Keeping up with the Neighbors: Social Interaction in a Production Economy

It is well-documented that individuals care about how others around them are doing. This paper studies a production economy in which consumers provide labor supply to a representative firm to earn income for consumption, and their utility depends on their own leisure time, their own consumption level, as well as their neighbors’ consumption levels. We characterize the unique equilibrium for such an economy, allowing for three different types of effects of the neighborhood size: linear effect, zero effect, and nonlinear effect. Four network structures (empty network, ring network, star network, and core-periphery network) with different production technologies are analyzed. Our work contributes to a better understanding of the general equilibrium effect of social preferences and network structures.

The Case Against Patents

The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded—which, as evidence shows, has no correlation with measured productivity. Both theory and evidence suggest that while patents can have a partial equilibrium effect of improving incentives to invent, the general equilibrium effect on innovation can be negative. A properly designed patent system might serve to increase innovation at a certain time and place. Unfortunately, the political economy of government-operated patent systems indicates that such systems are susceptible to pressures that cause the ill effects of patents to grow over time. Our preferred policy solution is to abolish patents entirely and to find other legislative instruments, less open to lobbying and rent seeking, to foster innovation when there is clear evidence that laissez-faire undersupplies it. However, if that policy change seems too large to swallow, we discuss in the conclusion a set of partial reforms that could be implemented

The Impact of Credit on Village Economies

This paper evaluates the short- and longer term impact of Thailand's “Million Baht Village Fund” program, among the largest scale government microfinance iniatives in the world, using pre- and post-program panel data and quasi-experimental cross-village variation in credit per household. We find that the village funds have increased total short-term credit, consumption, agricultural investment, and income growth (from business and labor), but decreased overall asset growth. We also find a positive impact on wages, an important general equilibrium effect. The findings are broadly consistent qualitatively with models of credit-constrained household behavior and models of intermediation and growth. (JEL D14, G21, O12, O16, O18)

Macro/Micro Modelling and Gini Multi-Decomposition: An Application to the Philippines

Macro/micro-economic modelling has emerged as a rigorous instrument to link policy reforms with changes in income distribution. Indeed, this approach enables one to capture directly the general equilibrium effect of policy reforms upon changes in household welfare. These endogenous distributions combined with the Gini multi-decomposition provide powerful and detailed information for policy-makers interested in the trade-off between inequality and the efficient impact of reforms. Our results show that including the general equilibrium effect can yield results that differ from those of partial equilibrium analysis.

The Assignment of Workers to Tasks, Wage Distribution, and Technical Change: A Critical Review

This article reviews the literature on two-sided atomless assignment models of workers to tasks. Using simple parametric examples, the fundamental differences between the comparative-advantage and the scale-of-operations models are illustrated. Holding the distributions of abilities and tasks and the production function of worker-task pairs constant, the two principles are shown to produce different wage distributions and wage inequality. These models are useful to evaluate the general equilibrium effect of technical change on the wage structure. In all models, Skill Biased Technical Change that impacts the production function of worker-task pairs leads to rising wage inequality.