Neglected Features of the Safe Minimum Standard: Socio-economic and Institutional Dimensions

This article describes and critically investigates core features of the safe minimum standard of conservation (SMS), as outlined by Ciriacy-Wantrup, which have been neglected, de-emphasized or poorly interpreted. Different ensuing interpretations and developments of SMS, aimed at giving it a theoretical basis and operationalizing it, are scrutinized. It is shown that the definition of features such as irreversibility, uncertainty, threshold and critical zone imply a socio-economic and institutional approach of SMS. Hence, endeavors to find a formal and positive foundation (game theory) or to identify SMS as an adjunct to cost-benefit analysis are unsuccessful. Rather, approaches assigning the definition of acceptable resource use to politics and society conform with SMS (e.g. by political norm setting or societal discourse). Furthermore, the paper discusses close normative relatives of SMS and identifies intragenerational distributional justice as a crucial variable for setting SMS. It is argued that SMS is a socio-economic and institutional approach; this should be the basis for further discussion and development of SMS.     

Optimal Provision of Public Goods: A Synthesis*

The standard approach to the optimal provision of public goods highlights the importance of distortionary taxation and distributional concerns. A new approach neutralizes distributional concerns by adjusting the income tax schedule. We demonstrate that both approaches are derived from the same basic formula. We also take the new approach further by deriving an intuitive formula for the optimal level of public goods, without imposing strong assumptions on preferences. This formula shows that distortionary taxation has a role to play, as in the standard approach. However, the main determinants of optimal provision are different, and the modified Samuelson rule is likely to lead to underprovision.     

Social Expenditure Projections: a Stochastic Approach

This paper develops a stochastic approach to the projection of ratios of social expenditure to GDP in order to examine their sampling properties using simulation methods. The approach involves the translation of informed judgements about the range of variation of variables into distributional parameters. It is suggested that the method can be used in other contexts where projections need to be based on variables whose distributional characteristics cannot be obtained from a time series of data, either because there are few data or because there are good reasons for believing that past variations give little insight into potential future variations. The results suggest that while the standard approach generates unbiased values, these may be associated with quite large standard errors. In making projections, it is therefore recommended that serious consideration should be given to the likely variability in the component distributions. In particular, the results are sensitive to assumptions regarding the growth rate of productivity.     

Does the microsimulation approach used in macro–micro modelling matter? An application to the distributional effects of capital outflows during Argentina's Currency Board regime

We provide a novel comparison between the behavioural and the non-parametric microsimulation approach. Coupled with a CGE model, we consider the distributional effects of the significant capital outflows faced by the Argentinean economy at the end of its Currency Board, in a context with significant macroeconomic similarities to the present crisis in Greece. Both the relatively straightforward ‘non-parametric’ approach and the more complex behavioural approach lead to distributional results that are consistent with the data, suggesting that both are viable alternatives. Looking forward, it would be desirable for researchers to look for additional evidence regarding the distributional effects that these microsimulation models can illuminate for given macroeconomic shocks.     

Economics and the Supreme Court: The Case of the Minimum Wage

In the United States, laissez-faire has been the policy advocated in good times, while social legislation has been called for during crises. One instance of this dichotomy concerns the transformation of the American understanding of minimum wage laws during the early 20^th century. During this time, the view of minimum wage laws changed from one that viewed such laws as theft, to one that saw such laws as being required for distributional justness. We examine the legal-historical debate concerning whether the Supreme Court renounced its policy of laissez-faire individualism in its 1937 ruling finding the minimum wage law constitutional, arguing that it did not. We investigate the free market standard that the Court used to find minimum wage laws unconstitutional in 1923. We demonstrate how the economic conditions of the Depression, coupled with the development of economic theory, explain how the Court eventually found the minimum wage law constitutional.     

Stochastic dominance, efficiency and separation in financial markets

A portfolio problem exhibits separation when all of its solutions can be expressed as affine combinations of a small number of mutual funds. The concept of separation is one of the cornerstones of modern portfolio theory, underlying everything from the mean-variance portfolio selection rule of [7. and 8.] and [11.] to the equilibrium pricing model of [10.], [6.] and [2.]. A great deal of effort has been put into investigating conditions which validate separation assumptions: [3.] as well as [4.] study this problem in terms of utility functions while [9.] takes a distributional approach. The purpose of this note is to show that for the distributional approach, the so-called weak and strong forms of separation are actually equivalent.     

