Estimating ‘gamma’ for tail-hedge discount rates when project returns are cointegrated with GDP

Martin Weitzman has suggested a method for calculating social discount rates for long-term investments when project returns are covariant with consumption or other macroeconomic variables, so-called ‘tail-hedge discounting’. This method relies on a parameter called ‘real project gamma’ that measures the proportion of project returns that is covariant with the macroeconomic variable. We compare two approaches for estimation of this gamma when the project returns and the macroeconomic variable are cointegrated. First, we use Weitzman’s own approach, and second a simple data transformation that keeps gamma within the zero to one interval. In a Monte-Carlo study, we show that the method of using a standardized series is better and robust under different data-generating processes. Both approaches are examined in a Monte-Carlo experiment and applied to Swedish time-series data from 1950–2011 for annual time-series data for rail freight (a measure of returns from rail investments) and GDP.     

Social dilemmas,time preferences and technology adoption in a commons problem

Agents interacting on a body of water choose between technologies to catch fish. One is harmless to the resource, as it allows full recovery; the other yields high immediate catches, but low(er) future catches. Strategic interaction in one ‘objective’ resource game may induce several ‘subjective’ games in the class of social dilemmas. Which unique ‘subjective’ game is actually played depends crucially on how the agents discount their future payoffs. We examine equilibrium behavior and its consequences on sustainability of the common-pool resource system under exponential and hyperbolic discounting. A sufficient degree of patience on behalf of the agents may lead to equilibrium behavior averting exhaustion of the resource, though full restraint (both agents choosing the ecologically or environmentally sound technology) is not necessarily achieved. Furthermore, if the degree of patience between agents is sufficiently dissimilar, the more patient is exploited by the less patient one in equilibrium. We demonstrate the generalizability of our approach developed throughout the paper. We provide recommendations to reduce the enormous complexity surrounding the general cases.     

Kalecki on money and finance

It is argued that Kalecki had a greater appreciation of the role of the monetary sector than has been generally recognized, and that Kalecki presented ideas which can be seen as now embedded in the structuralist post Keynesian analysis of endogenous money and in the circuitist approach. Six key features of Kalecki's monetary analysis are identified. The paper outlines Kalecki's dismissal of the ‘Pigou effect’ and the ‘Keynes effect’, and then discussion the relationship between the ‘principle of increasing risk’ and the nature of the supply of credit. It discusses interest determination in Kalecki's writings and the manner in which he distinguished different types of money.     

Quasi-hyperbolic discounting and social security systems

Hyperbolic discounting has become a common assumption for modeling bounded rationality with respect to individual savings decisions. We examine the effects of hyperbolic discounting on the comparison of alternative social security systems. We show that this form of bounded rationality breaks the equivalence between funded and pay-as-you-go (PAYG) systems established in Sheshinski and Weiss [Sheshinski, E., Weiss, Y., 1981. Uncertainty and optimal social security. Quarterly Journal of Economics 95, 189-206]. Intergenerational transfers within a PAYG economy are usually secured by the social security system and independent of longevity, whereas this is not the case for the funded economy. The savings level under hyperbolic discounting is lower than under exponential discounting [Laibson et al., 1998], but the ratio between the savings level under hyperbolic discounting within a funded economy and a PAYG economy depends on the effectiveness of the commitment devices. It is shown that if individuals are hyperbolic discounters, then in a PAYG economy any change in the mandated level of intergenerational transfers is neutralized by individuals’ voluntary bequests. This does not apply to a funded system.     

Transition from unemployment benefits to social assistance in seven European OECD countries

