Ex-post efficient permit markets: a detailed analysis

This paper provides a detailed analysis of ex-post efficient permit markets. After a short review of institutional designs that can achieve ex-post efficiency under uncertainty and asymmetric information, we analyze the effects of an ex-post efficient regulation on the expected costs of the regulated firms, on their investment behavior, and on the incentives for strategic behavior on imperfectly competitive permit markets. Also we inquire about the budget effects of the regulation. Our results show that ex-post efficient permit markets have considerable benefits beside the direct increase in expected social welfare.      

Old-age benefits and retirement decisions of rural elderly in Brazil

I estimate the impact of social security benefits on retirement decisions of rural workers by studying changes in the rules governing old-age benefits for rural workers in Brazil. I focus on a reform implemented in 1991, which reduced the minimum eligibility age, increased benefits, and extended the program to non-heads of households. Because those benefits come with no strings attached — they are not means or retirement tested — any behavioral response is a pure income effect. The main finding of the paper is that access to old-age benefits is a strong determinant of retirement of rural workers in Brazil: receiving old-age benefits increases the probability of not working by about thirty-eight percentage points and reduces total hours per week by 22½ h.     

ECONOMIC INCENTIVES AND CONTRACTS: THE USE OF PSYCHOTROPIC MEDICATIONS

The advent of novel psychotropic medications has revolutionized treatments for mental illnesses over the past few decades. Concurrently, changes in mental health coverage, particularly for Medicaid patients, created economic incentives for insurance carriers to shift costs and to encourage the use of psychotropic drugs. To quantify these effects, based on the framework in Griliches' seminal study on hybrid corn, we estimate logistic diffusion models using a longitudinal data set on Medicaid drug utilization. We find that financial incentives played a significant role in encouraging use of new medications that have lower physician specialty skill requirements. ( JEL O30, O33, I18, L14)     

The shading and distancing of commerce: When internalization is not enough

A political economy of degradation and of sustainability should account not only for the full range of production costs but the sources of those costs. It should consider how the pursuit of wealth can, deliberately or not, lead to uncounted costs and unaccountable actors. This article explores the conditions of cost generation and externalization, especially those that are largely unintended and inadvertent. It shows how the pursuit of wealth, the expansion of markets, the mobility of capital, and the entanglements of production processes can lead to the unwitting generation and displacement of costs. It analyzes competitive business strategy and patterns of production and consumption for their contribution to such costs. Business strategy and state policy tend to create a never-ending search for frontiers, however simulated and however unecological they may be. The costs generated in those frontiers are a function of shading, that is, obscuring of costs, and distancing, the separation of production and consumption decisions, both of which impede ecological and social feedback and create cognitive, institutional, and ethical lags between initial benefits and eventual full costs. As distance increases along dimensions of geography, culture, bargaining power, or agency, negative feedback loops are severed, stakeholders expand while decision making contracts, environmental problems are displaced, and shading and cost externalization increase. The likelihood of sustainable resource use increases as distance is lowered, as institutions locate decision authority in those who receive negative ecological feedback and who have the capacity and incentives to act on that feedback, and as the burden of proof for economic interventions shifts to the interveners.     

Debt, managerial compensation and learning

Using a dynamic model with uncertainty and asymmetric information, we study the impact of debt and bankruptcy on managerial compensation and learning. In this model, compensation has two roles to play—providing incentives to the manager and learning about his type. We show that debt, through bankruptcy, acts as a substitute of compensation in both dimensions and derive conditions under which debt lowers average compensation, pay-performance sensitivity and increases learning. We also examine the choice of debt and show that firm value can be increased due to debt's effect on managerial compensation, abstracting from other costs and benefits of debt. Finally, we conduct comparative statics with respect to the underlying parameters.     

Development and Use of Biopesticides: Implications of Government Policy and Consumers’ Preferences

Biopesticides developed and used in the future will emerge against the backdrop of the environmental effects associated with the use of conventional pesticides and government policies designed to control these effects. In the final analysis, farmers’ choices on pesticides will be influenced by the prevailing costs and benefits of conventional pesticides and their alternatives including biopesticides. The outlook for pesticide use is complicated, though some directions can be perceived. There are a number of factors that will serve potentially to impact pesticide use which in turn will affect the development of biopesticides. These include pesticide regulation, the FAIR Act, the crops planted, the management of ecologically based systems, and consumer demand for “green” products.     

