On the need to compensate the compensating variation in CGE modeling

The message of this research is that in the standard calibrated setting of Computational General Equilibrium (CGE) models, the welfare measures typically used to compare benchmark with counterfactuals are numéraire dependent. This evaluation bias affects the compensating variation and the Konüs index of cost of living. We show that the equivalent variation is neutral regarding the choice of value units in calibrated models but would be affected as well in uncalibrated CGE models. We illustrate with a simple example and propose an even simpler theoretical solution to overcome these biases; all that is required to have correct welfare estimates is to compensate normalizing with a suitable price index. This type of correction is necessary to overcome the sometimes blind implementation of welfare measures in numerical general equilibrium analysis. We show that the induced quantitative errors may be substantial providing biased welfare estimates and misleading results.     

Energy balance climate models and general equilibrium optimal mitigation policies

In a general equilibrium model of the world economy, we develop a two-dimensional energy balance climate model featuring heat diffusion and anthropogenic forcing driven by global fossil fuel use across the sphere of the Earth. This introduces an endogenous location dependent temperature function, driving spatial characteristics, in terms of location dependent damages resulting from local temperature anomalies into the standard climate-economy framework. We solve the social planner's problem and characterize the competitive equilibrium for two polar cases differentiated by the degree of market integration. We define optimal taxes on fossil fuel use and how they may implement the planning solution. Our results suggest that if the implementation of international transfers across latitudes is not possible then optimal taxes are in general spatially non-homogeneous and may be lower at poorer latitudes. The degree of spatial differentiation of optimal taxes depends on heat transportation. By employing the properties of the spatial model, we show by numerical simulations how the impact of thermal transport across latitudes on welfare can be studied.     

Coasian equilibrium

We consider a general equilibrium economy with public goods and externalities. Following Boyd and Conley (1997), we treat externality markets directly instead of indirectly through Arrovian commodities. Because such direct externality markets are not subject to the nonconvexities that Starrett [Starrett, D., 1972. Fundamental nonconvexities in the theory of externalities. Journal of Economic Theory 4, 180–199] shows are fundamental to Arrow’s externality markets, this new approach admits the use of largely standard methods to prove welfare and existence theorems in an economy with externalities. We extend the Boyd and Conley model to allow firms to benefit from public goods and be damaged by externalities, and to allow consumers to produce externalities. We state a first welfare theorem and prove the existence of a competitive equilibrium. Taken together, this can be viewed as a type of general equilibrium Coase theorem. Considered as a special case, these theorems also represent a significant generalization of existing results for pure public goods economies.     

Equilibrium mean–variance reinsurance and investment strategies for a general insurance company under smooth ambiguity

This work investigates the equilibrium investment and reinsurance strategies for a general insurance company under smooth ambiguity. The general insurance company holds shares of an insurance company and a reinsurance company. The claims of the insurer follow a compound Poisson process. The insurer can divide part of the insurance risk to the reinsurer. Besides, the insurer and reinsurer both participate in the financial market and invest in cash and stock. However, the general insurance company is ambiguous about the insurance and financial risks and is an ambiguity-averse manager (AAM). The uncertainties over the insurance and financial risks are described by second-order distributions. The AAM aims to maximize the average performance of the weighted sum surplus process of the insurer and reinsurer under the mean–variance criterion and smooth ambiguity. We present the extended Hamilton–Jacobi–Bellman (HJB) system for the optimization problem combining the mean–variance criterion and smooth ambiguity. In the case that the second-order distributions are Gaussian, we obtain the closed-forms of the equilibrium reinsurance and investment strategies. At the end of this work, sensitivity analyses are presented to show the economic behaviors of the AAM.     

Private and Social Incentives for Vertical Contract Disclosure

We follow the framework in Arya and Mittendorf's 2011 Rand Journal of Economics paper but extend their analysis by investigating supplier(s)' equilibrium choices of disclosure or confidentiality regarding their contract terms with the downstream retailers. In the case of a common supplier, we find that the unique subgame perfect Nash equilibrium (SPNE) is for the supplier to choose disclosure. This private incentive is opposite to social incentive, which calls for the regulator to choose confidentiality. In the case of dedicated suppliers, however, there are multiple SPNE due to coordination issues between the suppliers. The case which maximizes social surplus – disclosure – can be supported as a SPNE, together with the case of confidentiality, which maximizes supplier profits at the cost of everyone else. Copyright © 2014 John Wiley & Sons, Ltd.     

