Fair waste pricing: an axiomatic analysis to the NIMBY problem

A waste disposal facility has to be sited in one of several districts producing different amounts of waste. The construction cost of the facility depends on where it is sited. When a district accepts the facility, it bears a disutility. The problem here is to choose a siting district and to share the construction cost while considering fair compensation for the siting district. We provide an axiomatic framework to analyze this problem and seek normatively desirable and practical decision rules. A fair pricing rule is one that selects a district so as to minimize the social loss, applies a negative price to waste according to the social loss involved, and provides full compensation to the siting district. We show that this rule is a unique rule that satisfies certain requirements of efficiency, fairness, and robustness regarding the strategic transfers of waste. We then establish the nearly robustness of this rule to the misrepresentation of disutility information.     

Sharing Rules in Teams

We examine the problem of output sharing in a moral hazard in team situation. Although we do not consider any particular procedure, we assume that the team uses some procedure to decide a sharing rule before actual production takes place (for example, this may be a bargaining process or a team welfare maximization problem). This must take into account that the team will play a noncooperative game in the production process conditional on the chosen sharing rule. We show that the procedure for deciding the sharing rule does not have to look for anything more complicated than simple linear sharing rules. We also show that, when there is limited liability, the procedure needs to consider only the slightly more complicated piecewise linear rules. As a consequence of the linear sharing rule result, we are also able to provide a characterization of implementable outcomes. Journal of Economic Literature Classification Numbers: D82, D2, C72, J54.     

Asymmetric rules for claims problems without homogeneity

We introduce a general class of rules for claims problems, called the difference rules, and demonstrate that a rule satisfies composition down and composition up if and only if it is a difference rule. We show that these rules are very simple to describe when there are two agents. In a variable population framework, we introduce a family of rules satisfying consistency, composition down, and composition up, which we term the logarithmic-proportional rules. These rules satisfy neither symmetry nor homogeneity.     

A stochastic model of waste management with on and off site storage

When the regulatory threshold which specifies the maximum amount of waste that can be stored on site is exceeded, a waste generating firm must move waste to an off site location. Given that off site storage is costlier than on site storage, how much waste ought a firm—operating in a probabilistic environment—to produce in the time period of interest? This salient question has received insufficient theoretical attention in the extant literature. Therefore, we analyze a stochastic model with on and off site storage that is relevant to the management of a broad class of wastes. We first derive a representative waste generating firm's long run expected cost function. Next, we conduct comparative statics exercises to demonstrate the impact of key parameter changes on the firm's long run expected cost. Finally, we show that the optimal waste production level we seek is the solution to a specific cost minimization problem.     

Inflation dynamics in open economies: Empirical evidence for G7 countries on the role of import prices and the cost channel

The supply side effects of both the nominal interest rate (i.e., the cost channel) and import prices on inflation are very important for the design of monetary policy. However, the empirical identification of the cost channel (traditionally associated with the advance payment of wages) has ignored import prices. We start by deducting a New Keynesian Phillips Curve (NKPC) which shows that ignoring import prices in the estimation of the cost channel may lead to incorrect results. Taking this into account, we study the empirical relevance of the cost channel and import prices using the NKPC for the G7 countries. We test whether the estimation of the cost channel is affected when the price of imported inputs is considered; if it is relevant to extend the cost channel given that imports of final consumption goods are also paid in advance; if imports should be treated as inputs and/or consumption goods, and if there is an immediate or slow exchange rate pass-through. Empirical results indicate that the cost channel is present in imported consumption goods in particular, and import prices play an important role in explaining inflation dynamics.     

Priorities in the location of multiple public facilities

A collective decision problem is described by a set of agents, a profile of single-peaked preferences over the real line and a number of public facilities to be located. We consider public facilities that do not suffer from congestion and are non-excludable. We characterize the class of rules satisfying Pareto-efficiency, object-population monotonicity and sovereignty. Each rule in the class is a priority rule that selects locations according to a predetermined priority ordering among “interest groups”. We characterize the subclasses of priority rules that respectively satisfy anonymity, avoid the no-show paradox, strategy-proofness and population-monotonicity. In particular, we prove that a priority rule is strategy-proof if and only if it partitions the set of agents into a fixed hierarchy. Any such rule can also be viewed as a collection of generalized peak-selection median rules, that are linked across populations, in a way that we describe.     

A Markup Interpretation of Optimal Investment Rules

We re-examine the basic investment problem of deciding when to incur a sunk cost to obtain a stochastically fluctuating benefit. The optimal investment rule satisfies a trade-off between a larger versus a later net benefit; we show that this trade-off is closely analogous to the standard trade-off for the pricing decision of a firm that faces a downward sloping demand curve. We reinterpret the optimal investment rule as a markup formula involving an elasticity that has exactly the same form as the formula for a firm's optimal markup of price over marginal cost. This is illustrated with several examples.     

