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Slack – the underutilization of factors of production – varies systematically with economic development. Using novel and detailed measures of the utilization of labor and capital from a large representative sample of firms in rural and urban Kenya, we show that utilization is increasing in firm size, market access, and economic activity. We present a model of firm capacity choice where indivisibility in at least one input is a key driver of slack. We embed the model in spatial general equilibrium, with features characteristic of low-income settings – including many small firms and high transport costs – and show that it rationalizes both the endogenous emergence of slack in steady-state and elastic aggregate supply curves. We empirically validate model predictions using reduced-form estimates of the general equilibrium effects of cash transfers from a large-scale RCT in Kenya. The parsimonious model replicates much of the experimental evidence, predicting a large real multiplier of 1.5, driven by expansion in low-utilization sectors and firms, and limited average price inflation. Counterfactual analyses indicate that multipliers are likely to be meaningfully smaller in lower slack settings, such as urban areas. We use the model to revisit the estimation of spatial spillovers in clustered RCTs and uncover non-trivial ’missing intercept’ effects on income and inflation. Additionally, we innovate methodologically by pre registering key elements of model estimation and validation. The findings suggest that input indivisibilities and slack are key features of developing country settings, and are quantitatively important for macroeconomic dynamics and policies.

A model of Edgeworthian economies is studied, in which participants are randomly chosen at each period to exchange two goods to increase their utilities, as described by the Cobb–Douglas utility function. Participants can trade deviating from their bilateral equilibrium, provided that the market and the trade follow appropriate symmetry conditions. The article aims to study the convergence to equilibrium in a situation where individuals or small groups of participants trade in a market, and prices are determined by interactions between the participants rather than by demand and supply alone. A dynamic matching and bargaining game is considered, with statistical duality imposed on the market game, ensuring that each participant has a counterpart with opposite preferences. This guaranties that there is sufficient incentive for trade. It is shown that, in each period, the expected logarithm of the trading price in the Edgeworthian economy equals the expected Walrasian price. This demonstrates that, under symmetry conditions, the trading price in the Edgeworthian economy is related to the Walrasian price, indicating convergence of the trading price in the Edgeworthian economy towards the Walrasian price. The study suggests that, under the right conditions, the decentralized trading model leads to price convergence similar to what would be expected in a more classical Walrasian economy, where prices balance demand and supply. [ABSTRACT FROM AUTHOR]

Purpose: Our result of this paper aims to indicate that the beta pricing formula could be applied in a long-term model setting as well. Design/methodology/approach: In this paper, we show that the capital asset pricing model can be derived from a three-period general equilibrium model. Findings: We show that our extended model yields a Pareto efficient outcome. Practical implications: The capital asset pricing model (CAPM) model can be used for pricing long-lived assets. Social implications: Long-term modelling and sustainability can be modelled in our setting. Originality/value: Our results were only known for two periods. The extension to 3 periods opens up a large scope of applicational possibilities in asset pricing, behavioural analysis and long-term efficiency. [ABSTRACT FROM AUTHOR]

This paper contributes to the literature on finance, production, and Research and Development (R&D) by investigating the unique possibilities of polarized decisions of entrepreneurs to yield "extreme" points rather than an "interior solution." Financiers provide credits for employing sector‐specific skilled and unskilled workers as well as for R&D. With the objective of maximizing returns, financiers' interest lies in financing R&D only in the skilled sector while the unskilled sector—without innovation—collapses. Such corner solution occurs due to much higher skilled‐augmenting technical change guaranteeing maximum prospective return than that in the unskilled. This offers a novel interpretation of a declining share of production workers. [ABSTRACT FROM AUTHOR]

This paper explores how state capacity in the sense of controlling tax evasion affects wage inequality through constructing several general equilibrium models. We analyse six types of redistribution in urban areas, and find that effect variations in urban wage inequality arise depending on the specific recipients of redistribution. Notably, under redistribution to urban unskilled labour, changes in wage inequality will depend on the capital intensity of the urban skilled sector when state capacity increases. [ABSTRACT FROM AUTHOR]

We consider a small open economy with three sector and four factors. Agricultural sector produces output with unskilled labour and land. Manufacturing sector and skill formation sector produce output with skilled labour and capital. Skill formation sector transforms the unskilled labour into skilled labour. We also consider an extended version of this model where agricultural sector also uses capital. So capital is mobile between all three sectors. Both change in the price of manufacturing sector and capital stock alter skill formation in a similar direction. But change in the price of manufacturing sector leads to change in skilled–unskilled wage inequality in the same direction whereas due to change in capital stock it changes in opposite direction. In our extended study, where capital is mobile between all three sectors, the results of the basic model are unaltered. JEL Codes: F13, J31 [ABSTRACT FROM AUTHOR]

