nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2013‒11‒22
28 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Household and firm leverage, capital flows and monetary policy in a small open economy By Mara Pirovano
  2. Zero Lower Bound and Parameter Bias in an Estimated DSGE Model By Yasuo Hirose; Atsushi Inoue
  3. A comparison of numerical methods for the solution of continuous-time DSGE models By Juan Carlos Parra-Alvarez
  4. Entry and markup dynamics in an estimated business cycle model. By Lewis, Vivien; Stevens, Arnoud
  5. Flexible prices, labor market frictions and the response of employment to technology shocks By Francesco Zanetti; Federico S. Mandelman
  6. Government spending, consumption, and the extensive investment margin. By Lewis, Vivien
  7. Capital Account Openness and the Losses from Financial Frictions By Minsoo Han
  8. The Effects of the Saving and Banking Glut on the U.S. Economy By Alejandro Justiniano; Giorgio Primiceri; Andrea Tambalotti
  9. On the Optimal Size of Public Employment By Eduardo Zilberman; Anna Dos Reis
  10. Time is money: Life cycle rational inertia and delegation of investment management By Kim, Hugh H.; Maurer, Raimond; Mitchell, Olivia S.
  11. The Political intergenerational welfare state: A Unified framework By Monisankar Bishnu; Min Wang
  12. A Path Through the Wilderness: Time Discounting in Growth Models By Pedro Garcia Duarte
  13. Factor income taxation, growth, and investment specific technological change By Monisankar Bishnu; Chetan Ghate; Pawan Gopalakrishnan
  14. Work Hour Mismatch and On-the-job Search By Keisuke Kawata
  15. Worker Flows under Mismatch By William Hawkins
  16. The dynamics of environmental concern and the evolution of pollution By Emeline Bezin
  17. Effects of carbon taxes in an economy with large informal sector and rural-urban migration By Karlygash Kuralbayeva
  18. The Financial Accelerator and the Optimal Lending Contract By Mikhail Dmitriev; Jonathan Hoddenbagh
  19. Risks to price stability, the zero lower bound and forward guidance: A real-time assessment By Coenen, Günter; Warne, Anders
  20. Time Preference and Income Convergence in a Dynamic Heckscher-Ohlin Model By Taketo Kawagishi; Kazuo Mino
  21. The Informativeness of Stock Prices, Misallocation and Aggregate Productivity By Vaidyanathan Venkateswaran; Hugo A. Hopenhayn; Joel David
  22. Recall and Unemployment By Shigeru Fujita; Giuseppe Moscarini
  23. Firm Dynamics, Job Turnover, and Wage Distributions in an Open Economy By Cosar, A. Kerem; Guner, Nezih; Tybout, James
  24. How family status and social security claiming options shape optimal life cycle portfolios By Hubener, Andreas; Maurer, Raimond; Mitchell, Olivia S.
  25. Investment in financial literacy, social security and portfolio choice By Jappelli, Tullio; Padula, Mario
  26. The Optimal Design of a Fiscal Union By Jonathan Hoddenbagh; Mikhail Dmitriev
  27. Product diversity, demand structures and optimal taxation. By Lewis, Vivien; Roland, Winkler
  28. Learning from Search in the Housing Market By Irina Telyukova; Leena Rudanko

  1. By: Mara Pirovano (University of Antwerp, Faculty of Applied Economics; Catholic University of Leuven, Center of Economic Studies)
    Abstract: This paper outlines a framework for analysing the interaction between financial frictions at the household and firm level, liability dollarization and optimal monetary policy in a small, open economy subject to productivity and capital inflow shocks. It is found that, first, for the shocks under review, the extent of co-movement of financial variables pertaining to entrepreneurs and homeowners crucially depends on the degree of exchange rate flexibility. Second, for a central bank not concerned with financial stability, reacting to inflation and output is considered optimal. Third, including financial stability in the central bank's objectives results in an optimal monetary policy rule reacting to exchange rate depreciation, but not to credit growth, even in the case of large capital inflow shocks. In fact, reacting to credit growth reinforces the initial shock, increasing financial imbalances.
