Environmental Protection and Urban Unemployment: Environmental Policy Reform in a Polluted Dualistic Economy

This paper explores sufficient conditions for the welfare‐improving environmental policy reform in the Harris–Todaro economy. A rise in the pollution tax rate in the urban manufacturing has spillover effects on the two labor market distortions: the less‐than‐optimal manufacturing employment and the urban unemployment. If both are weakened the welfare improves. Otherwise, we need to develop an alternative sufficient condition. It is shown that there exists a range of welfare‐improving pollution tax rates, and that it corresponds to the lower values of tax rate. This range may shrink by the wage subsidy policy and the technological change toward less pollution‐intensive techniques.     

Urban unemployment, informal sector and development policies

We analyze the effects of wage subsidy policies on unemployment and welfare in the model that is characterized by the existence of both open unemployment and the informal sector that producesfinal goods. Our main findings are as follows. Wage subsidies to the agricultural and informal sectors increase welfare and decrease urban unemployment. The effects of a wage subsidy to manufacturing sector on welfare and unemployment are conditional. We identify some sufficient conditions for the definite results and interpret them.     

More on phantom bidding

Summary. A phantom bidding model is analyzed for a sale auction. The following issues are addressed: the effects of phantom bidding on overall social welfare and buyers' profits. It is shown that social welfare may increase or decrease as the auctioneer switches from the fixed reserve price policy to phantom bidding. The buyers' profits will increase whenever social welfare increases. Received: November 4, 1998; revised version: February 8, 1999     

Reassessing welfare reform data: a response to cherry

Abstract

This is a response to Robert Cherry's comment on the article, “Welfare as We [Don't] Know It: A Review and Feminist Critique of Welfare Reform Research” that appeared in the 10(2) issue of Feminist Economics. This response argues that while some combination of welfare reform, the booming economy in the late 1990s, and changes in economic policy all worked together to decrease caseloads and increase employment rates among welfare leavers, these are incomplete measures of the impact of welfare reform on the lives of lone mothers. This paper also argues that the effects of welfare reform on lone mothers are more mixed than Cherry acknowledges. This paper concludes that when one holistically examines low-income lone mothers' lives, it is premature to declare welfare reform a success.     

should Transfers To Poor Families Be Conditional On School Attendance? A Household Bargaining Perspective*

This article considers the welfare implications of transfers to poor families that are conditional on school attendance and other forms of investment in children's human capital. Family decisions are assumed to be the result of (generalized) Nash bargaining between the two parents. We show that, as long as bequests are zero, conditional transfers are better for children than unconditional transfers. The mother's welfare may also be improved by conditional transfers. Thus, conditioning transfers to bequest‐constrained families have potentially desirable intergenerational and intragenerational welfare effects. Conditioning transfers to unconstrained families make every family member worse off.     

Partial privatization in mixed duopoly with price and quality competition

We analyze price and quality competition in a mixed duopoly in which a profit-maximizing private firm competes against a state-owned public firm. We first show that the welfare-maximizing public firm provides a lower quality product than the private firm when they are equally efficient. In order to maximize social welfare, government manipulates the objective of the public firm that is given by a convex combination of profits and social welfare. It is demonstrated that an optimal incentive of the public firm is welfare maximization under the absence of quality competition, but it is neither welfare maximization nor profit maximization under the presence of quality competition. The result supports a completely mixed objective between welfare and profit maximizations or partial privatization of the public firm.      

Labour-supply impacts of effective welfare programme parameters: a reanalysis

We quantify the impact of effective welfare programme parameters on the labour supply of single female household heads – the primary group of welfare recipients in the USA. Our panel of data is derived from the US Census Bureau's Current Population Survey for the years 1979 to 1990 inclusive. Behavioural impacts from a range of economic variables are consistent in sign with predictions made by economic theory. We find that effective welfare gurantee levels and the effective tax rate on earned income both significantly decrease labour supply. The marginal effects of these welfare programme parameters are economically small: a US$1000 increase in the expected welfare guarantee level reduces annual labour supply by about 36 hours; a 10 percentage point increase in the effective tax rate on earned income reduces annual labour supply by about 7.5 hours.     

On the Relevance of John Rawls's Theory of Justice to Welfare Economics

Mainstream microeconomic theory makes some use of John Rawls's Theory of Justicein discussing welfare economics and social welfare functionals. While various elements of his approach are usually mentioned, his basic point is generally taken to be his difference principle (maximizing the welfare of the worst off individual) applied as a decision principle for evaluating the equity of resource allocation.