We develop a dynamic model of input–output networks that incorporates adjustment costs of changing inputs. Our closed-form solution for the dynamics of the economy shows that temporary shocks to upstream sectors, whose output travels through long supply chains, have disproportionately significant welfare impact compared to affected sectors' Domar weights. We conduct a spectral analysis of the U.S. production network and reveal that the welfare impact of temporary sectoral shocks can be represented by a low-dimensional, 3-factor structure. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to provide a micro‐economic foundation for an argument that the direct employment by the government is more desirable than the government purchase of private goods to eliminate unemployment. A general equilibrium model with monopolistic competition is devised, and the effects of policies (government purchase, tax rate operation, and government employment) on macroeconomic variables (consumption, price, and profit) are investigated. It is shown that (1) the government purchase is inflationary in the sense that additional effective demand by the government not only increases private employment but also raises prices; (2) the government employment can achieve full employment without causing a rise in prices. [ABSTRACT FROM AUTHOR]

Corruption is a symptom of wider political dynamics intertwined with sectors prone to criminal activities. This arises due to the laxity of legal enforcement or a dysfunctional political system. This paper analytically demonstrates the nexus between organized crime and corruption in the presence of the public sector. The relevant questions at this juncture are: (i) How does capital investment in the industrial sectors affect the crime–corruption nexus? (ii) Why a more stringent law-and-order enforcement may produce counterproductive outcomes? and (iii) Whether the creation of alternative income opportunities in the legally approved sectors by the government will lower corruption and decriminalize society? What we will try to show is that when corruption becomes necessary to sustain the criminal sector, capital expansion and deterrence policy augment crime and corruption. This crucially depends on a multitude of general equilibrium factors including the labor relocation effect, capital relocation effect, and factor intensity of sectors. [ABSTRACT FROM AUTHOR]

This article studies the effects of higher bank capital requirements. Using new firm-lender matched credit data from South Korea, we document that Basel III coincided with a 25% decline in credit from regulated banks, and an increase of similar magnitude from non-bank (shadow) lenders. We use our data to estimate the effect of capital requirements on bank credit, and the spillover effect of the reform on non-bank lending. We then build a general equilibrium model with heterogeneous banks and firms that replicates these micro estimates. We find that Basel III can account for most of the observed decrease in regulated bank lending and about three quarters of the increase in shadow lending. The latter is driven exclusively by general equilibrium effects of the reform. [ABSTRACT FROM AUTHOR]

Diagnostic expectations constitute a realistic behavioural model of inference. This paper shows that this approach to expectation formation can be productively integrated into the New Keynesian framework. Diagnostic expectations generate endogenous extrapolation in general equilibrium. We show that diagnostic expectations generate extra amplification in the presence of nominal frictions; a fall in aggregate supply generates a Keynesian recession; fiscal policy is more effective at stimulating the economy. We perform Bayesian estimation of a rich medium-scale model that incorporates consensus forecast data. Our estimate of the diagnosticity parameter is in line with previous studies. Moreover, we find empirical evidence in favour of the diagnostic model. Diagnostic expectations offer new propagation mechanisms to explain fluctuations. [ABSTRACT FROM AUTHOR]

In recent decades, there has been a notable increase in linkages of services in decoupling global value chains (GVCs) and a surge in regulatory mechanisms embedded in service provisions in trade agreements. Existing literature tried to empirically link the impact of such service provisions on GVC‐related services, but none focused on identifying relevant service provisions. This study is a novel attempt in this direction using a machine learning algorithm augmented in gravity modelling. Building on the identified service provisions, the study quantifies their impact on GVC‐related services conditioned on the countries' income levels. The study also conducts the general equilibrium analysis by simulating a scenario incorporating identified service provisions in the India‐ASEAN trade agreement. The analysis finds that few service provisions exist that enhance the share of foreign service inputs in manufacturing exports of the countries involved in GVC‐related service participation. Moreover, the impact is heterogeneous regarding benefits to the developing countries as a destination of service‐value added. Finally, the study shows that introducing selected service provisions in existing trade agreements can potentially increase welfare and service trade. [ABSTRACT FROM AUTHOR]

The gravity model is the workhorse model of trade. Yet, many economists still view gravity as a reduced‐form estimating equation and apply it without guidance from theory, while others are skeptical about its usefulness for counterfactual projections. This paper offers a historical overview of the evolution of gravity, from an a‐theoretical application to an estimating computable general equilibrium model, which can be nested in more complex frameworks. Along the way, I address some misconceptions about gravity, summarize the current recommendations for gravity estimations, highlight properties that have made gravity so successful, and review the latest contributions to the related literature. [ABSTRACT FROM AUTHOR]

