs of capacity expansion for a branch are compared: (1) the capacity expansion takes place with only one, multiplant, monopoly firm, (2) the capacity expansion takes place in a branch producing the same output but with two or more multiplant firms. It is argued that monopoly welfare gains are likely to arise for a centralized process of capacity expansion compared to a decentralized one.     

Calculating the welfare costs of import restrictions in the imperfect substitutes model

This paper supplies equations for partial-equilibrium calculations of the welfare effects of tariffs and quotas when the imported good and the competing domestic good are imperfect substitutes in demand. The equations take into account the response of the price of the domestic substitute. Although other studies have acknowledged this response, they have failed to account for it in their welfare calculations. To demonstrate the importance of this response, it is shown how it affects the calculations for the welfare costs of tariffs and quotas on US imports of footwear. It is shown that ignoring the response of domestic prices leads to significant overstatement of the welfare costs of tariffs and significant understatement of the welfare costs of quotas for the industry.     

Social security trust fund flows and the welfare costs of rent seeking

The current study provides estimates from a Parks regression (using panel data) that suggest that the welfare costs due to rent seeking efforts by interest groups to obtain Social Security trust fund flows ranged from approximately $132 million (per twoyear federal election cycle from 1985–1994) to a theoretical expectation of $66 billion, all in real terms. These welfare costs are in addition to any other social costs that may be present, including the reduced levels of national saving that Social Security may induce.     

Measuring the welfare costs of EU accessionThe case of VAT reform in Bulgaria

We analyze possible reforms to the Bulgarian VAT system, evaluating revenue-neutral reallocations of goods to tax bands within the existing 2-rate structure. We investigate the sensitivity of the results to behavioural response and imperfect tax recovery. We find only a weak case for the use of non-uniform VAT rate structures for redistributional purposes. Selective VAT exemptions can produce approximate welfare gains equivalent to a general price fall of much less than 1 per cent for plausible specifications of social welfare.
JEL classification: D31, J31, P24.     

Tax revenues, fiscal corruption and “shame” costs

In this paper we explore tax revenues in a regime of widespread fiscal corruption in a static framework. We prove that the relationship between the tax rate and tax revenues depends on the relevance of the “shame effect” of being detected in a corrupt transaction. In countries with a “low shame” effect, tax revenues grow as the tax rate increases. Moreover, there is a critical tax rate where the growth rate of tax revenues begins to reduce. In countries with a high “shame effect” tax revenues increase up to a threshold value and then decrease.     

腐败对外国直接投资影响的实证分析

本文依据世界106个国家的截面数据,分析了腐败对外国直接投资(FDI)的影响.研究结果表明,腐败与FDI之间存在显著的负相关.但是,腐败对FDI的负面影响可以在一定程度上被诸如东道国经济开放和政治稳定等积极因素所抵消.     

The effect of corruption on capital accumulation

This paper examines the effect of corruption in infrastructure development as well as in capital and labor markets, on capital accumulation and output in an overlapping generations model. Corruption affects income redistribution, government expenditures on infrastructure, firms’ incentive to invest, and workers’ incentive to supply labor. An increase in corruption in infrastructure development decreases capital accumulation and output if the decrease in the savings of ordinary workers is sufficiently large. An increase in corruption in the capital market decreases capital accumulation and output. An increase in corruption in labor market decreases capital accumulation and output when labor supply is completely inelastic. Simulation results based on plausible parameter values indicate that an increase in corruption in the labor market will also reduce labor supply, capital accumulation and output.      

The impact of liberalization on bureaucratic corruption

Liberalization increases the number of goods available for consumption within a country. Since bureaucrats value variety, this raises the marginal utility of accepting a bribe. This “benefit effect” is counteracted by an increasing “cost effect” from corruption deterrence activities that arise due to greater international pressure to curb corruption. The interaction of these two effects can lead to a non-monotonic relation between liberalization and corruption. Moreover, pre-commitment to deterrence activities is shown to be more effective in controlling corruption. Empirical evidence supports the existence of a non-monotonic relation between economic openness and corruption among developing countries.     

腐败对外国直接投资影响的实证分析

本文依据世界106个国家的截面数据．分析了腐败对外国直接投资（FDI）的影响。研究结果表明，腐败与FDI之间存在显著的负相关。但是，腐败对FDI的负面影响可以在一定程度上被诸如东道国经济开放和政治稳定等积极因素所抵消。     

Petty corruption

This paper analyzes a petty corruption model in which the entrepreneur’s type is drawn from an absolutely continuous probability distribution function F over [0, 1], and perfect Bayesian equilibrium is adopted as the solution concept for a one-stage game. In the one-stage game, if there is more than one bureaucrat, no project is approved with a strictly positive probability. For an infinitely repeated game, I show that the single window policy strictly increases the social benefits in a socially optimal equilibrium. I would like to thank Mukul Majumdar for valuable guidance and encouragement. I am also grateful to Kaushik Basu, Fernando Vega-Redondo, an anonymous referee, seminar participants at the international meeting for public economic theory (PET07) and especially Ani Guerdjikova and Roy Radner for helpful comments. Thanks are due to Hideaki Goto and Eunkyeong Lee for useful conversation.     

History-based price discrimination and entry in markets with switching costs: A welfare analysis

We analyze history-based price discrimination in an asymmetric industry, where an incumbent, protected by switching costs, faces an entrant who does not have access to information about consumers’ purchase histories. We demonstrate that consumer surplus is higher with uniform pricing than with history-based price discrimination. We find that the entry decision is invariant to whether the incumbent implements history-based pricing or uniform pricing. This implies that the potential abuse of market dominance imposed by history-based price discrimination is exploitation, not exclusion. Finally, we establish that the profit gain to the incumbent from history-based pricing exceeds the associated loss to consumers.     

The internet as an indicator of corruption awareness

We apply a standard specification of the causes of corruption to a large sample of countries to investigate the effect of internet awareness about corruption on prevalence and perceptions of corruption. The main hypothesis is that greater corruption awareness acts as a corruption deterrent. A unique data set of internet searches on Google and Yahoo is compiled using alternate variations of “corruption”, “bribery” and “country name” keywords to capture internet corruption awareness. Results show that internet hits about corruption per capita correlate negatively with corruption perceptions and corruption incidence. This finding generally holds for different specifications and other robustness checks.     

Bicameralism and corruption

This paper studies the impact of bicameralism on the level of corruption of elected officials. The relationship between parliamentary organization and corruption is analyzed in a two-period game between legislators, citizens and a lobby group, which delivers several predictions that we empirically investigate using a panel of 35 democracies during the period 1996-2004. Assuming that legislators choose a multidimensional policy on which citizens and a lobby group have opposing interests, we show that bicameralism improves the accountability of legislators to the electorate when the same party controls the two chambers and party polarization is high, while the opposite holds if the two chambers are controlled by different parties. These predictions find strong support in our empirical analysis.