Harnessing the political economy of environmental policy: David Pearce’s contribution to OECD

During 34 years, David Pearce made major contribution to OECD work on environmental economic issues, with a particular focus on cost–benefit analysis, economic instruments, biodiversity and distributive issues. This article provides a brief review of David Pearce’s contributions. This work was particularly useful in enhancing the political economy of environmental policy which is at the core of OECD work. The opinions expressed in this paper reflect the author’s perception of this long history of the development of environmental economics at OECD; it does not necessarily reflect the views of the OECD and its member countries. Many thanks to Jonathan Fisher, Nick Johnstone and Michel Potier for their comments on an earlier draft.     

The Green Solow model

We argue that a key empirical finding in environmental economics—the Environmental Kuznets Curve (EKC)—and the core model of modern macroeconomics—the Solow model—are intimately related. Once we amend the Solow model to incorporate technological progress in abatement, the EKC is a necessary by product of convergence to a sustainable growth path. We explain why current methods for estimating an EKC are likely to fail; provide an alternative empirical method directly tied to our theory; and estimate our model on carbon emissions from 173 countries over the 1960–1998 period.     

Determinants of the adjusted net saving rate in developing economies

The adjusted net saving rate, initially known as the genuine saving rate, was first published by the World Bank in the late 1990s as a more comprehensive measure of national saving and one more indicative of sustainable development. The adjusted net saving rate incorporated not just physical capital depreciation, but natural capital depletion and environmental damage, as well as including some human capital formation. In this paper, using a cross‐section of developing economies for 2001–2006, determinants of the adjusted net saving rate are estimated. For comparison, the same determinants for the gross national saving rate are estimated. Also, a basic Solow growth model is extended to incorporate natural resources and to justify a more comprehensive measure of savings, such as the adjusted net saving rate, for modeling economic growth. The two measures of savings are then compared as determinants in estimations of economic growth. Understanding the determinants of the adjusted net saving rate is useful for policies to promote sustainable development.     

The influence of facility characteristics and permit conditions on the effectiveness of environmental regulatory deterrence

This paper analyzes the influence of facility characteristics and permit conditions on the effectiveness of regulatory pressure—stemming from inspections and sanctions—at inducing better environmental performance from individual polluting facilities. The study considers the influence of various facility characteristics, especially those relating to size and operation (e.g., capacity utilization), and permit conditions that vary across facilities (e.g., effluent limit level). To capture this influence, the paper analyzes the interactions between regulatory pressure and facility characteristics/permit conditions when estimating the level of environmental performance. The empirical analysis examines wastewater discharges by U.S. chemical manufacturing facilities for the years 1995–2001.     

Misperceiving the value of information in predicting the performance of others

Economic models typically allow for “free disposal” or “reversibility” of information, which implies non-negative value. Building on previous research on the “curse of knowledge” we explore situations where this might not be so. In three experiments, we document situations in which participants place positive value on information in attempting to predict the performance of uninformed others, even when acquiring that information diminishes their earnings. In the first experiment, a majority of participants choose to hire informed—rather than uninformed—agents, leading to lower earnings. In the second experiment, a significant number of participants pay for information—the solution to a puzzle—that hurts their ability to predict how many others will solve the puzzle. In the third experiment, we find that the effect is reduced with experience and feedback on the actual performance to be predicted. We discuss implications of our results for the role of information and informed decision making in economic situations. Electronic Supplementary Material Supplementary material is available in the online version of this article at http://dx.doi.org/10.1007/s10683-006-9128-y. JEL Classification C91, D83     

Economic importance and statistical significance: Guidelines for communicating empirical research

Abstract

A critical objective for many empirical studies is a thorough evaluation of both substantive importance and statistical significance. Feminist economists have critiqued neoclassical economics studies for an excessive focus on statistical machinery at the expense of substantive issues. Drawing from the ongoing debate about the rhetoric of economic inquiry and significance tests, this paper examines approaches for presenting empirical results effectively to ensure that the analysis is accurate, meaningful, and relevant for the conceptual and empirical context. To that end, it demonstrates several measurement issues that affect the interpretation of economic significance and are commonly overlooked in empirical studies. This paper provides guidelines for clearly communicating two distinct aspects of “significance” in empirical research, using prose, tables, and charts based on OLS, logit, and probit regression results. These guidelines are illustrated with samples of ineffective writing annotated to show weaknesses, followed by concrete examples and explanations of improved presentation.     

