Simple General Equilibrium Model Research Articles

Recent progress in hukou reform and labor market integration in China: 1996–2022

To investigate the household registration system (hukou) reform in China, it is important to quantify the thresholds of obtaining hukou in urban areas at the city level. We build a new index to measure the likelihood of obtaining urban hukou for migrants in each destination city, termed the “settlement probability”, based on individual information of floating population from the population census and hukou policies of 332 cities from 1996 to 2022. We find that the average settlement probability has been steadily increasing since 1999, reaching 91% in 2022, and 15 provinces have achieved low thresholds. We further build a simple general spatial equilibrium model with the factor of settlement probability to investigate the impacts of hukou reform. The empirical analysis shows there is a mismatch between settlement probability and settlement intentions. Moreover, we find that higher settlement probability is significantly correlated with more migrants' inflow, lower migrants' wages and higher urban housing prices, especially in more developed cities. Therefore, hukou reform is crucial for enhancing the integration of China's labor market.

A Simple Model of Corporate Tax Incidence

We analyze the incidence of a linear corporate tax using a simple and portable competitive general equilibrium model in which capital owners choose to invest either in domestic production or a foreign investment opportunity and workers make extensive margin labor supply decisions. Our analysis explores the effect of corporate taxation on wages, employment, domestic profits, and domestic investment. Analytical results and numerical simulations generate insights in line with recent empirical evidence on corporate tax incidence: the burden of the corporate tax is shared between workers and firms, with larger responses among more capital-intensive firms.

Neoclassical production, scarcity of skills and Pareto distributions

The distribution of top earnings follows a “power-law”: the top tail of the distribution is thick relative to other distributions and is approximately Pareto-distributed. There are different mechanisms proposed in the literature that yield Pareto distributions and power-laws. This paper shows that a simple general equilibrium model where aggregate production is assumed of the constant-elasticity-of-substitution (CES) type over multiple labor inputs generates distributions in earnings and wages that follow power-laws. The finding is very general as the distribution of the skill-types is irrelevant for the shape parameter (the Pareto exponent) of the power-law. The model displays a tight relationship between the Pareto exponent and the elasticity of substitution between the labor inputs. Available empirical estimates of the elasticities of labor substitution and of the labor supply predict a Pareto exponent consistent with its empirical counterpart for the distribution of earnings in the US.

WORKFORCE AGING AND INDUSTRY-LEVEL PRODUCTIVITY

This paper investigates the relationship between the age structure of workforce and industry-level productivities using international panel data. We find that when the growth rate of prime-age workforce (aged between 30 and 49) falls, the growth rate of total factor productivity in industries that are highly dependent on prime-age workers tends to fall relative to that in other industries. We also present a simple general equilibrium model based on industry-level external economies of scale. We show that our empirical findings are consistent with the hypothesis that there are industry-level externalities coming from prime-age workers.

Competition Policy in a Simple General Equilibrium Model

Most industrial organization research, including applications to competition policy, undertakes partial equilibrium analysis in a single sector, often with a fixed number of firms. For welfare analysis, this approach is valid only if the rest of the economy is perfectly competitive, an assumption far from reality. This article examines competition policy in a simple, multisector, general equilibrium model with free entry and exit, allowing for differing distortions in each sector. Flows between sectors readily reverse standard prescriptions. But such results may be partially offset or overturned yet again when incorporating free entry and exit. Analysis of efficiencies also changes qualitatively.

The end of the Equity Premium Puzzle? An analysis of the European Financial Markets

Abstract This paper evaluates the magnitude of the equity premium in the European financial markets of the last twenty years. We document a substantial decrease in its value, especially after the onset of Great Recession. A habit consumption model predicts a value for the equity premium much higher than observed in data. Conversely, a simple general equilibrium model in the spirit of Mehra and Prescott (1985) is now able to explain the premium without resorting to extremely high coefficients for risk aversion. JEL classification numbers: G11, G12, G14. Keywords: Equity premium puzzle, Habit formation: Stock returns.

Generalized separability and integrability: Consumer demand with a price aggregator

This paper examines demand systems where the demand for a good depends on other prices only through a common price aggregator (a scalar function of all prices). We refer to this property as “generalized separability” and provide the functional forms of demand that this property implies when demand is rational, i.e., derived from utility maximization. Generalized separability imposes restrictions on either income or price effects, and greater flexibility is obtained by adding indirect utility as an additional aggregator. We provide examples and applications which encompass a large variety of examples from the literature. In particular, generalized separability can be used in simple general-equilibrium models to obtain a more tractable framework and yet generate a wider range of effects of market size and productivity on firm size, entry, and prices.

