Table Of ContentCONSUMERWELFAREANDVARIETY
By
KAYOKOISHIKAWA
ADISSERTATIONPRESENTEDTOTHEGRADUATESCHOOL
OFTHEUNIVERSITYOFFLORIDAINPARTIALFULFILLMENT
OFTHEREQUIREMENTSFORTHEDEGREEOF
DOCTOROFPHILOSOPHY
UNIVERSITYOFFLORIDA
1998
ACKNOWLEDGMENTS
TheauthorisindebtedtoDr.EliasDinopoulosandDr.BinXufortheirhelpful
suggestionsandcommentsonthesecondchapter. Theauthoralsoreceivedgreathelp
withthethirdchapterfromDr.StevenSlutsky. Dr.ChrisMcCartyandDr.John
ScogginsattheBureauofEconomicandBusinessResearchhelpedtogatherthedataset
usedinthefourthchapter.
Theauthorisalsogratefulforsupportandhelpfromthemembersofher
supervisorycommittee:Dr.WilliamBomberger,Dr.DavidDenslow,Jr.,Dr.Douglas
Waldo,Dr.ChrisJames,and,ofcourse,thechair.Dr.MarkRush.
u
TABLEOFCONTENTS
gage
ACKNOWLEDGMENTS
ii
ABSTRACT v
CHAPTERS
INTRODUCTION
1 1
2 TARIFFSANDHYSTERESIS:THEORYANDEMPIRICS.... 5
Introduction 5
Cost-BenefitAnalysis 7
SignificanceoftheSankCost:EmpiricalEvidence 18
ConcludingRemarks 22
3 TRADE,WELFAREANDHYSTERESIS:THECASE
OFDEVELOPINGCOUNTRIES 24
Introduction 24
Cost-BenefitAnalysis 25
ConcludingRemarks 36
4 CONSUMERUTILITY,VARIETYANDAPARTMENT
RENTS 37
Introduction 37
HeterogeneityofHousingServicesandHedonicPrice
Functions 39
HedonicEstimationResults 40
TheProblemoftheStandardUrbanEconomicModel 45
ActivityCircle,ConsumerUtilityandRent 50
ConcludingRemarks 56
5 CONCLUSIONANDSUMMARY 59
APPENDICES
A APPENDIXFORCHAPTERTHREE 60
RelationshipbetweenNandP 60
ConsumerSurplusandTariffRevenue 60
B APPENDIXFORCHAPTERFOUR 62
DataSet 62
EstimationResultsforHedonicRentFunction 63
ProofforA'andA' 65
EffectoftheApartmentConstructionBoominFlorida 66
HousePricevs.Rent 67
REFERENCES 69
BIOGRAPHICALSKETCH 73
IV
AbstractofDissertationPresentedtotheGraduateSchooloftheUniversityofFloridain
PartialFulfillmentoftheRequirementsfortheDegreeofDoctorofPhilosophy
ConsumerWelfareandVariety
By
KayokoIshikawa
May1998
Chairman:ProfessorMarkRush
MajorDepartment:Economics
Theobjectiveofthisdissertationistoshowtheimportanceofallowingthe
numberofvarietiestochangeintheeconomicwelfareanalyses. Itisawell-accepted
ideathatasthevarietyofgoodsandservicesavailableincreases,consumers’utilities
increase. However,detailedstudiesarescarce.
Thefirsttwoessaysfocusonhowinternationaltradeaffectsthewelfareofsmall
countriesbychangingthenumberofvarietiesofgoodsavailable. Previousstudieshave
measuredthelossfromimposingtariffsasbeingverysmalland,hence,concludedthat
closingtheeconomyfromtherestoftheworldcouldstimulateeconomicgrowthina
smallcountry. Thisledmanydevelopingcountriestoadoptimportsubstitutionpolicies,
which,unfortunately,createdanevenbiggergapbetweenthemanddevelopedcountries.
Thisconflictbetweentheoryandrealityshouldbeanalyzed. Bothessaysfeatureamodel
foradevelopingcountry’simportmarketthatassumesforeignfirmsmustpayafixed
entrycostthatdiffersamongfirms. Eachfirmsellsadifferentiatedproduct. Thefirst
essaystudiestheinstantaneouscase,whilethesecondlooksataninfinitehorizonmodel.
