Table Of ContentMicroeconomic Simulation Models for Public Policy Analysis
A 1978 conference sponsored by
The Institute for Research on Poverty
Mathematica Policy Research, Inc.
The National Science Foundation
This is a volume in the
Institute for Research on Poverty Monograph Series
A complete list of titles in this series appears at the end of this volume.
MICROECONOMIC SIMULATION MODELS
FOR PUBLIC POLICY ANALYSIS
Volume 2
Sectoral, Regional, and General Equilibrium Models
Edited by
Robert H. Haveman
Institute for Research on Poverty
University of Wisconsin-Madison
Madison, Wisconsin
Kevin Hollenbeck
Urban Systems Research and Engineering
Washington, D. C.
ACADEMIC PRESS
A Subsidiary of Harcourt Brace Jovanovich, Publishers
New York London Toronto Sydney San Francisco
This book is one of a series sponsored by the Institute for Research on Poverty
of the University of Wisconsin pursuant to the provisions of the
Economic Opportunity Act of 1964.
Copyright © 1980 by the Board of Regents of the University of Wisconsin System
on behalf of the Institute for Research on Poverty.
All rights reserved.
No part of this pubhcation may be reproduced or transmitted in any form or by any means,
electronic or mechanical, including photocopy, recording, or any information storage and
retrieval system, without permission in writing from the publisher.
The views expressed in this book are those of the authors; they do not necessarily represent the
official views of the institutions with which the authors are affiliated.
ACADEMIC PRESS, INC.
Ill Fifth Avenue, New York, New York 10003
United Kingdom Edition published by
ACADEMIC PRESS, INC. (LONDON) LTD.
24/28 Oval Road, London NW1 7DX
Library of Congress Cataloging in Publication Data
Main entry under title:
Microeconomic simulation models for public policy
analysis.
(Institute for Research on Poverty monograph series)
"A 1978 conference, sponsored by the Institute for
Research on Poverty, Mathematica Policy Research, Inc.,
the National Science Foundation."
Includes bibliographical references and index.
CONTENTS: v. 1. Distributional impacts.—v. 2.
Sectoral, regional, and general equilibrium models.
1. Policy sciences—Mathematical models—
Congresses. 2. Microeconomics—Mathematical models—
Congresses. I. Haveman, Robert H. II. Hollenbeck,
Kevin. III. Wisconsin. University—Madison. Institute
for Research on Poverty. IV. Mathematica Policy Research, Inc.
V. United States. National Science Foundation. VI.
Series: Wisconsin. University—Madison. Institute for
Research on Poverty. Monograph series.
H22.M5 338.5'01'51 79-8866
ISBN 0-12-333202-8 (v. 2)
PRINTED IN THE UNITED STATES OF AMERICA
80 81 82 83 9 8 7 6 5 4 3 2 1
We would like to dedicate this book to David Kershaw (1942-1979),
founder of Mathematica Policy Research,
supporter of and participant in this conference,
colleague and friend.
■fftj^ The Institute for Research on Poverty is a national center for research
ES S3 established at the University of Wisconsin in 1966 by a grant from the
Wwr Office of Economic Opportunity. Its primary objective is to foster basic,
I multidisciplinary research into the nature and causes of poverty and means
to combat it.
In addition to increasing the basic knowledge from which policies aimed at the
elimination of poverty can be shaped, the Institute strives to carry analysis beyond
the formulation and testing of fundamental generalizations to the development and
assessment of relevant policy alternatives.
The Institute endeavors to bring together scholars of the highest caliber whose
primary research efforts are focused on the problem of poverty, the distribution of
income, and the analysis and evaluation of social policy, offering staff members
wide opportunity for interchange of ideas, maximum freedom for research into
basic questions about poverty and social policy, and dissemination of their findings.
Ύ \ \ ^ \^ Mathematica Policy Research, Inc. (MPR) was founded in 1968
A ü i ^A to operate the nation's first large-scale social policy experiment,
-*- the New Jersey Negative Income Tax Experiment. Since that time,
MPR has expanded considerably and now conducts social policy research, social
science experiments, and large-scale evaluation research in the areas of income se-
curity and welfare, health, housing, education and training, and micro simulation
modeling.
