The macroeconomic effects of German unification: Real adjustments and the welfare state

We study the effects of German unification in a model with capital accumulation, skill differences and a welfare state. We argue that this event is similar to a mass migration of low-skilled agents holding no capital into a foreign country. Absent a welfare state, we observe an investment boom, depressed output and employment conditions. Capital owners and high-skilled agents are willing to give up to 4% of per-capita consumption to favor unification. When a welfare state exists the investment boom disappears and the recession is prolonged. Now, with unification, capital owners and high-skilled agents lose 4% of per-capita consumption.

The survival of the welfare state

This paper provides an analytical characterization of Markov perfectequilibria in a politico-economic model with repeated voting, whereagents vote over distortionary income redistribution. The key featureof the theory is that the future constituency of redistributive policiesdepends positively on the current level of redistribution, since thisaffects both private investments and the future distribution of voters.Agents vote rationally and fullly anticipate the effects of their politicalchoice on both private incentives and future voting outcomes. The modelfeatures multiple equilibria. In "pro-welfare" equilibria, both welfarestate policies and their effects on distribution persist forever. In"anti-welfare equilibria", even a majority of beneficiaries ofredistributive policies vote strategically so as to induce the formationof a future majority that will vote for zero redistribution.

Crossing the Rio Grande: Migrations, business cycles and the welfare state

In this paper we study the macroeconomic effects of an inflow oflow-skilled workers into an economy where there is capital accumulation and two types of agents. We find that there are substantial dynamic effects following unexpected migrations with adjustments that resemble those triggered by a sudden disruption of the capital stock. We look at the interrelations between these dynamic effects and three different fiscal systems for the redistribution of income and find that these schemes can change the dynamics and lead to prolonged periods of adjustments. Theaggregate welfare implications are sensitive to the welfare system: while there are welfare gains without redistribution, these gains may be turned into costs when the state engages in redistribution.

Stabilization versus insurance: Welfare effects of procyclical taxation under incomplete markets

We construct and calibrate a general equilibrium business cycle model with unemployment and precautionary saving. We compute the cost of business cycles and locate the optimum in a set of simple cyclical fiscal policies. Our economy exhibits productivity shocks, giving firms an incentive to hire more when productivity is high. However, business cycles make workers' income riskier, both by increasing the unconditional probability of unusuallylong unemployment spells, and by making wages more variable, and therefore they decrease social welfare by around one-fourth or one-third of 1% of consumption. Optimal fiscal policy offsets the cycle, holding unemployment benefits constant but varying the tax rate procyclically to smooth hiring. By running a deficit of 4% to 5% of output in recessions, the government eliminates half the variation in the unemployment rate, most of the variation in workers'aggregate consumption, and most of the welfare cost of business cycles.

A measure of rationality and welfare

There is evidence showing that individual behavior often deviates fromthe classical principle of maximization. This evidence raises at least two importantquestions: (i) how severe the deviations are and (ii) which method is the best forextracting relevant information from choice behavior for the purposes of welfare analysis.In this paper we address these two questions by identifying from a foundationalanalysis a new measure of the rationality of individuals that enables the analysis ofindividual welfare in potentially inconsistent subjects, all based on standard revealedpreference data. We call such measure minimal index.

Immigration and the survival of the welfare state

This paper analyzes the political sustainability of the welfare state in a model where immigration policy is also endogenous. In the model, the skills of the native population are affected by immigration and skill accumulation. Moreover, immigrants affect future policies, once they gain the right to vote. The main finding is that the long-run survival of redistributive policies is linked to an immigration policy specifying both skill and quantity restrictions. In particular, in steady state the unskilled majority admits a limited inflow of unskilled immigrants in order to offset growth in the fraction of skilled voters and maintain a high degree of income redistribution.Interestingly, equilibrium immigration policy shifts from unrestricted skilled immigration,when the country is skill-scarce, to restricted unskilled immigration, as the fraction of native skilled workers increases. The analysis also suggests a new set of variables that may help explain international differences in immigration restrictions.

