nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒02‒13
twelve papers chosen by
Christian Zimmermann
University of Connecticut

  1. Health Care Financing over the Life Cycle, Universal Medical Vouchers and Welfare By Juergen Jung; Chung Tran
  2. The Black Economy and Education By Kolml, Ann-Sofie; Larsen, Birthe
  3. Family Job Search, Wage Bargaining, and Optimal Unemployment Insurance By and Bertil Holmlund, Susanne Ek
  4. Public Capital, Public Pension, and Growth By Noritaka Maebayashi
  5. Technology Adoption, Vintage Capital and Asset Prices By Xiaoji Lin
  6. Accounting for the Racial Property Crime Gap in the US: A Quantitative Equilibrium Analysis By Marco Cozzi
  8. Financial Innovation and Endogenous Growth By Stelios Michalopoulos; Luc Lueven; Ross Levine
  9. Retirement and Social Security: A Political Economy Perspective By Ryo Arawatari; Tetsuo Ono
  10. Discrimination and Employment Protection By Holden, Steinar; Rosén, Åsa
  11. Income inequalities and innovation by incumbents By Helene LATZER
  12. Euler-Equation Estimation for Discrete Choice Models: A Capital Accumulation Application By Russell Cooper; John Haltiwanger; Jonathan Willis

  1. By: Juergen Jung (Department of Economics, Towson University); Chung Tran (Department of Economics, University of New South Wales)
    Abstract: In this paper we develop a general equilibrium overlapping generations (OLG) model with health shocks to analyze the life-cycle pattern of insurance choice and health care spending. We use data from the Medical Expenditure Panel Survey (MEPS) and show that our model is able to match the life-cycle trends of insurance take up ratios and average medical expenditures in the U.S. We then demonstrate how this model can be used to conduct health care policy analysis by evaluating the macroeconomic effects of a counter factual health care reform using a system of universal health insurance vouchers. Our results suggest that health insurance vouchers are able to extend insurance coverage to the entire population but they also increase aggregate spending on health. More importantly, we find that the positive insurance effect (efficient risk pooling) dominates the negative incentive effect (tax distortions and moral hazard) which results in significant welfare gains for all generations when a payroll tax is used to finance the voucher program. In addition, our results suggest that the choice of tax financing instrument and accounting for general equilibrium price adjustments are critical in determining the performance of the voucher program.
    Keywords: Public health insurance, private health insurance, vouchers, dynamic stochastic general equilibrium model, endogenous health production.
    JEL: H51 I18 I38 E6 E21 E62
    Date: 2010–02
  2. By: Kolml, Ann-Sofie (Dept. of Economics, Stockholm University); Larsen, Birthe (Insead, CEBR and Copenhagen Business School)
    Abstract: This paper develops and equilibrium search and matching model with informal sector employment opportunities and educational choice. We show that informal sector job opportunities distort educational attainment inducing a too low stock of educated workers. As informal job opportunities to a larger extent face low skilled workers, combating the informal sector improves welfare as it increases the incentives for education. However, too aggressive combating of the informal sector is not optimal as that induces inefficiently high unemployment rates.
    Keywords: Tax evasion; underground economy; education; matching; unemployment
    JEL: H26 I21 J64
    Date: 2010–02–02
  3. By: and Bertil Holmlund, Susanne Ek (Department of Economics)
    Abstract: The paper develops an equilibrium search and matching model where two-person families as well as singles participate in the labor market. We show that equilibrium entails wage dispersion among equally productive risk-averse workers. Marital status as well as spousal labor market status matter for wage outcomes. In general, employed members of two-person families receive higher wages than employed singles. The model is applied to a welfare analysis of alternative unemployment insurance systems, recognizing the role of spousal employment as partial substitute for public insurance. The optimal system involves benefit differentiation based on marital status as wellas spousal labor market status. Optimal differentiation yields small welfare gains but gives rise to large wage differentials.