    Keywords: DSGE model, capital inflows, financial frictions, liability dollarization, financial stability
    JEL: E44 E47 E52 F41 F47
    Date: 2013–11
  2. By: Yasuo Hirose; Atsushi Inoue
    Abstract: This paper examines how and to what extent parameter estimates can be biased in a dynamic stochastic general equilibrium (DSGE) model that omits the zero lower bound constraint on the nominal interest rate. Our experiments show that most of the parameter estimates in a standard sticky-price DSGE model are not biased although some biases are detected in the estimates of the monetary policy parameters and the steady-state real interest rate. Nevertheless, in our baseline experiment, these biases are so small that the estimated impulse response functions are quite similar to the true impulse response functions. However, as the probability of hitting the zero lower bound increases, the biases in the parameter estimates become larger and can therefore lead to substantial differences between the estimated and true impulse responses.
    Date: 2013–09
  3. By: Juan Carlos Parra-Alvarez (Aarhus University and CREATES)
    Abstract: This paper evaluates the accuracy of a set of techniques that approximate the solution of continuous-time DSGE models. Using the neoclassical growth model I compare linear-quadratic, perturbation and projection methods. All techniques are applied to the HJB equation and the optimality conditions that define the general equilibrium of the economy. Two cases are studied depending on whether a closed form solution is available. I also analyze how different degrees of non-linearities affect the approximated solution. The results encourage the use of perturbations for reasonable values of the structural parameters of the model and suggest the use of projection methods when a high degree of accuracy is required.
    Keywords: Continuous-Time DSGE Models, Linear-Quadratic Approximation, Perturbation Method, Projection Method
    JEL: C63 C68 E32
    Date: 2013–11–15
  4. By: Lewis, Vivien; Stevens, Arnoud
    Abstract: How do changes in market structure affect the US business cycle? We estimate a monetary DSGE model with endogenous firm/product entry and a translog expenditure function by Bayesian methods. The dynamics of net business formation allow us to identify the extent to which desired price markups and inflation decrease when entry rises. We find that a 1 percent increase in the number of competitors lowers desired markups by 0.17 percent. While markup fluctuations due to sticky prices or exogenous shocks account for a large proportion of US inflation variability, endogenous changes in desired markups also play a non-negligible role.
    Date: 2013–10
  5. By: Francesco Zanetti; Federico S. Mandelman
    Abstract: Recent empirical evidence establishes that a positive technology shock leads to a decline in labor inputs. Can a flexible price model enriched with labor market frictions replicate this stylized fact? We develop and estimate a standard flexible price model using Bayesian methods that allows, but does not require, labor market frictions to generate a negative response of employment to a technology shock. We find that labor market frictions account for the fall in labor inputs.
    Keywords: Technology shocks, employment, labor market frictions
    JEL: E32
    Date: 2013–11–13
  6. By: Lewis, Vivien
    Abstract: We find VAR evidence that a rise in US government spending boosts consumption and firm entry. The joint dynamics observed in the data poses a puzzle for business cycle models with endogenous entry (extensive-margin investment). Persistent spending expansions generate entry but crowd out consumption through a negative wealth effect. Model features that dampen the wealth effect, such as credit-constrained consumers or non-separable preferences, reduce entry. This leads to weaker competition in oligopolistic markets, such that markups rise and consumption falls. The model captures the joint dynamics if labor supply is very elastic or public and private consumption are complements.
    Date: 2013
  7. By: Minsoo Han (Pennsylvania State University)
    Abstract: The goal of this paper is to isolate the role of openness to international financial markets (capital account openness) on the total factor productivity (TFP) effect of financial frictions. To do so, I formulate a model in which individual households are either workers or entrepreneurs, can only save in the form of capital, and entrepreneurs are subject to a collateral constraint. Using this structure, I compare two steady states of a calibrated model numerically: one in which the capital rental rate must clear a domestic capital rental market (closed economy), and one in which that rate is given by the world (small open economy). The model predicts that a small open economy is affected less by financial frictions than a closed economy: for the tightest collateral constraint, TFP in a small open economy is only about 1% lower than in the economy without a collateral constraint, while it is 15% lower in a closed economy. TFP losses in a small open economy reflect factor misallocation among incumbent entrepreneurs (intensive margin), not distortions along entry-exit margin, whereas for a tight financial frictions, there are distortions on both intensive and entry-exit margins in a closed economy. Using macro data, I find that a 1% rise in openness is associated with 0.196% decline in the effect of financial frictions on TFP. Running the same regression on subsamples, I also find that this empirical result mainly comes from a group of low income countries.
    Date: 2013
  8. By: Alejandro Justiniano; Giorgio Primiceri; Andrea Tambalotti
    Abstract: We use a quantitative equilibrium model with houses, collateralized debt and foreign borrowing to study the impact of global imbalances on the U.S. economy in the 2000s. Our results suggest that the dynamics of foreign capital flows account for between one fourth and one third of the increase in U.S. house prices and household debt that preceded the financial crisis. The key to these findings is that the model generates the sustained low level of interest rates observed over that period.
