A sub-national version of the GTAP model for Italy

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1 A sub-national vesion of the GTAP model fo Italy Gabiele Standadi a,b Faneso Bosello a,b, Fabio Eboli a,b a CMCC EuoMediteanean Cente on Climate Change b FEEM Fondazione Eni Enio Mattei Univesity of Milan Coesponding autho: gabiele.standadi@feem.it Abstat We develop a sub-national vesion of the GTAP model fo Italy. The upgaded model allows assessing moe popely the tade and envionmental poliies and/o shoks, whose effets an be lagely diffeent within a ounty. We use an innovative method to estimate bilateal tade flows aoss sub-national egions. In addition, the theoetial stutue is modified in ode to inopoate the possibility of an ineasing spatial mobility in both fatos and goods maket at sub-ounty level. We ay out a simple expeiment to test the obustness of ou model. Results ae onsistent with the standad CGE assumptions; moving towads moe ompetitive and integated makets a negative shok esults in a lowe loss in tems of welfae. 1. Intodution In this pape we desibe the methodology to build a sub-national vesion of the GTAP model. GTAP stands fo global tade analysis pojet, it is a widespead model and database among CGE (omputable geneal equilibium) modelles. It pefoms eonomi analysis of tade and envionmental poliies o assesses the eonomi onsequenes of limate hange impats. This wok is an appliation to Italy. Howeve, the methodology an be applied to othe ounties aoding to the data availability at the sub-ounty level. In this fist vesion, we wok with 10 setos and thee Italian mao-egions (Noth, Cente, ). As a next step, the model will be extended to all 20 Italian egions and 57 GTAP setos. At this stage, the aim is not to have a ealisti pitue of the poliy effets but athe to undestand how the model woks fom an eonomi point of view and its potential ontibution. The motivations fo suh a wok ae impotant. Fist, few global CGE models exist at the subnational level due to the diffiulty to eate mutually onsistent soial aounting matixes fo a lage numbe of sub-national egions. 1 Nevetheless, the tade and envionmental poliies deided at the wold level may aise signifiant effets also at sub-ounty level, highlighting distibutional issues that equie onsistent and diffeentiated poliy ations. Seond, onening issues suh as limate hange, a moe detailed geogaphial loalization epesents an impotant tool to assess moe popely the eonomi onsequenes of physial impats. Fo example, given a physial impat at the loal level, the eonomi effets ae likely to be stonge in a speifi sub-national egion but it ould also be inteesting to analyse to what extent they inteat with othe egions within a ounty and also the est of the wold. The potential to impose diffeentiated shoks within a ounty onstitutes one of the main stengths in this type of model. 1 Fo a bief suvey of the liteatue on sub-national CGE global models see setion 2 in Peali et al. (2012). Fo an extensive liteatue see Rodiguez (2007). 1

2 In ode to egionalize GTAP at sub-ounty level, the methodologial appoah implies two main tasks to be developed/aomplished. The fist one is the database development and seond one the model impovement. Regading the fist task, the majo effot in building a sub-national CGE database onsists in estimating the tade flows aoss sub-national egions. Due to the lak of data, this is usually done though a gavitational appoah as in Hoidge and Wittwe (2010) and Dixon et al. (2012). We popose an altenative and innovative appoah. We ombine in a onsistent way two soues of infomation: tanspot data and eonomi podution data both fom ISTAT (Italian National Statistial Institute). The seond task equies modifying the theoetial stutue of the model to take into aount two diffeent degees of fatos and goods mobility (national and sub-national). In fat, both goods and fatos ae expeted to move easie within the ounty than between ounties. In ode to have a validation of the diffeent speifiations we ay out a simple expeiment (a unifom wold deease by 20% in land podutivity) and we ompae the esults oming fom the GTAP model and ou modified sub-national vesions. Results on welfae ae obust with espet to the standad GTAP model and onsistent with the CGE neolassial famewok (welfae impoves when moving towads moe ompetitive and integated makets). The sensitivity analysis on elastiity paametes also shows onsistent eonomi esults. The pape is oganized as follows. Setion 2 pesents data and the estimation stategy to obtain tade flows aoss sub-national egions. Setion 3 desibes the model impovement fo the fatos and goods maket. Setion 4 lays out the esults of the expeiment and sensitivity analysis. Setion 5 onludes and skethes some ideas fo futue eseah. 2. Database development Ou stating point is GTAP 7 database (Naayanan, 2008), onsisting of 57 setos and 113 ounties o goups of ounties. The efeene yea is Conening the sub-national soues, we ollet data fom ISTAT, whih povides two types of infomation. Fo the fist type of infomation, data on value added, labou and land fo the 20 Italian egions and 40 setos oveing all the eonomi system ae available. Fo the seond type of infomation, ISTAT epots bilateal flows of aied goods (tons) by mode of tanspotation (tuk, ail, wate and ai) fo the 20 Italian egions. Howeve, limitations in tems of seto oveage (data available only fo 10 agiultual/industial setos) and measuement unit (volume athe than eonomi value) exist. 2 It is woth noting that this is mainly a methodologial wok. Fo this eason, we keep the setoal and geogaphial aggegation simple with only 10 setos and thee Italian sub-national egions (Noth, Cente and ). The othe GTAP ounties ae inluded in two lage goups, Euopean Union and Rest of the Wold. We follow a two-steps poedue to deive the sub-national database fo Italy desibed, espetively, in sub-setions 2.1 and 2.2. All the data efe to 2004, the base yea in GTAP Splitting the podution side The fist step onsists in splitting the Italian podution using the ISTAT infomation about eonomi podution. Patially, the statistial poedue is the following. Fist, we math the 40 ISTAT setos with the 10 GTAP setos hosen in ou aggegation. Then we distibute the Italian value added and 2 Fo the moment, we use the oveall amount of aied goods as a poxy in the sevie setos. 2

