Endogenous fluctuations in unionized economies with productive externalities

Summary. We discuss the effects of unions on steady-state multiplicity and welfare, and on the existence of endogenous fluctuations. We consider an OG economy with productive capital externalities and we focus on underemployment equilibria. We find that for wide regions in the parameter space, including an arbitrarily small degree of externalities and a Cobb-Douglas technology, unions increase steady state employment and welfare, and local indeterminacy (sunspots) emerges. Moreover with a CES technology multiplicity of steady states is only possible in the presence of unions. Our results also show that the role of unions in shaping local dynamics and bifurcations depends on technology (externalities and factors substitutability).Received: 16 January 2002, Revised: 18 March 2004, JEL Classification Numbers: E32, J51, D60, D62. Correspondence to: Leonor ModestoThis paper is a much revised version of our former working paper Unions, Increasing Returns and Endogenous Fluctuations. Financial support from Fundação para a Ciência e Tecnologia under the POCTI, is gratefuly acknowledged.     

Institution building and growth in transition economies

Drawing on the recent literature on economic institutions and the origins of economic development, we offer a political economy explanation of why institution building has varied so much across transition economies. We identify dependence on natural resources and the historical experience of these countries during socialism as major determinants of institution building during transition. Using natural resource reliance and the years under socialism to extract the exogenous component of institution building, we also show the importance of institutions in explaining the variation in economic development and growth across transition economies during the first decade of transition.     

Optimal taxation, global externalities and labor mobility

This paper concerns transboundary environmental problems in the context of an optimal tax model. We assume that part of the labor force is mobile across countries, and that the set of tax instruments includes a nonlinear income tax and a commodity tax on the ‘dirty’ good that is causing damage to the environment. The purpose is to compare the (globally optimal) second best policy of a cooperative equilibrium with the policy implicit in a noncooperative equilibrium. We show that the commodity taxes differ between equilibria because of: (i) transboundary externalities not internalized by national governments, (ii) interaction effects between environmental and other policies, and (iii) labor mobility.     

Consumption externalities, rental markets and purchase clubs

Summary. A premise of general equilibrium theory is that private goods are rival. Nevertheless, many private goods are shared, e.g., through borrowing, through co-ownership, or simply because one persons consumption affects another persons wellbeing. I analyze consumption externalities from the perspective of club theory, and argue that, provided consumption externalities are limited in scope, they can be internalized through membership fees to groups. Two important applications are to rental markets and purchase clubs, in which members share the goods that they have individually purchased.Received: 2 June 2003, Revised: 8 March 2004, JEL Classification Numbers: D11, D62.This paper was supported by the U.C., Berkeley Committee on Research, and the Institute of Economics, University of Copenhagen. I am grateful to Birgit Grodal for her collaboration on the theory that underlies this paper, and for her helpful and motivating comments about these particular extensions. I also thank Hal Varian, Doug Lichtman, Steve Goldman, Karl Vind, anonymous referees, and members of the Berkeley Microeconomics Seminar for discussion.     

Economic reforms and human development: evidence from transition economies

Do market-oriented economic reforms result in higher levels of human well-being? This article studies the impact of macro-level institutional and infrastructure reforms on the economic, educational and health dimensions of human well-being among 25 transition economies. We use panel data econometrics based on the LSDVC technique to analyse the effects of market-oriented reforms on the human development index (HDI), as a measure of human well-being, from 1992 to 2007. The results show the complexity of reform impacts in transition countries. They show that institutional and economic reforms led to positive economic effect and significant impacts on other dimensions of human development. We find some positive economic impacts from infrastructure sectors reforms. However, not every reform measure appears to generate positive impacts. Large-scale privatizations show negative effects in health and economic outcomes. The overall results show the importance of the interaction among different reform measures and the combined effect of these on human development.     

Optimal product strategies in the presence of network externalities

A network externality exists when a user’s benefit from a product increases with the number of other users in the same network. We examine the possibility that a software firm may exploit network externalities by introducing a limited feature version of its commercially available software into the market. The two versions need not be perfectly compatible and network externalities are allowed to decline as the difference between the versions increases. We obtain conditions under which introducing a limited feature version is optimal.     

