Comparative Static Framework Research Articles

Cooperative Solutions for Network Games with Quadratic Utilities

This paper analyzes the public goods model with linear quadratic utilities in which each player determines the intensity of the activity they take, which can also be described as a network game with local payoff complementarity, as well as positive payoffs and negative quadratic costs. Players play cooperative games with each other, and cooperative solutions when the game is the planner’s optimal concern for the collective, describing each player’s optimal action in maximizing the individual and public interest. They are implemented programmatically to facilitate simple computations. In these games, players’ activities can be linked to their positions in the local interaction network. The cooperative actions taken by any player are proportional to their Katz-Bonacich centrality in a complementary linear quadratic game. In other words, higher Katz-Bonacich centrality, higher action. We then use a comparative statics framework to analyse the effect that changes in individual variables have on cooperative actions.

History vs. equilibrium one more time: how Keynes’s General Theory foundered on the rocks of comparative statics

Keynes’s message, that full employment was an unlikely outcome for a capitalist economy, did not survive scrutiny in a comparative-statics framework. But this was the fault of the framework, not the message. The main criticisms leveled at the idea of an underemployment equilibrium were that, as the money wage rate fell, the Keynes effect would lead to an expansion of investment demand (Modigliani) and that the real-balance effect would lead to an expansion of consumption demand (Haberler and Pigou). Neither of these criticisms survives when real-time changes in the money wage replace static comparisons of equilibria with different money wages. The lesson is that dynamic adjustment is key to understanding the workings of a capitalist economy.

Bayesian Comparative Statics

We study how information affects equilibria and welfare in games. For an agent, more precise information about an unknown state of the world leads to a mean-preserving spread of beliefs. We provide necessary and sufficient conditions to obtain either a non-increasing-mean or a non-decreasing-mean spread of actions whenever information precision increases for at least one agent. We apply our Bayesian comparative statics framework to study informational externalities in strategic environments. In persuasion games, we derive sufficient conditions that lead to extremal disclosure of information. In oligopolistic markets, we characterize the incentives of firms to share information. In macroeconomic models, we show that information not only drives the amplitude of business cycles but also affects aggregate output. Finally, in a novel application, we compare the demand for information in covert and overt information acquisition games.

A Primer on the Welfare Effects of Regulatory Reforms in Network Industries

Starting from an industry where production is provided by a public monopolist, we look at the effects on the consumers' surplus of a sequence of reforms in network industry. Using a simple comparative statics framework, we find indifference conditions in consumers' surplus between respectively public monopoly, unregulated private monopoly, regulated private monopoly, vertically disintegrated monopoly, duopoly and liberalized market. The results are determined by the relative size of the x-inefficiencies of the public monopolist, allocative inefficiencies of private monopoly, the cost of unbundling and costs related to establishing a competitive market.

A micro founded approach to the valuation of benefits of freight travel time savings

This article investigates how freight travel time savings should be taken into account in cost–benefit analysis. The general setting of this article is to suppose that transport operators face a constraint on minimum travel time and to examine, in a comparative static framework, what is occurring when this minimum travel time is altered. The analysis takes into account three aspects of freight travel time savings that deserve specific attention and have been, to our knowledge, neglected in existing approaches: the distinction between make to order and make to stock production contexts, the distinction between travel time and transportation time and finally the impact of transport time savings on wider logistics organisation. In this context, the present contribution analyses how this change in the minimum travel time affects the different economic agents' tradeoffs between the duration and cost of the various operations used in production and transport activities. Our findings show that the benefits of travel time savings are at least equal to the sum of travel operating costs reduction, decrease of generalised immobilisation costs of the good (depreciation, financial immobilisation costs, and costs of damage insofar as are related to transport duration). We also draw the implications of this analysis for the valuation of projects that save travel time for freight.

Have Mining Royalties Been Beneficial to Australia?

