Steady-state Welfare Research Articles

Trade liberalisation, resource sustainability and welfare: The case of East Baltic cod

Recent research has warned that liberalising trade in capture fish products originating from inefficiently managed fisheries might cause over-exploitation, reduced fish stocks and thereby a reduced steady-state of welfare. This paper qualifies the warning in a case study of the East Baltic cod market by developing an age-structured bio-economic supply model combined with basic theory of trade between two countries. Welfare effects of trade liberalisation are identified taking fishing quotas, input limitations, mesh-size regulations and shared ownership of stocks into account. It is shown that although liberalising trade in products supplied by such a fishery might cause steady-state welfare reductions in the supplier countries, these welfare reductions are small compared to the welfare gains from a hypothetical change to optimal management. Hence, the introduction of better fisheries management is much more important than trying to meet potential negative consequences of trade liberalisation since even small improvements in fisheries management may offset the negative effects of trade liberalisation.

Endogenous fluctuations in unionized economies with productive externalities

We discuss the effects of unions on steady-state multiplicity and welfare, and on the existence of endogenous fluctuations. We consider an OG economy with productive capital externalities and we focus on underemployment equilibria. We find that for wide regions in the parameter space, including an arbitrarily small degree of externalities and a Cobb-Douglas technology, unions increase steady state employment and welfare, and local indeterminacy (sunspots) emerges. Moreover with a CES technology multiplicity of steady states is only possible in the presence of unions. Our results also show that the role of unions in shaping local dynamics and bifurcations depends on technology (externalities and factor’s substitutability).

Dynamic efficiency in the two-sector overlapping generations model

This paper examines dynamic efficiency in the context of a two-sector overlapping generations model. First, conditions for dynamic efficiency in a centrally planned economy are derived. Then, in a competitive environment, the implications of dynamic (in)efficiency for the steady state relative price and steady state welfare are demonstrated. For the special case of a log-linear world, the golden rule savings rate is identified along with restrictions on parameters that yield dynamically efficient steady states. The results are further demonstrated via a welfare analysis of a simple tax/subsidy scheme.

The Long-Run Effects of Pay-as-You-Go Medicare on Savings and Consumer Welfare

This article extends earlier results on the short-run effects of a change in insurance coverage on savings and consumer welfare to the case of the long-run effects of a change in pay-as-you-go Medicare coverage on savings and consumer welfare in an overlappinggenerations economy. The notion of steady-state actuarial fairness is introduced. It is found that under some nonrestrictive assumptions, a rise in Medicare coverage reduces steady-state per capita capital and savings, provided that individuals are risk averse and prudent. Moreover, risk aversion and prudence guarantee that a rise in Medicare coverage raises steady-state welfare when Medicare is steady-state actuarial fair or favorable. Simulation results reinforce these findings. Moreover, they show that steady-state actuarial unfavorableness may or may not reverse the last conclusion.

Implications of Intellectual Property Rights for Dynamic Gains from Trade

A simple intellectual property rights (IPRs) framework is introduced into a dynamic quality ladder model of technological diffusion between innovating firms in one country and imitating firms in another country. The presence of technological spillovers and feedback effects between firms in the two countries demonstrates that, even when steady state growth increases, transition costs sometimes dominate steady state welfare gains. Most existing models of international IPRs find that high intellectual property enforcement in the imitating country leads to welfare gains in the innovating country at the expense of the imitating country. In contrast, we find IPR regimes that, even after accounting for transition costs, positively affect welfare in both countries. Preferred IPR regimes maintain competition from imitative activity but enforce some remuneration to innovators for the spillovers they generate. Well-designed IPR regimes imposed at the time of trade liberalization will be welfare enhancing for both regions relative to trade liberalization without IPR enforcement.

