The Structure of Applied General Equilibrium Models

Introduction xiii Acknowledgments xvii Notation xix Competitive Equilibrium 1(34) Basic Concepts 1(3) Commodities and Agents; Demands and Supplies 2(1) The Behavior of Producers and Consumers 3(1) General Competitive Equilibrium 4(1) Characteristics of a General Competitive Equilibrium 4(1) Excess Demand Equilibrium 4(11) Assumptions on Excess Demand 4(1) An Existence Proof 5(5) Multiplicity of Equilibrium 10(3) Lack of General Properties of Excess Demand 13(1) Computation of Equilibria 14(1) Competitive Equilibrium 15(3) Efficiency and Equity 18(11) Pareto-Efficiency 18(1) The First Welfare Theorem 19(1) The Welfare Optimum 20(4) The Second Welfare Theorem 24(1) The Single-Consumer Case 25(1) Welfare Consequences of Reforms 26(3) Possible Extensions of the Competitive Model 29(6) Optimal Production and Consumption Allocations 35(56) Producer Behavior 35(24) The Producer 35(1) Technology of the Firm 36(5) Profit Maximization 41(14) Producer Behavior in Applied Models 55(4) Consumer Behavior 59(22) The Consumer 60(1) Assumptions on Consumer Behavior 61(4) Utility Maximization 65(6) Recovering Consumer Behavior via Integrability or via Revealed Preference 71(3) Consumer Behavior in Applied Models 74(7) Supply and Demand under the Standard Assumptions 81(3) Welfare 84(7) The Welfare Optimum 84(3) Welfare Measures 87(4) Applied General Equilibrium 91(46) The Negishi Format 92(5) Existence of Equilibrium: Negishi's Theorem 92(4) Multiplicity of Equilibrium 96(1) The Full-Format 97(4) The Open Economy Format 101(6) Existence of Equilibrium 101(5) Extensions of the Open Economy Model 106(1) The CGE Format 107(5) The Basic CGE Model and the CGE Format 108(2) Extensions of the Basic CGE Model 110(2) Comparing the Formats 112(3) Model Implementation 115(22) Empirical Elaboration 116(6) The Treatment of Missing Commodities and Markets 122(5) Simulations 127(2) A GAMS Application of the Basic CGE Model 129(8) International Trade 137(20) Reinterpreting the Competitive Equilibrium Model as a World Model 137(1) International Trade in the General Equilibrium Model 138(5) The Multi-country Case 138(4) The Two-Country Case and the Small-Country Assumption 142(1) Welfare Implications 143(1) The International Competitive Equilibrium 143(1) The Competitive Equilibrium under the Small-Country Assumption 143(1) Practices in Applied Modeling 144(13) International Trade in the CGE Model 145(2) Issues in Model Specification 147(6) Empirical Elaboration: The SAM for a Country Model with International Trade 153(2) Simulations 155(2) Taxes, Tariffs, and Quotas 157(36) Government and Taxation 157(5) Government 157(1) A Short Typology of Taxes 157(4) Taxes May Affect Allocations 161(1) Taxes and Quotas in General Equilibrium 162(11) Indirect Taxes on Consumption 163(5) Indirect Taxes on Production and Intermediate Demand 168(2) Tariffs and Quotas in International Trade 170(3) Government Activity: A Summary 173(1) Welfare Implications 173(10) Indirect Taxes on Consumption in the Closed Economy 174(4) Indirect Taxes on Production and Intermediate Demand in the Closed Economy 178(1) Tariffs and Quotas in the International Trade Model 178(1) Indirect Taxes and Tariffs in the Small Open Economy 179(2) Welfare Analysis in the Absence of Compensation 181(1) Consequences of the Propositions for Policy Design 182(1) Practices in Applied Modeling 183(10) Taxes and Tariffs in the CGE Model 183(2) Issues in Model Implementation 185(2) Empirical Elaboration: The SAM with Taxes and Tariffs 187(1) Simulations 188(5) Price Rigidities 193(36) Price Rigidities and Supporting Mechanisms 193(1) Price Rigidities in General Equilibrium 194(21) Centrally Held Stocks 195(3) Shifting the Adjustment to Consumers 198(4) Dreze Rationing 202(6) Benassy Rationing: Fix-Price Exchange Equuilibria 208(3) Virtual Tax Rationing 211(1) Soft Rationing 212(1) Shifting the Adjustments Also to Producers 213(2) Welfare Implications 215(3) Centrally Held Stocks 215(1) Consumer (and Producer) Rationing 216(2) Practices in Applied Modeling 218(11) Fixed Prices in the CGE Model 218(5) Issues in Model Implementation 223(2) Empirical Elaboration 225(1) Simulations 226(3) Finite-Horizon Dynamics 229(38) Elements of Dynamics 229(1) Finite-Horizon Dynamics 230(22) T-Period Competitive Equilibrium 230(10) Temporary Equilibrium 240(7) Single-Period Equilibrium 247(2) Dynamics in the Presence of International Trade, Taxes, and Price Rigidities 249(3) Welfare Implications 252(1) Intertemporal Pareto-Efficiency 252(1) Static Pareto-Efficiency 253(1) Practices in Applied Modeling 253(14) Dynamics in the CGE Model 255(2) Issues in Model Implementation 257(6) Empirical Implementation 263(3) Simulations 266(1) Infinite-Horizon Dynamics 267(58) Dynastic Models 267(24) Specification of the Dynastic Negishi Program 267(3) Negishi Equilibrium: Fixed Discount