Inequality, Growth, and Congestion Externalities

We describe and numerically simulate the aggregate and distributional properties of an endogenous growth model with an infrastructure externality which is subject to relative congestion. We show that the congested externality induces higher growth, greater inequality, labor/leisure trade-off ambiguities and an ineffective capital income tax for the government to achieve long-term redistribution goals. We demonstrate the economic implications of congestions in production and consumption externalities on the public to private capital ratio, growth and income distribution. Finally, we discuss alternative tax options for promoting inclusive growth.

The “New” Economics of Trade Agreements: From Trade Liberalization to Regulatory Convergence?

What incentives do governments have to negotiate trade agreements that constrain their domestic regulatory policies? We study a model in which firms design products to appeal to local consumer tastes, but their fixed costs increase with the difference between versions of their product destined for different markets. In this setting, firms' profit‐maximizing choices of product attributes are globally optimal in the absence of consumption externalities, but national governments have unilateral incentives to invoke regulatory protectionism to induce firm delocation. An efficient trade agreement requires commitments not to engage in such opportunistic behavior. A rule requiring mutual recognition of standards can be used to achieve efficiency, but one that requires only national treatment falls short. When product attributes confer local consumption externalities, an efficient trade agreement must coordinate the fine details of countries' regulatory policies.

Optimal taxation with externalities of consumption and education spending

We investigate optimal taxation when a person’s utility decreases in others’ consumption and school quality increases in others’ education spending. Education externalities reduce education spending and schooling time from optimal levels, whereas consumption externalities cause high consumption relative to leisure and public goods. Internalizing education externalities supports education subsidies but opposite taxes on consumption and labour income. Internalizing consumption externalities supports consumption taxes but equal rates of labour income taxes and education subsidies. Internalizing both externalities justifies higher education subsidies than labour income taxes and positive taxes on labour income and consumption. We also investigate quantitative implications for tax reform and government debt sustainability.