nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2011‒02‒12
nineteen papers chosen by
Christian Zimmermann
University of Connecticut

  1. Tradable pollution permits in dynamic general equilibrium: can optimality and acceptability be reconciled? By BRECHET, Thierry; JOUVET, Pierre - André; ROTILLON, Gilles
  2. Sorting and the Output Loss Due to Search Frictions By Gautier, Pieter; Teulings, Coen
  3. Family policies : what does the standard endogenous fertility model tell us ? By BAUDIN, Thomas
  4. Estimating the Euler Equation for Aggregate Investment with Endogenous Capital Depreciation By Eleni Angelopoulou; Sarantis Kalyvitis
  5. Competitive Equilibria with Production and Limited Commitment By Arpad Abraham; Eva Carceles-Poveda
  6. Fertility, human capital accumulation, and the pension system By CREMER, Helmuth; GAHVARI, Firouz; PESTIEAU, Pierre
  7. First-and second-best allocations under economic and environmental uncertainty By Konstantinos Angelopoulos; George Economides; Apostolis Philippopoulos
  8. Longevity and Saving for Retirement. By Vaz Paralta, Sara Sofia
  9. Transition to FDI openness: reconciling theory and evidence By Ellen R. McGrattan
  10. In-Work Benefits and Unemployment By Tonin, Mirco; Kolm, Ann-Sofie
  11. A Matching Model of the Academic Publication Market By Radu Vranceanu; Damien Besancenot; Kim Huynh
  12. Aggregate Implications of Micro Asset Market By Chris Edmond & Pierre-Olivier Weill
  13. Population Growth and Multiple Equilibria: Inferences from a Modified Ramsey Model By Lehmijoki, Ulla
  14. Incentive Effects of Risk Pooling, Redistributive and Savings Arrangements in Unemployment Benefit Systems: Evidence from a Job-Search Model for Brazil By Robalino, David A.; Zylberstajn, Eduardo; Robalino, Juan David
  15. Ist Wirtschaftswachstum systemimmanent? By Irmen, Andreas
  16. Intrepreting Labor Supply Regressions in a Model of Full and Part-Time Work By Yongsung Chang; Sun-Bin Kim; Kyooho Kwon; Richard Rogerson
  17. Tax Evasion under Market Incompleteness By Marco Maffezzoli
  18. The optimal trade-off between quality and quantity with uncertain child survival By BAUDIN, Thomas
  19. Property rights with biological spillovers: when Hardin meets Meade By BALESTRA, Carlotta; BRECHET, Thierry; LAMBRECHT, Stéphane

  1. By: BRECHET, Thierry (Université catholique de Louvain, CORE and Chair Lhoist Berghmans in Environmental Economics and Management, B-1348 Louvain-la-Neuve, Belgium); JOUVET, Pierre - André (EconomiX, Université de Paris Ouest, Nanterre – La Défense, France); ROTILLON, Gilles (EconomiX, Université de Paris Ouest, Nanterre – La Défense, France)
    Abstract: In this paper we study the optimal growth path and its decentralization in a two-sector overlapping- generations model with pollution. One sector (power generation) is polluting and the other (final good) is not. Pollution is regulated by tradable emission permits. The issue is whether the optimal growth path can be replicated in equilibrium with pollution permits, given that some permits must be issued free of charge for the sake of political acceptability. We provide a policy rule that allows optimality and acceptability to be reconciled.
    Keywords: general equilibrium, optimal growth, pollution, tradable emission permits, acceptability
    JEL: D61 D9 Q28
    Date: 2010–10–01
  2. By: Gautier, Pieter (VU University Amsterdam); Teulings, Coen (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: We analyze a general search model with on-the-job search and sorting of heterogeneous workers into heterogeneous jobs. This model yields a simple relationship between (i) the unemployment rate, (ii) the value of non-market time, and (iii) the max-mean wage differential. The latter measure of wage dispersion is more robust than measures based on the reservation wage, due to the long left tail of the wage distribution. We estimate this wage differential using data on match quality and allow for measurement error. The estimated wage dispersion and mismatch for the US is consistent with an unemployment rate of 4-6%. We find that without search frictions, output would be between 7.5% and 18.5% higher, depending on whether or not firms can ex ante commit to wage payments.
