A Framework for Analyzing Language and Welfare

The paper proposes a general model that will encompass trade and social benefits of a common language, a preference for a variety of languages, the fundamental role of translators, an emotional attachment to maternal language, and the threat that globalization poses to the vast majority of languages. With respect to people’s emotional attachment, the model considers minorities to suffer losses from the subordinate status of their language. In addition, the model treats the threat to minority language as coming from the failure of the parents in the minority to transmit their maternal language (durably) to their children. Some familiar results occur. In particular, we encounter the usual social inefficiencies of decentralized solutions to language learning when the sole benefits of the learning are communicative benefits (though translation intervenes). However, these social inefficiencies assume a totally different air when the con-sumer gains of variety are brought in. One fundamental aim of the paper is to bring together contributions to the economics of language from labor economics, network externalities and international trade that are typically treated separately.

A Framework for Analyzing Language and Welfare

The paper proposes a general model that will encompass trade and social benefits of a common language, a preference for a variety of languages, the fundamental role of translators, an emo-tional attachment to maternal language, and the threat that globalization poses to the vast ma-jority of languages. With respect to people’s emotional attachment, the model considers minor-ities to suffer losses from the subordinate status of their language. In addition, the model treats the threat to minority language as coming from the failure of the parents in the minority to transmit their maternal language (durably) to their children. Some familiar results occur. In particular, we encounter the usual social inefficiencies of decentralized solutions to language learning when the sole benefits of the learning are communicative benefits (though translation intervenes). However, these social inefficiencies assume a totally different air when the con-sumer gains of variety are brought in. One fundamental aim of the paper is to bring together contributions to the economics of language from labor economics, network externalities and international trade that are typically treated separately.

Optimal Universal and Categorical Benefits with Classification Errors and Imperfect Enforcement

We determine he optimal combination of a universal benefit, B, and categorical benefit, C, for an economy in which individuals differ in both their ability to work - modelled as an exogenous zero quantity constraint on labour supply - and, conditional on being able to work, their productivity at work. C is targeted at those unable to work, and is conditioned in two dimensions: ex-ante an individual must be unable to work and be awarded the benefit, whilst ex-post a recipient must not subsequently work. However, the ex-ante conditionality may be imperfectly enforced due to Type I (false rejection) and Type II (false award) classification errors, whilst, in addition, the ex-post conditionality may be imperfectly enforced. If there are no classification errors - and thus no enforcement issues - it is always optimal to set C>0, whilst B=0 only if the benefit budget is sufficiently small. However, when classification errors occur, B=0 only if there are no Type I errors and the benefit budget is sufficiently small, while the conditions under which C>0 depend on the enforcement of the ex-post conditionality. We consider two discrete alternatives. Under No Enforcement C>0 only if the test administering C has some discriminatory power. In addition, social welfare is decreasing in the propensity to make each type error. However, under Full Enforcement C>0 for all levels of discriminatory power. Furthermore, whilst social welfare is decreasing in the propensity to make Type I errors, there are certain conditions under which it is increasing in the propensity to make Type II errors. This implies that there may be conditions under which it would be welfare enhancing to lower the chosen eligibility threshold - support the suggestion by Goodin (1985) to "err on the side of kindness".

Tax Structure, Growth and Welfare in the UK

This paper studies the quantitative implications of changes in the composition of taxes for long-run growth and expected lifetime utility in the UK economy over 1970-2005. Our setup is a dynamic stochastic general equilibrium model incorporating a detailed scal policy struc- ture, and where the engine of endogenous growth is human capital accumulation. The government s spending instruments include pub- lic consumption, investment and education spending. On the revenue side, labour, capital and consumption taxes are employed. Our results suggest that if the goal of tax policy is to promote long-run growth by altering relative tax rates, then it should reduce labour taxes while simultaneously increasing capital or consumption taxes to make up for the loss in labour tax revenue. In contrast, a welfare promoting policy would be to cut capital taxes, while concurrently increasing labour or consumption taxes to make up for the loss in capital tax revenue.