MPR has a staff of over 300 persons who specialize in economic, sociological,
and survey research, policy analysis, systems design and implementation, and na-
tional sample and specialized survey operations. The company has attracted a pro-
fessional research and operating staff with a strong commitment to social change
through policy research in the public sector. Corporate headquarters and the Re-
search, Survey, and Information Systems divisions are located in Princeton, New
Jersey. The Research Division also maintains an office in Madison, Wisconsin. MPR
Denver is located in Denver, Colorado, and the Policy Studies Division is located in
Washington, D.C
LIST OF FIGURES
1.1 Scheme of Portfolio Allocation for Households 15
1.2 Flow Chart Illustratingthe Sequence of Decision Making
Concerning Prices 16
1.3 Employment Subsidized under AlternativeWage
Subsidy Schemes 37
2.1 Macro Delivery and Income Determination Structure of
Swedish Model 53
2.2 Business Decision System (One Firm) 56
2.3 Production System (One Firm) 58
2.4 Ordering of Variables, Policy Parameters,and Coefficients
of Entire Micro to Macro Model 62
2.5 Tax System 63
2.6 GNP Effects of Value-added and Payroll Tax Changes 72
2.7 Sector Effects on Industrial Output of Complete Change of
Tax over Five-year Period 83
2.8 Relationship between Rates of Return (RR) and Growth in
Output (DO) of Individual Firms in the Market 84
2.9 Rates of Change in Nominal Wage Coststo Firms (DW) and
Real Rates of Return (RR) after Inflationary Period in
Investment Goods Sector 86
3.1 Outline ofthe Interrelation between Data Setsfor the Model 104
4.1 A Schematic Flow Chart ofthe Simulation Model 140
xi
LIST OF TABLES
1.1 Summary of Sequence of Events in a Round of the
Transactions Model 6
1.2 Information Continually Updated and Available Concerning
Each Fictional Firm during a Run of the Transactions Model 8
1.3 Information Continually Updated and Available Concerning
Each Fictional Person during a Run of the Transactions Model 12
1.4 Market Participation in Transactions Model, by Sector 18
1.5 Cash Flows Between Sectors Occurring in the Transactions
Model, by the Event Generating Them 20
1.6 Gross National Product 24
1.7 Unemployment Rates 25
1.8 National Income 26
1.9 Personal Income and Outlay 27
1.10 Interest Rates 28
1.11 Balance Sheet for Nonfinancial Firms 30
1.12 Results of Monetary and Fiscal Policy Experiments 32
1.13 Contrasting Results of Experimental Runs with Two Forms
of Wage Subsidy, 1975 11 l-l V 37
1.14 Within-sample Forecast Accuracy of Bennett, Bergmann, and
Data Resources Quarterly Models of the U.S. Economy,
1973-1975 46
2.1 Swedish Taxes 65
2.2 Sensitivity Analysis with Value-added and Payroll Taxes 73
2.3 Effect of Temporary Lowering of Value-added Tax by 3
Percentage Points, 2nd and 3rd Quarters 1974 77
2.4 "Budget Neutral" Changes Between Payroll and Value-added
Tax Systems 79
3.1 Classification of Industries, Consumer Goods, and Consumer
Groups Used in Model 102
xiv List of Tables
3.2 U.S. Taxes and Their Treatment in the Model 106
3.3 fj Proportion and Tax Rate on Tax on Capital (CTR) for
Each Tax Scheme 117
3.4 Welfare Gains under Various Assumptions 119
3.5 Percentage Changes in Real Income after Income Taxes and
Transfers by Consumer Group, for Each Tax Replacement 120
3.6 Percentage Changes in Relative Prices and Quantity Outputs
by Industry, for Each Tax Replacement 122
4.1 Changes in Disposable Income from PBJI, by Income Source 141
4.2 Distribution of Change in Disposable Income by Income Class 143
4.3 Change in Disposable Income and Gross Output from PBJI,
by Region 144
4.4 Ratios of Gross Output to Changes in Disposable Income and
Induced Manpower Demand from PBJI, by Region 145
4.5 Net Change in Gross Output from PBJI and Federal Income
Surtax, by Production Sector 147
4.6 Net Change in Induced Manpower Demand from PBJI and
Federal Income Surtax, by Occupation 148
4.7 Earnings Class Net Impact Indicators from PBJI and Federal
Income Surtax, by Region 149
5.1 Characteristics of Four Hypothetical Metropolitan Areas 182
5.2 No-Policy Simulation Results, Eight Cases, 1960-1970 185
5.3 Assumed Rehabilitation in 1960 188
5.4 Percentage Changes in Housing Services from the Stock under
a Rehabilitation Program 192
5.5 Absolute Changes in Housing Services from the Stock under
a Rehabilitation Program 195
5.6 Changes for Households under a Rehabilitation Program 198
5.7 Change in Housing Services from the Stock under a Combined
Household-Assistance and Rehabilitation Program 201
5.8 Changes for Households under a Combined Housing-Assistance
and Rehabilitation Program 202
6.1 National Model Outputs 215
6.2 Regional Model Outputs 218
6.3 1973 IDIOM National Income Accounts Calibration Procedures 220
6.4 IDIOM Parameter and Data Documentation 222
6.5 IDIOM Dimensionality 223
6.6 Arms Export Reduction by Industry 225
6.7 National Income and Product Impacts for Four Scenarios of
Arms Export Reduction 226
6.8 Selected Effects of Arms Export Reduction on National
Industry, Occupation, and Primary Materials 228
List of Tables xv
6.9 Regional and State Employment Impacts of Four Scenarios of
Arms Export Reduction 229
6.10 Base National Model Variables and Parameters 234
6.11 Regional Model Variables and Parameters 238
LIST OF CONTRIBUTORS
KENNETH J. ARROW, Joan Kenney Professor of Economics and Professor of
Operations Research, Stanford University, Stanford, California
RICHARD S. BARR, Assistant Professor of Management Science, Southern Meth-
odist University, Dallas, Texas
HAROLD BEEBOUT, Director, Policy Studies Division, Matherhatica Policy Re-
search, Inc., 2101 L Street, N.W., Washington, D.C.