    Keywords: search, sorting, wage dispersion, on-the-job search, unemployment
    JEL: E24 J62 J63 J64
    Date: 2011–02
  3. By: BAUDIN, Thomas (Université catholique de Louvain, CORE and IRES, B-1348 Louvain-la-Neuve, Belgium)
    Abstract: Very few studies have explored the optimality properties of the "standard model" of fertility where parents must determine their optimal trade-off between quality and quantity. The present paper works to fill that gap and find three main results. First, when there exist positive externalities in the accumulation of human capital, it is optimal to subsidize education and to tax births. Second, when the Social Welfare Function does not consist of the average utility, the social returns on educational in- vestments can be weaker than the private returns when the optimal population growth rate is negative. In this case, the optimal economic policy consists in subsidizing births and taxing education. Finally, when the health expenditure is introduced as another source of positive externalities, it can be optimal to tax the parental health expenditure to decentralize the first-best path even if this expenditure is always too low at the laissez-faire equilibrium.
    Keywords: fertility, education, family policy, mortality, quality quantity trade-off
    JEL: D10 H21 J13 J18
    Date: 2010–10–01
  4. By: Eleni Angelopoulou (Bank of Greece); Sarantis Kalyvitis (DIEES, AUEB)
    Abstract: This paper looks at the empirical consequences of introducing endogenous capital depreciation in the standard neoclassical model with quadratic adjustment costs. To this end, we formulate an empirical specification that accommodates capital maintenance and utilization in the Euler equations for aggregate investment. The empirical estimates with data from the Canadian survey on Capital and Repair Expenditures show that, in contrast to the existing literature, the performance of the Euler equations is improved when we account for the impact of variable capital depreciation.
    Keywords: Euler equation; endogenous depreciation; maintenance expenditures
    JEL: D92 E22
    Date: 2011–02–02
  5. By: Arpad Abraham (Department of Economics, University of Rochester); Eva Carceles-Poveda (Department of Economics, Stony Brook University)
    Abstract: This paper studies a production economy with aggregate uncertainty where consumers have limited commitment on their financial liabilities. Markets are endogenously incomplete due to the fact that the borrowing constraints are determined endogenously. We first show that, if competitive financial intermediaries are allowed to set the borrowing limits, then the ones that prevent default will be an equilibrium outcome. The equilibrium allocations in this economy are not constrained efficient due to the fact that intermediaries do not internalize the adverse effects of capital on default incentives. We also isolate and quantifiy this new source of inefficiency by comparing the competitive equilibrium allocations to the constrained efficient ones both qualitatively and quantitatively. We tend to observe higher capital accumulation in the competitive equilibrium, implying that agents may enjoy higher (average) welfare in the long run than in the constrained efficient allocation.
    Keywords: Enforcement Constraints, Intermediation, Risk Sharing, Capital Accumulation.
    JEL: D52 E23
    Date: 2010–10
  6. By: CREMER, Helmuth (Toulouse School of Economics ( University or Toulouse and Institut Universitaire de France), F-3000 Toulouse, France); GAHVARI, Firouz (University of Illinois at Urbana-Champaign, Department of Economics, IL, USA); PESTIEAU, Pierre (CREPP, University of Liege, B-4000 Liège, Belgium; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve)
    Abstract: This paper provides a unified treatment of externalities associated with fertility and human capital accumulation within pas-as-you-go pension systems. It considers an overlapping generations model in which every generation consists of high earners and low earners with the proportion of types being determined endogenously. The number of children is deterministically chosen but the children’s future ability is in part stochastic, in part determined by the family background, and in part through education. In addition to the customary externality source associated with a change in average fertility rate, this setup highlights another externality source. This is due to the effect of a parent’s choice of number and educational attainment of his children on the proportion of high- ability individuals in the steady state. Our other results include: (i) Investments in education of high- and low-ability parents must be subsidized; (ii) direct child subsidies to one or both parent types can be negative; i.e., they can be taxes; (iii) net subsidies to children (direct child subsidies plus education subsidies) to at least one type of parents must be positive; (iv) parents who have a higher number of children should invest less in their education.