The topic of this paper is the transition from unemployment benefit schemes to social assistance in seven European OECD countries. The unemployment benefit schemes are formally quite different in the seven countries. Most are mandatory but Denmark and Sweden have voluntary unemployment insurance and Finland has a mandatory basic scheme with a voluntary income related component on top of that. Self employed people can join the U.B. schemes in the 3 Scandinavian countries. All the U.B. schemes have working or contribution conditions to be met by the members in order to obtain eligibility for benefits. These conditions are relatively tight in the Netherlands, France and Sweden and relatively easy in Denmark and Great Britain with Germany and Finland in between (based on rules in 1994–95). Recent developments in several countries have been to tighten the access conditions to the U.B. schemes and from 1997 Denmark will be ‘on line’ with Germany. The Netherlands have tightened the access criteria very significantly in 1995. There is a considerable variation as far as the duration of the unemployment benefit period is concerned. Sweden has a benefit period in fact without effective time limitations. The Danish benefit period is also very long, 7 years now being reduced to 5 years. 5 years is also the maximum duration in the Netherlands and in France, but only after many years of work and after a relatively high age has been reached. The maximum period in Germany, 22/3 years, also requires a long work history and a relatively high age. Finland and Great Britain have uniform benefit period (just as in Denmark and Sweden), in Finland it is appr. 2 years (longer for elderly unemployed just as in Sweden and Denmark) and in Great Britain it was 1 year but from October 1996 it was reduced to 1/2 year. The differences in the duration of the benefit periods between the seven countries are very considerable. As already mentioned, there has been a tendency to reduce the benefit period in several countries. Such a change is also being considered for the ‘never ending’ benefit period in the Swedish U.B. scheme. The benefit formula is purely flat rate in Great Britain and income related in the other countries. There is a maximum benefit level in 5 of these countries, but not in Finland, where the compensation is stepwise decreasing with increasing income. In the 5 countries with income related benefits and a maximum benefit level, this maximum level is reached at a relatively low income in Denmark (2/3 APW income) and Sweden (close to APW income) and at a relatively high income in the Netherlands (appr. 1.5 APW income) and Germany (appr. 1.7 APW income) and at a very high income level in France. France is the only country among the 7, where the benefits after an initial period are being reduced regularly (every 4 months) in the benefit period down to a minimum level. Sweden and Germany have reduced the benefit levels in recent years. Denmark has the highest gross compensation percentage, 90, in relation to lost income, but it is only effective over a relatively narrow income interval, from approx. 133,000 DKK to 162,000 DKK (1996), ‘between’ the min. and max. U.B. rates. According to the 3 institutional criteria applied here, access to the schemes, duration of the benefit period and the type of benefit formula, the U.B. schemes of the seven countries studied are very different. The exit scheme from U.B is social assistance in most of the countries, but not in Germany, where it is possible to continue in a scheme with lower compensation but still income related. For Sweden it is hardly meaningful to speak of an ‘exit scheme’ when the U.B. insurance is without effective time limitations. The exit schemes in the other countries are all characterized by having flat rate benefits. All the exit schemes are means tested and this is a crucial difference to the U.B. schemes, and they are without time limitations. Means testing and no effective time limitations are usual characteristics for social assistance and social assistance like schemes. In all the countries, except in Denmark and Sweden, there is ‘topping-up’ from social assistance to a guaranteed minimum level disregarding the income sources. In the two Scandinavian countries mentioned, a ‘social event’, i.e. illness or unemployment, is required in order to be eligible for social assistance benefits. Net replacement rates are used to illustrate the levels of compensation within the U.B. and the S.A. schemes, to identify possible incentives problems, and to illustrate the economic implications of the transition from U.B. to S.A. schemes. The net replacement rates presented are calculated by using the ‘disposable income after net housing costs’ income concept. The calculations include several family types, singles and couples with and without children and for the couples with one or two incomes. A general result but with some modifications, cf. the following, could be that the U.B. based replacement rates usually are higher than the S.A. based, but that the difference is minor when the U.B. scheme is flat rate or income related with a maximum benefit level being reached at a relatively low income, for Great Britain there are in several cases no difference at all. The ‘topping-up’ has the implication that the U.B. and S.A. based replacement rates are often identical at the lower end of the income scale. The very high S.A. based replacement rates (well over 100 per cent) often seen for Denmark and Sweden at low income levels do not necessarily imply, that social assistance in those two countries is more generous than in the other countries, it is very much an effect of not having more or less automatic ‘topping-up’ to a guaranteed minimum income level when earned income is low. The single parent family type seems to have incentives problems at relatively low income levels in most of the countries, especially when receiving U.B., she may temporarily be caught in the ‘unemployment trap’. The one earner couple with children may also be exposed to the ‘unemployment trap’ but on a more permanent basis. The S.A. based replacement rates for this family type are extraordinarily high (and higher than the U.B. based) in Denmark and Sweden, where this family type, however, is very rare. For the two earner family (where one of the spouses always has earned income) the means testing of S.A. makes an impact on the S.A. based net replacement rates, they are in most cases substantially lower than the U.B. based. The results of the net replacement calculations indicate no or only minor economic implications by a transition from U.B. to S.A. in the lower end of the income scale while the effect in most cases will be more substantial in the higher end of the income scale. This is not always the case in Sweden and Denmark where S.A. for some family types are preferable to U.B. and where the difference in other cases may be so small, that it implies incentives problems for joining the voluntary U.B. scheme. The calculation of ‘long term’ (5 years) net replacement rates for families at a low income level (the point in the income distribution where only 5 per cent have lower income) and only including one earner families, reveals that either the long benefit period in the U.B. scheme (Sweden and Denmark) or ‘topping-up’ (Germany, the Netherlands and Great Britain) generate ‘constant’ net replacement rates, and quite high ones, at low income levels. Only in France and to some extent in Finland will there be a decrease in net replacement rates over time. Most of the differences concerning the duration of unemployment benefit periods and to some extend the benefit formulas have no effect on the long term net replacement rates. At higher income levels the time limitations in the U.B. schemes will be visible again, except in Great Britain where the U.B. and S.A. benefits are almost identical. It is not possible to point out a ‘worst’ country with respect to ‘incentives’ problems, but the Danish, and to some degree also the Swedish, U.B. schemes with their high net replacement rates at lower income levels and long duration periods ‘stand’ out in many cases, and the S.A. schemes in those two countries may also contribute to permanent ‘unemployment traps’ as well as lack of incentives to join the voluntary insurance schemes. The two Scandinavian countries are, however, not alone with ‘incentives problems’. The section on long term net replacement rates showed that for low income levels the replacement rates were high and constant in most countries. This result is often due to ‘topping-up’ to a guaranteed minimum standard.     

