Research Seminar, Summer Term 2003

ETH Zurich
Summer term 2003

Monday, 17:15 to 19:00
ETH Zurich, Rämistrasse 101, Room HG G 26.3

Everyone who is interested is cordially invited!

If you would like to receive our weekly invitation via e-mail, or if you have any other question, please send an e-mail to Thomas Steger.

Lucas Bretschger: Natural Resource Use and Induced Technical Progress
The paper studies transitional dynamics and long-term growth paths in a multisector R&D-based endogenous growth model with exhaustible natural resources, labour, knowledge, and physical capital as inputs. Technological change is endogenous, material use is bounded, and elasticities of substitution between capital and resource inputs are allowed to be smaller than unity. We identify conditions under which investment incentives and economic growth are sustained. It is demonstrated that a low elasticity of substitution between capital and resources in the knowledge-competing sector is favourable for the growth rate of aggregate output.

Klaus Wälde: Growth Cycles
Current explanations why a growing economy necessarily goes through booms and recessions predict countercyclical R&D activities. As this is very controversial from an empirical perspective, a stochastic model of endogenous business cycles and growth is presented where the determinants of the cyclical behavior of R&D investment are analytically studied. Providing an explicit expression for the expected length of a cycle shows that high frequency fluctuations can be understood by this approach. It is also shown how small technological improvements translate into large aggregate fluctuations. How to distinguish empirically between endogenous and exogenous sources of fluctuations is discussed as well.

Michael Pflüger: Market structure and the taxation of foreign trade
The paper compares non-cooperative commodity taxation under the destination and origin principles under a variety of different assumptions about market structure and in the absence and the presence of transport costs for international trade. The international spillovers of tax policy that exist in each setting are isolated and their sign is evaluated at the Pareto efficient tax rate. A main result of our analysis is that introducing a revenue constraint for national governments critically affects both the net spillovers and the comparison between the two tax principles under each of the different assumptions about market structure.

Werner Hediger: "Sustainable farm income: an agricultural Hartwick rule"
Soil erosion is a physical and economic problem of natural capital degradation. Even along an intertemporally efficient trajectory, one can have in a loss of soil fertility and a continuous decline of agricultural net revenue. Moreover, soil erosion is a major source of surface water pollution in rural areas. Erosion control is thus a challenge for sustainable resource management and internalizing external effects.
To sustain the level of farm income, an "agricultural Hartwick rule" is proposed which addresses both on-farm and off-farm effects of soil erosion. First, it requires the investment of the soil rents into alternative capital. Second, additional measures are required to comply with an ambient quality target. A charge-subsidy scheme proves the most adequate from a perspective of cost-effectiveness and sustainability, if effluent charge revenues are earmarked to subsidize cropland retirement at the watershed scale. In combination with the investment of soil rents this enables to maintain the level of farm income constant over time while respecting the ambient quality target. Altogether, this fulfills the requirements of efficiency and sustainability.

Christian Groth: Too Little or Too Much R&D?
According to the first generation models of endogenous growth based on expanding product variety, the market economy unambiguously generates too little R&D. Later, by disentangling returns to specialization from the market power parameter, it was shown that with sufficiently low returns to specialization too much R&D can occur. The present paper takes a step further, disentangling the market power parameter from the capital share in final output. At a theoretical level this helps finding too much R&D as well. On the other hand, in view of the empirically realistic order of magnitude between the parameters, disentangling market power and capital share tends to diminish the scope for excess R&D. Finally, by differentiating between net and gross returns to specialization we demonstrate what drives the differing inefficiency results in this literature.

Francesco Ricci: Environmental Policy and Growth when Inputs are Differentiated in Pollution Intensity
Environmental policy affects the distribution of market shares if intermediate goods are differentiated in pollution intensity. When innovations are environmental friendly, a tax on emissions skews demand towards new goods, which are the most productive. In this case along a balanced growth path the tax has to increase to keep the market shares of goods of different vintages constant. An increase in the burden of taxation lowers output on impact but, comparing balanced growth paths, we find that it spurs innovation. Through this channel environmental policy may increase the growth rate of the economy.

Ottmar Edenhofer: Why Many Economic Models Overestimate the Costs of Climate Policy
An integrated assessment model incorparating induced technical progress is presented. With induced technical change, a credible quantity setting of emissions (Post-Kyoto) could trigger an endogenous sustainability transition of the energy system. After switching from fossil to non-fossil fuels, the quantity limits will no longer be binding and the post-Kyoto treaty will eventually have made itself superflous.

Thomas Steger: "Convergence Accounting"
In macroeconomic dynamic models the speed at which output converges to its steady state is of outstanding interest. Theoretical investigations usually focus on the asymptotic speed of convergence alone. This procedure is, however, unnecessarily restrictive and hides important information. The paper at hand provides a straightforward and simple analytical decomposition of the instantaneous rate of convergence into its economic determinants. In addition, the resulting convergence-accounting formula is applied to a general R&D-based endogenous growth model. The determinants of the rate of convergence and the driving forces behind the convergence process can be identified.