Towards a post-Keynesian Welfare economics

This article has two objectives. First, I raise the issue of whether we still need to bother with welfare economics. The increased acceptance of ideas from the new right with its strong criticism of state intervention makes this a valid question to pose. It is argued that post-Keynesians' concerns with uncertainty may form the basis of a valid counter to these new-right arguments. Secondly, I consider the possibility of there being a specifically post-Keynesian perspective on welfare economics. It is argued that this perspective favours egalitarian activism.     

Information,endogenous uncertainty and risk aversion

The importance of incomplete information and risk aversion for the allocation of economic resources is shown to depend critically on whether uncertainty is exogenously imposed or endogenously related to the ability of the price system to aggregate and disseminate the information possessed by the agents in a decentralized market economy. The specific example analysed in this paper is a two-period exchange model with competitive markets and a homogeneous product.Comments and suggestions by anonymous referees, Jacques Drèze, Jan Rose Sørensen, and financial support from the Danish Social Science Research Council are gratefully acknowledged.     

Investment under uncertainty and option value in environmental economics

A question has arisen concerning the relationship between the financial theory of options and the concept of option value developed in the literature on environmental preservation. This article presents simple models in each approach and then demonstrates their equivalence. The conventional, differing interpretations of results in the two approaches are also shown to be consistent though consideration of the difference can lead to a deeper understanding of the concept of option value.     

Welfare economics and bounded rationality: the case for model-based approaches

In this paper, we examine the problems facing a policy maker who observes inconsistent choices made by agents who are boundedly rational. We contrast a model-less and a model-based approach to welfare economics. We make the case for the model-based approach and examine its advantages as well as some problematic issues associated with it.     

Political uncertainty,risk of Frexit and European sovereign spreads

Using data from a prediction market (crowd-based forecasts), we build a daily measure capturing the risk of Frexit related to the 2017 French presidential elections. We study how unexpected changes in this new measure of political uncertainty in France affect European sovereign spreads vis-à-vis Germany. We show that our uncertainty proxy drives not only the French sovereign spread but also the spreads of those EU countries deemed the most vulnerable to the risk of desegregation of the Euro Zone. These results suggest that specific political uncertainty affects short-term investor’s expectations and may outweigh other economic determinants of sovereign spreads shortly prior to high stake elections     

Time-varying uncertainty and variance risk premium

This paper extends the AK production model in Pindyck and Wang (2013) into a more general setting in which the volatility of capital stock is stochastic and driven by shocks. After solving the equilibrium, the fundamental shocks are embedded into the stock price and the leverage effect is contributed from three distinct channels. As an application, we employ our extended AK production model to match well the negative variance risk premium.     

Increasing risk and equilibrium under uncertainty

The impact of increasing risk on social welfare and resource allocation is analysed in a general equilibrium model with endowment uncertainty. It is shown that the equilibrium allocation of resources is affected only by an increase in those risks which are important for society as a whole. In contrast, increases in purely individual risk do not influence achievable social welfare and have no effect on the utility of traders in a competitive market.     

Endogenous factor market distortion, risk aversion, and international trade under input uncertainty

In the context of non-diversifiable and sector-specific risks in labour markets, we show that the resulting factor market distortion – attributable to an endogenous intersectoral wage differential – can provide a possible rationale that explains why larger wage dispersion prevails in developing nations. We also demonstrate how endogenous wage distortions spill over to capital markets, with capital-poor economies offering lower rates of returns. In addition, we show that inequality in the distribution of wealth further deviates factor allocation away from first-best and impairs intersectoral mobility of the poor.
Ce mémoire montre que la distorsion dans le marché des facteurs qui résulte de risques non diversifiables et spécifiques à certains secteurs (et qui se traduit par un différentiel de salaire endogène entre secteurs) peut expliquer pourquoi on observe une dispersion plus grande des salaires dans les pays en voie de développement.On montre aussi comment des distorsions endogènes de salaires débordent vers les marchés de capitaux,ce qui fait que les pays pauvres en capital ont des rendements plus faibles.De plus, on montre que l'inégalité dans la distribution de la richesse contribue à faire dévier l'allocation des ressources de son optimum de premier ordre et nuit à la mobilité inter-sectorielle des pauvres.     