North-South Technological Diffusion and Dynamic Gains from Trade

This paper revisits the question of gains from trade in a dynamic setting from the perspective of an R&D based growth model of technological diffusion. The transition paths, as well as steady-state growth paths, are analyzed for a developed and a developing nation trading in intermediate and final goods. Static computable general equilibrium (CGE) models have yielded only small welfare gain estimates (.5-1%) for trade liberalization. Dynamic models have increased these estimates (up to 10%), but often ignore feedback effects caused by technological diffusion and generally consider only steady-state welfare effects. These feedback effects are especially important due to the long transition paths they induce for both countries. This paper studies the transitional dynamics in a quality ladder model of endogenous growth in which North-South trade leads to technological diffusion through reverse engineering of intermediate goods. The concept of learning-to-learn is incorporated into both imitative and innovative processes, which in turn drive domestic technological progress. International trade with imitation leads to feedback effects between Southern imitators and Northern innovators who compete for the world market. Consequently, both regions face transition paths dependent on their relative technologies. When the South liberalizes its trade, world growth increases, leading to welfare gains of 5% for the South. While the North also experiences steady-state welfare gains, the transition costs borne by the North during the long transition lead to an overall loss in Northern welfare. Still, this loss is attributable to the lack of intellectual property rights (IPRs) rather than trade per se. Interestingly, imposition of IPRs not only leads to an overall welfare gain for the North, but also further boosts Southern welfare gains up to 16%, again because of the feedback effects in technology.

Correcting Dynamic Inefficiency when Labor Supply is Endogenous: A Steady State Analysis

In this paper I show that, when endogenous labor supply is considered, dynamic inefficiency of Overlapping Generation economies can be neither necessary nor sufficient for debt issuing to generate a steady state welfare improvement, even in the absence of distortionary taxes.

Social security reforms and early retirement

Many reform proposals of the social security systems in various OECD economies suggest to scale down the non-actuarial parts of the pension systems. These reforms have a flavor of increased efficiency at the costs of welfare losses for low-income individuals. Assessing the economic effects, we investigate five different reform proposals by means of a numerical overlapping generations model for the Norwegian economy. The model features an endogenous retirement age and heterogeneous individuals within generations. It turns out that the various reforms, which scale down the public non-actuarial pension system, lead to increases in the retirement age and steady-state welfare gains for all income classes.

Efficiency and distribution effects of a revenue-neutral income tax reform

We study the quantitative effects of two revenue-neutral income tax reform proposals, (i) a flat-rate tax and (ii) a consumption tax, in a general equilibrium model with elastic labor supply and progressive income taxation. Households are heterogeneous with regard to their productivity and their assets. The model is calibrated with regard to the German economy in 1996. Importantly, the endogenous labor income distribution as computed from our model is equal to the empirical labor income distribution in Germany. As our first main result, both reform proposals are shown to have only negligible effects on the labor income distribution. Second, both tax reform proposals result in a moderate increase of aggregate employment and a strong increase of aggregate savings. And third, both reform proposals imply significant steady-state welfare gains equivalent to a rise of total consumption of 3.6% and 8.2%, respectively.

Tariffs, Time Preference, and the Current Account under Weakly Nonseparable Preferences

Incorporating weakly nonseparable preferences into the familiar time–preference model, the author emphasizes a role of steady–state welfare changes in determining the effect of permanent tariffs on the current account. The effect consists of a welfare effect, due to steady–state welfare changes, which is negative (positive) when preferences toward imports are more (less) wealth–enhanced than toward exports; and a substitution effect, which occurs only with initial distortion. Even without initial distortion, a marginal tariff has a first–order welfare effect on the current account. Its sign does not depend on whether impatience is increasing or decreasing in wealth.

Multiple reserve requirements in a monetary growth model

This paper considers a monetary growth model in which banks provide liquidity, and in which a government finances a deficit by printing money and selling bonds. In this context, I examine the possibility that the government may want to impose binding reserve requirements on banks' holdings of both money and government bonds. Conditions are established under which doing so increases steady state welfare and reduces the scope for indeterminacies. Furthermore, under a binding system of multiple reserve requirements we have that money is superneutral. On the other hand, if reserve requirements are imposed on cash holdings alone, increases in the steady state inflation rate adversely affect capital accumulation and long run real activity. Thus systems of multiple binding reserve requirements can insulate real activity from the consequences of inflationary taxation.

