Bequests as signals: Implications for fiscal policy

This paper explores how bequests affect redistributive fiscal policies. The main premise underlying our approach is that bequests act as a signal of parental affection. It is shown that private transfers in the form of bequests may not offset public transfers to a significant extent, even though such private transfers are altruistically motivated and are strictly positive for all but a negligible set of households. This is notable since these conditions are normally believed to yield a fully offsetting response (Ricardian equivalence). We explicitly identify circumstances under which the departure from Ricardian equivalence is large. Notably, the departure may be quite large even when our model is observationally very close to one in which Ricardian equivalence is known to hold (in the sense that children care very little about parental affection).     

Liquidity risk and financial competition: Implications for asset prices and monetary policy

This paper studies the implications of banking competition for capital markets and monetary policy. In particular, I develop a two-sector monetary growth model in which a group of agents is exposed to liquidity shocks and money is essential. Banks insure depositors against such risk and invest in the economy's assets. In this setting, I compare an economy with a perfectly competitive banking sector to an economy with a fully concentrated financial sector. Unlike previous work, banks can have market power in both deposits and capital markets. Compared to a perfectly competitive financial sector, I demonstrate that a monopolistic banking system can have substantial adverse consequences on capital formation, assets prices, and the degree of risk sharing. Furthermore, multiple steady-states can emerge and the economy becomes subject to poverty traps. More importantly, market power in financial markets may overturn the Tobin effect present under a perfectly competitive financial sector. This necessarily happens in economies with high degrees of liquidity risk and low levels of capital formation.     

Decentralizing development: Allocating public goods via competition

Decentralizing the allocation of public goods by giving funds directly to communities takes advantage of local information concerning needs, but leaves funds open to misuse or capture by local elites. A large scale development project in Indonesia attempts to overcome this downside of decentralized allocation by having communities compete locally for block grants. Competition weeds out less efficient projects. Increasing the number of villages bidding by 10% leads to a 1.8% decline in road construction costs. Increased community participation in project planning also leads to better outcomes.     

Clusters and comparative advantage: Implications for industrial policy

Cases of industrial agglomeration or “clusters” arise in the presence of industry-specific and local externalities, also called Marshallian externalities. The standard argument is that such externalities may justify a policy of infant-industry protection to allow and encourage clusters to emerge. In this paper I explore this carefully, and show that different policy implications emerge under a more realistic modeling of clusters. In particular, rather than distorting prices to promote clusters in “advanced sectors” that may exhibit strong clustering possibilities, countries should focus instead on promoting clustering in current sectors, which have revealed to have the strongest comparative advantage. Import substitution is not a proper way to achieve this.     

Airline Deregulation: Neoclassical Theory as Public Policy

We present a common analytical framework for evolutionary and institutional economics, conceived as the study of systems that do not tend toward, nor necessarily fluctuate around, a steady state. Using an evolutionary equation, we derive an analytical theory of the relation between resource abundance and the rate of return available under differing institutional structures. We suggest that the recent political and financial turmoil around the world reflects incompatibilities between existing institutional structures and the increasing scarcity of resources. We apply this idea to the most fundamental determinant of any society's prosperity, profitability and even long-term survival, namely its fertility and rate of population growth.     

Viewpoint: Canadian competition policy: progress and prospects

Abstract.  This paper discusses the state of competition policy – in particular the economics of competition policy – in Canada today and considers its prospects going forward. It argues that: (i) the importance of competition policy has become accepted widely in Canada and indeed throughout much of the world; (ii) competition policy design and enforcement is in general well done in Canada; (iii) economists, including many Canadians, have played a central role in the development of an efficient and effective competition policy in Canada and elsewhere; and (iv) competition policy in Canada is today facing very serious challenges, and economists should be concerned.     

The role of financial sector competition for monetary policy

Abstract In this paper, we examine the impact of competition in the banking industry on financial market activity. In particular, we explore this issue in a setting where banks simultaneously insure individuals against liquidity risk and offer loans to promote intertemporal consumption smoothing. In addition, spatial separation and private information generate a transactions role for money. Interestingly, we demonstrate that the industrial organization of the financial system bears significant implications for the effects of monetary policy. Under perfect competition, higher rates of money growth lead to lower interest rates and a higher volume of lending activity. In contrast, in a monopoly banking sector, money growth restricts the availability of funds and raises the cost of borrowing.     