Species preservation versus development: An experimental investigation under uncertainty

The safe minimum standard (SMS) is a decision rule to preserve renewable resources, unless the social costs of doing so are intolerable. While unpersuasive to many, support for the SMS has been advocated by some economists for settings involving irreversibility and a high degree of uncertainty. The objective of this paper is to explore decision-making involving species preservation versus development within an experimental laboratory setting, and involving uncertainty. The experimental design implements a number of prior game-theoretic investigations of the SMS (Bishop, 1978; Ready and Bishop, 1991; Palmini, 1999), involving insurance, and lottery or combined games against nature. The choices are between species preservation, which possibly provides a cure for a disease, or developing habitat, leading to irreversible depletion. Econometric results from a random parameters logit model, using responses from 117 participants (across both U.S. and Mexican university student samples) and 9 treatment choices, indicate that support for the SMS varies across the type of game, the imposed maximum regret condition concerning the relative magnitude of the costs of disease and net benefits of development, a constructed measure of respondents' risk aversion, and other factors. There is also strong evidence of unobservable heterogeneous preferences for preservation within our sample.     

How does credit supply respond to monetary policy and bank minimum capital requirements?

We use data on UK banks׳ minimum capital requirements to study the interaction of monetary policy and capital requirement regulation. UK banks were subject to both time-varying capital requirements and changes in interest rate policy. Tightening of either capital requirements or monetary policy reduces the supply of lending. Lending by large banks reacts substantially to capital requirement changes, but not to monetary policy changes. Lending by small banks reacts to both. There is little evidence of interaction between these two policy instruments. The differences in the responses of small and large banks identify important distributional consequences within the financial system of these two policy instruments. Finally, our findings do not corroborate theoretical models that raise concerns about complex interactions between monetary policy and macro-prudential variation in capital requirements.     

Elasticities of Demand and Willingness to Pay for Environmental Services in Sweden

Are environmental services luxuriesor necessities? Are low-income groupsrelatively more willing to pay forenvironmental improvements than high-incomegroups? The discussion on the shape of theenvironmental Kuznets curve and environmentaljustice call for analyses that approach thesequestions. Following a survey-based approachfor modelling the demand for public goods, thispaper provides estimates of income and priceelasticities of demand for reduced marineeutrophication effects in the case of theBaltic Sea, using data from five Swedishcontingent valuation studies. Point estimatesindicate that reduced marine eutrophicationeffects can be classified as a necessity and anordinary and price elastic service. Confidenceintervals show however that the classificationas a necessity is not statisticallysignificant. Income elasticities of willingnessto pay, not to be confused with incomeelasticities of demand, are estimated for abroad range of environmental services inSweden. A basic finding is that income tends toinfluence willingness to pay positively andsignificantly. The elasticity estimates are inmost cases greater than zero, but less thanunity, indicating that the benefits ofenvironmental improvements tend to beregressively distributed. In a cost-benefitanalysis of a project suggesting environmentalimprovements, distributional concerns thereforecall for an introduction of weights or at leasta sensitivity analysis of how weighting wouldchange decisions about the project's socialprofitability.     

Renewable Resource Policy When Distributional Impacts Matter

The standard assumption in bioeconomic resource models is that optimal policies maximize the present value of economic surplus to society. This assumption implies that regulatory agencies should not be concerned with the distributional consequences of management strategies. Both contemporary welfare-theoretic and rent-seeking approaches suggests distributional issues are important in designing resource management policies. This paper explores resource management when the managing agency has preferences defined over the economic welfare of various groups with a direct economic interest in the use of resources. Policy schemes consistent with this approach are derived and compared with standard results.     

An International Comparison and Analysis of Lotteries and the Distribution of Lottery Expenditures

Lotteries are found in nearly half of the world's countries, with annual worldwide lottery ticket sales topping $115 billion. Despite the global presence of lottery games, there has been little research conducted on any international aspect of lotteries. This paper presents the first-ever examination and comparison of lottery games from around the world. Differences in both absolute and relative lottery expenditures are presented. Estimates for the income elasticity of demand for lottery tickets provide evidence on the distributional burden of lottery expenditures. These estimates consider each country by continental location and country income level. Further analysis reveals that lower income countries could adopt Lotto games in order to increase revenues. Recognizing that the distributional impact of lottery games is one of the greatest concerns surrounding lotteries, it is shown that the introduction of Lotto games does not significantly affect the distributional burden of lottery ticket expenditures. Given the international scope of lotteries and the availability of international lottery game data, the paper concludes by discussing future research on international lottery games.     