Portfolio efficiency analysis with SFA: the case of PSI-20 companies

This study aimed to assess the technical efficiency (TE) of individual companies and their respective sectors that are traded on the Portuguese stock market. We accomplished this by combining the internal input variables (e.g., ‘market value and return’) with exogenous variables (e.g., ‘interest income’, ‘depreciation’, ‘cost of goods’, ‘employees’ and ‘net sales’) into a Stochastic Frontier Analysis (SFA) model. The TE of the PSI-20 (Portuguese Stock Index) was estimated using factors that affect efficiency variability. The main advantage of using the SFA approach is its potential to discriminate between measurement error and systematic inefficiencies in the estimation process. The results demonstrated that TE is higher for enterprises in the industrial, construction and distribution sectors, whereas the commercial banking sector has the lowest TE scores. The ‘employees’ and ‘depreciation’ are the variables which most contribute to stock market inefficiency.     

Depletion: Bridging the Gap Between Theory and Practice

Adjusting national income for depletion is important in order to send correct signals to policy makers. This article reviews a number of depletion measures that have been recently brought forward in the context of environmental accounting (‘practice’) and green accounting (‘theory’): depletion as change in total wealth; depletion as ‘using up’ of the resource; depletion as net savings; or, depletion as net investment. The differences in assumptions between these measures are clarified by contrasting their approaches with the classic theory of a firm engaged in extraction. All measures are evaluated using a time series of data on Dutch natural gas reserves. Our main findings are that correcting for the cost of depletion would lead to significant adjustments of both level and growth rates of Dutch net national income, with a strong dependency on the chosen measure.We counter criticism that accounting in practice would necessarily underestimate depletion. The choice for a depletion measure should be determined by the context of use: measurement of social welfare or sustainable income. The physical measure put forward in the SEEA Central Framework can be justified by its consistency with the income concept that underlies the SNA.     

The Ramsey Discounting Formula for a Hidden-State Stochastic Growth Process

The long term discount rate is critically dependent upon projections of future growth rates that are fuzzier in proportion to the remoteness of the time horizon. This paper models such increasing fuzziness as an evolving hidden-state stochastic process. The underlying trend growth rate is an unobservable random walk hidden by noisy transitory shocks and recoverable only as a probability distribution via Bayesian updating. A simple expression is derived for the time-declining Ramsey discount rate. The components of this hidden-state Ramsey discounting formula are then analyzed, followed by a few remarks about possible implications and applications.     

On Britain's Return to the Gold Standard: Was there a ‘Pigou–McKenna School’?

It is common to refer to the ‘Keynes–McKenna school’ in opposition to Britain's return to the gold standard. However, after considering A.C. Pigou's reading of Sir Reginald McKenna's testimony to the Chamberlain–Bradbury Committee and the influence of that reading on Pigou's draft of the Committee's report to the British government, the case is made for the ‘Pigou–McKenna school’ as a policy school that was supportive of a return to the gold standard but against doing so prematurely. This is perhaps more meaningful than reference to the ‘Keynes–McKenna school’, which incorrectly implies that McKenna was opposed to Britain returning to gold.     

