General Equilibrium Effects Research Articles

The Dutch disease revisited: absorption constraint and learning by doing

This paper revisits the Dutch disease by analyzing the general equilibrium effects of a resource shock on a dependent economy, both in a static and dynamic setting. The novel aspect of this study is to incorporate in one coherent framework two distinct features of the Dutch disease literature that have previously been analyzed in isolation: capital accumulation with absorption constraint, and productivity growth induced by learning-by-doing. The result of long run exchange rate appreciation is maintained in line with part of the Dutch Disease literature. In addition, a permanent change in the employment shares occurs after the resource windfall, in favor of the non-traded sector and away from the traded sector growth engine of the economy. In other words, in the long run both of the classic symptoms of the Dutch Disease remain in place.

Reform, informal sector, and extortion

AbstractInformal economy involving unrecorded, unregistered, extra‐legal activities employs majority of the work force in the developing world. Such extra‐legal existence of informal production is facilitated through extortion by agents of political forces in power. Also, extortion activities themselves constitute an informal segment. Full‐scale general equilibrium consequences of such institutions are rarely discussed in the literature. We develop a well‐specified general equilibrium model to explore the possible consequences of reform. Economic reform may have an expansionary effect on the number of extortionists. Depending on capital mobility and factor intensity assumptions informal output and informal wage may increase.

Rational Inattention and Dynamics of Consumption and Wealth in General Equilibriumm

This paper derives the general equilibrium effects of rational inattention (or RI; Sims 2003, 010) in a model of incomplete income insurance (Huggett 1993, Wang 2003). We first show that, under the assumption of CARA utility with Gaussian shocks, the permanent income hypothesis (PIH) arises in steady state equilibrium due to a balancing of precautionary savings and impatience. We explore how the introduction of RI can help the model fit the joint equilibrium dynamics of consumption, income, and wealth. We then contrast RI with habit formation and show that the two models make very different general equilibrium predictions, and that RI is closer to the data. We finally show that the equilibrium welfare costs of incomplete information due to RI are relatively low within the CARA-Gaussian setting.

Quinoa quandary: Cultural tastes and nutrition in Peru

Using a model of household food demand that incorporates regional preferences (tastes) for culturally appropriate food, I investigate whether tastes for quinoa in the Puno region of Peru reduced household nutrition intakes when quinoa prices dramatically increased between 2004 and 2012. Adapting a model from Atkin (2013) and utilizing data from a national Peruvian household survey (ENAHO), I am able to deconstruct regional changes in household nutrition over time into several general equilibrium effects; in particular, I isolate the effect of regional tastes for quinoa on nutrition outcomes. This effect is identified by an exogenous spike in quinoa prices driven by international demand for quinoa. While I find evidence that regional tastes for quinoa do exist in the Puno region, these tastes do not have a statistically significant impact on nutrition outcomes. My results lend support to the conjecture that tastes for culturally appropriate food do not meaningfully affect household nutrition if the food in question is a sufficiently small component of a household’s overall diet.

Fiscal Federalism, Grants, and the U.S. Fiscal Transformation in the 1930s

We propose a theory of tax centralization and intergovernmental grants in politico-economic equilibrium. The cost of taxation differs across levels of government because voters internalize general equilibrium effects at the central but not at the local level. The equilibrium degree of tax centralization is determinate even if expenditure-related motives for centralization considered in the fiscal federalism literature are absent. If central and local spending are complements, intergovernmental grants are determinate as well. Our theory helps to explain the centralization of revenue, introduction of grants, and expansion of federal income taxation in the U.S. around the time of the New Deal. Quantitatively, the model can account for the postwar trend in federal grants, and a third of the dramatic increase in the size of the federal government in the 1930s.

A General Equilibrium Framework for Integrated Assessment of Transport and Economic Impacts

The use of separate transport and economic models in urban planning provides a limited view of economic impacts, restricts the testing of network design options and lengthens the planning process. Furthermore, the standard methodology for economic appraisal assumes partial economic equilibrium and cannot determine the distribution of impacts from the transport sector to households. Computable general equilibrium (CGE) models can capture general equilibrium effects and measure welfare at the household level, but mostly lack integration with transport models and do not represent all trip generators. This paper develops an integrated traffic assignment and spatial CGE model in nonlinear complementarity form, casted as a framework for economic appraisal of urban transport projects. The CGE submodel generates commuting, shopping and leisure trips as inputs into the transport submodel, which then assigns trips to the network according to user equilibrium. The resulting travel times then feed back into household prices and freight margins. Households and firms fully account for travel times in decisions on where to shop, how much labour to supply and where to source production inputs. Calibration and applications of the model are demonstrated for 14 regions and 2 industries across Sydney using GAMS/PATH on the NEOS server. The welfare of various network improvements is measured using equivalent variations. The model can be calibrated to external strategic transport models, and be extended to simulate additional trip generators and land-use.