3 pimay fatos in GTAP aoss the thee Italian mao-egions using the shaes of ISTAT fo value added labou and land. Capital is omputed as a diffeene between value added and labou. Fo setos, whih use also natual esoues (anothe pimay fato in GTAP) we take the sub-national shae of value added in those seto as a poxy. The sub-egional input-output tables ae deived assuming that intemediate inputs of oigin seto i in the destination seto j ae distibuted aoding to the value added shae in the oigin seto. Fo example, the eonomi value of the agiultual goods whih the Italian manufatues puhase in Italy ae split based on the agiultual value added shae in the sub-national egion. 2.2 Estimation of tade flows aoss sub-national egions The seond step is the most hallenging beause we need to detemine the bilateal tade flows aoss sub-national egions. These data ae vey often missing. As mentioned befoe eseahes usually use the gavitational appoah to estimate the tade flows as in Hoidge and Wittwe (2010) and Dixon et al. (2012). By this method, the bilateal tade flows aoss sub-national egions ae estimated using the setoal podution in the oigin and destination egions and the distane between them, following the gavity equation as in the Newtonian physis. Consequently, it is possible to oveome the poblem of the missing data. This omes at ost to intodue some distotions and inonsistenies beause othe vaiables ae likely to play a ole in the detemination of the tade aoss egions (omitted vaiables). Some altenative appoahes exist. Fo example, eliable tanspot data exist fo United States of Ameia. Chintakan and Millimet (2006) and Canning and Tsigas (2000) make use of them to obtain tade flows aoss membe States. Dubé and Lemelin (2005) also use tanspot data to estimate the tade flows aoss the thee sub-national egions of Quebe. In addition, they integate this infomation with eonomi data about aggegate sub-national expots and impots and apply a oss entopy optimisation method to make onsistent the two types of infomation. Given the tanspot infomation fom ISTAT, we also pefe to use tanspot data to depit bilateal flows athe than the gavitational appoah beause the fome seems to epesent moe effetively the atual flows of ommodity within a ounty. Nevetheless, following the appoah of Dubé and Lemelin, we deide to integate the tanspot data with the eonomi podution infomation in the omputation of tade flows aoss Italian egions. This is done by adjusting the tade flows aoss sub-national egions by the RAS statistial method to make these flows onsistent with the podution data. 3 This opeation is impotant fo thee easons. Fist, we have a moe detailed setoal aggegation fo the podution and this will be useful to deive the full database with 57 GTAP setos. Seond podution epots value and not volume data. Finally, we maximise all the infomation available at the sub-national level in a onsistent famewok. Patially, we use the shaes obtained fom ISTAT tanspot data to distibute the setoal GTAP Italian podution, whih is demanded domestially, between domesti sub-national use and tade flows aoss Italian egions. Conside the shae matix Π epesented in Table 1. Aftewads, vetos and matixes ae in bold type. In matix Π the geneal element is π with 0 π 1. The ow epesents the oigin subnational egion and the olumn the destination sub-national egion. Basially, we have 10 diffeent Π, one fo eah seto. As ou poedue is valid fo all the setos, fo sake of algebai simpliity we do not onside a seto index in the est of the sub-setion. 3 The RAS is a oss entopy optimization method and it should be pefeed in the absene of infomation about vaiation in olumn stutue o ow stutue of the matix (MDougall, 1999). 3

