Abstract

This paper studies legislative bargaining over redistribution in the context of a Neoclassical growth model where agents are heterogeneous in their initial capital. In each period, members of a legislature negotiate over the current capital tax. Tax revenues finance lump-sum redistribution.  A key feature of the bargaining process is that the status quo is endogenous: the capital tax chosen in the current period becomes the default option in the next legislative session. We argue that the endogenous status quo serves a disciplinary role: policymakers may not propose (or accept) high taxes because doing so may improve, via a change of the status quo, the bargaining power of low wealth legislators in future sessions. We find equilibrium capital taxes below 35% under different calibrations of the model. Finally, we analyze how redistribution and taxation vary as we change the distribution of agenda setting power, the distribution of wealth within the legislature, and institutional features of the bargaining protocol.

Abstract

This paper studies the differences in firm size distributions between European countries. We start by documenting large differences using the EFIGE database: in the countries under most severe distress in the sample (Italy and Spain) firms are relatively small compared with the remaining countries. To account for this, we develop a multi-country, continuous time version of Melitz (2003) with endogenous process innovation. Firms choose when to become exporters by paying a sunk export cost. This gives them access to a larger market, increases profits and provides incentives to grow faster. We analytically derive both an endogenous steady state Pareto size distribution of firms and the transitional distribution between steady states. The model allows us to identify the main source of the distribution's difference: export costs. This sharply contrasts the predictions of a closed economy model, where heterogeneous innovation costs account for the difference. Additionally we identify strong microeconomic similarities among countries that at first appear different, such as Spain and U.K., and strong microeconomic differences between countries that appear similar, such as Austria and Germany.  International trade is essential to uncover these patterns.

Abstract

We explore the relationship between trade costs, the .firm size distribution, and welfare. Existing studies focus mainly on the upper tail of the distribution to determine welfare e.ffects, since exporters are relatively large. But this view ignores that small, non exporting .firms react to trade  costs by entering the export market or changing their innovation decisions. We build a model of international trade and innovation and derive an endogenous, closed form solution .firm size distribution. We then assess the impact of a reduction in trade costs (tariffs and iceberg costs) on welfare and how diff.erent assumptions about the measure of small firms a.affect this result. First, we fi.nd that innovation plays an important role in determining welfare gains. Second, the welfare gains are very sensitive to the measure of small .firms (entrants). Third, as a corollary, we find that welfare gains from lowering tariffs are much larger than welfare gains from lowering iceberg transport costs. In particular, the contribution of innovation to the increase in welfare from lower trade costs is much larger under tariff.s. This suggests that changes in trade policy can be much more beneficial than technology improvements.

Abstract

We explore how impediments to resource reallocation limit the ability of developing countries to adopt new technologies. An efficient economy innovates quickly; but when the economy is unable to redeploy resources away from inefficient uses, technological adoption becomes sluggish, growth is reduced, and income lags further behind the leading economy. We use a firm dynamics model to analyze income gaps between the U.S. and several developing countries. For the median country, the model accounts for one third of the income gap with respect to the U.S., with 60% of the simulated gap explained by firm renewal distortions taken individually and 40% by their interaction.

Abstract

Although time consistency problems play an important role in public policy, game theoretical models in macroeconomics seem to indicate the opposite. Due to the complexity of this kind of models, it is commonly assumed that the information is complete and perfect. In turn, this assumption becomes the key element that allows agents to coordinate perfectly to punish the government if it deviates. As a result, a wide range of feasible payoffs can be sustained as equilibrium, including the best payoff under commitment. Since this approach is widely used for normative purposes a natural question emerges: are the above results robust to small variations in information? This paper analyzes an investment taxation problem in an economy with incomplete information. Specifically, we study an environment with the following main characteristics: 1) the aggregate productivity (fundamental) is stochastic, 2) only the government observes it and; 3) every agent privately receives a noisy signal about the fundamental. The first characteristic implies that the best policy (tax on investment) with commitment is state contingent. The second and third characteristics make the information incomplete. In particular, agents have different information sets, and therefore different beliefs, about the true state of the economy. As a result, independently of the accuracy of the signal, incomplete information reduces the set of equilibrium payoffs. First, we show that any policy that depends solely on the fundamental cannot be an equilibrium. Second, the best equilibrium policy is independent of the fundamental. Finally, for any discount factor strictly smaller than one and for any size of the noise, the best equilibrium is inefficient.

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