Individual risk and Lebesgue extension without aggregate uncertainty

Many economic models include random shocks imposed on a large number (continuum) of economic agents with individual risk. In this context, an exact law of large numbers and its converse is presented in [Y.N. Sun, The exact law of large numbers via Fubini extension and characterization of insurable risks, J. Econ. Theory 126 (2006) 31-69] to characterize the cancellation of individual risk via aggregation. However, it is well known that the Lebesgue unit interval is not suitable for modeling a continuum of agents in the particular setting. The purpose of this paper is to show that an extension of the Lebesgue unit interval does work well as an agent space with various desirable properties associated with individual risk.     

Fiber investment and access under uncertainty: long-term contracts,risk premia,and access options

Journal of Regulatory Economics - Regulated access schemes shape incentives for both investment and entry in next-generation networks. We study in a general duopoly setting whether and how risk...     

Tariff,Growth, and Welfare

We develop a two‐country (Home and Foreign) by two‐good (consumption good and investment good) by one factor (capital) endogenous growth model with international knowledge spillover to study the relationship between an import tariff and economic growth and welfare. First, unlike the past literature, we do not need to make an assumption such that the growth rates between countries are identical in a balanced growth path (BGP). Second, we show that there exists a unique and saddle‐point BGP with both countries being incompletely specialized. Third, a higher import tariff on the consumption good in the domestic country may boost (reduce) the rate of economic growth when the foreign (domestic) country has an absolute advantage in the investment good. Finally, a rise in the tariff rate by one country may improve world welfare under some parameter spaces.     

Past experience of uncertainty affects risk aversion

In an experiment with more than 500 participants we study how past experience of uncertainty (imperfect knowledge of the state space) affects risk preferences. Participants in our experiment choose between a sure outcome and a lottery in 32 periods. All treatments are exactly identical in periods 17–32 but differ in periods 1–16. In the early periods of the risk treatment there is perfect information about the lottery; in the ambiguity Treatment participants perfectly know the outcome space but not the associated probabilities; in the unawareness treatment participants have imperfect knowledge about both outcomes and probabilities. We observe strong treatment effects on behavior in periods 17–32. In particular, participants who have been exposed to an environment with very imperfect knowledge of the state space subsequently choose lotteries with high (low) variance less (more) often compared to other participants. Estimating individual risk attitudes from choices in periods 17–32 we find that the distribution of risk attitude parameters across our treatments can be ranked in terms of first order stochastic dominance. Our results show how exposure to environments with different degrees of uncertainty can affect individuals’ subsequent risk-taking behavior.     

Welfare costs of monetary policy uncertainty in the economy with shifting trend inflation

We study welfare costs of the uncertainty about monetary policy in the economy featuring shifting trend inflation. We follow Ruge-Murcia (J Econ Dyn Control 36: 914–-938, 2012) to employ the SMM approach to fit the model to the US data (1979Q1-2015Q1). We find that the monetary policy uncertainty affects economic welfare through different dimensions. On the one hand, the policy uncertainty itself distorts the economic welfare negligibly, not only by increasing volatilities of consumption and leisure, but also by decreasing their average levels. A higher level of trend inflation then signifies these changes to produce greater welfare costs. Furthermore, the adverse impacts of policy uncertainty on the economy, documented by the impulse response functions of macroeconomic variables to policy uncertainty shock, become larger when central banks raise their inflation targets. On the other hand, the costs of exogenous variations in trend inflation are larger if there is policy uncertainty.     

Growth, Competition and Welfare

The impact of competition on growth and welfare is analysed by developing a model in which the number of firms, profit margins and innovation rates are endogenous. Different regimes of oligopolistic competition are distinguished. The tougher the price competition, the lower the profit margins for a given rate of concentration. This reduces the number of firms and product variety in a free entry equilibrium. Consequently, tougher competition implies larger firm size and higher rates of innovation since new technologies can be applied in a larger market. Oligopolistic pricing leads to underinvestment in firm-specific knowledge, even if inter-firm knowledge spillovers are neglected.