Uncertainty and climate treaties: Does ignorance pay?

Uncertainty and learning play an important role in the management of many environmental and resource problems and in particular in climate change. In stylized game-theoretic models of international environmental treaty formation, which capture the strategic interactions between nations, learning usually has a negative impact on the success of cooperation. We use a richer climate model that captures the large heterogeneity between different world regions and considers uncertainty about the benefits and costs from climate mitigation. By explicitly exploiting differences between regions and allowing transfers to mitigate free-rider incentives, we derive much more positive conclusions about the role of learning.     

CASH INCENTIVES AND UNHEALTHY FOOD CONSUMPTION

This paper studies the effectiveness of taxes, subsidies and cash incentives in reducing unhealthy food consumption. Using an inter‐temporal rational choice model with habit, we calibrate and simulate the effect of those policies to US and UK data. Our findings suggest that cash incentives may be the most effective policy in reducing unhealthy food consumption. However, when comparing the reduction in costs for the social security system with the implementation costs, cash incentives can lead to significant monetary losses. Taxes are relatively ineffective in reducing unhealthy food consumption. Finally, subsidies have the best balance between effectiveness and monetary benefits to society.     

Consumer support for environmental policies: An application to purchases of green cars

This paper focuses on how consumer motivation can be tapped in order to encourage the adoption of cleaner technologies. Consumers are heterogeneous — they may be guided by intrinsic motivation or extrinsic motivation. While information provision policies (such as the energy label for cars) may be effective in encouraging certain consumers to adopt green cars, financial incentive schemes (such as subsidies or fines) may be more persuasive for extrinsically-motivated consumers. We develop a dynamic theory of adoption of environmental innovations, in which information-provision policies are followed by financial incentives (first ‘carrot’, then ‘stick’ incentives). Analysis of a survey dataset of Swiss households observes considerable heterogeneity in terms of support of information-provision or financial incentive policies, in line with our conjectures. Our results will be of particular interest to policymakers interested in guiding consumers towards cleaner technologies.     

Why China's approach to institutional change has begun to succeed

In the constantly changing modern economic environment, a country's ability to implement institutional reforms is crucial to maintain economic growth and to promote the welfare of its citizens. Unfortunately, it can be difficult to persuade institutional stakeholders that the change is necessary, and as a result, efforts at institutional change often fail. To avoid situations in which change is sudden and disruptive, China has chosen a more cautious approach of gradual institutional change leading to smooth reform, which Deng Xiaoping referred to as “crossing the river by stepping from stone to stone” — a metaphor that translates into doing a careful experiment before broad application of an approach for which you lack prior experience. This approach allows adaptation to local conditions during subsequent broader adoption of a new approach, and can thereby decrease the risks and costs of adopting a new strategy by first testing the change and then demonstrating the potential benefits to local residents and governments. This innovative approach has been a key component of China's economic reforms since 1978, and the Chinese experience shows how adapting programs to local natural and social conditions can help to motivate change and sustain the implementation of new institutions.     

Motivation crowding in environmental protection: Evidence from an artefactual field experiment

This paper examines how motivation, crowding and social image affect environmental conservation decisions. An artefactual field experiment conducted in Bolivia is used to reproduce the trade-off between individual and social benefits in natural resource use and test the effect of non-monetary and non-regulatory incentives on pro-social behavior for environmental conservation. The results show the presence of a social norm prescribing positive contribution towards environmental protection, and that external incentives have heterogeneous effects on pro-social behavior depending on how they influence reputation and self-image. The experimental results differ from those of analogous experiments conducted in the laboratory, and are instead consistent with those from field experiments on common-pool resource management. This fact suggests caution in generalizing conclusions, reached in the laboratory, to different settings and populations.     

