Endogenous Comparative Advantage*

We develop a model of trade between identical countries. Workers endogenously acquire skills that are imperfectly observed by firms; therefore, firms use aggregate country investment as the prior when evaluating workers. This creates an informational externality interacting with general equilibrium effects on each country's skill premium. Asymmetric equilibria with comparative advantages exist even when there is a unique equilibrium under autarky. Symmetric, no‐trade equilibria can be unstable under free trade. Welfare effects are ambiguous: trade can be Pareto‐improving even if it leads to an equilibrium between rich and poor countries, with no special advantage regarding country size.     

Multilateral Reforms of Trade and Environmental Policy

The paper analyzes environmental tax policy reform using a competitive model of world trade that includes production‐generated environmental damage (pollution) and trade tariffs. The authors examine the feasibility of Pareto‐improving multilateral reforms of environmental taxes, and show that any environmental tax reform that is mutually welfare‐improving when compensating lump‐sum transfers are assumed is also welfare‐improving when a suitable tariff reform (but no transfers) is combined with the tax changes. Several specific reform proposals are developed. These results expand the feasible set of mutually improving policy proposals for international policy initiatives.     

Strategic Consumption Complementarities: Can Price Flexibility Eliminate Inefficiencies and Instability?

Generally, two facts occur with strategic complementarities and fixed prices: (i) the equilibria are multiple and (ii) if the complementarities are strong, the law of demand is violated and the equilibrium is unstable. In this paper, we analyse the effect of price flexibility on these features as well as on market welfare properties. Assuming an exchange economy with H agents consuming two goods with one strategic complement, we show that flexibility of prices may remove both the multiplicity of the equilibria and the instability of behavior when the externalities are strong. Moreover, we find conditions to correct instability when it is caused by perverse wealth effects. When preferences are quasilinear and identical, if the externality is beneficial, any equilibrium is Pareto optimal despite the externality. But if the externality is detrimental, corrections are required.     

Global warming and economic externalities

Despite worldwide policy efforts such as the Kyoto Protocol, the emission of greenhouse gases (GHG) remains a negative externality. Economic equilibrium paths in the presence of such an uncorrected externality are inefficient; as a consequence, there is no real economic opportunity cost to correcting this externality by mitigating global warming. Mitigation investment using resources diverted from conventional investments can raise the economic well-being of both current and future generations. The economic literature on GHG emissions misleadingly focuses attention on the intergenerational equity aspects of mitigation by using a hybrid constrained optimal path as the “business-as-usual” benchmark. We calibrate a simple Keynes-Ramsey growth model to illustrate the significant potential Pareto improvement from mitigation investment and to explain the equilibrium concept appropriate to modeling an uncorrected negative externality.     

Regular Distributive Efficiency and the Distributive Liberal Social Contract

We consider abstract social systems of private property, made of n individuals endowed with nonpaternalistic interdependent preferences, who interact through exchanges on competitive markets and Pareto‐improving lump‐sum transfers. The transfers follow from a distributive liberal social contract defined as a redistribution of initial endowments such that the resulting market equilibrium allocation is both: (i) a distributive optimum (i.e., is Pareto‐efficient relative to individual interdependent preferences) and (ii) unanimously weakly preferred to the initial market equilibrium. We elicit minimal conditions for meaningful social contract redistribution in this setup, namely, the weighted sums of individual interdependent utility functions, built from arbitrary positive weights, have suitable properties of nonsatiation and inequality aversion; individuals have diverging views on redistribution, in some suitable sense, at (inclusive) distributive optima; and the initial market equilibrium is not a distributive optimum. We show that the relative interior of the set of social contract allocations is then a simply connected smooth manifold of dimension n ? 1. We also show that the distributive liberal social contract rules out transfer paradoxes in Arrow–Debreu social systems. We show, finally, that the liberal social contract yields a norm of collective action for the optimal provision of any pure public good.     

Endogenous Timing in Mixed Duopolies With Externality

We investigate endogenous timing in a mixed duopoly with a negative externality. We find that quantity (price) competition yields a simultaneous‐move (sequential‐move) outcome under a significant negative externality. These results indicate that mixed duopolies yield the same results as private duopolies under a significant negative externality, which is in sharp contrast to the results in mixed duopolies without a negative externality. Unless the negative externality is insignificant, public leadership yields greater welfare than private leadership, and public leadership is more robust than the private leadership as equilibrium. If optimal environmental tax policy is introduced, however, private leadership yields the greatest welfare and this an equilibrium outcome in the endogenous timing game under quantity competition.     

