ON INTERNATIONAL MIGRATION AND THE SOCIAL WELFARE FUNCTION

In defining optimum population, economists have used two distinct concepts of the social welfare function: the Millian and the Benthamite. Although analytically the issue of the welfare impact of international migration is closely related to the concept of optimum population, the migration analysis has been based almost exclusively on the Benthamite welfare function. As its point of departure, the present note explores the implications of the alternative Millian welfare function for migration analysis.
An interesting aspect of the results derived from the present exercise is that they are in sharp contradiction with the results based on the Benthamite social welfare function. This highlights the sensitivity of the results to the welfare criteria used and the need for greater caution in policy formulation.     

Recognizing progeny in the value of life

This note generalizes the value of life to incorporate the preferences for descendants of a dynastically altruistic decision-maker. It derives the value of progeny and shows how it depends on the Benthamite vs. Millian nature of dynastic altruism.     

MONETARY POLICY IN EMU WITH ASYMMETRIC TRANSMISSION AND NON-TRADABLE GOODS

Which policy objective should a central bank pursue in a monetary union with asymmetric monetary transmission and different rates of inflation? Should it base its decisions on the EU‐wide average of inflation and growth or should it instead focus on (appropriately weighted) national utility losses based on national rates of inflation and growth? We find that a policy which minimises the sum of national utility losses leads to higher average utility if the variability of common shocks is large relative to idiosyncratic demand shocks in the non‐tradables sectors. We draw conclusions for the appropriate weight of common and national objectives in the union.     

Disutility of pollution and endogenous growth

Endogenous growth is generally built on a positive externality hypothesis which is the opposite of a negative externality caused by pollution. We study a linear technology with simple assumption: an aggregate capital stock which represents a learning by doing effect and a pollution flow proportional to production. In this framework, we analyse the precise effects on growth of the disutility of pollution and its interaction with the utility of consumption in an economy without abatement technology. The decentralized equilibrium always leads to unlimited growth, but optimal growth is often limited (the negative effect of pollution dominating the positive effect of learning by doing). In this case, the optimal policy which leads the decentralized economy to follow the optimal growth path is to tax capital; in contrast with the optimal subsidy policy in an economy without pollution. When an abatement technology is introduced, the optimal solution can lead the economy to unlimited growth, whatever the form of the utility function.     

Ramsey discounting calls for subtracting climate damages from economic growth rates

The Ramsey equation ties the utility discount rate and the elasticity of marginal utility of consumption together with per capita consumption growth rates to calculate consumption discount rates. For many applications, per capita consumption growth rates can be approximated with per capita output growth rates. That approximation does not work for climate change, which drives an ever-increasing and increasingly uncertain wedge between output and consumption growth. NAS (2017), in a central recommendation and illustrative example, conflates the two. The correct, consumption-based discounting method generally decreases consumption discount rates and, thus, increases the resulting Social Cost of Carbon Dioxide (SC-CO₂).     

“The winner takes it all” or a story of the optimal allocation of the European Cohesion Fund

This paper aims to determine an optimal allocation of the European Cohesion Fund (ECF) and compares it with the observed allocation. This optimal allocation is the solution of a donor optimization problem which maximizes recipient countries' GDP per capita to achieve economic convergence in the European Union. Compared to the observed allocation, our solution can identify the recipient countries that can benefit from higher ECF transfers than the observed levels, as those having low relative GDP per capita, large population size and where the ECF has a strong capacity to support economic growth. Result is robust to changes in the specification of the donor's utility function.     

Optimally eating a stochastic cake: a recursive utility approach

In this short paper, uncertainties on resource stock and on technical progress are introduced into an intertemporal equilibrium model of optimal extraction of a non-renewable resource. The representative consumer maximizes a recursive utility function which disentangles between intertemporal elasticity of substitution and risk aversion. A closed-form solution is derived for both the optimal extraction and price paths. The value of the intertemporal elasticity of substitution relative to unity is then crucial in understanding extraction. Moreover, this model leads to a non-renewable resource price following a geometric Brownian motion.     

Demographic structure and capital accumulation

This paper develops an overlapping-generations (OLG) model to analyze the consequences of demographic structure changes induced by an exogenous shift in the birth rate. We first show that a finite growth rate of the population that maximizes long-run capital per capita exists. Then, we examine the theoretical properties of this growth rate by showing that: (i) it corresponds to the demographic structure such that the average ages of capital holders and workers are equal; (ii) it is associated to an efficient steady state; (iii) it increases with compulsory transfers from younger to older generations. Finally, we explain why standard OLG models do not exhibit such a growth rate.     

Creative Destruction, Investment Volatility, and the Average Age of Capital

In this article, a new numerical procedure is used to compute the equilibrium of a vintage capital growth model with nonlinear utility, where the scrapping time is nonconstant. We show that equilibrium investment and output converge nonmonotonically to the balanced growth path due to replacement echoes. We find that the average age of capital is inversely related to output, which is consistent with recent micro evidence reinforcing the importance of the embodied question. We also find that an unanticipated permanent increase in the rate of embodied technological progress causes labor productivity to slowdown in the short run.     

