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A Practical Method for Explicitly Modeling Quotas and Other Complementarities

Author

Listed:
  • 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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    References listed on IDEAS

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    1. K.R. Pearson, 1991. "Solving Nonlinear Economic Models Accurately Via a Linear Representation," Centre of Policy Studies/IMPACT Centre Working Papers ip-55, Victoria University, Centre of Policy Studies/IMPACT Centre.
    2. Elbehri, Aziz & Ken Pearson, 2000. "Implementing Bilateral Tariff Rate Quotas in GTAP using GEMPACK," GTAP Technical Papers 475, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
    3. Elbehri, Aziz & Pearson, Ken, 2000. "Implementing Bilateral Tariff Rate Quotas In Gtap Using Gempack," Technical Papers 28715, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
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    Cited by:

    1. 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.
    2. 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.
    3. repec:oup:ecpoli:v:32:y:2017:i:92:p:651-705. is not listed on IDEAS
    4. 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;CES;MSH, vol. 32(92), pages 651-705.
    5. 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.
    6. 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.
    7. repec:eee:rensus:v:77:y:2017:i:c:p:596-603 is not listed on IDEAS
    8. 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.
    9. 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.
    10. 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.
    11. 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.
    12. 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.

    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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