EKC-type transitions and environmental policy under pollutant uncertainty and cost irreversibility

Previous studies have suggested that some pollutant levels first increases due to the economic growth and then start decreasing, the pattern being called the “environmental Kuznets curve” (EKC). We examine EKC-type transitions of pollutant levels not with respect to economic growth but more generally in time. Assuming that each policy maker optimally executes the two switching options of regulation and unregulation for pollution, the switching dynamics of environmental policy can be described by an alternating renewal process. It is shown that the double Laplace transform of transition density of a pollutant level can be obtained by a novel application of renewal theory. The expected level of overall pollutants is then calculated numerically and found to exhibit either a Λ‐shaped or an N-shaped pattern in time. Our results present a simple explanation for the EKC-type transitions of pollutant levels within a real options framework.     

Equilibrium pricing of contingent claims in tradable permit markets

We advance a model of the tradable permit market and derive a pricing formula for contingent claims traded in the market in a general equilibrium framework. It is shown that prices of such contingent claims exhibit significantly different properties from those in the ordinary financial markets. In particular, if the social cost function kinks at some level of abatement, the forward price, as well as the spot price, can be subject to the so‐called price spike. However, this price‐spike phenomenon can be weakened if a system of banking and borrowing is properly introduced. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:559–589, 2010     

Political Measures for Strategic Environmental Policy with External Effects

This paper investigates an environmental policy designed to reduce the emission of pollutants under uncertainty, with the agent problem as an optimal stopping problem. We first analyze the two cases in which there are one agent and two competing agents by following Ohyama and Tsujimura (2005). When we consider a model of strategic agents, we need to analyze the external economic effect that is peculiar to an agent’s environmental policy implementation. Then, to improve and resolve these external effects, we examine three alternative political measures, comprising an environmental subsidy, an environmental tax and an emission trading system. The results of the analysis indicate that the environmental subsidy and environmental tax promote environmental policy. However, they do not create an incentive to be the leader. On the other hand, an emissions trading system not only promotes environmental policy but also creates an incentive for leadership.This paper was previously circulated under the title “Political Measures for Strategic Environmental Policy with Induced Effects”. The authors would like to thank Masaaki Kijima for helpful comments. The authors would also like to thank Alistair Munro and two anonymous referees providing detailed comments and suggestions. This research was partially supported by Daiwa Securities Group Inc. The second-named author was partially supported by the Ministry of Education, Culture, Sports, Science and Technology, Grant-in-Aid for Scientific Research (B) (2), 16310118.     

Interindustry flows, non-traded intermediate goods and the theory of effective protection : A general equilibrium analysis

This paper examines the response of net and gross outputs of tradeable goods to changes in tariff structure in the context of a comprehensive general equilibrium model with interindustry flows and non-traded, as well as imported, intermediate goods. There are two major results. First, the nominal rate of tariffs on a tradeable good is shown to correctly indicate the movements of its net output under most general conditions. Second, the (modified and) generalized Corden index of effective protection for a tradeable good is revealed to be in a close relationship with the behavior of its gross output under certain restrictions on the input substitutability of industries.     

Pricing of discount bonds with a Markov switching regime

We consider a Markov switching regime and price a discount bond using a CIR-type short rate model. An explicit formula is obtained for the bond price which includes the solution of a matrix ODE. Our model is easy to calculate and captures the effect of regime uncertainty in the price and term structure.     

Compensation measures for alliance formation: A real options analysis

This paper presents a real options model of alliance formation between two firms for entry into a new market. We analyze how different compensation measures affect the alliance timing and option values. Generally, when profit structures of the two firms before and after an alliance are different, their individually optimal alliance timings do not coincide. Therefore, achieving an agreement on a common alliance timing becomes an important issue. To promote alliance formation, we examine two feasible compensation measures provided by one firm to the other: share adjustment (flow compensation) and subsidy (lump-sum compensation). We find that subsidy induces an earlier alliance, although share adjustment is Pareto optimal in terms of the joint option value.     

Partial Free Trade Agreements and Economic Welfare: Reconsidering GATT Article 24

This paper generalizes the Kemp–Wan theorem on the customs union to cover partial and incomplete free trade agreements emerging all over the world and elucidates the conditions which ensure that they are potentially conducive to the economic welfare of member countries without harming the rest of the world. In the light of this generalization, it also reconsiders two well‐known conditions stipulated in Article 24 of the GATT required for the formation of FTAs.     

Insider trading with correlation between liquidity trading and a public signal

We analyse a Kyle-type continuous-time market model in which liquidity trading is correlated with a noisy public signal that is released continuously. We show that, in contrast to the previous literature, Kyle's λ, the price sensitivity to the order flow, can even be non-monotonic, depending on the correlation structure. We also show that the introduction of an additional public signal does not necessarily improve the informational efficiency of the market, depending on the correlation.     

A theory of competitive industry dynamics with innovation and imitation

Empirical evidence on industry life-cycle reveals a pattern in which innovation rates remain fairly stable or are perhaps even higher at early stages, while patenting increases sharply as the industry matures. This increase in patenting in later stages is accompanied by net exit and lower rates of output growth and price decline. In this paper, we develop a dynamic model of a competitive industry with innovation and imitation that is consistent with these stylized facts. We derive an equilibrium growth path, along which leading firms invest in increasing the stock of technological knowledge and choose not to prevent imitation by other firms as long as the industry remains relatively small. As the industry expands including new entry, the leaders' optimal amount of investment gradually declines. We show that under some rather general conditions, there would exist a scale of the industry where innovating firms would choose to start preventing free imitation, bringing further expansion of the industry through new entry to a halt and causing net exit.