Leslie Young

Black hole tariffs and endogenous policy theory : political economy in general equilibrium

Preface Acknowledgments list of results 1. A preview of the results 2. Endogenous policy theory: a diagrammatic approach Part I. Endogenous Policy Theory with Specific Factors: The Theory of Industry Tariffs in Partial Equilibrium: 3. The probabilistic voting model of political efficiency and powerless politicians 4. Endogenous lobbying theory and the contribution specialization theorem 5. Endogenous tariff theory 6. The power function model of endogenous industry lobbying 7. Three simple tests of the Stolper-Samuelson theorem 8. The invisible foot and the waste of nations: lawyers as negative externalities Part II. Endogenous Policy Theory in General Equilibrium: A Long-Run Theory of National Tariff Levels: 9. The 2 x 2 x 2 x 2 model of endogenous redistribution theory 10. A prisoners dilemma theory of endogenous protection: the Leontief model 11. The compensation effect and the multiple equilibrium trap 12. increasing returns to politics and factor endowments: economic development and Brazilian vitality versus the Indian disease 13. Endogenous protection in the United States, 1900-88 14. A Cobb-Douglas model 15. Black hole tariffs 16. The endowment effect: cross-national evidence on endogenous tariffs Part II. Postscript: 17. The senile-industry argument for protection 18. Optimal obfuscation and the theory of the second worst: the politically efficient policy Mathematical appendices References Author index Subject index.

Unemployment and the formation of duty-free zones

Abstract A number of authors have suggested that the formation of a duty-free zone may reduce the welfare of the host country. Their analyses assumed full employment. For a country suffering unwemployment of the Harris-Todaro type, we show that the value of national output at world prices increases with the formation of a duty-free zone which involves the reduction of tariffs on intermediate imports into the zone.

Endogeneous Protection, Factor Returns and Resource Allocation

We consider a Heckscher-Ohlin-Samuelson trade model with two lobbies, representing the interests of factor owners, and two political parties. The lobbies contribute resources to politics, equating their returns to political and economic activity at the margin, while the parties maximize their probability of election, trading off general voter dissatisfaction with protection against the electioneering resources that favorable policies attract from the lobbies. The equilibrium level of protection of a factor and its expected rate of return increase with its relative endowment. If this relative endowment is high (low) then the factor will be better (worse) off than under free trade but at intermediate factor endowment ratios, both factors will be worse off. Under parameter changes making lobbies more sensitive to the commodity price, the lobbies contribute more resources to politics and can both be worse off even though the parties are proposing lower trade distortions.

Intermediate goods and the formation of duty-free zones

Abstract If a country forms a duty-free zone by lowering tariffs on intermediate goods and taxes on foreign capital used in the zone, then resources are attracted from the surrounding domestic zone. This can worsen the effects of the distortions due to the tariffs remaining in the domestic zone and can lower the host countrys national income and welfare. This tends to occur if: (1) there is less substitutability between the intermediate and labor than between these factors and capital, (2) there is currently a small foreign-owned sector in which the share of labor in total costs is large relative to the share of the imported intermediate in the foreign sector and relative to the share of labor in total costs in the domestic zone. Ironically, under the latter circumstances, the host country is likely to regard a duty-free zone as an attractive option.

Debt and Expropriation

We regress leverage on an index of corporate exposure to expropriation by the controlling shareholder - the ratio of his ownership rights O to his control rights C - and on an index of creditor rights. Amongst corporations that can access related party loans, a lower O/C ratio increases leverage when creditor protection is weak; but reduces leverage where creditor protection is strong. In the first case, higher leverage gives the controlling shareholder control of more resources to expropriate. In the second case, minority shareholders and external lenders constrain the leverage of group affiliates that seemed more vulnerable to expropriation.