Improving competition in the non-tradable goods and labour markets: the Portuguese case

This study assesses the macroeconomic impacts of increasing competition in the non-tradable goods and labour markets in Portugal. We lean on evidence that the maintenance of low competition in these markets may have contributed to the recent poor performance of the Portuguese economy. The analysis is performed using PESSOA, a dynamic general equilibrium model for a small-open economy integrated in a monetary union, featuring non-Ricardian characteristics, a multi-sectoral production structure and a number of nominal and real rigidities. We conclude that measures aimed at increasing competition in the Portuguese non-tradable goods and labour markets could induce important international competitiveness gains and be valuable instruments in promoting necessary adjustments within the monetary union framework. However, in the short run, real interest rates are likely to increase, driving consumption and output temporarily downwards.     

Woodsy the optimal owl: Environmental campaigns, norms, and implications for public goods policy

Norms regarding private provision of a public good (e.g. cutting down on energy use, not littering) can affect the marginal gains from contributing to a public good and therefore people's decisions about contributing to the public good. A model is proposed in which norms of private contributions to a public good can be influenced by public policy, and these norms affect people's self-image, which derives from a comparison of one's own contribution with the norm contribution. In this context, we examine the conditions under which private contributions to a public good are efficient, and the conditions under which policy affecting these norms improves social welfare. We find that (1) a benevolent social planner who fails to account for private provision norms will underprovide the public good, and (2) public policy that attempts to raise the norm contribution of private provision can increase social welfare if the effect of raising the norm does not have an extreme negative effect - either extremely small or extremely large - on peoples' self-image.     

European competition policy modernization: From notifications to legal exception

Council Regulation (EC) 1/2003 came into force in May 2004 and replaced the mandatory notification of agreements by a regime of ex post monitoring. This paper shows that ex post monitoring is the optimal audit regime when the competition authority's probability of error is low. On the other hand, the notification system becomes optimal when the competition authority's probability of error is high. The paper also shows that block exemptions and black list (regimes of per se (il)legality) should be implemented when the agreements’ expected welfare impact is very high and very low, respectively.     

Quantifying economic sustainability: Implications for free-enterprise theory, policy and practice

In a previous paper (Ulanowicz, Goerner, Lietaer, and Gomez, 2009), we combined thermodynamic, network, and information theoretic measures with research on real-life ecosystems to create a generalized, quantitative measure of sustainability for any complex, matter/energy flow system. The current paper explores how this metric and its related concepts can be used to provide a new narrative for long-term economic health and sustainability. Based on a system's ability to maintain a crucial balance between two equally essential, but complementary factors, resilience and efficiency, this generic explanation of the network structure needed to maintain long-term robustness provides the missing theoretical explanation for what constitutes healthy development and the mathematical means to differentiate it quantitatively from mere growth. Matching long-standing observations of sustainable vitality in natural ecosystems and living organisms, the result is a much clearer, more accurate understanding of the conditions needed for free-enterprise networks to produce the kind of sustainable vitality everyone desires, one which enhances and reliably maintains the health and well-being of all levels of global civilization as well as the planet.     

Environmental prospects for the next century: Implications for long-term policy and research strategies

This report examines environmental prospects for the twenty-first century, and then suggests some appropriate long-term management strategies and research priorities. A few current global trends (e.g., increasing concentrations of atmospheric trace gases, population, agricultural production) are practically irreversible over the next couple of decades due to inertias in the systems involved. However, there are bound to be nonlinearities, discontinuities, and surprises in the behavior of many environmental and socioeconomic systems. In fact, the main challenge for managers, policy analysts, and politicians is to develop strategies that are robust in response to these surprises, exploiting the opportunities as well as softening the shocks that may arise.The main characteristics of such strategies are that they be adaptive, interdisciplinary, and cross-sectoral. As pointed out by Harvey Brooks [2], we must avoid partial solutions that may be optimal for a particular sector or decade, but which are far from optimal for the biosphere as a whole over the long term.     

The welfare loss associated to characteristics of the goods: application to housing policy

The subsidies in kind aimed at heterogeneous goods do not merely generate the traditional excess burden: there is an alternative welfare loss as the distortion also affects non-price characteristics of the good. The reason is that the beneficiary of this type of subsidy has to consume a good with some given characteristics which do not necessarily agree with his choice in the market. The welfare loss analysed here tries to overcome the lack of a correct measure of excess burden in the situations indicate above. Therefore, the paper constitutes an empirical novelty in the theory of excess burden. Moreover, we provide empirical evidence of the welfare loss after estimating a hedonic price model and using predicted prices in a quadratic almost ideal demand system for housing characteristics. The new excess burden is computed under standard assumptions from the theory of rationing. We identify the sources of the losses and we also provide a monetary measure suggesting that, under plausible parameter values, it can be quantitatively high.     

