Capital Inflow in the Presence of Endogenous Labour Supply and Monopolistic Competition

This paper examines the impact of capital mobility within the context of a simple general equilibrium model where the supply of labour is endogenous and the producer services sector is subject to monopolistic competition. It is shown that the presence of monopolistic competition influences the size of all comparative static results. The paper also shows that the size of the elasticity of substitution between leisure and consumption of the final good plays a crucial role in determining the impact of changes in the supply of capital on utility-maximising labour supply and welfare. Specifically, it is shown that capital mobility has no impact on optimal labour supply if the elasticity of substitution is equal to unity. The impact of a small capital inflow on welfare can be negative if the elasticity of substitution is sufficiently larger than unity.     

International Factor Mobility, Government Size and Welfare

An examination of the available data reveals that the size of government varies considerably across time and countries. By making use of a simple general equilibrium model, this paper demonstrates that size of government is affected by the availability of capital and labour within an economy. Specifically, this paper utilises a model of a closed economy that produces one-private and one-public good. Both goods are produced by means of capital and labour. Production functions are subject to constant returns to scale and perfect competition prevails in all markets. The elasticity of substitution between the public and the private good is greater than unity and there is no international factor mobility in the initial equilibrium. The size of government is measured by total spending on the public good as a proportion of the total expenditure on the private and public goods. It is shown that capital (labour) inflow can decrease (increase) the size of government. Capital inflow increases welfare if the private good is relatively capital intensive whereas labour inflow increases welfare if the public good is relatively capital intensive.     

Skilled–unskilled wage inequality,product variety,public input and increasing returns: A static general equilibrium analysis

The paper develops a four sector small open economy model with two traded final good sectors, a public intermediate good producing sector and a nontraded good sector producing varieties of intermediate goods. There are three primary factors: capital, skilled labour and unskilled labour. Industrial sector producing a traded good uses capital, intermediate goods and skilled labour as inputs. Intermediate goods producing sector also uses capital and skilled labour. Public input producing sector and the agricultural sector producing the other traded good use capital and unskilled labour as inputs. It is shown that, if production technologies are the same for the agricultural sector and the public input producing sector and if the scale elasticity of output is very low, then an increase in capital stock (unskilled labour endowment) raises (lowers) the skilled–unskilled wage ratio. However, an increase in skilled labour endowment does not produce any unambiguous effect. On the other hand, an increase in the tax rate on industrial output and/or an increase in the price of the agricultural product, armed with the same set of assumptions, lowers the skilled–unskilled wage ratio.     

Factor Supplies, Welfare and Output When Non-traded Intermediate Production Has Increasing Returns

This paper considers the impact of an exogenous change in the supply of primary factors on output levels, relative prices and welfare in the presence of output generated increasing returns to scale. Unlike the existing studies, this paper utilises a model of a small open economy where increasing returns do not occur in the production of a traded final good but in the production of a non-traded intermediate good. Within the context of the present study, it is shown that the Rybczynski theorem is unlikely to hold and an increase in the supply of either primary factor can harm welfare.     

Labour supply, foreign investment and welfare in the presence of public infrastructure

Within the context of a small open economy where both foreign investment and the provision of public infrastructure are endogenous, this paper examines the impact of an exogenous increase in labour supply. An increase in labour supply can be attributed to labour inflow. A number of empirical studies have demonstrated the importance of public infrastructure in real economies and both developed and developing countries have attracted significant foreign investment in recent years. This paper shows that, in the case of a diversified equilibrium, variations in labour supply do not affect the wage rate, provision of public infrastructure or welfare. However, an increase in labour supply decreases foreign investment as long as the producers of the private goods derive equal benefits from public infrastructure. In the case of complete specialisation, an increase in labour supply increases the provision of public infrastructure, which leads to an increase in the wage rate and foreign investment. An increase in labour supply increases welfare as long as the provision of public infrastructure involves some fixed cost.     

Increased Input Supplies,Government Size,Welfare and Trade in the Presence of Increasing Returns

This paper examines the impact of exogenous changes in the supply of primary factors of production on the relative size of government and welfare in the context of a model where increasing returns are present in the production of an intermediate good. It is shown that an increase in the supply of labor (capital) increases the relative size of government if the share of labor is large (small) in the public sector as compared to the private sector. An increase in the supply of capital increases welfare but the impact of an increase in the supply of labor cannot be unambiguously determined. In the context of a North-South model, the paper also considers the pattern of trade. It is shown that North will export capital-intensive intermediate goods to the South. Received September 13, 2001; revised version received June 1, 2002 Published online: February 17, 2003 I am indebted to Professor Bob Catley and two anonymous referees for invaluable comments and suggestions. However, responsibility of any remaining errors or omissions is mine alone.     