Agglomeration externalities: Marshall versus Jacobs

The literature remains inconclusive as to whether Marshallian specialization or Jacobian diversification externalities favor regional innovativeness. The specialization thesis asserts that regions with production structures specialized towards a particular industry tend to be more innovative in that particular industry, as it allows for knowledge to spill over between similar firms. The diversification thesis argues that knowledge spills over between different industries, causing diversified production structures to be more innovative. A closely related debate evolves around local competitiveness hypotheses. Using an original database of innovation counts, both these issues are addressed for the Dutch context. The results show that the Marshallian specialization thesis holds, though more pronounced for R&D intensive and small firms. Fierce local competition within an industry negatively affects innovativeness in that particular industry.JEL Classification: O18, O31, R10Gerben van der Panne: The author wishes to thank Fia Wunderink, Wilfred Dolfsma and Alfred Kleinknecht for helpful comments on an earlier version of this paper.     

Network externalities and long-run market shares

We study a dynamic duopoly model with network externalities. The value of the product depends on the current and past network size. We compare the market outcome to a planner. With equal quality products, the market outcome may result in too little standardization (i.e. too many products active in the long run) but never too much. The potential inefficiency is non-monotonic in the strength of the network effect, being most likely for intermediate levels. When products differ in quality, an inferior product may dominate even when the planner would choose otherwise, but only if the discount factor is sufficiently large     

Competition in telecommunication networks with call externalities

This paper describes a model involving two interconnected networks offering different degrees of quality. In these networks, there are call externalities enabling consumers to assess the quality of the calls they send and receive. Networks compete in two-part tariffs. Our aim is to show that the “profit neutrality” result no longer applies due to network asymmetry and call externalities. In the case of non reciprocal access charges, call externalities generate private incentives enabling each competitor to charge low access prices. This reduces the risk of tacit collusion as competitors are free to negotiate their access charges.      

Negative externalities and welfare improving preference changes

When the over-consumption of open access resources and congestible public goods generate negative externalities and social welfare losses, many individuals and environmental advocacy organizations offer as an alternative nongovernmental solution the adoption of new ecology sustaining preferences. This paper shows that exogenously inducing a change in preferences and the adoption of new externality internalizing preferences, which increase an individual's marginal rate of substitution between a private good and a good whose consumption imposes external costs on others, not only reduces the aggregate output of the negative externality but also produces an economic state that is socially superior to the initial state. Because it is based on both the initial and new preferences, the social superiority welfare criterion makes possible meaningful welfare comparisons of economic states generated by preference changes. A computational general equilibrium model is then used to simulate preference changes and to calculate the resulting allocative and welfare effects. The computer simulations reveal that important factors in the attainment of a socially superior state include (i) the particular characteristics of an individual's negative externality reaction function, (ii) the magnitude of the preference change, and (iii) the number of individuals changing preferences.     

Convergence speed and preference externalities in a one-sector model with elastic labor supply

In a one-sector model with elastic labor supply where consumption and leisure externalities are incorporated, we examine the impact of preference externalities on convergence speed.     

Relative price shifts,economies of scale and poverty during economic transition1

Economic transition is associated with significant shifts in relative prices between private and public goods. If, as a result, public goods claim a larger share of total expenditures, economies of scale in consumption increase. We show how relative price changes might alter the welfare of different‐sized households in the short run and over time. We illustrate, for a selection of transition economies, that conventional poverty profiles are quite sensitive to assumptions made about economies of scale in consumption. In particular, the common view that large households with many children are poor relative to small households (such as those comprising the elderly) is shown to be highly non‐robust.     

Devaluation and pass-through in indebted and risky economies

This paper develops a structural general equilibrium model to analyse the pass-through from devaluation to producer and consumer prices in Emerging Market Economies (EMEs). Simulation analysis shows that balance-sheet effects created by capital market imperfections and the home bias shrink the impact of devaluation on both types of internal prices. This finding helps explain why pass-through to internal prices is low in EMEs. It also shows that, for benchmark values of the parameters, devaluation remains a good device to modify the real exchange rate and to mitigate the negative impact of external shocks in EMEs.     

Evolution of market shares with repeated purchases and heterogeneous network externalities

We investigate how market shares change when a new, superior technology exhibiting network externalities is introduced in a market initially dominated by an old technology. This is done under the assumption that consumers are heterogeneous in their valuation of technology quality and network externalities and that goods are not (perfectly) durable and thus have to be bought repeatedly. When both technologies are unsponsored, the old technology dominates when the quality difference is small, and it disappears when the quality difference is large. When the new technology is sponsored, the relationship between the quality difference and the long-run market share of the new technology is non-monotonic and the old technology always continues to exist.

