Research Database

Fifty-eight years ago, Harberger (1954) estimated that the costs of monopoly, which resulted from misallocation of resources across industries, were trivial. Others showed the same was true for tariffs. This research soon led to the consensus that monopoly costs are of little significance—a consensus that persists to this day.

This paper reports on a new literature that takes a different approach to the costs of monopoly. It examines the costs of monopoly and tariffs within industries. In particular, it examines the histories of industries in which a monopoly is destroyed (or tariffs greatly reduced) and the industry transitions quickly from monopoly to competition. If there are costs to monopoly and high tariffs within industries, we should be able to see these costs whittled away as the monopoly is destroyed.

In contrast to the prevailing consensus, this new research has identified significant costs of monopoly. Monopoly (and high tariffs) is shown to significantly lower productivity within establishments. It also leads to misallocation within industry: resources are transferred from high to low productivity establishments.

From these histories a common theme (or theory) emerges as to why monopoly is costly. When a monopoly is created, “rents” are created. Conflict emerges among shareholders, managers, and employees of the monopoly as they negotiate how to divide these rents. Mechanisms are set up to split the rents. These mechanisms are often means to reduce competition among members of the monopoly. Although the mechanisms divide rents, they also destroy them (by leading to low productivity and misallocation).

We construct a stochastic overlapping-generations general equilibrium model in which households are subject to aggregate shocks that affect both wages and asset prices. We use a calibrated version of the model to quantify how the welfare costs of big recessions are distributed across different household age groups. The model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages. Asset price declines hurt the old, who rely on asset sales to finance consumption, but benefit the young, who purchase assets at depressed prices. In our preferred calibration, asset prices decline 2.4 times as much as wages, consistent with the experience of the US economy in the Great Recession. A model recession is close to welfare neutral for households in the 20-29 age group, but translates into a large welfare loss of more than 8% of lifetime consumption for households aged 70 and over.

This paper presents a new method for predicting turning points. The paper formally defines a turning point; develops a probit model for estimating the probability of a turning point; and then examines both the in-sample and out-of-sample forecasting performance of the model. The model performs better than some other methods for predicting turning points.

In this paper we develop a theory of how factors interact at the plant level. The theory has implications for (1) the micro foundations for capital-skill complementarity, (2) the relationship between factor allocation and plant size, and (3) the effects of trade and growth on the skill premium. The theory is consistent with certain facts about factor allocation and factor price changes in the 19th and 20th centuries.

Currently, Argentina is experiencing what the government describes as a “great depression.” Using the “Great Depressions” methodology developed by Cole and Ohanian (1999) and Kehoe and Prescott (2002), we find that the primary determinants of both the boom in Argentina in the 1990s and the subsequent depression were changes in productivity, rather than changes in factor inputs. The timing of events links the boom to the currency-board-like Convertibility Plan and the crisis to its collapse. To gain credibility, the Argentine government took measures to make abandoning the plan more costly. Because the government was unable to enforce fiscal discipline, however, these increased costs failed to make the plan more credible and instead made the crisis far worse when it failed.

This paper describes methods for estimating the parameters of continuous time linear stochastic rational expectations models from discrete time observations. The economic models that we study are continuous time, multiple variable, stochastic, linear-quadratic rational expectations models. The paper shows how such continuous time models can properly be used to place restrictions on discrete time data. Various heuristic procedures for deducing the implications for discrete time data of these models, such as replacing derivatives with first differences, can sometimes give rise to very misleading conclusions about parameters. The idea is to express the restrictions imposed by the rational expectations model on the continuous time process of the observable variables. Then the likelihood function of a discrete-time sample of observations from this process is obtained. Estimators are obtained by maximizing the likelihood function with respect to the free parameters of the continuous time model.

This paper examines the sets of feasible allocations in a large class of economic environments in which commitment is impossible (the standard definition of feasibility is adapted to take account of the lack of commitment). The environments feature either memory or money. Memory is defined as knowledge on the part of an agent of the full histories of all agents with whom he has had direct or indirect contact in the past. Money is defined as an object that does not enter preferences or production and is available in fixed supply. The main proposition proves that any allocation that is feasible in an environment with money is also feasible in the same environment with memory. Depending on the environment, the converse may or may not be true. Hence, from a technological point of view, money is equivalent to a primitive form of memory.