Declining Discount Rates: The Long and the Short of it

The last few years have witnessed important advances in our understanding of time preference and social discounting. In particular, several rationales for the use of time-varying social discount rates have emerged. These rationales range from the ad hoc to the formal, with some founded solely in economic theory while others reflect principles of intergenerational equity. While these advances are to be applauded, the practitioner is left with a confusing array of rationales and the sense that almost any discount rate can be justified. This paper draws together these different strands and provides a critical review of past and present contributions to this literature. In addition to this we highlight some of the problems with employing DDRs in the decision-making process, the most pressing of which may be time inconsistency. We clarify their practical implications, and potential pitfalls, of the more credible rationales and argue that some approaches popular in environmental economics literature are ill-conceived. Finally, we illustrate the impact of different approaches by examining global warming and nuclear power investment. This includes an application and extension of Newell and Pizer [‘Discounting the benefits of climate change mitigation : how much do uncertain rates increase valuations?’ Journal of Environmental Economics and Management 46 (2003) 52] to UK interest rate data.     

A Social Safety Net for the Impact of Technical Change:An Evaluation of the Myers Committee's Adjustment Assistance Proposal*

This paper assesses the ‘social safety net’ proposal of the Myers Committee Report on Technological Change as a programme aimed to ameliorate the losses of individuals adversely affected by technical progress. The point is made that, while the safety net is geared toward retrenched employees moving through the unemployment pool, much of the actual loss from unanticipated technical progress is taken as writ ten-down capital values by immobile factor owners tied to the old technology. In the end, the safely net amounts to little more than increased unemployment benefits which do not compensate many of the injured parties. Moreover, by deviating from the standard unemployment benefits scheme in having their supplementary scheme internalize some of the costs of such benefits within the firm, the Myers Committee proposal thus hinders the very adjustment to technological change which one might have supposed the scheme would seek to facilitate.     

Unconditionally optimal Ramsey policy

We discuss a time invariant policy which delivers the unconditionally optimal outcomes in purely forward-looking models and Ramsey outcomes in purely backward-looking models. This policy is a product of interaction between two institutions with distinct responsibilities. Motivated by Brendon and Ellison (2015), we think of them as arms of government. One institution is responsible for ‘forward guidance’, setting rules which are necessary and sufficient to determine private expectations. The second institution implements optimal policy taking expectations as given. The forward guidance rules are designed to maximise the unconditional expectation of the social objectives.     

Wealth Accounting,Exhaustible Resources and Social Welfare

The empirical literature on natural resource accounting uses methods which implicitly or explicitly entail measuring changes in total resource asset value when an exhaustible resource is depleted. In contrast, the growth theoretic literature on saving, social welfare and sustainable development is built upon a central finding, that the change in real wealth (as measured by net or ‘genuine’ saving) is proportional to the change in social welfare. We show that the change in total wealth exceeds the change in real wealth in optimal and non-optimal models of resource-extracting economies. This suggests that the change in social welfare is over-estimated when the change in total resource asset value is used as the measure of depletion. A simple empirical exercise, using World Bank data on ‘adjusted net saving’, reinforces the results from theory.     

Congestion Pricing and Learning in Traffic Network Games

A stochastic model describing the learning process and adaptive behavior of finitely many users in a congested traffic network with parallel links is used to prove convergence almost surely toward an efficient equilibrium for a related game. To prove this result, we assume that the social planner charges on every route the marginal cost pricing without knowing what is the efficient equilibrium. The result is a dynamic version of Pigou’s solution, where the implementation is made in a decentralized way and the information about players gathered by the social planner is minimal. Our result and setting may be extended to the general case of negative externalities.     

Irrationality and intertemporal choice in early neoclassical thought

Early neoclassical economists presumed an element of irrationality in the context of intertemporal decision making. W.S. Jevons, Irving Fisher, Alfred Marshall, and A.C. Pigou observed a preference for present over future consumption, and each took this as evidence that consumer 'foresight' or 'will power' was defective. The labouring classes were said to discount future consumption to reflect uncertainty, and such discounting is regarded as 'rational.' But each of these economists focused on an additional, and purportedly 'irrational,' reason for discounting: 'impatience.' Consumers are thus said to make persistent miscalculations when it comes to decisions involving time.
Irrationalité et choix intertemporel dans les débuts de la pensée néo-classique. Les premiers économistes néo-classiques présumaient qu'il y avait un brin d'irrationalité dans le processus de décision intertemporel. W.S. Jevons, Irving Fisher, Alfred Marshall et A.C. Pigou ont observé une certaine préférence de la consommation présente par rapport à la consommation future et en ont déduit que le consommateur manquait de 'prévoyance' et de 'volonté.' On suggérait que les classes travailleuses escomptaient leur consommation future à cause de l'incertitude - ce qui était considé comme rationnel. Mais chacun de ces économistes faisait aussi appel à une raison additionnelle pour escompter la consommation future - l'impatience - un motif jugé irrationnel. On en concluait que les consommateurs faisaient des erreurs persistantes de calcul quand ils prenaient des décisions intertemporelles.     