As a novel financial instrument, green bonds require further research to understand their causal effects and theoretical mechanisms on sustainable development fully. This paper constructs a theoretical model that characterizes the issuance of green bonds as the extent to which social planners prioritize environmental benefits in bond markets. In this model, we define sustainable development as the geometric mean of environmental factor inputs and final production output. By maximizing consumer utility, this model elucidates the direct and non-linear relationship between green bonds and sustainable development. The paper empirically investigates this proposition using data from 19 European countries between 2018 and 2022. The results indicate that: (1) Green bonds significantly promote sustainable development. This financial instrument, designed to raise funds for environmental projects, can indeed promote sustainable development through clean and green resource allocation. (2) The promotional effect of green bonds on sustainable development increases significantly with improvements in innovation efficiency, industrialization rates, and savings rates. This finding elaborates on the conditions under which the positive impact of green bonds on sustainable development is enhanced. (3) Green bonds only promote sustainable development when a country's factor endowment structure reaches a specific threshold. Beyond this threshold, as the factor endowment structure becomes very high, the country's sustainable development gains sufficient momentum, diminishing the role of green bonds. This finding suggests that the positive impact of green bonds on sustainable development is contingent upon certain properties reflecting the economic basis. [ABSTRACT FROM AUTHOR]

COVID-19 has adverse impacts on contact-intensive sectors, viz., manufacturing, tourism, and the entertainment sector (ES). In a general equilibrium (GE) model with online, entertainment and informal sectors employing skill, unskilled, and capital, we show that COVID-19 could cause polarization pushing contact-intensive entertainment industry on the brink of collapse while the other two survive. Dual roles of factor intensity and contact intensity (CI) contribute to such finite changes, triggering inter-skill wage inequality. This is the first of its kind to offer a theoretical mechanism capturing the contractionary effects on contact-intensive sectors and wage inequality. These results match with the literature emphasizing the hardships faced by the cultural sector. [ABSTRACT FROM AUTHOR]

We develop a model of investor information choices and asset prices in which the availability of information about fundamentals is time-varying and responds to investor demand for information. A competitive research sector produces more information when more investors are willing to pay for that research. This feedback, from investor willingness to pay for information to more information production, generates two regimes in equilibrium, one having high prices and low volatility, the other the opposite. The low-price, high-volatility regime is associated with greater information asymmetry between informed and uninformed investors. Information dynamics move the market between regimes, creating large price drops even with no change in fundamentals. In our calibration, the model suggests an important role for information dynamics in financial crises. This paper was accepted by Kay Giesecke, finance. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2021.01213. [ABSTRACT FROM AUTHOR]

This special issue on spatial macroeconomics aims to bridge the divide between spatial and macroeconomics. Defined in the introduction, spatial macroeconomics explores the interactions between economic activity and geographical space. The issue comprises eleven papers authored by a total of 32 researchers. These papers were selected through a combination of solicited submissions and an open call for contributions. Four papers within this special issue delve into spatial macroeconomic theory. They cover topics such as agglomeration economies for innovation, a neoclassical spatial general equilibrium growth model, the spatial sorting of heterogeneous workers and the impact of national industrial policies in strategic industries on trade. Additionally, seven papers offer empirical studies that encompass a wide range of methodologies. These include general equilibrium models, input-output-based analyses and econometric models. The empirical research addresses various topics, such as the impact of trade on productivity, the trade-off between efficiency and equity, fiscal assistance, local and nationwide fiscal multipliers, forced human displacement during wars and the spatial diffusion effects of renewable energy resource deployment. [ABSTRACT FROM AUTHOR]

In this study we use a spatial dynamic general equilibrium model to analyse the macroeconomic impact of cohesion policy-like investments in nine net beneficiary member states of the European Union. We examine whether or not the objective of reducing regional disparities (equity) prevents the interventions from maximising their impact on national GDP impact (efficiency) by looking at GDP multipliers and interregional spillovers. We find that there may be an equity-efficiency trade-off depending on the characteristics of both the investments made and the targeted regional economies. Moreover, the analysis shows that the growth spillovers from more developed to less developed regions are limited. This implies that, in order to reduce regional disparities, investment must be made in the less developed regions of each country. [ABSTRACT FROM AUTHOR]

The article makes a theoretical attempt to explain how different interconnected measures of globalisation—service led growth, tariff reform, agricultural trade liberalisation and capital account liberalisation—affect the skilled–unskilled wage disparity, sector-wise performance, income distribution and aggregate welfare of the economy. We pay attention to land augmenting technological progress as an essential ingredient of inclusive growth and discuss effects of COVID-19 as a supply shock. In so-doing, we construct a three-sector general equilibrium framework with an export-oriented service sector, a tariff-protected import competing manufacturing sector and an export-oriented traded agricultural sector. We find that service-led growth and tariff liberalisation shifts the income distribution in favour of the landed gentry and skilled labour. Agricultural trade liberalisation and capital account liberalisation also debilitate the income distribution. Land augmenting technological progress adversely impacts the manufacturing sector but benefits the other sectors. Following the outbreak of the pandemic, a fall in labour endowment and rise in transaction costs were observed. A decrease in the endowment of skilled labour reduces the production in service sector and increases the production of the manufactured commodity. The results are reversed when the endowment of unskilled labour decreases. An increase in transaction produces unfair outcome from the perspective of income distribution. In this context it becomes imperative to mention that, the construction of the three-sector general equilibrium framework is not new, and that the effects of the COVID-19 pandemic cannot be reduced to just a supply shock. COVID-19 has elements of both supply shock and demand shock, but in this article, we address supply side dimensions of COVID shock in conjunction with the effects of lockdown. In addition, we also demonstrate the robustness of our results to an alternate assumption on the structure of the model. JEL Codes: D50, F66, J31 [ABSTRACT FROM AUTHOR]