The “Henry tax review,” Australia's Future Tax System (Commonwealth of Australia, Department of Treasury, ), recommended that royalties be abolished and replaced by a resource rent tax. Regarding abolition, AFTS drew on KPMG Econtech () (http://taxreview.treasury.gov.au/content/html/commissioned_work/downloads/KPMG_Econtech_Efficiency%20of%20Taxes_Final_Report.pdf), a major report commissioned by Treasury to investigate the efficiencies of a wide range of Australian taxes, using MM900, a proprietary CGE model. That report estimated that the average excess burden of royalties and crude oil excise, taken together, was 50 cents per dollar of public revenue, and that the marginal excess burden, at 70 cents, was the highest of all imposts except those on gambling. We argue that the KPMG Econtech long‐run comparative static framework was inappropriate for policy purposes. By ignoring that mining is largely foreign owned, the model missed a large “rectangle” of gain – which we calculate using a partial equilibrium model. More fundamentally, the finding that royalties do harm is difficult to reconcile with the widely accepted claim that a rise in the terms of trade is beneficial. Using a partial equilibrium model, we conclude that royalties are likely to have brought substantial benefits to Australians, and that higher royalty rates would have increased both economic welfare as well as public revenue.

Consumer surplus and the reform of network industries: a primer

Starting from an industry where production is provided by a public monopolist, we observe the effects of a sequence of reforms within the network industry on consumer surplus. Using a simple comparative statics framework, we find the indifference conditions for the consumer surplus under the following regimes: a public monopoly, an unregulated private monopoly, a regulated private monopoly, a vertically disintegrated monopoly, a duopoly and a liberalized market. The results are determined by the relative size of the x-inefficiencies of the public monopolist, allocative inefficiencies of the private monopoly, the cost of unbundling and the costs related to establishing a competitive market.

New Entrant and Closure Provisions: How do they Distort?

Provisions to endow new entrants with free allowances and to require closed facilities to forfeit allowance endowments are ubiquitous in the EU Emissions Trading Scheme, but a new design feature in cap-and-trade systems. This essay seeks to explore, within a comparative statics framework, the effect of these provisions on agent behavior in output and emissions markets assuming profit maximization. The main conclusion is that the principal effect is on capacity. The effect of the resulting over-capacity on output markets is to reduce output price and to increase output. The effect on emissions markets is more ambiguous in that it depends on the emission characteristics of the new capacity, existing capacity, and the capacity not retired, and the distribution of the excess capacity among these categories.

Investment Risks and Returns of Hybrid Pension Plans: Sponsor and Member Perspectives

This paper analyzes pension plan costs and investment strategies in the context of alternative hybrid pension plans which are optimal either from the perspective of the plan sponsor or the beneficiaries. The focus is in particular on how the introduction of minimum and maximum limits for pension benefits as well as minimum guarantees and caps on the return of the members' individual investment accounts affect investment decisions and plan costs. Within a comparative static analysis framework, it is shown that for low to medium risk portfolios, minimum benefit guarantees tend to be more expensive than minimum return guarantees while for the latter costs increase exponentially with investment risk. The study also finds that the portfolio choice of the sponsor and the beneficiaries shows substantial differences depending on the exact plan design and the beneficiaries' risk aversion. Combining minimum return guarantees and caps on investment returns emerged as a possible means to reduce such differences, to share investment risks and returns more equally between sponsor and beneficiaries, and to keep pension plan costs under control.

Implications of Optimal Investment Policies for Hybrid Pension Plans: Sponsor and Member Perspectives

This paper analyzes pension plan costs and investment strategies in the context of alternative hybrid pension plans which are optimal either from the perspective of the plan sponsor or the beneficiaries. The focus is in particular on how the introduction of minimum and maximum limits for pension benefits as well as minimum guarantees and caps on the return of the members' individual investment accounts affect investment decisions and plan costs. Within a comparative static analysis framework, it is shown that for low- to medium-risk portfolios, minimum benefit guarantees tend to be more expensive than minimum return guarantees while for the latter costs increase exponentially with investment risk. The study also finds that the portfolio choice of the sponsor and the beneficiaries shows substantial differences depending on the exact plan design and the beneficiaries' risk aversion. Combining minimum return guarantees and caps on investment returns emerged as a possible means to reduce such differences, to share investment risks and returns more equally between sponsor and beneficiaries, and to keep pension plan costs under control.

