nep-cmp New Economics Papers
on Computational Economics
Issue of 2011‒08‒09
twelve papers chosen by
Stan Miles
Thompson Rivers University

  1. Numerically stable and accurate stochastic simulation approaches for solving dynamic economic models By Kenneth Judd; Lilia Maliar; Serguei Maliar
  2. The Optimal Dynamic Infant Industry Protection in Joining a Free Trade Agreement: A Numerical Analysis of the Vietnamese Motorcycle Industry By Tran Lam Anh Duong
  3. Retirement Choice Simulation in Household Settings with Heterogeneous Pension Plans By Li, Jinjing; O'Donoghue, Cathal
  4. An algorithm for calculating the set of superhedging portfolios and strategies in markets with transaction costs By Andreas L\"ohne; Birgit Rudloff
  5. Incentives of Retirement Transition for Elderly Workers: An Analysis of Actual and Simulated Replacement Rates in Ireland By Li, Jinjing; O'Donoghue, Cathal
  6. What about Coal? Interactions between Climate Policies and the Global Steam Coal Market until 2030 By Clemens Haftendorn; Claudia Kemfert; Franziska Holz
  7. On loss-avoiding lump-sum pension optimization with contingent targets By Azzato, Jeffrey; Krawczyk, Jacek; Sissons, Christopher
  8. Supply-based Dynamic Ramsey Pricing with Two Sectors: Avoiding Water Shortages By Sağlam, Yiğit
  9. Labor Supply Elasticities in Europe and the US By Olivier Bargain; Kristian Orsini; Andreas Peichl
  10. Managerial versus production wages: Offshoring, country size and endowments By Benz, Sebastian; Kohler, Wilhelm
  11. Estimating Labor Supply Responses and Welfare Participation: Using a Natural Experiment to Validate a Structural Labor Supply Model By Jörgen Hansen; Xingfei Liu
  12. Decomposing Inequality and Social Welfare Changes: The Use of Alternative Welfare Metrics By John Creedy; Nicolas Hérault

  1. By: Kenneth Judd (Hoover Institution); Lilia Maliar (Universidad de Alicante); Serguei Maliar (Universidad de Alicante)
    Abstract: We develop numerically stable and accurate stochastic simulation approaches for solving dynamic economic models. First, instead of standard least-squares methods, we examine a variety of alternatives, including least-squares methods using singular value decomposition and Tikhonov regularization, least-absolute deviations methods, and principal component regression method, all of which are numerically stable and can handle ill-conditioned problems. Second, instead of conventional Monte Carlo integration, we use accurate quadrature and monomial integration. We test our generalized stochastic simulation algorithm (GSSA) in three applications: the standard representative agent neoclassical growth model, a model with rare disasters and a multi-country models with hundreds of state variables. GSSA is simple to program, and MATLAB codes are provided.
    Keywords: Stochastic simulation; generalized stochastic simulation algorithm (GSSA), parameterized expectations algorithm (PEA); least absolute deviations (LAD); linear programming; regularization.
    JEL: C63 C68
    Date: 2011–07
  2. By: Tran Lam Anh Duong
    Abstract: This paper investigates the optimal dynamic paths of trade protection imposed on infant industries during the process of joining a free trade agreement. The framework is based on the dynamic learning-by-doing model developed in Melitz (2005), where industries are experiencing dynamic externalities. In this framework, restricted-time protection is introduced as a realistic approach to correspond to the conditions of actual agreements. According to the computational analysis, in some feasible cases of optimal tariff paths may not follow a downward trend, as conventional wisdom would suggest. The results of the numerical simulation applied to the Vietnamese motorcycle industry support these findings.
    Keywords: dynamic externality, infant industry protection, numerical analysis, Vietnam
    JEL: F13 F17 L62
    Date: 2011–05
  3. By: Li, Jinjing (Maastricht University); O'Donoghue, Cathal (Teagasc Rural Economy Research Centre)
    Abstract: This paper estimates a structured life cycle model of family retirement decision using a unique historical dataset back simulated from Living in Ireland survey. Our model takes the advantages of the dataset and models retirement decisions in terms of monetary and leisure incentives, which reflect the complex welfare system in Ireland. The household extension version of the model adapts a collective modelling approach, where the intra-household bargaining is considered. We further incorporate complimentary leisure, which allows us to analyse the interactions of spouses' retirement timing. This methodology enables us to capture the dynamics of retirement and tax-benefit policies and can be used to simulate the effect of policy reform on household retirement behaviours. The paper, in addition, applies the model to assess individual budgetary implications and the labour market impact of rising the minimum retirement age. Our simulation shows that increasing the minimum age for state pension entitlement to 70 would only delay the retirement by less than 2 years according to the individual based model. When we consider the intra-household bargaining and the higher preference of leisure found in the dual career households, the effect of postponing retirement further declines. The result suggests barely postponing the minimum retirement age for state pension without redefining the occupation and private pension rules will only have limited impact for household retirement behaviour in Ireland.
