nep-cmp New Economics Papers
on Computational Economics
Issue of 2005‒02‒01
fourteen papers chosen by
Stan Miles
York University

  1. A Toolbox for the Numerical Study of Linear Dynamic Rational Expectations Models By Oviedo, P. Marcelo
  2. How is Confidence Related to Unemployment in Europe? A fuzzy logic answer By António Caleiro
  3. Microsimulation as a Tool for Evaluating Redistribution Policies. By François Bourguignon; Amedeo Spadaro
  4. Sharing resources within the household: a multi-country microsimulation analysis of the determinants of intrahousehold "strategic weight" differentials and their distributional outcomes. By Kristian Orsini; Amedeo Spadaro
  5. A reduced algorithm from Faugeras-Bethod’s theorem in labeling problems By Crescenzio Gallo; Giancarlo De Stasio
  6. Copula Based Monte Carlo Integration in Financial Problems By Alessio Sancetta
  7. The More Cooperation, the More Competition? A Cournot Analysis of the Benefits of Electric Market Coupling By Benjamin F. Hobbs; Fieke A. M. Rijkers
  8. Reform of the Stability and Growth Pact: Reducing or Increasing the Nuisance? By Paola Monperrus-Veroni; Francesco Saraceno
  9. Escaping Mass Education – Why Harvard Pays By Bergh, Andreas; Fink, Günther
  10. Job Turnover, Wage Rates, and Marital Stability: How Are They Related? By Ahituv, Avner; Lerman, Robert
  11. Reducing the Risk of Investment-Based Social Security Reform By Martin Feldstein
  12. Residential Segregation in General Equilibrium By Patrick Bayer; Robert McMillan; Kim Rueben
  13. "An Analysis of Airport Pricing and Regulation in the Presence of Competition Between Full Service Airlines and Low Cost Carriers" By Tae Hoon Oum; Xiaowen Fu; Mark Lijesen
  14. Telecommunications Reform within Russia’s Accession to the World Trade Organization By Jesper Jensen; Thomas F. Rutherford; David G. Tarr

  1. By: Oviedo, P. Marcelo
    Abstract: By simplifying the computational tasks and by providing step-by-step explanations of the procedures required to study a linear dynamic rational expectations (LDRE) model, this paper and the accompanying ``LDRE Toolbox" of Matalb functions guide a researcher with almost no experience in computational work to resolve and study his own model. After coding the model following specific guidelines, a single function call is all that is needed to log-linearize the model; simulate it under exogenous sequences of shocks; compute sample and population moment conditions; and obtain impulse-response functions. Three classical models in the Real-Business-Cycles literature are solved and studied throughout to give detailed examples of the steps involved in solving and studying LDRE models using the LDRE Toolbox. Namely, the economies in Brock and Mirman (Optimal Growth and Uncertainty: the Discounted Case, Journal of Economic Theory, 4(3): 479-513; 1972); King, Plosser, and Rebelo (Production, Growth and Business Cycles I: The Basic Neoclassical Model, Journal of Monetary Economics 21: 195-232; 1988); and Mendoza (Real Business Cycles in a Small Open Economy, American Economic Review 81(4): 797-818; 1991).
    JEL: C6 E3 E4
    Date: 2005–01–26
  2. By: António Caleiro (Department of Economics, University of Évora)
    Abstract: Notwithstanding the numerous applications of fuzzy logic in several fields of economics, it is surprising that, to the best of our knowledge, so very few applications have been made in modelling approximations of subjective economic variables, such as confidence, satisfaction or even expectations, by objective ones, such as unemployment, output or inflation. This gap in the literature is accompanied by a lack on the availability of data concerning those subjective variables. Given that one of the main concerns of fuzzy logic is to capture approximate rather than exact forms of reasoning, and this also characterises many economic situations, such as in fact forming intrinsically subjective measures of confidence, this logic can and should indeed be used to understand how some of those subjective measures can be approximated by objective ones. This task is accomplished in the paper by the use of data on consumer confidence and on the unemployment rate for the pre-enlargement fifteen European Union member states. The results indicate the clear importance of unemployment on confidence, which is a result that should be taken into account when analysing policy-making that, from a naïve and/or easy viewpoint, considers confidence as a relevant variable but ignores unemployment.