DISPLACEMENT EFFECTS OF LATVIAN RURAL DEVELOPMENT PROGRAMME 2007-2013

Periodic evaluation of EU Member States Rural Development Programme (RDP) specific policy interventions is considered crucial in policy development. The main reasons for the evaluation of specific policy interventions are the assessment of a programme’s impact, the improvement of programme management and administration, identification of necessary improvements in the delivery of interventions and meeting the accountability. The core question to be answered in programme evaluation is whether the stated objectives are accomplished by particular intervention (support or „treatment” provided to programme participants). The main problem in the process of evaluation is the assessment of the counterfactual outcome by modelling the situation where treatment is absent. The counterfactual outcome has to be estimated by statistical methods as it is usually not observed. General equilibrium effects occur when a programme affects units other than its participants. The most important possible impacts are the substitution effect and the displacement effect. Displacement effects are unplanned and indirect. They usually play a more important role in the evaluation at the programme level than in the evaluation of RDP individual measures. Displacement effect is the programme effect that occurs in a programme area at expense of another area. It takes place if farms located in one geographical area, which is not a subject to RD support, becomes adversely affected by a support provided to farms located in another geographically area. The existing study provides an assessment of the displacement effects on the employment in unsupported units at the programme level after the net effects on the employment calculated at the measure level are aggregated over the entire programme.

Deflating Asset Price Bubbles with Leverage Constraints and Monetary Policy

We develop an experimental production economy to study the general equilibrium and welfare effects of speculation and stabilization policies. Participants playing the role of household-investors interact in labor, output, and, in some treatments, asset markets. Without the ability to trade assets, participants over-supply costly labor to acquire saving. The presence of asset markets improves welfare by allowing investors to substitute labor income for speculative gains. Asset prices deviate substantially from fundamental value. Leverage constraints that prevent investors from borrowing for speculation are ineffective at stabilizing asset prices. Households often circumvent the constraints by excessively supplying labor and generating increased wealth which can be used for speculation. Wealth inequality is worsened due to endogenously higher interest accumulated by borrowers and savers. An asset inflation targeting policy fuels initial asset price growth but, as interest rates rise rapidly, effectively deflates asset price deviations. With learning, the policy stabilizes asset prices and consequently interest rates, which enhances welfare and reduces inequality. We develop a model of heterogeneous expectations to rationalize our experimental findings.ur experimental findings.

Financial development and occupational choice

In this paper we incorporate occupational choice in the style of Lucas (1978) with an additional dimension of heterogeneity in wealth into a model of banking. We use this model to better understand how development of the financial sector affects misallocation and occupational choice. Our model demonstrates three channels through which enforcement of credit contracts are tied to misallocation. Improvements in enforcement shifts the risks in variance of output from banks toward entrepreneurs; consequently, improved enforcement can serve as a form of risk sharing in the absence of state contingent loans. Second, reduction in the risk for bankers improves the appeal of banking and the general equilibrium effect shrinks the margin of intermediation, reducing the importance of initial wealth distributions. Finally, improved enforcement leads to more relaxed credit constraints, as banks are willing to lend more to entrepreneurs, further reducing the importance of initial wealth in occupational choice.

Public health and economic risk assessment of waterborne contaminants and pathogens in Finland

This study shows that a variety of mathematical modeling techniques can be applied in a comprehensive assessment of the risks involved in drinking water production. In order to track the effects from water sources to the end consumers, we employed four models from different fields of study. First, two models of the physical environment, which track the movement of harmful substances from the sources to the water distribution. Second, a statistical quantitative microbial risk assessment (QMRA) to assess the public health risks of the consumption of such water. Finally, a regional computable general equilibrium (CGE) model to assess the economic effects of increased illnesses. In order to substantiate our analysis, we used an illustrative case of a recently built artificial recharge system in Southern Finland that provides water for a 300,000 inhabitant area. We examine the effects of various chemicals and microbes separately. Our economic calculations allow for direct effects on labor productivity due to absenteeism, increased health care expenditures and indirect effects for local businesses. We found that even a considerable risk has no notable threat to public health and thus barely measurable economic consequences. Any epidemic is likely to spread widely in the urban setting we examined, but is also going to be short-lived in both public health and economic terms. Our estimate for the ratio of total and direct effects is 1.4, which indicates the importance of general equilibrium effects. Furthermore, the total welfare loss is 2.4 times higher than the initial productivity loss. The major remaining uncertainty in the economic assessment is the indirect effects.