    Keywords: pay-as-you-go social security, endogenous fertility, education, endogenous ratio of high to low ability types, three externality sources, education subsidies, child subsidies
    JEL: H2 H5
    Date: 2010–09–01
  7. By: Konstantinos Angelopoulos; George Economides; Apostolis Philippopoulos
    Abstract: This paper uses a micro-founded DSGE model to compare second-best optimal environmental policy and the resulting allocation to first-best allocation. The focus is on the source and size of uncertainty, and how this affects optimal choices and the inferiority of second best vis-à-vis first best.
    Keywords: General equilibrium; uncertainty; environmental policy; second best
    JEL: C68 D81 H23
    Date: 2010–10
  8. By: Vaz Paralta, Sara Sofia
    Abstract: Epargner pour la retraite est une décision qui dépend du revenu disponible comme du revenu espéré futurement, de la composition des ménages et les âges des individus, de la richesse nette accumulée et, finalement, de la longévité durant l’âge actif et pendant la période de la retraite. La théorie du cycle de vie explique les décisions de consommation et l’épargne en fonction des phases de la vie de l’individu. Dans une première phase, (en occurrence l’enfance), l’individu consomme et reçoit son éducation. Dans une seconde phase, (l’activité professionnelle), l’individu produit, consomme et épargne. Dans une troisième phase, celle de la retraite, l’individu utilise sa richesse nette accumulée pendant la période d’activité incluant la richesse provenant de la sécurité sociale pour financer sa consommation du cycle de vie. Les modèles sociaux assurent le remplacement du revenu et l’accès à des prestations dans toutes les phases de la vie de l’individu et influencent les décisions de consommation et d'épargne. Dans cette thèse, le comportement de l’épargne est analysé en prenant en compte la longévité dans les différents pays représentatifs des modèles sociaux européens, notamment, la Suède (Modèle Nordique), la France (Modèle Continental), le Portugal (Modèle Méditerranéen) et le Royaume-Uni (Modèle Anglo-Saxon).
    Abstract: Saving for retirement is a decision that depends on many factors. Firstly, it depends on the disposable income and future expected income. Secondly, the composition of households and the ages of individuals are determinant. Thirdly, it depends on the composition of net wealth and, finally, longevity during working life and retirement period. The life-cycle theory explains the consumption and saving decisions in function of the different phases in life. During childhood, the individual consumes and receives his education. In a second stage, the individual actively consumes, produces and saves. In a third phase, the individual uses his accumulated net wealth, including the amount of social security wealth, to finance his consumption of life-cycle during retirement. The social models ensure a substitution income and access to benefits in every stage of life, causing an impact on consumption and saving decisions. In this dissertation, saving behaviour is analysed by considering the impact of longevity in different countries representative of the various European Social Models, i.e. Sweden (Nordic Model), France (Continental Model), Portugal (Mediterranean Model) and the UK (Anglo-Saxon Model).
    Keywords: Modèles Sociaux; Longevité; Consommation; Epargne; Social Models; Longevity; Consumption; Saving;
    JEL: J14 H55 H53 J11 I31 E21
    Date: 2010–05
  9. By: Ellen R. McGrattan
    Abstract: Empirical studies quantifying the economic effects of increased foreign direct investment (FDI) have not provided conclusive evidence that they are positive, as theory predicts. This paper shows that the lack of empirical evidence is consistent with theory if countries are in transition to FDI openness. Anticipated welfare gains lead to temporary declines in domestic investment and employment. Also, growth measures miss some intangible FDI, which is expensed from company profits. The reconciliation of theory and evidence is accomplished with a multicountry dynamic general equilibrium model parameterized with data from a sample of 104 countries during 1980–2005. Although no systematic benefits of FDI openness are found, the model demonstrates that the eventual gains in growth and welfare can be huge, especially for small countries.