Entrepreneurship and conflict generating product price changes

This paper addresses the issue of the impact of changes in world prices upon the welfare of households in small open economies. Making use of a model of a small open economy with one monopolistically competitive industry, we derive conditions under which an exogenous increase in the world price of the monopolistically competitive good, arising from a shift in demand, is conflict generating between the owners of unskilled and skilled labour in the short run but Pareto improving in the long run. Output adjustments at the intensive margin make for conflict generation, but the converse holds for adjustments at the extensive margin in the long run. The analysis highlights the importance of the induced increase in the number of domestic varieties and of the skilled labour intensity in the production of goods relative to its intensity in the setting up of firms.     

Public consumer goods, output-generated variable returns, and labor supply

This paper develops a simple general-equilibrium model of a closed economy. The economy under consideration produces two final goods, one private and one public, which are both produced with labor and an intermediate good under constant returns to scale. The intermediate good is produced by labor alone, and its production is subject to output-generated variable returns to scale. The public good can be interpreted as government spending on environmental quality, police protection, cultural activities, and publicly funded health care. The model is used to examine the impact of an exogenous change in labor supply on the size of the government, relative prices, and welfare. Within the context of the present study, an increase in labor supply can be attributed to either exogenous immigration or population growth. The model is also used to examine the relationship between the size of the country and the pattern of trade.     

Foreign Capital, Urban Unemployment, and Economic Growth

A three-sector endogenous growth model, is used to study the effects of foreign direct investment (FDI) on the dynamics of urban unemployment, labour income, and capital income as well as national welfare in a Harris–Todaro economy. It is shown that more FDI can affect the economy's dynamics and national welfare positively or negatively. The paper derives conditions as to how the growth rate and welfare effects of FDI relate to the intersectoral mobility of capital, the destination of FDI, the elasticities of substitution, and the factor intensities of the final good production.     

PETROLEUM REFINING INDUSTRY: AN ASSESSMENT OF ITS PRODUCTION STRUCTURE*

Cost structure of petroleum refining industry in Kuwait has been examined, with specific focus on factor substitution, and economies of scale and utilisation. This has been done by estimating translog cost functions, both long‐run and short‐run, using annual time‐series data covering the period from 1976 to 1998. The results indicate that the implied production structure is non‐homothetic, and the pattern of scale effect is labour and capital saving but material using. The evidence also supports presence of induced exogenous technical change, which is non‐neutral (labour and capital using, and material saving). The elasticity of substitution between capital and labour is negative, implying that the two inputs are complements. The results also indicate absence of economies and diseconomies of scale in the petroleum refining industry.     

Cost relationships and challenges in the Spanish apparel industry

In the twenty-first century, the Spanish textile and apparel industries have faced substantial challenges, resulting in declining sales and employment. This study concentrates on the apparel industry, since its economic challenges and opportunities differ from those of the textile industry. The analysis employs a transcendental logarithmic cost function to investigate the presence of scale economies and the interrelationships among inputs of domestic capital, labour and intermediate goods as well as outsourced intermediate products for the Spanish apparel industry and discusses the implications for its future competitiveness and the demand for domestic inputs. The results are consistent with diseconomies of scale or, in the case of one model, possibly constant returns to scale, indicating that some contraction of the industry due to international competition will not raise unit costs. All of the inputs except for capital and intermediate goods were found to be substitutes. An important finding is that the cross elasticity values of both labour and domestic intermediate goods with respect to the price of outsourced goods have risen over time, indicating an increased sensitivity of the quantity demanded of these home-country inputs to the price of imported intermediate goods. It follows that domestic input markets will be more substantially affected by international prices for outsourced inputs as the industry tries to maintain its competitiveness in the global environment.     

Capital income taxation,tax criteria,and intergenerational welfare

In a two-period overlapping-generations model, residence criteria are shown to be optimal with lump-sum transfers to the younger generation in a dynamically efficient open economy even if all wage income, corresponding to rent income under exogenous labor supply, is not taxed away. When tax revenues are also distributed to the older generation — which indeed may be desirable for short-term intergenerational welfare distribution reasons — a weighted average rule is derived for optimal international taxation. The taxation of domestic savings income follows the inverse elasticity rule in respect to savings and, surprisingly, higher investment elasticity increases the tax level. Finally, for a small open economy and for large identical economies, tax competition with a mixed scheme of residence-based taxes and source-based subsidies yields the same tax policy as tax cooperation with no restrictions on the domestic and international capital income tax instruments.     

A Model of Trade Liberalization in Services*

This paper develops an intra‐industry service trade model taking into account important features of services. We find that service trade liberalization between identical economies is welfare enhancing when the pre‐trade domestic market liberalization is limited. This holds regardless of the degree of trade liberalization and of the mode of supply. However, if the pre‐trade environment is characterized by a free‐entry equilibrium, then service trade liberalization is not necessarily welfare improving. It is welfare enhancing if the trade liberalization is full and the mode of supply is cross‐border. The gain from trade in our model comes from the improvement in service quality—better matching between consumers’ ideal varieties and firms’ product specificity. The implications for the mode of supply in service trade are also explored.     