On the characterisation and measurement of the welfare effects of income mobility from an ex-ante perspective

The paper employs a rank-dependent formulation of the social welfare function with time-separable utilities to evaluate the economic consequences of income mobility from an ex-ante perspective. The resultant class of measures can be decomposed not only in terms of structural and exchange mobility but also in terms of vertical and horizontal mobility, thereby encompassing two of the main approaches in the literature. We illustrate our measurement framework by comparing mobility in the USA and Germany using data from the Cross-National Equivalent File 1980-2005. We find that the pattern of income mobility in the USA was both less pro-poor and more horizontally inequitable than in Germany, but that the latter did not translate into higher levels of exchange mobility given higher levels of absolute inequality and the vertical stance of the growth process.

Welfare Implications of Public Education Spending Rules

In this paper, we quantitatively assess the welfare implications of alternative public education spending rules. To this end, we employ a dynamic stochastic general equilibrium model in which human capital externalities and public education expenditures, nanced by distorting taxes, enhance the productivity of private education choices. We allow public education spending, as share of output, to respond to various aggregate indicators in an attempt to minimize the market imperfection due to human capital externalities. We also expose the economy to varying degrees of uncertainty via changes in the variance of total factor productivity shocks. Our results indicate that, in the face of increasing aggregate uncertainty, active policy can signi cantly outperform passive policy (i.e. maintaining a constant public education to output ratio) but only when the policy instrument is successful in smoothing the growth rate of human capital.

Longitudinal analysis of income-related health inequality: welfare foundations and alternative measures

This paper elaborates the approach to the longitudinal analysis of income-related health inequalities first proposed in Allanson, Gerdtham and Petrie (2010). In particular, the paper establishes the normative basis of their mobility indices by embedding their decomposition of the change in the health concentration index within a broader analysis of the change in “health achievement” or wellbeing. The paper further shows that their decomposition procedure can also be used to analyse the change in a range of other commonly-used incomerelated health inequality measures, including the generalised concentration index and the relative inequality index. We illustrate our work by extending their investigation of mobility in the General Health Questionnaire measure of psychological well-being over the first nine waves of the British Household Panel Survey from 1991 to 1999.

A Foundation System and a State System - Private-School Implications on Welfare and Education Expenditure

This paper examines the effects of two different education - financing systems: a foundation system and a state system on the level and distribution of resources devoted to education in the presence of private schools. We use political economy approach where households differ in their level of income, and the central tax rate used to nance education is determined by a majority vote. Our analysis focuses on implications of allowing for a private-school option. To evaluate the importance of private schools we develop a computational model and calibrate it using USA data. The results reveal that the private school option is very important quantitatively in terms of welfare, total resources spent on education and equity.

Ordering Policy Rules with an Unconditional Welfare Measure

The unconditional expectation of social welfare is often used to assess alternative macroeconomic policy rules in applied quantitative research. It is shown that it is generally possible to derive a linear - quadratic problem that approximates the exact non-linear problem where the unconditional expectation of the objective is maximised and the steady-state is distorted. Thus, the measure of pol icy performance is a linear combinat ion of second moments of economic variables which is relatively easy to compute numerically, and can be used to rank alternative policy rules. The approach is applied to a simple Calvo-type model under various monetary policy rules.

Universal banking, competition and risk in a macro model

A stylized macroeconomic model is developed with an indebted, heterogeneous Investment Banking Sector funded by borrowing from a retail banking sector. The government guarantees retail deposits. Investment banks choose how risky their activities should be. We compared the benefits of separated vs. universal banking modelled as a vertical integration of the retail and investment banks. The incidence of banking default is considered under different constellations of shocks and degrees of competitiveness. The benefits of universal banking rise in the volatility of idiosyncratic shocks to trading strategies and are positive even for very bad common shocks, even though government bailouts, which are costly, are larger compared to the case of separated banking entities. The welfare assessment of the structure of banks may depend crucially on the kinds of shock hitting the economy as well as on the efficiency of government intervention.

