Controlling endogenous fluctuations of human capital investment in an OLG economy

A bifurcation occurs when there is a sudden qualitative or topological change in the behavior of the original system by varying one or more parameters (the bifurcation parameters) of the original system. Bifurcation can cause unacceptable new conditions or instability in the economy system. Its control is done by designing a controller input, thereby achieving desirable dynamical behavior. This paper deals with the control of a bifurcation caused by a rise in information costs in a human capital investment model. By employing the delayed feedback control (DFC) method, unstable fluctuations stemming from the system can be controlled without changing its original properties. In addition, we show the effectiveness and feasibility of the developed methods in the system with explicit functions.     

Indeterminacy in a small open economy with endogenous labor supply

Summary. We establish conditions under which indeterminacy can occur in a small open economy business cycle model with endogenous labor supply. Indeterminacy requires small externalities in technologies with social constant returns to scale, independently of the intertemporal elasticities in both consumption and labor. Received: December 12, 2001; revised version: May 17, 2002 RID="*" ID="*"The paper has benefited from discussions with Jess Benhabib and Mark Weder, as well as from the comments of an anonymous referee. Correspondence to: Q. Meng     

Inequality,unemployment, and endogenous growth in a political economy with a minimum wage

This paper presents development of an endogenous growth model with heterogeneous households and political determination of the minimum wage. We investigate the interaction of inequality, unemployment, and economic growth. First, the arguments in this paper show that a positive correlation exists between inequality and unemployment, Second, the interaction between inequality and economic growth is shown to be a positive relation if high inequality pertains in a society. It is a negative relation if low inequality pertains.      

Urban unemployment and optimal trade policy in a cash-in-advance economy

This paper examines the welfare effects of commercial and tax/subsidy policies on a developing economy with sectoral unemployment and differential cash-in-advance constraints. The optimal tariff can be negative when the cash-in-advance requirement for buying the importable good is larger than that for the exportable good. In addition, when capital is sectorally mobile, production taxes are superior to production subsidies to the importable sector. Nevertheless, to reach the first-best optimum, a uniform wage subsidy to both sectors is required.     

Cost of capital,discounting and relational contracting: endogenous optimal return and duration for joint investment projects

Concession, project financing and public–private partnership schemes are investment projects that are generally submitted to valuation criteria based on discounted cash flow analysis. The theoretical basis of these valuation criteria are now at issue. Pursuant to recent advances in relational contracting economics and behavioural finance, joint investment projects can be considered as special relational environments where the project's returns improve on alternative replacement opportunities. This article seeks to bridge the gap between new theories and widely used valuation techniques by providing a generalized approach to investment valuation. This article suggests reasonable valuation criteria that fit these new theoretical developments, including an endogenous optimal duration function that may be integrated into the project's contractual agreement.     

Second-best optimal taxation of capital and labor in a developing economy

As commercial integration reduces the reliance on foreign trade taxation, raising tax revenue has become a major concern for the governments of developing economies. This paper examines how the tax burden in a developing economy should be distributed between capital income and labor income. We study a two-sector model, where the traditional sector is “informal” and consequently cannot be taxed by the government. In this setup, we find that the optimal (second-best) tax structure in order to raise a certain amount of revenue requires to tax capital income at least as much as labor income, and possibly more.     

Foreign direct investment and endogenous growth in Vietnam

Foregin Direct Investment's (FDI's) contribution to growth has been a controversial topic in economic literature and appears to be country specific. In this article, we use time-varying coefficients in an augmented production function and let FDI indirectly affect Gross domestic product growth through labour productivity. This approach creates built-in heteroskedasticity, so the feasible generalized least square estimation is employed. The results show that FDI has significant and positive effect on labour productivity and economic growth in Vietnam, but the effect is not equally distributed among economic sectors.     

Existence of a statistical equilibrium for an economy with endogenous offer sets

A statistical equilibrium consists of distributions over offer sets of agents that can be achieved in the greatest number of ways. Although it is known that a unique equilibrium exists when the offer sets are finite and exogenous, the general case has been an open question. This paper (1) generalizes the concept of statistical equilibrium to the case where offer sets are endogenous and not necessarily finite, (2) proves the existence of equilibrium, (3) discusses a computational algorithm to obtain the equilibrium, and (4) applies the theory to the labor market and analyzes the implication of the minimum wage policy.     

Government policies and graft in an economy with endogenous labor supply

This paper is an extension of Marcouiller and Young's [Am. Econ. Rev. 85 (1995) 630] paper which shows that in a two-good economy with constant labor supply, the government can always increase graft by squeezing the formal sector out of existence. In this paper, we find that if individuals choose the amount of labor they supply, the government can increase graft by eliminating formal production in relatively rare cases.     

Optimal size, optimal timing and optimal financing of an investment

Corporate investment is an important determinant of economic well-being. The existing literature identifies optimal investment size and timing without the possibility of debt financing, as well as the effect of debt financing on investment timing without the option to choose investment size. This paper contributes to the literature by identifying the optimal size, optimal timing and optimal financing for an investment when the firm controls all three decisions (as it usually does in practice). The investment size and investment trigger are generally positively related: when investment is delayed (accelerated) it is larger (smaller) in size, thus the overall effect on investment is ambiguous. However, when tax rate or bankruptcy cost is increased, the trigger rises and size falls, hence the effect on investment is unambiguously negative. The effect of debt financing on investment depends on the amount of debt used; with the optimal amount of debt, investment is delayed relative to the no-debt case, and this delay can be economically significant; however, the investment, when eventually made, will be larger in size. Overall, it is not appropriate to ignore either the firm’s ability to choose investment size or its option to use debt financing, when modeling the investment decision.     