Transportation and quality of life

This paper investigates the importance of transportation for quality of life in Denmark. We first calibrate a simple general equilibrium model to analyse how local wage levels, housing costs, and commuting costs vary across urban areas as well as to construct a quality of life index that measures a representative household’s willingness to pay for local amenities. We find that the quality of life is high in large cities. Wages and rents are also substantially higher in urban areas. We then regress the quality of life index on observed amenities to infer how quality of life is associated with transportation. Our empirical results suggest that the quality of the public transport system is particularly important for the quality of life.

User Prices and Multiplicity in a Simple General Equilibrium Model

User Prices and Multiplicity in a Simple General Equilibrium Model

Tax Policy in the Slovak and Czech Economies

Today, society is struggling with the uncertainty caused by the pandemic of coronavirus disease 2019 (covid-19). Government budgets will face a real challenge in the coming years. This paper provides an overview of public finances and their condition over the past 20 years in the Slovak and Czech Republics. It investigates the possible effects of different tax type changes and also the option to cover budget losses. A simple dynamic stochastic general equilibrium (DSGE) model with three sectors was calibrated using data from 2018 and a stochastic analysis was performed. It was shown that the economy was more sensitive to shocks on social security contributions than to those on other taxes. The results may help support a reform of decreasing labour taxes, for which both Slovakia and Czechia have been waiting for a long time.

Bilateral Trade and Productivity Differences in a Ricardo-Cournot Model

Purpose - Using a model that highlights Ricardian comparative advantage and Cournot competition, I derive theoretical predictions on how bilateral measures of trade intensity, specialization, and intraindustry are interrelated, and how Ricardian productivity differences affect these measures. We test the predictions using trade and production data, and confirm them. Design/methodology - A simple two-country general equilibrium model is constructed to derive theory-based bilateral indexes. We then test the relationships among them using panel data for 35 countries and 14 industries between 1996 and 2008. Findings - Bilateral trade intensity is increasing in specialization, as in the classical trade theory, and in intra-industry trade, as in the new trade theory. However, productivity differences positively affect specialization, and negatively affect intra-industry trade. These effects cancel each other; thus productivity differences have little impact on trade intensity. Originality/value - This paper provides a comprehensive conceptual framework for understanding the relationship among trade intensity, specialization, intra-industry trade, and productivity differences. We derive theory-consistent measures of specialization, intra-industry trade, and productivity differences. Moreover, we reevaluate the empirical relevance of these variables for the study of gravity equations. This paper is also an effort to capture oligopolistic competition in a general equilibrium framework, interests in which recently resurged.

Strategic deviations in optimal monetary policy

This paper investigates the circumstances under which a central bank is more or less likely to deviate from the optimal monetary policy rule. The research question is addressed in a simple New Keynesian dynamic stochastic general equilibrium (DSGE) model in which monetary policy deviations occur endogenously. The model solution suggests that higher future central bank credibility attenuates the current period policy trade-off between a stable inflation rate and a stable output gap. Together with the loss of credibility after a policy deviation, this provides the central bank with an incentive to implement past policy commitments. The result is valid even if the central bank may recover credibility with some probability after a policy deviation. My main finding is that the central bank is willing to implement past policy commitments if a sufficient fraction of agents is not aware of the exact end date of the policy commitment. The result challenges the time-inconsistency argument against monetary policy commitments and provides a potential explanation for the repeated implementation of monetary policy commitments in reality.

The Shock Reaction in a Simple Close Economy

As the general objective of a representative government is to achieve in creating the economic conditions that support the wellbeing of citizen, it, thus, needs to design and implement its policies in an appropriated manner. Hence, to support the valuable information for designing and implementing such policies, this work is designed to gain that information by trying to identify the reactions of various variables to government policies. To meet this objective, this work proposed a simple close economy Dynamic stochastic general equilibrium (DSGE) model with the public goods in the household consumption bundle. Also, the usual shocks studied in the DSGE model were included in the reaction investigation process. The Bayesian technique is then employed to estimate the model parameters by using the quarterly detrended data of Thailand in the period of 2001 to 2019. The result showed the crowding-out effect driven by government spending. Also, the reactions of the major macroeconomic variables to each shock were consistent with some previous studies.

Modeling functional and juridical informality: a guide for data-driven policy

ABSTRACT This paper reviews a methodology for integrating the informal sector into social accounting matrices and a simple computable general equilibrium model. The model distinguishes informality according to whether the presence of the informal sector is due to capital limitations, functional informality, versus juridical informality, which may arise as an illegal or quasi-legal competitive strategy that runs the risk of state sanctions. The goal is to offer policymakers some perspectives on how the informal sector could be incorporated into the economy without first repressing it in a way that inhibits its transformation.

