Elasticity Of Utility Research Articles

ε‐ces preferences and trade

AbstractKimball preferences possess properties that make them a powerful tool for multi‐sector applied general equilibrium. While they are homothetic, they also can be made arbitrarily close to constant elasticity of substitution (ces) preferences, thereby sharing some of their properties ‘by continuity’. We develop a trade model which brings together traded and nontraded sectors, variable markups, and costly trade for this rich class of homothetic preferences. We characterize the consequences—for both sectors—of trade liberalization in traded sector. Numerical simulations for a calibrated version of the model reveal that the elasticity of utility with respect to trade costs is about 25%–27%, depending on whether traded and nontrade goods are complements or substitutes.

Optimal Reciprocal Import Tariffs Under Variable Elasticity of Substitution

We explore the impact of reciprocal, specific or ad valorem, import tariffs on welfare among N symmetric countries (a free-trade agreement)—using the standard Krugman’s one-sector trade model, with unspecified variable-elasticity preferences (mostly under decreasing elasticity of utility). Without transport costs, any tariff is harmful, a specific import subsidy (export tariff) can be welfare-improving, whereas ad valorem tariffs or subsidies are always harmful. Under transport costs, a small ad valorem tariff can be beneficial; moreover, under sufficiently high transport costs, both kinds of tariffs can be become beneficial. The reason is mitigated distortion: excessive entry under decreasingly elastic utility.

Monopolistic competition model: The impact of technological innovation on equilibrium and social optimality

This paper considers a monopolistic competition model with the endogenous choice of technology in the closed economy case. Our aim is to obtain the comparative statics of the equilibrium and socially optimal solutions with respect to the technological innovation parameter that affects costs. The key findings are the following: consumption and investments in productivity both increase with the growth of technological innovation; the behavior of the equilibrium variables depends on the elasticity of demand only; the behavior of the socially optimal variables depends on the elasticity of utility only; finally, the behavior of the equilibrium and socially optimal variables does not depend on the properties of the costs as a function of investments in R&D.

Endogenous Market Structures and Welfare

I characterize microfounded endogenous market structures with Bertrand and Cournot competition and perform welfare analysis generalizing the Mankiw-Whinston condition for excess entry. The impact of market leaders on welfare is reconsidered, with a number of policy implications about strategic investments, vertical contracts, bundling, mergers and more. The neutrality of consumer surplus holds only when utility is homothetic. Under quantity competition, aggressive (accommodating) leaders increase consumer surplus if the elasticity of utility is decreasing (increasing) in consumption. This provides general rules to evaluate mergers and abuse of dominance issues in antitrust policy.

Agglomeration effect and tax competition in the metropolitan area

This paper analyzes tax competition between a central city and a suburban city in a metropolitan area allowing migration. We compare the local government’s tax policies both in the closed economy and in the open economy. Then, we investigate how the agglomeration effects influence the migration in equilibrium and examine the centripetal forces and the centrifugal forces in the metropolitan area. We also investigate the efficiency of the market equilibrium. It is found that each government has a dominant strategy in determining tax rate in a closed economy. The population distribution depends on the housing lot’s and public good’s elasticity of utility in an open economy. The tax rates of both cities depend on the marginal productivity of the public good in the central city. It is shown that less concentration on the central city occurs in the equilibrium.

Commitment and Discretion in Health Care Policy Making

Abstract This paper analyzes the welfare effect from government sponsored insurance under two policy regimes for reimbursement levels – the first under which policy makers commit to a specific reimbursement schedule, the second which allows discretion in setting reimbursement schedules. We find that prices and quality will differ depending on which policy regimen is followed. We are able to identify a level for the policy maker’s elasticity of utility with respect to its policy tool under which government insured patients are unambiguously better off with policy commitment. The ordering of welfare is reversed if the elasticity of utility is reversed. In either case, privately insured patients may be better or worse off.

Is sustainable growth optimal?

This paper analyzes sustainable growth in a stochastic environment, with human extinction as a possible outcome. The basic constraint of sustainability is that consumption never decreases over an infinite horizon, which requires that the probability of extinction be maintained at zero. We show that this problem can be examined in a standard optimal-growth model. Under certain conditions, the solution of this problem is a corner solution with probability of survival equal to one, at the cost of economic growth. These conditions depend on the initial development level and on the elasticity of utility with respect to consumption. In some circumstances, which depend on the social discount rate, optimal-growth paths do not exist. In these situations, the sustainable-growth concept has a clear autonomy with respect to the usual optimality criterion.