In Search of a Rationale for Differentiated Environmental Taxes

Environmental tax schemes in OECD countries often involve tax rates differentiated across industrial, commercial and household sectors. In this paper, we investigate four potentially important arguments for these deviations from uniform taxation: pre-existing tax distortions, domestic equity concerns, global environmental effectiveness, and strategic trade policy. Our primary objective is to ascertain whether the degree of tax differentiation observed in many countries can be rationalized on economic grounds. In simulations with a computable general equilibrium model, we calculate optimal policies under various settings. Our simulation results lead us to conclude that there is little economic rationale for the common policy practice of discriminating strongly in favor of heavy industries, even when accounting for interacting taxes, distributional concerns, leakage, and international market power. --optimal environmental taxation,computable general equilibrium

Learning on the Cheap and Quick: Gains from trade through imported expertise

Gains from knowledge transmission arising from the presence of foreign firms has received a good deal of empirical attention, but micro-foundations for this mechanism are weak . Here we focus on production by foreign experts who may train domestic unskilled workers who work with them. Gains from training can in turn be decomposed into two types: (a) obtaining knowledge and skills at a lower cost than if they are self-taught at home, (b) producing domestic skilled workers earlier in time than if they the domestic economy had to rediscover the relevant knowledge through “reinventing the wheel”. We develop a three-period model in which the economy initially has no skilled workers. Workers can withdraw from the labor force for two periods of self study and then produce as skilled workers in the third period. Alternatively, foreign experts can be hired in period 1 and domestic unskilled labor working with the experts become skilled in the second period. We analyze how production, training, and welfare depend on two important parameters: the cost of foreign experts and the learning (or “absorptive”) capacity of the domestic economy.

What if? Policy analysis with calibrated equilibrium models

The goal of this paper is to build up and apply a simple static model of world oil markets.CGE, static model, oil markets

Combining Top-Down and Bottom-up in Energy Policy Analysis: A Decomposition Approach

The formulation of market equilibrium problems as mixed complementarity problems (MCP) permits integration of bottom-up programming models of the energy system into top-down general equilibrium models of the overall economy. Despite the coherence and logical appeal of the integrated MCP approach, implementation cost and dimensionality both impose limitations on its practical application. A complementarity representation involves both primal and dual relationships, often doubling the number of equations and the scope for error. When an underlying optimization model of the energy system includes upper and lower bounds on many decision variables the MCP formulation may suffer in robustness and efficiency. While bounds can be included in the MCP framework, the treatment of associated income effects is awkward. We present a decomposition of the integrated MCP formulation that permits a convenient combination of top-down general equilibrium models and bottom-up energy system models for energy policy analysis. We advocate the use of complementarity methods to solve the top-down economic equilibrium model and quadratic programming to solve the underlying bottom-up energy supply model. A simple iterative procedure reconciles the equilibrium prices and quantities between both models. We illustrate this approach using a simple stylized model. --Mathematical Programming,Mixed Complementarity,Top-Down/Bottom-Up

Learning on the quick and cheap: Gains from trade through imported expertise

Gains from productivity and knowledge transmission arising from the presence of foreign firms has received a good deal of empirical attention, but micro-foundations for this mechanism are weak . Here we focus on production by foreign experts who may train domestic unskilled workers who work with them. Gains from training can in turn be decomposed into two types: (a) obtaining knowledge and skills at a lower cost than if they are self-taught at home, (b) producing domestic skilled workers earlier in time than if they the domestic economy had to rediscover the relevant knowledge through “reinventing the wheel”. We develop a three-period model in which the economy initially has no skilled workers. Workers can withdraw from the labor force for two periods of self study and then produce as skilled workers in the third period. Alternatively, foreign experts can be hired in period 1 and domestic unskilled labor working with the experts become skilled in the second period. We analyze how production, training, and welfare depend on two important parameters: the cost of foreign experts and the learning (or “absorptive”) capacity of the domestic economy. Classification-