Environment,imperfect competition,and trade: Insights for optimal policy in general equilibrium

I build a two-country general oligopolistic equilibrium model, in which sectors differ in emissions and technologies, and pollution can be transboundary. I derive the optimal bilateral environmental policy for the economy as a whole, for the cases in which the environmental damage either linearly or quadratically increases in total pollution. The analysis highlights that the optimal emission tax can even be negative, and bilateral trade liberalization should be matched with either a rise or a fall in the optimal emission tax. The moments of the emission distribution and technology distribution across sectors are fundamental to implement optimal environmental policies.     

'Industrial demonopolization and competition policy in Poland and Hungary': a comment'

Protestations that ‘neither neoclassical economics nor Western experience offers clear guidelines concerning optimal competition policies towards state-owned firms in a transition economy’ are overly pessimistic. Both sources suggest the importance of attacking barriers to entry into markets, especially when those barriers are associated with vertical integration or exclusive vertical contracts by already dominant enterprises. Beyond this, they demonstrate that different priorities of enforcement are appropriate in transition economies and that competition advocacy is especially important in this context.     

What’s the aim for competition policy: optimizing market structure or encouraging innovative behaviors?

Innovation is usually thought of as a change in the fundamentals of an economy, which can require adjustments by policy-makers. The latter are usually thought as in regard to a dominant vision, which is to restore an optimal market structure, and leads to a competition policy mainly aimed at controlling for antitrust practices and limiting market power. In this paper, we favor another vision of innovation, as a discovery process that cannot allow ex ante a definition of best practices. Dealing with information issues in two different and alternative perspectives, we argue that antitrust authorities confront a market imperfection–market failure dilemma (MI–MF dilemma) which leads them to favor the existence of appreciative and discretionary policy rather than encouraging the existence of any market structure thought of as optimal as regards the current state of information. We conclude with policy implications, contrasting the EU with the US. This paper was presented at the 10th International J.A. Schumpeter Society Conference on Innovation, Industrial Dynamics and Structural Transformation: Schumpeterian Legacies, Milan 2004. It owes very much to the collaboration of J-L Gaffard with M. Amendola in the recent years. However he is not responsible for the way we have taken advantage of it.     

Collaborative innovation and policy support: the emergence of trilateral networks

ABSTRACT

The present article models the critical factors for a successful and evolutionarily stable National System of Innovation. We simulate a model, against the background of increasingly complex technologies, in a national process of agents’ interactions with social-dilemma characteristics. In particular, the articleinvestigates the emergence of a trilateral collaborative innovation alliance among ‘enterprise’, ‘university’ and ‘government’. We apply a tripartite evolutionary game with a replication process and explore the role and options of the public policy agent to support collaboration on innovation. We find that some policy mix, in particular, a combination of (1) public rewards for cooperation, (2) public punishment for non-cooperation and (3) settings of public cost controls and tax income from innovation, can promote broad and sustainable innovation alliances. For instance, threats of strong punishment, even with low public rewards for cooperation, may promote the formation of a collaborative innovation alliance. We run some sensitivity analyses of the results through parametric variation of two critical factors of the model, knowledge spillover and output elasticity of knowledge input. We find some qualifications for the velocity of the process.     

The sensitivity of climate-economy CGE models to energy-related elasticity parameters: Implications for climate policy design

A dynamic climate-economy CGE model based on the GTAP framework is used to analyse how sensitive simulation results are to alternative values assumed by several types of elasticity of substitution in energy-related linkages. Input substitutability in the production function is also tested for the relationship between capital and energy in different manufacturing sectors. The simulation exercise reveals that the model produces highly differentiated results when different sets of elasticity parameters are adopted. As a general result, lower substitutability values correspond to a reduction in the flexibility of energy substitution possibilities, making carbon abatement efforts more expensive. Moreover, this restriction generates changes in the distribution of costs associated with abatement efforts across regions. This brings to severe implications on international competitiveness especially for energy-intensive industrial sectors. The direct implication derived from this work is that in order to use CGE models to assess the amount and distribution of mitigation costs and to inform the international community involved in discussing the feasibility of climate policies, the use of empirically estimated behavioural parameters at the highest possible disaggregation level is highly recommended.     

Cancelling out early age gender differences in competition: an analysis of policy interventions

We study the willingness to compete of 588 children and teenagers aged ten to seventeen. We replicate the gender difference in tournament entry choices usually found in the literature for adults. We then show that policy interventions like quotas and preferential treatment help to close down the gender gap without leading to losses in efficiency, during or after a tournament. Given that differences in competitive behavior are prevalent from an early age, the application of interventions to promote females in competitions may be desirable already at early ages to promote equal chances for women on labor markets later on.