CPB Discussion papers 2008
n° 116 - December 2008
European natural gas markets: resource constraints and market power
ZWART Gijsbert
The European natural gas market is characterized by declining indigenous resources, particularly in the UK and the Netherlands, and a growing dependence on a small number of large exporters who, as a consequence, see their market power increasing. In this paper we analyze long-run scenarios for the European natural gas markets in a model, NATGAS, that explicitly includes both factors, resource constraints and producers’ market power.
We analyze the impact of conditions on the global LNG market on market shares of pipeline gas suppliers, as well as on the speed of depletion of indigenous European resources. We focus on how shadow prices of resource constraints affect substitution patterns in the various scenarios. Keywords: European natural gas market, complementarity model, market power, resource rent.
n° 115 - December 2008
Rising health spending, new medical technology and the Baumol effect
POMP Marc, VUJIC Suncica
Health expenditure as a share of GDP rises in most OECD countries. One of the possible causes is the so-called Baumol effect, which may arise if labour productivity in health care grows more slowly than in the overall economy. If in addition demand for health care is inelastic, then the share of health spending in GDP will rise over time. This paper estimates the Baumol effect in health spending, using a panel data set of OECD countries. We do indeed find that one percentage growth in economy-wide labour productivity is associated with about 0.5 percent growth in real health spending. This implies that economy-wide productivity growth leads to higher real health spending.
n° 114 - November 2008
Why are criminals less educated than non-criminals? Evidence from a cohort of young Australian twins
WEBBINK Dinand, KONING Pierre, VUJIC Suncica, MARTIN Nick
Many studies find a strong negative association between crime and education. This raises the question whether crime reduces investment in human capital or whether education reduces criminal activity. This paper investigates this question by using fixed effect estimation on data of Australian twins. We find that early arrests (before the age of 18) have a strong effect on human capital accumulation. In addition, we find that education decreases crime. However, controlling for early arrests and early behaviour problems reduces the estimated effect of human capital on crime to less than on third of the previously estimated association. From this, we conclude that the strong association between human capital and crime is mainly driven by the effect of early criminal behaviour on educational attainment. The strong detrimental effects of early criminal behaviour become also transparent if we consider the estimated effects of early arrests on three measures of crime. We find large effects of early criminal behaviour on participation in crime later on. This suggests that programs that succeed in preventing early criminal behaviour might yield high social and private returns.
n° 113 - November 2008
The effect of childhood conduct disorder on human capital
VUJIC Suncica, KONING Pierre, WEBBINK Dinand, MARTIN Nick
This paper estimates the longer-term effects of childhood conduct disorder on human capital accumulation and violent and criminal behaviour later in life using data of Australian twins. We measure conduct disorder with a rich set of indicators based on diagnostic criteria from psychiatry (e.g., aggression to people and animals, destruction of property, deceitfulness or theft, and/or serious violations of rules). Using ordinary least squares (OLS) and twin fixed effects (FE) estimation approaches, we find that early (pre-18) conduct disorder problems significantly affect both human capital accumulation and violent and criminal behaviour over the life course. For instance, within pairs of identical twins we find that conduct disorder reduces the probability of high school graduation with 4 to 13 percent points and increases the probability of being arrested with 7 to 16 percent points. Robustness checks suggest that these estimates may be lower bounds of the true effects of conduct disorder. In addition, we find that conduct disorder is more deleterious if these behaviours occur earlier in life. We conclude that childhood mental health problems have high human and financial costs for families and society at large. Effective treatments early in life might yield high returns.
n° 112 - September 2008
Investigating uncertainty in macroeconomic forecasts by stochastic simulation
LANSER Debby, KRANENDONK Henk
Uncertainty is an inherent attribute of any forecast. In this paper, we investigate four sources of uncertainty with CPB’s macroeconomic model SAFFIER: provisional data, exogenous variables, model parameters and residuals of behavioural equations. We apply a Monte Carlo simulation technique to calculate standard errors for the short-term and medium-term horizon for GDP and eight other macroeconomic variables. The results demonstrate that the main contribution to the total variance of a medium-term forecast, emanates from the uncertainty in the exogenous variables. For the short-term forecast both exogenous variables and provisional data are most relevant.