4 Table 1 Noth Cente Tot Noth π 11 π 12 π 13 Π 1. Cente π 21 π 22 π 23 Π 2. π 31 π 32 π 33 Π 3. Tot Π.1 Π.2 Π.3 1 Denoting Y the GTAP Italian podution in a seto whih is sold in Italy, D the sub-national demand (exluded demand fo foeign goods), EXP the bilateal sub-national expots towads the othe sub-national egions, IMP the bilateal sub-national impots fom the othe sub-national egions, EXPAG the aggegate sub-national expots towads the est of Italy and IMPAG the aggegate sub-national impots fom the est of Italy, we ompute these vaiables fo, say, subnational egion Cente applying the following fomulas: (π π π (π π π (π π Y Y Y Y 22 + π 23 + π 32 + π ) Y ) Y 32 = EXP = EXP = IMP = IMP ) Y Cente, Noth Cente, = EXPAG Noth,Cente, Cente = D = IMPAG Cente Cente Cente We apply the same poedue fo the othe sub-national egions. The use of two diffeent soues to obtain the sub-national database (eonomi data fo podution and tanspot data fo demand and tade) makes the following equations not veified: Y Y Y Noth Cente = D = D = D Noth Cente + EXPAG + EXPAG + EXPAG Noth Cente IMPAG IMPAG IMPAG Noth Cente In ode to adjust these equations we esot to the bi-popotional method, the so-alled RAS method. Conside the bilateal tade matix A = Π Y, size 3 x 3, omputed stating fom tanspot data, whee we put π 11 = π 22 = π 33 = 0. In matix A the geneal element is a whee ow epesents the oigin sub-national egion and olumn the destination sub-national egion. We also have taget veto of ow totals R (aggegate sub-national expots to the est of Italy, size 3 x 1) and taget veto of olumn totals C (aggegate sub-national impots fom the est of Italy, size 3 x 1). Tagets ae omputed using also the ISTAT infomation about eonomi podution aoding to the following equations: R R R C C C Noth Cente Noth Cente = Y = Y = Y = D = D = D Noth Cente Noth Cente D D D Noth Cente + EXPAG + EXPAG + EXPAG + IMPAG + IMPAG + IMPAG Noth Cente Y Y Noth Cente Y Noth Cente 4

5 The RAS method attempts to find a new simila matix B suh that: b b = = whee b, and ae, espetively, the geneal element of matix B, veto R and veto C. The new matix B is elated to the oiginal A via the iteative poedue: b = m m a whee m is the multiplie of ow and m is the multiplie of olumn. Fo this initial appliation we split the Italian expots towads EU and est of the wold and Italian impots fom EU and est of the wold using the setoal sub-national shae of value added Model impovement So fa we have woked only on the database, seahing the best ule to obtain onsistent SAMs aoss the sub-national egions. Howeve, it is easonable to assume that a sub-national egion does not behave exatly as a ounty. This, in tun, implies some hanges in the theoetial stutue of the model. Fo example, in GTAP the fato endowments annot move outside the ounty they belong. This makes sense in a national ontext but it is unlikely to happen at the sub-national level. Wokes and apital an easily ealloate in othe sub-national egions afte an eonomi shok. Anothe issue is the podut substitution fom the demand side. In the CGE famewok, the standad Amington assumption pevents unealisti speialization phenomenon and tade oveflows fom waping the esults of the model. The values of the Amington elastiity ae set by eonometi estimations, whih ae aied out at the national level. Given the empiial evidene about the fat that tade within a ounty is bigge than tade between ounties given the same distane, the so-alled bode effet (MCallum, 1995), these Amington elastiities should be ealibated at the sub-national level and the demand tee modified to onside the ineased podut substitution inside the bodes. We inopoate all these haateistis in ou theoetial stutue and evaluate diffeent subnational models in ode to veify thei onsisteny with CGE eonomi theoy and with the standad GTAP model. Basially we have two main model impovements. The fist one onsists in intoduing apital and labou mobility within Italy (endogenous fato supply at the sub-ounty level) though a CET (onstant elastiity of tansfomation) funtion, as a esult wokes and apital an move outside the Italian sub-national egion they belong afte a shok in the eonomi system. In the seond impovement we inset a speial Amington nest fo the sub-national egions to take into aount the fat that poduts ae lose substitutes within the ounty than aoss ounties. 3.1 Fist model impovement: mobility in fatos maket The value added in the standad GTAP model is funtion of five pimay fatos: land, natual esoues, unskilled labou, skilled labou and apital. All the setos use labou and apital while 4 We ae awae that this assumption is vey stong beause impot and expot pattens ae diffeent. Nevetheless, we use it only in this methodologial pape. We emove it in the 20 egions vesion of the model whee additional data fom ISTAT on sub-national foeign expots and impots ae available. 5