Past investments in electricity, Internet, and road infrastructure, in isolation and bundled, have contributed to structural transformation and economic development in Africa. Using new data on the expansion of the road, electricity, and Internet networks over the past two decades, the paper shows that having access to both paved roads and electricity has led to a significant reallocation of labor from agricultural to both manufacturing and services. Adding access to fast Internet has had a major impact on structural change, with an even larger impact on reallocating labor away from agriculture. The paper then uses a spatial general-equilibrium model to quantify the impacts of future regional transport investments, bundled with electricity and Internet investments, on economic development in countries in the Horn of Africa and Lake Chad region. [ABSTRACT FROM AUTHOR]

We analyze the general equilibrium effects of countercyclical unemployment benefit policies. Our heterogenous-agent model features costly job search with imperfect insurance of unemployment risk and individual savings. Our model predicts: (1) the additional unemployment under a countercyclical policy relative to that under an acyclical policy to be a superlinear function of the aggregate shock?s size, (2) a higher unemployment rate sensitivity to UI policy changes when individual savings are relatively low. Our estimates of the effects of UI policy changes are based on transition dynamics following a large, unanticipated increase in the unemployment rate. [ABSTRACT FROM AUTHOR]

We examine the likely effect of the African Continental Free Trade Area (AfCFTA) on African investment using data on announced greenfield investment. Departing from existing work on this subject, we add value by providing estimates based on a general equilibrium counterfactual analysis in a structural gravity framework. Results suggest that the stock of announced intra‐African greenfield investment in 2018 would have increased by 0.7 percent from a successful implementation of the AfCFTA in that year relative to the baseline scenario of no agreement, with considerable heterogeneity across source and destination countries. Moreover, the positive effect is found to increase with the depth of the negotiated agreement. Exploring possible transmission channels we find the trade elasticity of announced greenfield investment to be positive, especially for trade in intermediates in African host countries with strong governance indicators. This suggests that, by improving institutional quality and galvanising regional value chains, integration within Africa could also incentivise investment. [ABSTRACT FROM AUTHOR]

We investigate theoretically and empirically the effect of globalisation on informality. We use a model with two identical countries. Firms in each country choose to be formal or informal. Relative to an informal firm, a formal one produces a good of higher quality and pays social contributions on each worker. We determine the effect of globalisation on the size and the share of informality from the comparison of Autarky and Full Integration scenarios. We prove that for a given quality gap between formal and informal products, (i) globalisation increases the size of informality for low and high levels of social contributions but decreases it for intermediate ones; (ii) globalisation increases the share of informality for low social contributions and decreases it for high social contributions. The turning points depend increasingly on the quality gap. We then test these theoretical results by relying on the well‐informed data available for Latin‐American countries and using the economic sector as a proxy for the quality gap between a formal and an informal firm. Our empirical results are highly consistent with the theoretical model. In terms of policy implications, they show that globalisation may be used by the states together with modulated social contributions so as to reduce informality, but not for all economic sectors simultaneously. [ABSTRACT FROM AUTHOR]

We quantify the trade and welfare effects of RCEP. Using a quantitative multi-country and multi-sector trade model that distinguishes key characteristics between intermediates and final goods, we illustrate the heterogeneous impacts of RCEP on trade and welfare. RCEP has trade creation effects within members but has trade diversion effects for non-members. There are substantial welfare gains within RCEP, but the decomposition results indicate that the sources of welfare gains differ, with China and ASEAN countries mainly originating from growth in the volume of trade, but at the cost of the deterioration in terms of trade. Trade liberalization in service also contributes to welfare gains, mainly from intermediates trade. India's accession to RCEP improves the welfare of itself and its members, while its terms of trade deteriorate. We also find that with distinctions between intermediates and final goods, the heterogeneous effects of the two can be captured. Moreover, our model predicts more significant welfare gains than a model without input-output networks and sectoral linkages. [ABSTRACT FROM AUTHOR]

