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Now showing items 1 - 16 of 19

  • A dynamic North-South model of demand-induced product cycles

    Foellmi, Reto   Grossmann, Sandra Hanslin   Kohler, Andreas  

    This paper presents a dynamic North-South general-equilibrium model where per capita incomes shape demand patterns across regions. Innovation takes place in a rich North while firms in a poor South imitate products manufactured in North. Allowing a role for per capita incomes in determining demand delivers a complete international product cycle as described by Vernon (1966), where the different stages of the product cycle are not only determined by supply-side factors but also by the distribution of income between North and South. We analyze how changes in the gap between North and South due to changes in Southern labor productivity, population size in South and inequality across regions affect the international product cycle. In line with presented stylized facts, we predict a negative correlation between adoption time and per capita incomes. (C) 2017 Elsevier B.V. All rights reserved.
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  • Harmful Procompetitive Effects of Trade in Presence of Credit Market Frictions

    Foellmi, Reto   Oechslin, Manuel  

    We explore the consequences of international trade in an economy that encompasses technology choice and an endogenous distribution of mark-ups due to credit market frictions. We show that in such an environment a gradual opening of trade may-but not necessarily must-have a negative impact on productivity and overall output. The reason is that the procompetitive effects of trade reduce mark-ups and hence make access to credit more difficult for smaller firms. As a result, smaller firms-while not driven out of the market-may be forced to switch to less productive technologies.
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  • Do Professionals Get It Right? Limited Attention and Risk-taking Behaviour

    Foellmi, Reto   Legge, Stefan   Schmid, Lukas  

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  • The macroeconomics of Model T

    Foellmi, Reto   Wuergler, Tobias   Zweimüller, Josef  

    We study a model of growth and mass production. Firms undertake either product innovations that introduce new luxury goods for the rich; or process innovations that transform existing luxuries into mass products for the poor. A prototypical example for such a product cycle is the automobile. Initially, an exclusive product for the very rich, the automobile became affordable to the middle class after the introduction of Ford's Model T, "the car that put America on wheels". We present a model of non-homothetic preferences, in which the rich consume a wide range of exclusive high-quality products and the poor a more narrow range of low-quality mass products. In this framework, inequality affects the composition of R&D through price and market size effects. The inequality-growth relationship depends on how mass production affects productivity; and on the particular dimension of inequality (income gaps versus income concentration). Our model is sufficiently tractable to incorporate learning-by-doing, oligopolistic market structures, and different sources of knowledge spillovers. (C) 2014 Elsevier Inc. All rights reserved.
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  • Is inequality harmful for innovation and growth? Price versus market size effects

    Foellmi, Reto   Zweimueller, Josef  

    We introduce non-homothetic preferences into an R&D based growth model to study how demand forces shape the impact of inequality on innovation and growth. Inequality affects the incentive to innovate via a price effect and a market size effect. When innovators have a large productivity advantage over traditional producers a higher extent of inequality tends to increase innovators' prices and mark-ups. When this productivity gap is small, however, a redistribution from the rich to the poor increases market sizes and speeds up growth.
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  • Is inequality harmful for innovation and growth? Price versus market size effects

    Foellmi, Reto   Zweimüller, Josef  

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  • Consumption paths under prospect utility in an optimal growth model

    Foellmi, Reto   Rosenblatt-Wisch, Rina   Schenk-Hoppe, Klaus Reiner  

    This paper studies the Cass-Koopmans-Ramsey model of optimal economic growth in the presence of loss aversion and habit formation. The representative agent's preferences for consumption can be gradually varied between the standard constant intertemporal elasticity of substitution (CIES) case and Kahneman and Tversky's prospect utility. We find that the transitional dynamics of optimal consumption paths differ distinctly from the standard model, in particular consumption smoothing is more pronounced. We also show that prospect utility can cause the economy to remain in a steady state with low consumption and low capital. (C) 2010 Elsevier B.V. All rights reserved.
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  • Exclusive Goods and Formal-Sector Employment

    Foellmi, Reto   Zweimüller, Josef  

    We explore how the underemployment problem of less-developed economies is related to income inequality. Consumers have non-homothetic preferences over differentiated products of formal-sector goods and thus inequality affects the composition of aggregate demand via the price-setting behavior of firms. We find that high inequality divides the formal sector into mass producers and exclusive producers (which serve only the rich); high inequality generates an equilibrium where many workers are crowded into the informal economy; and an increase in subsistence productivity raises the unskilled workers' wages and boosts employment due to the higher purchasing power of poorer households. (JEL D31, D43, E24, E26, J24)
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  • Market imperfections, wealth inequality, and the distribution of trade gains