Trade and Contract Enforcement

Abstract We model imperfect contract enforcement when the victims of default resort to spot trading because the act of repudiation reveals a favorable outside option. We show that enforcement imperfection is essentially distinct from the contract incompleteness analyzed in the previous literature. Improved contract execution benefits traders on the excess side of the spot market by attracting potential counter-parties, but harms them by impeding their exit from unfavorable contracts. Multiple optima are possible, with anarchy a local optimum, perfect enforcement a local minimum and imperfect enforcement a global optimum. LDCs exhibit parameter combinations such that imperfect enforcement may often be optimal.

Risk Aversion and Optimal Trade Restrictions

If the representative consumer of a country is risk averse then the choice of trade controls must take account of their effects on the fluctuations of domestic real income. If the world price of the importable is uncertain and risk aversion is high then the optimal policy for achieving a ceiling on expected imports involves a reduction in imports and a rise in the domestic price as the world price falls. Moreover, a quota is superior to a tariff in achieving the ceiling. Under domestic uncertainty, a tariff is superior to a quota but it could be optimal to reduce the domestic price as imports increase.

The Optimal Policies for Restricting Trade under Uncertainty

A basic theme of microeconomics is the equivalence of price and quantity controls under certainty. The welfare comparison of these two control modes under uncertainty has been undertaken recently in two different contexts. Weitzman (1974) initiated the comparison of these two modes in the context of a planning authority which faces uncertainty about the costs and benefits of producing a particular good. It chooses between controlling quantities and setting a price for producers. His analysis has been developed by Laffont (1977), Ireland (1977), Malcomson (1978), Weitzman (1978) and Yohe (1978). A second area of analysis, to which this paper contributes, is the welfare comparison of the two control modes in the context of international trade under uncertainty. In this context, prices are determined by market choices by both sellers and buyers but the government intervenes in the market, e.g. through a quota or a tariff. Fishelson and Flatters (1975) and Young (1979a) have compared the use of quotas and ad valorem tariffs by a large country to improve its terms of trade. For a small country, Dasgupta and Stiglitz (1977) and Young (1980) have compared the two instruments when they are constrained to raise a fixed expected tariff revenue; Pelcovits (1976) has compared the two instruments when they are constrained to yield a fixed level of expected imports. Anderson (1978) has shown that, for a small country, a specific tariff yields higher domestic expected consumers surplus than the mean-equivalent import quota. For a large country, he showed that a specific tariff yields higher world expected consumers surplus than the mean-equivalent quota. It is natural to compare the welfare effects of quotas, ad valorem tariffs and specific tariffs under uncertainty because there are the most widely used and easily administered instruments for restricting trade. However, none of the above authors have considered what policy would be optimal for the objective that they consider. This paper shows that the answer to this question can be surprisingly simple and general. Our results should be compared to Weitzmans recent results (1978) on the optimal form of controls for a planning authority.

Unemployment and the optimal export-processing zone

Abstract In a country with Harris–Todaro unemployment, the formation of an urban export-processing zone reduces national income unless it raises rural wages. In that case, increases in zone wages increase national income by less than dollar-for-dollar. If foreign capital is taxed optimally, then intermediate imports into the zone should be subsidized, while the wage should be at the minimum feasible level. For a given tax policy, either the wage should be at the minimum or the ad valorem tariff on the intermediate should exceed the inverse of the elasticity of supply of labor from the countryside. Existing zone policies depart from these prescriptions.

Ranking optimal tariffs and quotas for a large country under uncertainty

Abstract Optimal tariffs and quotas are compared for a large country under uncertainty. If the import supply schedule has constant elasticity and is subject to multiplicative uncertainty and domestic demand is random then the optimal policy is a fixed ad valorem tariff. If the supply schedule has constant elasticity but this elasticity is random then the optimal tariff is superior to the optimal quota. If the demand and supply schedules are linear then the optimal quota is superior to the optimal tariff if and only if the supply schedule is inelastic and the degree of uncertainty in the demand and supply schedules is small.