This article tells the story of the first international topological conference in Moscow (1935), an outstanding event that, for the first time, brought together the most notable American, European, and Soviet mathematicians, including those who would later play decisive roles in the mathematization of economics: John von Neumann, Leonid Kantorovich, and Albert W. Tucker. The fact that Kantorovich was in contact with von Neumann and his closest colleagues, Solomon Lefschetz and Garrett Birkhoff, is hardly appreciated in the histories of mathematics and mathematical economics. Their brief academic exchange was interrupted by the increasing international isolation of Soviet mathematics and by the wars that ensued. The article provides a historical account of the conference and traces the intellectual and personal affinities of Soviet and non-Soviet mathematicians, as well as their conceptual innovations. It argues that the conference, as a singular event linking several research communities, mattered for the development of various formal frameworks and their dissemination, contributing to the intellectual landscape in which postwar mathematical economics could emerge. The article calls for a deeper analysis of conceptual affinities and motivations in applying mathematics to economics and for a more nuanced narrative linking these motivations to social and political contexts of economic modeling. [ABSTRACT FROM AUTHOR]

This article has two objectives. The first is to understand why the 2008 Great Financial Crisis (GFC) did not lead to continuing intra-disciplinary debates between mainstream and heterodox economists. This gap is attributed here to mainstream macroeconomists' insistence on using a general equilibrium analytical lens: so doing invisibilizes key aspects of the GFC and restricts the space for inter-paradigmatic exchange. This leads to our second objective: to explore the place of institutional economics in an era in which our community exists outside the economics mainstream. Assisted by insights from Richard Rorty and Tom Shippey, we argue that institutional economics' role remains robust precisely because of features already present in the earliest original institutionalist explorations: analytical flexibility, and specifically understanding that no one model can fully describe lived reality or guide policy responses; a willingness to challenge the use of power for positional advantage, either by privileged agents in the economy itself or by economists defining acceptable terms of theoretical discourse; and an awareness that while social scientific inquiry can "make" (t) truths by careful explorations of socio-economic dynamics, it cannot "find" (T) truths that exist independent of human understanding. [ABSTRACT FROM AUTHOR]

Our study investigates a model of general equilibrium banking that incorporates moral hazard and incentive mechanisms for bank risk-taking, with a particular focus on deposit market competition. Our findings reveal that when banks compete perfectly in the deposit market, it leads to maximal welfare and an optimal level of bank failure risk. This outcome remains valid even if the risk of failure for competitive banks is higher than that of banks with monopoly rents, and it is not affected by social costs associated with bank failures. Our model suggests that there is no trade-off between bank competition and financial stability. Our results support the empirical findings of Carlson, Correia, and Luck (J Polit Econ 130(2): 462–520, 2022). [ABSTRACT FROM AUTHOR]

News story for "Endogenous Credit, Limited Commitment, Business Cycle" Countercyclical Investment Patterns with Endogenously Determined Credit Anticipated returns are sufficiently high to offset the elevated risks during downturns, presenting favorable investment opportunities. For instance, Warren Buffett accumulated more than $10 billion in profits amidst the 2008 financial crisis, as highlighted in his Wall Street Journal interview from October 2013: "In terms of simple profitability, an average investor could have performed just as well investing in the stock market if they bought during the panic period." In "Endogenous Credit, Limited Commitment, Business Cycle," Choi, Koo, Lim, and Yoo reveal a divergence in investment behavior between affluent and less affluent individuals during economic downturns. Whereas wealthier individuals tend to increase their exposure to risky investments, less affluent individuals tend to reduce theirs. We employ rigorous modeling and solution analysis to establish endogenous borrowing constraints in general equilibrium, elucidating the observed investment patterns. We study a continuous-time model of consumption and portfolio selection of an agent with a limited ability to commit to a debt contract in which the credit limit is endogenously determined. We consider the case where the agent borrows against future income and/or collateral assets. We also study the determination of the credit limit in a general equilibrium model. We derive the credit limit in closed form. The credit limit is smaller than the natural limit because of limited commitment and an increasing function of both income and the collateral price. We extend the baseline model to the case with a regime switch and show that the credit limit is cyclical; it is lower (higher) when the Sharpe ratio is high (low). The model predicts that the rich tend to increase the proportion of risky investments in downturns, whereas the poor decrease them. Funding: H. K. Koo acknowledges the support by the National Research Foundation of Korea grant funded by the Korean Government [NRF-2020R1A2C1A01006134, NRF-2021S1A5A2A03065678], and B. H. Lim acknowledges support by the National Research Foundation of Korea grant funded by the Korean Government (NRF-2020R1F1A1A01076116). Supplemental Material: The online appendix is available at https://doi.org/10.1287/opre.2021.0351. [ABSTRACT FROM AUTHOR]