    Keywords: Confidence, European Union, Fuzzy Logic, Unemployment
    JEL: C10 C82 E32
    Date: 2005
  3. By: François Bourguignon; Amedeo Spadaro
    Abstract: During the last twenty years, microsimulation models have been increasingly applied in qualitative and quantitative analysis of public policies. This paper provides a discussion on microsimulation techniques and their theoretical background as a tool for the analysis of public policies with particular attention to redistribution and social policies. Basic principles in using microsimulation models and interpreting their results are analyzed, with particular emphasis on tax incidence, redistribution and poverty analysis. Social welfare analysis permitted by microsimulation techniques is also discussed. Finally, the paper points to limits of present approaches and directions for future research.
    Date: 2005
  4. By: Kristian Orsini; Amedeo Spadaro
    Abstract: Equal intra-household sharing is still assumed by the vaste majority of applied analyses in welfare economics. Few pieces of work have tried to depart from the equal sharing hypothesis, but their impact has been limited by lack of data or restricted application to special cases. This paper proposes a new framework to derive sharing rules based on individual bargaining power. The latter is defined for each household member as the share of resources gained by the household due to his/her presence. The causes of power differentials and their impact on income distribution are analysed in four EU countries presenting significantly different tax-benefit systems: Finland, Italy, Germany and the United Kingdom.
    Date: 2005
  5. By: Crescenzio Gallo; Giancarlo De Stasio
    Abstract: This paper illustrates a new approach to labeling ("object classification") problems, and it targets the simplification of a (computationally) complex algorithm based on Faugeras and Berthod's theorem.
    Date: 2005–01
  6. By: Alessio Sancetta
    Abstract: A computational technique that transform integrals over RK, or some of its subsets, into the hypercube [0, 1]K can be exploited in order to solve integrals via Monte Carlo integration without the need to simulate from the original distribution; all that is needed is to simulate iid uniform [0, 1] pseudo random variables. In particular the technique arises from the copula representation of multivariate distributions and the use of the marginal quantile function of the data. The procedure is further simplified if the quantile function has closed form. Several financial applications are considered in order to highlight the scope of this numerical technique for financial problems
    Keywords: Copula, Martingale, Monte Carlo Integral, Quantile Transform, Utility Function.
    JEL: C15 G11 G12
    Date: 2005–01
  7. By: Benjamin F. Hobbs; Fieke A. M. Rijkers
    Abstract: Market coupling in Belgian and Dutch markets would permit more efficient use of intercountry transmission, 1) by counting only net flows against transmission limits, 2) by improving access to the Belgian market, and 3) by eliminating the mismatch in timing between interface auctions and the energy spot market. A Cournot market model that accounts for the region’s transmission pricing rules and limitations is used to simulate market outcomes with and without market coupling. This accounts for 1) and 2). Market coupling improves social surplus in the order of 108 €/year, unless it encourages the largest producer in the region to switch from a price-taking strategy in Belgium to a Cournot strategy due to a perceived diminishment of the threat of regulatory intervention. Benefit to Dutch consumers depends on the behavior of this company. The results illustrate how large-scale oligopoly models can be useful for assessing market integration.
