Ngo Van Long (CIRANO/McGill University), Koji Shimomura (Kobe University)
and Harutaka Takahashi (Meiji-Gakuin University)
"Comparing open-loop with Markov equilibria in a class of differential games "
Japanese Economic Review
We consider a class of differential games with transition equations
that are homogeneous of degree one. For any game G with a discount
rate r, consider a Markov perfect equilibrium (MPE) with strategies
that are linear in the state variables. We show that the time paths of
the control variables of this equilibrium constitute an open-loop equilibrium
of a corresponding game G* that differs from G only that its rate of
discount r* is equal to r plus a suitably chosen constant. In the context of
a resource depletion game, this implies that the open-loop solution is more
conservationist. In an alternative formulation, we consider a game G with
a rate of stock depreciation b, and a Markov perfect equilibrium with strategies
that are linear in the state variable. Then, the resulting equilibrium time paths
of the control variables can be used to form an open-loop equilibrium of
a corresponding game G** with a rate of depreciation b** that is equal to
b plus a suitably chosen constant. The interpretation for the case of a resource
game is similar. We also prove a converse result: under certain assumptions,
an open-loop equilibrium of a differential game G can be used to construct
a MPE of a modified game G**. This result is useful because it means
a MPE can be found by first solving for an open-loop equilibrium.
Murray C. Kemp (University of New South Wales), Koji Shimomura (Kobe University)
and Henry Wan, Jr. (Cornell University)
"Trade gains when the opportunity to trade changes the state of information"
Review of International Economics
J.S.Mill suggested that the deconstruction of old preferences and their replacement
by new are among the greatest benefits impared by free trade. However,
Mill's arguemnt relied on a possibly controversial ethical judgement.
In the present note we approach the question posed by Mill with only the conventional
Paretian ethical baggage and show that, if all agents are rational in a sense to be clear
and if the well being of each agent is independent of irrelevant alternatives, then trade
is potentially gainful.
Murray C. Kemp (University of New South Wales) and Koji Shimomura (Kobe University)
"Trade gains in chaotic equilibria"
Review of International Economics
It is shown by means of an OLG example that free international trade
may be both deterministically chaotic and gainful in the sense of
Pareto to a partcipating country.
Kazuo Nishimura (Kyoto University) and Koji Shimomura (Kobe University)
"Chaotic equilibria in a small open overlapping generations economy
with child-parent externality"
Review of International Economics
This paper presents a simple overlapping generations model of a small open economy
with child-parent externality that exhibits chaotic equilibrium dynamics.
Jota Ishikawa (Hitotsubashi University)
"Expanding the Purchase of a Foreign Intermediate Good:
An Analysis of VIEs and Content Protection under Oligopoly"
Global Competition and Integration
edited by Ryuzo Sato, Rama V. Ramachandran and Kazuo Mino
(Kluwer Academic Publishers)
This paper presents a model of vertically related markets characterized
by oligopolies and analyzes the effects on economic agents of expansions
of the purchase of a foreign intermediate good by domestic final-good producers.
The analysis provides an interesting insight into voluntary import expansions (VIEs)
and content protection (CP). It is shown that VIEs committed in terms of quantity
and VIEs committed in terms of market share could generate opposite effects.
In particular, a domestic VIE and a foreign CP scheme do not necessarily benefit
foreign intermediate-good producers.
Laixun Zhao (Niigata University)
"Labor-management bargaining and transfer pricing in multinational corporations"
Canadian Journal of Economics
This paper studies transfer pricing and its relation with the determination of
wages and employment when a subsidiary of the multinational corporation
(MNC) is located in a unionized labor market. Our results suggest that the union
prefers to negotiate with the headquarters rather than with the subsidiary, while
the MNC prefers the opposite. This arises because the MNC can use transfer
pricing as a bargaining tool in decentralized labor-management negotiations.
Thus the MNC charges the transfer price differently for the unionized subsidiary
than for the profit-maximizing subsidiary. In addition, several interesting comparative
statics analyses are conducted.
Takumi Naito (Osaka University)
"Tariff Revenue, Government Expenditure and Growth in a Small Open Economy"
Japanese Economic Review
We develop a small-open endogenous growth model with domestic
and foreign intermediate goods. The Marshallian external economies
in domestic intermediate good sector work as the engine of sustained growth.
The model offers two arguments. First, imposing a trade distortion is growth-
and welfare-improving if the government uses the tariff revenue for correcting
the domestic distortion. Second, comparing the tariff with a lump-sum tax as
a financing device, the former is certainly worse than the latter with respect to
both growth and welfare, if the two intermediate goods are substitutes.
Toru Kikuchi (Kobe University)
"Strategic Export Policy in a Differentiated Duopoly: A Note"
Open Economies Review
The purpose of this paper is to further explore how optimal export policies
are affected by the nature of oligopolistic competition and the structure of
demand. It is shown that (1) the more cost-competitive the home firm is,
the higher the optimal level of export intervention becomes; (2) as the goods
become better complements, the optimal level of export intervention increases;
(3) the nature of the effects of strategic export policies on foreign firm depends
on both the mode of competition and the structure of demand.
