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.     

Optimal human capital policies under the endogenous choice of educational types

This study examines optimal human capital policies under nonlinear labor and capital income taxes in the presence of consumption value of education in a two‐period setting. We show that when individuals can choose educational types differing by the relative importance of consumption value and production value, education subsidies for low‐type individuals should not equal an efficient level that offsets distortions induced by nonlinear taxes on labor and capital income. Our findings imply that education policy does not restore efficiency, or the Diamond–Mirrlees production efficiency theorem fails. Moreover, capital income taxation is optimal, which means that the Atkinson–Stiglitz theorem breaks down.     

Public investment,the rate of return,and optimal fiscal policy in a stochastically growing economy

This study examines the optimal fiscal policy in a stochastic endogenous growth model with private and public capital. The government is willing to actualize a socially optimal equilibrium using a lump-sum tax and government debt linked to public investments, subject to the budget constraint under the golden rule of public finance. A socially optimal fiscal policy states that a deterministic rate of return on government bonds sets the marginal product of public capital. Moreover, public investments optimally adjust the ratio of private capital to public capital to equate the rates of return on such capital. The presence of stochastic disturbances results in a disparity between the optimal marginal products of the two types of capital, as reported in previous empirical studies. This disparity significantly affects the socially optimal growth rate in response to investment risk.     

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     

The effect of a progressive taxation scheme on the endogenous formation of jurisdictions

This paper analyzes the effect of a progressive taxation scheme on the segregative properties of the endogenous formation of jurisdictions. Households living in the same place form a jurisdiction which aims to produce a local public good and implement a redistribution policy by granting every household a demogrant of an amount determined by the jurisdiction. In every jurisdiction, production of local public services and the demogrant are financed with a local tax based upon the households wealth. Local wealth tax rates and the level of the demogrant are exogenously determined in every jurisdiction. Households are free to leave their jurisdiction for another jurisdiction that would provide them with their highest utility. We found that the existence of a demogrant seems to mitigate the segregative properties of endogenous jurisdiction formation, because the condition identified by Gravel and Thoron to ensure segregation of any stable jurisdiction structure remains necessary, but is no longer sufficient.     

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.     

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.     

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.     

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.     

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.     

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.     

A political economy perspective on horizontal FDI in a dynamic Cournot-oligopoly with endogenous entry

Entry in a homogeneous Cournot-oligopoly is excessive if and only if there is business-stealing (Amir et al., 2014). The excessive entry prediction has been derived primarily for closed economies and using a welfarist benchmark. We extend this framework and allow for (1) horizontal FDI in a multi-period setting and (2) interest group-based government behaviour. Opening the market to greenfield investments from abroad tends to aggravate the entry distortion. Moreover, market opening may reduce welfare if a more pronounced entry distortion dominates the gain in consumer surplus. Finally, a government, which places sufficiently little weight on the interests of consumers, will object to market opening, even if welfare rises.     

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.     

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.     

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.