Markups, gaps and the welfare costs of business fluctuations

In this paper we present a simple theory-based measure of the variations in aggregate economic efficiency: the gap between the marginal product of labor and the household s consumption/leisure tradeoff. We show that this indicator corresponds to the inverse of the markup of price over social marginal cost, and give some evidence in support of this interpretation. We then show that, with some auxilliary assumptions our gap variable may be used to measure the efficiency costs of business fluctuations. We find that the latter costs are modest on average. However, to the extent the flexible price equilibrium is distorted,the gross efficiency losses from recessions and gains from booms may be large. Indeed, we find that the major recessions involved large efficiency losses. These results hold for reasonable parameterizations of the Frisch elasticity of labor supply, the coefficient of relative risk aversion, and steady state distortions.

Hypothesis on immigration and welfare

The number of hypothesis trying to explain which are the reasons behind the decision to migrate to work into a developed country are diverse and at the same time, difficult to test due to the multiplicity of factors which affect it. This papers attempts to move forward trying to disentangle which are the socio-economic factors that explain the differences in the figures of immigrants in the OECD countries. We show empirical evidence about the determinants of the migratory flows to 17 OECD countries from 65 countries in the 1980-2000 period. Our results reveal the importance to differentiate the inflows composition by at least income in the origin countries. Thus, regarding inflows from non-high-income countries, the results suggest that there is a pull effect from monetary and not real income, and then, the welfare magnets hypothesis should be rejected. This group reacts more to the migratory policy than the inflows coming from high-income countries, although those policies designed to slow down the inflows have not been able, in the aggregate, to reduce them.

A dynamic analysis of human welfare in a warming planet

Climate science indicates that climate stabilization requires low GHG emissions. Is thisconsistent with nondecreasing human welfare?Our welfare or utility index emphasizes education, knowledge, and the environment. Weconstruct and calibrate a multigenerational model with intertemporal links provided by education,physical capital, knowledge and the environment.We reject discounted utilitarianism and adopt, first, the Pure Sustainability Optimization (orIntergenerational Maximin) criterion, and, second, the Sustainable Growth Optimization criterion,that maximizes the utility of the first generation subject to a given future rate of growth. We applythese criteria to our calibrated model via a novel algorithm inspired by the turnpike property.The computed paths yield levels of utility higher than the level at reference year 2000 for allgenerations. They require the doubling of the fraction of labor resources devoted to the creation ofknowledge relative to the reference level, whereas the fractions of labor allocated to consumptionand leisure are similar to the reference ones. On the other hand, higher growth rates requiresubstantial increases in the fraction of labor devoted to education, together with moderate increasesin the fractions of labor devoted to knowledge and the investment in physical capital.

Healthy, educated and wealthy : Is the welfare state really harmful for growth?

In this paper, we study how public and private expenditures in health and education affect economic growth by their influence on people's health, abilities, skills and knowledge. We consider a growth accounting framework in order to test whether welfare expenditures more than offset the efficiency losses caused by distortionary taxation, and whether the effects of public expenditure on economic growth differ from those of private expenditure. Our empirical analysis is based on a panel of 19 OECD countries observed between 1971 and 1998. The results are consistent with the hypothesis that the contribution of welfare expenditures more than compensates for the distortions caused by the tax system; and the estimated positive impact is stronger for health than for education. We also find some evidence that public expenditure influences GDP growth more than private expenditure.

Deciding the sale of a life policy in the viatical market: Implications on individual welfare

[cat] En aquest article, es presenta un model econòmic que permet determinar la venda o no d'una pòlissa de vida (total o en part) per part d'un assegurat malalt terminal en el mercat dels viatical settlements. Aquest mercat va aparèixer a finals de la dècada dels 80 a conseqüència de l'epidèmia de la SIDA. Actualment, representa una part del mercat dels life settlements. Les pòlisses que es comercialitzen en el mercat dels viaticals són aquelles on l'assegurat és malalt terminal amb una esperança de vida de dos anys o menys. El model és discret i considera només dos períodes (anys), ja que aquesta és la vida residual màxima que contempla el mercat. L'agent posseix una riquesa inicial que ha de repartir entre consum i herència. S'introdueix en primer lloc la funció d'utilitat esperada del decisor i, utilitzant programació dinàmica, es dedueix l'estratègia que reporta una utilitat més gran (no vendre/vendre (en part) la pòlissa en el moment zero/vendre (en part) la pòlissa en el moment ú). L'òptim depèn del preu de la pòlissa venuda i de paràmetres personals de l'individu. Es troba una expressió analítica per l'estratègia òptima i es realitza un anàlisi de sensibilitat.

