Showing papers in "Journal of Economics in 1998"
TL;DR: In this article, the authors show that if the tax payment per worker is held constant, it cannot be ruled out that a lower marginal tax rate leads to an increase in employment.
Abstract: In the framework of an efficiency-wage model, Hoel [Journal of Economics (1990) 51: 89–99] argues that a reduction in the marginal income-tax rate reduces employment. The present note shows that this result depends on how the tax reform is assumed to change the burden per worker. If the tax payment per worker is held constant, it cannot be ruled out that a lower marginal tax rate leads to an increase in employment.
243 citations
TL;DR: In this article, tax-policy measures within a two-sector endogenously growing economy with elastic labor supply were analyzed, and it was shown that a higher pollution tax as well as a revenue-neutral environmental tax reform boost economic growth, whereas a tax on capital, consumption or labor reduces the long-term growth rate of the economy.
Abstract: This paper analyzes tax-policy measures within a two-sector endogenously-growing economy with elastic labor supply. Pollution is either modeled as a side product of physical capital used as a production factor in the final-good sector or as a side product of production. The framework allows us to analyze the consequences of isolated tax changes or of a revenue-neutral environmental tax reform for economic growth. Although pollution does not directly affect production processes, it can be shown that a higher pollution tax as well as a revenue-neutral environmental tax reform boost economic growth, whereas a tax on capital, consumption, or labor reduces the long-term growth rate of the economy.
88 citations
TL;DR: In this article, the authors explore the market certainty equivalence of risky government revenue and find that if the state returns to each household its own tax-revenue risks, equivalence will be re-established as in certainty models.
Abstract: This paper focuses on the design of a consumption tax in a world of capital risk. The certainty literature discusses two standard options, namely the cash flow method and the pre-payment method (i.e., the wage tax), and finds the two approaches to be equivalent. Models that consider capital risk (via asset choice) reach different conclusions. This discrepancy arises in part due to a different choice of the social discount rate. In light of the failure of the discount-rate argument to resolve the issue at hand, we explore the market certainty equivalence of risky government revenue. We let revenue risks stay in the private sector, and examine the market value of the feasible transfer (e.g., in the form of a public good) back to households. We reach three broad conclusions. First, we find that if the state returns to each household its own tax-revenue risks, equivalence will be re-established as in certainty models. Next, we show that if the state engages in intergenerational risk sharing (e.g., through a system of stochastic tax transfers), the wage tax cannot be construed to be a valid pre-payment alternative to the cash flow or a modified wage-tax-ation system. Efficient risk allocation across generations under a cash flow tax (or, one that includes future capital gains as well as wages in the tax base) leads to a Pareto improvement over the simple wage tax. Finally, a major policy implication follows; in order to be practicable, a consumption tax would have to be implemented via registered savings accounts much in the fashion of the Canadian registered retirement savings plans program rather than through the pre-payment route.
83 citations
TL;DR: In this article, the authors consider a model in which firms first choose process R&D expenditures and then compete in an output market, and they show that the symmetric equilibrium under competitive competition is sometimes unstable and that two asymmetric equilibria must also exist.
Abstract: We consider a model in which firms first choose process R&D expenditures and then compete in an output market. We show the symmetric equilibrium under R&D competition is sometimes unstable, in which case two asymmetric equilibria must also exist. For the latter, we find, in contrast to the literature that total profits are sometimes higher with R&D competition than with research joint venture cartelization (due to the cost asymmetry of the resulting duopoly in the noncooperative case). Furthermore, these equilibria provide another instance of R&D-induced firm heterogeneity.
68 citations
TL;DR: In this paper, a social-welfare (illfare) function framework is applied to compare two demographic groups as to the severity of their unemployment experience, based on the assumption that for each individual the disutility of unemployment is an increasing and convex function of spell length.
Abstract: A social-welfare (illfare) function framework is applied to compare two demographic groups as to the severity of their unemployment experience. This is based on the assumption that for each individual the disutility of unemployment is an increasing and convex function of spell length. The very concept of spell length and its distribution, however, is not unambiguous. In contrast to previous literature which focuses exclusively on the “interrupted spell length in a stock of unemployed”, we stress the usefulness of the concept of “complete spell length in a cohort of unemployed”. We establish an equivalence relationship between second-degree dominance in the cohort and first-degree dominance in the stock. For specific illfare functions the disutilityU(x) when applied to the cohort and the disutilityU′(x) when applied to the stock will produce the same value of aggregate welfare (illfare).
