The Incredible Economics of Geoengineering

The focus of climate policy so far has been on reducing the accumulation of greenhouse gases. That approach, however, requires broad international cooperation and, being expensive, has been hindered by free riding; so far, little action has been taken. An alternative approach is to counteract climate change by reducing the amount of solar radiation that strikes the Earth—“geoengineering.” In contrast to emission reductions, this approach is inexpensive and can be undertaken by a single country, unilaterally. But geoengineering also has worrying consequences: it may harm some countries; it would not address ocean acidification; it would pose new risks. The fundamental challenge posed by this new technology is not free riding but governance: who should decide if and under what circumstances geoengineering should be used?     

A Voting Architecture for the Governance of Free‐Driver Externalities,with Application to Geoengineering

Abating climate change is an enormous international public‐goods problem with a classical “free‐rider” structure. However, it is also a global “free‐driver” problem because geoengineering the stratosphere with reflective particles to block incoming solar radiation is so cheap that it could essentially be undertaken unilaterally by one state perceiving itself to be in peril. This exploratory paper develops the main features of a free‐driver externality in a simple model motivated by the asymmetric consequences of type‐I and type‐II errors. I propose a social‐choice decision architecture, embodying the solution concept of a supermajority voting rule, and derive its basic properties.     

Using the law to change the custom

The custom often acts as a powerful hindrance to equity-increasing changes. In this paper, we present a simple model of legal dualism in which a progressive legal reform can, under certain conditions, shift the conflicting custom in the direction intended by the legislator. Formal law then acts as an outside anchor that exerts a 'magnet effect’ on the custom. We also characterize the conditions under which a moderate reform performs better than a radical one in improving the welfare of the disadvantaged sections of the population. We illustrate our insights using examples on inheritance, marriage, and divorce in Sub-Saharan Africa and India.     

The Political Economy of Geoengineering as Plan B: Technological Rationality,Moral Hazard,and New Technology

Geoengineering would mask and reproduce capital’s contradictory needs to self-expand, on the one hand, and maintain a stable climate system, on the other. The Plan B frame, which presents geoengineering as a back-up plan to address climate change in case there is a failure to sufficiently reduce emissions (Plan A), is one means to depict this condition to the public and is a product of, and appeals to, a prevalent ‘technological rationality’. Despite its misleading simplicity, logical flaws, and irrational rationality, the Plan B frame is a relatively valid representation of geoengineering in current political-economic conditions. Although the Plan B frame will gain traction because Plan A is too expensive in the short term and does not serve powerful interests, there are alternative social futures in which technology could be used to address climate change in ways that preserve the environment and reduce social risks.     

Miracle on Sixth Avenue: Information Externalities and Search

After a long dormant period, Lower Sixth Avenue in New York has under gone a rapid revitalisation. We show that a simple search theoretic model with information spillovers can explain both the period of underuse and the rapid turnaround. The model reduces to a simple equation, which allows us to do comparative statics on the duration of vacancies. We show how the solution reacts to changes in market structure and changes in search technology. The model is suggestive of difficulties that may occur in many markets in which there are changes over time in the optimal use of resources.     

Cooperation and Competition in Climate Change Policies: Mitigation and Climate Engineering when Countries are Asymmetric

We study a dynamic game of climate policy design in terms of emissions and solar radiation management (SRM) involving two heterogeneous countries or group of countries. Countries emit greenhouse gasses (GHGs), and can block incoming radiation by unilateral SRM activities, thus reducing global temperature. Heterogeneity is modelled in terms of the social cost of SRM, the environmental damages due to global warming, the productivity of emissions in terms of generating private benefits, the rate of impatience, and the private cost of geoengineering. We determine the impact of asymmetry on mitigation and SRM activities, concentration of GHGs, and global temperature, and we examine whether a tradeoff actually emerges between mitigation and SRM. Our results could provide some insights into a currently emerging debate regarding mitigation and SRM methods to control climate change, especially since asymmetries seem to play an important role in affecting incentives for cooperation or unilateral actions.     

Do standards improve the quality of traded products?