To take the difference principle as the essence of Rawls's work is an error. The present paper reviews the basic argument of the Theory of Justice

compares it with the use that economists make of it, and concludes that in a number of quite specific ways Rawls's ideas are misrepresented and misused by mainstream microeconomists.     

WELFARE ECONOMICS AND THE MEASUREMENT OF NNP*

Some relationships between NNP and economic welfare are explored in the confines of a simple, static welfare maximization model. Various assumptions concerning both the measurement of NNP and the economic system underlying this model are dropped seriatem and the implications for the correspondence between NNP and economic welfare are examined. The following conclusions emerge. There are several classes of resource reorganization in which NNP and welfare move in the same direction, so that NNP can serve as an ordinal proxy for welfare. These include changes in taxes or competitive imperfections which result in product substitution and movements along the transformation function. With a general qualification, NNP-welfare correspondence is preserved for allocative changes which affect the real costs and prices of goods included in NNP or of non-included goods in inelastic demand; changes in involuntary unemployment; and changes in technological externalities affecting producers. There are other cases where changes in NNP and welfare are not positively correlated. Included here are changes in real costs of non-included goods for which demand is elastic and changes in technological externalities imposed on consumers.     

Incomplete Markets, Transitory Shocks, and Welfare

Although equilibrium allocations in models with incomplete markets are generally not Pareto-efficient, it is often argued that quantitative welfare losses from missing assets are small when time horizons are long and shocks are transitory. In this paper we use a computational analysis to show that even in the simplest infinite horizon model without aggregate uncertainty welfare losses can be substantial. Furthermore we show that in this model welfare losses from incomplete markets do not necessarily disappear when one considers calibrations of the model in which agents become very patient. We argue that when the economic model is calibrated to higher frequency data, the period persistence of negative income shocks must increase as well. In this case the welfare loss of incomplete markets remains constant even as agents' rate of time preference tends to one. Journal of Economic Literature Classification Numbers: D52, D58, D60.     

WELFARE REFORM AND CHILDREN'S EARLY COGNITIVE DEVELOPMENT

In this paper, we use a dynamic structural model to measure the effects of (1) single mothers' work and welfare use decisions and (2) welfare reform initiatives on the early cognitive development of the children of the NLSY79 mothers. We use PIAT‐Math scores as a measure of attainment and show that both the mothers' work and welfare use benefit children on average. Our simulation of a policy that combines a time limit with work requirement reduces the use of welfare and increases employment significantly. These changes in turn significantly increase children's cognitive attainment. This implies that the welfare reform was not only successful in achieving its stated goals, but was also beneficial to welfare children's outcomes. In another policy simulation, we show that increasing work incentives for welfare population by exempting labor income from welfare tax can be a very successful policy with some additional benefits for children's outcomes. Finally, a counterfactual with an extended maternal leave policy significantly reduces employment and has negative, though economically insignificant, impact on cognitive outcomes. (JEL I38, J22, J18)     

Specific vs Ad Valorem Strategic Export Subsidies with Taxation Distortion

This paper employs a model to compare the welfare between optimal specific and ad valorem export subsidies if the subsidy payment is financed by distortional taxation. It is found that the welfare under the specific subsidy regime is higher (lower) than that under the ad valorem subsidy regime if the social cost of taxation distortion is low (high). Moreover, the signs of the two optimal subsidies are also crucially dependent on this social cost. They are positive (negative) if the social cost is low (high).     

Welfare Effects of Transparency in Foreign Exchange Markets: the Role of Hedging Opportunities

The paper studies the impact of more transparency on the risk‐sharing opportunities in the foreign exchange market and the associated implications on ex ante welfare. Transparency is measured in this model by the informational content of publicly observable signals about exchange rate developments. The authors find that in this model more transparency improves welfare in economies that are poorly endowed with capital and/or where investors are not very risk‐averse, while welfare is reduced in economies with large capital endowments and/or where investors are highly risk‐averse.     

The trade paradox persists under excise taxes

Brander and Krugman (1983) and Sertel (1988) followed by Krugman (1989), showed two sides of a ‘trade paradox’: The paradox in competition, viz. that opening trade (or increasing competition) may cause welfare to decline, and the paradox in efficiency, viz. that an increase in unit transport cost may increase welfare. In this paper, we consider the situation in an environment where interventionist trade policies are not permitted but each country is sovereign to impose an excise tax (or subsidy). The paradoxes persist under equilibrium excise taxes, reckoned both at the non-cooperative (Nash or dominant strategy) equilibrium and at the cooperative solution among tax-imposing authorities maximizing welfare. We also see that the paradoxes persist in a taxless environment where market equilibrium is Stackelberg rather than Cournot.     