    JEL: E20 E21 E44 F32 G21
    Date: 2013–11
  9. By: Eduardo Zilberman (PUC-Rio); Anna Dos Reis (PUC-Rio)
    Abstract: A public job can be seen as a source of insurance against income risk. Indeed, many public employees have job stability, which is compounded with a less volatile and more compressed wage distribution. Hence, by increasing its number of public employees, the government enhances the overall degree of insurance in the economy. In this paper, we introduce public employment in a standard incomplete markets model with overlapping generations. The aim is to explore the welfare gains or losses due to a larger government, accounting for this extra source of insurance. In a model economy calibrated to Brazil, we find that if the government relies on consumption taxes to balance its budget, the optimal size of public employment is nearly flat, ranging from 10 to 24 percent of the workforce. However, if the public employment is reduced from 22 to 10 percent, welfare losses due to a reduction in the degree of insurance are 4.5 percent, which are compensated by welfare gains due to level and inequality effects. Finally, if the wage distribution becomes even less volatile and more compressed, social welfare decreases.
    Date: 2013
  10. By: Kim, Hugh H.; Maurer, Raimond; Mitchell, Olivia S.
    Abstract: We investigate the theoretical impact of including two empirically-grounded insights in a dynamic life cycle portfolio choice model. The first is to recognize that, when managing their own financial wealth, investors incur opportunity costs in terms of current and future human capital accumulation, particularly if human capital is acquired via learning by doing. The second is that we incorporate age-varying efficiency patterns in financial decisionmaking. Both enhancements produce inactivity in portfolio adjustment patterns consistent with empirical evidence. We also analyze individuals' optimal choice between self-managing their wealth versus delegating the task to a financial advisor. Delegation proves most valuable to the young and the old. Our calibrated model quantifies welfare gains from including investment time and money costs, as well as delegation, in a life cycle setting. --
    Date: 2013
  11. By: Monisankar Bishnu (Indian Statistical Institute, New Delhi); Min Wang (Peking University)
    Abstract: We provide a complete characterization of intergenerational welfare state with education and pension under probabilistic voting where voters internalize the general equilibrium effects materializing in their life-span. We show that as public education is introduced in the economy through the political process of voting, it always increases (reduces) the accumulation of human capital (physical capital), but strikingly, has no effect on the political equilibrium of PAYG social security tax. On the other hand, the introduction of a politically determined PAYG social security most defnitely reduces physical capital accumulation, however it will reduce the human capital accumulation if only if the public education is already present in the economy. Otherwise, it may lead to an increase in the human capital accumulation. We also demonstrate that the general equilibrium effects are crucial to sustain the social security program, and explain why the presence of PAYG social security may not provide su› cient incentive for public investment in education. Finally, we show that the simultaneous arrangement of public education and pension can increase the long-run growth if and only if the relative political weight of the old is small so that the pension program is thin, which makes the result of Boldrin and Montes (2005) study conditional on the intergenerational distribution of voting power in our political economy setup.
    Keywords: Education, Social security, Probabilistic voting, Markov Perfect Equilibrium, Endogenous growth
    JEL: E6 H3 H52 H55 D90
    Date: 2013–05
  12. By: Pedro Garcia Duarte
    Abstract: Although economists have recognized long ago that “time enters into all economic questions”, the ways they treated and modeled time has varied substantially in the last century. While in the 1930s there was a distinctive Cambridge tradition against discounting utilities of future generations, to which Frank Ramsey subscribed, postwar neoclassical growth economists (of the “Ramsey-Cass-Koopmans model”) applied the discount factor either to individual’s or to social planner’s decision-making as a technical requirement of dynamic general equilibrium models. My goal in this article is to shed some historical light on how a practice that was condemned as ethically indefensible when applied to intergenerational comparisons became a technical requirement in dynamic models of either a consumer or a planner deciding the intertemporal allocation of resources.
    Keywords: time discount; growth models; Ramsey-Cass-Koopmans model; economic dynamics
    JEL: B22 B23 E32
    Date: 2013–11–12
  13. By: Monisankar Bishnu (Indian Statistical Institute, New Delhi); Chetan Ghate (Indian Statistical Institute, New Delhi); Pawan Gopalakrishnan (Indian Statistical Institute, New Delhi)
    Abstract: We construct a tractable endogenous growth model with production externalities in which the public capital stock augments investment speci?c technological change. We characterize the ?rst best ?scal policy and show that there exist several labor and capital tax-subsidy combinations that decentralize the planner?s growth rate. The optimal factor income tax mix is therefore indeterminate which gives the planner the flexibility to choose policy rules from a large set. Our model explains why many advanced economies experiencing similar growth rates have widely varying factor income tax rates.