n° 111 - September 2008
Gravity with Gravitas: CommentSTRAATHOF Bas
In GRAVITY WITH GRAVITAS: A SOLUTION TO THE BORDER PUZZLE, Anderson and Van Wincoop (2003) estimate what trade between US states and Canadian provinces would have been if the border between Canada and the United States had not existed. They showed that computing the border effect requires solving a non-linear system of multilateral price indexes. This note shows that the non-linear system can be solved analytically, such that a numerical approximation is no longer needed. The exact solution yields a reduced-form log-linear gravity equation that can be estimated using standard econometric techniques. After estimation, the calculation of treatment effects like the border effect is straightforward. Using the same data and assumptions, I find that the border effect for Canada is half as large as reported by Anderson and Van Wincoop.
n° 110 - August 2008
Opportunistic competition law enforcement
BIJLSMA Michiel, VAN ELK Roel
Most studies of competition law enforcement treat competition authorities as all-knowing, unwavering and benevolent. They do not behave opportunistically, do not face asymmetric information and choose their actions to optimize social welfare.
In this paper, we drop one of these assumptions, and study a competition authority that can not commit to a particular investigation strategy. As a consequence, a competition authority’s decisions to investigate will be driven by the (ex-post) desistance effect instead of the (ex ante) deterrence effect of an investigation policy. The resulting opportunistic behaviour may lead to a suboptimal investigation strategy.
To analyse the interplay between investigation policies, deterrence and desistance, we study a model in which a competition authority monitors multiple sectors and faces a budget constraint that prevents it from deterring cartels in all sectors simultaneously. We find that, in the absence of commitment, developing a sector specific reward scheme based on the number of captured cartels can improve welfare.
n° 109 - juillet 2008
Access Regulation and the Adoption of VoIP
DE BIJL Paul , PEITZ Martin
The introduction of packet-switched telephony in the form of VoIP raises concerns about current regulatory practice. Access regulation has been designed for traditional telephony on PSTN networks. In this paper, we analyze the effect of access regulation and retail price regulation of PSTN networks on the adoption of a new technology in the form of VoIP. In particular, we show that with endogenous consumer choice between PSTN and VoIP telephony, higher prices for terminating access to the PSTN network make VoIP less likely to succeed and lead to lower profits of operators that offer VoIP telephony exclusively.
n° 108 - juillet 2008
Innovation, convergence and the role of regulation in the Netherlands and beyond
DE BIJL Paul , PEITZ Martin
In the light of converging services for voice, data, and video, this paper discusses the challenges for telecommunications regulation from a European perspective. The Netherlands, a country with excellent conditions for facilities-based competition, is discussed as a case in point. With dynamic issues at the heart of the debate, the role of regulation and government intervention more generally is to create and possibly to sustain conditions among operators to upgrade their networks and to provide innovative services. A fresh look at current regulation suggests that an overhaul may be needed.
n° 107 - juin 2008
Reassessing the relationship between inequality and development
FRANCOIS Joseph F. , ROJAS-ROMAGOSA Hugo
We reassess the empirical relevance of the Kuznets Curve with a new inequality dataset. Using panel data estimations that account for the heterogeneity of inequality observations, we test for both the unconditional and the conditional hypothesis that includes alternative inequality determinants. We find that inequality and income levels are related in a cubic function or 'tilde-pattern'. This novel finding does not contradict the traditional Kuznets hypothesis, but extends it. Increasing inequality in OECD countries during recent years suggests that inequality rises at high levels of economic development. This “tilde-pattern” is robust to different inequality indicators, estimation techniques and control variables.
n° 106 - juin 2008
Competition and access price regulation in the broadband marketBIJLSMA Michiel, KOCSIS Viktoria, VALMARI Nelli
In most European broadband Internet markets local loop unbundling is mandated under a cost-based regulated access price. We construct a model for differentiated Cournot competition between service-based and infrastructure-based firms, out of which one infrastructure-based firm (the incumbent) supplies to the service-based firms. We seek for and compare the socially optimal and the incumbent’s profit maximizing access price in two scenarios: (i) service-based firms and incumbent supply homogeneous services (partial differentiation), and (ii) all services are horizontally differentiated (uniform differentiation). We show that in both cases the incumbent never forecloses service-based firms if infrastructure-based competition is present or if services are somewhat differentiated. Under uniform differentiation the welfare optimizing access price is below marginal cost, hence the incumbent subsidizes the production of service-based firms and makes zero profit. In the case of partial differentiation, the same result obtains when both markets are concentrated. However, if markets are not concentrated, the socially optimal access fee exceeds the marginal cost.
