This dissertation consists of three essays in Macroeconomics. The first essay assesses the impact of offshoring on aggregate productivity and on labour market outcomes by developing a dynamic general equilibrium model in which workers acquire task-specific human capital. The dynamic nature of the model allows for differentiation between short and long run effects. While the welfare effects are unambiguously positive and independent of the skill-content of the offshored and inshored tasks, the distribution of the gains from trade critically depends on the time horizon. Workers with human capital specific to the inshored tasks gain over those performing offshored tasks in the short term. In the long run, the gains from trade are equally distributed among ex-ante identical agents. The model is calibrated to the U.S. economy; welfare gains from increased offshoring are found to be substantial even after taking into account losses in specific human capital for workers in the offshored occupations along the transition path. The second essay integrates the insight that exporting firms are typically more productive and employ higher skilled workers into a directed search model of the labour market. The model generates a skill premium as well as residual wage inequality among identical workers. Trade liberalization will cause a reallocation of workers both within and across industries, which will affect both types of inequality in a way that is consistent with findings from the empirical literature on trade and inequality. A calibrated version of the model can account for much of the effect of the Canada-U.S. Free Trade Agreement on the Canadian labour market. The final essay incorporates a distortionary tax into the microfoundations of money framework and revisits the optimum quantity of money. An optimal policy may consist of both a positive tax rate and a positive nominal interest rate: if the buyer's surplus share is inefficiently small, the intensive margin is distorted and the constrained optimal policy combines a sales tax with a money growth rate above that prescribed by the Friedman rule. Monetary, but not fiscal, policy alters the agent's bargaining position, leaving a special role for a deviation from the Friedman rule.

This thesis examines the income-shifting behaviour of multinational corporations when they are facing international corporate income tax rate differentials. Multinational corporations may apply tax-planning strategies in order to shift their pre-tax profits from a high-tax country to a low-tax country; therefore, the same amount of money would be subject to a lower tax rate. By doing so, multinational corporations minimize their global tax liabilities without changing their total income. The first essay develops a simple general equilibrium model by which to explore the effect of tax planning on the host country in terms of social welfare and optimal taxation. We endogenize multinational corporations’ investment decisions by allowing the user cost of capital to be affected by shifting decisions. We find that if tax rates are not excessively high, then an increase in tax planning activity causes a rise in optimal corporate tax rates, and a decline in multinational investment. Thus, fears of a “race to the bottom” in corporate tax rates may be misplaced. Also, we find that the residents in high-tax countries may be better off with (some) income shifting. We prove that there is an interior optimal thin capitalization rule (a restriction on the debt-to-equity ratio) that is lower than the degree of tax planning preferred by multinational firms. The second essay empirically examines the evidence of income-shifting behaviour of Canadian multinational corporations. The results are consistent with the income-shifting hypothesis that multinationals are inclined to shift their pre-tax profits to low-tax jurisdictions. I find that having non-arm’s length transactions with related parties in tax-haven countries has a significant negative impact on the taxable income that is reported in Canada. Further, I compare the different roles between small havens and large havens and find that the effect of having transactions with small havens is significantly negative, while the effect of having transactions with large tax havens is not significant. Also, I find that if Canadian corporations control their foreign-related corporations with whom they had non-arm’s length transactions, then they are more likely to report lower taxable incomes in Canada than are those that have other types of relationships with their foreign-related corporations.

The relationships between competition, innovation, and regulation have long been studied in an attempt to understand and evaluate the effect of regulation on the wealth and growth of nations. Recent empirical work has emerged taking advantage of the still ongoing proliferation of ever more disaggregated data to shed more light on these relationships and at the same time uncover new puzzles in need of explanations. This thesis is an attempt to address the discrepancies between some of these newly discovered phenomena and current theory. In Chapter 1 I introduce an insight of Friedrich Hayek - that competition allows a thousand flowers to bloom, and discovers the best among them - into a conventional model of Schumpeterian innovation. I show how the model can account for two seemingly contradictory empirical phenomena, a positive relationship between competition and industry-level productivity growth, and an inverted-U relationship between competition and firm-level innovation. In Chapter 2 I extend the model to investigate the effects of patent protection on competition and innovation, and to understand the interaction between patent policy and product-market regulation. I calibrate the model to show that patent protection in the U.S. is depressing competition, innovation, growth, and welfare. Using patent and citation data, I further provide empirical evidence supporting the implications of the model. In Chapter 3 I investigate the impact of regulatory entry barriers to new firms on aggregate output and total factor productivity. Following recent work by Thomas J. Holmes and John J. Stevens, I extend a standard model of monopolistic competition to account for the existence of both niche markets and mass markets within industries. Calibrating the model using U.S. manufacturing data, I show this extension goes a long way towards explaining the large gap between empirical estimates of the impact of barriers to entry and the quantitative predictions of current models.