Regulating Providers' Reimbursement in a Mixed Market for Health Care

Hospitals can be reimbursed for their costs in many ways. Several authors have investigated the effects of these reimbursement rules on physician incentives and, therefore, on the quantity of services provided to patients. A form of (linear) cost-sharing tends to emerge as the socially efficient reimbursement policy. We present a model of hospital reimbursement, based on Ellis and McGuire (1986). The new feature is that physicians can supply private health care services to a patient, as well as public sector ones; a common institutional arrangement in many health care systems. We investigate the optimal public sector reimbursement rule given that private market incentives must now be taken into account. Public sector cost-sharing remains socially efficient, but it is generally non-linear: the precise details depend on whether public and private services are substitutes or complements and on the degree of social efficiency achieved in the private sector. Other reimbursement schemes exhibit optimality properties not present in Ellis and McGuire's work.     

Options for Electricity Transmission Regulation in Australia

The pricing of access to electricity transmission networks in Australia is currently under review. Several options have been proposed including those based on nodal pricing and the assignment of transmission rights contracts. As most of the marginal costs of transmission are recovered through wholesale electricity prices we focus on the key issue of regulation and investment incentives. We find that current options are unlikely to be adequate in terms of encouraging socially optimal levels and timing of new transmission investment. As an alternative, we propose a regulatory scheme, based on a related idea by Sappington and Sibley that can overcome this problem. Our scheme can potentially generate first best results and is readily applicable given the current institutional structure of electricity markets in Australia.     

The social efficiency of instruments of promotion of renewable energies: A transaction-cost perspective

This paper compares the social efficiency of the regulatory instruments used to promote renewable energy sources in electricity generation, taking into consideration their role in promoting the preservation of collective goods. They are based on a purchase obligation and act either by price (feed-in tariffs) or by quantity (bidding for new RES-E capacities; RES-E quotas). From the Public Economics perspective, the two instruments are distinct in terms of cost-efficacy and market incentives in a world of imperfect information. Exchangeable quotas of green certificates are preferred because this instrument allows better control over consumer costs and whilst retaining market incentives. Transaction cost economics (TCE) contributes to the assessment of these instruments, by introducing RES-E investment safeguard as a major determinant of social efficiency, and the instruments' conformity to its institutional environment as a determinant of its viability. In light of this additional consideration, the arrangements between RES-E producers and obligated buyers inherent in each instrument are in fact quite similar—either long-term contracting or vertical integration. We compare and assess RES-E price- and quantity-instruments on several dimensions from both the public economics and TCE perspectives: control of the cost for consumers, safeguards of RES-E investments, adaptability of the instrument in order to preserve its stability in the long run, market incentive intensity, and conformity with the new market regime of electricity industry. It shows neither instruments offer an optimal solution in each of these dimensions. The government will thus select an instrument in accordance with the relative importance of its objectives.     

The Oslo Protocol on sulfur reduction: the great leap forward?

The increasing number of international environmental agreements (IEAs), and the fact that under some agreements emissions have been reduced beyond agreed targets, are frequently viewed as success stories of international cooperation. We argue that success can only be measured if abatement targets under an IEA are compared with estimated abatement levels in the absence of a treaty, and are evaluated in terms of costs and benefits. We analyze the Oslo Protocol on sulfur reduction, showing that this IEA is not the great leap forward when compared with the calculated Nash equilibrium and the social optimum. However, we also demonstrate that under the Oslo Protocol, more ambitious targets could not have been realized due to strong free rider incentives.     

Lethal model 2: the limits to growth revisited

The author examines some major concerns about global economic growth from both theoretical and empirical points of view, using "the limits-to-growth debate as a reference point to understand the earlier debate about the limits to and perils of growth, and to provide some perspective about the newer debate about environmental threats." He concludes that environmental and resource constraints on economic growth should be modest over the next 50 years and that economic growth is possible providing emphasis is given to "the importance of careful scientific and policy analysis and establishing or strengthening institutions that contain incentives that are compatible with the thoughtful balancing of long-run costs and benefits of social investments."     