Border tax adjustments and tariff‐tax reforms with consumption pollution

We develop a model of a small open economy, where pollution per unit of consumption between domestically produced and imported quantities of the same good differs. We show that the first‐best policy combination calls for consumption taxes on all polluting goods, and border tax adjustment (BTA) measures, that is, tariffs or import subsidies. We identify conditions under which well‐known tariff‐tax reform policies for developing economies, such as a consumer‐price‐neutral piecemeal reform of trade and a consumption tax, and a consumer‐price‐neutral reform of all trade and consumption taxes improve welfare. We also evaluate whether reforms of trade taxes alone are superior to consumer‐price‐neutral reforms of trade and consumption taxes.     

To Trade Or Not To Trade: Economies With A Variable Number Of Tradeables*

We present a general equilibrium model that encompasses the endogenous selection and shadow‐pricing of a set of tradeable commodities, with home‐based and social production activities. In the model, a market system is a set of costly social institutions which embody the trade and production technologies available in the economy. Our equilibrium concept describes the pricing of market institutions, thus pricing the tradeability of a commodity. We obtain the existence and the decentralization of Pareto‐efficient allocations. We discuss an example regarding the transition of a guild‐based economy into a market‐based economy.     

MICROECONOMIC REFORM AND INCOME DISTRIBUTION: THE CASE OF AUSTRALIAN PORTS AND RAIL FREIGHT

We analyze structural changes in the Australian ports and rail freight industries that were driven by microeconomic reform; we find such reforms may generate welfare gains with reduced inequality. We estimate the effects on household income groups of these industry changes by applying a computable general equilibrium model incorporating microsimulation behavior. The structural changes lead to a small increase in household welfare in most regions, with an overall increase of 0.18%, and a small decrease in inequality. Our analysis suggests that policy makers in Australia and other high‐income nations should give serious consideration to microeconomic reform of infrastructure industries. (JEL C68, C69, D31, L92)     

On optimality in intergenerational risk sharing

Summary. This paper defines and studies optimality in a dynamic stochastic economy with finitely lived agents, and investigates the optimality properties of an equilibrium with or without sequentially complete markets. Various Pareto optimality concepts are considered, including interim and ex ante optimality. We show that, at an equilibrium with a productive asset (land) and sequentially complete markets, the intervention of a government may be justified, but only to improve risk sharing between generations. If markets are incomplete, constrained interim optimality is investigated in two-period lived OLG economies. We extend the optimality properties of an equilibrium with land and give conditions under which introducing a pay-as-you-go system at an equilibrium would not lead to any Pareto improvement. Received: October 5, 1998; revised version: April 3, 2001     

RESTRICTING EMPLOYMENT OF LOW‐PAID IMMIGRANTS: A GENERAL EQUILIBRIUM ASSESSMENT OF THE SOCIAL WELFARE IMPLICATIONS FOR LEGAL U.S. WAGE‐EARNERS

This paper builds on earlier work that used a general‐equilibrium model to show that reducing employment of unauthorized immigrants in the United States through a tighter border‐security policy lowers the average income of legal residents. Here we exploit further the detail available in the general‐equilibrium model to look at distributional effects, recognizing that the policy increases wage rates for low‐paid legal workers. We assess the social welfare effect on legal workers using a constant elasticity of substitution social welfare function. We contrast our general‐equilibrium approach to immigration analysis with the more commonly used partial‐equilibrium, econometric approach. (JEL D63, J61, C68)     

On Indeterminacy and Growth under Progressive Taxation and Utility‐Generating Government Spending

We examine the theoretical interrelations between progressive income taxation and macroeconomic (in)stability in an otherwise standard one‐sector AK model of endogenous growth with utility‐generating government purchases of goods and services. In sharp contrast to traditional Keynesian‐type stabilization policies, progressive taxation operates like an automatic destabilizer that generates equilibrium indeterminacy and belief‐driven fluctuations in our endogenously growing macroeconomy. Unlike the no‐sustained‐growth counterpart, this instability result is obtained regardless of (i) the degree of the public‐spending preference externality and (ii) whether private and public consumption expenditures are substitutes, complements or additively separable in the household's utility function.     