    Keywords: Investment Specific Technological Change, Endogenous Growth, Factor Income Taxation, Welfare, First best fiscal policy, Indeterminacy
    JEL: E2 E6 H2 O4
    Date: 2013–01
  14. By: Keisuke Kawata (Graduate School for International Development and Cooperation)
    Abstract: This paper explores an on-the-job search model with wage bargaining and mismatch. It considers two types of jobs and workers, and the instantaneous value of the job-worker match depends on their type. The most important assumption is that while the job type is fixed throughout its life, the worker type changes in accordance with a stochastic process. This paper shows that although the workers turnover decision is privately efficient, this decision may be socially inefficient because of the hold-up problem.
    Keywords: On-the-job search, Wage bargaining, Mismatch, Holdup problem
    JEL: J63 J81
    Date: 2013–10
  15. By: William Hawkins (Yeshiva University)
    Abstract: I study a dynamic model of matching between heterogeneous workers and heterogeneous jobs. Workers and jobs are attached to different labor markets, and within each labor market, workers and jobs are assigned to different locations, representing heterogeneity in the skills of workers and the skill requirements of jobs. A match between a worker and a job in a given labor market produces flow output that depends on the quality of their match, which is a decreasing function of the distance between them. The worker and the job split this output in a fixed ratio. Matching is frictionless within each labor market. Each period, the set of matches between workers and firms is such that no worker-job pair strictly prefer to be matched with each other than with their current partners. The model is consistent with evidence from the Current Population Survey on the cross-sectional and cyclical behavior of job-to-job transitions. Notably, a worker who recently experienced a job-to-job transition is more likely to undergo another.
    Date: 2013
  16. By: Emeline Bezin
    Abstract: We develop an overlapping generations model within which the evolution of pollution and the formation of environmental concern are endogenous. On the one hand, people heterogeneously concerned with environmental issues contribute to pollution which is a public bad. On the other hand, the transmission of environmental attitudes is the result of some economic choice which is affected by pollution. The model predicts that the long run proportion of environmentally concerned individuals will always be high. Though, depending on the pollution-generating technology, the transition from a low-environmentally concerned society to a high-environmentally concerned one is accompanied by two different outcomes regarding the long run level of pollution. If the technology is “clean”, there is a stable steady state level of pollution. However, if it is “dirty”, pollution experiences an unlimited growth which eventually causes an environmental disaster. This result captures some stylized facts regarding the joint evolution of environmental concern and pollution in developing nations. In the latter case, we show that intergenerational transfers from the older generation to the young working one restore the possibility to reach a stationary level of pollution.
    Keywords: Overlapping generations, pollution, environmental concern, cultural transmission,environmental policy
    JEL: Q50 D90 J11
    Date: 2013
  17. By: Karlygash Kuralbayeva
    Abstract: I build an equilibrium search and matching model of an economy with an informal sector and rural-urban migration to analyze the effects of budget-neutral green tax policy (raising pollution taxes, while cutting payroll taxes) on the labor market. The key results of the paper suggest that when general public spending varies endogenously in response to tax reform and higher energy taxes can reduce the income from self-employed work in the informal sector, green tax policy can produce a triple dividend: a cleaner environment, lower unemployment rate and higher after-tax income of the private sector. This is due to the ability of the government, by employing public spending as an additional policy instrument, to reduce the overall tax burden when an increase in energy tax rates does not exceed some threshold level. Thus governments should employ several instruments if they are concerned with labor market implications of green tax policies.
    Date: 2013–12
  18. By: Mikhail Dmitriev; Jonathan Hoddenbagh
    Abstract: In the financial accelerator literature pioneered by Bernanke, Gertler and Gilchrist (1999) entrepreneurs are myopic and lenders suboptimally choose a safe rate of return on their loans. We derive the optimal lending contract for forward looking entrepreneurs and provide three main results. First, under the optimal contract we find that financial frictions do not amplify business cycle fluctuations. Second, we show that shocks to the variance of unobserved idiosyncratic productivity --- so-called ``risk shocks'' --- have little effect on the real economy under the optimal contract. Third, we find that amplification under the suboptimal contract depends on loose monetary policy: when interest rate setting follows a standard Taylor rule, the financial accelerator is significantly dampened or even reversed.