Vertical Foreign Direct Investment versus Outsourcing: A Welfare Comparison from the Perspective of a Host Country

In the offshoring literature, there is a huge disconnect between the alternative modes of organizing offshore production and their relative welfare impact on a host country. We bridge this gap by comparing the welfare of a host country from vertical foreign direct investment (VFDI) vis‐à‐vis international outsourcing. Our model finds that the ability to maximize welfare in the alternative modes of organizing offshore production is contingent on the absorptive capacity of the host country. If a host country's absorptive capacity is above a critical threshold, outsourcing is more welfare enhancing vis‐à‐vis VFDI; while even with an absorptive capacity lower than this critical threshold, outsourcing being welfare improving over VFDI cannot be ruled out.     

THE EFFECT OF WELFARE ASSET RULES ON AUTO OWNERSHIP,EMPLOYMENT, AND WELFARE PARTICIPATION: A LONGITUDINAL ANALYSIS

This paper investigates how asset tests for welfare eligibility affect auto ownership, employment, and welfare participation for single mothers without a college degree. We combine longitudinal data from the 1996 Survey of Income and Program Participation with data on state‐level welfare program rules from the Urban Institute and data on state‐level controls to test whether these single mothers were more likely to (1) own a car, (2) be employed, and (3) be off of welfare, depending on the welfare asset rules instituted in their state. We find evidence that, taken as a group, the asset rules have a statistically significant effect on the probability of car ownership. Ordinary least squares results and cross‐sectional two‐stage least squares (2SLS) results using the asset rules to instrument for car ownership show a large, positive, statistically significant effect of car ownership on employment. However, in 2SLS models controlling for prior car ownership and prior employment, the asset instruments are weaker and we do not find an effect of car ownership on employment. Of significance for policy makers, we find that the asset rules do not have a statistically significant joint effect on welfare participation, even after addressing possible endogeneity. (JEL I38, J68, J08)     

Tax Havens,Growth, and Welfare

This paper develops an endogenous growth model featuring tax havens, and uses it to examine how the existence of tax havens affects the economic growth rate and social welfare in high‐tax countries. We show that the presence of tax havens generates two conflicting channels in determining the growth effect. First, the public investment effect states that tax havens may erode tax revenues and in turn decrease the government's infrastructure expenditure, thereby reducing growth. Second, the tax planning effect of tax havens reduces marginal cost of capital and hence encourages capital accumulation so as to spur economic growth. The overall growth effect is ambiguous and is determined by the extent of these two effects. The welfare analysis shows that tax havens are more likely to be welfare‐enhancing if the government expenditure share in production is low, or the initial income tax rate is high. Moreover, the welfare‐maximizing income tax rate is lower than the growth‐maximizing income tax rate if tax havens are present.     

Modeling welfare loss asymmetries arising from uncertainty in the regulatory cost of finance

The allowed rate of return (AROR) is a critical input in the regulatory assessment of revenue requirements, price caps and other controls. Errors in estimating AROR impact on investment incentives and price setting and hence can induce welfare loss. It is often suggested that the welfare losses that arise from under-estimation of the AROR may be significantly greater than arise from over-estimation. However, to date, this proposition has not been examined in any detail. This paper assesses the extent of welfare loss asymmetry and its implications for the choice of AROR.     

A Case for Bundling Public Goods Contributions

We extend the model of voluntary contributions to multiple public goods by allowing for bundling of the public goods. Specifically, we study the case where agents contribute into a common pool which is then allocated toward the financing of two pure public goods. We explore the welfare implications of allowing for such bundling vis‐à‐vis a separate contributions scheme. We show that for high income inequality or for identical preferences among agents bundling leads to higher joint welfare. Interestingly, a welfare improvement can in some cases occur despite a decrease in total contributions. On the contrary, when agents are heterogenous, for low income inequality bundling can lead to lower total contributions and may decrease welfare compared to a separate contribution scheme. Our findings have implications for the design of charitable institutions and international aid agencies.     

Pricing Discretion and Price Regulation in Competitive Industries

Price capped firms enjoy a large degree of pricing discretion, which may harm customers and competition. We study two alternative regulatory regimes to limit it: the first regime (Absolute) places a fixed upper limit to the prices charged in captive markets, while the other regime (Relative) constrains the captive prices relatively to the competitive ones. Under the Relative regime, captive prices are only weakly lower and competitive prices are always higher than under the Absolute regime. However, the number of competitors and/or their output may be higher under the Relative regime. While the effects on aggregate welfare are ambiguous, there is some evidence that the Relative regime is more likely to increase consumers’ surplus and social welfare the more efficient are the competitors.