Air Quality and Manufacturing Firm Productivity: Comprehensive Evidence from China

An emerging literature estimates air pollution’s effects on productivity but only for small groups of workers of particular occupations or firms. To provide more comprehensive estimates necessary for nationwide policy analysis, we estimate effects for a nationally representative sample of China’s manufacturing firms from 1998 to 2007 and capture all channels by which pollution influences productivity. We use thermal inversions as an instrument to estimate the causal effect of pollution on productivity. A one μg/m3 decrease in PM2.5 increases productivity by 0.82% with an elasticity of -0.44. Firms respond by hiring more workers attenuating the elasticity to -0.17. Using the differential effect of China’s accession into the WTO on coastal versus inner regions, we estimate the causal effect of output on pollution (elasticity of 1.43) to simulate the dynamic, general-equilibrium effects of PM2.5 yielding an elasticity of -0.28. An exogenous 1% decrease in PM2.5 nationwide increases annual productivity by CNY 35.9 thousand for the average firm and CNY 5.7 billion or 0.039% of GDP nationally.

Energy Subsidy Reform and Poverty in Arab Countries: A Comparative CGE‐Microsimulation Analysis of Egypt and Jordan

This study simulates the macroeconomic and distributive impacts of real proposed (by local policy makers) energy subsidy reforms in Egypt and Jordan. To do that, we develop a dynamic CGE‐microsimulation model that is able to reconcile the general equilibrium effects of the reform and the individual‐ and household‐specific distributive effects. While the nature of the proposed reforms differs in the two countries, the study underscores the need, in both countries, for reform to generate fiscal savings to boost private investment and increase economic growth. It also shows that the reform alone would further exacerbate poverty through increased consumer prices. However, a modest reinvestment of fiscal savings into cash transfers creates a win‐win scenario of reduced poverty without significantly sacrificing the fiscal and growth benefits from the reform. Impacts (prices, growth, fiscal savings, poverty) are greater in Egypt due to the extent of proposed reforms and the fact that a larger share of the energy products concerned are consumed directly by households, while in Jordan the major effects come from the increase in intermediate input costs which generate a fall in the aggregate demand and, so, in labor demand.

The general equilibrium impacts of unemployment insurance: Evidence from a large online job board

During the Great Recession, U.S. unemployment benefits were extended by up to 73weeks. Theory predicts that extensions increase unemployment by discouraging job search, a partial equilibrium effect. Using data from the large job board CareerBuilder.com, I find that a 10% increase in benefit duration decreased state-level job applications by 1%, but had no robust effect on job vacancies. Job seekers thus faced reduced competition for jobs, a general equilibrium effect. Calibration implies that the general equilibrium effect reduces the impact of unemployment insurance on unemployment by 39%.

The Intended and Unintended Impacts of a Merit-Based Financial Aid Program for the Poor: The Case of Ser Pilo Paga

We study a recent merit-based financial program for the poor in Colombia. We exploit sharp eligibility rules in household wealth and standardized test scores to identify the causal effect of financial aid on postsecondary enrollment and academic performance. We find large positive effects on postsecondary enrollment on both the extensive and intensive margins. Immediate enrollment doubled among eligible students, making the SES gap in enrollment disappear among top students. At the intensive margin, the program shifted students from low-quality institutions into higher-quality institutions, and from public to private colleges. We also observe significant general equilibrium effects in secondary and postsecondary education. The program promoted class diversity at top private schools, and significantly raised student quality at these institutions (but not public institutions). Demand for top private education shifted to the right, driving admission rates downward and increasing entry competition at these institutions, thus raising stratification by ability. However, program beneficiaries did not fully crowd out high-SES students from top private schools because supply also expanded. Finally, the program seems to have raised high school exit test performance among recent cohorts with relatively poor backgrounds.

Does It Pay to Know Prices in Health Care?

