Resource allocation in a general equilibrium model of production under uncertainty

The purpose of this paper is to examine the implications of uncertainty for resource allocation, real income, and income distribution in terms of a simple two-sector general equilibrium model of a small country where uncertainty is introduced by assuming that production in one sector occurs in a stochastic environment. Assuming decreasing risk aversion, we show that an increase in uncertainty causes the movement of the resources away from the uncertain sector, a decline in expected real income, and a shift in the distribution of income against the factor employed intensively by the uncertain sector.     

On a general equilibrium model of the incidence of the corporation tax under uncertainty

This paper addresses two issues. First, we demonstrate that when there is uncertainty in a general equilibrium model of a large country the usual rule for the auctioneer, that of searching for a set of relative prices at which excess demand in each market is zero, is no longer appropriate. It is suggested that the setting of expected demand to expected supply in each market would be a convenient generalization. Secondly, results on the incidence of the corporation income tax when there is uncertainty in the corporate sector, and alternatively when there is uncertainty in the noncorporate sector, are presented.     

Democracy and competition: Vertical differentiation and labor in a general equilibrium model

We consider a general equilibrium model with vertical preferences and one or two firms, where workers and consumers are differentiated, respectively, by their sensitivity to effort and their preference for quality. The question in this paper is whether a decentralized choice through majority vote would lead to more or less competition. We compare the duopoly and the monopoly cases from the viewpoint of each individual, then we deduce the choice of the majority. We prove that, under concentrated ownership (where owners have a null density), duopoly is always preferred by the majority; while under egalitarian ownership (where firms are equally shared by all the population), the choice of the majority depends on the relative size of workers' and consumers' segments.     

Endogenous uncertainty in a general equilibrium model with price contingent contracts

Summary This paper views uncertainty and economic fluctuations as being primarily endogenous and internally propagated phenomena. The most important Endogenous Uncertainty examined in this paper is price uncertainty which arises when agents do not have structural knowledge and are complelled to make decisions on the basis of their beliefs. We assume that agents adopt Rational Beliefs as in Kurz [1994a]. The trading of endogenous uncertainty is accomplished by using Price Contingent Contracts (PCC) rather than the Arrow-Debreu state contingent contracts. The paper provides a full construction of the price state space which requires the expansion of the exogenous state space to include the state of beliefs. This construction is central to the analysis of equilibrium with endogenous uncertainty and the paper provides an existence theorem for a Rational Belief Equilibrium with PCC. It shows how the PCC completes the markets for trading endogenous uncertainty and lead to an allocation which is Pareto optimal. This paper also demonstrates that endogenous uncertainty is generically present in this new equilibrium.This research was supported in part by the Fondazione Eni Enrico Mattei of Milan, Italy, and by the National Science Council of Taiwan. The authors thank Carsten K. Nielsen for valuable suggestions.     

Optimal labor income taxation in a two-sector dynamic general equilibrium model

This paper presents a new approach to the two-sector optimal taxation problem. We derive the optimal labor income tax rate which depends on factor intensity across sectors. It is the labor intensity that determines the initial wage rate, and therefore the optimal labor tax rate. We show that an increase in the initial relative price of consumption goods decreases the optimal tax rate on labor income in the case that the consumption goods sector is capital-intensive while it increases the optimal tax rate on labor income in the case that the investment goods sector is capital-intensive.     

A general equilibrium model of the incidence of corporation income tax under uncertainty

In this paper we investigate the incidence of the corporation income tax in terms of a two-sector, general equilibrium model, where production decisions are made under uncertainty. The conventional result, derived originally by Harberger (1962), is that if the corporate sector is the capital-intensive sector, then capital must bear a greater burden of the tax, in proportion to its initial share in national income, than labor. This result continues to hold unambiguously under uncertainty only if the relative and the absolute risk aversion of the corporations are non- increasing in profits. Otherwise, the Harberger result may not hold.     

简化一般均衡模型中一般均衡点的确定

经济学教材在讨论一般均衡的时候,往往以两个人、两种生产要素、两种产品这种最简单的社会作为研究对象,它们通常只阐述了一般均衡的存在,但都没有说明这种最简单的社会一般均衡点的确定即以此作为研究对象。     

The welfare implications of resource allocation policies under uncertainty: The case of public education spending

In this paper, we examine whether policy interventions, aimed at improving resource allocation, also have important stabilization effects over the business cycle. To this end, we employ a dynamic stochastic general equilibrium model in which public education expenditures, financed by distorting taxes, enhance the productivity of private education choices. We then calculate the welfare implications of competing operating targets using a state-contingent instrument rule for public education spending. Our main findings are: (i) there can be important cyclical effects of different resource allocation policies depending on the operating target used and the degree of macroeconomic uncertainty; (ii) it is important to use an operating target which is as close as possible to the heart of the market imperfection that justifies policy action; (iii) policy action should not be monotonic in the degree of macroeconomic uncertainty.     

Estimating labour supply elasticities under rationing: a structural model of time allocation behaviour

Abstract .  This paper presents a structural model of the allocation of time to various non-market activities and market work by couples and single men and women. Parameters are estimated using a sample taken from the UK 2000 Time Use Survey. Own-wage effects are found to be positive for both men and women and are larger for cohabiting individuals than for singles. The presence of young children leads to a much larger increase in the time spent in home production by women than by men. However, the presence of young children causes men to increase their total time spent working by more than women.     

