1. 1 A General Equilibrium Analysis at the Economy and Household Level: An Application to Italian Agriculture Riccardo Magnani and Federico Perali University of Verona La Microsumlacion como instrumento de evaluacion de las politicas publicas Madrid, November 15-16 2004

2. 2Organization The macro level The macro level The “MEG” General Equilibrium Model at the Economy Level (scenarios and results) The “MEG” General Equilibrium Model at the Economy Level (scenarios and results) The Political Economy of the Results The Political Economy of the Results The micro level The micro level The Collective Farm-Household Model The Collective Farm-Household Model Estimation technique Estimation technique Econometric Results Econometric Results The General Equilirium Representation of the Estimated Farm-Household Model The General Equilirium Representation of the Estimated Farm-Household Model

3. 3 The micro-macro link

4. 4 The macro Level The “MEG” General Equilibrium Model of the Italian Economy with Emphasys on the Agricultural Sector

5. 5 The MEG Model The Input-Output Table (SAM) of Italian Agriculture (integrated with the rest of the Italian economy) “Non behavioral” simulations impacts on the farm/household/environmental budgets The MEG ISMEA model The ISMEA survey of the Socio-Economic Characteristics of Italian Farm-households The ISMEA survey of the Socio-Economic Characteristics of Italian Farm-households (1881 obs)

6. 6 The 1996 ISMEA Socio Economic Survey The ISMEA survey was designed on the basis of a household collective model of the farm-household aiming at anticipating the real demand for information necessary to estimate the econometric model

7. 7 Data Sources Agricultural Household Rural and Urban Households ISMEA Farm Budgets Italian Input-Output Table Household Budgets ISTAT ’95, Household Budgets Income and Wealth Banca d’Italia ’95, Income Data Leisure Eurisko ’95, Time Use Data

8. 8 The MEG Model The I-O Table 41 sectors of which 23 agricultural 9 agro-industrial 7 other industries 2 services The SAM 11 household classes 7 farm-household types 1 rural class 3 urban classes (low-medium- high income) (Households consume and offer labor) The GovernmentRest of the World and Europe The Structure

9. 9 Labor used by 41 sectors capital used by 41 sectors independent labor used by 23 sectors land used by 23 sectors Indirect taxation net of transfers The MEG Model PRODUCTION PRIVATE CONSUMPTION DEMAND LEISURE ADDED VALUE AVAILABLE INCOME input/output table 41 sectors (41x41) The Model Scheme Table of private consumption (41x11) 11 categories of private consumption Public expenditures private investiments and stocks variations export Time budget (11x1) Dependent labor income Capital income Indipendent labor income Returns from land transfers taxation

10. 10 The MEG Model FARM AND RURAL HOUSEHOLDS The model scheme LIMITED RESOURCES LARGEPROFESSIONALS WITH LABOR REMUNERATION: LOW HIGH RESIDENTIALRETIREDVERY LARGE RURAL URBAN HOUSEHOLDS LOW INCOME MEDIUM INCOME HIGH INCOME FIRMS GOVERNMENT SAM structure

11. 11 The MEG Model Limited ResourcesVery small farm-households with very low gross returns, farm assets and global income. RetiredFarms with retired heads of households. ResidentialsFarms whose heads of households are prevalently employed in non agricultural activities. Small farm-householdsFarms with gross returns less then the first quartile of the distribution. Medium Farm-householdsFarms with gross returns between the first and third quartile of the distribution. Large Farm-householdsFarms with gross returns greater then the third quartile of the distribution. Very Large Farm-householdsFarms with gross returns greater then the third quartile of the distribution (livestock and intensive cultivations). Farm-Household Typologies

12. 12Leisure The stylized time use survey is a peculiar aspect of the ISMEA survey. Leisure information for the urban households come from the Eurisko Survey leisure=recreation+personal care+rest

13. 13 The MEG Model Soft wheat1 Durum wheat2 rice3 Corn and other cereals4 Dried fodder5 Irrigated forage6 potatoes7 tomatoes8 Other vegetables and legumes9 Sugar beet10 Soy bean11 Other industrial crops12 tobacco13 Grapes14 Olives15 Fruit16 Floricolture17 Milk18 Beef19 Forestry20 Sheap and goats21 Other livestock22 Fishery23 Agriculture The sectors

