[Show abstract][Hide abstract] ABSTRACT: We develop a simple life cycle model with endogenous longevity where religious firms influence religious beliefs using donations as an input. The model suggests that either wealth and economic development or competition by religious firms can explain cross-country variation in religious beliefs, but to explain cross-country variation in religious beliefs, longevity, and consumption both development and competition are required. Our results depend on the wealth and substitution effects that accompany economic development and religious market competition. Copyright (c) 2010 The Ohio State University.
Journal of money credit and banking 01/2010; 42(1):189-202. · 1.09 Impact Factor
[Show abstract][Hide abstract] ABSTRACT: This paper studies the phenomenon of mismatch in a decentralized credit market where borrowers and lenders must engage in costly search to establish credit relationships. Our dynamic general equilibrium framework integrates incentive based informational frictions with a matching process highlighted by (i) borrowers’ endogenous market entry and exit decision (entry frictions) and (ii) time and resource costs necessary to locate credit opportunities (search frictions). A key feature of the incentive compatible loan contract negotiated between borrowers and lenders is the interaction of informational frictions (in the form of moral hazard) with entry and search frictions. We find that the removal of entry barriers can eliminate information-based equilibrium credit rationing. More generally, entry and incentive frictions are important in understanding the extent of credit rationing, while entry and search frictions are important for understanding credit market breakdown.
Villanova School of Business Department of Economics and Statistics, Villanova School of Business Department of Economics and Statistics Working Paper Series. 01/2009;
[Show abstract][Hide abstract] ABSTRACT: This paper constructs a three-country, specific-factor, trade-theoretic model in which two of the countries are in conflict and where war effort is determined endogenously in a Nash equilibrium. The third country does not take part in the war, but trades with the warring countries. In the framework, we examine, inter alia, how war and welfare are affected by globalization and by two instruments available to the third country - one carrot and one stick. Our overall conclusion is that the third parties do have the incentives for, and can play an effective role in, conflict resolution.
Canadian Journal of Economics. 01/2007; 40(4):1168-1187.
[Show abstract][Hide abstract] ABSTRACT: We construct a specific-factor trade-theoretic model for two small open economies that are in conflict with each other and where war efforts are determined endogenously. War efforts involve the use of soldiers and imported military hardware. The purpose of war is to capture disputed land or some other resource, but with war lives are lost and production is sacrificed. In this framework, we examine the effect of foreign aid on the war efforts in the warring countries. We find, inter alia, that an increase foreign aid to the warring countries may increase war efforts when arms protect lives in a significant way.
Frontiers of Economics and Globalization. 03/2006; 1:3-15.
[Show abstract][Hide abstract] ABSTRACT: We develop a general equilibrium model of credit formation where borrowers and lenders must search for matches and where the composition of borrowers adjusts to satisfy equilibrium entry conditions. When market liquidity dries up as a result of fundamental shocks to the system, fewer borrowers will participate in the credit market with low-quality borrowers suffering disproportionately because of a flight to quality. However, less liquid credit markets need not be associated with lower social output, because the effect of higher average quality may outweigh that of reduced market participation, depending crucially on the source of the liquidity shock.
Journal of Economic Dynamics and Control 02/2005; · 0.86 Impact Factor
[Show abstract][Hide abstract] ABSTRACT: We develop a simple analytical framework where the longevity of profit-maximizing firms requires costly resources. We show that a firm's longevity and value are positively related to the firm''s pricing power, cash reserves, honesty, and ratio of equity to debt financing.
[Show abstract][Hide abstract] ABSTRACT: The life-cycle model is extended to analyze the causes of longer lifespans. In contrast to previous work, the extension delivers an explicit interior solution for consumption and longevity, where consumption is essential for living and longevity is financed with excess wealth. The solution is consistent with cross-country life-expectancy trends and explains gender differences in consumption and longevity. Also, a central testable hypothesis of the model is strongly supported by regressions using OECD panel data.