    Keywords: retirement, choice modelling, microsimulation
    JEL: J14 J26
    Date: 2011–07
  4. By: Andreas L\"ohne; Birgit Rudloff
    Abstract: We study the explicit calculation of the set of superhedging portfolios of contingent claims in a discrete-time market model for d assets with proportional transaction costs when the underlying probability space is finite. The set of superhedging portfolios can be obtained by a recursive construction involving set operations, going backward in the event tree. We reformulate the problem as a sequence of linear vector optimization problems and solve it by adapting known algorithms. The corresponding superhedging strategy can be obtained going forward in the tree. We discuss the selection of a trading strategy from the set of all superhedging trading strategies. Examples are given involving multiple correlated assets and basket options. Furthermore, we relate existing algorithms for the calculation of the scalar superhedging price to the set-valued algorithm by a recent duality theory for vector optimization problems.
    Date: 2011–07
  5. By: Li, Jinjing (Maastricht University); O'Donoghue, Cathal (Teagasc Rural Economy Research Centre)
    Abstract: Retirement behaviours and elderly poverty issues have been the subject of much attention and discussion in recent years as most countries are facing a rapidly ageing society. Ireland enjoys a relatively young population compared with other European countries, but is also struggling with increasing fiscal pressures. This paper analyses the retirement pattern and the replacement rate observed in Ireland using the Living in Ireland panel dataset. Since traditional empirical estimations may have selection bias issues as people with low replacement rates may not choose to retire, the paper adopts a combined method with both synthetic household simulation and empirical estimates. The study reveals the social economic attributes patterns associated with the replacement rates and retirement behaviours, and explores the heterogeneities of replacement rates among retirees.
    Keywords: retirement, replacement rates, microsimulation
    JEL: J14
    Date: 2011–07
  6. By: Clemens Haftendorn; Claudia Kemfert; Franziska Holz
    Abstract: Because of economic growth and a strong increase in global energy demand the demand for fossil fuels and therefore also greenhouse gas emissions are increasing, although climate policy should lead to the opposite effect. The coal market is of special relevance as coal is available in many countries and often their first choice to meet energy demand. In this paper we assess possible interactions between climate policies and the global steam coal market. Possible market adjustments between demand centers through market effects are investigated with a numerical model of the global steam coal market until 2030: the "COALMOD-World" model. The COALMOD-World model is an equilibrium model that computes future trade flows, infrastructure investments and prices until 2030. We investigate three specific designs of climate policy: a unilateral European climate policy, an Indonesian export-limiting policy and a carbon capture and storage (CCS) fast-roll out policy in the broader context of climate policy and market constraints. We find that market adjustment effects in the coal market can have significant positive and negative impacts on the effectiveness of climate policies.
    Keywords: climate policy, future coal production, energy, numerical modeling, international trade
    Date: 2011
  7. By: Azzato, Jeffrey; Krawczyk, Jacek; Sissons, Christopher
    Abstract: Consider a lump-sum pension fund problem, in which an agent deposits an amount with a fund manager up front and is later repaid a lump sum x(T) after time T. The fund manager may be both cautious in seeking a payoff x(T) meeting a certain target, but relaxed toward the possibility of exceeding this target. We use a computational method in stochastic optimal control (“SOCSol”) to find approximately-optimal decision rules for such “cautious-relaxed” fund managers. In particular, we examine fund optimisation problems in which the target is contingent upon market conditions such as inflation.
    Keywords: lump-sum, pension, optimal, inflation,
    Date: 2011–02–18
  8. By: Sağlam, Yiğit
    Abstract: In many countries, current water-pricing policies are dictated by the sole objective of breaking-even in each period. This results in large withdrawals, which are not sustainable in the long-run, hence not optimal. In this paper, I derive the optimal dynamic water resource management policy of a benevolent government, which supplies water to households and agriculture. I compare the efficiency implications of the current and the optimal pricing policies using simulations. I endogenize crop-choice decisions and estimate the changes in the crop composition with the generalized method of moments. Using data from Turkey, I nd that, under the policy of break-even prices, the average number of years before the government runs into the water shortage, when it cannot meet the sectoral demands, is eight years. In contrast, if the government were to choose water prices optimally, then water shortages would be practically nonexistent over the next century.