    Keywords: Electric power, Electric transmission, Liberalization, Oligopoly, Complementarity models, Computational models, Netherlands, Belgium, France, Germany, Market Coupling
    Date: 2005–01
  8. By: Paola Monperrus-Veroni (Observatoire Français des Conjonctures Économiques); Francesco Saraceno (Observatoire Français des Conjonctures Économiques)
    Abstract: This paper aims at providing a quantitative assessment of different proposals for reforming the Stability and Growth Pact by extending a counterfactual experiment performed in Eichengreen and Wyplosz (1998). Using estimated coefficients from a reduced form model, we simulate the path of the output gap for the largest Euro zone countries (France, Germany, Italy) after imposing limits to structural deficit according to different fiscal rules (structural deficit rules, golden rules and rules that incorporate the stock of debt). For each of these countries we can rank the different reform proposals in terms of output loss over the period considered. Our analysis has the merit of using a uniform method and hence allow a comparison across countries and across rules. The main results of the experiment, which emerge robustly, are (a), that the golden rule would be the most beneficial both using individual country's criteria and global criteria; and (b) that the status quo, the Maastricht rule, is less restrictive than many currently debated alternatives.
    Keywords: Stability Pact, Golden Rule, European Union, Institutional Reform, Fiscal Rules
    JEL: E62 E63 H62
    Date: 2005
  9. By: Bergh, Andreas (Department of Economics, Lund University); Fink, Günther (Bocconi University)
    Abstract: Private universities, as opposed to publicly financed ones, are dominant in some countries and almost non-existent in others. We develop a dynamic model to demonstrate that private providers emerge as soon as they can profitably sell an elite signal to the most highly talented. As private providers engage in cream skimming, the returns to publicly provided education decreases, but the average return to higher education increases because of the signaling benefit created. We use numerical simulations to demonstrate the dynamic implications of our model, and provide some basic empirical evidence in support of the theory presented
    Keywords: Higher education; tertiary education; Signaling
    JEL: H52 I22
    Date: 2005–01–11
  10. By: Ahituv, Avner (University of Haifa and Urban Institute); Lerman, Robert (American University, Urban Institute and IZA Bonn)
    Abstract: This study examines the interplay between job stability, wage rates, and marital instability. We use a Dynamic Selection Control model in which young men make sequential choices about work and family. Our empirical estimates derived from the model account for selfselection, simultaneity and unobserved heterogeneity. The results capture how job stability affects earnings, how both affect marital status, and how marital status affects earnings and job stability. The study reveals robust evidence that job instability lowers wages and the likelihood of getting and remaining married. At the same time, marriage raises wages and job stability. To project the sequential effects linking job stability, marital status, and earnings, we simulate the impacts of shocks that raise preferences for marriage and that increase education. Feedback effects cause the simulated wage gains from marriage to cumulate over time, indicating that long-run marriage wage premiums exceed conventional short-run estimates.
    Keywords: marriage and marital dissolution, job turnover, wage rates, panel data
    JEL: C15 C33 J12 J31 J63
    Date: 2005–01
  11. By: Martin Feldstein
    Abstract: This paper describes the risks implied by a mixed system of Social Security pension benefits with different combinations of pay-as-you-go taxes and personal retirement account (PRA) saving. The analysis shows how these risks can be reduced by using alternative private market guarantee strategies. The first such strategy uses a blend of equities and TIPS to guarantee at least a positive real rate or return on each year%u2019s PRA saving. The second is an explicit zero-cost collar that guarantees an annual rate of return by giving up all returns above a certain level. One variant of these guarantees uses a two stage procedure: a guaranteed return to age 66 and then a separate guarantee on the implicit return in the annuity phase. An alternative strategy provides a combined guarantee on the return during both the accumulation and the annuity phase. Simulations are presented of the probability distributions of retirement incomes relative to the %u201Cbenchmark%u201D benefits specified in current law. Calculations of expected utility show that these risk reduction techniques can raise expected utility relative to the plans with no guarantees. The ability to do so depends on the individual%u2019s risk aversion level. This underlines the idea that different individuals would rationally prefer different investment strategies and risk reduction options.
