Carbon Taxes and Joint Implementation. An Applied General Equilibrium Analysis for Germany and India

Germany has committed itself toreducing its carbon emissions by 25 percent in2005 as compared to 1990 emission levels. Toachieve this goal, the government has recentlylaunched an environmental tax reform whichentails a continuous increase in energy taxesin conjunction with a revenue-neutral cut innon-wage labor costs. This policy is supposedto yield a double dividend, reducing both, theproblem of global warming and high unemploymentrates. In addition to domestic actions,international treaties on climate protectionallow for the supplementary use of flexibleinstruments to exploit cheaper emissionreduction possibilities elsewhere. One concreteoption for Germany would be to enter jointimplementation (JI) with developing countriessuch as India where Germany pays emissionreduction abroad rather than meeting itsreduction target solely by domestic action. Inthis paper, we investigate whether anenvironmental tax reform cum JI providesemployment and overall efficiency gains ascompared to an environmental tax reformstand-alone. We address this question in theframework of a large-scale general equilibriummodel for Germany and India where Germany mayundertake JI with the Indian electricitysector. Our main finding is that JI offsetslargely the adverse effects of carbon emissionconstraints on the German economy. JIsignificantly lowers the level of carbon taxesand thus reduces the total costs of abatementas well as negative effects on labor demand. Inaddition, JI triggers direct investment demandfor energy efficient power plants produced inGermany. This provides positive employmenteffects and additional income for Germany. ForIndia, joint implementation equips itselectricity industry with scarce capital goodsleading to a more efficient power productionwith lower electricity prices for the economyand substantial welfare gains.     

The Downside of Knowledge Spillovers: An Explanation for the Dispersion of High-tech Industries

Both theoretical work on knowledge spillovers and regional policy initiatives often assume that there exists a general and unanimous advantage for firms to cluster. But opposed to the benefit is the disadvantage of sharing knowledge with other (rival) firms. This paper highlights the “downside” associated with knowledge spillovers and presents a four-stage game of location choice where spillovers result from labour poaching and where the strategic interaction between firms may make them avoid co-location with spillovers. The model provides an explanation for the dispersion of German high-tech industries found in a companion paper.     

Soziale Lage — Was sind die drängendsten Probleme?

Democracy seems to be at risk. People elect populists and autocrats, who offer simple solutions to social problems. Often, these problems are not even real ones but are only perceived as such. Economists have measures to determine which problems are fact-based, but they cannot draw a clear distinction between academic analysis and normative demand. If politics pursues a correction of a market outcome, any normative criteria other than efficiency have to be outlined explicitly. Nevertheless, some authors consider inequality one of the central contemporary social and economic challenges. Marcel Fratzscher emphasises that the solution is not found in more redistribution via taxes and transfers, but rather through greater equality of opportunity and social and educational mobility. Bert Rürup thinks that to stabilise the acceptance of the compulsory pension scheme, the dominance of the equivalence principle should be reduced. Further, the existence of different federal subsidy schemes should be replaced by a fixed federal contribution rate in alignment with the pension expenditures. In an international comparison, the fiscal burden for households with small and mid-level earned incomes is exceptionally high in Germany. In order to reduce this burden, Rürup suggests a contribution-free allowance for the social insurance contributions.     

The systematic risk of corporate bonds: default risk,term risk,and index choice

In this paper, we empirically examine the systematic risk of corporate bonds in the Euro area. Based on a unique sample of 784 bonds from 1999 to 2010, we show that the systematic risk of constructed bond portfolios and individual bonds—measured against three different market indices—depends on credit quality, term risk, and index choice. A significant increase in systematic risk for lower-rated bonds is observed following the start of the financial crisis. In multi-factor models, bond portfolios load significantly on default and term risk, which are included as additional factors. Conducting Fama and MacBeth cross-sectional tests, we find that default and term risk are priced with economically relevant premiums that range from 0.35 to 0.62 % per month. Our results are robust to the inclusion of characteristics such as rating and time to maturity.     

Variable Selection in Cross‐Section Regressions: Comparisons and Extensions

Cross‐section regressions often examine many candidate regressors. We use multiple testing procedures (MTPs) controlling the false discovery rate (FDR) — the expected ratio of false to all rejections — so as not to erroneously select variables because many tests were performed, yielding a simple model selection procedure. Simulations comparing the MTPs with other common model selection criteria demonstrate that, for conventional tuning parameters of the selection procedures, only MTPs consistently control the FDR, but have slightly lower power. In an empirical application to growth, MTPs and PcGets/Autometrics identify similar growth determinants, which differ somewhat from those obtained by Bayesian Model Averaging.     

PRICE SETTING OF MARKET MAKERS: A FILTERING PROBLEM WITH ENDOGENOUS FILTRATION

This paper studies the price‐setting problem of market makers under risk neutrality and perfect competition in continuous time. The classic approach of Glosten–Milgrom is followed. Bid and ask prices are defined as conditional expectations of a true value of the asset given the market makers' partial information that includes the customers' trading decisions. The true value is modeled as a Markov process that can be observed by the customers with some noise at Poisson times. A mathematically rigorous analysis of the price‐setting problem is carried out, solving a filtering problem with endogenous filtration that depends on the bid and ask price processes quoted by the market maker. The existence and uniqueness of the bid and ask price processes is shown under some conditions.     

Does truth win when teams reason strategically?

We study behavior in the race game with the aim of assessing whether teams can create synergies. The race game has the advantage that the optimal strategy depends neither on beliefs about other players nor on distributional or efficiency concerns. Our results reveal that teams not only outperform individuals but that they can also beat the “truth-wins” benchmark. In particular, varying the length of the race game we find that the team advantage increases with the complexity of the game.