48 citations
TL;DR: In this article, the Tobin portfolio shift effect in the wealth-is-status and the spirit-of-capitalism models of growth is demonstrated, showing that higher inflation leads to higher capital stock in the long run, and inflation increases the endogenous-growth rate of the economy.
Abstract: This paper demonstrates the unambiguous existence of the Tobin portfolio-shift effect in the wealth-is-status and the spirit-of-capitalism models of growth. Namely, higher inflation leads to higher capital stock in the long run, and inflation increases the endogenous-growth rate of the economy.
45 citations
TL;DR: The authors showed that the menu-cost model implies that prices adjust asymmetrically to nominal demand shocks and that the asymmetry is linked to the elasticity of demand as well as menu costs.
Abstract: In this paper we demonstrate that the menu-cost model implies that prices adjust asymmetrically to nominal-demand shocks and that the asymmetry is linked to the elasticity of demand as well as menu costs. These implications are tested using manufacturing and retailing panel data for the OECD countries. The empirical results give some support for the menu-cost model.
44 citations
TL;DR: In this article, the authors developed a model in which the spillover of R&D is a consequence of a rational investment in imitation, and the model incorporates the innovator's choice between patenting and secrecy as a protection device.
Abstract: The paper develops a model in which the spillover of R&D is a consequence of a rational investment in imitation. The model incorporates the innovator's choice between patenting and secrecy as a protection device. The analysis demonstrates that an increase in patent breadth always discourages resorting to secrecy, whereas the influence of increased patent life is the opposite with large spillovers. An increase in patent life can also reduce innovative activity with large spillovers. Under endogenous imitation, short patents are socially optimal.
40 citations
TL;DR: In this paper, a two-country model where a monopolist producing in one country can choose between export and foreign direct investment was considered, and it was shown that both the research choice and the multinational choice had a positive effect on consumers' welfare.
Abstract: The paper examines how investment in research influences the form of foreign expansion chosen by the firm, and vice versa. We consider a two-country model where a monopolist producing in one country can choose between export and foreign direct investment. We assume process innovation, where the cost-reducing technological innovations are an outcome of the firm's investment in R&D. The role of technology transfer costs is explored. The model shows that, with low costs of technology transfer, there is a two-way link between the firm's R&D effort and multinational expansion. We also prove that both the research choice and the multinational choice have a positive effect on consumers' welfare in both countries.
38 citations
TL;DR: In this paper, the impact of changes in the relative standard in a short-run and long-run equilibrium is analyzed for an industry consisting of identical firms under perfect competition, and the influence of the demand and supply side on an optimal standard can be demonstrated.
Abstract: The paper considers relative standards which limit the level of emissions per unit of output. The representative firm is characterized by a cost function describing the actual production process, a separate abatement technology, and the fact that (gross) emissions are proportional to output. At first, the implications of a relative standard and of its marginal change for a single firm are examined. It is shown that the standard cannot be replaced by a corresponding tax. Afterwards a positive analysis is performed for an industry consisting of identical firms under perfect competition. Comparative statics are used to analyze the impacts of changes in the relative standard in a short-run and long-run equilibrium. It turns out that the standard always possesses a price effect. Moreover the relevant factors which govern price, quantity, and profit changes are revealed. Then the paper characterizes the optimal standard for the same framework. A main result is that the first-best allocation can never be obtained by means of a relative standard, even if firms are identical. The influence of the demand and supply side on an optimal standard can be demonstrated since the underlying model is simple and transparent. The resulting market price is compared to social marginal costs. Finally the investigation is extended to monopoly and symmetric oligopoly.
34 citations
TL;DR: In this paper, the authors propose a game-theoretic model to study various effects of scale in an insurance market, where both the buyers and sellers of insurance make strategic bids to determine market price and quantity.
Abstract: We propose a game-theoretic model to study various effects of scale in an insurance market. After reviewing a simple static model of insurer solvency (in which all customers have inelastic demand), we present a one-period game in which both the buyers and sellers of insurance make strategic bids to determine market price and quantity. For the case in which both buyers and sellers are characterized by constant absolute risk aversion, we show that a unique market equilibrium exists under certain conditions. For the special case of risk-neutral insurers, we then consider how both the price and quantity of insurance, as well as other quantities of interest to public-policy decision makers, are affected by the number of insurance firms, the number of customers, and the total amount of capital provided by investors.
