DISCOUNT RATE FOR PUBLIC INVESTMENT IN A MONETARY DISEQUILIBRIUM ECONOMY*

In this paper, we explore the social rate of discount for public investment in a monetary overlapping generations model which allows for market disequilibria arising from price and wage rigidities. Financing public investment with a lump-sum tax on the younger generation, borrowing and money supply, the government maximizes the sum of generational utilities discounted by a social rate of time preference. For the social welfare optimum, it is required to take the boundary-maintaining policy by making demand for output equal to supply. In a stationary state, we show that (i) the social rate of discount on the Keynesian-repressed inflation boundary should be the weighted average of the social rate of time preference and the market rate of interest, the weights depending on the amount of private investment crowded out by public investment, and (ii) on the Keynesian-classical boundary it should be a modified version of the weighted average rule, containing an extra term which represents the marginal opportunity cost of public investment through its impact on labour employment.     

Credit Rationing,Income Exaggeration,and Adverse Selection in the Mortgage Market

We examine the role of borrower concerns about future credit availability in mitigating the effects of adverse selection and income misrepresentation in the mortgage market. We show that the majority of additional risk associated with “low‐doc” mortgages originated prior to the Great Recession was due to adverse selection on the part of borrowers who could verify income but chose not to. We provide novel evidence that these borrowers were more likely to inflate or exaggerate their income. Our analysis suggests that recent regulatory changes that have essentially eliminated the low‐doc loan product would result in credit rationing against self‐employed borrowers.     

PRICING,CAPACITY, AND CONSTRUCTION BOUNDARY OF A CONGESTIBLE HIGHWAY WITH AN ELASTIC DEMAND: SOCIAL OPTIMUM,SECOND BEST,PRIVATIZATION, AND VERTICAL DISINTEGRATION*

This paper uses a spatial model to analyse first‐ and second‐best policies, impacts of privatization and vertical disintegration of a congestible highway with elastic demand. The paper also uses simulation methods to analyse the welfare cost of a uniform‐toll constraint. Results show, inter alia, that the social optimum requires the marginal cost of highway extension to be equal to the net consumer benefit at the boundary, while in the second‐best case the aggregate user cost must be measured in terms of the shadow price. In turn, a profit‐maximizing firm equates the marginal extension cost to the markup revenue at the boundary.     

OPTIMAL INCOME TAXATION,DYNAMIC EFFICIENCY,AND THE SOCIAL COST OF PUBLIC EXPENDITURE*

An interest income tax and a publicly provided private good are introduced into the Hamada overlapping-generations model consisting of heterogeneous individuals where the government can use a wage-income tax, an identical lump-sum transfer, and the public debt. Two interesting problems are studied: (a) what relation exists between the optimal interest rate and the population-growth rate and (b) how dynamic efficiency affects the optimal-decision rules of taxes and the publicly provided good. We show that (i) if the government can (not) tax the interest income, then the optimal interest rate is (not) equal to the population-growth rate, (ii) without the availability of the interest tax the difference between these two rates is mainly caused by the income-distribution effect of the public debt and (iii) the dynamic efficiency effects on the optimal rules of the wage tax and the publicly provided good depend on not only such a difference but also the average substitute-complement relations among leisure, the second-period consumption and the publicly provided good.     

HOW DO JAPANESE HEALTH INSURANCE SOCIETIES FINANCE THEIR CONTRIBUTIONS TO THE HEALTH SERVICE SYSTEMS FOR THE ELDERLY?*

We examine how Japanese health insurance societies finance (or distribute) the costs (or cost savings) from an increase (or decrease) in contributions to the Health Service Systems for the Elderly. Three ways are possible: (i) adjusting the premiums of the employee or employer; (ii) providing an optional benefit; and (iii) adjusting reserves by the change in contribution. We find that more than six‐sevenths of the changes are associated with changes in reserves, followed by premiums, and finally optional benefits. The increase in the premium mostly shifted to employees, while employees enjoyed a nearly 60% decrease in total premium.     

MULTIPLIER EFFECTS OF PUBLIC SERVICES IN A TWO‐SECTOR MODEL OF MONOPOLISTIC COMPETITION

In a two‐sector model of monopolistic competition, this paper explores what impacts an expansion of government spending on public services has on national income. In the short run where entry and exit of firms are restricted, a rise in government spending on services like health care (which has only a role of substituting for market services) increases national income, but that on services like elderly care (which has not only this role but also another role of contributing to home production of services) decreases it. These results are reversed in the long run. Welfare effects of public services are also examined.     

SCHOOL CHOICE AND STUDENT SORTING: EVIDENCE FROM ADACHI WARD IN JAPAN*

We examine whether the school choice programme of public junior high schools in Adachi ward has caused student sorting and has thus increased the differences in scores between the schools. We find that students are sorted in the sense that the students living in the school attendance areas where there is a higher proportion of high‐status occupations are more likely to select private schools even after the introduction of the school choice programme, or they select public schools with higher scores. Adachi's average scores relative to the Tokyo average have improved, while the between school differences in scores have not expanded.