Harvest Decisions and Spatial Landscape Attributes: The Case of Galician Communal Forests

In recent years, forest management has moved towards a landscape approach reflecting a mix of social, environmental and economic values. In this paper, we evaluate the effect on harvesting decisions of the spatial attributes of communal forests in Galicia. We first model the forest landscape management problem within a bioeconomic framework, which allows the identification of optimal clear-cutting strategies. This framework makes it possible to model a Faustmann-type rotation at the landscape level. The empirical analysis uses data from communal forests in Galicia, Spain. Under communal ownership, members of a rural community have rights to forest resources, but not rights to the forest itself. The management of communal forests integrates multiple forest uses within the decision making process. Given the communal nature of forest rights, and given these multiple uses, we show that landscape patterns—fragmentation, diversity and clumpiness—determine rotation periods.     

Using Labels to Investigate Scope Effects in Stated Preference Methods

Insufficient sensitivity to scope (variations in the scale of the environmental good on offer) remains a major criticism of stated preference methods, and many studies fail a scope test of some sort. Across a range of existing explanations for insensitivity to scope (commodity mis-specification, embedding, warm glows) there seems to exist no clear conclusion on how to deal with the problem. This paper provides an alternative explanation for insufficient sensitivity to scope, based on re-definition of the determinants of value for environmental goods within an attributes-based choice model. In the proposed framework respondents’ Willingness To Pay need depend not only on physical characteristics of a good, but may also depend on the ‘label’ under which the environmental good is ‘sold’ in the hypothetical market. To investigate this problem, a Choice Experiment study of biodiversity was conducted. We find that controlling for the effects of a label—in this case, national park designation—leads to significant increase in the scope sensitivity of welfare measures.     

The 2001-3 electricity distribution price control review in the Netherlands: regulatory process and consumer welfare

The outcome of the first electricity distribution price control review in The Netherlands did not deliver the savings initially suggested by the regulator (DTe). During the course of the first 3-year regulatory period, DTe revised the X-Factors four times. The impact on tariffs has been substantial. DTe initially announced in 2000 that savings would be equivalent to 25% of electric distribution revenues ( 2bn). However, final X-Factors in May 2003 resulted in savings of 10% of revenues. The total cost to consumers—when compared to the most probable outcome—has been 140 mln (7% of total revenues).      

Does the Porter Hypothesis Explain Expected Future Financial Performance? The Effect of Clean Water Regulation on Chemical Manufacturing Firms

Previous research provides opposing theoretical arguments regarding the effect of environmental regulation on financial performance. As one important argument, the Porter hypothesis claims that tighter regulation improves financial performance. This study provides empirical evidence on this debated effect. In particular, we employ panel data analysis to examine the effect of Clean Water Act regulation, as measured by permitted wastewater discharge limits, on expected future financial performance, as measured by Tobin’s q, for publicly owned firms in the chemical manufacturing industries. We find that tighter permitted discharge limits lower Tobin’s q; i.e., more stringent Clean Water Act regulation undermines expected future financial performance. By decomposing Tobin’s q into its constituent components—market value and replacement costs—and estimating each component separately, we find that tighter permitted discharge limits lower both components with a larger impact on market value, which implies that investors revise their expectations of the discounted present value of future profits in response to changes in Clean Water Act regulation.     

Corruption and the Political Economy of Resource-Based Development: A Comparison of Asia and Sub-Saharan Africa

We model how the “supply and demand” for bribes affects resource use by an economy, and the reinvestment of resource rents in other assets. This requires adjusting the World Bank’s measure adjusted net savings for any rent dissipation due to corruption. The impacts of corruption on long-run changes and periodic growth in the adjusted net savings rate are estimated across African and Asian economies from 1970 to 2003. Corruption rather than resource dependency per se affects negatively the ability of African countries to reinvest resource rents in the short term, but for Asian countries, corruption is less important than point resources. Corruption influences long-run growth in adjusted net savings rates in all countries, and is also the “pathway” through which this growth is affected by patterns of resource use, trade and abundance.     

Hedonic price measurement: the CCC approach

An accurate measurement of general price inflation is an essential prerequisite for sound economic analysis and prudent policy-making. Regrettably, numerous hedonic regression studies (predominately focusing on computers) have suggested that due to product quality changes, national statistical agencies are not computing unbiased price-trend estimates. This paper argues that the time-honored hedonic estimation procedure—the adjacent year regression (AYR) method—is generally neither unbiased nor robust. Consequently, the continuously changing coefficient (CCC) approach is introduced. Utilizing various hedonic techniques, several quality-adjusted price-trends for laser printers (1992–2005) were estimated and compared with the one officially released by the statistical agency.     