ROBERT L. BENNETT, Associate Professor of Economics, University of Maryland—
College Park, College Park, Maryland
BARBARA R. BERGMANN, Professor of Economics, University of Maryland-
College Park, College Park, Maryland
DAVID BETSON, Economist, Office of the Secretary, Office of Income Security
Policy/Research, Office of the Assistant Secretary for Planning and Evalua-
tion, U.S. Department of Health, Education and Welfare, Washington, D.C.
GERARD M. BRANNON, Professor of Economics, Georgetown University, Wash-
ington, D.C.
STEVEN B. CALDWELL, Assistant Professor of Sociology, Cornell University,
Ithaca, New York
ANNE P. CARTER, Professor of Economics, Brandeis University, Waltham, Massa-
chusetts
BENJAMIN CHINITZ, Vice President for Regional Research, Abt Associates; Pro-
fessor of Economics, SUNY-Binghamton, Binghamton, New York
LEONARD DRABEK, Economist, Manpower Analysis Branch, Health Resources
Administration, U.S. Department of Health, Education and Welfare, Wash-
ington, D.C.
STEPHEN P. DRESCH, Chairman, Institute for Demographic and Economic Studies,
Inc., 155 Whitney Avenue, New Haven, Connecticut
GUNNAR ELIASSON, President, Industrial Institute for Economic and Social
Research (IUI), Grevgatan 34, Stockholm, Sweden
xvii
XVIII List of Contributors
DON FULLERTON, Assistant Professor of Economics and Public Affairs, Woodrow
Wilson School of Public and International Affairs, Princeton University,
Princeton, New Jersey
HARVEY GALPER, Associate Director, Office of Tax Analysis, U.S. Treasury De-
partment, Washington, D.C.
IRWIN GARFINKEL, Professor, School of Social Work, University of Wisconsin-
Madison; Director, Institute for Research on Poverty, University of Wisconsin-
Madison, Madison, Wisconsin
AMIHAI GLAZER, Assistant Professor of Economics, University of California,
Irvine, Irvine, California
EDWARD M. GRÄMLICH, Professor of Economics and Public Policy, University
of Michigan, Ann Arbor, Michigan
DAVID GREENBERG, Economist, SRI International, Menlo Park, California
MARTIN GREENBERGER, Professor of Mathematical Sciences, The Johns Hopkins
University, Baltimore, Maryland
BRUCE HAMILTON, Associate Professor of Political Economy, The Johns Hopkins
University, Baltimore, Maryland
ROBERT HARRIS, Executive Vice President, The Urban Institute, 2100 M Street,
N.W., Washington, D.C.
ROBERT H. HAVEM AN, Professor of Economics, University of Wisconsin—Madison ;
Fellow, Institute for Research on Poverty, University of Wisconsin—Madison,
Madison, Wisconsin
KEVIN HOLLENBECK, Senior Analyst, Urban Systems Research and Engineering,
1120 19th Street, N.W., Washington, D.C.
MARTIN HOLMER, Economist, Office of the Secretary, Office of Income Security
Policy/Research, Office of the Assistant Secretary for Planning and Evalua-
tion, U.S. Department of Health, Education, and Welfare, Washington, D.C.
JAMES R. HOSEK, Economist, Rand Corporation, 1700 Main Street, Santa Monica,
California
MICHAEL D. INTRILIGATOR, Professor of Economics, UCLA; Research Associ-
ate, Human Resources Research Center, Los Angeles, California
RICHARD KASTEN, Economist, Office of the Secretary, Office of Income Secur-
ity Policy/Research, Office of the Assistant Secretary for Planning and Evalu-
ation, U.S. Department of Health, Education, and Welfare, Washington, D.C.
JONATHAN R. KESSELMAN, Associate Professor, Department of Economics,
University of British Columbia, Vancouver, B.C., Canada
NICHOLAS M. KIEFER, Assistant Professor of Economics, University of Chicago,
Chicago, Illinois
LARRY J. KIMBELL, Director of Economics Models, UCLA Business Forecasting
Project; Associate Professor, Graduate School of Mangement, UCLA; Research
Associate, Human Resources Research Center, Los Angeles, California
A. THOMAS KING, Economist, Office of Economic Research, Federal Home Loan
Bank Board, Washington, D.C.
JILL A. KING, Senior Researcher,Mathematica Policy Research, Inc., 2101 L Street,
N.W., Washington, D.C.