Healthy, educated and wealthy : Is the welfare state really harmful for growth?

In this paper, we study how public and private expenditures in health and education affect economic growth by their influence on people's health, abilities, skills and knowledge. We consider a growth accounting framework in order to test whether welfare expenditures more than offset the efficiency losses caused by distortionary taxation, and whether the effects of public expenditure on economic growth differ from those of private expenditure. Our empirical analysis is based on a panel of 19 OECD countries observed between 1971 and 1998. The results are consistent with the hypothesis that the contribution of welfare expenditures more than compensates for the distortions caused by the tax system; and the estimated positive impact is stronger for health than for education. We also find some evidence that public expenditure influences GDP growth more than private expenditure.

Deciding the sale of a life policy in the viatical market: Implications on individual welfare

[cat] En aquest article, es presenta un model econòmic que permet determinar la venda o no d'una pòlissa de vida (total o en part) per part d'un assegurat malalt terminal en el mercat dels viatical settlements. Aquest mercat va aparèixer a finals de la dècada dels 80 a conseqüència de l'epidèmia de la SIDA. Actualment, representa una part del mercat dels life settlements. Les pòlisses que es comercialitzen en el mercat dels viaticals són aquelles on l'assegurat és malalt terminal amb una esperança de vida de dos anys o menys. El model és discret i considera només dos períodes (anys), ja que aquesta és la vida residual màxima que contempla el mercat. L'agent posseix una riquesa inicial que ha de repartir entre consum i herència. S'introdueix en primer lloc la funció d'utilitat esperada del decisor i, utilitzant programació dinàmica, es dedueix l'estratègia que reporta una utilitat més gran (no vendre/vendre (en part) la pòlissa en el moment zero/vendre (en part) la pòlissa en el moment ú). L'òptim depèn del preu de la pòlissa venuda i de paràmetres personals de l'individu. Es troba una expressió analítica per l'estratègia òptima i es realitza un anàlisi de sensibilitat.

International Equity on Greenhouse Gas Emissions and World Levels: an integrated analysis through distributive welfare indices

Up until now, analyses of the international distribution of pollutant emissions have not paid sufficient attention to the implications that, in terms of social welfare, the combined evolution of the global world average entails. In this context, this paper proposes the use of environmental welfare indices, taken and adapted from the literature on social welfare and inequality, in order to make a comprehensive examination of the international equity factor and the mean factor in this field. The proposed methodology is implemented empirically in order to explore the evolution in distributive-based environmental welfare on a global level for the three main pollutants with greenhouse gas effects: CO2, CH4 and NO, both globally and for selected years during the period of 1990- 2005. The main results found are as follows: firstly, typically, the environmental welfare associated with the overall greenhouse gases decreased significantly over the period, due primarily to the role of CO2; secondly, in contrast, the global welfare associated with CH4 and NO improved; and thirdly, typically, the evolutions can be attributed to a greater extent to the mean component than to the distributive component, although there are exceptions. These results would seem to be relevant in policy terms. JEL codes: D39; Q43; Q56. Keywords: environmental welfare: greenhouse gases; environmental equity.

Decentralization and the Welfare State: What Do Citizens Perceive?

Trust in public institutions and public policies are generally perceived as a precondition for economic recovery in times of recession. Recent empirical evidence tends to find a positive link between decentralization and trust. But our knowledge about whether decentralization – through increased trust – improves the perception of the delivery and effectiveness of public policies is still limited. In this paper we estimate the impact of fiscal and political decentralization on the perception of the state of the education system and of health services, by using the 2002, 2004, 2006 and 2008 waves of the European social survey. The analysis of the views of 160,000 individuals in 31 European countries indicates that while the effect of fiscal decentralization on the perception of the state of the health and education system is limited, political decentralization clearly affects citizen’s satisfaction with education and health delivery. The influence of political decentralization, however, is highly contingent on whether we consider the capacity of the local or regional government to exercise authority over its citizens (self-rule) or to influence policy at the national level (shared-rule). Keywords: Education, health, satisfaction, fiscal and political decentralization, Europe. JEL codes: H11, H77