14. 14 The MEG Model Meat24 Milk and other dairy products25 Bread, pasta and other transformed products26 Transformed vegetable and fruit products27 Fats and oils28 Feed29 Transformed tobacco30 Sugar31 beverages32 Gasoline33 Electric energy34 Water35 Fertilizers36 Pesticides37 Other chemical & pharmac. products38 Other industries39 Agro-Industry Other industries Transportation, communication, credit40 Other services41 Services The sectors

15. 15Implications Costs/Returns Ratio(%) With premium Without Premium Durum Wheat63,8125,8 Soft Wheat74,1103,0 Dried Forage21,7 Decoupling An example of a Center Italy Farm

16. 16 The Results Agricultural Labor Demand does not vary significantly for hired labor but farm employment and wages are significantly lower. Non Farm LaborFarm Labor Var. % Demand-0,11-0,76 Price-0,57 Impact on the Agricultural Sector Impact on the Agricultural Sector 5. Labor Demand and Wages Total Decoupling (D1)

17. 17 The Results Global Income - Var % Limited Resources-0,11 Retired-0,13 Residentials0,40 Small Farm-households0,01 Medium Farm-households0,77 Large Farm-households0,49 Very Large Farm-households0,21 Average0,48 Impact on the Agricultural Sector Impact on the Agricultural Sector 6. Farm households income Total Decoupling (D1)

18. 18 The Results PRODUCTSVar. % PriceExp Share Fish0,070,087 Meat-0,130,228 Dairy products-1,260,138 Bread, pasta and others0,020,167 Vegetables and Fruit-0,030,176 Oils and Fats0,010,038 Sugar, coffee, and others-0,310,074 Beverages-0,100,092 Inflation rate-0,231 Total Decoupling (D1) Impact on consumers and society Impact on consumers and society 1.Inflation

19. 19 The Results GLobal Income - Var % Farm Households0,48 Rural and Urban Households0,01 Welfare Farm Households0,51 Rural and Urban Households-0,02 Total Decoupling (D1) Impact on consumers and society Impact on consumers and society Income and Welfare Income and Welfare

20. 20 The Results In general In general The impacts are mainly contained within the agricultural sector: a surgical reform! The changes in production induced by decoupling may be relevant already in the medium run. At the regional level, the reduction of durum wheat and industrial crops in favor of dried fodder and the contraction of sheep and goat production are signals of the strong possibilities of reconversion of agriculture in Southern Italy. Total Decoupling (D1)

21. 21 The Results In general In general How does Italian agriculture change? The reform accelerates the tendency to reduce cereal and oil-seeds crops and opens up an opportunity to the growth of livestock production, potentially more extensive and fed in a more natural way. The environmental impact of agriculture reduces. At the agro-industry level, the separation between the food industry and agriculture (e.g. pasta and durum wheat production). Total Decoupling (D1)

22. 22 Ranking the Scenarios The scenarios have been ranked according to: The producers’ point of view The producers’ point of view (choice based on production protection and value added) The agro-industry point of view The agro-industry point of view (choice based also on other aspects) The consumers and society’s point of view (choice based on inflation and welfare ). The consumers and society’s point of view (choice based on inflation and welfare ).

23. 23 The Producers’ point of view

24. 24 The AgroIndustry Point of View

25. 25 The Consumer Point of View

26. 26 Social Welfare Rankings

27. 27 Pareto Rankings

28. 28 It follows that … Total Decoupling is preferrable from the producer point of view The level of well-being increases especially for the medium and large farm-households The reform does not significantly affect consumer prices The level of social welfare and society’s income distribution are not affected by the reform Decoupling benefits especially the professional farms

29. 29 Equity and Efficiency Equity in the agricultural reform debate in Italy is not an issue at the macro level (with the exception of the non professional households in the South) However, the equity question is open within the household society: what is the reorganization of the household due to policy changes in the farms deciding to “Disactivate?” or to “leave livestock” or … need to get “real”, i.e. micro! How does the reform affects labor/leisure allocations and welfare levels? Can we regionalize the macro-results with the micro approach? A related practical question: How much of the macro- detail is maintained at the micro-level and viceversa?