n° 105 - mai 2008
International spillovers of domestic reforms: the joint application of the Lisbon Strategy in the EU. 2008
LEJOUR Arjan, ROJAS-ROMAGOSA Hugo
Using the CGE model WorldScan, we assess the benefits for the EU member states of jointly reaching four of the Lisbon targets (i.e. 70% employment, skills upgrades, increased R&D expenditures and administrative burden reductions of 25%), compared with the alternative when each country unilaterally pursues these reforms. With this approach, we estimate the associated international spillovers of joint EU coordination. Spillovers associated with R&D expenditures are a key factor. When the R&D target is jointly reached in the EU, output almost doubles and consumption experiments an even greater increase. The other three targets also produce positive spillovers, but of a much lower magnitude.
n° 104 - avril 2008
The impact of demographic uncertainty on public finances in the Netherlands
ARMSTRONG Alex, DRAPER Nick, WESTERHOUT Ed
The expected increase in the ratio of retirees to workers that is due to population ageing is sure to increase pressure on public finances and the Dutch economy in the coming decades. However, because of the uncertainty regarding future demographic developments, the exact extent of the problem is unknown. This paper presents stochastic simulations, i.e. simulations that combine the CGE model of the Dutch economy GAMMA with stochastic population projections.
n° 103 - avril 2008
Impact of bank competition on the interest rate pass-through in the euro area
VAN LEUVENSTEIJN Michiel, KOK SORENSEN Christoffer, BIKKER Jacob A., VAN RIXTEL Adrian A. R. J. M.
This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products, in line with expectations. Using an error correction model (ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loan market competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks under competition compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest rates in more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective.
n° 102 - avril 2008
Does education reduce the probability of being overweight?
WEBBINK Dinand, MARTIN Nicholas G., VISSCHER Peter M.
The prevalence of overweight and obesity is growing rapidly in many countries. Education policies might be important for reducing this increase. This paper analyses the causal effect of education on the probability of being overweight by using longitudinal data of Australian identical twins. The data include self-reported and clinical measures of body size. Our cross-sectional estimates confirm the well-known negative association between education and the probability of being overweight. For men we find that education also reduces the probability of being overweight within pairs of identical twins. The estimated effect of education on overweight status increases with age. Remarkably, for women we find no negative effect of education on body size when fixed family effects are taken into account. Identical twin sisters that differ in educational attainment do not systematically differ in body size. This finding is robust to differences in employment and number of children.
n° 101 - mars 2008
Rhineland exit
BOVENBERG Lans., TEULINGS Coen
We argue in favour of the shareholder model of the firm for three reasons. First, serving multiple stakeholders leads to ill-defined property rights. Second, giving workers a claim on the surplus of the firm raises the cost of capital for investments in jobs. Third, assigning the full surplus of the firm to shareholders provides the best possible social insurance by the diversification of firm-specific risks on capital markets. Whereas globalisation has increased firm-specific risk by intensifying competition, globalisation of capital markets has also greatly increased the scope for diversification of firm-specific risk. This is an efficient form of social insurance. Coordination in wage bargaining and collective norms on what is proper compensation play an important role in reducing the claim of workers on the firm's surplus. In Denmark, workers bear les firm-specific risk than workers in the United States do. Collective action thus has an important role to play. Politicians, however, also face the temptation to please voters and incumbent workers with short-run gains at the expense of exposing workers to firm-specific risks and reducing job creation for future generation.