WELFARE IMPLICATIONS OF FACTOR TAXATION WITH RISING WAGE INEQUALITY

In recent decades, the structure of wages in the U.S. economy has shifted to favor workers with college degrees over those without college degrees. Concurrently, there has been an increase in the share of the workforce that is college educated. We build an overlapping generations model in which skill-biased technological change drives both rising wage inequality and a rising percentage of skilled (educated) workers in the labor force. We explore the implications for agent welfare and for the distribution of income of different factor taxation choices. We find that higher tax rates on capital and lower tax rates on unskilled labor can yield steady-state welfare gains across a heterogeneous population, and that these gains increase as the economy experiences technological change that favors skilled labor. Moreover, these shifts in taxation can lower net wage inequality. Steady-state welfare gains, however, come at the expense of agents alive upon implementation.

Weakly non‐separable preferences and the Harberger‐Laursen‐Metzler effect

We examine the current account effect of a terms‐of‐trade deterioration for a small country model, incorporating weakly non‐separable preferences à la Shi (1994) under endogenous time preference. This enables us to emphasize a welfare change as an important determinant of the current account. Even with increasing marginal impatience, the Harberger‐Laursen‐Metzler effect occurs if consumers' preference toward imports is sufficiently wealth enhanced: in that case a terms‐of‐trade deterioration must reduce steady‐state welfare to shift preference away from imports to exports. Several empirical implications are also derived. JEL Classification: F41; F32 Préférences faiblement nonséparables et l'effet de Harberger‐Laursen‐Metzler. L'auteur examine l'effet sur le compte courant d'une détérioration des termes d'échange dans un modèle d'un petit pays, quand les préférences sont faiblement nonséparables à la Shi (1994) et que la préférence temporelle est endogène. Cela permet de souligner qu'un changement dans le niveau de bien‐être est un déterminant important du compte courant. Contrairement à ce qu'on trouve dans la littérature spécialisée, même quand on postule une impatience marginale croissante, l'effet Harberger‐Laursen‐Metzler se produit si la préférence des consommateurs pour les importations est suffisamment dépendante du niveau de richesse: dans ce cas‐là, une détérioration des termes d'échange doit réduire le niveau de bien‐être en régime permanent de manière à déplacer les préférences des importations vers les exportations. On déduit certaines implications empiriques de ces résultats.

Altruism and Self-Restraint

We address the issue of altruism when standard-of-living aspirations are transmitted from one generation to the other. In that case, the influence of altruistic parents is not limited to the bequest they could leave; indeed, they direct the evolution of children’s aspirations toward raising their utility by restraining their own consumption standard. We show that, even if there is no bequest, altruism always increases capital accumulation and has a stabilizing effect on the economy. However, its effect on steady state welfare can be negative. In an example nesting the Barro-Weil model, bequests can be positive even if this is never the case in the Barro-Weil economy. It is possible for an economy to experience regime shifts along the convergence path to the steady state.

Socially Excessive Bankruptcy Costs and the Benefits of Interest Rate Ceilings on Loans

The authors study the capital accumulation and welfare implications of ceilings on loan interest rates in a dynamic general equilibrium model. Binding ceilings on loan rates reduce the probability of bankruptcy. Lower bankruptcy rates result in lower bankruptcy and liquidation costs. The authors state conditions under which the resources freed by this cost-saving result increase the steady state capital stock, reduce steady state credit rationing, and raise the steady state welfare of all agents. The authors also argue that the conditions stated are likely to be satisfied in practice. Finally, their results hold even if initially there is capital over- accumulation.