MACROECONOMIC POLICY REFORMS AND PRODUCTIVITY GROWTH IN AFRICAN AGRICULTURE

This article employs a two‐stage procedure to investigate the impact of macroeconomic policy reforms on the agricultural productivity growth of 33 African countries from 1981 to 2001. In the first stage, we measure agricultural productivity using a nonparametric Malmquist productivity index. In the second stage, we build a generalized method of moments (GMM) model with a measure of structural adjustment program (SAP) intensity as a key instrument for macroeconomic policy reforms. We also control for the effects of globalization, civil violence, level of development of physical and financial infrastructure, and other economic variables as well as natural resource factors that directly affect agricultural productivity. Our results indicate a strong positive correlation between the extent of SAP intensity and agricultural productivity, suggesting that the macroeconomic policy reforms improved agricultural productivity growth in the sample countries. (JEL E6, O13, O41)     

Liberal parentalism

What normative constraints should bind parents (or policy makers) if they intervene in the choices of children (or constituencies) whose preferences evolve over time? For a sophisticated child who anticipates correctly his preference change, we prove that generically there exist parental interventions that are Pareto improving over the backward induction path that the child will follow on his own. If, in contrast, the child misperceives his future preferences, Pareto improving interventions might not exist, and even nudges might be painfully sobering. The parent may then choose to minimize the maximal disappointment along time that her benevolent intervention would cause.     

Digital technologies,knowledge spillovers,innovation policies,and economic growth in a creative region

We theoretically study the impact of two innovation policies on economic growth in a region that is creative in the sense of Richard Florida and that uses digital technologies to produce a final consumption good. The use of these digital technologies in our creative region gives rise to incomplete knowledge spillovers. Our analysis generates three salient findings. First, we characterize the balanced growth path (BGP) equilibrium. Second, we solve the social planner's problem, describe the Pareto optimal allocation of resources, and then compare the Pareto optimal allocation with the BGP equilibrium allocation. Finally, we study the impacts that a research subsidy and a particular patent policy have on economic growth in our creative region and then we relate our findings to the incompleteness of the above-mentioned knowledge spillovers.     

Pension,possible phaseout,and endogenous fertility in general equilibrium

The rich literature on Pay-As-You-Go (PAYG)-type pensions provides a notion that when pension return is dominated by the market return, generally it is impossible to phase pension out without hurting any generation. We show that PAYG pensions can indeed be phased out in a much richer framework where fertility is endogenous and general equilibrium effects are present. Interestingly, the factor that helps us to phase the pension out in a Pareto way is hidden in the structure of PAYG pension itself. Individualistic agents fail to recognize the benefits of their fertility decision on these programs and, therefore, end up in an allocation that is strictly dominated by the allocations that internalize this externality. Exploiting this positive externality, competitive economy can improve its allocations and can reach the planner's steady-state in finite time where each generation secures as much utility as in the competitive equilibrium. Clearly, it is possible to transition in a Pareto way to an economy either with no pension or with pensions whose return is not dominated by market return.     

HEALTH CARE IN THE UNITED STATES: WHY IS SUPPLY SO PRICE INSENSITIVE?

Health spending as a percentage of gross domestic product in the U.S. economy is growing, from 5% in 1960 to about 16% in the current period, and it is predicted to grow to as much as 30% in 2050. Then why is the supply of health care in the United States so insensitive to steeply rising prices? This paper conducts an econometric study to show that high health‐care costs have an adverse impact on labor productivity, causing a negative production externality in all industries. So, can the rising cost of health‐care affect the U.S. comparative advantage? The paper seeks answers to these questions in a general equilibrium model and finds that the labor productivity shock is responsible for the sluggish or declining supply of health care. Consumers are able to afford less health care due to a possible decline in real wages. U.S. comparative advantage becomes a nonissue, provided that the equilibrium is stable in spite of a negatively sloped health‐care supply curve. Negative externality, leading to market failure, may be addressed in two alternative ways. (JEL F11, I11, I12, I18)     

Strategic Ignorance as a Self-Disciplining Device

We analyse the decision of an agent with time-inconsistent preferences to consume a good that exerts an externality on future welfare. The extent of the externality is initially unknown, but may be learned via a costless sampling procedure. We show that when the agent cannot commit to future consumption and learning decisions, incomplete learning may occur on a Markov perfect equilibrium path of the resulting intra-personal game. In such a case, each agent's incarnation stops learning for some values of the posterior distribution of beliefs and acts under self-restricted information. This conduct is interpreted as strategic ignorance. All equilibria featuring this property strictly Pareto dominate the complete learning equilibrium for any posterior distribution of beliefs.     

Welfare and excess volatility of exchange rates

We study the properties of a GEI model with nominal assets, outside money (injected into the economy as in Magill and Quinzii (J Math Econ 21:301–342, 1992)), and multiple currencies. We analyze the existence of monetary equilibria and the structure of the equilibrium set under two different assumptions on the determination of the exchange rates. If currencies are perfect substitutes, equilibrium allocations are indeterminate and, generically, sunspot equilibria exist. Generically, given a nonsunspot equilibrium, there are Pareto improving (and Pareto worsening) sunspot equilibria associated with an increase in the volatility of the future exchange rates. We interpret this property as showing that, in general, there is no clear-cut effect on welfare of the excess volatility of exchange rates, even when due to purely extrinsic phenomena.