    JEL: E3
    Date: 2013–11–14
  19. By: Coenen, Günter; Warne, Anders
    Abstract: This paper employs stochastic simulations of the New Area-Wide Model - microfounded open-economy model developed at the ECB - to investigate the consequences of the zero lower bound on nominal interest rates for the evolution of risks to price stability in the euro area during the recent financial crisis. Using a formal measure of the balance of risks, which is derived from policy-makers' preferences about inflation outcomes, we first show that downside risks to price stability were considerably greater than upside risks during the first half of 2009, followed by a gradual rebalancing of these risks until mid-2011 and a renewed deterioration thereafter. We find that the lower bound has induced a noticeable downward bias in the risk balance throughout our evaluation period because of the implied amplification of deflation risks. We then illustrate that, with nominal interest rates close to zero, forward guidance in the form of a time-based conditional commitment to keep interest rates low for longer can be successful in mitigating downside risks to price stability. However, we find that the provision of time-based forward guidance may give rise to upside risks over the medium term if extended too far into the future. By contrast, time-based forward guidance complemented with a threshold condition concerning tolerable future inflation can provide insurance against the materialisation of such upside risks. --
    Keywords: monetary policy,deflation,zero lower bound,forward guidance,DSGE modelling,euro area
    JEL: E31 E37 E52 E58
    Date: 2013
  20. By: Taketo Kawagishi (Tezukayama University); Kazuo Mino (Kyoto University)
    Abstract: This paper shows that income convergence in an open-economy setting hinges upon how the time-discount rate of the households is determined. As opposed to the case of constant time-discount rate where cross-country income divergence may emerge, the small-open economy may catch up with the rest of the world if the discount rate increases with consumption. In contrast, either if the discount rate decreases with consumption or if future-oriented investment of the household lowers the time- discount rate, then the small-open economy fails to catch up with the rest of the world under free trade of commodities.
    JEL: F43 O41
    Date: 2013–11
  21. By: Vaidyanathan Venkateswaran (Pennsylvania State University); Hugo A. Hopenhayn (UCLA); Joel David (USC)
    Abstract: Capital markets function as aggregators of private information and in an environment with imperfectly informed firms, guide investment and production decisions. We study the implications of poorly functioning capital markets for the misallocation of factors of production across heterogeneous firms. Our theoretical framework combines a noisy rational expectations model of asset markets with a standard model of production by heterogeneous firms. We use a model calibrated to cross-country stock market and firm-level data to investigate the extent to which differences in capital market conditions can explain TFP differences across countries.
    Date: 2013
  22. By: Shigeru Fujita; Giuseppe Moscarini
    Abstract: Using data from the Survey of Income and Program Participation (SIPP) covering 1990-2011, we document that a surprisingly large number of workers return to their previous employer after a jobless spell and experience more favorable labor market outcomes than job switchers. Over 40% of all workers separating into unemployment regain employment at their previous employer; over a fifth of them are permanently separated workers who did not have any expectation of recall, unlike those on temporary layoff. Recalls are associated with much shorter unemployment duration and better wage changes. Negative duration dependence of unemployment nearly disappears once recalls are excluded. We also find that the probability of finding a new job is more procyclical and volatile than the probability of a recall. Incorporating this fact into an empirical matching function significantly alters its estimated elasticity and the time-series behavior of matching efficiency, especially during the Great Recession. We develop a canonical search-and-matching model with a recall option where new matches are mediated by a matching function, while recalls are free and triggered both by aggregate and job-specific shocks. The recall option is lost when the unemployed worker accepts a new job. A quantitative version of the model captures well our cross-sectional and cyclical facts through selection of recalled matches.
    JEL: E24 E32 J63
    Date: 2013–11
  23. By: Cosar, A. Kerem (University of Chicago Booth School of Business); Guner, Nezih (MOVE, Barcelona); Tybout, James (Pennsylvania State University)
    Abstract: This paper explores the combined effects of reductions in trade frictions, tariffs, and firing costs on firm dynamics, job turnover, and wage distributions. It uses establishment-level data from Colombia to estimate an open economy dynamic model that links trade to job flows in a new way. The fitted model captures key features of Colombian firm dynamics and labor market outcomes, as well changes in these features during the past 25 years. Counterfactual experiments imply that integration with global product markets has increased both average income and job turnover in Colombia. In contrast, the experiments find little role for this country's labor market reforms in driving these variables. The results speak more generally to the effects of globalization on labor markets in Latin America and elsewhere.