n° 100 - février 2008
Is part-time employment here to stay? Evidence from the Dutch Labour Force Survey 1992-2005
BOSCH Nicole , DEELEN Anja, EUWALS Rob
To balance work and family responsibilities, the Netherlands have chosen a rather unique model that combines a high female employment rate with a high part-time employment rate. The model is likely to be the result of (societal) preferences as the removal of institutional barriers, like lower marginal tax rates for partners and better childcare facilities, has not led to more working hours. It is, however, an open question whether the model is here to stay or whether younger generations of women will choose full-time jobs in the near future. In this study, we investigate the development of working hours over successive generations of women using the Dutch Labour Force Survey 1992-2005. We find evidence of an increasing propensity to work part-time over the successive generations, and a decreasing propensity to work full-time for the generations born after the early 1950s. Our results are in line with results of studies on social norms and attitudes as they find a similar pattern over the successive generations. It therefore seems likely that without changes in (societal) preferences the part-time employment model is indeed here to stay for some more time.
n° 99 - février 2008
Economic perspectives for Central America after CAFTA; a GTAP-based analysis
FRANCOIS Joseph F., RIVERA Luis., ROJAS-ROMAGOSA Hugo
Using a GTAP CGE application, we assess the main economic results of CAFTA for Central America (CA). Currently, Central America enjoys preferential access to the US market through the Caribbean Basin Initiative (CBI). CAFTA will consolidate and augment these concessions. Meanwhile, the agreement requires widespread opening of CA markets to US imports over time. The implementation of the ATC protocol in 2005 implies increased Chinese competition for the region in the textile and apparel sectors. CAFTA will balance for this new source of competition by allowing better access for CA textiles and apparel products, while creating large opportunities for labour market improvements and FDI inflows to Central America. If these opportunities are exploited, the region has much to gain from CAFTA. However, we also find a strong sectoral readjustment from agricultural sectors to maquila-based industries, which could create important adjustment strains.
n° 98 - janvier 2008
The costs and benefits of providing open space in cities
ROUWENDAL Jan, VAN DER STRAATEN Willemijn
Although many researchers have investigated the value of open space in cities, few of them have compared them to the costs of providing this amenity. In this paper, we use the monocentric model of a city to derive a simple cost-benefit rule for the optimal provision of open space. The rule is essentially the Samuelson-condition for the optimal provision of a public good, with the price of land as the appropriate indicator for its cost. The condition is made operational by computing the willingness to pay for public and private space on the basis of empirical hedonic price functions for three Dutch cities. The conclusions with respect to the optimal provision of open space differ between the three cities. Further investigation reveals that willingness to pay for parks and public gardens increases with income, although not as fast as that for private residential space.
n° 97 - janvier 2008
Corporate tax policy and incorporation in the EU
DE MOOIJ Ruud A., NICODÈME Gaëtan
In Europe, declining corporate tax rates have come along with rising tax-to-GDP ratios. This paper explores to what extent income shifting from the personal to the corporate tax base can explain these diverging developments. We exploit a panel of European data on legal form of business to analyze income shifting via incorporation. The results suggest that the effect is significant and large. It implies that the revenue effects of lower corporate tax rates ? possibly induced by tax competition ? will partly show up in lower personal tax revenues rather than lower corporate tax revenues. Simulations suggest that between 12% and 21% of corporate tax revenue can be attributed to income shifting. Income shifting is found to have raised the corporate tax-to-GDP ratio by some 0.25%-points since the early 1990s.
n° 96 - janvier 2008
Macroeconomic resilience in a DSGE model
ELBOURNE A.C, LANSER Debby, SMID Bert, VROMANS Martin
We use the dynamic stochastic general equilibrium (DSGE) model of Altig et al. (2005) to analyse the resilience of an economy in the face of external shocks. The term resilience refers to the ability of an economy to propser in the face of shocks. The Altig et al. model was chosen because it combined both demand and supply shocks and because various market rigidities/imperfections, which have the potential to affect resilience, are modelled. We consider the level of expected discounted utility to be the relevant measure of resilience. The effect of market rigidities, eg. wage and price stickiness, on the expected level of utility is minimal. The effect on utility is especially small when compared to the effect of market competition, because the latter has a direct effect on the level of output. This conclusion holds for the family of constant relative risk aversion over consumption utility functions. A similar conclusion was drawn by Lucas (1987) regarding the costs of business cycles. We refer to the literature that followed Lucas for ideas for how a DSGE model might be adjusted to give a more meaningful analysis of resilience. We conclude that the Altig et al. DSGE model does not produce a relationship between rigidities and the level of output and, hence, does not capture the effect of inflexibility on utility that one observes colloquially.
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