This article examines Peter Howitt's contribution to non-Walrasian economics in relation to his account of Keynes' theoretical apparatus as developed in his General Theory. We address the following issues: first, what was, according to Howitt, the central message in Keynes' General Theory? Second, how does Howitt assess the Keynesian legacy, from the initial works by Patinkin related to multiple equilibria models through to the disequilibrium macroeconomics of the 1970s? Third, how far do Howitt's own theoretical findings connect with Keynes' claims about the functioning of a decentralised market economy? [ABSTRACT FROM AUTHOR]

This paper documents an early fork in the development of macroeconomics, by examining a debate between the Dutch economists Jan Tinbergen and Johan Koopmans. In a 1932 paper, Tinbergen argued that two firms could be stuck in a "bad" equilibrium in the absence of a coordinated action to increase employment. Koopmans replied with a paper demonstrating that multiple equilibria in an exchange economy could not be ranked on the basis of their productive efficiency. This debate contributed to a larger turn away from dynamising the general equilibrium model, towards the new field of macrodynamics, with long-ranging consequences for the field. [ABSTRACT FROM AUTHOR]

Sraffa's "On the Relations between Cost and Quantity Produced" (1925) and Samuelson's "An Exact Hume-Ricardo-Marshall Model of International Trade" (1971) presented a strikingly similar analytical argument regarding the theoretical domain of Marshallian partial equilibrium models. Yet they reached radically different conclusions from their analyses. This article addresses this theoretical puzzle and proposes a plausible solution. To this end, the article reconstructs the evolution of Sraffa's and Samuelson's thinking on Marshallian partial equilibrium analysis and the evolution of Samuelson's thinking regarding Sraffa's 1926 critique of Marshallian economics. Sraffa's unpublished manuscripts to which Samuelson did not have access during his lifetime are carefully examined. A change in Sraffa's assessment of Marshallian partial equilibrium methodology that occurred in the second half of the 1920s is highlighted. This leads to new insights into Sraffa's thinking on the role and significance of the case of constant costs within Marshallian economics. [ABSTRACT FROM AUTHOR]

The aviation industry faces an urgent need to adopt sustainable aviation fuels for significant decarbonization. Power-to-Liquid (PtL) fuel is considered a potential game changer, but questions remain about the wider economic impacts of introducing PtL fuel in the aviation sector. This paper examines the economic impacts of introducing PtL fuel blending quotas along with a price policy consisting of a kerosene tax and PtL fuel subsidies for the case of Germany. Based on a detailed supply chain analysis, we apply a social accounting matrix and a computable general equilibrium model to take into account both, the production and utilization perspectives of PtL jet fuel. Our results show that the influence of low blending quotas is mainly limited to the aviation sector, with a 10 % blending quota increasing consumer prices by 7.9 % and reducing aviation industry output by 3.1 %. When quota levels increase, however, the effects go beyond the air transport system. On inter-sectoral level, we identify three main patterns: First, industries that substantially contribute to the PtL fuel supply chain, such as metal products and electrical equipment, see increasing levels in both, domestic production, and imports. Second, aviation upstream industries like transport infrastructure and aircraft production see reduced domestic production and imports. Third, aviation downstream industries, such as delivery services and travel agencies, see substitution effects, where imports partly replace domestic output. Macroeconomic indicators are affected negatively by the quota scenarios, but the relative impact is low as the maximum decrease in the gross domestic product (GDP) does not exceed 0.35 %. PtL fuel production subsidies can largely mitigate the decrease in aviation demand but come at the cost of a stronger reduction in the GDP and government income. Moreover, the sensitivity analysis emphasizes that various assumptions and parameters, such as the cost projections of PtL fuel, import options, and elasticities of demand, affect the intensity of economic consequences. Our analysis implies the trade-offs of policymaking between sectoral and macroeconomic interests in the context of sustainable fuels. The main contribution of this study is the investigation of the broader economic effects resulting from the adoption of PtL fuels in aviation. In particular, the production as well as the utilization perspective are considered simultaneously in this study.

Given the global climate emergency and the complex financing problems facing developing countries, some economists are advocating the introduction of payments for environmental services. The question is whether payments for environmental services will enable developing countries to make the ecological transition compatible with the economic growth they need to develop. This study presents a theoretical analysis of the economic and ecological efficiency of such a mechanism, and aims to determine whether it has any recessionary or disincentive effects. In other words, it determines whether, from a theoretical point of view, the environmental services provided by developing countries are compatible with continued growth. The study introduces a “payments for environmental services” procedure into a general equilibrium model (with involuntary unemployment) composed of multinational firms in developed and developing economies. This theoretical model yields the following results. Firstly, higher ecological taxes can directly increase environmental services without any recessionary effect. The system of payments for environmental services means that green investment is not necessarily incompatible with growth and development in developing countries. On the other hand, services in return for environmental payments can lead to a rebound effect from polluting activities, which is why such programs need to be accompanied by more radical environmental policies. In conclusion, while payments for environmental services can promote both ecological transition and growth in developing countries, it is necessary to control the rebound effect arising from the development of economic activity.

