Efficiency and prices in economies of overlapping generations

In a general economy of overlapping generations, I introduce a notion of uniform inefficiency, corresponding to the occurrence of a Pareto improvement with a small uniform destruction of resources [G. Debreu, The coefficient of resource utilization, Econometrica 19 (1951) 273-292]. I provide a necessary and sufficient condition for uniform inefficiency in terms of prices at a competitive equilibrium: an allocation is uniformly inefficient if and only if the relative price of the aggregate endowment in a given period into the aggregate endowment up to that period does not vanish over periods of trade, a sort of Modified Cass Criterion [D. Cass, On capital overaccumulation in the aggregative neoclassical model of economic growth: a complete characterization, J. Econ. Theory 4 (1972) 200-223]. Minimal assumptions on fundamentals are needed for such a complete characterization. Furthermore, proofs reduce to simple and short direct arguments. Finally, I verify that uniform inefficiency is preserved under perturbations, a property that might fail for the canonical notion of inefficiency. Remarkably, an allocation is uniformly inefficient if and only if a non-vanishing redistribution, like a social security mechanism, is welfare improving.     

Carbon sequestration and permit trading on the competitive fringe

This paper makes two contributions to the carbon-sequestration policy literature. First and foremost, we develop a theoretical framework in which sequestration and permit-trading markets are analyzed jointly in the context of a competitive fringe model. Our framework formalizes the linkage between regulatory policy changes (as they manifest themselves in the permit market) and subsequent equilibrium allocations in the sequestration market. Second, we perform a numerical analysis demonstrating the role market structure, or market power, might play in the determination of the equilibrium sequestration allocation and carbon price. Both our analytical and numerical results demonstrate the importance of incorporating into empirical supply-side models demand-side information that is reflective of an underlying market structure.     

Self-insurance vs. self-financing: A welfare analysis of the persistence of shocks

We study the welfare cost of market incompleteness in a generalized Bewley model where idiosyncratic risk takes the form of entrepreneurial productivity shocks. Market incompleteness in our framework has two dimensions. First, in the Bewley tradition, only a limited set of instruments for consumption smoothing is available. Second, entrepreneurs? capital rental is subject to collateral constraints. As is well known, it is harder to self-insure against more persistent shocks, and the welfare cost of missing consumption insurance increases with shock persistence. On the other hand, with collateral constraints, an increase in shock persistence leads to better allocation of production factors through entrepreneurs? self-financing, and the welfare cost of imperfect capital rental markets decreases with shock persistence. The overall welfare cost of market incompleteness can be increasing, decreasing, or even non-monotone in shock persistence, depending on the relative strengths of its two components—the cost of missing insurance and the cost of imperfect capital markets.     

A characterization of inefficiency in stochastic overlapping generations economies

In this paper, we provide a characterization of interim inefficiency in stochastic economies of overlapping generations. With respect to the established body of results in the literature, we allow for sequentially incomplete markets and we remove the hypothesis of two-period horizons, by considering longer, though uniformly bounded, horizons for generations. The characterization exploits a suitably Modified Cass Criterion, based entirely on observable prices and independent of the length of the horizons of generations. For sequentially incomplete markets, we introduce a notion of unambiguous inefficiency, separating the inefficient intertemporal allocation of resources from incomplete risk-sharing. Unambiguous inefficiency reduces to inefficiency when markets are sequentially complete. Furthermore, our analysis shows that the hypothesis of two-period horizons is purely heuristic in establishing a criterion for inefficiency.     

A dynamic general equilibrium model of pollution abatement under learning by doing

In 2013, Beladi et al. constructed a dynamic general equilibrium model of pollution, and characterized a steady-state equilibrium. In this paper, we extend Beladi et al.’s model to an even more general model in which the pollution abatement costs under learning by doing are taken into account. In our model, the instantaneous abatement costs depend on both the rate of abatement and the experience of using a technology. Our objective is to apply optimal control theory to investigate the dynamic general equilibrium model of pollution abatement, and derive the steady-state equilibrium properties and optimal levels of emission permits and pollution treatment.     