Ichiro Gombi (Hirosaki University) and Shinsuke Ikeda (Osaka University)
"Habits, Costly Investment, and Current Account Dynamics"
Journal of International Economics
We analyze the current account dynamics for a small country model with
habit-forming consumers and costly investment. The model has several
empirical and policy implications. (i) It is consistent with stylized facts
regarding the effects of productivity shocks and increases in fiscal spending
and regarding the savings-investment co-movement. (ii) The long-run effect
of a temporary shock on net foreign assets is often opposite to that of
a permanent shock. (iii) Under strong habit persistence, the welfare dynamics
are sluggish, so that a beneficial tax-financed fiscal policy may have a harmful
hangover effect on welfare.
Jeffrey B. Nugent (University of Southern California) and Makoto Yano (Keio University)
"Aid, Non-Traded Goods and the Transfer Paradox in Small Countries"
American Economic Review
This study attempts to link the literature of international economics
on the transfer problem with that of development economics on the
empirical analysis of foreign aid. Given that most aid dependent countries
(ADCs) are small developing countries and some development economists
have been concerned that aid may lead to the over-expansion of the non-traded
goods sector, this paper constructs a theoretical model of a small open economy,
with both traded and non-traded goods. The paper demonstrates that
the expansion of the non-traded good sector can change the domestic price
of the non-traded good in such a way that the otherwise beneficial effect of aid
may be offset. Under certain conditions, the over-expansion of non-traded goods
can create a transfer paradox even in a small country. The model is estimated
with time series data for 44 ADCs for the period 1970-1990. The results demonstrate
that the non-traded goods expansion effect offsets the direct positive effect of aid
to some extent in about half the countries in the sample and completely
(thereby causing a transfer paradox) in perhaps one or two. The non-traded goods
effect is also shown to be considerably stronger and more likely to cause
immiserization than the tariff-distorting export-displacement effect
suggested by Harry Johnson.
Koji Shimomura (Kobe University)
"Factor Income Function and an Oligopolistic Heckscher-Ohlin Model of International Trade"
Economics Letters
This paper introduces a new duality concept, factor income function,
in order to establish the Factor Price Equalization theorem and
the Heckscher-Ohlin theorem in an oligopolistic Heckscher-Ohlin model
with increasing returns to scale.
Ngo Van Long and Koji Shimomura
"Education, Moral Hazard, and Economic Growth"
Journal of Economic Dynamics and Control
We build an overlapping generations model of endogenous growth
driven by human capital formation. Young people differ in their innate
abilities, but these differences are not known even by the individuals
themselves when they are going through the process of education,
so that there are no adverse selection problems. The probability of
successful completion of schooling depends on both innate abilities
and effort level. Moral hazard arises because effort is not observable.
Successful students become skilled workers while unsuccessful ones
become unskilled workers. A utilitarian government that cares about
income distribution within each generation transfers income from the rich
(skilled workers) to the poor (unskilled ones). This is anticipated by
the young pupils and reduces incentive for hard work. This results in
a lower rate of graduation, and has an adverse effect on the grwoth rate
of human capital and output. Comparative statics results across balanced
growth paths are derived. The parameters of interest are the students' rate
of time preference, their degree of effort aversion and the relative price of
the skill-intensive consumption good.
Koji Shimomura (Kobe University)
"A Simple Proof of the Sato Proposition on Non-Homothetic CES Functions"
Economic Theory
Based on some elementary results on duality, the paper proposes
a much simpler way of deriving the class of non-homothetic CES
functions which was derived as a solution to a partial differential
equation that defines the elasticity of substitution.
Junichi Goto (Kobe University)
"Regional Economic Integration and Article XXIV of the GATT"
Review of International Economics
This paper studies the economic impact of regionalism under the realistic assumptions
of constant tariffs and asymmetric bloc formation. Extending the Krugman framework,
we decompose the impact into several components, each of which has a clear economic
implication. Economic integration definitely worsens outsider's welfare even if the external
tariffs of the bloc are unraised. Bloc member's welfare first increases with the expansion
of the bloc, but when about half of the world is united into the bloc, welfare begins to decrease.
Simulation results shed some light on the incentive structure of major participants, who face
various configurations of regional integration.
Junichi Goto (Kobe University) and Koichi Hamada (Yale University)
"Economic Integration and the Welfare of Those Who Are Left Behind:
An Incentive-Theoretic Approach"
Journal of Japanese and International Economy
This paper analyzes the impact of regional integration on outside countries
as well as member countries, using a simple model with product differentiation
and increasing returns to scale. Major findings include: (i) economic integration
surely benefits the member countries but definitely worsen the welfare of the rest
of the world even if the integrating countries do not raise the external tariff rates
(i.e., Article XXIV of the GATT is not enough to keep the third countries from
incurring a loss); and (ii) incentives emerge for the outside countries to form
a countervailing free trade area to compensate for the loss of welfare due to the
formation of the original union. The results shed light on the recent development of
regionalism, such as EU, NAFTA, EAEC, and APEC.