The purpose of the study is to assess the impact of alternative options of progressive taxation on Russia’s macroeconomic performance. For quantitative assessments, a neoclassical general equilibrium model with heterogeneous households subject to idiosyncratic income shocks was used. Three groups of scenarios were analyzed, setting a threshold progressive tax scale with thresholds of 30, 50, and 70 thousand rubles, under which state income tax revenues (1) grow, (2) remain unchanged, and (3) decline. The maximum personal income tax rate in the analyzed scenarios was 25%. Steady states and transitions were calculated for the scenarios. According to the quantitative estimates, the first reform leads to a loss of 0.3% to 1.3% of GDP in the long run, depending on the assumed rates and threshold. Despite the increase in lump-sum transfers, aggregate household consumption decreases by 0.5–1.7% in all cases. The second reform leads to a loss of 0.2% to 0.6% of GDP in the long run. The third reform leads to insignificant fluctuations of GDP within 0.1%: GDP increases at the threshold of 30 thousand rubles and decreases at other thresholds. The scale of inequality reduction, as measured by the Gini coefficient, increases with an increase in the top tax rate. However, as the threshold increases, the depth of the Gini index reduction first increases and then decreases. In the short run, there is upward pressure on wages and prices. This is because a decrease in labor supply with unchanged capital in the short run leads to an increase in wage rates (a shift along the labor demand curve), and an increase in wage rates means an increase in marginal costs for firms, leading to higher prices.

A model of Edgeworthian economies is studied, in which participants are randomly chosen at each period to exchange two goods to increase their utilities, as described by the Cobb–Douglas utility function. Participants can trade deviating from their bilateral equilibrium, provided that the market and the trade follow appropriate symmetry conditions. The article aims to study the convergence to equilibrium in a situation where individuals or small groups of participants trade in a market, and prices are determined by interactions between the participants rather than by demand and supply alone. A dynamic matching and bargaining game is considered, with statistical duality imposed on the market game, ensuring that each participant has a counterpart with opposite preferences. This guaranties that there is sufficient incentive for trade. It is shown that, in each period, the expected logarithm of the trading price in the Edgeworthian economy equals the expected Walrasian price. This demonstrates that, under symmetry conditions, the trading price in the Edgeworthian economy is related to the Walrasian price, indicating convergence of the trading price in the Edgeworthian economy towards the Walrasian price. The study suggests that, under the right conditions, the decentralized trading model leads to price convergence similar to what would be expected in a more classical Walrasian economy, where prices balance demand and supply.

Rich behavioural biases, mistakes, and limits on rational decision-making are often thought to make equilibrium analysis much more intractable. We establish that this is not the case in the context of one-sector growth models such as Ramsey–Cass–Koopmans or Bewley–Aiyagari models. We break down the response of the economy to a change in the environment or policy into two parts: the direct response at the given (pre-tax) prices, and the equilibrium response which plays out as prices change. Our main result demonstrates that under weak regularity conditions, regardless of the details of behavioural preferences, mistakes and constraints on decision-making, the long-run equilibrium will involve a greater capital-labour ratio if and only if the direct response (from the corresponding consumption-saving model) involves an increase in aggregate savings. One implication of this result is that, from a qualitative point of view, behavioural biases matter for long-run equilibrium if and only if they change the direction of the direct response. We provide detailed illustrations of how this result can be applied and generate new insights using models of misperceptions, self-control and temptation, and naive and sophisticated quasi-hyperbolic discounting. [ABSTRACT FROM AUTHOR]

Changes to access to credit can potentially cause changes to the returns to various factors—general equilibrium (GE) effects. This paper considers changes in wages, prices of goods and services, interest rates, and in the returns to forming or maintaining social ties. Such GE effects can lead to positive and/or negative indirect effects on economic agents, including those who are not directly affected by a given credit policy. Thus such effects matter for the average level and distribution of impacts resulting from credit access. In addition, GE effects have implications for research design, in that those who are indirectly affected via GE channels are generally not a valid counterfactual for those who are directly affected. [ABSTRACT FROM AUTHOR]

Most Supplemental Nutrition Assistance Program (SNAP) research focuses on individuals who receive SNAP without examining the effects on the broader economy. We develop a general equilibrium model of the US economy to quantify SNAP's broader fiscal consequences. We find that SNAP expands the agricultural and food sectors by about 1% while slightly shrinking service sectors favored by higher income households. Effects on goods and factor prices are modest, with virtually no deadweight losses associated with the taxation needed to fund SNAP. SNAP improves the welfare of low‐income recipient households by 4.9%, while having a negligible adverse effect on high‐income households. [ABSTRACT FROM AUTHOR]

