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A Practical Method for Explicitly Modeling Quotas and Other Complementarities

Author

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  • W. Jill Harrison
  • Mark Horridge
  • K.R. Pearson

  • Glyn Wittwer

Abstract

To make CGE models realistic, inequality constraints (e.g., import quotas) or non-differentiable functions (e.g., income tax schedules) are sometimes needed. Both situations may be described using complementarity conditions, which state that either an equation is true or its complementary variable is at a boundary value. The paper describes a practical way to solve CGE models that contain such conditions. The technique, which is different from complementarity algorithms commonly used elsewhere (e.g., GAMS), has been implemented in the current version of the GEMPACK system, and has been used in a number of applications. This paper explains why the solution methods used in previous versions of GEMPACK do not handle complementarity conditions well, and describes how a two-pass procedure can overcome these difficulties. The key insight is that if we knew in advance which constraints would be binding in the accurate solution, the complementarity conditions could be reformulated in terms of smooth functions only, via a closure change which allows us to ignore the troublesome equations.

Suggested Citation

  • W. Jill Harrison & Mark Horridge & K.R. Pearson & Glyn Wittwer, 2004. "A Practical Method for Explicitly Modeling Quotas and Other Complementarities," Computational Economics, Springer;Society for Computational Economics, vol. 23(4), pages 325-341, June.
    • Handle: RePEc:kap:compec:v:23:y:2004:i:4:p:325-341
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    Cited by:

    1. Dixon, Peter B. & Rimmer, Maureen T., 2011. "You can't have a CGE recession without excess capacity," Economic Modelling, Elsevier, vol. 28(1-2), pages 602-613, January.
    2. Eugenio Arima & Paulo Barreto & Farzad Taheripour & Angel Aguiar, 2021. "Dynamic Amazonia: The EU–Mercosur Trade Agreement and Deforestation," Land, MDPI, vol. 10(11), pages 1-23, November.
    3. Swati Dhingra & Hanwei Huang & Gianmarco Ottaviano & João Paulo Pessoa & Thomas Sampson & John Van Reenen, 2017. "The costs and benefits of leaving the EU: trade effects," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 32(92), pages 651-705.
    4. Markus Lips & Peter Rieder, 2005. "Abolition of Raw Milk Quota in the European Union: A CGE Analysis at the Member Country Level," Journal of Agricultural Economics, Wiley Blackwell, vol. 56(1), pages 1-17, March.
    5. Ashley Winston, 2005. "The Theory of Tariff Rate Quotas: An Application to the U.S. Sugar program using MONASH-USA," Centre of Policy Studies/IMPACT Centre Working Papers ip-83, Victoria University, Centre of Policy Studies/IMPACT Centre.
    6. Peter B. Dixon & Maureen T. Rimmer, 2010. "Simulating the U.S. Recession with and without the Obama package: the role of excess capacity," Centre of Policy Studies/IMPACT Centre Working Papers g-193, Victoria University, Centre of Policy Studies/IMPACT Centre.
    7. Naudé, Wim & Rossouw, Riaan, 2008. "South African quotas on textile imports from China: A policy error?," Journal of Policy Modeling, Elsevier, vol. 30(5), pages 737-750.
    8. Antimiani, Alessandro & Finizia, A. & Henke, Roberto & Manfredi, G. & Merciai, S., 2008. "The impact of the reform of the milk quota regime on the Italian dairy sector," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 43658, European Association of Agricultural Economists.
    9. M. Kohlhaas & K.R. Pearson, 2002. "Introduction to GEMPACK for GAMS Users," Centre of Policy Studies/IMPACT Centre Working Papers ip-79, Victoria University, Centre of Policy Studies/IMPACT Centre.
    10. Glyn Wittwer & Marnie Griffith, 2011. "Modelling drought and recovery in the southern Murray‐Darling basin," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 55(3), pages 342-359, July.
    11. Dong, Huijuan & Dai, Hancheng & Geng, Yong & Fujita, Tsuyoshi & Liu, Zhe & Xie, Yang & Wu, Rui & Fujii, Minoru & Masui, Toshihiko & Tang, Liang, 2017. "Exploring impact of carbon tax on China’s CO2 reductions and provincial disparities," Renewable and Sustainable Energy Reviews, Elsevier, vol. 77(C), pages 596-603.
    12. Gasiorek, Michael & Holmes, Peter & Rollo, Jim & Wang, Zhenkun & Gonzalez, Javier Lopez & Parra, Maximiliano Mendez & Maliszewska, Maryla & Paczynski, Wojtek & Cirera, Xavier & Willenbockel, Dirk & Fo, 2010. "Mid-term Evaluation of the EU’s Generalised System of Preferences," Conference papers 331999, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    13. Keith Walsh & Martina Brockmeier & Alan Matthews, 2005. "Implications of Domestic Support Disciplines for Further Agricultural Trade Liberalization," The Institute for International Integration Studies Discussion Paper Series iiisdp99, IIIS.
    14. Beckman, Jayson & Arita, Shawn & Mitchell, Lorraine, 2015. "The Transatlantic Trade and Investment Partnership and Agriculture: A Quantitative Analysis," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205056, Agricultural and Applied Economics Association.

    More about this item

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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