Inefficiency and complementarity in sharing games

A sharing game is a very simple device for partially reconciling an organization’s goal with the interests of its members. Each member chooses an action, bears its cost, and receives a share of the revenue which the members’ actions generate. A (pure-strategy) equilibrium of the game may be inefficient: surplus (revenue minus the sum of costs) may be less than maximal. In a previous paper, we found that for a wide class of reward functions, no one squanders at an inefficient equilibrium (spends more than at an efficient profile) if the revenue function has a complementarity property. In the present paper, we examine the “opposite” of the complementarity property (Substitutes) and we study a class of finite games where squandering equilibria indeed occur if Substitutes holds strongly enough. Squandering equilibria play a key role when one traces the effect of technological improvement on a sharing game’s surplus shortfall. We then turn to the question of choice among reward functions in a principal/agents setting. We find that if we again assume complementarity then strong conclusions can be reached about the reward functions preferred by “society”, by the players (agents), and by the principal.     

Bertrand oligopoly in a spatial context: The case of quantity independent transportation costs

The theory of spatial competition [for a review, see Gabszewicz and Thisse (1985)] is usually based on the assumption of transportation costs which are proportionate to distance and quantity. In reality, however, there exist frequently considerable economies of scale, especially with respect to the conveyed quantity of goods. A good case in point is transportation cost incurred by a consumer patronizing a shopping area. Cost economies of scale will in general influence consumers' optimal choice with respect to quantities and best market places. In the extreme, consumers' outlays on transportation can be considered independent of the purchased quantity, but approximately proportionate to distance. In the present paper, the impact of this assumption on spatial competition is analysed. It will be shown, that existence and uniqueness of spatial oligopolistic equilibrium is restored. Furthermore, due to some residual monopolistic power, prices do not converge to the perfectly competitive equilibrium prices when the distance between the firms shrinks to zero. In conclusion the model exhibits a fundamental difference in the market structure, when the spatial aspect is incorporated.     

Migration and the wage and unemployment gaps between urban and non-urban sectors: A dynamic general equilibrium reinterpretation of the Harris–Todaro equilibrium

This paper offers a dynamic general equilibrium reinterpretation of the static partial migration equilibrium by Harris and Todaro [Harris, J., Todaro, M., 1970. Migration, unemployment and development; a two-sector analysis. American Economic Review 60, 126–142], under (i) flexible urban and rural wages and (ii) free mobility of workers and free entry of firms. The proposed model accounts for the set of stylized facts in developing countries: rural to urban migration and higher urban wages and unemployment.The model allows us to view the wage gap as a compensating differential for the negative amenities associated with job destruction and subsequent costly search on the consumption side, which can also be seen as a match-specific premium based on a sectoral productivity differential on the production side. Our model predicts the comovements among urban and non-urban wages and migration flows to the urban sector, an empirical regularity observed over the urbanization process of developing economies. Finally, we also conduct a welfare analysis.     

Spatial Cournot competition and economic welfare: a note

We investigated welfare implications in location-quantity models in a symmetric linear city. We found that when firms are not agglomerated in equilibrium, increasing the distance between firms raises (reduces) producer surplus and social welfare (consumer surplus). Moreover, central agglomeration is always optimal for consumers among symmetric locations, but not necessarily for producers. Central agglomeration can be inefficient even if it is the unique equilibrium outcome. In short, the firms are more likely to agglomerate or locate closer than what welfare maximizers would dictate, whereas they locate farther apart than what consumer surplus maximizers would recommend.     

SOCIAL SAVINGS

Abstract ‘Social savings’ is a cliometric concept to measure the benefit to society of technological improvements. The terms are defined, and the relationship between social savings and consumer surplus, total factor productivity and growth accounting measures is discussed. We critically outline Fogel's original application of social savings to American railroads in 1890, before looking at subsequent uses of the concept, both to other transport improvements and to other technological changes more generally. The paper concludes by setting out areas to which social savings could be applied, as well as setting out guidelines that future economic historians should use when applying the technique, in order to maximize the likely usefulness of any such work.     