Harvesting in an integrated general equilibrium model

Harvesting of prey biomass is analyzed in an integrated ecological-economic system whose submodels, a predator–prey ecosystem and a simple economy, are microfounded dynamic general equilibrium models. These submodels are interdependent because the ecosystem responds to harvesting—through the reactions of optimizing individual organisms—by changing the provision of public ecosystem services to consumers. General analytical results are derived regarding the impact of harvesting policies on short-run equilibria of both submodels, on population dynamics, and on stationary states of the integrated model. A key insight is that prey biomass carries a positive ecosystem price which needs to be added as a tax mark-up to the economic price of harvested biomass to attain allocative efficiency. Further information on the dynamics is gained by resorting to numerical analysis of the policy regimes of zero harvesting, laissez-faire harvesting and efficient harvesting.

It “... is a matter of weighing costs and benefits of taking action, whether the action is the “inert” one of leaving resources alone in order to conserve them, or whether it involves exploiting a resource ... for so-called material ends”. Pearce (1976, p. 320)

Helpful comments from an anonymous referee are gratefully acknowledged. Remaining errors are the authors’ sole responsibility.     

The value of reputation on eBay: A controlled experiment

We conducted the first randomized controlled field experiment of an Internet reputation mechanism. A high-reputation, established eBay dealer sold matched pairs of lots—batches of vintage postcards—under his regular identity and under new seller identities (also operated by him). As predicted, the established identity fared better. The difference in buyers’ willingness-to-pay was 8.1% of the selling price. A subsidiary experiment followed the same format, but compared sales by relatively new sellers with and without negative feedback. Surprisingly, one or two negative feedbacks for our new sellers did not affect buyers’ willingness-to-pay. JEL Classification D82 · L14 · Z13     

Confidence in Keynes and Hayek: Reply to Burczak

We agree with Burczak's identification of the crucial issues. We disagree with his interpretation of them. We expand our defense of the claim that Keynes was a rationalist. We introduce the "horizon principle" to critize Keynes' dichotomy between short-term and long-term expectations. We question the statistical simile guiding some Post Keynesian dsiscussions of uncertainty. We point to the role of evolution in shaping conventions that fit the economic environment in a world with novel events. We think the evidence favors our view over Burczak's. Finally, we put in a plea for framing the issues in a way that facilitates empirical testing.     

Budget impact analysis for dapagliflozin in type 2 diabetes in Egypt

Abstract

Introduction: Type 2 diabetes mellitus (T2DM) is a major health problem in Egypt with a high impact on morbidity, mortality, and healthcare resources. This study evaluated the budget impact and the long-term consequences of dapagliflozin versus other conventional medications, as monotherapy, from both the societal and health insurance perspectives in Egypt.

Methods: A static budget impact model was developed to estimate the financial consequences of adopting dapagliflozin on the healthcare payer budget. We measured the direct medical costs of dapagliflozin (new scenario) as monotherapy, compared to metformin, insulin, sulphonylurea, dipeptidyl peptidase-4 (DPP-4) inhibitors, thiazolidinedione, and repaglinide (old scenarios) over a time horizon of 3 years. Myocardial infarction (MI), ischemic stroke, hospitalization for heart failure (HHF), and initiation of renal replacement therapy (RRT) rates were captured from DECLARE TIMI 58 trial. One-way sensitivity analyses were conducted.

Results: The budget impact model estimated 2,053,908 patients eligible for treatment with dapagliflozin from a societal perspective and 1,207,698 patients from the health insurance (HI) perspective. The new scenario allows for an initial savings of EGP121 million in the first year, which increased to EGP243 and EGP365 million in the second and third years, respectively. The total cumulative savings from a societal perspective were estimated at EGP731 million. Dapagliflozin allows for savings of EGP71, EGP143, and EGP215 million in the first, second and third years respectively, from the HI perspective, with total cumulative savings of EGP430 million over the 3 years.

Conclusion: Treating T2DM patients using dapagliflozin instead of conventional medications, maximizes patients’ benefits and decreases total costs due to drug cost offsets from fewer cardiovascular and renal events. The adoption of dapagliflozin is a budget-saving treatment option, resulting in substantial population-level health gains due to reduced event rate and cost savings from the perspective of the national healthcare system.     