Welfare Cost of (Low) Inflation: A General Equilibrium Perspective

This paper provides general equilibrium estimates of the steady-state welfare gains of lowering inflation from a low level to close to price stability, using an overlapping-generations growth model. Money demand is modeled on the basis that real money balances are a factor of production. Assuming a standard Fisher equation modified by the presence of an income tax, it is found that inflation unambiguously reduces capital intensity, drives up the before-tax real rate of return to capital, and unambiguously imposes a life-time welfare cost. This welfare cost is, however, quantitatively very modest (under 0.2 percent of GDP annually) within reasonable ranges of all parameter values.

Borrowing constraints and individual welfare in a neoclassical growth model

The welfare effects of borrowing constraints are examined within a version of Diamond's 1965 neoclassical growth model with two types of agents: lenders and constrained borrowers. Changes in the borrowing limit affect factor prices and, consequently, agents' welfare. When the borrowing constraint is relaxed, constrained borrowers' steady-state welfare may be either higher or lower as a result. The same result applies to lenders' welfare. The ratio of the number of constrained borrowers to the number of lenders influences the direction of welfare changes, as does the value of agents' intertemporal elasticity of substitution. The analysis focuses on steady states, but transitional dynamics also are considered.

Capital mobility in a dynastic framework

This paper studies the pattern of capital mobility within a two-country dynastic model in which each country is exogenously characterized by its degree of altruism toward children. The steady-state welfare implications of restricted as well as unrestricted capital mobility are established. It is shown that world integration increases the steady-state welfare of the more altruistic capital exporting country and can either increase or reduce the steady-state welfare of the less altruistic capital importing country. Copyright 2000 by Oxford University Press.

Barriers to International Capital Flows: Who Should Erect Them and How Big Should They Be?

Until recently, the trend in world capital markets has been toward increasing globalization. Recent events in Latin America and Asia have caused many in policy-making circles to question whether this trend should be wholly, or at least partially, reversed. It is commonly argued that—at a minimum—countries should be given the discretion to erect such barriers, at least in certain circumstances. Recent events, then, have forced a rethinking of the desirability of unrestricted world capital flows. The general presumption appears to be that the victims of highly volatile capital flows should be allowed to limit or restrict inflows and outflows of funds. But outflows of funds from smaller and less developed economies often represent inflows of funds to larger and more developed economies. This raises the issue of whether there would be benefits associated with larger and wealthier economies taking actions to limit capital mobility. This paper presents a formal analysis of erecting barriers to international capital flows. We find that, in contrast to conventional thinking, when there are substantial differences in per capita GDP across countries, long-run output in all countries can be increased by having wealthier economies erect some partial barriers to capital mobility. Interestingly, wealthier economies need not persuade poorer economies to cooperate: by implementing an appropriately selected tax on capital flows it will often be the case that the wealthy economy can unilaterally obtain a higher steady state welfare level for all agents in all economies. We also show that these same barriers need not eliminate endogenously arising volatility in income, capital flows, and asset returns. Under some circumstances, then, if it is desirable to reduce such volatility, this must be accomplished by other means. However, and this bears emphasis, the case for imposing barriers on capital flows does not depend critically on the ability of these barriers to eliminate excess volatility.

Unions, Increasing Returns and Endogenous Fluctuations

We analyse the implications of unions (efficient bargaining) for multiplicity of stationary states and welfare, local indeterminacy, bifurcations and endogenous fluctuations (deterministic and stochastic). We use an overlapping generations model with external increasing returns to scale, where capital is the unique asset. We find that a slight increase in unions power may increase the levels of capital, employment and the welfare of all agents at the steady state. However multiple steady states may exist. Moreover, our results show that increasing returns to scale are a necessary condition for the emergence of deterministic endogenous fluctuations. However, we find that union's bargaining power can dramatically influence the local stability of the system. In fact, while an increase in the bargaining power of unions reduces the scope for local indeterminacy, the emergence of endogenous fluctuations, through Hopf bifurcations may become more likely when unions are present. Therefore, if the relevant trajectory exhibits endogenous fluctuations, steady state welfare is no longer the unique important element from a social point of view. In this case, whether unions are good institutions or not may well depend on the trade off between efficiency and intergenerational equity that society is willing to take.