SECTOR‐SPECIFIC EXTERNALITIES AND STATUS PREFERENCES IN THE UZAWA‐LUCAS MODEL*

This paper shows that introducing preferences for social status based on human capital holdings modifies the finding of Gómez (2004 ) that sector‐specific externalities associated with human capital in the goods sector do not violate the optimality of the competitive economy in the Uzawa–Lucas model. The effect of an increase in the degree of sector‐specific externalities is qualitatively the same as that of an increase in the strength of the desire for status. Hence, paradoxically, a greater degree of sector‐specific externalities makes human capital accumulation more excessive from the social point of view.     

SUSTAINABLE CONSTANT CONSUMPTION IN A SEMI‐OPEN ECONOMY WITH EXHAUSTIBLE RESOURCES*

To sustain constant consumption, Hartwick's rule prescribes reinvesting all resource rents in reproducible capital. However, Hartwick's rule is not necessarily the result of optimization. In this paper, we address this insufficiency by deriving a constant consumption path endogenously in a semi‐open economy with an exhaustible resource, which has full access to world goods and capital markets, while the resource flows are not internationally tradable. Our findings show that, due to the essentiality of both capital and resource to the production process, the economy transforms its domestic assets into foreign ones, consuming a constant interest flow from the latter.     

HETEROGENEOUS RISK ATTITUDES IN A CONTINUOUS‐TIME MODEL*

We prove that every continuous‐time model in which all consumers have time‐homogeneous and time‐additive utility functions and share a common probabilistic belief and a common discount rate can be reduced to a static model. This result allows us to extend some of the existing results of the representative consumer and risk‐sharing rules in static models to continuous‐time models. We show that the equilibrium interest rate is lower and more volatile than in the standard representative consumer economy, and that the individual consumption growth rates are more dispersed than in the absence of uncertainty.     

UNIQUENESS AND INDETERMINACY OF THE EQUILIBRIUM GROWTH PATH IN THE UZAWA‐LUCAS MODEL WITH SECTOR SPECIFIC EXTERNALITIES*

We introduce sector specific external effects of human capital on production in an otherwise Uzawa‐Lucas model of endogenous growth; and show that the problem of indeterminacy of the competitive equilibrium growth path does not exist even if the production function satisfies the increasing returns to scale at the social level.     

MONOPOLISTIC COMPETITION WITH EFFICIENCY GAPS AND A HECKSCHER‐OHLIN TRADE PATTERN*

We develop a two‐factor, three‐sector model of international trade in which the monopolistically competitive firms are characterized by different fixed production costs. We show that, depending on the pattern of the international distribution of factor endowments, the trade pattern is determined not only by relative factor endowments as suggested by Heckscher and Ohlin, but also by absolute factor endowments via a mechanism of competitive selection in the monopolistically competitive sector.     

THE EXISTENCE OF EQUILIBRIUM IN A DIFFERENTIATED DUOPOLY WITH NETWORK EXTERNALITIES*

The existence of a pure‐strategy subgame‐perfect equilibrium in qualities and prices is investigated in a duopoly model of vertical differentiation where quality improvements require a quadratic variable cost and network externalities operate. We show that there exists a parameter region where the incentive to predate at the quality stage prevents firms from reaching a pure‐strategy non‐cooperative equilibrium with prices above marginal costs. If network externalities are sufficiently large, a Bertrand equilibrium with zero profits may arise, although the amount of product differentiation is strictly positive.     

INTERNATIONAL AND INTRA‐NATIONAL TRADE: A CONTINUUM APPROACH*

We build up a Ricardian trade model with multiple regions within a nation and examine how international trade determines interregional patterns of production and specialization. We show that the degree of interregional concentration of economic activities moves in different directions in two trading nations. The role of “absolute advantage” becomes crucial in dictating the course of income disparity across regions. We discuss cases with varying degrees of labour mobility and reconfirm the result on post‐trade interregional concentration and dispersion. Later we explore the impact of “scale factor” in this model and show how principle of comparative advantage and economies of scale interact to determine the pattern of specialization and volume of trade.     

