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11. Love of Variety and Gains from Trade

Author:
Christophe Gouel and Sébastien Jean
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Centre d'Etudes Prospectives et d'Informations Internationales (CEPII)
Abstract:
This paper shows how gains from trade are conditioned by love of variety, defined as the extent to which an additional product variety generates benefits in either final or intermediate consumption. We develop a multi-country, multisector gravity trade model where love of variety is parameterized separately from product substitutability using a generalized CES demand function, and show analytically how gains from trade depend on love of variety through different channels that we identify and interpret. In this context, except for very specific parameterizations, gains from trade differ between a heterogeneous- and a homogeneous-firm model. Counterfactual simulations based on a calibrated version of this model show that, all other things being equal, the assessed gains from trade commonly vary by a proportion of one to three depending on the value of the love-of-variety elasticity, in a way that differs significantly across countries. Trade war simulations also point to the strong sensitivity of the assessed impacts. We conclude that love of variety is a key determinant of the gains from trade, an aspect that has so far been overlooked for the sake of convenience in the modeling framework and due to lack of empirical estimates.
Topic:
International Cooperation, International Trade and Finance, Trade Wars, and Models
Political Geography:
Global Focus

12. Poor Substitutes? Counterfactual methods in IO and Trade compared

Author:
Keith Head and Thierry Mayer
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Centre d'Etudes Prospectives et d'Informations Internationales (CEPII)
Abstract:
Constant elasticity of substitution (CES) demand for monopolistically competitive firm-varieties is a standard tool for models in international trade and macroeconomics. Inter-variety substitution in this model follows a simple share proportionality rule. In contrast, the standard toolkit in industrial organization (IO) estimates a demand system in which cross-elasticities depend on similarity in observable attributes. The gain in realism from the IO approach comes at the expense of requiring richer data and greater computational challenges. This paper uses the dataset of Berry et al. 1995, who established the modern IO method, to simulate counterfactual trade policy experiments. We use the CES model as an approximation of the more complex underlying demand system and market structure. Although the CES model omits key elements of the data generating process, the errors are offsetting, leading to reasonably accurate counterfactual predictions. For aggregate outcomes, it turns out that incorporating non-unitary pass-through matters more than fixing over-simplified substitution patterns. We do so by extending the commonly used methods of Exact Hat Algebra and tariff elasticity estimation to take into account oligopoly.
Topic:
Economics, Business, Monopoly, Trade, and Models
Political Geography:
Global Focus

13. Scenarios for an impact assessment of global bioeconomy strategies: results from a co-design process

Author:
Ruth Delzeit, Tobias Heimann, Franziska Schunemann, and Mareike Soder
Publication Date:
07-2021
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
The replacement of fossil resources with renewable biomass in a bioeconomy is seen as a major contribution to climate change mitigation. This transformation will affect all members of society, making it crucial to consider the views of different stakeholders to ensure a socially acceptable transition towards a sustainable bioeconomy. To explore potential outcomes of bioeconomy strategies assuming different future pathways, a scenario analysis is a tool to inform decision-makers about policy impacts and trade-offs. The inter- and transdisciplinary research project “BioNex – The future of the biomass nexus” is the first project to develop bioeconomy scenarios together with stakeholders from politics, industry, and civil society in an iterative co-design process. As a result, three storylines describing diverging potential global futures are developed and quantified: Towards sustainability, business as usual, and towards resource depletion. The futures are driven by different assumptions on climate policy, cropland expansion, productivity growth in agriculture, prices of fossil energy, and consumption behaviour. Additionally, in the co-design process, three bioeconomy policies are developed: policy as usual, stronger development of the bioeconomy, and no policies. Besides presenting the results of the stakeholder workshops, this paper evaluates the strengths and shortcomings of a stakeholder approach in terms of policy-oriented research. According to the experience made within this study, it provides valuable insights for researchers and funding authorities they can use to optimise the employment of stakeholder-based research approaches.
Topic:
International Cooperation, Economy, Biology, and Models
Political Geography:
Global Focus

14. Procedurally Justifiable Strategies: Integrating Context Effects into Multistage Decision Making

Author:
Fynn Kemper and Philipp Wichaardt
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
This paper proposes a simple framework to model contextual influences on procedural decision making. In terms of utility, we differentiate between monetary payoffs and contextual psychological ones, e.g. deriving from the subjects’ normative frame of reference. Monetary payoffs are treated as common knowledge while psychological payoffs are treated as partly unforeseeable. Regarding behaviour, we assume that players act optimal given their local perception of the game. As perceptions may be incorrect, we do not consider common equilibrium conditions but instead require strategies to be procedurally justifiable. As we will argue, various common inconsistencies considered in behavioural economics can be understood as procedurally justifiable behaviour. With the present framework, we add an abstract tool to the discussion which allows to consider also the behavioural implications of players foreseeing the corresponding behavioural effects ̶ which is often not considered in the respective original models.
Topic:
Economics, Monetary Policy, and Models
Political Geography:
Global Focus

