Relative Price Effects Research Articles

Pareto improving interventions in a general equilibrium model with private provision of public goods

Most of the literature on government intervention in models of voluntary public goods supply focuses on interventions that increase the total level of a public good, which is considered to be typically underprovided. However, an intervention that is successful in increasing the public good level need not benefit everyone. In this paper we take a direct approach to welfare properties of voluntary provision equilibria in a full blown general equilibrium model with public goods and study interventions that have the goal of Pareto improving on the voluntary provision outcome. Towards this end, we study a model with many private goods and non-linear production technology for the public good, and hence allow for relative price effects to serve as a powerful channel of intervention. In this setup we show that Pareto improving interventions generally do exist. In particular, direct government provision financed by “small” , or “local” , lump-sum taxes can be used generically to Pareto improve upon the voluntary provision outcome.

The Drivers of Public Expenditure on Health and Long-Term Care: An Integrated Approach

This paper proposes a framework for projecting public health and long-term care expenditures. It considers demographic and other (non-demographic) drivers of expenditures. The paper extends demographic drivers by incorporating death-related costs and the health status of the population. Concerning health care, the projections incorporate income and the effects of technology cum relative prices. For long-term care, the effects of increased labour participation, reduction of informal care and Baumol's cost disease are taken into account. Using this integrated approach, public health and long-term care expenditures are projected for all OECD countries. Alternative scenarios are simulated, together with sensitivity analysis. Depending on the scenarios, total public OECD health and long-term care spending is projected to increase in the range of 3.5 to 6 percentage points of GDP for the period 2005-2050.

Representing induced technological change in models for climate policy analysis

Induced technological change (ITC), whereby the relative price effects of reducing greenhouse gas emissions stimulate innovation that mitigates the cost of abatement, is both tantalizing to decision makers and challenging to represent in the computational economic and engineering models used to analyze climate change policy. This overview reconciles the divergent views of technology and technological change within different types of models, elucidates the theoretical underpinnings of ITC, introduces the reader to the techniques of their practical implementation, and evaluates the implications for models' results.

Do Higher Wages Cause Inflation?

Much empirical evidence suggests that wage increases do not lead to inflation. This paper demonstrates that a 2-sector dynamic general equilibrium model calibrated to the U.S. economy is able to explain this evidence. We quantify the effect of an increased wage-markup on the inflation rate in both the goods sector and the service sector. The mechanisms we emphasize and quantify are changes in relative prices and monetary policy. We find that our model is successful in explaining the empirical evidence. Quantitatively, the relative price effect is more important than monetary policy in mitigating the effect of higher wage-markups.

Risk Related Non-price Effects of the CAP Arable Crop Regime

This paper seeks to provide an empirical measure of the (absolute and relative) size of the relative price effect, the wealth effect and the insurance effect for a specific policy package: the arable crop regime of the Common Agricultural Policy (CAP) of the European Union (EU).

The Role of ICT in the Global Investment Cycle

Most macroeconomic forecasters underestimated global investment during the late 1990s. One potential reason was that the models they were using were insufficiently disaggregated. In this paper, an empirical model is estimated whose out-of-sample forecasts largely predicted the global investment boom of the late 1990s. The main factor behind the improved model performance is the distinction between investment in ICT assets and investment in other assets, using disaggregated investment data provided by the OECD. In line with previous studies on US and UK investment performance, ICT investment is estimated to be much more responsive to changes in the real user cost of capital. In particular, panel and seemingly unrelated regression (SUR) estimates suggest very strong relative price effects on ICT investment for all G7 countries and Australia. The data also allow an examination of the effects of possible deflator mismeasurement; but within our framework, the measurement of investment using harmonised, rather than national, deflators is not found to have a material impact on forecasting performance.

La declinación relativa de la agricultura en el proceso de desarrollo: alguna evidencia para la economía argentina (1955-2003)

El análisis de las causas que explican la declinación relativa de la agricultura en la economía es uno de los desafíos centrales del desarrollo económico. Sobre el particular, la literatura suele poner énfasis en los argumentos que descansan en el lado de la demanda, tal como la ley de Engel. Más recientemente, estas explicaciones han sido desafiadas por otros enfoques que destacan principalmente las diferencias en las dotaciones de factores (efecto Rybczynski), los cambios en los precios reales del sector agropecuario y las tasas diferenciales del cambio tecnológico, a efectos de explicar este fenómeno. Este trabajo analiza el proceso de transformación sufrido por la economía argentina durante las últimas cinco décadas, a partir de una metodología basada en la teoría de la dualidad y en un modelo que utiliza un mecanismo de corrección de errores, que permite explicar la dinámica de los desequilibrios y los costos del ajuste. Los resultados de las estimaciones sugieren que las caídas en los precios reales agropecuarios habrían sido menos importantes, como fuente de la declinación relativa de la agricultura en el caso argentino, que las diferentes tasas de crecimiento en la productividad observadas en el sector agropecuario y en la economía agregada.