Many countries are facing challenging fiscal financing issues as their populations age and the number of workers per retiree falls. Policymakers need transparent and robust analyses of alternative policies to deal with demographic changes. In this paper, we propose a simple framework that can easily be matched to aggregate data from the national accounts. We demonstrate the usefulness of our framework by comparing quantitative results for our aggregate model with those of a related model that includes within-age-cohort heterogeneity through productivity differences. When we assess proposals to switch from the current tax and transfer system in the United States to a mandatory saving-for-retirement system with no payroll taxation, we find that the aggregate predictions for the two models are close.

In models in which convergence in income levels across closed countries is driven by faster accumulation of a productive factor in the poorer countries, opening these countries to trade can stop convergence and even cause divergence. We make this point using a dynamic Heckscher-Ohlin model — a combination of a static two-good, two-factor Heckscher-Ohlin trade model and a two-sector growth model — with infinitely lived consumers where international borrowing and lending are not permitted. We obtain two main results: First, countries that differ only in their initial endowments of capital per worker may converge or diverge in income levels over time, depending on the elasticity of substitution between traded goods. Divergence can occur for parameter values that would imply convergence in a world of closed economies and vice versa. Second, factor price equalization in a given period does not imply factor price equalization in future periods.

We explore the welfare consequences of different taxation schemes in an economy where agents are debt-constrained. If agents default on their debt, they are banned from future credit markets, but retain their private endowments which are subject to income taxation. A change in the tax system changes the severity of punishment from default and, hence, leads to a limitation of possible risk sharing via private contracts. The welfare consequences of a change in the tax system depend on the relative magnitudes of increased risk sharing forced by the new tax system and the reduced risk sharing in private insurance markets. We quantitatively address this issue by calibrating an artificial economy to US income and tax data. We show that for a plausible selection of the structural parameters of our model, the change to a more redistributive tax system leads to less risk sharing among individuals and lower ex-ante welfare.

By the 1970s, quid pro quo policy, which requires multinational firms to transfer technology in return for market access, had become a common practice in many developing countries. While many countries have subsequently liberalized quid pro quo requirements, China continues to follow the policy. In this paper, we incorporate quid pro quo policy into a multicountry dynamic general equilibrium model, using microevidence from Chinese patents to motivate key assumptions about the terms of the technology transfer deals and macroevidence on China’s inward foreign direct investment (FDI) to estimate key model parameters. We then use the model to quantify the impact of China’s quid pro quo policy and show that it has had a significant impact on global innovation and welfare.

No abstract available.

No abstract available.

Herein, it is demonstrated that the competitive provision of fiat money is generically either inefficient or infeasible.

In a model which exhibits many monetarist properties it is shown that monetary and fiscal policies must be coordinated. The model is populated by overlapping generations of three-period lived agents who can hold fiat money, fiat bonds, and physical capital. A government produces a public good and issues both money and fiat bonds to finance permanent budget deficits. In this model both fiat money and fiat bonds can have value in equilibrium, and their co-existence can allow a more efficient financing of deficits than can a single debt instrument.

No abstract available.

This paper considers a policy environment in which policy is not set by a single policymaker, but by a sequence of policymaking administrations. Administration turnover is determined by a simple random process. The consequences of administration turnover are traced through for two versions of a linear rational expectations model, and numerical simulations of various policy environments are presented.

This chapter is an introductory essay to the volume Climate Change Economics: The Role of Uncertainty and Risk, edited by V. V. Chari and Robert Litterman. This volume consists of a collection of papers that were presented at "The Next Generation of Economic Models of Climate Change," a conference hosted by the Heller-Hurwicz Economics Institute at the University of Minnesota.

This paper describes a technique for distributing quarterly time series across monthly values. The method generalizes an approach described by Fernandez (1981). The paper also presents results of a test of the accuracy of these two approaches and two standard procedures suggested by Chow and Lin (1971).

The method proposed here includes two innovations which should improve the accuracy of econometric forecasting. First, it replaces the subjective, judgmental adjustments commonly used with a more formal, objective econometric procedure. Second, it includes a methodology for testing the usefulness of subperiod data which forecasters often inspect when choosing intercept adjustments. A sample application to the MIT-Penn-SSRC Model demonstrates that the procedure is both feasible and potentially helpful in the context of a large macroeconometric model.