The system-wide impacts of the external benefits to higher education on the Scottish economy: An exploratory “micro-to-macro” approach

The private market benefits of education, i.e. the wage premia of graduates, are widely studied at the micro level, although the magnitude of their macroeconomic impact is disputed. However, there are additional benefits of education, which are less well understood but could potentially drive significant macroeconomic impacts. Following the taxonomy of McMahon (2009) we identify four different types of benefits of education. These are: private market benefits (wage premia); private non market benefits (own health, happiness, etc.); external market benefits (productivity spillovers; and external non-market benefits (crime rates, civic society, democratisation, etc.). Drawing on available microeconometric evidence we use a micro-to-macro simulation approach (Hermannsson et al, 2010) to estimate the macroeconomic impacts of external benefits of higher education. We explore four cases: technology spillovers from HEIs; productivity spillovers from more skilled workers in the labour market; reduction in property crime; and the potential overall impact of external and private non-market benefits. Our results suggest that the external economic benefits of higher education could potentially be very large. However, given the dearth of microeconomic evidence this result should be seen as tentative. Our aim is to illustrate the links from education to the wider economy in principle and encourage further research in the field.

Aggregate and welfare effects of long run inflation risk under inflation and price-level targeting

This paper presents a DSGE model in which long run inflation risk matters for social welfare. Aggregate and welfare effects of long run inflation risk are assessed under two monetary regimes: inflation targeting (IT) and price-level targeting (PT). These effects differ because IT implies base-level drift in the price level, while PT makes the price level stationary around a target price path. Under IT, the welfare cost of long run inflation risk is equal to 0.35 percent of aggregate consumption. Under PT, where long run inflation risk is largely eliminated, it is lowered to only 0.01 per cent. There are welfare gains from PT because it raises average consumption for the young and lowers consumption risk substantially for the old. These results are strongly robust to changes in the PT target horizon and fairly robust to imperfect credibility, fiscal policy, and model calibration. While the distributional effects of an unexpected transition to PT are sizeable, they are short-lived and not welfare-reducing.

Anticipation, Learning and Welfare: the Case of Distortionary Taxation

We study the impact of anticipated fiscal policy changes in a Ramsey economy where agents form long-horizon expectations using adaptive learning. We extend the existing framework by introducing distortionary taxes as well as elastic labour supply, which makes agents. decisions non-predetermined but more realistic. We detect that the dynamic responses to anticipated tax changes under learning have oscillatory behaviour that can be interpreted as self-fulfilling waves of optimism and pessimism emerging from systematic forecast errors. Moreover, we demonstrate that these waves can have important implications for the welfare consequences of .scal reforms. (JEL: E32, E62, D84)

Cyclical and Welfare Effects of Public Sector Unions in a Real-Business-Cycle Model

Motivated by the highly-unionized public sectors, the high public shares in total employment, and the public sector wage premia observed in Europe, this paper examines the importance of public sector unions for macroeconomic theory. The model generates cyclical behavior in hours and wages that is consistent with data behavior in an economy with highly-unionized public sector, namely Germany during the period 1970-2007. The union model is a signifi cant improvement over a model with exogenous public employment. In addition, endogenously-determined public wage and hours add to the distortionary e ffect of contractionary tax reforms by generating greater tax rate changes, thus producing signi ficantly higher welfare losses.

Decision Errors, Legal Uncertainty and Welfare: a General Treatment

This paper provides a general treatment of the implications for welfare of legal uncertainty. We distinguish legal uncertainty from decision errors: though the former can be influenced by the latter, the latter are neither necessary nor sufficient for the existence of legal uncertainty. We show that an increase in decision errors will always reduce welfare. However, for any given level of decision errors, information structures involving more legal uncertainty can improve welfare. This holds always, even when there is complete legal uncertainty, when sanctions on socially harmful actions are set at their optimal level. This transforms radically one’s perception about the “costs” of legal uncertainty. We also provide general proofs for two results, previously established under restrictive assumptions. The first is that Effects-Based enforcement procedures may welfare dominate Per Se (or object-based) procedures and will always do so when sanctions are optimally set. The second is that optimal sanctions may well be higher under enforcement procedures involving more legal uncertainty.