Preferential trade areas, multinational enterprises, and welfare

Abstract.  The effects of preferential trade areas (PTAs) on the investments by multinational enterprises and their implications for the welfare of members and non‐members are studied in a model with two types of firms: national firms and multinational firms. In the presence of multinational activity PTAs can create new investment as well as divert investment from non‐members to members. Both affect the welfare of members positively. More interestingly, if the investment creation effect of a PTA is sufficiently strong, then the PTA could be welfare enhancing for non‐members as well. JEL classification: F2, L1     

Russian Railways Reform and the Problem of Non‐discriminatory Access to Infrastructure

Abstract Restructuring of the Russian railways system is well under way. Among the policies just now coming into practice are two that are standard in railways restructuring in other countries: the provision of access to the infrastructure by independent train operating companies, and assurances of non‐discriminatory access terms for such companies. However, 'discrimination'– in the traditional economic sense – is a standard and often welfare‐enhancing pricing strategy for the recovery of fixed costs in a sector, like railways, with declining average costs. If competition regulators are unable to distinguish between discrimination that harms competition and discrimination designed only to recover fixed costs, policy makers in Russia and elsewhere will face a choice between large government subsidies and large welfare losses. In these circumstances, other restructuring models should be considered.     

Pensions and fertility incentives

Abstract.  This paper discusses the welfare implications of a pay‐as‐you‐go pension reform by introducing a child benefit in an endogenous fertility setting. In the model of a small open economy, higher fertility is associated with a reduction of lifetime labour supply. The optimum share of fertility‐related pensions is always below unity, but generally positive. The former is true, since individuals do not take into account the impact of their labour supply choice on the parent generation. It is demonstrated that child allowances are equivalent to fertility‐related pensions as instruments to achieve the optimum allocation. JEL classification: H23, H55, J13     

Medicare for all or medicare for none? A macroeconomic analysis of healthcare reform

In this study, I develop a novel general equilibrium life cycle model composed of finitely-lived households that differ according to age, skill level, and access to employer-provided health insurance. After introducing a “Medicare for all” health insurance system to the model, I examine how the welfare response to this policy change will differ according to household characteristics. Then, I compare this system to a completely privatized health insurance system that achieves universal health insurance coverage through the creation of utilization-based premium subsidies. In general, both systems tend to improve the welfare of young households at the expense of old households. However, when using average value-of-life as the primary measure of welfare, Medicare for all either benefits unskilled households at the expense of skilled households, or makes both worse off. In contrast, the privatized system improves the average value-of-life of all household groups, regardless of skill level or prior access to employer-provided health insurance.     

Product differentiation, cost‐reducing mergers, and consumer welfare

Abstract.  Cost synergies are an explicitly recognized justification for a two‐firm merger, and empirical techniques are now widely used to assess the impact of cost‐reducing mergers on prices and welfare in the post‐merger market. We show that if the merger occurs in a vertically product differentiated market, then the merger will lead to a reduction in product offerings that limits the usefulness of pre‐merger empirical estimates. Indeed, we further show that in such markets, two‐firm mergers will typically lead to higher prices regardless of the merger's cost savings. JEL classification: L10, L41     

Optimal fixed cost subsidies in Melitz-type models

This paper analyzes the reallocation and welfare effects of fixed cost subsidies in a Melitz-type model. In a closed economy, the planner trades off product variety and average productivity effects. Neither subsidies on entry fixed costs nor on operating fixed costs are welfare enhancing. These results reflect the Pareto optimality of the laissez faire equilibrium. In a “small” open economy à la Demidova and Rodríguez-Clare (J Int Econ 78(1):100–112, 2009), an entry fixed cost subsidy does not enhance welfare, while a small operating fixed cost subsidy does. Only the latter affects the relative attractiveness of exporting. The average firm thus realloactes labor from export to domestic activity and operates at a smaller scale, which allows for a larger increase in domestic product variety than in the closed economy.     

Migration, Jobs and Welfare: A General Equilibrium Analysis

Immigration has been an important element of the economic development of many countries, although in recent years there has been an intensification of doubts about the benefits of further immigration. This paper brings some simple general‐equilibrium modelling tools to bear on the question of the employment and welfare effects of immigration. Employment and taxation effects, rather than wage and distributional effects, are found to be crucial in determining the impact of immigration on the welfare of factor‐owners in the receiving country. These employment effects depend on the type of immigration and the substitutability or complementarity relationships between immigrant labour and unemployed labour. Certain types of immigration are shown to be Pareto‐improving for the receiving country, without any need for lump‐sum transfers. Simple numerical simulations illustrate the results.     

Strategic Trade Policy with Heterogeneous Costs

The paper examines optimal strategic trade policy under a heterogeneous cost oligopoly. The first‐best policy involves a structure of firm‐specific export subsidies/taxes in which the government favours the most efficient firms only with a sufficiently low social cost of public funds.     

Government Subsidies of R&D in a Product Cycle Framework: US–Japan Simulations

The welfare effects of R&D subsidies are examined using a product cycle model of trade between two developed countries. Simulations are done for steady-state welfare in Japan and the USA for high- and low-skilled labor over different combinations of subsidy rates. Japanese subsidies to R&D usually benefit Americans owing to an increase in product variety. However, because Japanese R&D reduces wages in the US high-tech sector, American high-skilled workers are hurt if Japanese subsidies are too large. Large American subsidies may cause Japanese innovation to cease. However, Japanese steady-state welfare would be maximized in this case.     

