Welfare effects of 1992: A general equilibrium assessment for EC and EFTA countries

In this paper production, trade and welfare effects of European integration are discussed, with particular emphasis on the effects for the EC and EFTA. Insights from previous partial and general equilibrium analyses of the internal market are reviewed, and new model simulations are presented. In addition to the standard experiments of 1992 — as reduced trade costs and as full market integration — for the EC alone, and for the European Economic Area (EEA), an intermediate case, with full integration in the EC but only lower trade costs between the EC and EFTA, is analysed. All cases show that EFTA will benefit significantly from freer trade and closer integration with the EC. With regard to non-European regions, the simulations of European integration show some degree of trade diversion, but stylized model experiments indicate that a successful outcome of the Uruguay-round may more than offset the trade-diverting effects of 1992.     

Return migration, wage differentials, and the optimal migration duration

In simple static models, migration increases with the wage differential between host- and home-country. In a dynamic framework, and if migrations are temporary, the size of the migrant population in the host country depends also on the migration duration. This paper analyses optimal migration durations in a model which rationalises the decision of the migrant to return to his home country, despite persistently higher wages in the host country. The analysis shows that, if migrations are temporary, the optimal migration duration may decrease if the wage differential grows larger. Using micro data for Germany, the second part of the paper provides empirical evidence which is compatible with this hypothesis.     

Why are some people (and countries) more protectionist than others?

We analyze two cross-country data sets that contain information on attitudes toward trade as well as a broad range of socio-demographic and other indicators. We find that pro-trade preferences are significantly and robustly correlated with an individual's level of human capital, in the manner predicted by the factor endowments model. Preferences over trade are also correlated with the trade exposure of the sector in which an individual is employed: individuals in non-traded sectors tend to be the most pro-trade, while individuals in sectors with a revealed comparative disadvantage are the most protectionist. Third, an individual's relative economic status has a very strong positive association with pro-trade attitudes. Finally, non-economic determinants, in the form of values, identities, and attachments, play an important role in explaining the variation in preferences over trade. High degrees of neighborhood attachment and nationalism/patriotism are associated with protectionist tendencies.     

Economic integration and the profitability of cross-border mergers and acquisitions

The 1990s was a decade of increased economic integration. The decade also witnessed a sharp increase in cross-border mergers and acquisitions. From a theoretical perspective, the increase in international mergers in more integrated economies is rather puzzling. It is a well-established result that due to the “business stealing effect”, mergers in integrated markets are not likely to be profitable. A reasonable conjecture would therefore be that closer integration of markets would reduce the attractiveness of cross-border mergers and acquisitions. The present paper demonstrates that this is not necessarily the case: Economic integration may trigger cross-border acquisitions by reducing the business stealing effect and by reducing the reservation price of the target firm. The paper thus provides explanations to the observed increase in cross-border mergers in a world of more integrated economies.     

Evaluating investment projects in the presence of sectoral linkages1

In this paper we develop a framework to assess the economic impact of foreign investment projects. If investment projects interact with other industries in the host economy, either by buying inputs locally or by selling their own product to local downstream firms, they can create sectoral linkages. The expansion of upstream and downstream industries can feed back to the project's own industry leading to a further expansion of the local industry. We study the circumstances under which investment projects lead to the creation of sectoral linkages and characterize the factors that determine the project's welfare impact. We link analytical findings to case studies undertaken for the EBRD.     

Endogenous structural change and crisis in a multiple time-scales growth model

The slow and endogenous twist of economic macro-structure makes up an important evolutionary feature of capitalist economies, and may be at the root of structural crisis. In this line, a Goodwinian growth model with increasing returns and profit-sharing that tries to picture a simple scenario of the seventies crisis is considered. It is shown that the exhaustion of the Kaldor-Verdoorn “productivity law” can entail, in a nonlinear framework, a “catastrophic” bifurcation from a “high” to a “low” growth path. Slow/fast dynamical systems then allow one to formalize a multiple time-scales dynamics where the growth path is shaped by the structural framework in which it takes place, but has also a long -un feedback. Structural change and crisis appear as long term and endogenous outcomes.     

A corporate balance-sheet approach to currency crises

This paper presents a general equilibrium currency crisis model of the ‘third generation’, in which the possibility of currency crises is driven by the interplay between private firms’ credit-constraints and nominal price rigidities. Despite our emphasis on microfoundations, the model remains sufficiently simple that the policy analysis can be conducted graphically. The analysis hinges on four main features (i) ex post deviations from purchasing power parity; (ii) credit constraints a la Bernanke-Gertler; (iii) foreign currency borrowing by domestic firms; (iv) a competitive banking sector lending to firms and holding reserves and a monetary policy conducted either through open market operations or short-term lending facilities. We derive sufficient conditions for the existence of a sunspot equilibrium with currency crises. We show that an interest rate increase intended to support the currency in a crisis may not be effective, but that a relaxation of short-term lending facilities can make this policy effective by attenuating the rise in interest rates relevant to firms.     

Tariffs, licensing and market structure

This paper challenges the conventional wisdom that exclusive owners of an advanced technology are always better off when producing as a monopolist than when competing against another firm. Competition against a less-efficient firm weakens the power that a host country can exert on the incumbent in the form of its tariff policy. We show that this gives a motive for a monopolist to license its technology to another foreign firm. A host country gains more from increased competition if it can induce the foreign incumbent to transfer technology to the host country firm. We show that the host country can do so by tariff commitment. We also discuss the implications of bargaining under licensing and Bertrand competition in the product market. Hence, this paper qualifies and extends the recent work of Kabiraj and Marjit [Protecting consumers through protection: The role of tariff-induced technology transfer. European Economic Review 47, 113-124].     

Competition in taxes and performance requirements for foreign direct investment

Tax incentives offered to attract firms engaged in foreign direct investment are often tied to performance requirements such as domestic content restrictions or adherence to environmental standards. The tax competition literature has repeatedly shown that competition between municipalities for mobile firms tends to drive taxes to low levels. One would expect a comparable result for burdensome performance requirements. Despite this, the evidence suggests that while taxes have indeed been driven down, performance requirements are as popular as ever. We explain this seeming conundrum by showing that in the presence of spillovers, binding performance requirements can act as a coordination device for firms. In equilibrium, municipalities choose performance requirements, which maximize joint surplus from investment. Competition between municipalities then transfers this surplus to firms via tax subsidies.