We consider a scenario where inequality levels originate harmful effects on society. To alleviate this negative externality, we introduce tradable consumption licenses within a general equilibrium framework to obtain efficient outcomes, reduce inequality, and improve social welfare. This mechanism would be easily implementable with the necessary support of the law. [ABSTRACT FROM AUTHOR]

We use a spatial general equilibrium model to assess the macroeconomic and distributional impact of the European Commission's Recovery and Resilience Facility (RRF). We employ two alternative regional distributions of investments: one based on the regional share of population only, and the other based on Cohesion Policy criteria. Our results suggest that the disbursement of RRF grants would lead to an increase in the European Union's gross domestic product (GDP) of approximately 0.85% in 2026, corresponding to a present value GDP multiplier of 1.22. The latter rises to 3.25 in the long run. Under the population criterion, GDP impacts are higher relative to the Cohesion criterion, at the detriment of territorial cohesion. [ABSTRACT FROM AUTHOR]

This paper evaluates the effects of sanctions on Russia between 2014 and 2019 and the resulting countersanctions. We estimate their impact on trade in a gravity framework, allowing for treatment heterogeneity among pairs and sectors, and use the estimated elasticities in a general equilibrium analysis. We find that the sanctions decreased trade with Russia in key sectors, translating to a loss in real income in Russia by 0.3%. Full decoupling of the EU and its allies from Russia would increase this effect to over 4%. Our results emphasize the role of deep sanctions as a foreign policy instrument and international cooperation. [ABSTRACT FROM AUTHOR]

This paper adds to a sparse but growing literature on the economic costs and benefits of hosting refugees, including a unique policy of providing refugees with access to cultivable land. We construct a general equilibrium model from microsurvey data to simulate the spillover effects of giving land to refugees on income and production in the host‐country economy surrounding a refugee settlement in Uganda. Reduced‐form econometric analysis of land allocations at the refugee settlement, robust to several specifications, confirms the simulation finding that providing refugees with agricultural land significantly improves their welfare and self‐reliance. Simulations reveal that refugee aid and land allocations generate positive income spillovers in the local economy out to a 15‐km radius around the refugee settlement. Host‐country households benefit significantly from the income spillovers that refugee assistance creates, and host‐country agriculture is the largest beneficiary among production sectors. [ABSTRACT FROM AUTHOR]

The existing literature on bankruptcy division either ignores creditor type or focuses on secured and unsecured creditors, subsuming operational creditors in the latter category. Further, implications for the debtor and the economy as a whole are under-emphasized. We build a general equilibrium model with default using three game-theoretic division rules to examine the appropriate adjudication of the claims of financial and operational creditors for optimum output and firm profits as well as creditor welfare. Our paper extends and enriches the normative discussion on these game-theoretic division rules. The analysis indicates that the proportion of claims held by financial and operational creditors is a key determinant of overall outcomes, and that interests of the corporate debtor represent common ground that could soften creditor competition. Using a dataset of bankruptcy resolution cases from India, we identify the specific rules that approximate actual payout for different claim proportions and deduce the overriding power of financial creditors. Institutional changes that would result in better long-term outcomes are proposed. [ABSTRACT FROM AUTHOR]

How relevant are government-owned banks in the economy, especially during recessions? We study the role of government-owned banks in a dynamic stochastic general equilibrium (DSGE) model with heterogeneous financial intermediaries, heterogeneous households, and minimum capital requirement constraints. We show that the capitalization of government-owned banks during recessions smooths the effects of a negative shock and helps the economy recover more quickly. However, these stabilizing effects could be partially offset by banks' inefficiency in transforming one unit of capital into loans. Therefore, ignoring the heterogeneity between private and government-owned banks may lead to misleading assessments and conclusions regarding the effects of economic policies on the macroeconomic and banking variables. This is particularly important for evaluating the effectiveness of macroprudential policies. [ABSTRACT FROM AUTHOR]

This chapter tells the story of how the concept of Pareto efficiency was shipped from Lausanne to the modern US theory of competitive general equilibrium, focusing on the specific role of Maurice Allais. It identifies similarities in both epistemological approach and theoretical achievements realized first by Pareto, then by Allais, and finally by Debreu and Arrow and Hahn. It also shows that these similarities are not casual, since historical circumstances account for the influence of Pareto on Allais and later of Allais on Arrow and Debreu. [ABSTRACT FROM AUTHOR]

This paper studies how linear tax and education policy should optimally respond to skill-biased technical change (SBTC). SBTC affects optimal taxes and subsidies by changing (1) direct distributional benefits of each policy instrument, (2) indirect, general-equilibrium effects on wages, and (3) education distortions. Analytically, the effect of SBTC on these three components is shown to be ambiguous. In simulations for the US economy, SBTC makes the optimal tax system more progressive and lowers optimal education subsidies. This is because for both income taxes and education subsidies; their direct distributional effects become more important, which more than offsets the larger general-equilibrium effects and increased education distortions. [ABSTRACT FROM AUTHOR]