FIRST‐BEST FISCAL POLICY WITH SOCIAL STATUS*

This paper examines the first‐best fiscal policy in a stochastic, infinite‐horizon representative agent model that exhibits consumption‐enhanced as well as wealth‐enhanced social status in the household utility. We show that the first‐best labour tax rate is a positive constant that is used to correct negative consumption externalities. The first‐best tax rate on capital income is also positive in order to overturn agents' status‐seeking capital over‐accumulation. Moreover, we find that in sharp contrast to a conventional automatic stabilizer, the first‐best capital tax rate moves in the opposite direction with shocks to firms' production technology, thus exacerbating the business cycle.     

Optimal trade policy in tariff games with inside money

We construct a bilateral trade model incorporating two physical goods and a financial asset (inside money) to discuss the optimal trade policy that countries would choose to maximize their respective utilities. In this Nash tariff game, the trade of physical commodities only occurs geographically across countries, and the trade of inside money allows for intertemporal allocation of consumptions. When the preferences, present and future endowments for each country are given, according to our numerical analysis, trade surplus or deficit (inside money) and optimal tariff rates are endogenously determined when general equilibrium conditions hold. One country may purchase inside money to shift current consumption to the future, and the other may be willing to issue inside money for smoothing its consumptions in two periods. This imbalance trade contradicts traditional trade models which imply a balanced trade policy. We further find that the price of inside money as an implied interest rate also is determined by the trade intervention policies.     

A MARKET WITH A SOCIAL CONSUMPTION EXTERNALITY*

We model a spatial market in which the utility of each consumer is affected by the consumers who buy precisely the same product. The marginal contribution of consumers x's purchase on consumer y depends on |x–y|, which declines as |x–y| increases. Such modelling of preferences fits goods that signal a consumer's place in society—clothing styles, automobiles and jewellry are examples. For 2n + 1 firms we find the unique symmetric equilibrium and derive comparative statics on the optimal number of firms, the largest number of firms the market can support, and the behaviour of profits per firm as n increases.     

ENDOGENOUS FLUCTUATIONS IN TWO‐COUNTRY MODELS*

This paper investigates the interlinkage in the business cycles of large‐country economies in a free‐trade equilibrium. We consider a two‐country, two‐good, two‐factor general equilibrium model with Cobb‐Douglas technologies and linear preferences. We also assume decreasing returns to scale in the consumption good sector. We first identify the determinants of each country's global accumulation pattern in autarky equilibrium, and secondly we show how a country's business cycles may spread throughout the world once trade opens. We thus give capital intensity conditions for local and global stability of competitive equilibrium paths.     

MIGRATION AND AGGLOMERATION WITH KNOWLEDGE SPILLOVERS*

In this paper, a Grossman–Helpman–Romer‐type endogenous growth model is developed that incorporates two regions and mobile workers. While the linkage between final goods firms and intermediate goods firms is strong, the linkage between innovation activities and manufacturing activities is weak in our paper. It is possible for the economy to reach either full agglomeration, partial agglomeration, or segmented agglomeration. We find that mobile workers acquire the highest welfare under full agglomeration. However, under segmented agglomeration, the welfare of skilled workers is not necessarily the lowest.     

CROSS‐HEDGING OF EXCHANGE RATE RISKS: A NOTE*

This note studies the optimal production and hedging decisions of a competitive international firm that exports to two foreign countries. The firm faces multiple sources of exchange rate uncertainty. Cross‐hedging is plausible in that one of the two foreign countries has a currency forward market. We show that the firm's optimal forward position is an over‐hedge, a full‐hedge or an under‐hedge, depending on whether the two random exchange rates are strongly positively correlated, uncorrelated or negatively correlated, respectively.     

Hub‐and‐spoke free trade areas: theory and evidence from Israel

Abstract We study how the sequential formation of free trade areas affects trade flows between member countries. In a three‐country, three‐good model of comparative advantage if two countries have an FTA, and both sign a similar agreement with the third, trade between the two decreases. However, if only one of them signs an additional FTA, a hub‐ and‐spoke pattern arises, and trade between the initial members increases. Israel’s experience lends strong support to our model: trade between Israel and the EU, subject to an FTA since 1975, increased by an additional 29% after the introduction of the US‐Israel FTA in 1985.     