Consumers rarely know the price of medical care before they consume it. I use variation in the timing of access to a new source of price information to show how access to and search for price information leads consumers to pay significantly less for care. I provide suggestive evidence that insurance coverage inhibits the use of price information, rationalizing the relatively low rates of search. The results indicate that availability of price information could have large impacts on prices even in the absence of general equilibrium effects. (JEL D82, D83, G22, I11, I13)

Why Is the Long-Run Tax on Capital Income Zero? Explaining the Chamley-Judd Result

Why is it optimal not to tax capital income in the long-run in Chamley (1986) and Judd (1985)? This paper demonstrates that the answer follows standard intuitions from the commodity tax literature. In the steady state, Engel curves for consumption are linear in labour earnings, irrespective of the utility function adopted. Thus, in the steady state, consumption demands in each period become equally complementary to leisure over time. This renders taxes on capital income redundant, since they cannot alleviate distortions from taxing labour income. The argument that taxes on capital income should be zero because distortions explode in finite time is relevant only if restrictions are imposed on the utility function. We show how these restrictions imply that consumption demands in each period are equally complementary to leisure over time. We also demonstrate that the optimal tax on capital income is zero irrespective of whether the gross interest rate is endogenous. This contradicts arguments that the entire burden of capital income taxes is shifted to labour through general equilibrium effects on the interest rate.

Firm Responses to Targeted Consumer Incentives: Evidence from Reference Pricing

Abstract As health insurance benefit designs become more innovative, fully understanding provider responses to consumer cost-sharing is important. This paper examines the effect of reference pricing, an insurance program that increases consumer cost sharing when consumers choose high-priced providers. We use geographic variation in the population covered by the program to estimate both supply-side responses to changes in consumer incentives and the general equilibrium effects of the program. We find that the program spurs provider price competition and leads to sizable decreases in medical spending. Our estimates suggest that the program leads to a 2.1% decrease in provider prices for three outpatient surgical services, which leads to a $5.8 million reduction in medical spending. Because the majority of the savings occur through provider price reductions, 78% of this reduction is in the form of an $4.5 million positive externality that benefits a population not subject to the program. Similar to the “generics paradox” for pharmaceuticals, we find that the program leads to price reductions for low-priced providers but has no effect on prices for high-priced providers.

A Framework for Separating Individual Treatment Effects from Spillover, Interaction, and General Equilibrium Effects

This paper suggests a causal framework for disentangling individual level treatment effects and interference effects, i.e., general equilibrium, spillover, or interaction effects related to treatment distribution. Thus, the framework allows for a relaxation of the Stable Unit Treatment Value Assumption (SUTVA), which assumes away any form of treatment-dependent interference between study participants. Instead, we permit interference effects within aggregate units, for example, regions or local labor markets, but need to rule out interference effects between these aggregate units.Borrowing notation from the causal mediation literature, we define a range of policy-relevant effects and formally discuss identification based on randomization, selection on observables, and difference-in-differences. We also present an application to a policy intervention extending unemployment benefit durations in selected regions of Austria that arguably affected ineligibles in treated regions through general equilibrium effects in local labor markets.

Secular Trends and Technological Progress

Can technological progress explain secular stagnation? We show how an excess of savings over investment arises when innovative production requires creative human capital rather than physical investment. Innovating firms cannot own human capital so they need less investment financing, but need to ensure the commitment of human capital by rewarding it gradually over time. Over time, as innovators are granted a rising income share, the supply of investable assets falls. The general equilibrium effect is declining corporate leverage, a gradual fall in interest rates and rising asset valuations. The concomitant rise in house prices and wage inequality leads to higher household leverage and mortgage default risk. We show that only a redistributive productivity shift can account for a fall in physical investment in the context of falling interest rates, consistent with major economic and financial trends since 1980.

On the Optimal Design of Place-Based Policies: A Structural Evaluation of EU Regional Transfers

We quantify general equilibrium effects of place-based policies in a multi-region framework with mobility, trade and agglomeration economies. Using detailed data on EU transfers, we infer the local effects of different transfer types on productivity, income and transportation cost. Based on these estimates and the general equilibrium model we derive the spatial distribution of economic activity and the resulting aggregate welfare effects if (i) no transfers were paid and taxes set to zero, (ii) transfers were distributed uniformly, (iii) transfers were welfare-optimally distributed. Characterizing the optimal distributions, we reveal complementarities between transfer types and between transfers and local endowments.