We examine whether standards raise the quality of traded products. Matching a panel of French firm–product–destination export data with a data set on sanitary and phytosanitary measures and technical barriers to trade, we find that such quality standards enforced on products by destination countries: (i) favour the export probability of high-quality firms provided that their productivity is high enough, (ii) raise the export sales of high-productivity, high-quality firms at the expense of low-productivity and low-quality firms and (iii) increase the quality supplied by firms if their productivity is high enough. We then develop a simple new trade model under uncertainty about product quality in which heterogeneous firms can strategically invest in quality signalling to rationalize these empirical results on quality and selection effects.     

The Intergenerational Transfer of Solar Radiation Management Capabilities and Atmospheric Carbon Stocks

Solar radiation management (SRM) technologies are considered one of the likeliest forms of geoengineering. If developed, a future generation could deploy them to limit the damages caused by the atmospheric carbon stock inherited from the current generation, despite their negative side effects. Should the current generation develop these geoengineering capabilities for a future generation? And how would a decision to develop SRM impact on the current generation’s abatement efforts? Natural scientists, ethicists, and other scholars argue that future generations could be more sanguine about the side effects of SRM deployment than the current generation. In this paper, we add economic rigor to this important debate on the intergenerational transfer of technological capabilities and pollution stocks. We identify three conjectures that constitute potentially rational courses of action for current society, including a ban on the development of SRM. However, the same premises that underpin these conjectures also allow for a novel possibility: If the development of SRM capabilities is sufficiently cheap, the current generation may for reasons of intergenerational strategy decide not just to develop SRM technologies, but also to abate more than in the absence of SRM.     

On the moral hazard problem without the first-order approach

We study the moral hazard problem without the first-order approach or other common structure. We present sufficient conditions under which the shadow value of simultaneously tightening the minimum payment and individual rationality constraints has a simple and intuitive expression. We then show how this expression can be used to perform comparative statics exercises in which we study (i) the effect of a change in the agent?s wealth on the well-being of the principal; and (ii) the effects of the outside option and minimum payment on the effort level optimally implemented.     

The Delaying Effect of Financing Constraints on Investment

We develop a simple model in which a firm considers a number of investment projects. Because of limited financial resources, the firm can undertake at most one project. In line with the literature on real options we stress features like irreversibility, uncertainty and the possibility of postponing the investment decision and show under which conditions limited availability of funds tends to increase the value of waiting.     

Status, the Distribution of Wealth, and Growth

We analyze a simple model of endogenous growth in which individuals care about both consumption and their rank in the distribution of wealth. We show that the steady-growth rate of the economy increases with both the strength of the status-seeking motive and the initial equality of the wealth distribution. Contrary to the basic model of endogenous growth, the equilibrium growth rate is not necessarily smaller than in the social optimum, and we identify the circumstances under which the two coincide.     

Zero-intelligence versus human agents: An experimental analysis of the efficiency of Double Auctions and Over-the-Counter markets of varying sizes

We study two well-known electronic markets: an over-the-counter (OTC) market, in which each trader looks for the best counterpart through bilateral negotiations, and a double auction (DA) market, in which traders post their quotes publicly. We focus on the DA–OTC efficiency gap and show how it varies with different market sizes (10, 20, 40, and 80 traders). We compare experimental results from a sample of 6400 undergraduate students in Economics and Management with zero-intelligence agent-based simulations. Simulation results show that the traded quantity increases with market size under both DA and OTC. Experimental results confirm the same tendency under DA, while the share of periods in which the traded quantity is lower than the efficient one increases with market size under OTC, ultimately leading to a DA–OTC efficiency gap increasing with the market size. We rationalize these results by putting forward a simple model of OTC market as a repeated bargaining procedure under incomplete information on buyers' valuations and sellers' costs. We show that efficiency decreases slightly with size due to two counteracting effects: acceptance rates in earlier interactions decrease with size, and earlier offers increase, but not always enough to compensate for the decrease in acceptance rates.     

Rational expectations for large CGE models: A practical algorithm and a policy application

We describe a simple iterative method for solving large dynamic CGE models under rational expectations. Details are given for Australia's MONASH model but the approach applies to a wide range of CGE models. The method is automated in the RunMONASH Windows software, putting CGE modelling under rational expectations within the reach of non-specialist modellers. We provide an illustrative application in which MONASH results under rational expectations are compared with results under static expectations. The application and supporting software can be downloaded. Results from the application are interpreted in terms of elementary economic mechanisms.     