6 only some setos use land and natual esoues. Land and natual esoues supplies ae sluggish aoss setos while labou and apital ae pefetly mobile. Howeve, all the pimay fato supplies ae geogaphially immobile. We do the following assumptions: 1) The mobility aoss setos does not hange. 2) Land and natual esoues ontinue to be geogaphially immobile at the sub-national level. 3) Sub-national unskilled labou, skilled labou and apital supplies ae geogaphially sluggish within Italy and they ontinue to be immobile fo est of Euope and est of the wold. The thid assumption is new with espet to the standad GTAP model. We model it though a CET funtion to epesent the impefet national mobility of the sluggish fato endowments (unskilled labou, skilled labou and apital). Fist ode onditions of the CET supply funtion and the fomula to detemine the national pie of the endowment (shadow pie) ae given in the equations 1-6, whee QL, QH, QK, PL, PH, and PK epesent, espetively, the quantity of supplied unskilled labou, skilled labou, apital and the assoiated pies. and ae, espetively, the unique Italian aggegate index and the sub-national index. The paametes L, H and K ae the elastiity of substitution of the endowment supply, they ae a measue of geogaphial mobility. We make the hypothesis that = =. L H K QL = QL QH QK QL PL = QH QH PH = QK QK PK PL PL = QL PH PH = QH PK PK = QK PL L PH PK H K L < 1 H K < 1 < 1 (1) (2) (3) (4) (5) (6) 3.2 Seond model impovement: the new tade stutue aoss sub-national egions In the standad GTAP model the demand side is made up of thee elements: pivate onsumption, govenment spending and intemediate goods. The demand tee follows a double nest. The fist nest links domesti demand of eah thee elements and aggegate foeign impots. The seond nest diffeentiates foeign impots aoding to the geogaphial oigin. Figue 1 desibes the taditional GTAP demand sheme. The seond model impovement onsists in modifying the tee in ode to make sub-national poduts lose substitutes among them than the national poduts. To ahieve this goal we inset two additional bundles fo eah sub-national egion keeping unhanged the stutue fo the est of Euope and the est of the wold. Figue 2 illustates the new demand tee. 6

7 Figue 1 Total demand in ounty fo good i by households, govenment and fims CES ARM Domesti demand in ounty fo good i by households, govenment and fims Aggegate foeign impots in ounty fo good i by households, govenment and fims CES IMP Foeign impots fom ounty 1 fo good i by households, govenment and fims Foeign impots fom ounty fo good i by households, govenment and fims Foeign impots fom ounty C fo good i by households, govenment and fims 7

8 Figue 2 Total demand in sub-national egion s whih belongs to ounty fo good i by households, govenment and fims CES ARM1 National demand in sub-national egion s fo good i by households, govenment and fims Aggegate foeign impots in subnational egion s fo good i by households, govenment and fims CES IMP1 CES ARM2 Foeign impots fom ounty 1 fo good i by households, govenment and fims Foeign impots fom ounty fo good i by households, govenment and fims Foeign impots fom ounty C fo good i by households, govenment and fims Domesti demand in sub-national egion s fo seto i by households, govenment and fims Aggegate impots in sub-national egion s fom the othe sub-national egions fo seto i by households, govenment and fims CES IMP2 Impots fom sub-national egion 1 s fo good i by households, govenment and fims Impots fom sub-national egion s s fo good i by households, govenment and fims Impots fom sub-national egion S s fo good i by households, govenment and fims 8

9 As we an note fom Figue 2, eah sub-national egion has the lassial nest fo the foeign aggegate impots and the foeign impots aoding to the geogaphial oigin but now thee ae two futhe bundles beause the national demand in the sub-national egion is boken in two pats. The uppe bundle links domesti demand and aggegate inta-national impots while the lowe bundle diffeentiates the impots with espet to the oigin sub-national egion. We inset fou additional paametes ARM1, IMP1, ARM2 and IMP2. Two elations haateises these fou paametes: ARM = ARM1 < ARM2 IMP = IMP1 < IMP2 whee ARM and IMP ae the Amington eleastiities in standad GTAP model epesented in Figue 1. We use CES (onstant elastiity of substitution) funtions to model the inte-national and inta-national bundles. As the following equations apply to all setos in the same manne, fo sake of algebai simpliity we do not onside a seto index in the est of the sub-setion. Stating fom pivate onsumption QC, QCD and QCM, epesent, espetively, the quantity of total, domesti and impoted pivate goods in the ounty o goup of ounties, epesented by index. QCU, QCDU and QCMU ae, espetively, total, national and intenational impoted pivate goods in the sub-national egion (the suffix U stands fo uppe bundle). QCDL and QCML epesent the domesti and inta-national impoted pivate goods in the sub-national egion (the suffix L stands fo lowe bundle). PC, PCD, PCM, PCU, PCDU, PCMU, PCDL and PCML ae the assoiated pies. The equations 7-12 show the mathematis behind the new tade stutue in Figue 2 fo pivate onsumption : QCD QCM QCDU QCMU QCDL QCML PC = QC PCD PC = QC PCM ARM ARM PCU = QCU PCDU PCU = QCU PCMU PCDU = QCDU PCDL PCDU = QCDU PCML ARM1 ARM1 ARM2 ARM2 ARM ARM ARM1 ARM1 ARM2 ARM2 (7) (8) (9) (10) (11) (12) Conening the govenment spending QG, QGD and QGM, epesent, espetively, the quantity of total, domesti and impoted goods puhased by govenment in the ounty o goup of ounties. QGU, QGDU and QGMU ae, espetively, total, national and intenational impoted goods puhased by govenment in the sub-national egion. QGDL and QGML epesent the domesti and inta-national impoted govenment goods puhased by the govenment in the subnational egion. PG, PGD, PGM, PGU, PGDU, PGMU, PGDL and PGML ae the assoiated pies. 9