[Show abstract][Hide abstract] ABSTRACT: The welfare costs of dynamic factor taxes are analyzed in a dynamic general equilibrium model with heterogeneous endowments, abilities, and tastes. Conventional functional form restrictions yield formulas for the transition effects and marginal welfare costs of factor taxes. Heterogeneity implies that taxes have feedback or distribution effects, beyond standard efficiency effects, that may lead to nonstandard aggregate dynamics. Also, marginal welfare costs vary systematically with initial distortions and agents' characteristics. Because factor taxes lower wealth inequality, equity gains offset efficiency losses with the offset weakening as initial distortions rise. However, distribution effects reinforce efficiency losses unless preexisting distortions are sufficiently high, in which case some types of heterogeneity yield offsetting distribution effects. Simulations suggest that, for labor taxes, distribution effects dominate dynamics, but not for capital taxes. Also, equity gains dominate efficiency losses and distribution effects for the marginal welfare cost of labor taxes, and vice versa for capital taxes.
[Show abstract][Hide abstract] ABSTRACT: Polls identify crime as the number one public worry. Crime also exacts tremendous costs not factored into official measures of well-being, and it is a favorite subject of political campaign promises. However, the public seems largely unaware that crime responds to economic conditions and incentives and that the results of a substantial body of work by economists have important implications for public policy. ; This article introduces the economics and crime literature by describing a simple supply-and-demand crime model in which criminals supply crime, the public demands protection from crime, and the government provides public protection. The author uses the model to show how crime responds to a variety of demographic and economic factors and also what results to expect from public policy proposals. ; Using state data from 1971 to 1994, the article outlines broad regional differences and trends in the patterns of crime in the United States. While the nation in the 1990s has seen crime fall dramatically in almost all categories, not all regions have benefited equally. In particular, southeastern states have seen distinct worsening in crime rates relative to other regions. ; The author subjects the data to a more in-depth treatment using a panel regression approach that estimates the effects of demographic and economic variables on crime. The results mirror some found by others but also highlight serious issues vexing the empirical literature. Generally, the demographic and economic variables explain crime rather well, and estimates for the most part conform to the economic model of crime.
[Show abstract][Hide abstract] ABSTRACT: Many existing theories of financial intermediation have difficulty explaining why financial activity can generate large real effects. This paper argues that the large real effects may reflect a multiplicity of equilibria. The multiple equilibria in this paper are generated by the dynamic interactions between the savings decisions of workers and the monopolistically competitive behavior of banks. We characterize the equilibria by showing the comparative-static responses of key aggregates to changes in the pure rate of time preference, investment uncertainty, and bank costs. We find that the results depend crucially on the intertemporal elasticity of labor supply and the aggregate level of employment. Small changes in the financial system may cause the economy to shift between low- and high-employment equilibria. The high-employment, high real interest rate equilibrium is consistent with the development experience of Japan, Korea, and Taiwan with repressed financial systems.
[Show abstract][Hide abstract] ABSTRACT: Why does financial activity generate large real effects? We argue that this may reflect a multiplicity of equilibria, due to dynamic interactions between worker's saving decisions and bank's monopolistic competition. We show that the equilibrium-responses of key aggregates to changes in investment uncertainty and intermediation costs depend crucially on intertemporal substitutability and aggregate employment. Small financial disturbances may cause the economy to shift between low and high-employment equilibria, thus providing explanation for the big push and the big crash. The high-employment, high-real-interest-rate equilibrium is consistent with the development experience of the financially repressed East Asian economies prior to July 1997.
Journal of Development Economics 02/1998; · 2.13 Impact Factor
[Show abstract][Hide abstract] ABSTRACT: Strategic interjurisdictional behavior and the interaction over time of the mean and dispersion of average tax rates across states are analyzed in a vector autoregression model. Variance decompositions reveal that fiscal competition explains roughly one-third of the time variation of state and local taxes. Impulse response functions identify the type of fiscal competition and the characteristics of leaders and followers. Local tax dynamics agree with Wildasin's (1988) results on expenditure competition with significant short- and medium-run effects but insignificant long-run effects. State tax dynamics conform to tax export competition with significant effects occurring over a relatively short time.
[Show abstract][Hide abstract] ABSTRACT: This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection as well as empirical evidence on the effects of patent rights. Then, the second part considers the international aspects of IPR protection. In summary, this paper draws the following conclusions from the literature. Firstly, different patent policy instruments have different effects on R&D and growth. Secondly, there is empirical evidence supporting a positive relationship between IPR protection and innovation, but the evidence is stronger for developed countries than for developing countries. Thirdly, the optimal level of IPR protection should tradeoff the social benefits of enhanced innovation against the social costs of multiple distortions and income inequality. Finally, in an open economy, achieving the globally optimal level of protection requires an international coordination (rather than the harmonization) of IPR protection.