The relationships between competition, innovation, and regulation have long been studied in an attempt to understand and evaluate the effect of regulation on the wealth and growth of nations. Recent empirical work has emerged taking advantage of the still ongoing proliferation of ever more disaggregated data to shed more light on these relationships and at the same time uncover new puzzles in need of explanations. This thesis is an attempt to address the discrepancies between some of these newly discovered phenomena and current theory. In Chapter 1 I introduce an insight of Friedrich Hayek - that competition allows a thousand flowers to bloom, and discovers the best among them - into a conventional model of Schumpeterian innovation. I show how the model can account for two seemingly contradictory empirical phenomena, a positive relationship between competition and industry-level productivity growth, and an inverted-U relationship between competition and firm-level innovation. In Chapter 2 I extend the model to investigate the effects of patent protection on competition and innovation, and to understand the interaction between patent policy and product-market regulation. I calibrate the model to show that patent protection in the U.S. is depressing competition, innovation, growth, and welfare. Using patent and citation data, I further provide empirical evidence supporting the implications of the model. In Chapter 3 I investigate the impact of regulatory entry barriers to new firms on aggregate output and total factor productivity. Following recent work by Thomas J. Holmes and John J. Stevens, I extend a standard model of monopolistic competition to account for the existence of both niche markets and mass markets within industries. Calibrating the model using U.S. manufacturing data, I show this extension goes a long way towards explaining the large gap between empirical estimates of the impact of barriers to entry and the quantitative predictions of current models.

In this thesis we are particularly concerned about the development of new and improved influenza vaccines with in the changing external economic environment. The thesis covers two major objectives: 1) Developing methods to estimate the costs of influenza vaccine development The ability to calculate the development costs for specific medicines and vaccines are important to inform investments in innovation. Unfortunately, the literature is predominated by non-reproducible studies only measuring aggregate level drug research and development (R&D) costs. Further, the literature appears very scant on the development costs of new vaccines. In the first objective we therefore describe methodology that improves the transparency and reproducibility of primary indication expected R&D expenditures of influenza vaccines. 2) Developing methods to focus influenza vaccine R&D towards meeting cost-effectiveness targets The second objective is focused on how to forecast evidence requirements for cost effectiveness analysis (CEA) of influenza vaccines. The guidance to manufacturers on what evidence would optimally support acceptable CEA is scant. The absence of such guidance and the increased emphasis on CEA can add significant risk to the vaccine development process. Thus we perform a Value of Information (VOI) analysis on the parameters of a cost effectiveness model designed to evaluate new influenza vaccines designed for use in elderly adults. The results of this study highlight what type of endpoints that should be studied in influenza vaccine R&D programs. From our work on these objectives we are able to shed light on economics that should be considered while developing a new influenza vaccine. Though our contribution is mainly methodological, we conclude the thesis suggesting changes in the way the vaccine industry and HTA agencies work. These changes are in our view necessary to meet society’s demand for new vaccines that deliver high value for money.

In this thesis we are particularly concerned about the development of new and improved influenza vaccines with in the changing external economic environment. The thesis covers two major objectives: 1) Developing methods to estimate the costs of influenza vaccine development The ability to calculate the development costs for specific medicines and vaccines are important to inform investments in innovation. Unfortunately, the literature is predominated by non-reproducible studies only measuring aggregate level drug research and development (R&D) costs. Further, the literature appears very scant on the development costs of new vaccines. In the first objective we therefore describe methodology that improves the transparency and reproducibility of primary indication expected R&D expenditures of influenza vaccines. 2) Developing methods to focus influenza vaccine R&D towards meeting cost-effectiveness targets The second objective is focused on how to forecast evidence requirements for cost effectiveness analysis (CEA) of influenza vaccines. The guidance to manufacturers on what evidence would optimally support acceptable CEA is scant. The absence of such guidance and the increased emphasis on CEA can add significant risk to the vaccine development process. Thus we perform a Value of Information (VOI) analysis on the parameters of a cost effectiveness model designed to evaluate new influenza vaccines designed for use in elderly adults. The results of this study highlight what type of endpoints that should be studied in influenza vaccine R&D programs. From our work on these objectives we are able to shed light on economics that should be considered while developing a new influenza vaccine. Though our contribution is mainly methodological, we conclude the thesis suggesting changes in the way the vaccine industry and HTA agencies work. These changes are in our view necessary to meet society’s demand for new vaccines that deliver high value for money.

