Essays on economic dynamics

Abstract

The dissertation includes two sections, which apply dynamic economic models to study different economic issues. The Section Two studies the optimal design of the Pacific Salmon Treaty, which was signed by the U.S. and Canada in 1999 to share salmon on the Pacific coast. Moral hazard exists because countries may steal from each other. If a country’s observed output is suspiciously too high, the treaty either reduces the country’s future share, or asks the country to make a monetary transfer to its opponent. A calibrated version of our model shows that it is optimal for the U.S. to pay Canada $327.58 million every 30.68 years. Switching to the optimal contract improves the total welfare by 1.54%. The Section Three studies Chinese housing market. China’s housing price has been growing steadily over the past decade, despite the fact that capital return has fallen dramatically. In a rational bubble framework, the fast growth rate of housing price implies a risk of the burst of housing bubble. We study the impact of bubble burst on China’s economy, where the government’s infrastructure investment, largely funded by land sale, is excessive. Our calibrated model shows that if the bubble bursts in 2017, then in the short run GDP growth rate falls to 2.3% due to the hit to the housing sector, but GDP in the long run exceeds that under the bubble because excessive infrastructure investment is no longer sustainable. If the bubble remains, however, implementing property tax will reduce its size and increase long-run output.