Factor β 270(2) Existence and Efficiency of Equilibrium with Recursive Utility Functions 272(6) Multiplicity and Indeterminacy of Equilibrium 278(1) Dynamics and Steady States 279(4) Finite-Horizon Approximations 283(2) Real Business Cycles 285(6) Overlapping Generations Models of Pure Exchange 291(19) Alternative OLG Models 291(3) Specification of the Model with Financial Claims and Existence of Equilibrium 294(10) Inefficiency of Equilibrium 304(3) Indeterminancy of Equilibrium 307(1) Dynamics and Steady States 307(2) Finite-Horizon Approximations 309(1) Overlapping Generations Models with Production 310(9) Specification of the Model 310(2) Existence of Equilibrium 312(4) Inefficiency of Equilibrium 316(1) Indeterminacy of Equilibrium 317(1) Dynamics and Steady States 317(1) Finite-Horizon Approximations 318(1) Practices in Applied Modeling 319(6) Issues in Model Implementation 319(3) Simulations 322(3) Externalities 325(26) Positive Externalities 325(20) Nonrival Commodities in Consumption 325(7) Interdependent Utilities: Empathy 332(4) Interdependent Consumptions 336(3) Interdependence in Production 339(2) Endowments Dependent on Consumption: Efficiency Wages 341(4) Pollution and Negative Externalities 345(2) Pollution in the Competitive Model 345(2) The Treatment of Externalities 347(1) Perspectives for Implementation in Applied Models 347(4) Nonconvexities 351(36) Within-Firm Nonconvexities 352(3) Indivisibilities at Firm Level 355(17) Decentralization of a Welfare Optimum: The General Case 357(2) Setup Costs: Decentralization of a Welfare Optimum 359(2) Setup Costs: Equilibrium with Given δj Zero Transfers among Consumers 361(2) Increasing Returns to Scale: Decentralization of a Welfare Optimum 363(2) Increasing Returns: Equilibrium with Rules to Determine qj and Zero Transfers among Consumers 365(5) Increasing Returns: Equilibrium for Concave-Convex Cost Functions 370(1) Solving Model with Indivisibilities 371(1) Nonconvexities at Above-Firm Level 372(4) Nonrival Goods Produced Intentionally: Research and Development 372(2) Nonrival Goods Produced as By-products: Economies of Scope and Learning by Doing 374(2) Nonconvexities in Consumption 376(8) Nonconvexities in the Utility Function and Indivisible Commodities 376(3) Nonconvexity and Efficiency Wages 379(5) CGE Applications 384(3) Imperfect Competition 387(40) The Main Issues in Partial Equilibrium 388(5) An Example: Cournot Duopoly 388(2) Main Issues 390(1) The Stages of Anticipation and Market Clearing 391(2) The Main Issues in General Equilibrium 393(11) An Example with Two Strategic Consumers 393(3) A Representation That Avoids Inverse Demand Functions 396(1) A First Sketch of Alternative Specifications for the Anticipation Stage 397(1) Introducing Producers 398(2) Producers as Noncompetitive Agents 400(2) The Normalization Issue 402(1) Free Entry 403(1) Pareto-Efficiency 403(1) Alternative Specifications for the Anticipation and the Market-Clearing Stages 404(4) The Anticipation Stage 404(2) The Market-Clearing Stage 406(2) Simplified Representations of the Anticipation Stage 408(8) Negishi's Subjective Demand Approach 408(1) Generalizing Negishi's Approximation 409(2) A Markup Representation 411(3) Objective Markups 414(2) Practices in Applied Modeling 416(11) Issues 417(3) Applications 420(2) Possible Extensions and Directions for Future Research 422(5) Money and Incomplete Asset Markets 427(38) Cash-in-Advance 427(9) Flexible Supply of Money 428(2) Scarcity of the Medium of Exchange: General Equilibrium with Cash-in-Advance 430(5) Welfare Properties of the Equilibrium 435(1) Incomplete Asset Markets 436(22) An Example of Restricted Access: The Case of Commodity Markets 437(1) Concepts and Assumptions 438(3) Issues and Approaches Related to the Existence Proof 441(3) Approximate Equilibrium with Financial Assets: An Existence Proof 444(8) Properties of the Equilibrium: Pricing of Assets, Nonarbitrage and Efficiency 452(3) Introducing Firms 455(2) Returns in State s Depend on Prices in State s Only 457(1) Practices in Applied Modeling 458(7) Determination of the Absolute Price Level: Nonhomogeneities 459(1) Exchange Rates 460(1) Transactions Demand for Money 460(1) Financial Assets 461(1) Models with Nonhomogeneities, Transactions Demand for Money, and Financial Assets 462(3) A Mathematical Background 465(28) Sets and Functions 465(5) The Convex Program 470(2) The Parametric Convex Program 472(4) The Fixed-Point Mapping 476(2) The Nonconvex Program 478(1) Infinite Dimensions 479(1) Multiplicity of Solutions of F(x) = 0 479(4) Solving a System of Equations F(x) = 0 483(5) Solving a Nonlinear Complementarity Problem 488(5) B A GAMS Application 493(36) Defining the Model in GAMS 493(16) Computation of Equilibrium 509(1) Accounting 510(4) Report Writing 514(5) Running the GAMS Job 519(2) Listing of Results 521(8) C Assumptions 529(6) References 535(16) Index 551