This dissertation investigates the causes and effects of the decentralization of environmental regulation. In Chapter 1, I provide an historical overview of air pollution regulation in the U.S., which serves as the context for this dissertation. Chapter 2 develops a model of interjurisdictional environmental regulation where economic and pollution spillovers may arise. I show that these spillovers may cause local jurisdictions to seek decentralized regulatory control, which in turn generates inefficient outcomes. Chapter 3 investigates empirically whether the decentralization of air pollution regulation in the U.S. during 1971-1990 caused an increase in transboundary air pollution. I find that the transfer of regulatory authority from the federal government to an individual state generated a significant increase in air pollution observed at monitors in downwind states. These findings vary with distance to those states creating transboundary spillovers and across pollutants with different atmospheric lifetimes. This is consistent with the notion that local governments do not account for externalities that their policies generate. The final chapter estimates a model of interjurisdictional environmental regulation that allows for transboundary pollution and competition for firms. The interdependence in jurisdictions’ regulatory choices from the spillovers creates a challenging identification problem, which I address using exclusion restrictions derived from the atmospheric physics of pollution propagation. For total suspended particulates, transboundary pollution will typically occur only between contiguous neighbours in the direction of the wind. This implies that exogenous factors affecting pollution dispersion (such as wind velocity) in distant jurisdictions can serve as instruments for neighbours' endogenous policy choices: they do not affect a given jurisdiction's regulatory choice directly, but directly affect the choices of that jurisdiction's neighbours. I find that a shift from centralized to state regulatory control causes significant increases in the number of polluting firms that locate in that state and decreases elsewhere; the same shift increases ambient air pollution at home and in other states. I also find that state regulatory choices respond much more to changes in the number of firms than to pollution. Further, I show that the degree of decentralization and the observed pollution outcomes are far from the counterfactual efficient levels.

This dissertation investigates the causes and effects of the decentralization of environmental regulation. In Chapter 1, I provide an historical overview of air pollution regulation in the U.S., which serves as the context for this dissertation. Chapter 2 develops a model of interjurisdictional environmental regulation where economic and pollution spillovers may arise. I show that these spillovers may cause local jurisdictions to seek decentralized regulatory control, which in turn generates inefficient outcomes. Chapter 3 investigates empirically whether the decentralization of air pollution regulation in the U.S. during 1971-1990 caused an increase in transboundary air pollution. I find that the transfer of regulatory authority from the federal government to an individual state generated a significant increase in air pollution observed at monitors in downwind states. These findings vary with distance to those states creating transboundary spillovers and across pollutants with different atmospheric lifetimes. This is consistent with the notion that local governments do not account for externalities that their policies generate. The final chapter estimates a model of interjurisdictional environmental regulation that allows for transboundary pollution and competition for firms. The interdependence in jurisdictions’ regulatory choices from the spillovers creates a challenging identification problem, which I address using exclusion restrictions derived from the atmospheric physics of pollution propagation. For total suspended particulates, transboundary pollution will typically occur only between contiguous neighbours in the direction of the wind. This implies that exogenous factors affecting pollution dispersion (such as wind velocity) in distant jurisdictions can serve as instruments for neighbours' endogenous policy choices: they do not affect a given jurisdiction's regulatory choice directly, but directly affect the choices of that jurisdiction's neighbours. I find that a shift from centralized to state regulatory control causes significant increases in the number of polluting firms that locate in that state and decreases elsewhere; the same shift increases ambient air pollution at home and in other states. I also find that state regulatory choices respond much more to changes in the number of firms than to pollution. Further, I show that the degree of decentralization and the observed pollution outcomes are far from the counterfactual efficient levels.

Master of Arts / Department of Economics / Steven P. Cassou / This report shows the mathematics behind the solution to continuous time optimization problems. It shows how to specify the Hamiltonian function, how to use the Hamiltonian to obtain the optimal conditions for a typical economic optimal control problem and applies these techniques to several optimal control problems commonly encountered in macroeconomics. An appendix shows how to set up the optimal conditions for the case in which the state and co-state variables are both vectors. A second appendix shows how to approach the control situation for a system of optimal control problems where the co-state variable for the first sub-optimal control problem is the state variable for the second sub-optimal control problem.

Doctor of Philosophy / Department of Economics / Philip G. Gayle / This dissertation seeks to answer questions regarding changes in the competitive environment in international air travel markets which has undergone rapid changes since the early 1990s. Specifically, the research in this dissertation examines policies regarding cooperation among airlines in international air travel markets as well as how cooperation affects an airline's product quality. These issues are explored in two essays which comprise my dissertation. The first essay explores the efficacy of a policy known as a carve-out. Airlines wanting to cooperatively set prices for their international air travel service must apply to the relevant authorities for antitrust immunity (ATI). While cooperation may yield benefits, it can also have anti-competitive effects in markets where partners competed prior to receiving ATI. A carve-out policy forbids ATI partners from cooperating in markets policymakers believe will be most harmed by anti-competitive effects. We examine carve-out policy applications to three ATI partner pairings, and find evidence of tacit collusion in carve-out markets in spite of the policy, calling into question whether consumers benefited from application of the policy in the cases studied. The second essay examines the relationship between product quality and airline cooperation. Much of the literature on airline cooperation focuses on the price effects of cooperation. The key contribution of our paper is to empirically examine the product quality effects of airline cooperation. Two common types of cooperation among airlines involve international alliances and antitrust immunity (ATI), where ATI allows for more extensive cooperation. The results suggest that increases in the membership of a carrier's alliance or ATI partners are associated with the carrier's own products having more travel-convenient routing quality. Therefore, a complete welfare evaluation of airline cooperation must account for both price and product quality effects.