TL;DR: The incompatibility between avoiding the repugnant conclusion and the Pareto-plus principle is fundamental and not restricted to the commonly used population principles is shown in this paper, where the authors examine the nature of this trade-off.
Abstract: It is well-known that there is a trade-off among the properties of population principles that are used to make social evaluations when the number of people in the society under consideration may vary. The commonly used principles either lead to the repugnant conclusion (which is the case for classical utilitarianism), or they violate the Pareto-plus principle and related properties (average utilitarianism is an example of such a principle). This paper examines the nature of this trade-off and shows that the incompatibility between avoiding the repugnant conclusion and the Pareto-plus principle is fundamental and not restricted to the commonly used population principles.
TL;DR: In this article, the authors extend the standard model of private provision of public goods by including consumption externalities to characterize a situation in which economic activities pollute the environment and show that international income transfers in both directions can improve the global environmental quality as well as the welfare of each country.
Abstract: In this paper, we extend the standard model of private provision of public goods by including consumption externalities to characterize a situation in which economic activities pollute the environment. We consider a case in which there are an industrial country which can afford to invest in the environment and a developing country which cannot. Then, we show that international income transfers in both directions can improve the global environmental quality as well as the welfare of each country. We also show that the results have important implications for policies such as official development assistance or the assignment of tradable emission permits.
TL;DR: In this paper, the authors investigated the impact of privatization in a shirking model of efficiency wages and found that without trade unions, privatization lowers wages and raises employment, output, and profits, while effort and productivity effects depend on the employees' risk aversion.
Abstract: The impact of privatization is investigated in a shirking model of efficiency wages. Without trade unions, privatization — modeled as a stricter control of employees — lowers wages and raises employment, output, and profits, while effort and productivity effects depend on the employees' risk aversion. However, for a utilitarian monopoly union, facing a company characterized by a constant-elasticity labor-demand schedule, privatization raises efficiency wages. If privatization is modeled as a stronger profit orientation, wages, effort, and labor productivity will rise, while employment will shrink in a wage-setting firm. Again, wage and employment effects can be reversed in the case of wage negotiations.
TL;DR: In this article, the authors extended the basic endogenous-growth model by Barro and studied the growth and welfare effects of fiscal policy for the competitive economy and the growth rate of the social optimum.
Abstract: This note extends the basic endogenous-growth model by Barro [Journal of Political Economy (1990) 98: S103–S125]. It is supposed that the government pays lump-sum transfers to the representative household or levies a lump-sum tax, besides financing public investment. Growth and welfare effects of fiscal policy are studied for the competitive economy and the growth rate of the social optimum is compared with the one of the competitive economy.
TL;DR: In this article, it is argued that low-skilled workers have an incentive to escape to the unofficial sector if welfare benefits come too close to the net wage in the official sector.
Abstract: It is often argued that low-skilled workers have an incentive to escape to the unofficial sector if welfare benefits come too close to the net wage in the official sector. Upper limits of welfare benefits often serve as an instrument to ensure a sufficiently high income differnetial between sectors. However, if unofficial-sector income is insecure, and if a change of sectors is costly, an option value of working in the official sector has to be taken into account. This option value reduces the incentive for lowly skilled workers to give up official-sector jobs. Upper limits of welfare benefits might therefore be defined less restrictively.
TL;DR: In this article, the authors considered a dynamic three-sector dual-economy model where the technology transfer takes place from the foreign enclave to the labor-intensive domestic enclave and analyzed the long-run equilibrium and the comparative steady-state effects.
Abstract: We consider a dynamic three-sector dual-economy model when the technology transfer takes place from the foreign enclave to the labor-intensive domestic enclave. The long-run equilibrium and the comparative steady-state effects are analyzed. It is shown that the policy of subsidization to the foreign enclave may satisfy the conflicting tasks of raising national income and lowering unemployment simulataneously in the long run. Subsidization to a domestic enclave does not satisfy both the objectives.
TL;DR: In this paper, the authors examine two questions in asymmetric Cournot and Bertrand oligopoly with a demand shock and show that social welfare increases in Cournot competition and consumer surplus decreases in Bertrand competition.
Abstract: This paper examines two questions in asymmetric Cournot and Bertrand oligopoly with a demand shock. Under which conditions is information sharing a subgame-perfect equilibrium? What is the welfare effect when firms are better off? Given these questions, the normal assumptions in the earlier literature can be relaxed in three ways: demand functions can be asymmetric; a demand shock can affect firms differently; distributions of the demand shock and information signals can be arbitrary. Under these general assumptions, the answer to the first question is: every firm's response to the demand shock is stronger when all firms have perfect information than when one firm does so alone; the answer to the second question is: social welfare increases in Cournot competition, and consumer surplus decreases in Bertrand competition.