Social Norms and Behavior in the Local Commons as Seen Through the Lens of Field Experiments

Behavior in the local commons is usually embedded within a context of incentives, regulations and social norms for the group of resource users. Standard environmental economics has tended mostly to focus on the material incentives and regulations that transform the relative material costs and benefits of various/specific/certain actions. However, there exist behavioral aspects and social norms that affect how individuals value material and non-material incentives, and thus determine their decision to either cooperate or over-extract resources from a common-pool. This paper discusses the importance of social norms in shaping behavior in the commons through the lens of experiments—in particular, experiments conducted in the field with exactly those people who usually face these social dilemmas in their daily lives. Using a large sample of experimental sessions inclusive of around one thousand people, both villagers and students, I test some hypotheses about behavior in the commons, wherein regulations and social norms constrain people’s choices. The results suggest that people evaluate several components of intrinsic and material motivations in deciding whether or not to cooperate. While responding in the expected direction to an imperfectly monitored fine for over extraction, the valuation of the private net cost of violating the regulation is not a sufficient explanation for participants’ changes in behavior in the experiments. Even when violations have zero cost, people may react positively to an external regulator who issues a normative statement about a rule aimed at solving a particular social dilemma.     

环境创新税收政策解构与重构：由单一工具转向组合工具

税收政策工具内置的行为诱导、社会公平、经济发展等性能，使其成为激励环境创新的重要手段。税收政策工具可以解构出环境税与税收优惠两大核心政策工具。其中，环境税将污染行为的外部成本内部化，向企业传递价格压力信号，迫使其作出缴税、减产抑或投入环境创新的抉择，本质上是一种反向压力工具；税收优惠则是一种正向鼓励工具，以减轻税负的方式将应收税款让渡于创新研发，将污染企业向投入环境创新的方向引导。两个政策子工具虽然作用机制相反，但政策目标一致，通过科学、精细的税制设计，实现不同政策功能协同互补，以发挥组合工具“1+1＞2”的政策效应，最大化提升企业环境创新积极性。此外，还应统筹税收政策工具与其它政策工具的组合使用。     

Energy in America's future

Energy in America's Future, the book reported on in this article, assembled facts and performed analyses required for making informed energy choices. It reached broad conclusions on supply and demand prospects and on the environmental and other social aspects of policy choices. Although near-term constraints are severely binding, the nation's natural resource position is favorable for long-run supply expansion. Future technologies are also promising in cost terms. Although costs are bound to rise, a ceiling on long-run supply costs looks to be possible at real levels surprisingly close to current prices. Energy consumption in relationship to overall national output (GNP) will be growing at a slower rate than in recent decades. Consumers will use relatively less energy as a result of higher energy prices, conservation incentives, and new energy-using technology. Even so, overall energy use will grow. Major energy demand policy issues concern not just the likely rate of growth of consumption, but also the possible problems connected with optimizing energy efficiency at the expense of economic efficiency (i.e., output in relation to all inputs, particularly those of labor and capital). Environmental impacts and concerns about questions of human health and safety will continue to affect public acceptance of particular energy technologies. The public will need to be adequately informed on the comparative risks of energy supply technologies, and the technical and institutional means available for reducing these risks. The price system must be permitted to function to the maximum feasible extent. In addition, the task for political leadership is to forge a public consensus in support of achievable energy goals. This has been difficult because of conflicting public perceptions of the facts and clashes in social values among different groups. The future prospects for achieving a national energy consensus should be enhanced by the outlook for slower energy demand growth and favorable supply prospects along with potential improvements in the environmental side effects associated with new and improved supply technologies. As knowledge of these changing circumstances becomes more broadly disseminated, the ability to achieve broad public support of energy goals should grow stronger.     

Designing credit agent incentives to prevent mission drift in pro-poor microfinance institutions

Credit agents in microfinance institutions (MFIs) must be given incentives to acquire information on potential borrowers and select them in accordance with the MFI's objectives. We show that while giving incentives has no cost in for-profit MFIs, it is costly in pro-poor MFIs: When repayment and wealth are positively correlated, a pro-poor MFI cannot obtain the selection of poor clients in the proportion it wishes with incentives based solely on repayment. It then becomes necessary to audit the share of very poor borrowers selected by an agent in order to provide the latter with adequate incentives. When audit costs are large, pro-poor MFIs may have to forego selection on wealth — and use other targeting devices such as working in impoverished geographical locations. Driven by donor concerns with ‘mission drift’ away from the poor, audits on the wealth status of clients have been introduced at the level of MFIs. We show that introducing pro-poor incentives requires extending such audits to the level of credit agents.