Taylor Rule implementation of the optimal policy at the zero lower bound: Does the cost channel matter?

This paper analyzes the implementation of the optimal policies at the Zero Lower Bound (ZLB) by the Taylor rule in the presence of a cost channel. We find that, the presence of a cost channel significantly impairs the ability of the Taylor rule to implement optimal policies when economy is subject to the ZLB. The main findings of the paper are, (i) the Taylor rule with optimally chosen inflation target partially implements the optimal discretionary policy but cannot implement the optimal policy under commitment, and (ii) the T-only policy, which follows discretion after an optimally chosen exit date from the ZLB, is the best that can be implemented by the Taylor rule in the presence of cost channel.     

Distributional Preferences and the Incidence of Costs and Benefits in Climate Change Policy

We explore the relationship between willingness to pay (WTP) for climate change mitigation and distributional preferences, by which we mean individuals’ opinions about who should be responsible for climate change prevention and whether the share of climate change impacts borne by the poor is a cause for concern. We use 1,770 responses to an online stated preference survey. The domestic costs in our survey’s policy choice scenarios are expressed as a set of randomized shares across four different payment vehicles, and the international cost shares are randomized across four groups of countries. We also elicit respondents’ perceptions of the likely regressivity of climate change impacts under a policy of business-as-usual. WTP is higher when larger cost shares are borne by parties deemed to bear a greater responsibility for mitigation, and when respondents believe (and care) that the impacts of climate change may be borne disproportionately by the world’s poor. That WTP for an environmental policy depends on the distributional consequences of the policy is an unsettling result: efficiency assessments are typically assumed to be separate from equity considerations in most benefit-cost analyses.     

Consumer search markets with costly revisits

This paper characterizes equilibrium outcomes in consumer search markets taking the cost of going back to stores already searched explicitly into account. We show that the optimal sequential search rule under costly revisits is very different from the traditional reservation price rule in that it is non-stationary and not independent of previously sampled prices. We explore the implications of costly revisits on market equilibrium in two celebrated search models. In the Wolinsky model, some consumers search beyond the first firm. In this class of models, costly revisits do make a substantive difference and their impact can be of the same order of magnitude as the initial search cost. In the Stahl oligopoly search model where consumers do not search beyond the first firm, there remains a unique symmetric equilibrium that has firms use pricing strategies that are identical to the perfect recall case.     

Overbidding and overspreading in rent-seeking experiments: Cost structure and prize allocation rules

We study experimentally the effects of cost structure and prize allocation rules on the performance of rent-seeking contests. Most previous studies use a lottery prize rule and linear cost, and find both overbidding relative to the Nash equilibrium prediction and significant variation of efforts, which we term ‘overspreading.’ We investigate the effects of allocating the prize by a lottery versus sharing it proportionally, and of convex versus linear costs of effort, while holding fixed the Nash equilibrium prediction for effort. We find the share rule results in average effort closer to the Nash prediction, and lower variation of effort. Combining the share rule with a convex cost function further enhances these results. We can explain a significant amount of non-equilibrium behavior by features of the experimental design. These results contribute towards design guidelines for contests based on behavioral principles that take into account implementation features of a contest.     

Group play in games and the role of consent in network formation

We study games played between groups of players, where a given group decides which strategy it will play through a vote by its members. When groups consist of two voting players, our games can also be interpreted as network-formation games. In experiments on Stag Hunt games, we find a stark contrast between how groups and individuals play, with payoffs playing a primary role in equilibrium selection when individuals play, but the structure of the voting rule playing the primary role when groups play. We develop a new solution concept, robust-belief equilibrium, which explains the data that we observe. We provide results showing that this solution concept has application beyond the particular games in our experiments.     

Cost sharing with multiple technologies

We study cost sharing problems where gains from cooperation can come from the presence of other agents, such as when agents share their technologies. A simple model is built, where economies of scale are eliminated in order to study this effect. We use as the key axiom the property that, if an agent does not improve the technology of any coalition he joins, he should not get any part of the gain from cooperation. With properties of linearity and symmetry, this axiom characterizes a well-defined set of rules. From this set, we propose a rule derived from the familiar Shapley value. We show that it is the only rule in that set satisfying an upper-limit property on individual cost allocations or a monotonicity property when technology improves. We also derive a distinct rule using a property that ensures that no coalition has an incentive to manipulate the individual demands of its members.     

Cost sharing with multiple technologies

We study cost sharing problems where gains from cooperation can come from the presence of other agents, such as when agents share their technologies. A simple model is built, where economies of scale are eliminated in order to study this effect. We use as the key axiom the property that, if an agent does not improve the technology of any coalition he joins, he should not get any part of the gain from cooperation. With properties of linearity and symmetry, this axiom characterizes a well-defined set of rules. From this set, we propose a rule derived from the familiar Shapley value. We show that it is the only rule in that set satisfying an upper-limit property on individual cost allocations or a monotonicity property when technology improves. We also derive a distinct rule using a property that ensures that no coalition has an incentive to manipulate the individual demands of its members.     