Home country effects of foreign direct investment: From a small economy to a large economy

Previous studies on home country effects mainly focused on FDI from large developed economies to other countries. But today's super recipient is a relatively larger economy than its investors and many of these investors are not classified as “developed economies.” A simple Ak type model implies that a small and more developed country investing in a large and less developed country will experience decreases in both employment and income disparity (compared to the recipient country) as the less-developed recipient country gains the higher technology of production through FDI inflows. The empirical results for the Four Tigers (source countries) and China (recipient country) are consistent with our theoretical model of FDI outflows. We also find that FDI outflows to China decrease the ratio of exports to GDP only for small source countries, even though a higher investment in China raises the share of these countries' exports-to-China to China's total imports.     

Factors substitutability,heterogeneity and endogenous fluctuations in a finance constrained economy

Summary.   This paper examines the local properties of perfect foresight equilibrium of a finance constrained economy featuring two classes of infinitely-lived agents with heterogeneous general preferences. It is primarily concerned with the conceivability of endogenous fluctuations for large plausible capital-labor elasticities of substitution. It is notably shown that heterogeneity in preferences allows Hopf cycles to be entirely consistent with a wide range of elasticities of substitution including the unitary one (Cobb-Douglas specifications). Received: April 23, 1999; revised version: January 24, 2000     

A welfare analysis of global patent protection in a model with endogenous innovation and foreign direct investment

This paper constructs a North–South quality-ladder model in which foreign direct investment (FDI) is determined by the endogenous location choice of firms, and examines analytically how strengthening patent protection in the South affects welfare in the South. Strengthening patent protection increases the South's welfare by enhancing innovation and FDI, but it also allows the firms with patents to charge higher prices for their goods, which decreases welfare. However, the model shows that the former positive welfare effect outweighs the latter negative effect. Moreover, introducing the strictest form of patent protection in the South, that is, harmonizing patent protection in the South with that in the North, may maximize welfare in the South as well as in the North. Further, a similar result can also be obtained in a nonscale effect model.     

Optimal investment strategies in an international economy with stochastic interest rates

We investigate how investors should optimally choose to invest in a dynamically complete international market. We find closed-form solutions for the optimal investment strategy and for the wealth loss an investor suffers from not investing internationally. Theoretically, we show that the gain from international investment is due to the speculative investment only, and why it is important for an investor from a large economy to invest in a small economy. In a numerical example we compare the wealth losses investors from Denmark and the U.S. suffer due to home bias.     

The political economy of land reform choices in Central and Eastern Europe

In all Central and Eastern European countries (CEECs) land reform has been a key part of the overall agrarian reforms and land reform procedures differ significantly among CEECs. This paper, by focusing on distributional effects and political economy implications, explains why thirteen CEEC governments chose particular reform procedures. Key factors in their choices are the history of the land ownership, including the post-collectivization ownership status, length of Communist rule, the ethnicity of pre-collectivization owners, and the equality of pre-collectivization asset distribution. These factors influence the distributional consequences of the land reform, including the (potential) conflicts between efficiency, social equity, and historical justice, and thus the political economy equilibrium.     

Real wage rigidities and optimal monetary policy in a small open economy

The main objective of the study is to provide a theoretical analysis of optimal monetary policy in a small open economy where households set real wage in a staggered fashion. The introduction of real wage rigidities plays a important role to resolve main shortcomings of the standard new Keynesian small open economy model. The main findings regarding the issue of monetary policy design can be summarized as three fold. First, the optimal policy is to seek to minimize variance of domestic price inflation, real wage inflation, and the output gap if both domestic price and real wage are sticky. Second, controlling CPI inflation directly or indirectly induces relatively large volatility in output gap and other inflations. Therefore, both CPI inflation-based Taylor rule and nominal wage-inflation based Taylor rule are suboptimal. Last, a policy that responds to a real wage inflation is most desirable.     

Location of public and private firms under endogenous timing of choices

This paper studies the choices of locations in a mixed duopoly when production costs are endogenously determined and the public firm maximizes a weighted sum of social surplus and its profits. We find that the locations of the two firms are decided simultaneously when the weight of the public firm’s profits in its objective function is high enough. When this is not the case we find that one firm (not always the public firm but sometimes also the private one) behaves as a leader in the choice of location and location decisions are made sequentially. Moreover, in equilibrium, the production cost of the public firm is never higher than that of the private firm.     

Tiebout and redistribution in a model of residential and political choice

The paper considers a two-community model with freely mobile individuals. Individuals differ not only in their incomes, but also in their tastes for a local public good. In each jurisdiction, the amount of public services is determined by majority vote of the inhabitants, and local spending is financed by a residence-based linear income tax. When making their residential and political choices, individuals thus face a trade-off between the provisionary and redistributive effects of policies. We analyze this trade-off and show that Tiebout-like sorting equilibria often exist. If the spread in tastes among individuals is very large, an almost perfect sorting according to preferences emerges; otherwise, a partial sorting prevails and stratification into rich and poor communities is more pronounced. Importantly, we demonstrate that all these sorting equilibria exist whether or not individuals are allowed to relocate after voting.     

Virtual integration and endogenous growth in the world economy

This study develops a three-country model of endogenous growth that captures the role of the interconnection of country-specific communications networks (i.e., virtual integration), which affects the productivity of R&D activity through an increase in stock of knowledge capital. The number of countries connected to internationally interconnected networks is found to determine the structure of dynamic comparative advantages. That is, countries with interconnected networks have a dynamic comparative advantage in differentiated products that require communication and activities. In the connected countries, researchers gain from efficient activity through the utilization of the greater stock of knowledge capital. The author acknowledges the comments from the participants at the 56th International Atlantic Economic Conference, held October 16–19, 2003, in Quebec City, Canada. The author is also grateful to the anonymous referee of this journal for helpful comments and suggestions.