Pareto Improving Interventions in a General Equilibrium Model with Private Provision of Public Goods

Most of the literature on government intervention in models of voluntary public goods supply focuses on interventions that increase the total level of a public good, which is considered to be typically underprovided. However, an intervention that is successful in increasing the public good level need not benefit everyone. In this paper we take a direct approach to welfare properties of voluntary provision equilibria in a full blown general equilibrium model with public goods and study interventions that have the goal of Pareto improving on the voluntary provision outcome. Towards this end, we study a model with many private goods and nonlinear production technology for the public good, and hence allow for relative price effects to serve as a powerful channel of intervention. In this setup we show that Pareto improving interventions generally do exist. In particular, direct government provision financed by small, or local, lump-sum taxes can be used generically to Pareto improve upon the voluntary provision outcome.

The demand for Canadian defence expenditures

This paper presents an analysis of the determinants of the demand for Canadian military expenditures through the estimation of a demand for defence expenditures model for the time period 1952–2001 using, among others, the auto‐regressive distributed lag approach to cointegration (ARDL) to estimate and test cointegration and long run relationships. The findings suggest that Canadian defence spending is determined by NATO's (Europe) defence spending, that of the US to a lesser extent, relative price effects and opportunity cost considerations. In light of the fact that Canada's national, foreign and defence interests are tied to international organizations and bilateral arrangements, the results are not surprising.

Knight Fever - Towards an Economics of Awards

Awards in the form of orders, medals, decorations and titles are ubiquitous in monarchies and republics, private organizations, not-for-profit and profit-oriented firms. Nevertheless, economists have disregarded this kind of non-material extrinsic incentive. The demand for awards relies on an individual's desire for distinction, and the supply of awards on the provision of incentives. Relative price and income effects are shown to be identifiable and strong. A number of empirically testable propositions are formulated. As awards are (at least so far) impossible to measure adequately, empirical tests are carried out using the technique of analytic narratives.

On the Neutrality of Redistribution in a General Equilibrium Model with Public Goods

We analyze a general equilibrium model of a completely decentralized pure public good economy. Competitive firms using private goods as inputs produce the public good, which is privately provided by households. Previous studies on private provision of public goods typically use one private good, one public good models in which the public good is produced through a constant returns to scale technology. Two distinguishing features of our model are the presence of several private goods and non-linear, in fact strictly concave, production technology for the public good. In this more general framework we revisit the question of neutrality of government interventions on private provision equilibrium outcomes. We show that relative price effects, which are absent with a single private good and under constant returns to scale technology for public good production, come to play an important role in our more general framework. Relative price effects provide a powerful channel through which government interventions can bring about redistributive wealth effects, which, in turn, will change equilibrium outcomes. While we confirm that the neutrality result holds for small taxes that involve only the contributing households, we show that contrary to what was shown in the one private good, linear production technology framework, a redistribution in favor of contributors is neither a necessary nor a sufficient condition to increase the level of privately provided public good. In particular, redistributions involving non-contributors only (i.e., without either subsidizing or taxing any contributor) can increase, or decrease, or leave unchanged the public good level. Even taxing a contributor and subsidizing non-contributors can move the public good level in any direction.

Effects of an increase in prescription copayment on utilization of low-sedating antihistamines and nasal steroids.