Productivity, relative sectoral prices, and total factor productivity: Theory and evidence

This study examines the role of sectoral productivity in explaining the structural change process and relative sectoral prices in an economy. A simple two-sector general equilibrium model was developed to show that improvement in agricultural productivity relocates labor away from the agriculture sector under certain conditions. In contrast to the conventional wisdom that relative sectoral prices reflect relative sectoral productivities, this study shows the possibility of a U-shaped relationship between the two factors and found a structural break in their relationship based on the US data during 1920–1965. We estimate our model parameters by using the simulated method of moments after constructing a suitable structural model with historical data on the US economy for the previous two centuries (1820–2017). For the most plausible set of parameter values, our model could primarily replicate the relative price of farm movement and the agricultural labor share of the US economic history.

Pareto-Improving Supply Subsidy in a Simple General Oligopoly Equilibrium Model with Pollution Permits

We introduce a competitive pollution permit market in a two-sector oligopoly equilibrium model. In this model, one commodity is inelastically supplied by one competitive trader and another one is produced by a finite set of oligopolists, using the first commodity as an input. The production of the second commodity is a polluting activity. We study both the competitive and oligopoly equilibria. We provide some conditions under which a supply subsidy given to the oligopolists that is financed by a tax on the competitive agent is Pareto-improving.

Competition Policy in a Simple General Equilibrium Model

The flow of resources across sectors to their best use, with concomitant entry and exit, is central to the functioning and welfare properties of a market economy. Nevertheless, most industrial organization research, including applications to competition policy, undertakes partial equilibrium analysis in a single sector, often with a fixed number of firms. This article examines competition policy in a simple, multi-sector, general equilibrium model with free entry and exit. Even partial equilibrium analysis yields some lessons, such as that accounting for free entry often makes strengthening competition policy more rather than less attractive. When admitting flows between sectors, familiar prescriptions readily reverse. But such results may be partially offset or overturned yet again when incorporating free entry and exit in nontargeted sectors. Finally, the analysis of efficiencies also changes qualitatively with free entry because even fixed costs are fully borne by consumers in equilibrium.

Minimum wage, trade and unemployment in general equilibrium

AbstractThe path‐breaking work of Card and Krueger, showing that a higher minimum wage can increase employment, turned the age‐old conventional wisdom on its head. This paper demonstrates that this apparently paradoxical result is perfectly plausible in a competitive general equilibrium production structure of a small open economy with a non‐traded good, without recourse to monopsony, spatial heterogeneity, heterogeneity of consumers and so on, the usual theoretical drivers behind the result. Following Jones and Marjit, we build a simple general equilibrium model with production complementarity and we show that a higher minimum wage can raise aggregate employment. Expansion in the non‐traded sector following a wage hike may be consistent with the overall expansion of the export sector in a multi‐good framework, an unlikely outcome in a conventional two‐good model which cannot accommodate with production complementarity.

The Effect of Political Uncertainty on Financial Flexibility and Firm Value

[enter Abstract Body]Constructing a simple general equilibrium model, I examine the effect of local and international political uncertainty on financial flexibility and firm value. The model predicts that political uncertainty will have a negative effect on both. I then empirically examine the effects of political uncertainty on firms in the BRICs countries. I find that local political uncertainty has negative effects on financial flexibility, but not on firm value, while international political uncertainty has negative and larger effects on both. Part of the reason for this is that financial flexibility and long-term debt acts as a partial hedge to political uncertainty.

A Second-Best Analysis of Alternative Instruments for the Preservation of Natural Resources

The literature on second-best environmental taxation provides us with a broad understanding of the welfare impacts of pollution regulation. However, most of the research undertaken to date has focused on environmental pollution, while other topics in environmental economics, such as the preservation of natural resources, have not warranted much attention in the optimal taxation literature. This paper uses a simple general-equilibrium model to analyze the welfare effects of taxes on final goods, taxes on natural resources, and extraction permits with a second-best approach based on the existence of initial distortionary taxes. This analysis not only takes into account the non-use utility of the mere existence of natural resources, but also captures the consequences of enjoying environmental goods on labor supply decisions, through the use-value attributed to natural resources. The comparison of the welfare impacts of a tax on final consumption and a tax on the use of natural resources is not conclusive. A consumption tax leads to a higher primary welfare effect than a resources tax, while taxing natural goods generates more revenue-recycling income than taxing consumption goods. In addition, as extraction permits do not generate new public revenues to reduce pre-existing distortionary taxes, this intervention entails the highest welfare costs.