Optimal Factor Taxation with Credibility. Impact of Scientific Computing on Science and Society. Edited by P. Neittaanmäki and M.-L. Rantalainen. Springer Verlag 2023.

Abstract:  In this document, optimal factor taxation is examined when output is produced from labor and capital and some (or all) households save in capital. Main results are as follows. There is a reputational equilibrium where the government has no incentive to change its announced tax policies. In that equilibrium, the assertion of zero capital taxation holds, independently of the wage earners’ savings behavior and their weight in the social welfare function. A specific elasticity rule is derived for the optimal wage tax. Finally, it is shown how fertility and mortality can be introduced as endogenous variables in the model.

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Optimal Taxation with Endogenous Population Growth and the Risk of Environmental Disaster. In: Dynamic Economic Problems with Regime Switches. Series “Dynamic Modeling and Econometrics in Economics and Finance” No. 25. Springer Nature Switzerland AG 2021.

Abstract. This study considers a market economy where firms produce goods from labor and capital and households supply labor, rear children, save in capital, promote their members’ health and longevity by health care and derive utility from their consumption and children, without caring of their adult offspring. There is a risk that population growth and capital accumulation trigger a lethal environmental disaster. Optimal policy is solved by a game where the government is the leader and the representative household the follower. The solution yields precautionary taxes on both capital income and health care.

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(2014) Landowning, Status and Population Growth. Economics Discussion Paper 2013:651 (c-authored with Ulla Lehmijoki). In: Dynamic Optimization in Environmental Economics. Heidelberg: Springer Verlag 2014. pp. 315-328.

This paper considers the effects the landowning and land reforms on economic and demographic growth by a family-optimization model with endogenous fertility and status-seeking. A land reform provides the peasants with strong incentives to limit their family size and to improve the productivity of land. Even though the income effect due to the land reform tends to rise fertility, a strong enough status-effect outweighs it, thus generating a decrease in population growth. The European demographic history provides supporting anecdotal evidence for this theoretical result.

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(2014) One-Parameter GHG Emission Policy with R&D-Based Growth. In: Dynamic Optimization in Environmental Economics. Heidelberg: Springer Verlag 2014. pp. 111-126

This document examines the GHG emission policy of regions which use land, labor and emitting inputs in production and enhance their productivity by devoting labor to R&D. The problem is to organize common emission policy, if the regions cannot form a federation with a common budget and the policy parameters must be uniform for all regions. The results are the following. An agreement of the self-interested central planner that allocates
emission caps in fixed proportion to past emissions (i.e. grandfathering) leads to the Pareto optimum, decreasing emissions and promoting R&D and economic growth.

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(2013) International Biodiversity Management with Technical Change. Published in “Green Growth and Sustainable Development”, edited by J. Crespo Cuaresma, T. Palokangas and A. Tarasyev. Springer Verlag.

I consider the case where the conservation of land yields utility through biodiversity, firms improve their efficiency by in-house R&D and a large number of jurisdictions establish a self-interested central planner for biodiversity management. I compare the regulation of land use with direct subsidies for conserved land and obtain following results. Regulation promotes biodiversity and economic growth. Because revenue-rasing taxes hamper growth, the replacement of regulation by subsidies decreases biodiversity, growth and welfare. Applied to NATURA 2000 in the EU, this suggests that regulation without any budget may be the appropriate degree of authority for the Commission.

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(2010) Economic Growth with Political Lobbying and Wage Bargaining. Control Applications of Optimization. Volume 7. Part 1.

Abstract. This paper examines an economy with a large number of industries, each producing a different good. Technological change follows a Poisson process where firms improve their productivity through investment in R&D. The less there are firms in the economy or the more they can coordinate their actions, the higher their profits. Labor is used in production or R&D. All workers are unionized and their wages depend on relative union bargaining power. If this power is high enough, then there is involuntary unemployment. Both workers and firms lobby the central planner of the economy which affects firms’ and unions’ market power. The main findings of the paper can be summarized as follows. The central planner can increase its welfare either (a) by
increasing the level of income or (b) by speeding up economic growth. If (a) is more effective than (b), then the central planner eliminates union power altogether to have full employment. On the other hand, if (b) is more effective than (a), then the central planner supports labor unions to promote cost-escaping R&D.

Control Applications of Optimization. Volume 7. Part 1. IFAC-Papers OnLine (DOWNLOAD)

Paper presented in IFAC/CAO ’09_Annual_Conference, May 6-8, 2009, Jyväskylä, Finland

(2009) International Emission Policy with Lobbying and Technological Change. Published in "Dynamic Systems, Economic Growth and the Environment", edited by J. Crespo Cuaresma, T. Palokangas and A. Tarasyev. Springer Verlag.

Abstract. I examine emission policy in a union of countries when production in any country incurs emissions that pollute all over the union, but efficiency in production is improved by research and development (R&D). I compare four cases: Laissez-faire, Pareto optimal policy, and the case of a self-interested central planner that decides on nontraded or traded emission quotas. I show that with nontraded quotas, the growth rate is socially optimal, but welfare sub-optimal. Trade in quotas speeds up growth from the initial position of laissez-faire, but slows down growth from the initial position of nontraded quotas.

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(2009) Optimal Economic Growth with a Random Environmental Shock (Co-authored by Sergey Aseev, Konstantin Besov and Simon-Erik Ollus). Published in "Dynamic Systems, Economic Growth and the Environment", edited by J. Crespo Cuaresma, T. Palokangas and A. Tarasyev. Springer Verlag.

Abstract. The government in a small open economy uses both an old “dirty,” or “polluting,” technology and a new “clean” technology simultaneously. However, because of climate change, it should take into account that at some stage in the future it will be penalized for production based on the old technology. In this paper, pollution is alleviated through international agreements that restrict polluting activities. The government’s incentives to invest in cleaner technologies are based on productivity of the technology and randomly increasing abatement costs for pollution in future. In contrast to the Schumpeterian model of creative destruction, both technologies can be used simultaneously. The technologies are subject to AK production functions. Assuming that the exogenous environmental shock follows a Poisson process, we use Pontryagin’s maximum principle to find the optimal investment policy. We find conditions under which a rational government should invest all its resources in one technology, while the other is moderately run down, as well as conditions under which it should divide the investments between the technologies in a certain ratio.

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(2008) International Emission Policy with Poisson Technological Change. Published in “Evolutionary and Deterministic Methods for Design, Optimization and Control”, edited by P. Neittaanmäki, J. Periaux and T. Tuovinen. Barcelona: International Centre of Numerical Methods in Engineering (CIMNE).

P. Neittaanmäki, J. Periaux and T. Tuovinen (editors):    Evolutionary and Deterministic Methods for Design, Optimization and Control.    Barcelona: International Centre of Numerical Methods in Engineering (CIMNE).   ISBN: 978-84-96736-45-0

Pages 430-438:  Tapio Palokangas, “International Emission Policy with Poisson Tehcnological Change.”

(2007) Employment Cycles in a Growth Model of Creative Destruction. Published in "Stochastic Economic Dynamics", edited by B.S. Jensen and T. Palokangas. CBS Press 2007.

Abstract. I construct a model of Schumpeterian growth with cycles for an economy with efficiency wages in R&D and wage bargaining in production. I show that the economy generates cycles in which capital, output and employment vary in fixed proportions. Capital accumulates until a new technology is introduced, at which moment employment falls sharply due to obsolescence of capital. While employment varies counter-cyclically, wages grow on the average in proportion to the level of productivity.

Published in “Stochastic Economic Dynamics”, edited by B.S. Jensen and T. Palokangas. CBS Press 2007. Homepage