    Keywords: international trade, firm dynamics, size distribution, labor market frictions, inequality
    JEL: F12 F16 E24 J64 L11
    Date: 2013–11
  24. By: Hubener, Andreas; Maurer, Raimond; Mitchell, Olivia S.
    Abstract: Household decisions are profoundly shaped by a complex set of financial options due to Social Security rules determining retirement, spousal, and survivor benefits, along with benefit adjustments that vary with the age at which these are claimed. These rules influence optimal household asset allocation, insurance, and work decisions, given life cycle demographic shocks such as marriage, divorce, and children. Our model generates a wealth profile and a low and stable equity fraction consistent with empirical evidence. We also confirm predictions that wives will claim retirement benefits earlier than husbands, while life insurance is mainly purchased by younger men. Our policy simulations imply that eliminating survivor benefits would sharply reduce claiming differences by sex while dramatically increasing men's life insurance purchases. --
    Date: 2013
  25. By: Jappelli, Tullio; Padula, Mario
    Abstract: We present an intertemporal portfolio choice model where individuals invest in financial literacy, save, allocate their wealth between a safe and a risky asset, and receive a pension when they retire. Financial literacy affects the excess return and the cost of stock market participation. Since literacy depreciates over time and has a cost related to current consumption, investors simultaneously choose how much to save, the portfolio allocation, and the optimal investment in literacy. This last depends on households' resources, its preference parameters and on how much financial literacy affects the returns on risky assets and the stock market participation cost, and the returns on social security wealth. The model implies one should observe a positive correlation between stock market participation (and risky asset share, conditional on participation) and financial literacy, and a negative correlation between the generosity of the social security system and financial literacy. The model also implies that the stock of financial literacy accumulated early in life is positively correlated with the individual's wealth and portfolio allocations later in life. Using microeconomic cross-country data, we find support for these predictions. --
    Keywords: Financial Literacy,Portfolio Choice,Saving
    JEL: E2 D8 G1 J24
    Date: 2013
  26. By: Jonathan Hoddenbagh; Mikhail Dmitriev
    Abstract: We study cooperative and non-cooperative fiscal policy in an open economy model where cross-country risk sharing is imperfect and countries face terms of trade externalities. We show that the optimal form of fiscal cooperation, or fiscal union, is defined by one parameter: the Armington elasticity of substitution between goods from different countries. We prove that members of a fiscal union should: (1) harmonize steady state income tax rates when the Armington elasticity is low in order to ameliorate terms of trade externalities; and (2) send fiscal transfers across countries when the Armington elasticity is high in order to improve risk sharing. Our analytical predictions hold both outside of and within currency unions. For standard calibrations, we find that the welfare gain from the optimal fiscal union is as high as 5% of permanent consumption when countries are able to trade safe government bonds, and can approach 20% when countries lose access to international financial markets. We also find that labor mobility significantly improves welfare and alleviates the need for a transfer union entirely.
    JEL: E50 F41 F42
    Date: 2013–11–14
  27. By: Lewis, Vivien; Roland, Winkler
    Abstract: This paper studies optimal taxation in a general equilibrium model with endogenous entry. We compare the constant elasticity of substitution (CES) model to three alternative demand structures: oligopolistic competition in prices, oligopolistic competition in quantities, and translog preferences. Our economy is characterized by two distortions: a labor distortion due to the misalignment of markups on goods and leisure, and an entry distortion due to the misalignment of the consumer surplus effect and the profit destruction effect of entry. The two distortions interact in determining the wedge between the market-driven and optimal level of product diversity. We show how optimal labor and entry taxes depend upon the prevailing demand structure, the nature and size of entry costs, and the degree of substitutability between goods.
    Date: 2013–11
  28. By: Irina Telyukova (UC San Diego); Leena Rudanko (Boston University)
    Abstract: House prices fall as the time on the market passes. We document this negative duration dependence for the US housing market using house-level data on listed prices. We interpret the pattern as a result of sellers' imperfect information about the "appeal" of houses to potential buyers. When listing a house sellers have beliefs about this appeal, but these beliefs get downgraded as the house remains on the market. We formalize these ideas in an equilibrium model of search and learning in the housing market, which builds on the work of Gonzalez and Shi (2009). We use the model to derive further testable predictions relating the degree of duration dependence in prices to cross-sectional variation in the activity-level of different housing markets. In the model learning takes place faster in more active markets, implying stronger duration dependence in prices.
    Date: 2013

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