October 2000

Laixun Zhao (Hokkaido University)
"Quantitative Trade Restrictions in Unionized Economies"
Review of International Economics
This paper models the interactions of a labor union and a monopoly firm
under an import quota in a small open economy. The distorted equilibrium is
depicted in a diagram, in which wages and employment in both sectors, and
the monopoly rent can be identified. The imposition of an import quota in
the unionized sector reduces monopoly rent, union employment and wages in
both sectors, compared with the case of autarky. In addition, we present
several surprising comparative statics results. For instance, an increase in
the world price causes the protected (i.e., `wrong') sector to shrink, wages
to decrease, and national income to rise if the initial world price is low.
Laixun Zhao (Hokkaido University)
"Unionization, Vertical Markets and Outsourcing of Multinationals"
Journal of International Economics
This paper offers an explanation for multinationals that are both
horizontally and vertically related. Specifically, when labor is unionized,
the conventional incentives for merger may disappear in industries of
successive (or bilateral) monopoly, due to `double marginalization', which
limits the amount of surplus that can be bargained between labor and the
firms. We show that vertical integration raises both union employment and
the negotiated wage, but may reduce total industry profits. As such, the
integrated firm has incentives to outsource - to go multinational,
regardless of whether the foreign country is unionized or not. We
demonstrate that the negotiated wage decreases and firm profits increase
with outsourcing. Thus, unionization in vertically related markets can make
firms become multinational conglomerates that are both vertically and
horizontally related.

September 2000

Eiji Fujii (Otaru University of Commerce) and
Menzie Chinn (University of California, Santa Cruz)
"Fin de Siecle Real Interest Parity"
Journal of International Financial Markets, Institutions & Money
We evaluate the recent evidence for real interest parity, focusing on
long-term yields. Examining the data on financial instruments of various
maturities across the G7 countries, we find substantial differences in the
degree of real interest equalization measured at different horizons. In
general, real interest parity holds better at long horizons than at short.
This empirical result is robust to alternative ways of modeling expected
inflation rates. Considering the relevance of long-term yields for the
investment decisions of firms, our findings imply that the degree of capital
mobility among the G-7 economies may be greater than previously thought.

August 2000

Laixun Zhao (Hokkaido University)
"Decentralization and Transfer Pricing under Oligopoly"
Southern Economic Journal
This paper presents a simple model of a partially decentralized
multinational firm (MNF) in competition with a rival firm. It is shown that
transfer pricing can be used as a rent-shifting device by the MNF to compete
with the rival. This arises because the MNF headquarters uses the transfer
price to manage different subsidiaries. The specific value of the transfer
price chosen by the MNF depends on whether the rival firm produces the
intermediate good or the final good or both of them, and whether the rival
is integrated or not. In particular, both decentralization and competition
with a fully integrated rival result in a lower transfer price.
Kazuo Mino (Kobe University) and Akihisa Shibata (Kyoto University) ,
 "Growth and Welfare Effects of Monetary Expansion in an Overlapping Generations Economy"
Japanese Economic Review
This paper studies the relation between money supply and long-run economic growth
in the context of an endogenous growth model with overlapping generations. We present
detailed analyses of growth and welfare effects of monetary expansion under alternative
money supply rules. It is shown that although monetary expansion has a growth enhancing
effect in the long run, in general it is not a Pareto improving policy. We also pay much
attention to the presence of multiple equilibria in endogenous money supply regimes.
Kazuo Mino (Kobe University)
" Sector-Specific Externalities and Endogenous Growth under Social Constant Returns"
Journal of Economic Theory
By examining two-sector models of endogenous growth with physical and human capital,
this paper demonstrates that indeterminacy of equilibrium may emerge even in the absence
of social increasing returns. The first model we examine assumes that both final good and
new human capital production sectors employ physical as well as human capital under social
constant returns but private decreasing returns due to the presence of sector-specific externalities.
It is shown that a small divergence between private and social factor intensity conditions
generates indeterminacy of equilibrium rather easily even under constant returns. I addition,
we show that introducing home production into the base model may enhance the possibility of
indeterminacy. Some extensions and intuitive interpretation of the indeterminacy conditions are
also presented.
Kazuo Mino (Kobe University)
"Optimal Taxation in Dynamic Economies with Increasing Returns",
Japan and the World Economy
This paper studies optimal taxation in dynamic economies with increasing returns. We show
that if there exists a stable open-loop Stackelberg equilibrium, the optimal rate of tax
on capital income in the steady state is negative in order to eliminate the wedge between
the private and the social rate of return to capital. This result also holds when the government
expenditure has a positive effect on production activities of the private agents. In contrast,
if the government takes a feedback strategy and if the government budget is balanced
in every period, then the optimal capital income taxation rule obtained under the open-loop strategy
may be violated. It is, however, shown that if the government can issue debt, the negative capital
income tax rule may be established even under the feedback policy rule.
Richard Cornes(Keele University), Ngo Van Long(McGill Universty) and Koji Shimomura(Kobe University)
"Drugs and Pests: Intertemporal Production Externalities"
Japan and the World Economy
We model the non-cooperative choice of levels of inputs whose current usage results in the future decline in their effectiveness. We show that there are multiple equilibria that are Pareto rankable. Compared with the social optimum, lack of cooperation implies excessive use of input, leading to excessively rapid rates of decline in effectiveness. The harm is more pronounced when firms use Markov perfect strategies, as compared with open-loop strategies.
Murray C. Kemp(University of New South Wales), Ngo Van Long(McGill University)
and Koji Shimomura(Kobe University)
"A Differential Game Model of Tariff War"
Japan and the World Economy
We present a simple two(-country) by two(-good) differential game model of international trade in which the governments of the two countries play a tariff-setting game. We explicitly derive a unilateral optimum tariff rate and then a Markov-perfect equilibrium pair of strategies (bilateral optimum tariff strategies) and compare the welfare level of each country among autarchic, fre-trade, unilateral and bilateral tariff equilibria.