Human capital and economic growth in an overlapping generations model

The paper describes an aggregative optimal growth model, the essential features of which are that individuals are mortal and obtain their labor skill through educational training. The process of human capital formation is described by an education function which relates the pass rate to the educational expenditure per student. Two alternative scenarios, private and public education regimes, are separately investigated. Under the decentralized education regime, risk-neutral individuals borrow to finance their education when young. Under the centralized education regime, the cost of education is financed by taxes imposed on the workers in the economy, and the central government maximizes a long-term social target function. The equilibria of both regimes are analyzed and various comparative static results derived. It is shown that educational investment in a decentralized equilibrium is higher than that in the centralized steady state. We also establish that there exists a time discount rate at which or above which the decentralized per capita consumption exceeds that of the centralized steady state whereas for time rates of discount sufficiently near the population growth rate, the above result will be reversed.     

Evolution of harvesting strategies: replicator and resource dynamics

Abstract. Economic theories of managing renewable resources, such as fisheries and forestry, traditionally assume that individual harvesters are perfectly rational and thus able to compute the harvesting strategy that maximizes their discounted profits. The current paper presents an alternative approach based on bounded rationality and evolutionary mechanisms. It is assumed that individual harvesters face a choice between two harvesting strategies. The evolution of the distribution of strategies in the population is modeled through a replicator dynamics equation. The latter captures the idea that strategies yielding above average profits are demanded more than strategies yielding below average profits, so that the first type ends up accounting for a larger part in the population. From a mathematical perspective, the combination of resource and evolutionary processes leads to complex dynamics. The paper presents the existence and stability conditions for each steady-state of the system and analyzes dynamic paths to the equilibrium. In addition, effects of changes in prices are analyzed. A main result of the paper is that under certain conditions both strategies can survive in the long-run. Correspondence to: J. Noailly     

Millian Efficiency with Endogenous Fertility

Should governments implement policies that affect fertility decisions on efficiency grounds? What is the correct notion of efficiency to use? To address these issues, this paper develops an extension of the notion of Pareto efficiency, referred to as Millian efficiency , to evaluate symmetric allocations in an overlapping generations setting with endogenous fertility. This extension is based on preferences of those agents who are actually alive, and exclusively allows for welfare comparisons of symmetric allocations. First, we provide necessary and sufficient conditions to determine whether an allocation is Millian efficient or not, and we show that the sufficient conditions for dynamic efficiency offered by Cass (1972) and Balasko and Shell (1980) cannot be directly applied when fertility decisions are endogenous. Second, we characterize Millian efficient allocations as the equilibria of a decentralized price mechanism, and we present a sufficient condition for dynamic efficiency that uses the sequence of prices associated to such decentralized equilibria. Finally, we analyse how intergenerational policies should be designed to restore efficiency and achieve net welfare gains in two different settings in which markets yield inefficient allocations: dynamic inefficiencies and financial market incompleteness regarding human capital. In the former, a pay-as-you-go social security system eliminates dynamic inefficiencies, provided pensions are explicitly linked with fertility decisions. In the latter, a specific link between social security and public education becomes a necessary condition for Millian efficiency.     

DISCOUNT RATE FOR PUBLIC INVESTMENT IN A MONETARY DISEQUILIBRIUM ECONOMY*

In this paper, we explore the social rate of discount for public investment in a monetary overlapping generations model which allows for market disequilibria arising from price and wage rigidities. Financing public investment with a lump-sum tax on the younger generation, borrowing and money supply, the government maximizes the sum of generational utilities discounted by a social rate of time preference. For the social welfare optimum, it is required to take the boundary-maintaining policy by making demand for output equal to supply. In a stationary state, we show that (i) the social rate of discount on the Keynesian-repressed inflation boundary should be the weighted average of the social rate of time preference and the market rate of interest, the weights depending on the amount of private investment crowded out by public investment, and (ii) on the Keynesian-classical boundary it should be a modified version of the weighted average rule, containing an extra term which represents the marginal opportunity cost of public investment through its impact on labour employment.     

On the implications of declining population growth for regional migration

Although many advanced economies nowadays experience decreasing populations, migration in models of economic growth has so far been almost exclusively analyzed for the case of non-negative population growth rates. This paper considers decreasing and possibly negative population growth rates in two two-sector growth models. As long as preferences are homothetic, neither a decrease in population growth rates nor an actual population decline does induce migration in either direction. Introducing quasi-linear preferences implies that a decline in population growth leads to migration from the rural to the industrial region. A complete depopulation of the rural region takes place if the population growth rate falls short of minus the rate of physical capital depreciation. These results reinforce pessimistic expectations about a rural exodus.     

Cash-in-advance constraint,optimal monetary policy,and human capital accumulation

This paper investigates optimal monetary policy in an overlapping-generations model with endogenous growth fueled by the accumulation of human capital and under a cash-in-advance constraint. We consider the case where the government finances public education fully by seigniorage. Three main results are obtained. First, there exists an optimal money growth rate that maximizes the economic growth rate along the steady growth path. Second, on this path, the Laffer curve of seigniorage takes the maximum. Finally, the money growth rate for maximizing seigniorage along the steady growth path, which also leads to maximization of the economic growth rate, is lower than that for maximizing seigniorage in the present period.     