THE THEORY AND ESTIMATION OF INDIVIDUAL AND SOCIAL WELFARE MEASURES

Abstract. The most widespread measure of individual welfare is consumer surplus ( cs ). If consumer surplus is to represent underlying preferences, very restrictive assumptions must be imposed and, worse, the resulting measures completely ignore distributional issues. Applied economists often argue that consumer surplus is a good approximation to the theoretically correct measures and the only feasible choice in practice. This is no longer true; recent advances in estimation techniques have made it possible to determine the approximate values of the correct measures quite satisfactorily. The theory and estimation of social welfare measures automatically involves ethical and distributional judgements. Often, these are difficult to incorporate in intuitive summary indicators that are easy to estimate. A range of money metric measures is presented that provide a more desirable, albeit still problematic alternative. Subject to severe data limitations, the theoretically correct welfare measures can be estimated for a wide range of modelling situations using parametric and nonparametric techniques.     

Consumer surplus analysis under uncertainty: A general equilibrium perspective

This paper derives an exact form of partial equilibrium efficiency measure under uncertainty which is consistent with expected utility maximization in a general equilibrium situation with ex-post spot markets for many goods and asset markets which are in general incomplete.We consider that the good under consideration tends to be negligibly small compared to the entire set of commodity characteristics which is assumed to be a continuum, and look into the limit property of preferences over state-contingent consumption of the good and state-contingent income transfer associated to it. We show that the limit preference exhibits risk neutrality, not only that it exhibits no income effect, meaning that the two conditions are tied together. We also show that the marginal rate of substitution between extra income transfers at different states of the world converges to the ratio between the Lagrange multipliers associated to those states. When the asset markets are complete such ratios are equalized between consumers, but it is not the case in general when the asset markets are incomplete. This means that using the aggregate expected consumer surplus as the welfare measure will be in general inconsistent with individuals’ expected utility maximization in the general equilibrium environment or with ex-ante Pareto efficiency.     

Targeted advertising,platform competition,and privacy

Targeted advertising can benefit consumers through lower prices for access to web sites. Yet, if consumers dislike that web sites collect their personal information, their welfare may go down. We study competition for consumers between web sites that can show targeted advertisements. We find that more targeting increases competition and reduces the web sites' profits, but yet in equilibrium web sites choose maximum targeting as they cannot credibly commit to low targeting. A privacy protection policy can be beneficial for both consumers and web sites. If consumers are heterogeneous in their concerns for privacy, a policy that allows choice between two levels of privacy will be better. Optimal privacy protection takes into account that the more intense competition on the high‐targeting market segment also benefits consumers on the less competitive segment. Consumer surplus is maximized by allowing them a choice between a high‐targeting regime and a low‐targeting regime which affords more privacy.     

Alpha-robust mean-variance reinsurance-investment strategy

Inspired by the α-maxmin expected utility, we propose a new class of mean-variance criterion, called α-maxmin mean-variance criterion, and apply it to the reinsurance-investment problem. Our model allows the insurer to have different levels of ambiguity aversion (rather than only consider the extremely ambiguity-averse attitude as in the literature). The insurer can purchase proportional reinsurance and also invest the surplus in a financial market consisting of a risk-free asset and a risky asset, whose dynamics is correlated with the insurance surplus. Closed-form equilibrium reinsurance-investment strategy is derived by solving the extended Hamilton–Jacobi–Bellman equation. Our results show that the equilibrium reinsurance strategy is always more conservative if the insurer is more ambiguity-averse. When the dependence between insurance and financial risks are weak, the equilibrium investment strategy is also more conservative if the insurer is more ambiguity-averse. However, in order to diversify the portfolio, a more ambiguity-averse insurer may adopt a more aggressive investment strategy if the insurance market is very ambiguous. For an ambiguity-neutral insurer, the investment strategy is identical to the non-robust investment strategy.     