    JEL: H0 H3 H5
    Date: 2005–01
  12. By: Patrick Bayer; Robert McMillan; Kim Rueben
    Abstract: Black households in the United States with high levels of income and education (SES) typically face a stark tradeoff when deciding where to live. They can choose neighborhoods with high levels of public goods or a high proportion of blacks, but very few neighborhoods combine both, a fact we document clearly. In the face of this constraint, we conjecture that racial sorting may dramatically lower the consumption of local public goods by high-SES blacks. To shed light on this, we estimate a model of residential sorting using unusually detailed restricted Census microdata, then use the estimated preferences to simulate a counterfactual world in which racial factors play no role in household residential location decisions. Results from this exercise provide the first evidence that sorting on the basis of race gives rise to significant reductions in the consumption of local public goods by black and high-SES black households in particular. These consumption effects lead to significant losses of welfare and are likely to have important intergenerational implications.
    JEL: H0 J7 R0 R2
    Date: 2005–01
  13. By: Tae Hoon Oum (Sauder School of Business, University of British Columbia); Xiaowen Fu (University of British Columbia); Mark Lijesen (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: Despite the airport privatization and deregulation trend in recent years, whether or not the privatized or commercialized airports should be left unregulated is still an open question. Related to this issue, one question that has received a very little attention to date is if and how pricing behavior of unregulated airports affect downstream airline competition, especially the competition between airlines offering differentiated services such as the case of full service airlines (FSA) vis-a-vis low cost carriers (LCC). If the upstream monopoly (airport) hinders downstream (airline) competition, the welfare effects of the upstream unregulated monopoly may be much larger than initially suspected. This aspect of airport pricing has not been formally incorporated in the debate on airport price regulation. In this paper, we study a duopoly model to capture the differential competitive effects of changing airport user charges on FSAs and LCCs. By making reasonable assumptions on differential price elasticities, unit costs and competitive behavior as manifested by firmspecific conduct parameters, we perform numerical simulations to measure differential effects on an FSA and an LCC of increasing airside user charge by an unregulated upstream monopolist airport. Our analytical and numerical results suggest existence of the asymmetric effects of an airport's monopoly pricing on LCC and FSA. That is, LCCs suffer more from an identical cost increase than FSAs and are, therefore, more vulnerable to monopolistic pricing practices of an unregulated airport. This implies that unregulated airport pricing would reduce the extent of competition in downstream airline markets, and thus, cause a further detrimental effect on welfare over and above the first-order dead weight loss of airport's monopolistic pricing. Considering that LCCs have brought considerable reduction of average fares and the associated welfare gains, it is important for the governments to take into account of these asymmetric effects of increasing airport user charges on FSAs and LCCs when they consider the form and extent of regulation or deregulation. Although our model and simulation work deal specifically with the effect of airport pricing on downstream airline markets, our framework of analysis may be applicable to analysis of any policy affecting costs of FSAs and LCCs including security levies as well as potentially adaptable to other upstream-downstream industry cases.
    Date: 2005–01
  14. By: Jesper Jensen; Thomas F. Rutherford; David G. Tarr (World Bank)
    Abstract: In World Trade Organization (WTO) accession negotiations, telecommunications is always a sector that receives close scrutiny by the WTO Working Party, and the extent of market access and nondiscriminatory treatment of multinational telecommunications companies in Russia has been a significant issue in Russia’s accession negotiations. Jensen, Rutherford, and Tarr use a computable general equilibrium model of the Russian economy to assess the role of telecommunications in the discussions regarding Russian accession to the WTO. The results show that reduction of barriers to foreign direct investment in telecommunications will bring substantial gains to the Russian economy, including an increase in the productivity of Russian labor and capital. Despite the fact that multinationals use Russian labor less intensively than Russian firms, demand for Russian labor employed in telecommunications should increase, following reductions in barriers to foreign direct investment that are included in the context of WTO accession. This is because the overall demand for telecommunication services should increase due to the growth effects of the liberalization of barriers against foreign direct investment generally and the reduction in tariffs. Russian capital owners in telecommunications will likely be sought as joint venture partners and can restructure and obtain gains as partners with foreign firms. Wholly owned Russian firms are likely to experience losses. This paper—a product of the Trade Team, Development Research Group—is part of a larger effort in the group to assess the consequences of liberalization of barriers against foreign direct investment in services.
    Keywords: International Economics
    Date: 2005–01–26

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