Federal Reserve Bank of Atlanta, Working Paper. 01/1998;
[Show abstract][Hide abstract] ABSTRACT: Poor performance by the financial sector can be costly for society. On the other hand, a healthy banking sector has been thought by some to contribute to the growth of the economy. Recently, though, economists have begun to analyze new elements of the linkages between the financial and real sides of the economy. ; This article provides an illustrative model that is meant to capture current thinking about the ways in which financial intermediaries affect growth. The model shows how households, firms, and financial intermediaries interact to determine equilibrium growth rates and various interest rates and rate spreads. It is also used to discuss the effects of repressive financial policies such as reserve requirements, interest rate controls, and entry limitations such as barriers to interstate banking. ; The authors survey recent empirical literature on growth and financial intermediation, which has shown that different measures of financial development are positively correlated with economic growth rates. They conclude that although there have been some attempts to quantify the effect of financial repression, attempting precise policy recommendations would be premature.
Economic review (Federal Reserve Bank of Atlanta) 01/1997;
[Show abstract][Hide abstract] ABSTRACT: The South has seen a remarkable economic rise during the past three decades. Was this growth a result of automatic forces or was it fueled by state and local tax policies? Traditional economic theory suggests that forces of convergence, not tax policies, have moved the southern states toward catching up with the rest of the nation. But more recent economic models recognize that convergence and low tax rates may not be mutually exclusive explanations for the South's stronger growth. ; This article presents an overview of relative state growth and relative state and local taxation from 1960 to 1992. After a brief discussion of the theoretical issues, the article surveys simple--but revealing--correlations across states and across time that characterize states' experiences. The correlations indicate convergence but also imply that shocks, including tax policy, matter for long-term growth. ; The author argues that the evidence on the growth effects of taxes has been mixed because empirical models imperfectly separate the growth effects of other government policies that occur simultaneously with tax policies. He demonstrates a simple way to get a more nearly accurate specification. His analysis shows that state and local taxes appear to have temporary growth effects that are stronger over shorter intervals and a permanent growth effect that does not disappear. ; In terms of policy implications, if long-term growth rates seem too low relative to other states, lowering aggregate state and local marginal tax rates is likely to have a positive effect on long-term growth rates. However, such a policy also reduces the progressivity of the tax system. No matter what emphasis is placed on growth, states should be aware of the potential trade-off.
[Show abstract][Hide abstract] ABSTRACT: This article examines whether price indexes, such as the CPI, the PPI, and the implicit price deflator for GDP (PGDP), tell a consistent story about the general price level and inflation rate. To this end, Zsolt Becsi analyzes the time series properties of these indexes. He finds that the PGDP has a stable long-term relationship with both of the other price indexes. Some evidence suggests that PGDP and CPI inflation have common long-run trends, while PPI inflation has no discernible stable long-run relationship with either PGDP or CPI inflation. ; Some theories suggest that the price level relevant for monetary policy is broader than price indexes of final goods and services such as the PGDP. This article investigates whether the PGDP captures movements in other price or inflation series. There is weak evidence that the PGDP shares common trends with the price levels and inflation rates of some intermediate goods and assets. Overall, these results suggest that PGDP makes a good indicator of the general price level for monetary policy because it reflects shocks to a broad range of other series.
[Show abstract][Hide abstract] ABSTRACT: Much of the 1992 presidential campaign focused on which fiscal policies would best promote economic growth. In this article, Zsolt Becsi develops an analytical and graphical framework to evaluate the long- and short-run effects of a variety of taxation and expenditure policies. ; Becsi shows that many tax schemes in their macro-economic effects are essentially taxes on labor or capital or both. While taxes on labor and capital both tend to depress private consumption and output in the long run, Becsi shows that a revenue-neutral reduction of capital taxes and increase in labor taxes are likely to be contractionary in the short run and expansionary in the long run. ; Becsi discusses several ways of spending the peace dividend from a reduction in defense expenditures. He shows that use of the dividend to reduce capital taxes causes consumption to rise in the long run with ambiguous effects on output. In the short run, output and consumption will move in opposite directions, but whether output rises or falls is uncertain. Using the peace dividend to increase public investment will also promote a long-run rise of consumption with ambiguous long-run output effects, but without short-run contractionary effects.