Theresultsshowthatanation’swelfareisalwaysimprovedwheneveritstariffrateis
reducedbecausemorefirmsenterandadditionalvarietiesareavailabletoconsumers.
Furthermore,simulationresultsshowthatthewelfaregaincanbelarge.
Thethirdessayanalyzestheeffectofvarietyonapartmentrents. Anempirical
studyshowsthereisanincreaseinrentduringthefirstfifteenyearsdespitethe
depreciationofthebuilding. Simulationresultssuggestthatthisrenthikeistoorapidto
befullyexplainedbytheconventionaltheory,thatthegrowthofthecity’sbordercauses
therentincrease. Thus,theeffectofvarietychange,showntobesignificantinthe
precedingchapters,isintroduced. Anindividual’sutilityincreasesastheimmediate
surroundingofhis/herlivingplace,an“activitycircle,”expandsandoffersmorevarieties
ofdailyactivities. Thisstudyprovidesthefirstempiricalevidencethatrentchanges
dependonboththecity’sgrowthrateandthechangeinthenumberofvarietiesavailable
withintheactivitycircle.
vi
CHAPTER
1
INTRODUCTION
Itiswellknownthatpeoplebenefitfromhavingmorechoices. Indeed,thisfactis
thereasonmonopolisticcompetitivefirmshavemoremarketpowerthanperfectly
competitivefirms:monopolisticallyfirmsacquiremarketpowerbecausetheycanselltheir
uniquenesstoconsumerswhoarewillingtopaymorefortheirpreferencestobebetter
met. Thereisalmostnodisagreementonthepointthatvarietybenefitsconsumers,but
detailedstudiesaresurprisinglyscarce.
Thisdissertationemphasizestheroleplayedbythenumberofvarietiesbystudying
thisissueintworapidlygrowingfieldsofeconomics,internationaltradeandurban
economics. Becausevarietyisassumedtoaddextrautility,ignoringtheeffectofvariety
changesmightcausesomebiasinwelfareanalyses,whichiswhatIfind.
Thenexttwochaptersofthisdissertationfocushowvarietiesintroducedby
internationaltradeaffectsmall,lessdevelopedcountries. Previousstudieshaveignored
thefactthatbyclosingacountryfrominternationaltrade,thenationforgoesthe
opportunitytointroducevarietiesofcommoditiesdevelopedoutsideofthecountry.
Resultingempiricalstudiesreportalossfromrestrictingtradebyimposingtariffsassmall
asonepercentofthenation’sGDP,andthusconcludedthatclosingtheeconomy,
especiallyfromdevelopedcountries,couldstimulatedomesticeconomicgrowth. This
conclusionhasledmanyLDCstoemployimportsubstitutionpolicies,andbroughtlittleor
evennegativegrowthtothosenations.
1
2
Theanalyticalmodelsintroducedinthenexttwochaptershavetwokey
assumptions. First,theimportingnationissmallandlessdeveloped,soitcannotproduce
closesubstitutestoimportedconsumergoods,suchasautomobilesandcomputers.
Second,bothmodelsassumethatforeignprovidersofthesegoodsfacedifferentlevelsof
entrycosts. Whenthetariffrateisdecreased,firmswithhigherentrycostswhohadnot
previouslybeeninthemarketenterandintroducenewgoods. Someofthenewfirmsthen
willnotwithdrawfromthemarketifthegovernmentraisesthetariffratebacktoits
originallevelbecausetheyhavealreadypaidtheentrycosts. Thisentrycost,asunkcost,
createshysteresisintheequilibriumnumberoffirmsand,hence,thenumberofvarietiesof
imports.
Thesecondchapterintroducesastaticmodeltoanalyzetheseeffects. Itassumes
thatasthenumberofvarietiesgrows,theelasticityofdemandforaparticularproduct
increases. Thisallowsanexplicitanalysisoftheeffectsonconsumerwelfarefrom
changingtheelasticityofdemand. Inmymodel,loweringthetariffratebenefitsthe
economyintwoways:byincreasingthevarietyofimportsandbyraisingthequantity
consumedduetotheelasticitychange. Withinthisframework,areductioninthetariff
ratealwaysraisesthewelfareofthecountry. Thisdiscussionstronglyrecommendsthat
developingcountriesopentheireconomybyeliminatingtariffs. Thechapteralsoprovides
someempiricalevidenceontheexistenceofhysteresisintheforeignsuppliers’behavior.