An experimental study on individual choice, social welfare, and social preferences

We experimentally study subjects’ compliance with dominance relationships of income distributions in a ranking task. The experiment consisted of four different treatments: Lottery, individual choice, social preferences, and social planner. Our results suggest that people's risk attitudes do not adequately reflect their inequality attitudes. Uninvolved social planners exhibit randomization preferences, while self-interested social planners are generally more inequality averse and try to avoid extreme outcomes.     

Fundamentals, information, and international capital flows: A welfare analysis

In the recent discussion surrounding the design of a new international financial architecture, enhancing transparency has widely been proposed as a policy essential for increasing the efficiency of international capital markets. This paper uses a simple two-country (two-agent) general equilibrium model with incomplete markets and production to explore the welfare consequences of an increase in public information about country-specific fundamentals (increase in transparency). An improvement in the quality of information has two effects on the ex ante welfare of individual countries: A direct effect that increases the efficiency of global capital allocation and welfare, and an indirect general equilibrium effect that increases asset price volatility and may decrease welfare. When the degree of risk-aversion is low, at least one country will gain from an increase in information quality. If the degree of risk-aversion is high, then there are robust examples of economies for which an increase in information hurts all countries. The paper also discusses how certain institutional arrangements (international derivative markets, international agency) could ensure that all countries gain from better information by providing insurance against information-induced asset price risk.     

Issues in environmental justice within the European Union

This paper surveys pressing issues facing current and future social policies in the European Union (EU) at the juncture of social justice demands and environmental concerns. European policy-makers have in fact only recently acknowledged the notions of environmental justice and environmental inequalities, which have been part of the US policy arsenal for almost two decades. Yet, challenges to equality and fairness in the environmental domain are many and growing within the European Union. After having defined environmental justice and environmental inequalities in the European context, the paper addresses two contemporary dimensions of those challenges for EU social policies: vulnerability and exposure to environmental disaster and risk; and fairness in environmental taxation and the related issue of fuel poverty.     

Elderly labor supply and fertility decisions in aging-population economies

With a longer life expectancy, individuals who plan to work when they are old may increase the number of their children. Therefore, when individuals choose the time of retirement, the fertility rate may not necessarily decline but even rise.     

Flooding risk and housing values: An economic assessment of environmental hazard

Climate change, the ‘boom and bust’ cycles of rivers, and altered water resource management practice have caused significant changes in the spatial distribution of the risk of flooding. Hedonic pricing studies, predominantly for the US, have assessed the spatial incidence of risk and the associated implicit price of flood risk. Using these implicit price estimates and their associated standard errors, we perform a meta-analysis and find that an increase in the probability of flood risk of 0.01 in a year is associated to a difference in transaction price of an otherwise similar house of - 0.6%. The actual occurrence of a flooding event or increased stringency in disclosure rules causes ex-ante prices to differ from ex-post prices, but these effects are small. The marginal willingness to pay for reduced risk exposure has increased over time, and it is slightly lower for areas with a higher per capita income. We show that obfuscating amenity effects and risk exposure associated with proximity to water causes systematic bias in the implicit price of flood risk.     

Competitive equilibria of economies with a continuum of consumers and aggregate shocks

This paper studies competitive equilibria of a production economy with aggregate productivity shocks. There is a continuum of consumers who face borrowing constraints and individual labor endowment shocks. The dynamic economy is described in terms of sequences of aggregate distributions. The existence of competitive equilibrium is proven and a recursive characterization is established. In particular, it is shown that for any competitive equilibrium, there is a payoff equivalent competitive equilibrium that is generated by a suitably defined recursive equilibrium.     