The Location of Firms in Unionized Countries*

This paper develops a two‐country economic geography model with Cournot competition, where the labor markets are unionized so that trade unions bargain efficiently with each firm over wages and employment. Agglomeration forces are present due to wage premia obtained by the trade unions. It is shown that if the bargaining power of unions differs across countries then, as trade costs are reduced, the country with relatively weak unions gradually acquires all firms. However, for a range of trade costs, it is also a locally stable equilibrium for all firms to locate in the country with strong unions.     

FREE VERSUS SECOND‐BEST ENTRY IN COURNOT OLIGOPOLIES WITH FIRM‐SPECIFIC NETWORKS

This paper endogenizes the number of firms in an industry with positive network effects, complete incompatibility, and firms that compete in quantity. To this end, we compare two possibilities: free entry and second‐best number of firms (the one that maximizes social welfare). We show that with business‐stealing competition, free entry yields, in general, more firms than the socially optimal solution. In addition, we find that by the nature of the industry with firm‐specific networks, total production may be greater or lower under free entry than with a regulator; moreover, some industries attain their maximum social welfare with a monopoly.     

JOB FLOWS AND UNEMPLOYMENT IN AN EQUILIBRIUM UNEMPLOYMENT MODEL WITH FIRM‐SPECIFIC SKILL TRAINING*

We introduce productivity enhancing firm‐specific skill training into the labour search model in which the firm‐specific skill training intensity and the job destruction rate are endogenously determined. It is shown that the higher the intensity of such training, the lower the rates of unemployment, job creation and job destruction. The paper's model provides a theoretical framework to understand the often mentioned peculiarity of the Japanese labour market; prevalently low rates of unemployment, job creation and job destruction in Japan are due to its training system which promotes workers to acquire firm‐specific skills.     

SOCIAL STATUS,EDUCATION AND GOVERNMENT SPENDING IN A TWO‐SECTOR MODEL OF ENDOGENOUS GROWTH*

This paper extends the relative wealth specification of status preference to the two‐sector Uzawa (1965 )– Lucas (1988 ) model and examines the effectiveness of government spending on economic growth. It is found that the desire for relative wealth‐induced social status and/or the education component of relative wealth‐induced social status are important ingredients in determining the growth rate effects of government spending. Provided that the agent is concerned with his or her relative social position, the education‐induced social status plays a more important role than the physical‐asset‐induced social status in determining the validity of public spending on growth. If individuals do not care about their education‐driven social rewards, then an increase in government spending has no effect on the balanced growth rate regardless of the presence of the physical‐asset‐induced social status. A rise in government spending reduces the long‐run growth rate if the education‐induced social status is present.     

PREDICTING STOCK RETURNS AND VOLATILITY WITH INVESTOR SENTIMENT INDICES: A RECONSIDERATION USING A NONPARAMETRIC CAUSALITY‐IN‐QUANTILES TEST

Evidence of monthly stock returns predictability based on popular investor sentiment indices, namely S^BW and S^PLS as introduced by Baker and Wurgler (2006, 2007) and Huang et al. (2015) respectively are mixed. While, linear predictive models show that only S^PLS can predict excess stock returns, nonparametric models (which accounts for misspecification of the linear frameworks due to nonlinearity and regime changes) finds no evidence of predictability based on either of these two indices for not only stock returns, but also its volatility. However, in this paper, we show that when we use a more general nonparametric causality‐in‐quantiles model of Balcilar et al., (forthcoming), in fact, both S^BW and S^PLS can predict stock returns and its volatility, with S^PLS being a relatively stronger predictor of excess returns during bear and bull regimes, and S^BW being a relatively powerful predictor of volatility of excess stock returns, barring the median of the conditional distribution.     

INTERCONNECTION AGREEMENT BETWEEN INTERNET SERVICE PROVIDERS AND THE OPTIMAL POLICY INTERVENTION: THE CASE OF COURNOT‐TYPE COMPETITION UNDER NETWORK EXTERNALITIES*

We derive the optimal subsidy policy for an interconnection agreement between two symmetric Internet service providers (ISPs) competing á la Cournot in a network service market. The interconnection quality agreed upon is lower than the socially optimal level, as suggested by Crémer et al. (2000 ). In the basic model where both ISPs compete in the domestic market, the optimal investment subsidy rate depends positively on the strength of network externalities. In the extended model where home and foreign ISPs compete in the home market, the optimal subsidy rate for the home government is higher than in the basic model.