    Keywords: Job search; wage bargaining; wage differentials; unemployment; unemployment insurance
    JEL: J31 J64 J65
    Date: 2010–01–27
  4. By: Noritaka Maebayashi (Graduate School of Economics, Osaka University)
    Abstract: This paper constructs an endogenous growth model with overlapping generations, whose engine of economic growth is productive public capital. The government faces a trade-off in public policy between public investment and social security provision because of its budget constraint. Larger public investment accelerates economic growth. On the other hand, larger public investment reduces the social security provision. This may reduce the consumption stream of agents. We first show that when the government aims at growth maximization, it chooses no social security provision. However, we also show that the growth-maximizing policy does not maximize welfare levels of each generation on the balanced growth path. Early generations may demand social security provision because the benefits from economic growth caused by an acceleration of public investment are relatively small. In contrast, future generations may require no social security provision but a large amount of public capital. Additionally, by setting the tax rate below the level that maximizes the growth rate, the government can make the welfare levels of all generations from the initial state on the balanced growth path better off. Moreover, in an economy facing an aging population, an increase in the social security provision to the old rather than an increase in public investment can be preferable from the viewpoint of social welfare.
    Keywords: public capital, social security, overlapping generations
    JEL: E62 H54 H55
    Date: 2010–01
  5. By: Xiaoji Lin
    Abstract: We study technology adoption, risk and expected returns using a dynamic equilibrium model with production. The central insight is that optimal technology adoption is an important driving force of the cross section of stock returns. The model predicts that technology adopting firms are less risky than non-adopting firms. Intuitively, by preventing firms from freely upgrading existing capital to the technology frontier, costly technology adoption reduces the flexibility of firms in smoothing dividends, and hence generates the risk dispersion between technology adopting firms and non-adopting firms. The model explains qualitatively and in many cases quantitatively empirical regularities: (i) The positive relation between firm age and stock returns; (ii) firms with high investment on average are younger and earn lower returns than firms with low investment; and (iii) growth firms on average are younger than value firms, and the value premium is increasing in firm age.
    Date: 2010–01
  6. By: Marco Cozzi (Queen’s University)
    Abstract: This paper studies the effects of both labor market conditions and asset poverty on the property crimes involvement of American males. Since the mid 60’s the property crimes arrest rate has been four times higher for black males if compared to white ones. Another set of stylised facts show for the first demographic group lower educational levels and worse labor market outcomes, with the African Americans supplying less hours of labor, gaining lower wages, experiencing both higher unemployment duration and rates. At the same time, more than 30% of black households had a negative net worth. A dynamic general equilibrium model is developed, exploiting these facts to quantitatively assess the race crime gap, that is the difference in crime explained by the difference in observables. The model is calibrated relying on US data and solved numerically. The model captures well relevant dimensions of the crime phenomenon, such as the inmates composition by race, employment status and education. Simulation results show that the observed poverty and labor market outcomes account for as much as 90% of the arrest rates ratio. Finally the model is used to compare two alternative policy experiments aimed at reducing the aggregate crime rate: increasing the expenditure on police seems to be cost effective, when compared to an equally expensive lump-sum subsidy targeted to the high school dropouts.
    Keywords: Property crimes, Computable General Equilibrium, Incomplete Markets, Race, Wealth Inequality
    JEL: K42 D58 D52 D99 J15
    Date: 2010–01
  7. By: Aronsson, Thomas (Department of Economics, Umeå University); Johansson-Stenman, Olof (Department of Economics)
    Abstract: This paper concerns optimal nonlinear taxation in an OLG model with two ability-types, where people care about their own consumption relative to (i) other people’s current consumption, (ii) own past consumption, and (iii) other people’s past consumption. We show that intertemporal consumption comparisons affect the marginal income tax structure in the same qualitative way as comparisons based on other people’s current consumption. Based on available empirical estimates, comparisons with other people’s current and previous consumption tend to substantially increase the optimal marginal labor income tax rates, while they may either increase or decrease the optimal marginal capital income tax rates.
    Keywords: Optimal income taxation; asymmetric information; relative consumption; status; habit formation; positional goods
    JEL: D62 H21 H23 H41
    Date: 2010–01–31
  8. By: Stelios Michalopoulos; Luc Lueven; Ross Levine
    Abstract: We model technological and financial innovation as reflecting the decisions of profit maximizing agents and explore the implications for economic growth. We start with a Schumpeterian endogenous growth model where entrepreneurs earn monopoly profits by inventing better goods and financiers arise to screen entrepeneurs. A novel feature of the model is that financiers also engage in the costly, risky, and potentially profitable process of innovation: Financiers can invent more effective processes for screening entrepreneurs. Every existing screening process, however, becomes less effective as technology advances. Consequently, technological innovation and, thus, economic growth stop unless financiers continually innovate. Historical observations and empirical evidence are more consistent with this dynamic model of financial innovation and endogenous growth than with existing models of financial development and growth.