A general equilibrium open economy model for emerging markets: Monetary policy with a dualistic labor market

An optimizing model of a small open emerging market economy (SOEME) with dualistic labor markets and two types of consumers, delivers a tractable model for monetary policy. Differences between the SOEME and the SOE are derived. Parameters depend on features of the labor market and on consumption inequality, and affect the natural interest rate, terms of trade and potential output. The supply curve turns out to be flatter and more volatile, with a larger number of shift factors, including policy-determined terms of trade. A simple basic version of the model is simulated in order to compare different policy targets in response to a cost shock. Flexible domestic inflation targeting gives the lowest volatility although there are trade-offs. Exchange rate volatility is relatively lower but still makes a major contribution to controlling inflation. Flexible CPI inflation targeting performs better when combined with some kind of managed floating. Inflation targeting has to be flexible. With more backward-looking behavior the policy response to a shock is reduced.     

Time-inconsistent preferences in a general equilibrium model

This paper introduces time-inconsistent preferences in a multicommodity general equilibrium framework with incomplete markets. The standard concept of competitive equilibrium is extended in order to allow for changes in intertemporal preferences. Depending on whether or not agents recognize that their intertemporal preferences change, agents are called sophisticated or naïve. This paper presents competitive equilibrium notions for economies with naïve agents and economies with sophisticated agents and provides assumptions under which both types of equilibria exist. Surprisingly, the set of naïve equilibria in societies populated by time-consistent households is not allocationally equivalent to the set of competitive equilibria. For sophisticated equilibria, the equivalence holds. Time-inconsistency also raises conceptual issues about the appropriate concept of efficiency. Choices have to be made concerning the incorporation of future preferences and the appropriate instruments to create Pareto improvements. For both naïve and sophisticated societies, we present four possible efficiency concepts. Suitable conditions are specified for which both naïve and sophisticated equilibria satisfy appropriate efficiency concepts.     

The reciprocity theorem in a model with variable factor supply

The reciprocity theorem is extended to include variable factor supply in a specific factor model.     

Dynamic general equilibrium model with uncertainty: Uncertainty regarding the future path of the economy

This paper develops a new method for incorporating uncertainty within a computable general equilibrium (CGE) model. The method involves incorporating uncertainty into the model by formulating different states of the world or paths that the economy may take. The risk then is that on one or more of the paths, there may be an external demand shock, for example, an exogenous shock in tourism demand. The multi-sector forward-looking CGE model with risk shows the impact of uncertainty on the economy and how households and industry respond to the presence of uncertainty. The results show that, where there is an asymmetric shock, the possibility of a future tourism demand shock creates a welfare loss. The welfare gains along the non-shocked path are a result of household's risk aversion and their substituting resources away from the shocked path. The difference in the monetary values of the welfare on the different paths can be interpreted as the ‘price’ of the risk. It is the price households would pay to remove the possibility of the tourism shock. Therefore, this research was able to quantify the monetary value of the risk. This method can be used in scenario modelling for other adverse contingent events, such as the uncertainty of climate change impacts, and agriculture production risks.     

A general equilibrium model of production with a random marginal rate of substitution

This paper examines the qualitative effects of risk aversion in a two-sector general equilibrium model where uncertainty is due to random production in one of the sectors. Technology is more general than used previously and provides for a random marginal rate of substitution. Also, the possibility that risk is decreasing in factor usage is considered. Results show that earlier qualitative conclusions on the effects of changing risk may be reversed under these cases.     

Fiscal policy reforms in general equilibrium: The case of Greece

This paper quantifies the macroeconomic and welfare implications of (i) changes in the tax-spending mix and (ii) debt consolidation policies. The setup is a neoclassical growth model augmented with a relatively rich public sector. The model is calibrated to the Greek economy. The results suggest that, if the goal of fiscal policy is to stimulate the economy and increase welfare by changing the tax mix, then it should decrease the tax rate on labour income and increase the consumption tax rate. While higher public investment spending is good for the economy, it is lower public consumption spending that is found to be expansionary. The results also suggest that both tax- and expenditure-based debt consolidation policies lead to worse economic activity in the short run, but they have strong beneficial effects in the medium and long run when the consolidation period finishes.     

Taxation under oligopoly in a general equilibrium setting

Taxation under oligopoly is analyzed in a general equilibrium setting where the firms are large relative to the size of the economy and maximize the utility of their shareholders. Assuming that preferences are either identical and homothetic or identical and quasi‐linear, then the oligopoly model is an aggregative game, which greatly simplifies the comparative statics for the effects of taxation. This novel analysis of taxation leads to a number of counterintuitive results that challenge conventional wisdom in microeconomics. A lump‐sum tax may increase the price of the oligopolistic good and decrease welfare whereas a profits tax may decrease the price of the oligopolistic good and increase welfare. A profits tax is shown to be superior to a lump‐sum tax. Furthermore, in line with conventional wisdom, total tax revenue is always higher with an ad valorem tax than with a specific tax that leads to the same price for the oligopolistic good.     

Calibration in applied general equilibrium modelling: The case of rationed households

In this paper an adaptation of the general calibration method for applied equilibrium models is proposed which takes into account excess demands or supplies as result of rationing. This adaptation is applied to a multi-level CES-type household. It turns out that the computational burden of this example stays limited as compared with calibration without rationing.     

Asset price volatility in a nonconvex general equilibrium model

Summary. Asset prices and returns are known to vary significantly more than␣output or aggregate consumption growth, and an order of magnitude in excess of what is justified by innovations to fundamentals. We study excess price volatility in a lifecycle economy with two assets (claims on capital and␣a public debt bubble), heterogeneous agents, and increasing returns to financial intermediation. We show that a relatively modest nonconvexity generates a set valued equilibrium correspondence in asset prices, with two␣stable branches. Price volatility is the outcome of an equilibrium selection mechanism, which mixes adaptive learning with “noise”, and alternates stochastically between the two stable branches of the price correspondence. Received: March 19, 1998; revised version: June 2, 1998