Investigating the linkage between infrastructure and regional development in India: era of planning to globalisation

The paper tries to find out the role played by economic and social infrastructure facilities in economic development across Indian states over the last quarter century. Infrastructure services have been indexed with the help of principal component analysis. Both parametric and non-parametric estimates are done to assess per capita income disparity. A comparative static framework is developed for testing the nature of movement of the development trajectory in income infrastructure plane over different time spans. The findings are statistically very significant to warrant new regional policies under the overall framework of globalisation in order to remove rising regional disparities in both infrastructure and income. This has a strong bearing on the success of poverty removal policies under globalisation as the poor are regionally concentrated in such diverse and heterogeneous country.

Increasing the United States Tariff-Rate Sugar Quota for Cuba and Mexico: A Partial-Equilibrium Simulation

Increases in the United States tariff-rate quota for sugar are simulated to determine the impact of Cuban market access and an increased Mexican allotment. The effects on both domestic and international sugar markets, including production, consumption, prices, and trade, are determined and welfare effects identified. This analysis is carried out using a partial-equilibrium simplified world trade model, Modele Internationale Simplifié de Simulation (MISS), which simulates, in a comparative-static framework, the effects of various policy actions.

Productivity, Efficiency and Technological Change in Indian Ports

This paper attempts to find out the relationship between productivity, efficiency and technological change in Indian ports. The use of comparative static framework has proved that Indian ports have witnessed a significant technological metamorphosis in terms of capital use. Increasing use of overhead capital has produced significant improvement in productivities. These findings have important implications for technology policy in the port sector in LDCs and particularly in India. When technology has become truly global and old geographical barriers have been narrowing, future growth of a port is highly contingent upon how fast it accommodates the new technology and improved services.

The Role of Promotion Programs for U.S. Poultry Exports

This study examines the effectiveness of price versus nonprice promotion programs for U.S. poultry exports. A comparative static simulation framework is specified for this purpose. The elasticities needed for the simulation model are estimated using seemingly unrelated regression and time-varying parameter regression techniques. Results from this study indicate that a price subsidy is more effective than nonprice market promotion programs in raising export demand for U.S. poultry.

Impact of Performance Indicators and Labour Endowment on Traffic: Empirical Evidence from Indian Ports

The nineties of the last century have witnessed the emergence of a new role the port infrastructure can play. Governments around the world have undertaken drastic measures for improving the operational efficiency of national ports through institutional reforms. Billions of private capital have been pledged for capacity expansion and service modernisation in the world port system during 1991–1998. Although India has recently opened this sector for private investments, the performance of the port system is not up to the mark. This paper attempts to find out the role played by port performance indicators (derived from principal component analysis) and labour endowment in determining port traffic in a comparative static framework. Even the use of OLS regression has come out with very satisfactory results. Both explanatory variables have been found to exert positive and significant impact upon port traffic. Finally, the use of a time dummy indicates some sort of stagnancy in Indian ports since liberalisation in 1991.

Analyzing the potential for water quality externalities as the result of market water transfers

This article presents a comparative static framework for predicting the water quality outcomes of water trade. The focus is on a comprehensive treatment of water quality processes. Previous work has assumed that reductions in agriculturally induced water quality externalities are an increasing function of irrigation application rates. The comparative static framework used here allows for the possibility that water transfer can result in both positive and negative water quality externalities as the result of dilution, even when the rate of loading decreases. We apply our model to the Owyhee aquifer of eastern Oregon, an area where nitrate concentrations exceeded the EPA standard of 10 ppm in over 30% of area test wells in 1991. In conclusion, we describe conditions when water trade is most likely to generate positive versus negative water quality externalities. We also draw policy conclusions about the kinds of institutional rules best suited to balance trade‐offs between gains to trade, water quality externalities, and transactions costs.