TL;DR: In this paper, a balanced growth model with finitely many processes, a uniform rate of profits, and a given composition of final demand is considered, and two types of equilibria are distinguished, "black" and "white": the color of an equilibrium is defined by the relative sign of two determinants associated with the operated methods.
Abstract: We consider a balanced-growth model with finitely many processes, a uniform rate of profits, and a given composition of final demand. Two types of equilibria are distinguished, “black” and “white”: the color of an equilibrium is defined by the relative sign of two determinants associated with the operated methods, and can be interpreted as a local property of a cross-dual dynamic process. Under standard economic assumptions, and flukes apart, the number of white equilibria exceeds that of black equilibria by one. In particular the total number of long-term equilibria is odd.
TL;DR: In this paper, the authors characterize the optimal path of the primary surplus that leads to the achievement of this Maastricht target using optimal-control theory and determine an upper bound of the public-debt-to-GDP ratio above which no retrenchment policy becomes effective.
Abstract: The reduction of government debt to 60% of the GDP in order to satisfy the requirements of the Maastricht Treaty for participation in the European Monetary Union is one of the primary economic-policy goals for most of the European Union countries. The first aim of the present paper is to characterize the optimal path of the primary surplus that leads to the achievement of this Maastricht target. Using optimal-control theory we are able to determine an upper bound of the public-debt-to-GDP ratio above which no retrenchment policy becomes effective. The second issue taken up is that of the sensitivity analysis with respect to the initial level of the debt-to-GDP ratio, the growth rate of the economy, the interest rate, the inflation rate, and the inverse of the velocity of the monetary base circulation.
TL;DR: In this article, the authors considered an urban foreign enclave with sector-specific foreign capital in an otherwise mobile-capable Harris-Todaro model and considered the taxation of foreign capital.
Abstract: We consider an urban foreign enclave with sector-specific foreign capital in an otherwise mobile-capital Harris-Todaro model. We consider the taxation of foreign capital. A dynamic version of this model is considered. The long-run equilibrium and the comparative steady-state effects are analyzed. We get some interesting effects of reduction in tax rate on foreign capital on the short-run and the long-run equilibrium levels of domestic factor income and national income under some meaningful conditions.
TL;DR: In this article, the authors show that equalizing transfers between individuals with identical tastes can increase total supply of the public good, and that more public goods can be supplied if agents move sequentially rather than simultaneously.
Abstract: We argue that there are interesting examples of privately provided public goods that do not satisfy the assumption of strict normality, and reconsider voluntary-contribution games in a more general framework. We show that, in general, (1) equalizing transfers between individuals with identical tastes can increase total supply of the public good, and (2) more of the public good can be supplied if agents move sequentially rather than simultaneously. These results are in sharp contrast to earlier conclusions derived in the literature under the assumption of strict normality.
TL;DR: In this paper, a model of wage and working-time setting by profit-maximizing firms in a competitive labor market with homogeneous workers is developed, where emphasis is placed on the role played by fixed costs of labor and of workers' varying effectiveness in time.
Abstract: The text develops a model of wage and working-time setting by profit-maximizing firms in a competitive labor market with homogeneous workers. Emphasis is placed on the role played by fixed costs of labor and of workers' varying effectiveness in time. Competition among firms implies a constraint on the utility level associated to the labor contract. The model contributes to explain insiders' rationing and other contemporary stylized facts, and lends itself to a particular approach to the problem of evaluating the consequences of mandatory working-time reductions.
TL;DR: In this article, the authors present a general-equilibrium dynamic Ramsey-type model that can generate endogenous cycle, assuming two different representative agents, borrowers and lenders, and financial intermediaries with inside and outside money.
Abstract: This paper presents a general-equilibrium dynamic Ramsey-type model that can generate endogenous cycle. We assume two different representative agents, borrowers and lenders, and financial intermediaries with inside and outside money. We investigate under which conditions this model presents a cyclical relationship between capital and loans. The sources of endogenous fluctuations in this model come from a credit restriction in the representative-borrower problem.
TL;DR: In this article, a model of multistage R&D patent policy is investigated, where firms choose their levels of research investment at each stage, and all subgame-perfect equilibria of the game are found.