The consumption benefits of investment in infrastructure: The evaluation of sites-and-services programs in underdeveloped countries

The justifications for housing subsidy programs in developing countries often rely upon substantial indirect benefits accruing to program participants (in the form of improved health, earning capacity or employment, or non-market activity). The empirical analysis in this paper suggests that such programs may often be justified solely on the basis of direct impacts. The paper presents a methodology for deriving rigorously the direct Hicksian benefits of housing subsidy programs such as ‘sites-and-services’ and ‘slum upgrading’ projects in developing countries. The methodology is used to evaluate the net benefits of a sites and services project typical of recent urban shelter programs sponsored by the World Bank. The results suggest that the direct benefits of such programs may be substantial. In the particular case analyzed, the rate of return approaches 40 percent.     

Joan Robinson as a teacher

Sraffa's construct, the standard commodity, responds to Ricardo's search for an ‘invariable’ measure of value, since it is a measurement unit invariant to changes in distribution. But Sraffa suggests that there is no ‘counterpart,’ no analogous search or needed construct, for the ‘problem’ of ‘difference’ as distinct from change (‘why two commodities produced by the same quantities of labour are not of the same exchangeable value’). Difference in this sense is crucial to Marx, who distinguishes value and surplus-value from capitalist price and profit in part in order to theorize differences as systematic value transfers. In that effort, Marx repeatedly poses commodities and capitals as ‘aliquot parts’ of the whole, so that profit is a redistributed share of aggregate surplus-value. This paper shows that, when Marx's aliquot part imagery is formalized, the resulting hypothetical system represents a meaningful ‘counterpart,’ a construct with a function in Marx's analysis of difference comparable to that of Sraffa's standard commodity in analyzing distributional change. A Marxian ‘standard system’ posing each commodity as an aliquot part of the social capital (a) defines the needed labor-time unit of social account by homogenizing heterogeneous concrete labors as socially average (‘abstract’) labor while simultaneously (b) allowing the derivation of exchange-value (e.g., capitalist production price) on that scale via summation of directly and indirectly embodied labor. Indeed, Marx's approach to production prices as resulting from an inter-industry redistribution of aggregate surplus-value is shown to be algebraically identical to the calculation of labor-embodied under ‘aliquot part’ production conditions.     

OPTIMAL TAXATION ON MIXED DIAMOND GOODS: IMPLICATIONS FOR PRIVATE CAR OWNERSHIP IN CHINA

Abstract. The ‘diamond effect’ exists when a consumer's utility depends on the exchange value, not just on the intrinsic consumption effects of the good. Yew‐Kwang Ng has discussed the optimal tax on a pure ‘diamond’ good. This paper extends Ng's model to cover mixed diamond goods. It uses three mathematical models to show that the optimal tax on a mixed diamond good with both intrinsic and diamond effects depends on the proportion of the diamond effect. The result may explain the violation of the Ramsey Rule in practice, and may be used to formulate private car taxes in China.     

Marx,Sraffa, and Surplus: Observations Prompted by Garegnani (2018)

ABSTRACT

In a posthumously published article, Pierangelo Garegnani (2018. ‘On the Labour Theory of Value in Marx and in the Marxist Tradition.’) depicts Marx’s project in Capital as that of ‘developing systematically the theory of Ricardo and [the] implications of social conflict’ implied by Ricardo’s ‘surplus approach to value and distribution’. This paper argues to the contrary that Marx’s theory of surplus value and exploitation differs from (neo-)Ricardian surplus theory in fundamental ways, and modifies Garegnani’s simple Sraffian model to illustrate the distinctive implications of Marx’s theory.     

Optimal Pollution Abatement Under ‘Sustainable’ and Other Social Time Preferences

This paper analyses optimal pollution abatement expenditure and the pricing of pollution under alternative social time preferences, including ‘sustainable’ preferences, defined as those that are consistent with two axioms of sustainable development introduced by Chichilnisky (Land Econ 73:467–491, 1997). These axioms state essentially that neither the welfare of present nor future generations ought to be favoured over the other in determining the socially optimal path of economic development. The method is to calibrate a modified Ramsey model of optimal global growth and saving, where pollution is generated by the global output of goods and services. Pollution in turn reduces output. The simulation results illustrate how sensitive the optimal pollution price and abatement expenditure can be over time to assumptions about the social time preference rate. They also show that ‘sustainable’ preferences impose a lower burden on future generations in terms of the pollution price and abatement expenditure. Hence there is a case for governments to make explicit their value judgments about intergenerational welfare, in the context of their notion of sustainable development, when setting target pollution abatement levels and pollution prices over time.