    Foellmi, Reto   Oechslin, Manuel  

    Globalization increasingly involves less-developed countries (LDCs), i.e., economies which usually suffer from severe imperfections in their financial systems. Taking these imperfections seriously, we analyze how credit frictions affect the distributive impact of trade liberalizations. We find that free trade significantly widens income differences among firm owners in LDCs: While wealthy entrepreneurs are better off, relatively poor business people lose. Intuitively, with integrated markets, profit margins shrink which makes access to credit particularly difficult for the least-affluent agents. Richer entrepreneurs, by contrast, win because they can take advantage of new export opportunities. Our findings resonate well with a number of empirical regularities, in particular with the observation that some liberalizing LDCs have observed a surge in top-income shares. (C) 2010 Elsevier By. All rights reserved.
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  • Volatile Top Income Shares in Switzerland? Reassessing the Evolution Between 1981 and 2010

    Foellmi, Reto   Martínez, Isabel Z.  

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  • International Arbitrage and the Extensive Margin of Trade between Rich and Poor Countries

    Foellmi, Reto   Hepenstrick, Christian   Josef, Zweimuller  

    We incorporate consumption indivisibilities into the Krugman (1980) model and show that an importer's per capita income becomes a primary determinant of "export zeros". Households in the rich North (poor South) are willing to pay high (low) prices for consumer goods; hence, unconstrained monopoly pricing generates arbitrage opportunities for internationally traded products. Export zeros arise because some northern firms abstain from exporting to the South, to avoid international arbitrage. Rich countries benefit from a trade liberalization, while poor countries lose. These results hold also under more general preferences with both extensive and intensive consumption margins. We show that a standard calibrated trade model (that ignores arbitrage) generates predictions on relative prices that violate no-arbitrage constraints in many bilateral trade relations. This suggests that international arbitrage is potentially important.
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  • Why progressive redistribution can hurt the poor

    Foellmi, Reto   Oechslin, Manuel  

    Recent macroeconomic research discusses credit market imperfections as a key channel through which inequality retards growth: With convex technologies, progressive transfers increase aggregate output because marginal returns become more equalized across investment opportunities. We argue that this reasoning may not hold in general equilibrium. Since the investment functions are concave in wealth, reducing inequality increases capital demand and the interest rate. Hence, through the impact on capital costs, shifting wealth from the rich to the middle class depletes the poorest investors' access to credit. But because the poor face the highest marginal returns, the net effect on output may be negative. We find, however, that redistributing towards the bottom-end of the distribution has a clear positive impact. Finally, we discuss the implications of our theoretical findings for future empirical research. (c) 2007 Elsevier B.V. All rights reserved.
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  • International arbitrage and the extensive margin of trade between rich and poor countries*

    Foellmi, Reto   Hepenstrick, Christian   Zweimüller, Josef  

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  • Who gains from non-collusive corruption? RID A-2727-2008

    Foellmi, Reto   Oechslin, Manuel  

    Non-collusive corruption, i.e., corruption that imposes an additional burden on business activity, is particularly widespread in low-income countries. We build a macroeconomic model with credit market imperfections and heterogeneous agents to explore the roots and consequences of this type of corruption. We find that credit market imperfections, by generating rents for the incumbent entrepreneurs, create strong incentives for corrupt behavior by state officials. However, non-collusive corruption not only redistributes income from non-officials towards officials but also within the group of potential entrepreneurs. If borrowing is limited, bribes prevent poorer but talented individuals from starting a business. But this is likely to benefit those who may enter anyway; the cost of capital is lower and there is less competition on the goods markets. (c) 2005 Elsevier B.V. All rights reserved.
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  • Structural change, Engel's consumption cycles and Kaldor's facts of economic growth

    Foellmi, Reto   Zweimueller, Josef  

    Non-linear Engel-curves for consumer goods cause continuous structural change. Goods are sequentially introduced starting out as a luxury with high income elasticity and ending up as a necessity with low income elasticity. Although this leads to rising and falling sectoral employment shares, the model exhibits a steady growth path along which the Kaldor facts are satisfied. Extending the basic model to the case of endogenous product innovations shows that complementarities between aggregate and sectoral growth may give rise to multiple equilibria. (C) 2008 Elsevier B.V. All rights reserved.
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  • Income Distribution and Demand-Induced Innovations

    FOELLMI, RETO   ZWEIMüLLER, JOSEF  

    We introduce non-homothetic preferences into an innovation-based growth model and study how income and wealth inequality affect economic growth. We identify a (positive) price effect-where increasing inequality allows innovators to charge higher prices and (negative) market-size effects-with higher inequality implying smaller markets for new goods and/or a slower transition of new goods into mass markets. It turns out that price effects dominate market-size effects. We also show that a redistribution from the poor to the rich may be Pareto improving for low levels of inequality.
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