10 The equations desibe the new tee fo the govenment demand: QGD QGM QGDU QGMU QGDL QGML PG = QG PGD PG = QG PGM ARM ARM PGU = QGU PGDU PGU = QGU PGMU PGDU = QGDU PGDL PGDU = QGDU PGML ARM1 ARM1 ARM2 ARM2 ARM ARM ARM1 ARM1 ARM2 ARM2 (13) (14) (15) (16) (17) (18) Finally, with egad to the intemediate goods QI, QID and QIM, epesent, espetively, the quantity of total, domesti and impoted intemediate goods in the ounty o goup of ounties. QIU, QIDU and QIMU ae, espetively, total, national and intenational impoted intemediate goods in the sub-national egion. QIDL and QIML epesent the domesti and inta-national impoted intemediate goods in the sub-national egion. PI, PID, PIM, PIU, PIDU, PIMU, PIDL and PIML ae the assoiated pies. The equations pesent the demand fo intemediate goods: QID QIM QIDU QIMU QIDL QIML PI = QI PID PI = QI PIM PIU = QIU PIDU PIU = QIU PIMU PIDU = QIDU PIDL PIDU = QIDU PIML ARM1 ARM1 ARM1 ARM1 ARM2 ARM2 ARM ARM ARM1 ARM1 ARM2 ARM2 (19) (20) (21) (22) (23) (24) 10

11 The domesti demand is the sum of the thee domesti demand omponents: pivate onsumption, govenment spending and intemediate goods. QDS is the quantity of demanded domesti goods and PDS is the assoiated pie. The equations ae epoted below: PDS QDS PDS QDS = PCD QCD = PCDL QCDL + PGD QGD + PGDL QGDL + PIDL QIDL + PID QID The impoted demand is also the sum of the thee impoted demand omponents: pivate onsumption, govenment spending and intemediate goods. QAI, QAIU and QAIL ae, espetively, the quantity of aggegate impoted goods in the ounty, the aggegate impoted goods fom aboad in the sub-national egion and the aggegate impoted goods fom the othe subnational egions. PAI, PAIU and PAIL ae the assoiated pies. The fomulas ae: (25) (26) PAI QAI = PCM PAIU QAIU PAIL QAIL QCM = PCMU QCMU = PCML QCML + PGM QGM + PGML QGML + PGMU QGMU + PIM QIM + PIMU QIMU + PIML QIML (27) (28) (29) The additional sub-national nest fo impots also equies the stutue of the bilateal tade flows to be modified. Fo ounties in the est of Euope and est of the wold, things do not hange but fo the Italian egions we intodue two bundles. The uppe one puts togethe goods oming fom aboad while the lowe one goods oming fom the othe Italian egions. We use CES pefeenes to model these two nests. In the following equations QXS, QXSU and QXSL epesent, espetively, the bilateal tade flows fom ounty d to ounty, the bilateal tade flows fom ounty to sub-national egion, the bilateal tade flows fom sub-national egion s to subnational egion. PXS, PXSU and PXSL ae the assoiated pies. The equations ae epoted below: QXS d QXS QXSU QXSU QXSL s d s d QXSL PAI = QAI PXS d PXS PAIU = QAIU PXSU PXSU PAIL = QAIL PXSL s d PXSL = QAI PAI s IMP = QAIU PAIU s = QAIL PAIL IMP1 IMP2 IMP IMP1 IMP2 (30) (31) (32) (33) (34) (35) 4. Model validation The main pupose of this pape is to establish and test a good method in ode to obtain a onsistent sub-national database along with a easonable theoetial model. Theefoe, this setion pesents a validation poess of fou sub-national models applied to the GTAP database integated with the Italian sub-national data, whih has been deived following the poedue illustated in setion 2. 11

