Mikko Puhakka

Renewable Resources in an Overlapping Generations Economy Without Capital

Abstract We incorporate a renewable resource into an overlapping generations model without capital and with quasi-linear preferences. Besides being an input for production the resource serves as a store of value. We characterize the dynamics, efficiency, and stability of the steady-state equilibria. The stability properties are sensitive to the type of resource growth. For constant growth there is only one steady-state equilibrium which is stable and efficient. In the general case of the concave growth function, there are usually at least two steady-state equilibria, one of which is stable and the other one unstable. The unstable steady state is efficient, but the stable one may or may not be. We study the robustness of our results by assuming a logarithmic utility function. We show that for the Cobb–Douglas production function the steady state is unique and stable regardless of whether the equilibrium is efficient or inefficient. Our analytical results are illustrated by numerical calculations.

Endogenous time preference, investment and development traps

We introduce endogenous time preference via investment in patience (farsightedness) in an overlapping generations growth model to study development traps. There is no investment in patience, if the economy is very poor, while if it is wealthy enough there is always such investment. We explore the conditions for the existence of the development trap, and study in detail a robust example of an economy with traps. It does not exist, if the economys total factor productivity is large enough. Our results illustrate the complementarity between physical investment and investment in farsightedness. Our model may also explain why economic growth is affected by initial conditions. In addition we show that increased international capital mobility does not necessarily help economies to escape from development traps.

Economic hardship and suicide mortality in Finland, 1875–2010

We investigate the determinants of suicide in Finland using annual data for consumption and suicides from 1860 to 2010. Instead of using some ad hoc measures of cyclical movements of the economy, we build our analysis on a more solid economic theory. A key feature is the habit persistence in preferences, which provides a way to measure individual well-being and predict suicide. We estimate time series of habit levels and develop an indicator (the hardship index) to describe the economic hardship of consumers. The higher the level of the index, the worse off consumers are. As a rational response to such a bad situation, some consumers might commit suicide. We employ the autoregressive distributed lags cointegration method and find that our index works well in explaining the long-term behavior of people committing suicide in Finland.

Rationing and Optimality in Overlapping Generations Models

The theory of overlapping generations models provides examples of economies where the first welfare theorem of static finite economies fails to hold. Since the discovery of this result, several authors have examined the relationship between competitive equilibria and Pareto optimal allocations, although they have systematically ignored alternatives to the competitive mechanism as the only allocation rule. To our knowledge, the question of whether a different allocation mechanism may perform better than the competitive one has not been posed. One alternative to the competitive allocation rule is provided by the theory of equilibria with rationing which has been developed extensively for static finite economies. Such models have been under constant criticism because they provide no or very little explanation as to why prices are fixed at non-Walrasian levels, although binding quantity constraints imply a clear signal as to how prices should adjust. Therefore, if the model of quantity rationing can be placed in a full dynamic framework where prices adjust from one period to the next, the criticism of assumed and unexplained price rigidity could be overcome. By adopting the approach of the law of supply and demand, i.e., demand rationing implies price increases and supply rationing implies price decreases, a well-defined class of price adjustment rules may be obtained which provides a first step toward a theory of price dynamics under nonmarket-clearing conditions. Optimality properties of rationing equilibria in static finite economies have been studied by several authors. Balasko (1979, 1982), BOhm and Muller (1977) and Dreze and Muller (1982) examined the question of different rationing equilibria for the same set of prices, whereas Bohm (1984)

The effects of aging population on the sustainability of fiscal policy

We study the effects of aging population on the sustainability of fiscal policy in overlapping generations models with government debt and a pay-as-you-go pension system. The smaller the population growth rate, the lower the maximum sustainable level of deficits. When the utility function is of a specific form, an increase in the payroll tax rate and the replacement rate decreases the level of maximum sustainable deficits; except in the case when pension depends on the wage level prevailing during the working period. The ratio of the deficits in two economies with different population growth rates is characterized with numerical examples.

Some Aggregate Effects of Heterogeneity in Information Processing

This paper analyzes the equilibrium of an economy where economic agents differ with respect to their information gathering and processing abilities. Our results depend on the magnitude of the relative risk aversion. We show that the unsophisticated (with respect to their information processing abilities) agents are disproportionately important in the cases of both large and small risk aversion. In the case of the relative risk aversion measure being greater than unity volatility of aggregate consumption is reduced. This supports the view that observed consumption in many countries fluctuates less than predicted by models with fully rational agents only. Copyright 1997 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

Revisiting unit roots in divorce rates

We explore the persistence of the divorce rates in OECD countries. We provide evidence to reject the null hypothesis of a unit root and propose that changes in divorce rates are nonlinear time series processes that could be modelled by stationary threshold autoregressive (TAR) or smooth transition autoregressive (STAR) models.

Indeterminacy and Stabilization of Endogenous Cycles with Balanced-Budget Distortionary Taxation

We study the effects of distortionary labor taxation on endogenous cycles and the indeterminacy of equilibria in an overlapping-generations model with a balanced-budget rule. Under proportional taxation there is a critical tax rate above which cycles vanish, while with linearly progressive taxation there is a critical level of tax exemption below which cycles also vanish. If the utility function is quasilinear, increasing the tax rate can cause the economy to become determinate both with proportional and with linearly progressive taxation, whereas a sufficiently high tax exemption can make equilibrium indeterminate if the utility function is more general.

Economic hardship and suicides

We investigate the determinants of aggregate suicides in 15 OECD countries during 1960 – 2010 using an economic model where changes in welfare constitute the propagation mechanism for suicide. In the model we assume that agents have habits in terms of their (level of) consumption. The relationship between actual consumption to this level of habit consumption provides us a hardship index which is the key variable in the empirical application. In this application, we compute the index for all sample countries and test whether we can predict changes in suicide with this index. The performance of this index is remarkably good. In practical terms, this means that at least some fraction of suicides is related to the well-being of individual agents. This is certainly consistent with most of the earlier research results. The novelty of our paper is, however, that we can explain changes in suicide with this single index that corresponds to a basic economic decision rule. Moreover, the results are strikingly robust in terms of the various control variables that have been suggested or used in previous empirical analyses.

A long-run perspective on renewable resource use and amenity benefits: the case of forestry

We examine the existence and stability properties of the long-run equilibrium in an economy using forest resources for consumption and amenity benefits. We incorporate forest resources into an overlapping generations model as a factor of production, source of amenity benefits and store of value. We characterise dynamics and stability of steady-state equilibria with a logistic resource growth function, and demonstrate with parametric and numerical examples that a unique and stable equilibrium exists under a set of parameter restrictions. We show that the productivity of timber in production of consumption and the weight given to amenities substantially affect the steady-state equilibrium stock and its stability and dynamics. Especially, the higher the productivity of timber in production, the lower the steady-state forest stock.