Institut für Agrarpolitik und Landwirtschaftliche Marktlehre

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A utility function based approach towards the modeling of migration in village equilibrium models
(2010) Kleinwechter, Ulrich
Village equilibrium models are computable general equilibrium (CGE) implementations of agricultural household models in a village equilibrium framework which have the salient feature of being able to capture general equilibrium effects arising at the level of rural communities. Due to the important role migration plays for livelihoods in developing countries, the approach has been successfully applied to analyze aspects related to migration and village economies. However, the depiction of migration in village equilibrium models is not carried out in a way that captures interactions between migration and household consumption demand while at the same time allows for an endogenous adjustment of the level of migration by the households themselves. Furthermore, approaches to modeling migration are purely demand side oriented. Supply side factors, such as differences between households, which may influence household responses to changes in incentives to migrate, cannot be accommodated in a theoretically convincing manner. To address these issues, a nonseparable household model with endogenous migration decisions and feedback to the consumption sphere is proposed as the theoretical foundation for a village equilibrium model. A composite utility function captures utility which accrues to the household through per capita household consumption of goods and leisure, on the one hand, and utility stemming directly from participation in different activities by the household including migration, on the other hand. It is shown that the allocation of labor among different activities is governed by the size of marginal returns to labor in terms of market returns, changes in household demand and (dis)utility of labor market participation relative to the household shadow wage. The practical implementation of the theoretical framework is achieved by the derivation of two independent demand systems from the composite utility function. A per capita linear expenditure system is proposed to depict household consumption demand. The allocation of labor to migration is assumed to follow a factor demand specification using power functions which translate utility considerations made by the household into imperfectly elastic responses to changes in incentives for participation in the labor market.
An integrated computable general equilibrium model including multiple types and uses of water
(2015) Luckmann, Jonas Jens; Grethe, Harald
Water is a scarce resource in many regions of the world and competition for water is an increasing problem. To countervail this trend policies are needed regulating supply and demand for water. As water is used in many economic activities, water related management decisions usually have complex implications. Economic simulation models have been proven useful to ex-ante assess the consequences of policy changes. Specifically, Computable General Equilibrium (CGE) models are very suitable to analyze the consequences of water-related management decisions, as they consider the interlinkages between different sectors and economic agents within an economy. However, so far there is no CGE model which provides a holistic picture of the water sector including all aspects of provision, demand and management. Against this background, in this thesis a CGE model (STAGE_W) is developed which is especially focused on the water sector and provides a generic, integrated and flexible framework to incorporate various water sources from which several water activities produce water commodities of differing quality. These are consumed by other activities or by households. The applications presented in this thesis are to the best knowledge of the author the first CGE approaches to depict the recycling of wastewater and the provision of brackish groundwater as independent activities. Another novelty of the model is that it is capable to depict cascading water use. Furthermore, the inclusion of several water specific taxation instruments allows for a wide range of water policy simulations. To demonstrate the capabilities of the model, STAGE_W is applied to a Social Accounting Matrix for Israel. Based on this database several case studies are conducted which are presented in three scientific articles. Israel provides an ideal example as the country is strongly affected by water scarcity and is also among the world leaders regarding the development of new water sources and technologies. In the first article, a literature review on previously existing approaches of water depiction in CGE models is provided along with a detailed description of the specifics of STAGE_W. The model is applied to simulate a reduction of freshwater resources. The effects of this shock are analyzed with and without further increasing the desalination capacity. The results show that the economic effects are slightly negative under both scenarios. Counterintuitively, the provision of additional potable water through desalination does not substantively reduce the negative outcomes. This is mainly due to the high costs of desalination, which are currently subsidized in Israel. The second article simulates an abolishment of the discriminatory water pricing system currently established in Israel. Instead, two alternative schemes are introduced: price liberalization, which unifies the prices for all potable water consumers at cost recovery rates, and marginal pricing, lifting the potable water price to the cost of desalination. It is found that both schemes yield a double dividend by simultaneously saving water and increasing economic growth. Thereby, marginal pricing allows for larger water savings while price liberalization results in higher economic growth. In the third article, the model is further refined: the quantity of sewage available for reclamation is linked to the water consumption of economic entities connected to a sewer system. This allows to depict cascading water use and to endogenously estimate the marginal value of unpurified sewage. It is shown that a consideration of this link is crucial, if a high share of potable water is reclaimed and used. In this case, reducing the potable water consumption of municipalities also negatively affects the availability of reclaimed wastewater and thereby reduces its potential as a substitute for potable water. These case studies provide evidence of the validity of the model developed. The model results cannot necessarily be anticipated, as they are the outcome of complex interrelations within the model and none of the previous models has the capacity to capture all the relevant aspects of the water sector which influence these outcomes. Therefore, it is concluded that STAGE_W constitutes a helpful tool to implement a more sustainable management of water resources, allowing policy makers to ex-ante estimate the economy-wide effects of water related decisions. As the whole economy is depicted, a more holistic picture of effects resulting from changes in the water sector can be drawn in comparison to single sector models or cost-benefit analyzes.