Seigniorage and public good in an OLG model with cash-in-advance constraints

This paper is a contribution to the theory of the optimal monetary policy in overlapping generations models with a cash-in-advance constraint applying on old age consumption purchases. We are particularly interested in the study of seigniorage when the latter is used to finance public goods valued by consumers. Assuming that a public good enters the utility function and the existence of cash-in-advance constraints, we find a Laffer curve of seigniorage at steady-state. We also analyze the dynamic optimal monetary policy when the government maximizes an intertemporal social welfare function and can only resort to seigniorage to finance the purchases of the public good. We show that the optimal rate of money growth may be strictly higher than the one which maximizes steady-state seigniorage: the optimal amount of seigniorage may lie on the decreasing part of the Laffer curve of seigniorage. We finally suppose that the government can use lump-sum taxes in addition to seigniorage. Then, the Friedman rule prevails and public expenditures are only financed through lump-sum taxes.     

Savings growth and the path of utility

Abstract.  We derive an expression relating the change in instantaneous utility to the growth of net (genuine) saving in an economy with multiple stocks and externalities that maximizes welfare in the utilitarian sense. This result is then shown to hold for decentralized competitive efficient economies as well, to yield an extension of the Hartwick rule: instantaneous utility is non-declining along a development path if genuine saving is decreasing. By way of example the rule is applied as a constant genuine saving rate rule in a simple Dasgupta-Heal-Solow-Stiglitz economy. The rule yields a path with unbounded consumption and higher wealth than on the standard Hartwick constant consumption path.     

Public investment,taxation, and long-run output in economies with multi-level governments

This paper examines the dynamic effects of taxation and investment on the steady state output level of an economy. A simple neoclassical growth model with different tiers of government is developed. The initial focus is on governments that aim to maximise their citizens' welfare and economic performance by providing consumption goods for private consumption and public capital for private production. It is shown that a long-run per capita output maximising tax rate can be derived and that there also exists an optimal degree of fiscal decentralisation. The analysis then extends to the case where governments attempt instead to maximise their own tax revenue to fund expenditures which do not contribute to the utility of their citizens. Three different cases of taxation arrangement are considered: tax competition, tax sharing, and tax coordination. The modeling shows that intensifying tax competition will lead to an increase in the aggregate tax rate as compared to the cases of sharing and coordination amongst governments. These tax rates are both higher than the long-run per capita output maximising rate that was implied under the welfare maximising government scenario.     

Common agency lobbying over coalitions and policy

This paper presents a theory of common agency lobbying in which policy-interested lobbies can first influence the choice of a proto-coalition and then influence the legislative bargaining over policy within that coalition. The equilibrium policy in the legislative bargaining stage maximizes the aggregate policy utility of the coalition members and the lobbies, but lobbying can also lead to the preservation of the status quo and lobby-induced gridlock. When the status quo does not persist, the policy outcome is largely determined by the selection of a coalition, since legislative bargaining under unanimity within the coalition leads to a coalition-efficient policy regardless of the identity of the proposer. An example is presented to identify the types of equilibria and provide a full characterization of an equilibrium.     

Economic-demographic interactions and the impact of investments in population control

The interaction between economic and demographic factors in the Philippines was examined, analyzing the effects of investment in fertility control on the birthrate, population size, and such economic variables as gross national product (GNP), wage rate, and family income. A family planning model that was constructed and is used to project population program cost and births prevented is grafted to and simulated with a larger economic/demographic model. The simulation results are anayzed. The economic demographic model to which the family planning subsystem was grafted is a modified version of the model constructed by Encarnacion et al. (1974). It is basically a neoclassical model, a closed economy in which the real wage rate is determined by the intersection of the demand and supply of labor. The demand for labor is derived from a Cobb-Douglas production function on the assumption that labor is paid the value of its margin product, and the labor supply is determined by age and sex specific labor force participation rates and population. Capital accumulation is influenced by population size through its effect on government and private consumption expe nditures. Fertility rate is determined by duration of marriage and the level and distribution of family incomes. The model was used to develop projections from 1970 through 2000. Results show that the effects on per capital income and real wage rate seem significant, yet family income appears largely unaffected and the effect on the traditional investment to output ratio (I/Y) seems minimal. One of the outcomes of the projection without family planning is that, if the economy were to depend solely on its own savings, the average annual rate of growth of gross national product (GNP) would be only about 4.32%, which is less than the historical growth rate of 6% and the present government longterm target of 8%. The result suggests that foreign investments and loans would have to play an increasingly important role in the economic growth of the Philippines unless the gross domestic investment of GNP ratio is increased substantially. Aggregate output is reduced due to a relatively smaller labor force. Thus, it is suggested that if population control programs are accompanied by an increase in the labor participation rate, particularly of women, the payoffs from family planning may be larger. Closer examination of the nature of the payoffs from the family planning program would reveal that they basically stem from the decrease in the number of persons sharing in national output and not from increased production and saving. The observation suggests that population control does not necessarily lead to more rapid economic growth defined as sustained increase in total output.