Health plans are using 3-tier copayment designs and other methods to control utilization that shifts drug costs to plan members. There is a need to determine the effects of increased member cost sharing on drug utilization and drug costs. To assess the impact of a 10 US dollars increase in prescription copayment in a public employer health plan for 2 classes of drugs used for allergic rhinitis. Changes in the number of prescriptions dispensed for 2 therapeutic classes.low-sedating antihistamines (LSAs) and nasal steroids (NSs).were examined 1 year prior to and 1 year after copayment increase. Relative price effects were measured as arc price elasticity, the ratio of the percent change in prescription utilization over the percent change in price, an indicator of how responsive patients are to the copayment increase. Of 8,643 continuously enrolled health plan beneficiaries, 2,150 patients (24.8%) received at least 1 NS or LSA during the 2-year period of the study, from January 1, 1998, through December 31, 1999. An average 10 US dollars increase in copayment per prescription was associated with no statistically significant change in utilization of combined LSA and NS prescriptions, 2.89 per patient in 1998 and 2.94 in 1999 (P = 0.597). Health plan costs for study drugs, unadjusted for inflation, decreased by 16.3% from 86.86 US dollars per patient in 1998 to 72.68 US dollars in 1999 (P = 0.004). Health plan costs per patient per month (PPPM) for all drugs for the 2,150 allergic rhinitis patients decreased by 13% from 41.33 US dollars PPPM in 1998 to 35.93 US dollars in 1999 (P<0.001), and health plan drug costs for all 8,643 members decreased by 13% from 14.93 US dollars per member per month (PMPM) in 1998 to 12.99 US dollars in 1999 (P<0.001). The actual average copayment increase was 7.23 US dollars (a 41% increase) for LSAs, which was associated with a 14.8% increase in utilization of LSAs and an 11.8% increase in the number of patients using LSAs; the number of LSA prescriptions per patient per year was unchanged at 2.68 in 1999 versus 2.61 in 1998 (P = 0.429). The actual average copayment increase was 10.98 US dollars (71%) for NSs, which was associated with an 11.3% decrease in utilization of NSs and a 10.2% decrease in the number of users of nasals steroids in 1999; the number of nasal steroid prescriptions per patient per year was unchanged at 2.05 in 1999 versus 2.07 in 1998 (P =.842). The combined utilization of LSA and NS prescriptions increased by 8.9% following the increase in copayments for these 2 therapeutically interchangeable drugs for allergic rhinitis. LSA prescriptions were less elastic, with an unadjusted arc elasticity of 0.39, while nasal steroid prescriptions were more responsive to the copayment change, with an unadjusted arc elasticity of.0.22. An average 10 US dollars increase in patient cost sharing per prescription (46.9% copayment increase) was associated with an increase in combined utilization of 2 drug classes used for allergic rhinitis (LSAs and NSs) but no change in the number of prescriptions per patient. Health plan costs decreased significantly for allergic rhinitis drugs, all drugs used by allergic rhinitis patients, and all drugs used by continuously enrolled health plan members. NSs exhibited a greater arc price elasticity compared with low-sedating oral antihistamines.

Fragmentation and East Asia's Information Technology Trade

This paper studies the growth and determinants of information technology (IT) trade in the Asia-Pacific region. We argue that the rise of IT trade must be understood within the context of increasing vertical fragmentation of production processes that has occurred over the past two decades. To evaluate this empirically, we estimate a set of pooled bilateral IT export equations for eight Asian countries, the U.S. and the E.U., where FDI inflows are introduced as a proxy for fragmentation. We apply a panel cointegration approach that allows for heterogeneity in short-run dynamics and in fixed effects. Consistent with production fragmentation, we find that the evolution of IT trade can be explained in part by traditional income and relative price effects but also by FDI inflow.

Income taxation when markets are incomplete

We investigate the welfare effects of proportional income taxation in a standard general equilibrium model with incomplete markets (GEI). Formally, our analysis is on the allocative effects of state-contingent income tax reforms. Tax reforms are restricted to be anonymous, publicly and truthfully announced before markets open, and they are required to result in an ex-post constrained efficient allocation. Our main result is to show that there do typically exist contingent tax reforms that are Pareto improving. These reforms, acting directly on the asset span, modify private risk-sharing opportunities. Thus, unlike most of the GEI literature, the type of policy transmission mechanism considered does not rely on second-order, relative spot price effects. Yet, the key welfare effects of our tax reforms are substantially equivalent to those induced through changes in relative spot prices, as, for example, in Geanakoplos and Polemarchakis (1986), Geanakoplos et al. (1990), or in Citanna et al. (2001). Mathematics Subject Classification (2000): 58E17, 46N10, 93B29 Journal of Economic Literature Classification: D52, H21, H24, H25

Price versus Income Effects as Sources of Growth in Government's Share of GDP

A demand-based model of public sector spending is used to identify the economic determinants of the relative size of government in the United States for the period 1949 to 1998. The government's share of GDP is hypothesized to be a function of income growth (Wagner's Law), relative prices for public sector output (Baumol/Beck hypothesis), and several demographic, cyclical, and budget variables. Although nondefense, noninterest government spending as a share of GDP has not grown in recent decades, the results support both income and price explanations of increasing government size. It is shown that the income and price effects are sensitive to the degree of disaggregation used to define government spending shares. Higher relative prices outweigh economic growth as a factor behind increasing shares for government consumption. Economic growth dominates the relative price effect for investment purchases. The two effects are similar for transfer payments.