Junichi Goto (Kobe University)
"The Impact of Migrant Workers on the Japanese Economy: Trickle vs. Flood"
Japan and the World Economy
This paper analyzes the economic impact of temporary and unskilled migrant
workers in Japan, who are illegal according to the current Japanese immigration
law but who have been dramatically increasing in recent years. The analysis,
using a simple CGE model, reveals the quadruple impact of the admission of
migrant workers on the welfare of the host country which has often been neglected
in the orthodox theory: (i) cheaper foreign labor effect; (ii) trade barrier effect;
(iii) nontradable income effect; and (iv) nontradable consumption effect. Moreover,
it is shown that, if Japan is to benefit from admitting foreign labor, the scale of admission
should be large and the admission should be accompanied by trade liberalization.
Jota Ishikawa (Hitotsubashi University) and Barbara J. Spencer (University of British Columbia)
"Rent-shifitng export subsidies with an imported intermediate product"
Journal of International Economics
This paper examines the implications of foreign or domestic imperfect competition
in intermediate-good supply for strategic policy. Assuming Cournot competition
for both a final and intermediate good, an export subsidy aimed at shifting rents
from foreign to domestic final-good producers may also serve to shift rents to
foreign suppliers, weakening the incentive for the subsidy. By contrast, rent-
shifting between final and intermediate-good producers can strengthen the
argument for an export subsidy if the suppliers are domestic. Alternative rent-
shifting policies (a production subsidy and an import tariff) at the intermediate-good
stage are also considered.
Koji Shimomura and Kar-yiu Wong
"The law of comparative advantage without social utility functions"
Review of International Economics
This paper derives sufficient conditions under which the Law of Comparative
Advantage are true when the preferences of the trading countries may not be
represented by "well-behaved" social utility functions. It shows that in the
neoclassical framework with convex technologies, profit maximization and
Walras Law, the law of comparative advantage under natural trade are still
valid if either the General Law of Demand or the Weak Axiom of Revealed
Preference holds, or if losers are compensated using lump-sum transfers or
consumption taxes.
Murray C. Kemp and Koji Shimomura
"The internationalization of the world economy and its implication for national welfare"
Review of International Economics
There is no generally accepted definition of internationalization or globalization.
In the present essay we offer three alternative definitions, in terms of (i) an
enlargement of the set of trading countries, (ii) an enlargement of the set of
traded commodities and (iii) the international sharing of technology, respectively.
It is shown that if each country adopts a Paretrian scheme of internal compensation,
then internationalization in each sense leaves at least one country better off and
that if international compensation is admitted, then internationalization in each
sense makes every country better off.
Kazuo Nishimura (Kyoto University), Tadashi Shigoka (Kyoto University)
and Makoto Yano (Keio University)
"Interior Optimal Chaos with Arbitrarily Low Discount Rates"
Japanese Economic Review
<> (Kazuo Nishimura)
In this study, we demonstrate, for an arbitrarily small discount rate, the existence
of a topologically chaotic policy function that lies in the interior of the technology
set in a two-sector model with smooth production functions. For this purpose,
we adopt CES production functions and a utility function with a constant elasticity
of intertemporal substitution. The two-sector model with those functions always
has a policy function lying in the interior of the technology set (interior policy function).
The existence of a scramble set of a policy function may be proved even in the case
in which the discount rate is arbitrarily small.
Gary Baierl (Northwestern University), Kazuo Nishimura (Kyoto University)
and Makoto Yano (Keio University)
"The role of capital depreciation in multi-sectoral models"
Journal of Economic Behavior and Organization
<> (Kazuo Nishimura)
This study investigates the role of capital depreciation in economic fluctuations
that may appear in multi-sectoral models of optimal growth. In the standard literature
on non-linear optimal dynamics, it has been assumed that capital depreciates completely
within a period. This study, in contrast, deals with the case in which capital depreciates
slowly (more precisely, only by a certain percentage). We adopt the standard two-sector
model with Cobb-Douglas production functions and characterize the dynamics around
the stationary state. We derive explicit conditions on parameter values under which
cyclical optimal paths appear. These conditions reveal the complexity that slow depreciation
adds to multi-sectoral optimal dynamics. The economic interpretation of slow depreciation
in multi-sectoral models is also discussed.
Jota Ishikawa (Hitotsubashi University)
"Who Benefits from Voluntary Export Restraints?"
Review of International Economics
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Developing a simple Cournot-oligopoly model, we examine the effects of voluntary
export restraints (VERs) on profits, market shares, consumers' surplus, and domestic
welfare when the domestic market is open to foreign direct investment (FDI) or
exports from a third country. A VER may induce FDI from the VER-restricted country
or exports from the third country. Under certain circumstances, the domestic firm loses
from a VER. Even if the domestic firm gains, the increase in the market share of
the domestic country induced by the VER could be less than that of the third country.