    Keywords: Invention, Economic Growth, Corporate Finance, Financial Institutions, Technological Change, Entrepreneurship.
    JEL: G0 O31 O4
    Date: 2010
  9. By: Ryo Arawatari (Faculty of Economics, Shinshu University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: Countries with higher implicit taxes on continued work are associated with lower labor force participation rates of the elderly. This paper constructs a politicoeconomic model that accounts for this feature based on multiple, self-fulfilling expectations of agents. In this model, agents are identical at birth and can become skilled (or remain unskilled) through educational investment. When agents hold expectations of higher future taxation (i.e., higher social security benefits), it provides a disincentive to engage in educational investment, thereby resulting in an unskilled majority. In turn, this unskilled majority supports higher taxation, which induces the retirement of the elderly and thus results in a lower labor force participation rate. The opposite applies when agents have expectations of lower taxes in their old age.
    Keywords: Political equilibrium; Retirement; Self-fulfilling expectations; Social security
    JEL: H55 D72 J26
    Date: 2010–02
  10. By: Holden, Steinar (Dept. of Economics, University of Oslo); Rosén, Åsa (Stockholm University (SOFI))
    Abstract: We study a search model with employment protection legislation. We show that if the output from the match is uncertain ex ante, there may exist a discriminatory equilibrium where workers with the same productive characteristics are subject to different hiring standards. If a bad match takes place, discriminated workers will use longer time to find another job, prolonging the costly period for the firm. This makes it less profitable for the firms to hire the discriminated workers, thus sustaining discrimination. In contrast to standard models, the existence of employers with a taste for discrimination may make it more profitable to discriminate also for firms without discriminatory preferences.
    Keywords: Discrimination; Employment Protection; Hiring Standards
    JEL: J60 J70
    Date: 2009–09–29
  11. By: Helene LATZER (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: Our paper presents a new rationale for innovation by incumbents. We show that the possibility to price-discriminate between consumers having different levels of wealth is a sufficient incentive for the industry leader to overcome the Arrow (1962) effect and keep investing in R&D, even in the absence of any incumbent advantage in the R&D field. We model an economy composed of two distinct groups of consumers, differing in their wealth endowment and subject to non-homothetic preferences, obtained through unit consumption of the quality good. We demonstrate that in such a framework, there exists a unique steady state equilibrium with positive innovation rates of both incumbents and challengers. Beyond its novelty, this result then also allows us to analyze the effect of the extent of income inequalities on both the challenger and incumbent innovation rates, and by extension on the economic growth rate. We demonstrate that a higher share of the population being poor is detrimental to the rate of economic growth, while a redistribution of wealth from rich to poor consumers increases the challenger innovation rate and has ambiguous effects on the incumbentÕs investment in R&D.
    Keywords: Growth, Innovation, Income inequalities.
    JEL: O3 O4 F4
    Date: 2009–11–13
  12. By: Russell Cooper; John Haltiwanger; Jonathan Willis
    Abstract: This paper studies capital adjustment at the establishment level. Our goal is to characterize capital adjustment costs, which are important for understanding both the dynamics of aggregate investment and the impact of various policies on capital accumulation. Our estimation strategy searches for parameters that minimize ex post errors in an Euler equation. This strategy is quite common in models for which adjustment occurs in each period. Here, we extend that logic to the estimation of parameters of dynamic optimization problems in which non-convexities lead to extended periods of investment inactivity. In doing so, we create a method to take into account censored observations stemming from intermittent investment. This methodology allows us to take the structural model directly to the data, avoiding time-consuming simulation based methods. To study the effectiveness of this methodology, we first undertake several Monte Carlo exercises using data generated by the structural model. We then estimate capital adjustment costs for U.S. manufacturing establishments in two sectors.
    Date: 2010–01

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