    Date: 2011
  10. By: Tonin, Mirco (University of Southampton); Kolm, Ann-Sofie (Stockholm University)
    Abstract: In-work benefits are becoming an increasingly relevant labour market policy, gradually expanding in scope and geographical coverage. This paper investigates the equilibrium impact of in-work benefits and contrasts it with the traditional partial equilibrium analysis. We find under which conditions accounting for equilibrium wage adjustments amplifies the impact of in-work benefits on search intensity, participation, employment, and unemployment, compared to a framework in which wages are fixed. We also account for the financing of these benefits and determine the level of benefits necessary to achieve efficiency in a labour market characterized by search externalities.
    Keywords: in-work benefits, search, labour force participation, wage adjustment
    JEL: J21 J38 H24
    Date: 2011–02
  11. By: Radu Vranceanu (Economics Department - ESSEC Business School); Damien Besancenot (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Kim Huynh (L.E.M. - Laboratoire d'Economie Moderne - Université Paris 2)
    Abstract: Given the myriad of journal titles in economics and business administration, scholars can sometimes target the wrong journal. This paper provides a dynamic analysis of the market for academic publications that brings into the picture this type of informational friction. The key modelling device is a paper-tojournal matching function, similar to the matching function traditional in labor economics. An equilibrium is defined as a situation where both editors and authors implement their optimal publication strategies. The model is then solved for the equilibrium submission fee, desk rejection rate and ratio between the number of editors and the number of authors.
    Keywords: Academic Journals ; Editors ; Imperfect Information ; Matching
    Date: 2010
  12. By: Chris Edmond & Pierre-Olivier Weill
    Abstract: This paper develops a consumption-based asset pricing model to explain and quantify the aggregate implications of a frictional financial system, comprised of many financial markets partially integrated with one another. Each of our micro financial markets is inhabited by traders who are specialized in that market’s type of asset. We specify exogenously the level of segmentation that ultimately determines how much idiosyncratic risk traders bear in their micro market and derive aggregate asset pricing implications. We pick segmentation parameters to match facts about systematic and idiosyncratic return volatility. We find that if the same level of segmentation prevails in every market, traders bear 30% of their idiosyncratic risk. With otherwise standard parameters, this benchmark model delivers an unconditional equity premium of 2.4% annual. We further disaggregate the model by allowing the level of segmentation to differ across markets. This version of the model delivers the same aggregate asset pricing implications but with only one-third the amount of segmentation: on average traders bear 10% of their idiosyncratic risk.
    Keywords: Asset pricing; market segmentation; idiosyncratic risk
    JEL: G12
    Date: 2011
  13. By: Lehmijoki, Ulla (University of Helsinki)
    Abstract: The demographic transition is introduced into the otherwise standard Ramsey model to generate multiple equilibria, poverty traps, and demography-driven cycles. The model is calibrated for global data to explore the demographic conditions under which multiplicity is realized. Three cases arise, referring either to unique or multiple equilibria, and to transitional cycles. The calibrated model shows that multiple equilibria can explain a considerable fraction of the global income gap. The model provides a test to distinguish the trapped countries from those which just suffer from a long-lasting demographic recession, showing that the latter are more common than the former. Therefore, the economic effects of the demographic transition, even though considerable, are temporary rather than permanent.
    Keywords: demographic transition, optimal growth, multiple equilibria, poverty traps, calibrations
    JEL: O41 O11 J11
    Date: 2011–01
  14. By: Robalino, David A. (World Bank); Zylberstajn, Eduardo (Fundação Getúlio Vargas); Robalino, Juan David (Imperial College London)
    Abstract: We develop a model of job search and use it to assess the effects that the Brazilian unemployment benefit system has on exit rates from unemployment. In our setup, unemployed workers receive job offers from the formal and informal sectors and decide whether to accept them or wait. Only jobs in the formal sector come with unemployment benefits. After incorporating the rules of the Brazilian unemployment benefit system we estimate the parameters of the model using its labor force survey (a rotating panel). Key parameters determining model dynamics are: the distribution of wage offers for each individual; the observed probabilities of separation from formal and informal jobs; and the unobserved job offers arrival rates. The results show that, in general, workers eligible for unemployment benefits also have higher offer rates – their unobserved characteristic are correlated with more job opportunities. Policy simulations ten suggest that the risk pooling and savings component of the unemployment benefit system have small effects on the probabilities of remaining unemployed. The main effect of both schemes is to reduce transitions into informal jobs. The effects are larger for unskilled workers, particularly women. The simulations also show that current effects are conditioned on the design of the system. More generous unemployment benefits, for instance, could substantially increase the share of workers who remain unemployed. In addition, asking workers to contribute to finance unemployment benefits would reduce formal employment.