A Computable General Equilibrium Analysis of Efficiency Improvements at Japanese Ports

In this paper we investigate the system-wide impact of increased efficiency of ports in Japan using a computable general equilibrium model developed for 1995. The Japanese Ministry of Transport has been implementing programs of the Ninth Seven-year Port Development Plan to improve port efficiency. The technological efficiency in the ports reduces the cost of shipping transportation, and the forward and backward linkages of imports and exports introduce some positive gains in the national GDP. Our analysis proves that the spillover effects are substantial on shipping transportation and to a lesser extent on the Japanese economy.     

Energy footprint of the city: Effects of urban land use and transportation policies

Urban land use and transportation policies have dramatic effects on the density and spatial distribution of residences in large cities. Effects of these policies have been analyzed using numerical urban simulation models. At the same time, the US Energy Information Administration’s Residential Energy Consumption Survey has allowed researchers to investigate the relation between household energy consumption and characteristics of housing units.This paper links these two lines of inquiry by demonstrating how simulation results on the implications of land use and transportation policies for the spatial form of cities can be used to compute implications for energy consumption. The resulting Urban Energy Footprint Model, “UEFM,” allows one to trace the implications of a change in land use zoning or transportation policy through its effects on housing markets and residential location to the resulting changes in energy use for residential and commuting purposes – i.e. to understand the energy footprint of transportation, housing, and land use policies. Accordingly, the UEFM provides, perhaps for the first time, a link between urban and energy economics, and can allow measurement of rebound effects of energy policies in a more general equilibrium context.     

Hotelling was Right

This paper proves existence of a subgame perfect equilibrium in Hotelling's original (unidimensional city, linear transportation costs, uniform distribution of the consumers, two firms with identical and constant marginal cost, perfectly inelastic demand) location–price game such that in the location subgame the location choices of the firms are pure and identical. The result can be extended to variations of the original setup (multidimensional city, nonlinear transportation costs, nonuniform distribution of consumers, many firms with identical and constant marginal costs, two or more firms with nonidentical but constant marginal costs).     

A new look at static spatial price equilibrium models

In this paper we propose a new view and more general formulations of static single commodity spatial equilibrium models, that lead to simpler and more efficient algorithms than those previously employed for solving models of this type. The proposed formulations incorporate general transportation networks and may be extended to allow for multiple commodities. Solution algorithms are suggested for the problem with multiple commodities, when there exists an equivalent optimization problem. We show that the multiple commodity problem may be cast in the form of a variational inequality, when there does not exist an equivalent optimization problem and propose algorithms to solve this version of the problem as well.     

Pre-play communication in procurement auctions: Silence is not golden

I study the effect of cheap talk between bidders on the outcome of a first-price procurement auction in which participation is costly. Although no side payments or commitments are allowed, there exists a family of equilibria in which sellers use communication to collude on a subset of participants and/or reveal information about their cost. Cheap talk matters in the sense that it strictly enlarges the set of Nash equilibria (symmetric and asymmetric) and the set of public correlated equilibria of the game. I show that the buyer may benefit from cheap talk between sellers and that the surplus increases in the amount of information revealed in equilibrium under one fairly general condition. This is because when communication is cheap, sellers cannot directly collude on higher prices. Rather, communication leads to competition between fewer, but more aggressive bidders, which entails greater allocative efficiency and a decrease in the total wasteful entry cost.     

Urban search models under high-relocation costs. Theory and application to spatial mismatch

We develop a search-matching model in which mobility costs are so high that it is too costly for workers to relocate when a change in their employment status occurs. We show that, in equilibrium, wages increase with distance to jobs and commuting costs because firms need to compensate the transportation cost difference between the employed and unemployed workers at each location in the city. We also show that the equilibrium land rent is negatively affected by the unemployment benefit because an increase in the latter induce firms to create less jobs, which, in turn, reduces the competition in the land market. We then use this model to provide a mechanism for the observed spatial mismatch between where black workers live and where jobs are. We finally show that a transportation policy consisting in subsidizing the commuting costs of black workers can increase job creation and reduce unemployment if the level of the subsidy is set at a sufficiently high level.