12 Beyond the fou sub-national speifiations, we have also the standad GTAP model with Italy onsideed as a whole. The legend below summaizes the diffeent types of model. Legend: AI RI RIMFM RIARM RIAFM Aggegated Italy in the standad GTAP model Regionalised Italy in the standad GTAP model Regionalised Italy with geogaphial Mobility in Fato Makets Regionalised Italy with ineased inte egional Amington elastiities Regionalised Italy with both ineased Amington and mobility in Fato Makets The AI model onsides Italy as whole, est of Euope and est of the wold. The theoetial stutue and paamete values ae those of the standad GTAP model. The AI model is not a subnational model. It is only to assess the obustness and eonomi onsisteny in the esults of the eal sub-national models with espet to the standad GTAP model in whih Italy is aggegated. The RI model onsides Noth, Cente and of Italy sepaately, est of Euope and est of the wold. It is the fist eal sub-national model. The theoetial stutue and paamete values ae the same of the standad GTAP model. Fo this eason sub-national egions behave exatly as GTAP ounties. The RI is the basi model with the lowest degee of maket integation and ompetition at the sub-national level. The RIMFM model onsides Noth, Cente and of Italy, est of Euope and est of the wold. We model a diffeent fato maket fo apital, unskilled and skilled labou as illustated in sub-setion 3.1. Paamete values ae the same but we inset an additional one, the elastiity of fato supply FAC = K = L = H (it is the same fo apital and labou). In ou efeene ase this paamete is set equal to -2. In the RIARM speifiation we have the same egions as befoe. Nevetheless, we build the new tade stutue to make poduts lose substitutes inside the national bodes than outside the national bodes, as we have seen in sub-setion 3.2. In addition, we put fou additional paametes fo the sub-national egions, ARM1, ARM2, IMP1, and IMP2. We have explained the eonomi meaning of these paametes in sub-setion 3.2. In ou efeene ase thei values ae set aoding to the following fomulas: ARM2 = 2 ARM1 IMP2 = 2 IMP1 ARM1 = ARM IMP1 = IMP whee ARM and IMP ae the values adopted in the standad GTAP model. Finally, in the RIAFM model both hanges in goods and fatos maket ae inopoated. RIAFM is the full model with the highest degee of maket integation and ompetition at the subnational level. We ompae the esults of the diffeent sub-national models among them and with the standad GTAP model whee Italy is aggegated as a single ounty. We also ay out a sensitivity analysis on the paametes adopted at the sub-national level to model fatos mobility and the new tade stutue. The aim of this validation poess is theefold: Testing if ou esults ae obust enough with espet to the standad GTAP model but at the same time veifying if welfae outomes impove both at the Italian and wold level when moving towads moe ompetitive and integated makets. Analysing the distibutional effets at the sub-national level. Caying out a sensitivity analysis to test the eonomi onsisteny of ou esults on the following paametes: 12

13 i) Amington elastiity fo inta-national tade, and ii) CET elastiity fo inta-national fato mobility. 4.1 The expeiment We implement a simple expeiment (a 20% unifom deease in land podutivity in Noth, Cente and of Italy, est of Euope and est of the wold). The simulation esults ae not intended to be ealisti but they allow us to assess how the model woks fom an eonomi point of view and to veify its onsisteny with espet to lassial CGE assumptions. Fo example, we expet that the loss in welfae fo Italy and the wold as a whole, following the negative shok, deeases stating fom the RI (the basi sub-nation model) to the RIAFM (modifiations both in the fatos and goods maket) beause we ae moving towads moe ompetitive and flexible makets in the Italian sub-national egions. Fo this initial appliation, we goup the eonomi system in 10 GTAP setos. Table 2 epots them. We have two agiultual setos, five manufatues and thee sevie setos. The setoal aggegation is the same in all the models onsideed in this wok. The geogaphial aggegation is displayed in Table 3. It is the same fo all the sub-national model. As mentioned befoe, in the AI we have the aggegated Italy. Table 2: setos GainsCops MeatLstk Extation PoFood TextWapp LightMnf HeavyMnf Util_Cons TansComm OthSevies Gains and ops Livestok meat poduts Mining and extation Poessed food Textiles and lothing Light manufatuing Heavy manufatuing Utilities and onstution Tanspot and ommuniation Othe sevies Table 3: egions Noth Cente EU ROW Noth of Italy Cente of Italy of Italy Rest of Euopean Union (27 ounties exept Italy) All emaining ounties in the wold 4.2 Results and sensitivity analysis Fo ou esults we look at the EV (Equivalent Vaiation), expessed in 2004 million $. This is a standad measue used in the CGE models to assess the welfae gain o loss afte a shok in the eonomi system. Basially it is the inome that you need to take away fom an individual to make he/him equivalently wose off o bette off following a pie hange. 13