On the timing of information release

We consider a simple principal-agent model in which moral hazard concerns can make it attractive to delay the release of valuable planning information. We also demonstrate that temporary manipulation of the content of the information released can be valuable.     

Constitutional Rules of Exclusion in Jurisdiction Formation

The rules under which jurisdictions (nations, provinces) can deny immigration or expel residents are generally governed by a constitution, but there do not exist either positive or normative analyses to suggest what types of exclusion rules are best. We stylize this problem by suggesting four constitutional rules of admission: free mobility, admission by majority vote, admission by unanimous consent, admission by a demand threshold for public goods. In a simple model we characterize the equilibria that result from these rules, and provide a positive theory for which constitutional rules will be chosen.     

A simple explanation of the relative performance evaluation puzzle

We study a simple moral hazard model in which two risk-neutral owners establish incentives for their risk-averse managers to exert effort. Because the probability distributions over output realizations depend on a common aggregate shock, optimal contracts make the compensation of each manager contingent on own performance but also on a performance benchmark—the performance of the other firm. If the marginal return of effort depends on the aggregate state, optimal contracts are not monotonically decreasing in the performance benchmark. This provides a simple explanation of the Relative Performance Evaluation (RPE) Puzzle—the documented lack of a negative relationship between CEO compensation and comparative performance measures, such as industry or market performance. Our simple model can also explain one-sided RPE—the documented tendency to insulate a CEO's rewards from bad luck, but not from good luck. We clarify that our results are robust in several dimensions and we discuss other applications of our findings.     

Non-parametric and semi-parametric asset pricing

We find that the CAPM fails to explain the small firm effect even if its non-parametric form is used which allows time-varying risk and non-linearity in the pricing function. Furthermore, the linearity of the CAPM can be rejected, thus the widely used risk and performance measures, the beta and the alpha, are biased and inconsistent. We deduce semi-parametric measures which are non-constant under extreme market conditions in a single factor setting; on the other hand, they are not significantly different from the linear estimates of the Fama-French three-factor model. If we extend the single factor model with the Fama-French factors, the simple linear model is able to explain the US stock returns correctly.     

AIRPORT PRIVATIZATION AND INTERNATIONAL COMPETITION

We provide a simple theoretical model to explain the mechanism whereby the privatization of international airports can improve welfare. The model consists of a downstream (airline) duopoly with two inputs (landings at two airports) and two types of consumers. The airline companies compete internationally. We show that the outcome in which both airports are privatized is always an equilibrium, whereas that in which no airport is privatized is an equilibrium only if the degree of product differentiation is large. We also discuss airport congestion problems within the model framework.     

Implementing the Mortensen rule in a frictional labor market

We show that, in settings where meetings can be multilateral, the allocation rule proposed by Mortensen (1982) can be relatively straightforward to implement: as a local auction conducted by sellers. The implications of using this mechanism in a simple model of the labor market are then explored. We characterize the equilibrium properties of this model, which include wage dispersion, and examine its implied Beveridge curve. A dynamic version of the model is calibrated to the US labor market, and we show that the model can account for observed vacancy rates, given parameters that are chosen to match the average wages and the natural rate of unemployment, although the implied wage dispersion is quite small. Finally, in the limit, as the time between offer rounds in the model approaches zero, the equilibrium approaches the Walrasian competitive equilibrium.     

Generalized least squares and maximum likelihood estimation of the logistic function for technology diffusion

Given a simple stochastic model of technology adoption, we derive a function for technological diffusion that is logistic in the deterministic part and has an error term based on the binomial distribution. We derive two estimators—a generalized least squares (GLS) estimator and a maximum likelihood (ML) estimator—which should be more efficient than the ordinary least squares (OLS) estimators typically used to estimate technological diffusion functions. We compare the two new estimators with OLS using Monte-Carlo techniques and find that under perfect specification, GLS and ML are equally efficient and both are more efficient than OLS. There was no evidence of bias in any of the estimators. We used the estimators on some example data and found evidence suggesting that under conditions of misspecification, the estimated variance-covariance of the ML estimator is badly biased. We verified the existence of the bias with a second Monte-Carlo experiment performed with a known misspecification. In the second experiment, GLS was the most efficient estimator, followed by ML, and OLS was least efficient. We conclude that the GLS estimator of choice.