Abstract: In this paper a model of multistage R&D patent policy is investigated. We study the impact of the duration of patent protection for intermediate products on R&D races when the discovery of the final product requires the accomplishment of an intermediate step. Using a multistage model where firms choose their levels of research investment at each stage, we find all subgame-perfect equilibria of the game. We also determine how competition affects a firm's level of research investment at different stages of the R&D competition.
TL;DR: In this paper, the authors use a contingent-claims approach to determine the market value of preventive investments and show that the lower the initial probability of an accident, the greater the value of a reduction in this probability.
Abstract: We use a contingent-claims approach to determine the market value of preventive investments. We show that the lower the initial probability of accident, the greater is the market value of a reduction in this probability. Besides, at initially low probabilities, ceteris paribus, the market gives a higher value to a reduction in accident probability when aggregate (correlated) catastrophic risks rather than independent ones are involved. The reverse occurs at initially high probabilities.
TL;DR: In this paper, an asymmetric game-theoretic static oligopoly model is developed for empirical work on oligopolistic markets. But the model is not suitable for the analysis of individual firms and welfare effects in terms of consumer surplus levels.
Abstract: The purpose of this paper is to develop an asymmetric game-theoretic static oligopoly model suitable for empirical work on oligopolistic markets. Prevailing models in applied research on oligopolistic industries are mainly of the type conjectural variations, Cournot models, although these models are known to be “logically flawed” from a game-theoretic point of view. As an alternative to these, a Bertrand model with three types of asymmetries is developed: firms can be concurrently asymmetric in cost levels and in the amount of product differentiation, where the impact from product differentiation on a firm's quantity demanded is divided into one relative-price component and one size component. This model is solved for different game-theoretic equilibria solutions. The conduct and performance of individual firms can be analyzed, and welfare effects in terms of consumer-surplus levels are calculated on the firm level. The model contains enough structure for direct use in applied research. A simple method for empirical use of the model is proposed, which minimizes the econometric task: By estimatingn+1 demand elasticities, the asymmetric market-demand structure for then firms will be completely specified.
TL;DR: In this article, a two-period model was constructed in which a domestic monopoly firm produces a good given an amount of import of the good, and the monopoly firm faces a capacity constraint with regard to its production level.
Abstract: This paper constructs a two-period model in which a domestic monopoly firm produces a good given an amount of import of the good. In the second period, the monopoly firm faces a capacity constraint with regard to its production level. The production level in the first period sets the maximum quantity for the second period. We investigate the effects of quotas on welfare to examine the economic rationale of the national-security argument for trade protection. Under decreasing marginal costs of a monopoly firm, tightening the import quota may increase the domestic consumer surplus and the social welfare.
TL;DR: In this paper, the authors examined whether neutral intervention operations are a substitute for sterilization operations under the dual-exchange regime from the viewpoint of dynamic adjustment and found that both operations will generate quite different behavior throughout the adjustment process.
Abstract: The purpose of this paper is to examine whether neutral-intervention operations are a substitute for sterilization operations under the dual-exchange regime from the viewpoint of dynamic adjustment. It is found that both operations will generate quite different behavior throughout the adjustment process, although they are substitutable from the viewpoint of insulating money supply from the status of the current account. In addition, we also found that if the monetary authorities either intervene in the financial foreign exchange market or undertake sterilization operations in the open market, the dual-exchange regime will lose its insulation function to external financial disturbances.
TL;DR: In this paper, the authors consider a closed macroeconomy where the monetary authority pursues an inflation target and policy outcomes are the consequence of a Nash game between fiscal and monetary authorities.
Abstract: This paper considers a closed macroeconomy where the monetary authority pursues an inflation target and policy outcomes are the consequence of a Nash game between fiscal and monetary authorities. The specification of the macroeconomic framework is characterized by nonlinearities which lead to multiple equilibria with differing stability properties. Employing a calibrated model and simulations derived using the Mathematica package, the stability properties of the economy and the likely choice of equilibrium are examined. Within this framework, the dynamic consequences of different time discount rates for the fiscal authority are investigated, both in a world of certainty and also in a world of uncertainty. It is shown that, in a world of certainty, it will be optimal to choose the fiscal authority's time discount rate equal to the market rate of interest. However, depending on the degree of uncertainty in evaluating the time discount rates of consumers and of the fiscal authority, it may be appropriate to bias the fiscal authority's discount rate above or below the expected interest rate.