14 Tables 4 shows the outomes fo all the egions and all the types of model. As expeted, the numbes ae negative but the magnitudes ae diffeent. To appeiate the undelying dynami it is moe useful to epesent the esults in a gaphial way. If we look at the Figues 3 and 4 we an obseve that the outomes ae obust with espet to the standad GTAP model in whih Italy is aggegated (AI model) and ae simila in all the sub-national speifiations. This is tue fo the Wold and Italy. On the othe hand, looking in a estited sale on the vetial axis (Figues 5 and 6) we an appeiate as moving towads moe ompetitive and integated makets at the subnational level, that is moving fom the RI to RIAFM, the welfae outomes impove. This is the ase fo both Wold and Italy. To summaize, the Figues above onfim the obustness of ou sub-national models with espet to the standad GTAP model and thei eonomi onsisteny with the neolassial CGE famewok. Nevetheless, Figue 6 shows a supising esult, the edution in welfae is lowe in RIARM and RIMFM models than in the AI model. This sounds stange if we think at the AI model as the one in whih fatos and goods maket ae pefetly integated and ompetitive within Italy. A possible explanation ould be that the geogaphial aggegation is not neutal in GTAP. In fat in the AI we have thee egions while in the othe sub-national models we have five egions. The othe possible explanation ould efe to the intodution of the new tade stutue aoss sub-national egions. Howeve this esult should be futhe investigated. Table 4 EV ( 2004 milion $) AI RI RIMFM RIARM RIAFM Noth Cente Italy EU ROW Wold Tuning to the distibutional effets, we an obseve in Figues 7, 8, 9 and 10 that in all the subnational speifiations the fist outome we get is in favou of having sub-national detail within a ounty. In fat, even when using an undiffeentiated impat though the Italian teitoy, we an note that is the most affeted sub-national egion beause its eonomy is agiultual intensive while Noth and Cente ae less impated. Fom the modelling pespetive, it is also inteesting to look at the diffeent oles played by the fatos and goods maket. In fat with espet to RI model the new Amington tade stutue basially does not hange the patten of the distibutional effets in the RIARM model. On the othe hand the new fatos maket exaebates the diffeene between and Cente/Noth egions beause is moe and moe affeted while Cente and Noth mitigate thei losses. The eason fo suh esult is that wokes and apital an now move fom to Noth and Cente. Finally, Figues 11 and 12 display the esults of the sensitivity analysis on sub-national Amington elastiity and CET elastiity in the sub-national endogenous supply of mobile pimay fatos. The sensitivity analysis is aied out in the last speifiation (RIAFM) beause it is ompehensive of all modifiations. The Figues show the welfae outomes in tems of EV fo the Wold and Italy, espetively. The blue line takes a pitue of the eonomy in thee diffeent instants. Keeping the Amington stutue fixed at ou efeene ase, we pogessively inease the fato mobility in thee steps aoding to the following fomulas: 14

15 1) FAC = 0 2) FAC = -2 3) FAC = -5 The absolute values, FAC, epesent, espetively low, medium and high level of fato mobility. They ae depited on the hoizontal axis. The ed line does the same thing fo the goods maket. Keeping the fatos maket stutue fixed at ou efeene ase ( FAC = -2), we pogessively inease the substitution aoss poduts oming fom diffeent sub-national egions using the fomulas epoted below: 1) ARM2 = ARM1, IMP2 = IMP1 2) ARM2 = 2 ARM1, IMP2 = 2 IMP1 3) ARM2 = 5 ARM1, IMP2 = 5 IMP1 Case 1, 2 and 3 above epesent, espetively low, medium and high mobility in the goods maket. Finally, the geen line meges these diffeent pitues in the following way: 1) ARM2 = ARM1, IMP2 = IMP1, FAC = 0 2) ARM2 = 2 ARM1, IMP2 = 2 IMP1, FAC = -2 3) ARM2 = 5 ARM1, IMP2 = 5 IMP1, FAC = -5 Case 1, 2 and 3 above epesent, espetively low, medium and high mobility in the goods and fatos maket. The aim is to disentangle the mobility fato effet (blue line), the ineasing sub-national Amington effet (ed line) and finally to analyse them simultaneously (geen line). The thee lines oss in the efeene ase of the RIAFM model. At fist glane, we an immediately see that all the lines ae monotonially ineasing. This is a good new beause it is a futhe poof about the fat that ou theoetial hanges ae onsistent with the standad CGE famewok of ompetitive makets. It is also inteesting to note that ed line is steepe than blue line. This implies that the model is moe sensitive to the Amington assumptions than to fato maket assumptions. As expeted, geen line epesents the lowest and highest point on the vetial axis. Its slope is vey high suggesting goods and fatos maket inteat in a multipliative way athe than additive. In Table 5 we epot the esults of the sensitivity analysis fo eah egion. Rest of the wold and est of Euope show simila esults in all the onsideed senaios. It is wothwhile to notie that in the ase FAC = 0, ARM2 = 2 ARM1 and IMP2 = 2 IMP1 the RIAFM model ollapses exatly in the RIARM speifiation. Conening the sub-national pattens, it is impotant to stess that moving towads the south-east senaios (ineasing oveall mobility), Noth and Cente expeiene a hange in the sign of EV. On the ontay absobs all the negative impat. This dynami is simila to that obseved moving fom RI to RIAFM model but now it is muh stonge beause Noth and Cente even gain fom the negative land podutivity shok. This outome is not vey supising. As podution ealloates fom agiultue to manufatues and sevies and being Noth and Cente intensive in these two setos, fatos and goods also ealloate in this new setoal/geogaphial spae. 15

16 Figue 3: equivalent vaiation in the Wold (2004 $ million) Figue 4: equivalent vaiation in Italy (2004 $ million) AI RI RIMFM RIARM RIAFM AI RI RIMFM RIARM RIAFM Figue 5: equivalent vaiation in the Wold (2004 $ million, estited sale) Figue 6: equivalent vaiation in Italy (2004 $ million, estited sale) AI RI RIMFM RIARM RIAFM AI RI RIMFM RIARM RIAFM 16