Minimum Wages and Employment: Reply

The results of my study (Leigh 2003, 2004) on the effect of minimum wages on employment have been brought into question by Watson (2004), which raises some potential methodological concerns. Careful reanalysis of the Western Australian minimum wage experiment demonstrates that this critique is not well founded. Further checks show that the results are robust to a number of alternative specifications, in addition to those presented in the original article.     

An Efficiency Approach to the Evaluation of Policy Changes

This paper describes an efficiency approach to the evaluation of policy changes. Rather than comparing the utility allocations that arise before and after a policy change is introduced, this approach evaluates a policy change by comparing it with other possible changes which might be made from the status quo. The main merit of the approach is that it is founded on the Pareto criterion rather than on a distributional value judgement. The paper provides a precise statement of the approach and applies it to a number of examples. Some objections to the approach are also anticipated and discussed.     

The value of state education to consumers in the UK

This paper considers the value of state schooling, as perceived by consumers, taking into account that many households supplement the minimum education provided free of charge with out-of-pocket payments through acquiring accommodation in the catchment area of a high-quality state school. It suggests ways to circumvent difficulties in modelling household behaviour arising from joint housing-education consumption in the context of a two-stage demand system, where the proposed money metric of state schooling can be estimated from data readily available in household expenditure surveys. The empirical analysis, based on UK data, estimates this money metric as the amount households with school-age children would be willing to accept in order to opt out of the state education system. The efficiency and distributional implications of the empirical findings are discussed.     

Safe Minimum Standards in Dynamic Resource Problems: Conditions for Living on the Edge of Risk

Safe Minimum Standards (SMSs) has been advocated as a policy rule for certain environmental problems where uncertainty about risks and consequences are thought to be profound. This paper explores the rationale for such a policy within both static and dynamic frameworks and derives conditions for when SMS can be summarily dismissed as a policy choice and for when SMS can be defended as an optimal policy based on standard economic criteria. It turns out that these conditions can be checked with quite limited information about damages and risks. In order to analyze the SMSs in a dynamic setting, we develop a method for solving optimal control problems when state space is divided into risky and non-risky sub-sets.      

When Can Public Policy Makers Rely on Private Markets? The Effective Provision of Social Services

The privatisation of social services is being increasingly discussed. The social services market is characterised by multiple market failures, including informational asymmetries, agency problems, externalities, and distributional concerns. Consumers may care as much or more about quality of services than about price. If quality is readily observable, the government can regulate private providers to assure standards are met. But when standards are difficult to observe or when the recipient is not the agent who makes the decisions, government ownership may be preferable. This paper categorises the market situations in which government provision of social services is likely to be most versus least attractive.     

Axiomatic foundations of Hicksian measures of welfare change

The aggregate Hicksian measures Σλ_iEV_i and Σλ_iCV_i are characterized by three simple properties. One property concerns the ranking of two states. The measures are Paretian. A second property expresses the postulate that welfare changes are to be evaluated in money. The third one deals with redistributions of incomes. Distributional considerations are taken into account by employing variable distributional weights λ_i.     

Nonlinear Modelling Using the Generalized Exponential Family of Distributions

This paper introduces an approach to nonlinear modelling which is based on the use of the generalized exponential family of distributions. The flexibility of the approach is illustrated using hypothetical data based on an economic model which exhibits multiple equilibria for certain periods of time and a unique equilibrium for other periods. The distributional analogue of multiple equilibria is multimodality. An advantage of this framework is that discrete jumps can be modelled without the need for identifying the timing of jumps ex post. The framework also has the advantage of explaining how smooth changes in market fundamentals can give rise to large and sudden changes in prices. The introduction of economic assumptions into nonlinear models is explained, and it is shown how an explicit form for the distribution of the dependent variable can be derived. It is suggested that the approach has considerable potential in a wide variety of economic contexts.