Consumption externalities with endogenous time preference

This paper shows that in a model with inelastic labor supply, consumption externalities have impacts on stationary consumption and capital. The key element in observing the effects of consumption externalities on stationary consumption and capital is the endogeneity of the time preference rate, which depends on future-oriented resources rather than on private consumption. We conclude that when individuals experience jealousy, they become more impatient, leading to a lower level of capital stock and a higher level of consumption relative to those of the social optimum, while when they experience admiration, these relationships are reversed. We examine an optimal tax policy that replicates the socially optimal path in the centrally planned economy. Finally, using numerical analysis we explore how this economy evolves through time.      

Convergence,technological interdependence and spatial externalities: a spatial dynamic panel data analysis

This study adopts a spatial dynamic panel data approach and spatial quasi-maximum likelihood to re-estimate the speed of growth convergence in 91 countries based on technological interdependence and spatial externalities. We perform a conditional Lagrange multiplier test for spatial error dependence and find some differences to previous studies. First, the switch from a cross-sectional to a dynamic panel data framework enables the estimated rate of conditional convergence to be higher, more accurate and more appropriate for realistic and theoretical expectations. Second, the spatial Durbin model (SDM) is a general form of simplified model that considers spatial error correlation, and its likelihood ratio test for the theoretical model of ‘learning by doing’ effect provides further evidence. Finally, statistical tests find that spatial correlation not only occurs in each variable, but also appears in the error term. Thus, the SDM does not exist in the assumptions associated with the spatial error, which are not necessarily correct.     

Openness,productivity and growth in the APEC economies

The 1980s and 1990s have witnessed the emergence of many Asian economies as important traders in the world. How has openness to trade and investment affected productivity and growth performance in those economies? This question is often tackled with the traditional growth regression method. However, the findings in the existing literature are still inconclusive. This paper proposes an alternative approach which is employed to examine the impact of openness on the sources of productivity and growth in the APEC economies. Specifically, the proposed technique distinguishes technological progress (innovation) from efficiency changes (catch-up) and attempts to isolate the influences of openness on these two distinct factors. The findings in this study may help gain fresh insight into the relationship between openness and productivity and growth performance in the APEC economies.First revision received: July 2001/Final revision received: May 2003The author thanks two anonymous referees for very helpful comments.     

Spatial welfare economics versus ecological footprint: modeling agglomeration,externalities and trade

A welfare framework for the analysis of the spatial dimensions of sustainability is developed. It covers agglomeration effects, interregional trade, negative environmental externalities, and various land use categories. The model is used to compare rankings of spatial configurations according to evaluations based on social welfare and ecological footprint indicators. Five spatial configurations are considered for this purpose. The exercise is operationalized with the help of a two-region model of the economy, that is, in line with the ‘new economic geography.’ By generating a number of numerical ‘counter-examples,’ it is shown that the footprint method is inconsistent with an approach aimed at maximum social welfare. Unless environmental externalities are such a large problem that they overwhelm all other components of economic well-being, a ‘spatial welfare economic’ approach delivers totally different rankings of alternative land use configurations than the ecological footprint.      

Mean-Gini analysis of stochastic externalities: The case of groundwater contamination

The mean-Gini approach is used to analyze stochastic externalities generated by agricultural production. The model addresses the problem of groundwater pollution caused by excessive fertilizer application. Inherent in the mean-Gini approach to expected utility maximization is a two-fold value: the simplicity of the two-parameter mean-variance model and satisfaction of necessary and sufficient conditions for stochastic dominance. Price and quantity policy recommendations to control externalities are formulated based upon the relative assessment of uncertainty by the regulatory authority and the farmers. Using the Gini as a measure of risk allows for the quantification of control policy measures under differentiated risk aversion and multiple sources of pollution. The model shows that when producers underestimate uncertainty, quota policies restricting fertilizer are more efficient than tax policies in reducing groundwater contamination.Work on this paper was carried out when visiting the University of Maryland. Financial aid for the work was provided by the USDA ERS-NRED under a cooperative agreement between the Department of Agricultural and Resource Economics, University of Maryland, and the USDA — Economic Research Service — Natural Resource Economics Division, I am grateful to John Miranowski and Darrell Hueth for that support. I am indebted as well to Lana Shalit, who helped me revise the paper.