17 Figue 7: equivalent vaiation RI model (2004 $ million) Figue 8: equivalent vaiation RIMFM model (2004 $ million) Noth Cente Noth Cente Figue 9: equivalent vaiation RIARM model (2004 $ million) Figue 10: equivalent vaiation RIAFM model (2004 $ million) Noth Cente Noth Cente 17

18 Figue 11: equivalent vaiation in the Wold (2004 $ million) Low Medium High Fatos and/o goods mobility FAC ARM FAC and ARM Figue 12: equivalent vaiation in Italy (2004 $ million) Low Medium High Fatos and/o goods mobility FAC ARM FAC and ARM 18

19 Table 5: sensitivity analysis (EV, 2004 million $) ARM2 = ARM1 IMP2 = IMP1 ARM2 = 2 ARM1 IMP2 = 2 IMP1 ARM2 = 5 ARM1 IMP2 = 5 IMP1 Noth FAC = FAC = FAC = Cente FAC = FAC = FAC = FAC = FAC = FAC = EU FAC = FAC = FAC = ROW FAC = FAC = FAC = Conlusions and futhe eseah Ou appoah uses both tanspot infomation and eonomi data in a onsistent statistial famewok via the RAS method to obtain a sub-national database fo Italy. Results ae obust enough with espet to the standad GTAP model and welfae outomes impove when moving towad moe ompetitive and integated makets at the sub-ounty level, suggesting a highe apaity of Italian sub-national agents to eat to hanges in elative maket pies (maket-diven o autonomous adaptation featue typial of CGE models). Distibutional eonomi effets ae stongly uneven aoss sub-national egions even in the ase of a unifom shok. Ineasing mobility of fatos (labou and apital) within Italy amplifies the uneven pattens aoss sub-national egions. Sensitivity analysis on Amington and CET elastiity shows onsistent eonomi esults. Futhe eseah involves two main field: the database and the model. Conening the database we have to extend this fist vesion to the 20 Italian egions. Atually, this goal has been ahieved, we just need to do some additional efinement and hek. It will be impotant to find a bette estimation method to detemine tade flows in the sevie seto beause so fa we have used the oveall amount of shipped goods as poxy. It would be also inteesting to oopeate with othe ounties inside and outside EU fo olleting sub-national infomation and extending the database beyond Italy, espeially in the Mediteanean aea. In fat, ou methodology an be applied to othe ounties aoding to the data availability, in patiula fo tanspot bilateal flows of aied goods. 19

20 With egad to the modelling pat, we should test the model with eal shoks (e.g. exteme natual events as floods) to hek whih model paameteization podues moe easonable esults. Finally, the majo effot in the next months will be to ombine the ICES, the enegy-oiented CGE model developed in CMCC and FEEM, and the sub-national model to analyse deepe the linkages in the enegy seto (RES inluded) and assess bette CO2 emission pattens. Aknowledgments This wok is pat of the eseah developed by CMCC (EuoMediteanean Cente on Climate Change) unde the GEMINA pojet, funded by the Italian Ministies fo the Reseah and fo the Envionment, Land and Sea. The authos ae the only esponsible fo eos and omissions in this wok. Refeenes Canning, P. & Tsigas, M. (2000). Regionalism, Fedealism, and Taxation: A Food and Fam Pespetive. Tehnial Bulletin No. 1882, Eonomi Reseah Sevies, U.S. Depatment of agiultue. Chintakan, P. & Millimet, D.L. (2006). The envionmental onsequenes of tade: Evidene fom subnational tade flows. Jounal of Envionmental Eonomis and Management, Elsevie, 52(1), Dixon, P., Rimme, M. & Wittwe, G. (2012). USAGE-R51, a state-level multi-egional CGE model of the US eonomy: Dubé, J. & Lemelin, A. (2005). Estimation expéimentale des flux d éhanges inteégionaux pa la méthode de minimisation de l entopie oisée. Revue anadienne des sienes égionales/canadian Jounal of Regional Siene, 28(3), Hoidge, M. & Wittwe, G. (2010). Binging egional detail to a CGE model using CENSUS data. Spatial Eonomi Analysis, 5(2), MCallum, J. (1995). National Bodes Matte: Canada-U.S. Regional Tade Pattens. Ameian Eonomi Review, 85(3), MDougall, R. (1999). Entopy Theoy and RAS ae Fiends. GTAP Woking Papes 300, Cente fo Global Tade Analysis, Depatment of Agiultual Eonomis, Pudue Univesity. Naayanan, B. & Walmsley, T. (2008). Global Tade, Assistane, and Podution: The GTAP 7 Data Base. Cente fo Global Tade Analysis, Pudue Univesity. Peali, F., Pieoni, L. & Standadi, G. (2012). Wold taiff libealization in agiultue: An assessment using a global CGE tade model fo EU15 egions. Jounal of Poliy Modeling, 34(2), Rodiguez, U-P. E. (2007). State-of-the-At in Regional Computable Geneal Equilibium Modelling with a Case Study of the Philippines, Agiultual Eonomis Reseah Review, Agiultual Eonomis Reseah Assoiation (India), 20(1),