Wednesday, December 29, 2010

JEL Picks (Dec 2010 issue)

Designing Climate Mitigation Policy
Joseph E. Aldy, Alan J. Krupnick, Richard G. Newell, Ian W. H. Parry and William A. Pizer

This paper provides (for the nonspecialist) a highly streamlined discussion of the main issues, and controversies, in the design of climate mitigation policy. The first part of the paper discusses how much action to reduce greenhouse gas emissions at the global level is efficient under both the cost-effectiveness and welfare-maximizing paradigms. We then discuss various issues in the implementation of domestic emissions control policy, instrument choice, and incentives for technological innovation. Finally, we discuss alternative policy architectures at the international level. (JEL Q54, Q58)
Full-Text Access | Supplementary Materials [AEA membership required to access all links]

Efficiency and Redistribution: An Evaluative Review of Louis Kaplow's The Theory of Taxation and Public Economics
Robin Boadway

Louis Kaplow proposes a two-step methodology for normative policy analysis and illustrates it using various policy reforms. The first step is to identify efficiency gains when hypothetical lump-sum taxes can undo redistributive consequences. The second step evaluates the redistributive effects using a strictly welfaristic social welfare function. I critically review the foundations for Kaplow's procedure and its reliance on strict welfarism. I argue that basing efficiency gains on hypothetical lump-sum tax adjustment can lead to social welfare reducing policies if such tax adjustments are not carried out. I also indicate some conceptual problems with translating welfarism into policy evaluation when individuals have different utility function, and review one promising alternative approach.(JEL H20, H41, H50)
Full-Text Access | Supplementary Materials

Does Network Theory Connect to the Rest of Us? A Review of Matthew O. Jackson's Social and Economic Networks
James E. Rauch

The ubiquity of networks in our social lives has long been recognized, and their importance in our economic lives is increasingly recognized as well. Yet the literature synthesized in Matthew O. Jackson's Social and Economic Networks, which covers the theory of how networks form, decay, and shape behavior at a general level, has had little influence on either applied theory or empirical work in this area. This is partly because of limitations of network theory as it has evolved in this literature. After describing the network theory presented in the book, I discuss these limitations and make some tentative suggestions as to how they might be overcome. (JEL D85, L14, Z13)
Full-Text Access | Supplementary Materials

Why Isn't Mexico Rich? [this was linked in this blog before as an NBER working paper] Gordon H. Hanson

Over the last three decades, Mexico has aggressively reformed its economy, opening to foreign trade and investment, achieving fiscal discipline, and privatizing state owned enterprises. Despite these efforts, the country's economic growth has been lackluster, trailing that of many other developing nations. In this paper, I review arguments for why Mexico hasn't sustained higher rates of economic growth. The most prominent suggest that some combination of poorly functioning credit markets, distortions in the supply of nontraded inputs, and perverse incentives for informality creates a drag on productivity growth. These are factors internal to Mexico. One possible external factor is that the country has the bad luck of exporting goods that China sells, rather than goods that China buys. I assess evidence from recent literature on these arguments and suggest directions for future research. (JEL E23, E65, F14, O10, O20, O47)
Full-Text Access | Supplementary Materials

Why Have Economic Reforms in Mexico Not Generated Growth?
Timothy J. Kehoe and Kim J. Ruhl

Following its opening to trade and foreign investment in the mid-1980s, Mexico's economic growth has been modest at best, particularly in comparison with that of China. Comparing these countries and reviewing the literature, we conclude that the relation between openness and growth is not a simple one. Using standard trade theory, we find that Mexico has gained from trade, and by some measures, more so than China. We sketch out a theory in which developing countries can grow faster than the United States by reforming. As a country becomes richer, this sort of catch-up becomes more difficult. Absent continuing reforms, Chinese growth is likely to slow down sharply, perhaps leaving China at a level less than Mexico's real GDP per working-age person. (JEL E23, E65, F14, O10, O20, O47)

Saturday, December 18, 2010

NBER picks this week: Arrow et al and Baldwin

Sustainability and the Measurement of Wealth
by Kenneth J. Arrow, Partha Dasgupta, Lawrence H. Goulder, Kevin J. Mumford, Kirsten Oleson  -  #16599 (EEE EFG)


We develop a consistent and comprehensive theoretical framework for assessing whether economic growth is compatible with sustaining well-being over time.  The framework focuses on whether a comprehensive measure of wealth - one that accounts for natural
capital and human capital as well as reproducible capital - is maintained through time.  Our framework also integrates population
growth, technological change, and changes in health.  We apply the framework to five countries that differ significantly in stages of
development and resource bases:  the United States, China, Brazil, India, and Venezuela.  With the exception of Venezuela, significant
increases in human capital enable comprehensive wealth to be maintained (and sustainability to be achieved) despite significant
reductions in the natural resource base.  We find that the value of "health capital" is very large relative to other forms of capital.
As a result, its growth rate critically influences the growth rate of per-capita comprehensive wealth.

Unilateral Tariff Liberalisation
by Richard Baldwin  -  #16600 (ITI)


Unilateral tariff liberalisation by developing nations is pervasive but our understanding of it is shallow.  This paper strives to partly
redress this lacuna on the theory side by introducing three novel political economy mechanisms with particular emphasis is on the role
of production unbundling.  One mechanism studies how lowering frictional barriers to imported parts can destroy the correlation of
interests between parts producers and their downstream customers.  A second mechanism studies how Kojima's pro-trade FDI raises the political economy cost of maintaining high upstream barriers.  The third works via a general equilibrium channel whereby developing
country's participation in the supply chains of advanced-nation industries undermines their own competitiveness in final goods, thus
making final good protection more politically costly.  In essence, developing nations' pursuit of the export-processing industrialisation undermines their infant-industry industrialisation strategies.

McCulloch on Deaton

Interesting read:

Angus Deaton's paper is fascinating – and depressing in almost equal measure. Deaton is the nearest thing to God in the field of measuring development. He is perhaps the single most respected economist working in this field having built a reputation over decades for his meticulous unpicking of all manner of development data – when Deaton says something, you listen.

That is from my colleague Neil McCulloch. Read here