Factor mobility and heterogeneous labour in computable general equilibrium modelling
(2014) Flaig, Dorothee; Grethe, Harald
The representation of labour markets in Computable General Equilibrium (CGE) models is characterised by a trade-off between data representation and data availability. Models are by definition abstract and simplified pictures of the real world: as a map of scale 1:1 does not help to find an unknown destination, a model which perfectly depicts the real world would hardly help to analyse adjustment effects of policy changes or macroeconomic shocks. When the analysis is focused on distributional issues, it seems obvious that such an analysis can only be based on models that differentiate at least more than one household group. Household groups characteristically differ in factor endowment and since factor income– besides price effects – is a main determinant of welfare analysis, the specification of labour markets crucially determines the analysis. There are mainly two possibilities to specify the labour market in a CGE model: First, the labour market can be set up as competitive market with perfect substitutability between individual workers on that market. With this setup, wages must be equal among labour types and sectors because every difference in wages provokes adjustments, which finally equalise wages again. In contrast, data reports typically significant wage differences between labour types that can only originate from imperfect labour markets. Thus, the second option is to depict these wage differences by imperfect substitutability of individual workers in the production process. But data on substitution possibilities of labour demand between different labour types is weak and estimations of substitution elasticities are in most of the cases not available. Meanwhile, in the real world, wages differ in various dimensions and in models labour types are typically differentiated by age, gender, skill level or occupation. When differentiating labour types within these dimensions, wage differences become possible and can be explained by transformation limitations between characteristics: e.g., wage differences between female and male workers are originating from the fact that female workers cannot become male workers. This differentiation has the effect that in most of the models, transformation between the characteristics of a dimension is no longer possible and workers stay in a specific labour type. Typically labour types are not differentiated by sector of employment and, thus, are assumed homogeneous amongst sectors. Movement of workers between sectors seems possible; nevertheless, data reports partly huge wage differences between different sectors of an economy. As a solution, CGE models typically include an efficiency parameter which allows calibrating the model according to the data, but the model assumes still homogeneous labour which should be priced equal. Thus, the efficiency parameter does not economically explain the existence of these wage differences. This thesis presents a comprehensive and flexible framework to introduce imperfect factor markets in CGE models. Labour mobility between labour types is controlled by migration functions where the degree of mobility is controlled by elasticities that govern the responsiveness of migration to changes in relative wages. Finally, the model provides the user with three additional instruments to control the operation of labour markets. First, the user can control the stock flow relationship for each labour type, e.g., does a migrating worker keep her productivity from the initial activity, adopt that of the destination activity or something in between; second, the user controls the flexibility of the labour market by setting the migration elasticities between activity blocks; and third, the setting of adjustment parameters determines the (assumed) costs of migrating. The analysis of productivity effects and costs of factor reallocation emphasises the relevance and influence of labour market specifications on model outcomes. Thus, this thesis sets the base for a careful setup and test of labour market assumptions applied in CGE models.
Village level impacts of trade reform in China
(2011) Kleinwechter, Ulrich; Grethe, Harald
During the past decades, China has carried out ambitious economic reforms. The reforms have resulted in strong economic growth and considerable reductions in poverty. The current situation, however, is also characterised by rising tensions within the country, caused, among others, by rural-urban and inland-coastal disparities. In this situation, rural-urban migration occupies central stage, both for the livelihoods of rural households and for the outcome of further policy reforms. In this context, trade liberalisation for a number of reasons can be expected to play an important role for the future development of poverty and inequality in the country. Against this background, the present work analyses and assesses the impacts of further trade liberalisation efforts on a rural community in south-western China. Recognising the importance of these issues, emphasis is put on poverty, inequality and rural-urban labour migration. Subject of the analysis is a village located in one of the less developed counties of Guizhou province. Thereby, this village level case study aims not only at shedding light on the impacts of future trade reforms on this particular village, but also has the objective of providing more general insights into the mechanisms which are at work when trade policies are brought down to a local level. The study seeks to promote an enhanced understanding of relevant processes in similar settings, allowing for improved assessments in the field of development oriented trade policy analysis. The objectives of the study are achieved by the application of a village computable general equilibrium model embedded into a macro-microsimulation framework. In this framework, aggregate results from a national level CGE study of unilateral trade liberalisation in China are administered as a policy shock to the village model, which offers a highly disaggregated picture of the village economy and allows for a detailed analysis of the impacts of the reform. The village model which is a CGE representation of the village economy forms the core part of the present study. The households which make up the village community are depicted by six representative household groups, each of them represented by an agricultural household model. The six groups stratify the village population by household demographics and income levels, thus distinguishing the households by their migration behaviour and by relative poverty. Each representative household can carry out up to four productive activities: agriculture, formal and informal local off-farm work as well as migration. Agricultural production is modelled with a nested Leontief-Cobb-Douglas technology. Household consumption is represented by a per-capita LES which includes self-consumption of agricultural output, purchased goods as well as leisure. By incorporating the assumption of a perfectly neoclassical village land market, the model makes a step towards the modelling of land rental transactions which take place within the village. The land market links the households together and creates local general-equilibrium effects which greatly affect the outcome of the policy reform. The salient feature of the village model is a novel approach towards the modelling of the households' labour allocation behaviour, and in particular the migration behaviour. The approach takes into account household preferences towards work in different types of employment as well as feedback links between household migration and consumption demand. This is achieved by the assumption of a composite utility function, which defines the behaviour of each household in the model. The composite utility function consists of a consumption utility function, which captures utility created by commodity consumption, and a labour utility function, which allows to account for the utility or disutility associated with the participation in different types of employment. By considering the disutility arising from certain employment options, the current work offers an important contribution to the methodological development of agricultural household and village equilibrium modelling. It provides a modelling framework, which paves the way for similar applications in different settings and opens an interesting field for future applications, which may also extend to levels of higher regional aggregation. At the same time, the model constitutes a highly valuable tool for the analysis of the migration behaviour of rural households under different policy scenarios along the lines of household demographics and income levels. Thereby, the availability of transparent information on socio-economic characteristics of the household groups, the remittances behaviour as well as the disutility connotations of migration offer great support to such efforts. Not least, it allows deriving theoretically sound hypotheses on the migration behaviour of rural households in different policy situations.

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