Dissertation abstract: Voting in the laboratory

Almost every week national elections are held somewhere in the world. Many more elections take place at federal and local levels of government. Surely, these are important events to many of us. This thesis aims at providing a better understanding of why and how people vote in elections. Three original modifications of Palfrey and Rosenthal’s (1983) participation game are used to study voter turnout theoretically and experimentally.¹ In the basic game, each voter supports (i.e., prefers) one of two exogenous candidates and privately decides between voting at a cost and abstaining (without costs). The candidate who receives more votes wins the election (ties are broken randomly) and each supporter of this candidate receives an equal reward, independent of whether or not she voted. The first study (published in the American Political Science Review 100, pp. 235–248) analyzes the effects of social embeddedness on turnout, assuming that voters may be influenced by observing the decisions of other voters around them (e.g., a family or working place). Our experimental results show that the social context matters: this information increases turnout by more than 50%. The increase is greater when neighbors support the same candidate rather than when they support opponents. The second study investigates the effects of public opinion polls on voter turnout and welfare. Poll releases resolve uncertainty about the level of support for each candidate caused by `floating’ voters, whose preferences change across elections. This information increases turnout in the laboratory by 28–34%, depending on the fraction of floating voters in the electorate. If polls indicate equal levels of support for both candidates—in which case aggregate benefits for society are not affected by the outcome—welfare decreases substantially due to costs from excessive turnout. In the final study, elections are preceded by the competition between two candidates: they simultaneously announce binding policy offers in which some voters can be favored at the expense of others through inclusion and exclusion in budget expenditure (Myerson 1993).² We observe that policy offers include 33% more voters—yielding a smaller budget share for each—when voting is compulsory rather than voluntary. Moreover, we find evidence of political bonds between voters and long-lived parties. Overall, in all three experiments many subjects strongly react to economic incentives (i.e., benefits, costs, and informational clues), often in line with what is observed outside of the laboratory. JEL Classification C72, C92, D72 Dissertation Committee: Arthur Schram, University of Amsterdam (advisor) Axel Ockenfels, University of Cologne Thomas Palfrey, California Institute of Technology Cees van der Eijk, University of Nottingham Frans van Winden, University of Amsterdam ¹Palfrey, T.R., & Rosenthal, H. (1983). A strategic calculus of voting. Public Choice, 41, 7–53. ²Myerson, R.B. (1993). Incentives to cultivate favored minorities under alternative electoral systems. American Political Science Review, 87, 856–869.     

Complexity and the limits to learning

In this paper we look at the manner in which ideas coming from complexity science change our understanding of the cognitive powers of agents that is really necessary to explain the evolution of markets and of firms. The general ideas behind complex systems dynamics and evolution are presented and then two examples are treated in detail. The first in an evolutionary model of a market in which some new product is developed by competing firms and their “task” is to find a strategy in terms of quality and price that will be sustainable. This essentially requires agents/firms to discover mutually compatible strategies, and to create thereby sustainable market niches. The second example considers the internal structure of firms, in terms of their constituent working practices and skills. It demonstrates that it is precisely their ignorance of the consequences of adopting any particular practice that generates diversity in the emergent capabilities of firms, exploring the dimension of potential demand and therefore leading to a successful and sustainable business sector. The work supports the notion that the cognitive abilities that are involved are not about deduction and logic, as a traditional view of rationality might suggest, but are about the development and contraction of interpretive frameworks, which will be different for each player. The paper links these examples to a general recognition of the idea that complex, multi-agent systems evolve through successive “structural attractors”—multi-dimensional dynamical systems—with temporary structural stability. Because real systems contain both the structure and deviations from it, then there is a constant probing of structural stability and the possibility of qualitative change to a new structural attractor. This resembles the ideas in biological evolution related to “punctuated equilibria,” but it also links this to the idea of emergent and evolving networks of interaction, never of course near thermodynamic equilibrium.      

Corporate governance as religion

This paper, examining five different corporate governance topics, considers whether certain corporate governance reforms—perhaps because of the passion with which their advocates advance them—have increasingly become articles of faith rather than matters of intellectual analysis and empirical evaluation. The paper proceeds on the premise that good corporate governance is very important, but that it is not always easy to determine whether any particular proposed reform actually constitutes good or bad corporate governance. It concludes that sound corporate governance reforms can only be forged on the anvil of close and rigorous examination—wherever that examination might lead.