30. 30 The Micro-Macro Link Exact aggregation theory The micro(macro) level is obtained by zooming in (out) the macro(micro) level One single source of information feeds both the micro and macro behavioral model: the ISMEA survey about the socio-economic conditions of Italian Agriculture was designed ad hoc to construct the micro/macro link and to support a collective approach to the theory of the household

31. 31 The Micro Level The Farm Household Model within a Collective Framework

32. 32 The Farm-household Framework The household enterprise, be it a farm or a firm, is the micro-level mirror image of the macro- economy: an ANALOGY principle At the household level, production and consumption decisions are non separable As far as information about home production is available and modeled, urban households are household enterprises as rural households do The collective approach permits deducing the welfare levels of individual household members thus making it possible to account for gender and inter-generational differences in the evaluation of policy impacts

33. 33 A Challenging Motivation To determine how much money is needed to make each household member as well off as they were before a change in living conditions, compensations should be defined on the basis of individual rather than household welfare This requires the knowledge of individual utilities that are derivable from the identification of the rule governing the intra- household allocation of resources within a collective approach … (f rom inter-household to inter- personal comparisons) Labor/leisure choices are individual

34. 34 Whose welfare do we have in mind? Sen (1983): “ A much more articulate family welfare function is needed to relate the collection of unequaled levels of well-being of family members to an aggregate measure for the family as a whole. This will, of course, involve a “ mini social choice problem.... ” The approach of “ equivalence scales ” has to be integrated more fully with intra-family allocation and theories of aggregation of unequal well-beings ” Gronau (1997): “ [...] the effect of children on consumption patterns depends on the intrahousehold redistribution of resources and consumption technology, and that in discussing “ children-welfare indices ” (which adult equivalence scales presume to be) one has to ask: whose welfare do we have in mind? ”

35. 35 From inter-household to inter-personal comparisons Who is better off? A poor child living in a rich household or a rich child living in a poor household? … or a child with a disability living in a rich household with respect to a child with a similar disability living in a poor household? Economists may have something to say in terms of material needs... less in terms of immaterial needs...

36. 36 The Edgeworth’s Box and the cooperative Nash solution

37. 37 Game theory as an instrument for interpreting the allocation mechanism THE COOPERATIVE NASH SOLUTION AS THE MAX OF THE HOUSEHOLD WELFARE FUNCTION COOPERATIVE MODELS: PARETO EFFICIENCY IMPLIES THE EXISTENCE OF THE SHARING RULE

38. 38 Research Program: model of a Micro-Economy ( Production and Consumption )

39. 39 A Miniature Gen Eq Model of the Household Enterprise Reduced Form of the Micro Economy ProductionConsumption

40. 40 Informational Requirements to Implement the Collective Approach φ is the sharing rule governing the intra-household allocation of resources. The existence of the sharing rule implies that we can recover individual consumptions and utility Labour/Leisure Consumption Consumption and Labour (and Production) The Farm-household Information set is 3 + at least one exclusive good

41. 41 Exclusive and Assignable Goods Definition 1: an exclusive good is a private good used by only one member of the household An exclusive good is thus a good for which it is possible to unequivocally identify the user. Definition 2: an assignable good is a private good whose consumption by each member of the household can be observed Assignability depends on the fact that it is possible to observe who consumes the good and in what proportion. Estimation challenge due to the presence of zeros (exclusive goods are observable at a high level of detail)

42. 42 The Source of the Identification Problem Our object of interest To be deduced from the observed consumption of exclusive goods

43. 43 The Source of the Identification Problem II

44. 44 Structural Identification (more structure, more identifying information) Assumption 1 The income structure is specified as an income scaled term a la Barten (1964)

45. 45 Structural Identification Proposition 1 For a given functional form of a collective demand system incorporating Assumption 1 and the associated unrestricted reduced form, both continuously differ, if the reduced form establishes a one-to-one correspondence with the structural form, then the sharing rule can be identified up to an additive constant.

46. 46 Correspondence between the structural and reduced form coefficients

47. 47 The sharing rule is identified up to a constant By equating the corresponding elements of the Jacobian of the structural and reduced form and solving we obtain: Chiappori, Fortin, Lacroix JPE 2002 Min Dist estimation method

48. 48 Or a Collective Quadratic Almost Ideal Demand System

49. 49 Permitting the Recovery of Individual Utilities (with a Barten-Gorman household technology)

50. 50 Coming from individual preferences

51. 51 Linked to the household cost-function

52. 52 The Sharing Rule and Intra-hh Transfers The scaling function of personal full income m i captures the size of the intra-household transfers The sum shared between the adults and children is Children get the rest The amount offered corresponds to the amount received by the children Note that for, then Symmetry of the Collective Slutsky?