June 2000

Toru Kikuchi (Kobe University)
"Country-Specific Communications Networks and International Trade
in a Model of Monopolistic Competition"
Japanese Economic Review
This study develops a model of monopolistic competition that captures the
role of country-specific communications networks in determining the
comparative advantages of countries.  A communications network is
characterized by (1) the existence of a large fixed cost for its
construction; and (2) a public monopoly that employs average-cost pricing.
It is demonstrated that the size of a country, measured by the size of the
country's endowment of factors of production, determines its comparative
advantage. A comparative advantage in the goods that require services
provided by a communications network is held by the larger of two countries.

April 2000

Jun-ichi Itaya (Hokkaido University) and Koji Shimomura (Kobe University)
       "A dynamic conjectural variations model in the private provision of public goods:
        a differential game approach"

        Journal of Public Economics
        The purpose of this paper is to provide reasonable microfoundation to justify
        the concept of a conjectural variations equilibrium which is often used in the literature
        on the private provision of public goods with the help of the differential game.
        By interpreting the steady state conjectures in a dynamic provision game as
        the conjectural variations in the corresponding static game, we derive explicit forms
        of Nash or nonzero conjectural variations, depending on the choice of the strategy spaces.
        Furthermore, we find that there may be uncountable many conjectural variations and
        the possibility of matching behavior (i.e., positive conjectures), when nonlinear Markov
        perfect strategies are used and when the domain of a state variable is a appropriately restricted.
Murray C. Kemp (University of New South Wales) and Koji Shimomura (Kobe University)
        "The gains from free trade when workers are not indifferent to their occupations"
        Journal of Post Keynesian Economics
        In a recent issue of the Journal of Post Keynesian Economics Paul Tompkinson
        re-opened an old debate between L. Thurow on the one hand and E. Katz and
        M. Syrquin on the other, re-affirming the possibility that free trade may be
        potentially harmful if workers are not indifferent to their occupations. However,
        Tompkinson's model excludes all sources of market failure and in fact a special case
        of the Arrow-Debre model, which is known to ensure potentially gainful trade.
        The source of Tompkinson's error is noted.

March 2000

Yin-Wong Cheung (University of California,Santa Cruz) and
Eiji Fujii (Otaru University of Commerce)
        "Which Aggregate Output Measures Should We Use?"
        Journal of Macroeconomics (v.22, n.2, Spring 2000)
        In this paper, we compare the temporal behavior of four monthly measures of
        aggregate output: namely, GDP, ICI, IP, and XCI. These four measures of
        output are found to have a common long-run component but distinct short-run
        cyclical patterns. The monetary effects on each of these four output
        variables are used to illustrate the implications of the choice of an output
        measure on empirical research. It is found that test results can be driven
        by the choice of the proxy for aggregate output.