Strategy-proof Location on a Network

We consider rules that choose a location on a graph (e.g. a road network) based on agents' single-peaked preferences. First, we characterize the class of strategy-proof, onto rules when the graph is a tree. Such a rule is based on a collection of generalized median voter rules (Moulin, 1980) satisfying a consistency condition. Second, we characterize such rules for graphs containing cycles. We show that while such a rule is not necessarily dictatorial, the existence of a cycle grants some agent an amount of decisive power, unlike the case of trees. Rules for this case can be described in terms of a subclass of such rules for trees. Journal of Economic Literature Classification Numbers: C72, D78.     

Average-cost pricing: Some evidence and implications

We present new survey evidence on pricing behavior for more than 14,000 European firms, and study its macroeconomic implications. Among firms that are price setters, roughly 75% respond that their prices are set as a markup on total costs, a business practice termed “full cost pricing”. Only 25% set prices as markups over variable or marginal costs. Moreover, using industry data for the U.S., we find that the correlation between changes in output prices and changes in variable input prices is significantly lower when fixed costs are likely to be more important.Since our results are similar to the findings in the classic and controversial paper of Hall and Hitch (1939) and subsequent survey evidence, we believe it worth studying the implications of full cost pricing for macroeconomics. We first propose a problem for the firm where full cost pricing can arise as optimizing behavior. We embed this problem, featuring an occasionally binding constraint, into a simple general equilibrium model. We show that when the model is hit by a shock that makes the constraint binding, the response of endogenous variables is amplified significantly more than it would be under the unconstrained regime.     

Minimum cost spanning tree problems with groups

We study minimum cost spanning tree problems with groups. We assume that agents are located in different villages, cities, etc. The groups are the agents of the same village. We introduce a rule for dividing the cost of connecting all agents to the source among the agents taking into account the group structure. We characterize this rule with several desirable properties. We prove that this rule coincides with the Owen value of the TU game associated with the irreducible matrix.     

Price Caps and Output Floors: A Comparison of Simple Regulatory Rules

We study in this paper a simple alternative to price cap regulation. The mechanism, which we label 'output floor' regulation, requires the regulated firm to supply a given level of output. This rule is as simple as price cap regulation, and performs identically when the regulated firm is a natural monopoly; however, we show that, in the presence of a competitive fringe, output floor regulation yields lower prices and stronger incentives for cost reduction. Its introduction, however, is likely to be resisted by the industry, since it lowers managerial utility and shareholders' profits.     

Resource and Waste Taxation in the Theory of the Firm with Recycling Activities

The management of solid waste has become an urgent problem in nations with a great population density. Accordingly, waste reduction through source reduction and recycling has become increasingly important. Our purpose is to show how prevention, recycling and disposal of waste could be part of a theory of the firm. We first derive efficient production functions from production processes with waste as a by-product. Waste obtained as new scrap can partially be recycled by using additional inputs in order to cut back the purchase of virgin material. Waste not completely recyclable will leave the firm as disposal which also entails cost to the firm. We use the dual cost function approach to develop a theory of the firm under solid residual management.Since the producer does not bear the full cost of disposal, there will be a bias toward virgin materials and away from recycling. The goal of the government is to stimulate the firms to recycle with respect to the preservation of exhaustible resources. An incentive to recycle is a tax on resources or on waste. In order to determine the tax levels the government maximizes welfare subject to the dynamic constraint for decumulation of land fill for waste deposits. This gives the user cost and its time profile for taxing waste disposal or virgin material.In a comparative statics analysis we compare the effect of taxes on waste vs. virgin material on effort to produce in a resource saving manner, on the quantity of recycled material, on output, and on the reduction of waste. Since the impact of environmental regulation on employment is important, our model detects seven effects on labor demand as part of resource conservation policy. We finally carry out a comparative statics analysis of waste intensive firms operating in different market structures. Of interest is the impact of a resource or waste taxation on market volume, on the number of firms, on resource saving effort, and on profit.     

Group strategyproof cost sharing: The role of indifferences

Every agent reports his willingness to pay for one unit of a good. A mechanism allocates goods and cost shares to some agents. We characterize the group strategyproof (GSP) mechanisms under two alternative continuity conditions interpreted as tie-breaking rules. With the maximalist rule (MAX) an indifferent agent is always served. With the minimalist rule (MIN) an indifferent agent does not get a unit of the good.GSP and MAX characterize the cross-monotonic mechanisms. These mechanisms are appropriate whenever symmetry is required. On the other hand, GSP and MIN characterize the sequential mechanisms. These mechanisms are appropriate whenever there is scarcity of the good.Our results are independent of an underlying cost function; they unify and strengthen earlier results for particular classes of cost functions.