Lawrence Martin

Trade and search generated unemployment

We argue that trade economists should begin to seriously consider environments in which unemployment is carefully modeled. We introduce such a model, derive several results, and compare them to results derived in full employment models. We argue that some traditional results are probably too narrow (the determinants of comparative advantage) and that some results do not generalize to models with unemployment (the link between trade and income distribution for employed factors). We also show that in some important cases results do generalize (there is an extended Stolper-Samuelson Theorem that links trade to the distribution of income for searching factors) and that our model allows us to address issues that traditional models cannot handle (the impact of trade on unemployment and the welfare of the unemployed).

The Structure of Simple General Equilibrium Models with Frictional Unemployment

We develop a two-sector general equilibrium model in which equilibrium unemployment arises endogenously because of trading frictions in the labor market of one sector. Externalities inherent in the search process lead to inefficient equilibria, and this has important implication for the basic structure of the economy. In particular, the relationship between factor rewards and commodity prices is fundamentally different from the analogous relationship in a frictionless economy. One implication is that the economys relative supply curve may be downward sloping, especially when the search sector is small. We also present several applications of the analysis.

Smuggling, trade, and price disparity: A crime-theoretic approach

Abstract We provide a simple but fairly general model of smuggling capable of handling both the Bhagwati-Hansen type of illegal trade through illegal entry points, and the Pitt type of illegal trade through legal entry points. The paper focuses on the latter type of trade. We take explicit account of the risk and uncertainty associated with illegal activity and, moreover, treat the real costs of smuggling as a choice variable of the firm. It is shown that smuggling, legal trade, and price disparity may coexist as in Pitt. The economys response to increased enforcement of laws against smuggling is explicitly analyzed. It is shown that increased enforcement raises real per unit costs of smuggling and the domestic price of importables but lowers both the absolute quantity and the share of illegal imports in total imports. The effect on welfare is ambiguous.

Search, Unemployment, and the Production of Jobs

The authors investigate the performance of the economy when search is required to find employment and when the duration of unemployment varies across sectors. They assume that in one sector factor markets are frictionless, while in the other se ctor idle factors of production must actively search each other out i n order to produce. They focus on how well the economy allocates work ers across sectors and the conditions under which the factor mix with in a sector is correct. The authors demonstrate that in equilibrium t he search sector is too small and its factor intensity is too asymmet ric. Copyright 1987 by Royal Economic Society.

Multiple free trade equilibria in micro models of unemployment

Abstract Neoclassical theory suggests that trade patterns are linked to autarkic differences in relative opportunity costs. We demonstrate that when the Heckscher-Ohlin-Samuelson model is extended to allow for unemployment, there are forces present that create multiple free trade equilibria, even when both countries are identical and autarkic equilibrium is unique. There is no necessary link between relative opportunity costs and trade patterns. While our primary focus is on search-generated unemployment, we argue that the analysis also applies to situations where unemployment is generated by minimum wages, efficiency wages, or implicit contracts.

Jobs and Chocolate: Samuelsonian Surpluses in Dynamic Models of Unemployment

In dynamic models of unemployment in which the employed consume more than the unemployed, workers are finitely lived, and jobs are lasting, employment transfers consumption from future generations to those currently alive, resulting in a social surplus. That is, these transfers allow the current generation to consume more than its share of the output produced during its lifetime, without the increased consumption coming at the expense of future generations. Moreover, due to these intergenerational transfers, the allocation that maximizes steady-state output is Pareto dominated by another feasible allocation with a higher level of steady-state employment.

Tax incidence in a simple general equilibrium model with collusion and entry

Abstract We develop a two-sector general equilibrium model in which oligopolistic firms collude (non-cooperative) and earn positive economic profits even though there is free entry. Entry decisions involve balancing sunk costs with the present value of future profits. The interest rate is determined in a capital market in which ownership of the capital stock and shares of firms are traded. Since the degrees of collusion and entry depend on future profits, both are influenced by the interest rate. We show how tax-induced changes in the interest rate affect market structure. In general, entry and collusive pricing effects work in opposite directions.

Transactions Costs, Frictional Unemployment and Technical Change in the Market Technology

The authors consider a one-sector growth model in which factor-market frictions are described by a market technology linking the number of unemployed factors to the number of new jobs. They explore the consequences of technical change in this technology, focusing on the impact on efficiency, and find that the relationship between the two depends on the labor intensity of the market technology. The authors also compare technical change in the market and production technologies and find that the relative importance of the two depends on the labor intensity of the market technology and the elasticity of factor supplies. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Cigarette Advertising and Regulation: A Game Theoretical Approach

This article describes the regulatory problems in controlling cigarette advertising and marketing activities and develops a framework employing a game-theoretic approach to create a public policy solution. The model assumes that cigarette advertising has differential effects—primary demand stimulation (of the overall market for cigarettes) and selective demand stimulation (for individual cigarette brands). We first propose a tax on total market sales and then show how this encourages firms to emphasize selective demand stimulation components such that aggregate demand for cigarettes decreases through reduced effectiveness of advertising messages to potential smokers.

On the Legal and Illegal Behavior of the Regulated Firm

This article develops a simple model of a firms privately optimal choice of the degree to which it will abide with regulations. The model allows for the firm to disguise its illegal actions in order to avoid detection and to expend resources to mitigate possible punishment for violations. Both price and quantity type regulatory schemes are considered. Under quantity regulation noncompliance increases the total amount of the regulated activity and distorts efficiency in production. Price regulation, on the other hand, introduces a kind of dichotomy between the real production plan of the firm and its illegal activity. Even though price regulations are substantially evaded, the total amount of the regulated activity remains unchanged, and the firm continues to produce efficiently.