Perfect competition in asymmetric information economies: compatibility of efficiency and incentives

The idea of perfect competition for an economy with asymmetric information is formalized via an idiosyncratic signal process in which the private signals of almost every individual agent can influence only a negligible group of agents, and the individual agents’ relevant signals are essentially pairwise independent conditioned on the true states of nature. Thus, there is no incentive for an individual agent to manipulate her private information. The existence of incentive compatible, ex post Walrasian allocations is shown for such a perfectly competitive asymmetric information economy with or without “common values”. Consequently, the conflict between incentive compatibility and Pareto efficiency is resolved exactly, and its asymptotic version is derived for a sequence of large, but finite private information economies.     

Separating reputation, social influence, and identification effects in a dictator game

This study explores the ways in which information about other individual's action affects one's own behavior in a dictator game. The experimental design discriminates behaviorally between three possible effects of recipient's within-game reputation on the dictator's decision: Reputation causing indirect reciprocity, social influence, and identification. The separation of motives is an important step in trying to understand how impulses towards selfish or generous behavior arise. The statistical analysis of experimental data reveals that the reputation effects have a stronger impact on dictators’ actions than the social influence and identification.     

The effect of ambiguous risk, and coordination on farmers' adaptation to climate change — A framed field experiment

The risk of losses of income and productive means due to adverse weather can differ significantly among farmers sharing a productive landscape, and is of course hard to estimate, or even “guesstimate” empirically. Moreover, the costs associated with investments in reduced vulnerability to climatic events are likely to exhibit economies of scope. We explore the implications of these characteristics on farmer's decisions to adapt to climate change using a framed field experiment applied to coffee farmers in Costa Rica. As expected, we find high levels of risk aversion, but even using that as a baseline, we further find that farmers behave even more cautiously when the setting is characterized by unknown or ambiguous risk (i.e. poor or non-reliable risk information). Secondly, we find that farmers, to a large extent, coordinated their decisions to secure a lower adaptation cost, and that communication among farmers strongly facilitated coordination.     

Natural capital, subjective well-being, and the new welfare economics of sustainability: Some evidence from cross-country regressions

The measurement of natural capital and its management during the economic development process are important aspects of the capital approach to sustainable development. However, the assessment of social welfare in terms of genuine savings (or changes in total wealth per capita) is arguably too limited. This paper tries to make a case for the incorporation of subjective well-being measures in debates about sustainable development by exploring the macro-level relationship between subjective well-being and natural capital in a cross-country setting. It is tested whether natural capital per capita is correlated with subjective well-being in a sample of fifty-eight developed and developing countries, using natural capital data from the World Bank's Millennium Capital Assessment. Bivariate regressions indicate that it is. When multiple regression models are estimated that include (a) major country-level determinants of subjective well-being (GNI per capita, social capital, income distribution, unemployment, inflation), and (b) regional dummy variables for ex-Soviet Union and Latin American countries, the positive correlation remains. The role of data outliers is carefully explored, and the sensitivity of the results to the use of alternative subjective well-being measures (i.e. life satisfaction, happiness, and a combined life satisfaction and happiness index) is investigated. This does not change the nature of the results. The findings arguably strengthen the case for a ‘new welfare economics of sustainability’ that takes subjective well-being measures into account.     

Optimal environmental taxes and standards: Implications of the materials balance

This paper investigates the implications of the materials balance for optimal environmental policy. We find that neglecting the materials-emissions relationship - as is common in models of optimal environmental regulation - implies biases, whose sign depends on the regulatory instrument chosen. When emissions are regulated through an emission tax, the seemingly optimal tax is too high. When regulation proceeds through the use of an emission standard, the seemingly optimal standard is too lax.     

On the self-interested use of equity in international climate negotiations

We discuss self-interested uses of equity arguments in international climate negotiations. Using unique data from a world-wide survey of agents involved in international climate policy, we show that the perceived support of different equity rules by regions may be explained by the ranking of their economic costs. Despite being self-interested, equity arguments may be perceived as being used for different reasons, for example, out of fairness considerations or in order to facilitate negotiations. Consistent with experimental and behavioral studies on fairness perceptions, we find that individuals are more likely to state reasons with positive attributes if they evaluate their own region or regions that support the individual's personally preferred equity rule. Negotiators perceive the use of equity by regions as less influenced by pressure from interest groups.