Nominal and Real Disturbances and Money Demand in Chinese Hyperinflation

This article reexamines the dynamics of hyperinflation by allowing variability in the relative price of capital goods in units of consumption goods that reflects interactions between the real and monetary sectors. The theory generates empirically testable implications that suggest expanding the standard Caganian money demand function to include both anticipated inflation and relative price effects in a nonlinear fashion. Employing data from the post–WW II Chinese hyperinflationary episode, the empirical findings suggest that conventional econometric investigations of money demand during hyperinflation overlook important nonlinear interactions between real and monetary activities and, hence, underestimate the welfare costs of hyperinflation.

A DECOMPOSITION OF GROWTH OF THE REAL WAGE RATE FOR SOUTH AFRICA: 1970–2000

This paper examines the potential trade-off between growth in employment and growth in wages. In order to assess the trade-off between employment growth and real wage growth, we make use of a simple decomposition model, following Mazumdar (2000), in which real wage growth is determined by growth in real value added, employment growth, a trend in the wage share of value added and a relative price effect.

Motivation Crowding Theory

The Motivation Crowding Effect suggests that external intervention via monetary incentives or punishments may undermine, and under different identifiable conditions strengthen, intrinsic motivation. As of today, the theoretical possibility of motivation crowding has been the main subject of discussion among economists. This study demonstrates that the effect is also of empirical relevance. There exist a large number of studies, offering empirical evidence in support of the existence of crowding–out and crowding–in. The study is based on circumstantial evidence, laboratory studies by both psychologists and economists, as well as field research by econometric studies. The pieces of evidence presented refer to a wide variety of areas of the economy and society and have been collected for many different countries and periods of time. Crowding effects thus are an empirically relevant phenomenon, which can, in specific cases, even dominate the traditional relative price effect.

A Simple Measure of the Intensity of Capital Controls

We present a readily available monthly measure of the intensity of capital controls across 29 emerging market countries that is based on the degree of restrictions on foreign ownership of equities. The initial opening of a market as given by our measure corresponds well with the liberalization dates of Bekaert and Harvey (2000a). In addition, our measure provides information on the extent of the initial opening as well as the evolution of the liberalization over time. We discuss two versions of the measure. One version provides the better indication of the extent of controls at a point in time, and is thus better suited for cross-sectional analysis. The other version—smoothed of the relative price effects of asymmetric shocks provides a better indication of changes in controls, and is thus more appropriate for time series work. After describing the measure, we compare it to other existing measures of capital controls and briefly describe some empirical applications.

Intrinsische Motivation und umweltpolitische Instrumente

Abstract In the discussion on the rational choice model of individual behavior, a growing emphasis has recently been placed on the importance of intrinsic motivation. Contrary to assumptions made in the standard economic literature, it is suggested that an individual's motivation to act may not be exclusively determined by external influences (incentives, restrictions) and (given) personal preferences, but, in addition, depends on intrinsically anchored ethical preferences. Intrinsic motivation may diminish if parallel external incentives, such as rewards or orders, come into play: Insofar as external intervention weakens the corresponding intrinsic motivation to act, the (normal) effect of relative prices is opposed by a (countervailing) crowding-out effect of intrinsic motivation. The effect of (over-) crowding-out has been thematized especially in the context of environmental policy. It was suggested that subsidies may support intrinsic incentives whereas taxes and licences (especially though command-and-control measures) tend to undermine them. This paper critically analyzes the impact of intrinsic behavior considerations on the evaluation of environmental policy instruments. It is argued that, if at all, economists' standard recommendations for policy design with respect to subsidies need not be revised even if intrinsic motivation plays any role for the agents' environmental bevavior. Furthermore, command-and-control policy might rather support than weaken intrinsic motivation.