Decomposing general equilibrium effects of policy intervention in multi-regional trade models: method and sample application

Policy interventions in large open economies do not only affect the allocation of domestic resources but change international market prices. The change in international prices implies an indirect secondary burden or benefit for all trading countries. This secondary terms of trade effect may have important welfare implications: Countries without change in domestic policies may nevertheless gain or suffer from the action of other countries; in turn, the primary welfare effect of countries interfering domestically may be substantially enhanced or weakened due to international spill-overs. Obviously, policy makers of economies that are integrated into international markets have an essential interest to gain insights about the different sources of welfare changes associated with domestic policy changes. In this paper, we present a decomposition that splits the overall welfare effect into a domestic market effect holding international prices constant and an international market effect as a result of changes in international prices (terms of trade effect). We demonstrate the usefulness of our decomposition approach in the context of an empirical welfare analysis of international carbon abatement policies. --

Computation of Equilibria in OLGModels with Many Heterogeneous Households

This paper develops a decomposition algorithm by which a market economy with many households may be solved through the computation of equilibria for a sequence of representative agent economies. The paper examines local and global convergence properties of the sequential recalibration (SR) algorithm. SR is then demonstrated to efficiently solve Auerbach- Kotlikoff OLG models with a large number of heterogeneous households. We approximate equilibria in OLG models by solving a sequence of related Ramsey optimal growth problems. This approach can provide improvements in both efficiency and robustness as compared with simultaneous solution methods.Computable general equilibrium, Overlapping generations, Microsimulation, Sequential recalibration

Integrating Bottom-Up into Top-Down: A Mixed Complementarity Approach

We motivate the formulation of market equilibria as a mixed complementarity problem (MCP) in order to bridge the gap between bottom-up energy system models and top-down general equilibrium models for energy policy analysis. Our objective is primarily pedagogic. We first lay out that the MCP approach provides an explicit representation of weak inequalities and complementarity between decision variables and market equilibrium conditions. This permits us to combine bottom-up technological details and top-down economic richness in a single mathematical format. We then provide a stylized example of how to integrate bottom-up features into a top-down modeling framework along with worked examples and computer programs which illustrate our approach. --Energy Policy,Computable General Equilibrium,Bottom-Up,Top-Down

Computation of Equilibria in OLG Models with Many Heterogeneous Households

This paper develops a decomposition algorithm by which a market economy with many households may be solved through the computation of equilibria for a sequence of representative agent economies. The paper examines local and global convergence properties of the sequential recalibration (SR) algorithm. SR is then demonstrated to efficiently solve Auerbach-Kotlikoff OLG models with a large number of heterogeneous households. We approximate equilibria in OLG models by solving a sequence of related Ramsey optimal growth problems.This approach can provide improvements in both efficiency and robustness as compared with simultaneous solution-methods.Computable general equilibrium, overlapping generations, microsimulation, sequential recalibration

Learning on the quick and cheap: gains from trade through imported expertise

Gains from productivity and knowledge transmission arising from the presence of foreign firms has received a good deal of empirical attention, but micro-foundations for this mechanism are weak . Here we focus on production by foreign experts who may train domestic unskilled workers who work with them. Gains from training can in turn be decomposed into two types: (a) obtaining knowledge and skills at a lower cost than if they are self-taught at home, (b) producing domestic skilled workers earlier in time than if they the domestic economy had to rediscover the relevant knowledge through "reinventing the wheel". We develop a three-period model in which the economy initially has no skilled workers. Workers can withdraw from the labor force for two periods of self study and then produce as skilled workers in the third period. Alternatively, foreign experts can be hired in period 1 and domestic unskilled labor working with the experts become skilled in the second period. We analyze how production, training, and welfare depend on two important parameters: the cost of foreign experts and the learning (or "absorptive") capacity of the domestic economy. --learning,transmission mechanism,multinationals,imported