Education Subsidies, Social Security and Growth: The Implications of a Demographic Shock

We develop a three-period overlapping-generations model in which individual decisions about education are the engine of growth. In this setting, we investigate the normative role of education subsidies and old age pensions. Calibrating this model on empirical data, it is shown that the case for positive pension benefits is rather weak on the optimal path. An important part of education subsidies should be financed by lump-sum taxes on retirees. We also examine how these transfers should be adjusted in the presence of a baby boom-baby bust demographic shock. It turns out that an appropriate policy could be to increase education when the baby-boom generation is at work. Labor productivity will then be higher when aging peaks so that the pension bill can be financed without reducing welfare for the baby-bust generations.
JEL classification : O 41; J 24; E 62     

Child allowances,educational subsidies and occupational choice

This paper examines the effects on occupational choice and capital accumulation attributable to government policies of child allowances and educational subsidies. We show that multiple steady states may arise under these two policies, with club convergence occurring, and the initial condition being of relevance, if the tax rate of labor income for skilled labor is fairly high. Under a policy of child allowances, an increase in the tax rate is found to raise the quantity of children, but lower the quality of adults; however, under a policy of educational subsidies, with an increase in the tax rate, corresponding increases are found in both the quantity of children and the quality of adults. For developed countries, introducing child allowances may improve or hurt the welfare while introducing educational subsidies is welfare improving.     

MEDICAID AND THE LABOR SUPPLY OF SINGLE MOTHERS: IMPLICATIONS FOR HEALTH CARE REFORM

The Medicaid expansions and health insurance subsidies of the Affordable Care Act (ACA) change work incentives for single mothers. To evaluate the employment effects of these policies ex ante, I estimate a model of labor supply and health insurance choice exploiting variation in pre‐ACA Medicaid policies. Simulations show that single mothers increase their labor supply at the extensive and intensive margin by 12% and 7%, respectively, uninsurance rates decline by up to 40%, and an average family's welfare improves by 1,600 dollars per year. Health insurance subsidies and not Medicaid expansions mostly drive these effects.     

Free Entry, Quasi-Free Trade, and Strategic Export Policy

This paper analyzes governments' choices between strategic export subsidies and free trade as a commitment when firms are free to enter or exit in response to these choices. Entry and exit is treated as a discrete process. Within the context of a four-stage game, two types of equilibria emerge: a quasi-free-trade equilibrium in which one of the two governments commits to free trade, while the other has a Nash equilibrium subsidy that is zero and bilateral export subsidies. Concerning welfare effects, if fixed costs are large enough, both countries achieve a welfare gain relative to free trade.     

Are migrants more skilled than non‐migrants? Repeat,return, and same‐employer migrants

Abstract.  I examine the determinants of inter‐state migration of adults within western Germany, using the German Socio‐Economic Panel from 1984–2000. Migrants who do not change employers represent one‐fifth of all migrants and have higher education and pre‐move wages than non‐migrants. Skilled workers thus have a low‐cost migration avenue that has not been considered in the previous literature. Other migrants are heterogeneous and not unambiguously more skilled than non‐migrants. I confirm that long‐distance migrants are more skilled than short‐distance migrants, as predicted by theory, and I show that return migrants are a mix of successes and failures. Most repeat migration is return migration. JEL classification: J6     

ENTREPRENEURSHIP AND JOB LOCK: THE INTERACTION BETWEEN TAX SUBSIDIES AND HEALTH INSURANCE REGULATIONS

This paper demonstrates that health insurance tax subsidies increase self‐employment, but that the effect differs substantially based on nongroup market regulations and health status. Using the Panel Study of Income Dynamics, I show that households that cannot purchase health insurance because of a preexisting condition do not respond to tax subsidies in states in which they would be denied insurance, but they respond strongly in states in which they face risk‐rated premiums. Households respond similarly to tax subsidies in states with nongroup market regulations similar to those established by the Affordable Care Act, regardless of preexisting conditions. (JEL H20, I13, J30)     

How do market reforms affect China's responsiveness to environmental policy?

A large percentage of total investment in China is allocated by the central government at below-market interest rates in pursuit of non-economic objectives. This has resulted in low rates of return and a high number of non-performing loans, threatening the future health of the Chinese economy. As a result, reform of capital markets is a high priority of the Chinese government. At the same time, the country is implementing various environmental policies to deal with serious pollution issues. In this paper we ask how reforms of the capital market will affect the functioning of a carbon tax. This allows us to assess how China's willingness to join global efforts to reduce carbon emissions is influenced by China's current efforts to reduce investment subsidies. We compare the costs of a carbon tax in a reformed economy with the costs of a carbon tax in the current subsidized economy. We find that in the subsidized economy the tax-interaction effect dampens the effect of a carbon tax resulting in smaller reductions in emissions than what would result in a reformed economy. Importantly, we also find that the effect on economic welfare from a carbon tax is lower in the subsidized economy; in fact, for lower levels of reductions, the carbon tax is actually welfare improving. These results have important implications for an economy undergoing economic transition. The carbon tax rate required to achieve a certain level of emission reductions will be higher in an economy with capital subsidies. However, the welfare implications of the tax indicate that the current system with capital subsidies is highly distorting implying that there is a high efficiency cost for the non-economic objectives the government is pursuing by maintaining this system of subsidies.     

The capability theory and welfare reform

This essay examines the foundation of welfare reform in the light of Amartya Sen's capability theory and the implications of his theory in the context of contemporary industrialized society. A method to formulate the equality of capabilities and to capture its philosophical meaning is explored from the viewpoint of a fair distributive justice; two concepts of freedom, well‐being freedom and agency freedom ; and the process of human life.     

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.