    Keywords: labor market transitions, unemployment insurance, social protection, job-search models, structural estimations
    JEL: J63 J64 J65
    Date: 2011–02
  15. By: Irmen, Andreas
    Keywords: Economic Growth; Neoclassical Growth Model; Economic Systems
    JEL: N10 O10 O33 P17 P27
    Date: 2011–01–28
  16. By: Yongsung Chang (University of Rochester); Sun-Bin Kim (Department of Economics, Korea University); Kyooho Kwon (University of Rochester); Richard Rogerson (Arizona State University)
    Abstract: We construct a family model of labor supply that features adjustment along both the intensive and extensive margin. Intensive margin adjustment is restricted to two values: full time work and part-time work. Using simulated data from the steady state of the calibrated model, we examine whether standard labor supply regressions can uncover the true value of the intertemporal elasticity of labor supply parameter. We find positive estimated elasticities that are larger for women and that are highly significant, but they bear virtually no relationship to the underlying preference parameters.
    Date: 2011–02
  17. By: Marco Maffezzoli
    Abstract: The available empirical evidence suggests that the distribution of income and its composition play an important role in explaining tax noncompliance. We address the issue from a macroeconomic point of view, building a dynamic general equilibrium Bewley model that jointly endogenizes the determinants of tax evasion and income heterogeneity. Our results show that the model can successfully replicate the salient qualitative and quantitative features of the data. In particular, the model replicates fairly well the shape of the cross-sectional distribution of misreporting rates over true income levels. Furthermore, we show that a switch from progressive to proportional taxation has important quantitative effects on noncompliance rates and tax revenues.
    Date: 2011
  18. By: BAUDIN, Thomas (Université catholique de Louvain, CORE and IRES, B-1348 Louvain-la-Neuve, Belgium)
    Abstract: The present paper investigates a standard model of endogenous fertility when child survival to adulthood is uncertain. In this framework, I first show that facing the risk their children die before reaching adulthood, parents don’t always formulate a precautionary demand for children. Indeed, there exists a non-empty set of utility functions for which parents undershoot their number of children rather than overshooting it. Second, the properties of the optimal economic policy will crucially depend on the manner the Social Welfare Function takes uncertainty into account. More precisely, if Social Welfare is evaluated after the resolution of uncertainty, the parental response to uncertainty is a source of social inefficiency. Then, individual decisions have to be corrected through tax or transfer on both births and education. This property becomes crucial to determine the optimal public response to a mortality crisis in presence of positive externalities on education.
    Keywords: fertility, uncertain child survival, optimal conditions, family policy
    JEL: D10 H21 J13 J18
    Date: 2010–10–01
  19. By: BALESTRA, Carlotta (Université catholique de Louvain , CORE and Chair Lhoist Berghmans in Environmental Economics and Management, B-1348 Louvain-la-Neuve, Belgium); BRECHET, Thierry (Université catholique de Louvain , CORE and Chair Lhoist Berghmans in Environmental Economics and Management, B-1348 Louvain-la-Neuve, Belgium); LAMBRECHT, Stéphane (Universités de Lille, Faculté des Sciences Economiques et Sociales, Université Lille 1 Sciences et Technologies, Laboratoire EQUIPPE, France and Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)
    Abstract: In an overlapping generations setup we address the issue of the optimal number of property rights to allocate over a natural resource when the goal is to maximize the stock of the natural resource at the steady state. We assume that the effect of the property rights regime on the evolution of the resource is twofold: through biological spillovers and through monitoring costs. Property rights are assigned to local communities, which can decide whether to cooperate or not. The outcome in the strategic setting is hence compared to the one in the cooperative setup. A fiscal policy able to decentralize the cooperative outcome is studied.
    Keywords: overlapping generations, resource management, common pool resource, spatial interdependence, strategic behaviour, cooperative behaviour
    JEL: H21 K11 Q20
    Date: 2010–11–01

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