15. Modeling Myths: On the Need for Dynamic Realism in DICE and other Equilibrium Models of Global Climate Mitigation

Author:
Claudia Wieners and Michael Grubb
Publication Date:
01-2020
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
We analyze and critique how optimizing Integrated Assessment Models, and specifically the widely-used DICE model, represent abatement costs. Many such models assume temporal independence –abatement costs in one period are not affected by prior abatement. We contrast this with three dimensions of dynamic realism in emitting systems: inertia, induced innovation, and path dependence. We extend the DICE model with a stylized representation of such dynamic factors. By adding a transitional cost component, we characterize the resulting system in terms of its capacity to adapt in path-dependent ways, and the transitional costs of accelerating abatement. We formalize a resulting metric of the pliability of the system, and the characteristic timescales of adjustment. With the resulting DICE-PACE model, we show that in a system with high pliability, the optimal strategy involves much higher initial investment in abatement, sustained at roughly constant levels for some decades, which generates an approximately linear abatement path and emissions declining steadily to zero. This contrasts sharply with the traditional formulation. Characteristic transition timescales of 20-40 years result in an optimum path which stabilizes global temperatures around a degree below the traditional DICE behavior; with otherwise modest assumptions, a pliable system can generate optimal scenarios within the goals of the Paris Agreement, with far lower long run combined costs of abatement and climate damages. We conclude that representing dynamic realism in such models is as important as – and far more empirically tractable than – continued debate about the monetization of climate damages and ‘social cost of carbon’.
Topic:
Climate Change, Economics, Paris Agreement, and Models
Political Geography:
Global Focus

16. Studying Political Violence Using Game Theory Models: Research Approaches and Assumptions

Author:
Mateusz Wajzer
Publication Date:
01-2020
Content Type:
Journal Article
Journal:
Polish Political Science Yearbook
Institution:
Polish Political Science Association (PPSA)
Abstract:
The purpose of the paper is to concisely present basic applications of game theory models for a scientific description of political violence. The paper is divided into four parts. The first part discusses the key theoretical issues including: the assumption of the players’ rationality, the assumption of the players’ common knowledge of their rationality, the Nash equilibrium concept, Pareto optimality, the Nash arbitration scheme and the concept of evolutionarily stable strategies. The second and third parts contain examples of uses of selected models of classical and evolutionary games in the studies on political violence. The following two interaction schemes were used to that end: the Prisoner’s Dilemma and Chicken. The paper ends with a summary and discussion. The key feature of the discussed models is their methodological simplicity, as demonstrated by the lack of need to use complicated mathematical methods. This is why the paper is mainly addressed to individuals who had not studied game theory before or who have insufficient knowledge in the field to conduct own studies.
Topic:
Political Violence, Violence, Models, and Game Theory
Political Geography:
Global Focus

17. Diversity and perceptions of Immigration: How the past Influences the present

Author:
Lauren McLaren, Anja Neundorf, and Ian Paterson
Publication Date:
01-2019
Content Type:
Working Paper
Institution:
Nottingham Interdisciplinary Centre for Economic and Political Research (NICEP)
Abstract:
Research on the relationship between immigration-related diversity and public attitudes to immigration generally focuses on contemporary levels of (or recent changes in) diversity. Drawing on the political socialization literature, this paper argues that by ignoring the effect of diversity during early socialization years, existing research fails to fully understand longterm trends in attitudes to immigration. Applying a generational change perspective to the British sample of the European Social Survey (2002-2017), along with two innovative approaches to modeling generational differences - generalized additive models (GAMs) and hierarchical age‒period‒cohort (HAPC) models - we are able to investigate attitudes among groups of birth cohorts socialized between 1935 and 2010. The findings show that younger cohorts are systematically more positive about immigration. These increasingly positive attitudes are related to a macro-context of higher diversity in younger cohorts’ early years. This effect may, however, be diminished by a context of high income inequality during the formative years.
Topic:
Immigration, Diversity, Social Order, and Models
Political Geography:
Britain and Global Focus

18. Tourism as a Mechanism in Reducing Income Inequality in Developing Economies

Author:
D. Tan and Risa Morimoto
Publication Date:
12-2019
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
Although numerous studies have investigated the contribution of tourism to economic growth and development, much less attention has been paid to assessing whether tourism-induced growth and development contribute to the poverty alleviation and income inequality (Kinyondo & Pelizzo, 2015). This study emamines the statistical relationship between tourism activities and a suite of income inequality measures. Using a dynamic fixed country-level effects panel model and bootstrapped standard errors, we find strong evidence showing both tourism dollars and inbound tourism numbers have an adverse effect ion income equality. These findings are supported by the results of the fixed-effects panel and dynamic pooled OLS regressions. The results of this study suggest that more effort should be exerted to develop pro-poor tourism initiatives in order to mitigate the inequitable distribution of the benefits of tourism as well as to reduce possible environmental degradation caused by rural poverty.
Topic:
Development, Tourism, Inequality, Income Inequality, Economic Theory, and Models
Political Geography:
Global Focus

19. A Method for Agent-Based Models Validation

Author:
Mattia Guerini and Alessio Moneta
Publication Date:
03-2016
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper proposes a new method to empirically validate simulation models that generate artificial time series data comparable with real-world data. The approach is based on comparing structures of vector autoregression models that are estimated from both artificial and real-world data by means of causal search algorithms. This relatively simple procedure is able to tackle both the problem of confronting theoretical simulation models with the data and the problem of comparing different models in terms of their empirical reliability. The paper also provides an application of the validation procedure to the Dosi et al. (2015) macro-model.
Topic:
Economics, Economic Theory, Data, and Models
Political Geography:
Global Focus

20. Let's Take the Bias Out of Econometrics

Author:
Duo Qin
Publication Date:
12-2016
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
This study exposes the cognitive flaws of ‘endogeneity bias’. It reviews how conceptualisation of the bias has evolved to embrace all major econometric problems, despite extensive lack of hard evidence. It reveals the crux of the bias – a priori rejection of causal variables as conditionally valid ones, and of the bias correction by consistent estimators – modification of those variables by non-uniquely and non-causally generated regressors. It traces the flaws to misconceived error terms in statistical modelling and estimation consistency. It highlights the need to shake off the bias to let statistical learning play an active and formal role in econometrics.
Topic:
Economics, Economic Theory, Models, and Bias
Political Geography:
Global Focus