    Keywords: Ramsey Pricing, Water Shortages, Water Pricing, Dynamic Programming, Irrigation,
    Date: 2011–02–18
  9. By: Olivier Bargain (University College Dublin); Kristian Orsini (University of Leuven); Andreas Peichl (University of Cologne)
    Abstract: Despite numerous studies on labor supply, the size of elasticities is rarely com- parable across countries. In this paper, we suggest the first large-scale international comparison of elasticities, while netting out possible differences due to methods, data selection and the period of investigation. We rely on comparable data for 17 Euro- pean countries and the US, a common empirical approach and a complete simulation of tax-benefit policies affecting household budgets. We find that wage-elasticities are small and vary less across countries than previously thought, e.g., between .2 and .6 for married women. Results are robust to several modeling assumptions. We show that differences in tax-benefit systems or demographic compositions explain little of the cross-country variation, leaving room for other interpretations, notably in terms of heterogeneous work preferences. We derive important implications for research on optimal taxation.
    Keywords: household labor supply, elasticity, taxation, Europe, US
    Date: 2011–07–27
  10. By: Benz, Sebastian; Kohler, Wilhelm
    Abstract: We explore the role of trade in differentiated final goods as well ollshoring of tasks for inequality both within and between countries. We emphasize the distinction between managerial and production labor. Managerial labor is a fixed input while production labor is a variable input. Following Grossman & Rossi-Hansberg (2010b) we assume that production labor is composed of tradable tasks, with Marshallian economies of scale on the task level. We first identify the key determinants of income distribution in a world where trade is restricted to final goods. We then allow for trade in production tasks, driven by country size as well as relative endowment with managerial and production labor. If the two countries are of equal size and if their relative endowments are not too different, then the task trading equilibrium features equalization of production wages, although the pattern of task trade and managerial wages are indeterminate. For differences in relative endowments beyond a certain threshold level, the trading equilibrium is unique and features one-way trade in line with comparative advantage. Relying on numerical simulations we show that international inequality is affected in a non-monotonic way by the cost of task trade. Comparing orders of magnitude we conclude that offshoring between similar countries only has a small positive effect on the managerial wage premium, compared to offshoring between countries with a different relative endowment. --
    Keywords: Offshoring,Economies of Scale,Income Distribution,International Inequality
    JEL: F12 F16 F23
    Date: 2011
  11. By: Jörgen Hansen; Xingfei Liu
    Abstract: In this paper, we formulate and estimate an economic model of labor supply and welfare participation. The model is estimated on data on single men from Quebec drawn from the 1986 Canadian Census. Budget sets for each work-welfare combination - accounting for income taxes, tax credits and welfare benefit rules - are derived using a microsimulation model. We validate our model by comparing reactions to a welfare reform that implied a dramatic increase in welfare benefits predicted by our model to those obtained by using a regression discontinuity approach. The results show that our model is capable of recovering actual changes in labor supply and welfare participation. We also show the advantage of having estimated a structural model by illustrating how labor supply and welfare participation change when benefit levels change. <P>
    Keywords: labor supply, welfare participation, unobserved heterogeneity, natural experiment, regression discontinuity, microsimulation,
    Date: 2011–07–01
  12. By: John Creedy (Department of Economics, The University of Melbourne); Nicolas Hérault (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: This paper presents two 'non-welfarist' approaches and one 'welfarist' approach to decompose changes in inequality and social welfare into three components. We distinguish the contributions of population, tax policy and labour supply behavioural effects. As an illustration, we decompose changes in inequality and in values of a social welfare function in Australia between 2001 and 2006. Inequality is first defined in non-welfarist terms as a function of disposable income: the independent judge places no value on leisure. Then this is modified to allow for evaluations using a weighted geometric mean of disposable income and leisure. This is seen to modify the evaluation of changes in important ways. Furthermore, the results are shown to be quite different from those obtained using a 'welfarist' evaluation in terms of money metric utility, where separate behavioural effects cannot be isolated.
    Keywords: Inequality decomposition, social welfare function, behavioural microsimulation, money metric utility
    JEL: D63 H31 I31 J22
    Date: 2011–04

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