53. 53 Sharing Rule and Intra-Household Transfers

54. 54 Graphically … how does power changes as the wife’s wage increases

55. 55 How power changes as the difference in education changes

56. 56 How power changes as the number of children increases

57. 57 Descriptive Statistics of the Variables used in the Econometric Analysis – Cons. Side

58. 58 The Production side of the Household Economy Own and Cross-price Elasticities Husband Wage Wife Wage Others Wage Price of Inputs Husband Domestic Share-0.1470.420-0.9112.580 Wife Domestic Share-0.558-0.9581.3500.089 Other Components Domestic Share-0.029-0.137-1.6500.619 Demand for Inputs - Share-0.0600.278-0.670-0.939 Household Production – A CRS Technology

59. 59 Farm Production Hired labourChemicalsMaterials Hired labour-0.36470.14030.1866 Chemicals0.304-0.65130.3094 Materials0.30950.2411-0.6072 Input price Crops Fruits and Other VegetablesMilkLivestock Hired labour0.2660.0060.2340.061 Chemicals0.335-0.1550.0360.029 Materials0.2220.0730.265-0.109 Output Elasticities - Factors

60. 60 Farm Production Elasticities with respect to Farm Characteristics - Factors Allen Elasticities of substitution - Factors NorthSouthPlanes Head’s Age Head’s Educ No.Children/ Ha Hired labour0.3390.6740.1810.1230.055-0.010 Chemicals0.102-0.3660.3350.0810.0200.045 Materials-0.245-1.012-0.0880.3110.0000.059 Hired labourChemicalsMaterials Hired labour-2.9230.3640.396 Chemicals-2.6980.999 Materials-1.961

61. 61 Farm production Shadow wageWage-off Wage hired labour Sample 8571115898896 Limited-resource 15151208310360 Retirement 38511924010319 Residential/lifestyle 41461279514535 Farming occupation/lower- sales 22861129312030 Farming occupation/higher- sales 5020113398038 Large family farms 12677116848301 Very large family farms 34390116259378 Shadow Wage, Wage off and Wage of Hired Labour by Farm Typologies, values are in Italian Lire

62. 62 The Consumption side of the Household Economy Gender Specific Compensated Price and Income Elasticities

63. 63 The Consumption side of the Household Economy Demographic Elasticities

64. 64 Intrahousehold Resources Allocation Summary of Predicted and Actual Sharing Rule Marginal Effects of the Sharing Rule

65. 65 Impact on the Sharing Rule of Exogenous Variables

66. 66 From the Econometrics to General Equilibrium by Household Type The estimated production technology and consumption preferences have been included in the household general equilibrium model, so no need for calibration Aggregation costs In the future, econometric estimates for the 23 sectors

67. 67 CAP Reform-% Change in Production (Xs) and Domestic Cons. prices (Pd)-Total Decoupling Scenario

68. 68 % Changes in Factor Prices Total Decoupling Scenario % Change of Factor Prices Dependent Labor 0.05 Farm Labor -0.57 Non Agricultural Capital 0.07 Agricultural Capital -4.45 Land 18.27

69. 69 SAM of Non Professional Farm Household Type

70. 70 SAM of Professional Household Farm Type

71. 71 Main features of Non Professional and Professional Farm-Household Types

72. 72 Micro-Simulation Variables of Interest

73. 73 Intra-hh Allocation Matters: from 0.46 (husb) to 0.5 shift in the sharing function

74. 74 Modelling a Labor Market Failure as a Mixed Complementarity Problem g G =G = Where: if

75. 75 Modelling a Labor Market Failure : Professional Farm Household Type

76. 76 Modelling a labor market failure : Non Professional Farm Household Type

77. 77 The General Equilibrium Set Up EquationDomainDescription Product FOC for profit max Household income Household profit Household consumption demand Market surplus omega Maximand

78. 78 The Optimization set up EquationDomainDescripti on Product FOC for profit max Household income Household profit Household consumpt demand Budget constraint Maximand

79. 79 What is next? IMPROVEMENTS ON THE MICRO-MACRO LINK: MACRO: 11 hh enterprises where production and consumption are non separable  23 production sectors for each type MICRO: 1 HOUSEHOLD – 1 SOCIAL ACCOUNTING MATRIX (SAM) so that we can have a fully implemented econometric micro-simulation with the advantage of simulating participation choices and other corner solutions more effectively REGIONALIZATION OF THE MACRO MODEL: Regionalization using a bottom up approach aggregating the household SAMs at the intermediate macro level

80. 80Conclusions (1)The Micro-Macro link can be successfully built if the developers of the micro and macro models work closely in the phases of model and survey design within the same institution so that the micro-macro correspondence can be effectively incorporated (2) For a sound micro-macro link to be established macro models should be micro- fundated and micro models should be macro related using exact aggregation theory