Costa Rica trade liberalization, fiscal imbalances, and macroeconomic policy: a computable general equilibrium model

This paper uses a computable general equilibrium model (CGE) to assess the gains from unilateral trade liberalization in Costa Rica within a comparative statics framework. The paper considers recent economic policies in Costa Rica and the structure of the economy. We then present a brief description of the economic scenarios we intend to analyze, in the context of the current economic situation in Costa Rica. The structure of the CGE is presented and data sources outlined. Simulations scenarios are described in detail and the results analyzed. Relevant policy conclusions are drawn.

Macro-economic analysis of forestry options on carbon sequestration in India

The forestry sector provides a number of climate change mitigation options. Apart from this ecological benefit, it has significant social and economic relevance. Implementation of forestry options requires large investments and sustained long-term planning. Thus there is a need for a detailed analysis of forestry options to understand their implications on stock and flow of carbon, required investments, value of forest wealth, contribution to GNP and livelihood, demand management, employment and foreign trade. There is a need to evaluate the additional spending on forestry by analysing the environmental (particularly carbon abatement), social and economic benefits. The biomass needs for India are expected to increase by two to three times by 2020. Depending upon the forest types, ownership patterns and land use patterns, feasible forestry options are identified. It is found among many supply options to be feasible to meet the `demand based needs' with a mix of management options, species choices and organisational set up. A comparative static framework is used to analyze the macro-economic impacts. Forestry accounts for 1.84% of GNP in India. It is characterized by significant forward industrial linkages and least backward linkage. Forestry generates about 36 million person years of employment annually. India imports Rs. 15 billion worth of forest based materials annually. Implementation of the demand based forestry options can lead to a number of ecological, economic and institutional changes. The notable ones are: enhancement of C stock from 9578 to 17 094 Mt and a net annual C-sequestration from 73 to 149 Mt after accounting for all emissions; a trebling of the output of forestry sector from Rs. 49 billion to Rs. 146 billion annually; an increase in GDP contribution of forestry from Rs. 32 billion to Rs. 105 billion over a period of 35 years; an increase in annual employment level by 23 million person years; emergence of forestry as a net contributor of foreign exchange through trading of forestry products; and an increase in economic value of forest capital stock by Rs. 7260 billion with a cost benefit analysis showing forestry as a profitable option. Implementation of forestry options calls for an understanding of current forest policies and barriers which are analyzed and a number of policy options are suggested.

International Migration in the Presence of Public Goods

This paper presents a broad analysis of how non- migrants are affected by immigration in the presence of public goods. Welfare-effects of migration are first considered in a comparative-static framework which is then supplemented by an analysis of costs and benefits in a more-period-context. This enables a consideration of immigration-induced expansions of the public capital stock on the one hand and its effects on public enlargement and replacement investments on the other.

Effects of Price versus Non-Price Export Promotion: The Case of Cotton

Commodity Credit Corporation (CCC) net expenditures for the cotton program exceeded $2 billion in fiscal 1986, decreased considerably over the 1987 to 1991 period, then climbed to $1.4 billion in fiscal 1992. Net expenditures for the cotton program are estimated at $2.2 billion in 1993 and at $1.7 billion for 1994 (1995 PresidentS Budget Summary). Concern about burgeoning U.S. budget deficits continues to place pressure on policy makers to reduce the cost of farm programs (Heflin). Thus, finding alternative, less-costly methods of providing support to cotton farmers is an important undertaking. Export subsidies have been shown to be a possible means of reducing government costs of domestic farm programs (Duffy and Wohlgenant), but little empirical effort has been expended in examining the potential economic effects of non-price export promotion. Accordingly, the purpose of this article is to provide an estimate of the effects of price versus non-price promotion on U.S. cotton price, domestic use of cotton, exports of cotton, and the cost of cotton programs. A comparative static framework will be used, similar to the model used by Duffy and Wohlgenant, to evaluate a price subsidy for exported cotton.