Themodelintroducedinthesecondchapterinvestigatestheinstantaneouseffectof
atariffreductiononthenation’swelfare. Missingfromthatmodel,andfromother
studies,isthelonger-runeffectonthenation’swelfarefromincludinghysteresisinthe
numberoffirmsinthemarket. Thethirdchapterdevelopsaninfinite-horizonmodelthat
3
featuresthehysteresiseffect:areductioninthetariffratechangestheequilibriumnumber
ofvarietiesofproductsimportedtothenationbyahighermagnitudethandoesarisein
thetariffratebyanequalmagnitude. Thisasymmetricmovementresultsinanother
hysteresis,namelyinthenation’swelfare. Inthisanalysis,ascenarioforthegovernment
ofadevelopingcountryisprovided:itcutsthetariffrateonceandthen(unexpectedly)
raisesitbacktoitsoriginallevel. Theresultingmagnitudeofthechangeinwelfareis
surprising. Unlikeconventionalmodelsthatpredictsmallwelfarechanges,thegaininthe
welfarecanbeasmuchasfiftypercentoftheoriginalwelfarelevel.
Thefourthchapterswitchestoanurbaneconomicssettingandexaminestheeffect
changesinthenumberofvarietiesofdailyactivitiesavailableintheimmediate
surroundingareahaveonanindividual’swillingnesstopaytoliveinthelocation. The
extrautilitycreatedbyhavingmoreactivityvarietiesmustbereflectedintherentthe
residentpaystoliveatthelocation. Theobjectiveofthischapteristoshowthatthe
standardurbaneconomictheoryforhowrentchangesovertime,whichlacks
considerationofchangesinthelocalnumberofvarieties,underestimatestherateof
changeinapartmentrentsastheapartmentages.
Thechapterstartsbyverifyingthestandardtheoryqualitativelywhileshowingitis
notsufficientquantitatively. CapozzaandHelsey(1989,1990)introduceamodelthat
connectstherateofincreaseinrenttotherateofcitygrowth. Thisstandardurban
economicmodelhasbeenacceptedwidely,butlittleempiricaltestshavebeenconducted
ofit. Bycomparingahedonicpricefunctionfortheapartmentrentinfastgrowing
countiesinFloridatoanindexforslowergrowingcounties,itisfoundthattheapartment
rentrisesmorequicklyincitiesexperiencingrapidgrowth. Thus,thischapterprovides
4
thefirstempiricalevidencethatthereisindeedapositiverelationshipbetweentherateof
rentincreaseandtherateofgrowthofthecityinwhichtheapartmentislocated.
However,simulationresultssuggestthattheexpansionofthecityisnottheonlyfactor
thatexplainschangesintherent. Hence,thechapterintroducesanewconceptofa
resident’s“activitycircle.” Thatis,anindividualhashis/hercircleinwhichhis/herdaily
activities,suchasgroceryshoppinganddiningout,takeplace. Individualsprefertohave
morevarietiesinthiscircle(itisbettertochoosefromfivedifferentrestaurantsthanonly
one),sotheyarewillingtopayahigherpricetoliveinaplacethatoffersmorevariety.
AddingthiseffectontothemodelintroducedbyCapozzaandHelsleyprovidesabetter
fittingexplanationfortheempiricalresultsonthechangeinrentovertime.
Theresultsfromthosethreechaptersclearlypointoutthesignificanceofvariety
changeintheconsumers’welfareorutility. Theunderestimationoftheeffectofthe
government’stradepolicyonthenation’swelfarecancausemisguidedpoliciesanthe
nationallevel. Theunderestimationofthegrowthrateoftheapartmentrentscancause
misguidedurbandevelopmentplans. Thesearejustafewexamples. Ifthisimportant
conceptisoverlookedinwelfareorcost-benefitanalysisinanyfieldsofeconomic,
underestimationofthechangeinwelfaremightoccur.