The Spanish automotive industry: scale economies and input relationships

This paper investigates the existence of economies of scale in the Spanish automobile industry as well as the substitution possibilities between input pairs and the direct and cross price elasticities of demand for the various inputs by estimating a translog cost function for both a three input model involving capital, labour, and intermediate goods as well as a four input model where energy is separated from other intermediate goods. The results of this study are consistent with the hypothesis of economies of scale in the Spanish automobile industry, particularly at the low and mean levels of output. These results also are consistent with the hypothesis that capital is a substitute for the other inputs, but that labour and intermediate goods are complements. Labour and energy also appear to have a complementary relationship over most of the data points in this study. The significance of a complementary relationship between labour and intermediate goods is that any attempt by the Spanish government to restrict imports of these inputs, resulting in higher domestic prices for them, may aggravate an already serious domestic unemployment problem.     

Market Size,Local Sourcing and Policy Competition for Foreign Direct Investment

This paper analyzes policy competition for a foreign‐owned monopolist firm between two asymmetric countries. In particular, one country has a larger economy than the other country. At the same time, the small country produces an intermediate good for the final good production, while the large country does not. We show that whether a country will win foreign direct investment (FDI) competition is determined by the interaction between relative transport costs of intermediate and final goods and the market size of the large country relative to that of the small country; and policy competition for FDI may Pareto weakly improve national welfare of the competing countries.     

Public Debt,Terms of Trade and Welfare: The Role of Capital Production Shares,External Balances,and Dynamic (In)efficiency

In view of still large external imbalances across the world economy and dramatically risen public debts in major advanced economies, this paper reconsiders the relationship between public debt, the terms of trade and welfare in a two-good, two-country overlapping generations model with technological differences across countries. We find that the terms of trade effect of a public debt shock depends only on international differences in capital production shares and the dynamic (in)efficiency of the world economy. As in a model with similar capital production shares, domestic welfare rises and foreign welfare decreases when Home has a positive external balance and the Golden Rule holds. Under dynamic efficiency, welfare decreases in the debt-expanding, net foreign creditor country if she has a relatively smaller capital production share, and if the welfare effect through the accumulation channel is negative. In contrast, under dynamic inefficiency she can increase her welfare by debt expansion.     

Competition,taxation and economic growth

The paper mainly examines the relationship between economic growth, tax policy and sectoral labor distribution in an endogenous growth model with expanding varieties. For analyzing these relationships, we consider an economy where three sectors of production are vertically integrated: final goods sector, intermediate goods sector and research sector. We show that the extent of imperfect competition in the intermediate products market affects both economic growth and the allocation of the available labor to all the sectors employing this input. The resources from capital taxation, which are used for financing research sector, have a U-shaped effect on growth and lead to a movement of the labor from research sector to final goods sector. Additionally, we show that if there exists a higher competitive structure in an economy, the probability of the positive effect of an increase in tax on growth gets higher.     

Oligopsony Distortions and Welfare Implications of Trade*

While imperfect competition in the output market has garnered extensive focus in the new trade theory literature, input market imperfection has received considerably less attention. Since market power in input purchase has been growing in recent years, it is worth examining the welfare implications of trade arising from oligopsony power. We develop a model consisting of two final goods, one intermediate good, and two primary factors (capital and labor). One final good and the intermediate good employ primary factors, whereas the other final good uses labor and the intermediate input. All markets operate under perfect competition except for the intermediate input, which is oligopsonistic. Using this model, we show that oligopsony can lead to some anomalies such as an increase in the oligopsony output, reward to the intensive‐factor in the oligopsony sector, national welfare, and deterioration of terms of trade, but it always decreases the reward to the intermediate input.     

Foreign capital,return to education and child labour

The paper attempts to identify the different channels through which economic reforms can affect the incidence of child labour in a developing economy using a three-sector general equilibrium framework with child labour. We show that reduction in poverty is not a necessary condition for the problem of child labour to improve in the developing economies. Economic reforms like an inflow of foreign capital can mitigate the incidence of child labour by raising the return to education and lowering the earning opportunities of children.     

Who gains from capital market integration? Tax competition between unionized and non‐unionized countries

The welfare effects of capital market integration are examined under a model of tax competition with two asymmetric countries. The asymmetry is expressed through the labour market: one country has a perfect labour market whereas the other country's labour market is unionized. Our results indicate that the welfare effects of capital market integration differ depending on whether governments are active or passive in attracting capital. In the absence of active governments, capital market integration benefits the country with a competitive labour market whereas it harms the unionized country. Capital market integration benefits both countries if governments are active and compete for mobile capital using taxes/subsidies.