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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

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(2009) Dynamic Systems, Economic Growth and the Environment. Edited by J. Crespo Cuaresma, T. Palokangas and A. Tarasyev. Springer Verlag.

This book focuses on the sustainability of economic growth in a changing environment, under the effects of global warming, dwindling energy resources, and technological change. It also provides explanations for significant fluctuations in countries’ growth rates. The results are derived from historical evidence on economic growth in relation to environmental policy, technological change, development of transport infrastructure, population issues, and environmental mortality. The rigorous analysis of theoretical and applied aspects reveals important policy implications for optimal investment, optimal timing of abatement activities, and for an optimal balancing of economic growth with environmental concerns.

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(2009) Investment, Expropriation, and Unionization. Economics of Governance 10: 27-42

Abstract. This paper examines the strategic interaction between a foreign direct investor, a labour union and a self-interested government in the following cases: (a) a competitive labour market, (b) bargaining over wages and employment, or (c) bargaining over wages only. The investor and the union lobby the government for taxation and labour market regulation, and the investor uses its control rights to protect its investment against expropriation. The main findings are as follows. In cases (a) and (b) above, the government can use taxation and labour market regulation as a non-distorting vehicle to press the investor’s profits to the minimum. Hence, union rights and right-to-manage bargaining (c) predict higher profits for foreign direct investment.

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(2009) Integration, Labor Market Regulation, Lobbying, and Technological Change. IZA Discussion Paper No. 4096. IZA, Germany.

Abstract. This paper examines an economic union where oligopolistic firms produce by skilled and unskilled labor and do in-house R&D by skilled labor. The planner of the union accepts new members to the union, regulates the labor market through a minimum wage for unskilled labor and supports firms by taxation. Firms and workers lobby the planner for prospective policy. It is shown that in the political equilibrium small unions regulate the labor market but do not support firms, while large unions deregulate the labor market and support firms. Journal of Economic Literature: F15, J50, O40.

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This paper is presented in

1. the HECER_Political_Economy_Conference, March 13-14, 2009, Helsinki, Finland

2. the IFAC 2011 Conference,  August 28 – September 2, 2011, Milan, Italy

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(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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(2009) Population Growth Overshooting and Trade in Developing Countries. Journal of Population Economics 22: 43-56. (co-authored with Ulla Lehmijoki)

Abstract. This paper examines a developing economy by a family-optimization model in which the number of children is a normal good in preferences. Trade liberalization generates two effects: an income effect, which raises population growth in the short run; and a gender wage effect, which decreases that in the long run. With higher income, families invest more in capital. Because female labor is more complementary to capital, a higher level of investment increases women’s relative wages and attracts more of them from child rearing into production. Consequently, the population growth rate falls below the original level in the long run. This paper also provides some empirical evidence on these results.

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(2008) Self-Interested Governments, labor Unions, and Immigration Policy. AUCO Czech Economic Review 2: 7-20

Abstract. This paper examines an economy with following properties. Attempts to restrain illegal immigration incur costs. Illegal workers can work only in the competitive sector. Workers and employers bargain over wages in the unionized sector and lobby the government for immigration policy and workers’ bargaining power. The main findings are as follows. If the government can determine legal immigration, then it expropriates rents from labor unions. In that case, neither workers nor employers are worse off, if legal immigration is increased by an international agreement. High per worker public spending involves border enforcement and the protection of union power.

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(2008) Emission Policy in an Economic Union with Poisson Technological Change. Applied Mathematics and Computation 204: 589-594

Abstract. This study examines optimal emission policy in a union of countries. In each country, labor is allocated between production and R&D which generates Poisson technological change. Production incurs emissions that are spread all over the union and aggravates pollution. Utility in any country depends negatively on both emissions and pollution in the union. The central planner of the union sets emission taxes for the countries. This study constructs a Pareto-optimal emission policy for the union.

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