The optimal choice of central bank independence and conservatism under uncertainty

This paper examines the optimal monetary delegation arrangement of central bank independence and conservatism in the presence of uncertainty about the central bank’s output objective. We show that full independence is no longer optimal with uncertain central bank preferences, and that optimal delegation involves the choice of both independence and conservatism. Further, we find that the usual trade-off between independence and conservatism no longer necessarily holds. Consequently, high central bank independence may also require a high level of conservatism.     

The trade paradox persists under excise taxes

Brander and Krugman (1983) and Sertel (1988) followed by Krugman (1989), showed two sides of a ‘trade paradox’: The paradox in competition, viz. that opening trade (or increasing competition) may cause welfare to decline, and the paradox in efficiency, viz. that an increase in unit transport cost may increase welfare. In this paper, we consider the situation in an environment where interventionist trade policies are not permitted but each country is sovereign to impose an excise tax (or subsidy). The paradoxes persist under equilibrium excise taxes, reckoned both at the non-cooperative (Nash or dominant strategy) equilibrium and at the cooperative solution among tax-imposing authorities maximizing welfare. We also see that the paradoxes persist in a taxless environment where market equilibrium is Stackelberg rather than Cournot.     

Growth, welfare and optimal trade taxes: a fallacy of composition

Optimal export taxation rules out the possibility of immiserizing growth in a two-country world. Thus, productivity increases in the exporting sector must be welfare improving. This paper shows that in a multicountry world such reasoning commits a fallacy of composition. Simultaneous growth of exporting nations can lead to welfare losses in the presence of unilaterally optimal export taxes. Also, optimal export taxes can decline in response to such growth. This result further strengthens the possibility of perverse welfare movements. Thus, standard policy recommendations of increasing productivity in the exporting sector may lead to unintended and self-defeating outcomes.     

The second-best use of social cost estimates

A significant literature has developed to estimate the damages to third parties from new electricity generation technologies. This paper focuses on how such estimates can be profitably used in the present regulatory environment, and in the potential new environment that may result from restructuring in the electricity industry.     

On the design of optimal grandfathering schemes for emission allowances

This paper derives optimal schemes for the free allocation of emission allowances in a dynamic context. We consider emissions- and output-based allocation rules which allow for updating of the basis of allocation over time and thereby do not rely on historical data only. We show that such dynamic schemes do not necessarily induce inefficient outcomes. In closed trading systems with an absolute cap on emissions, grandfathering schemes which allocate allowances proportionally to past emissions are first-best. However, in open trading systems where allowances can be traded with outsiders, first-best allocation schemes must not depend on firm-specific decisions while second-best schemes correspond to a Ramsey rule of optimal tax differentiation and are generally based on both past emission and output levels.     

Optimal size, optimal timing and optimal financing of an investment

Corporate investment is an important determinant of economic well-being. The existing literature identifies optimal investment size and timing without the possibility of debt financing, as well as the effect of debt financing on investment timing without the option to choose investment size. This paper contributes to the literature by identifying the optimal size, optimal timing and optimal financing for an investment when the firm controls all three decisions (as it usually does in practice). The investment size and investment trigger are generally positively related: when investment is delayed (accelerated) it is larger (smaller) in size, thus the overall effect on investment is ambiguous. However, when tax rate or bankruptcy cost is increased, the trigger rises and size falls, hence the effect on investment is unambiguously negative. The effect of debt financing on investment depends on the amount of debt used; with the optimal amount of debt, investment is delayed relative to the no-debt case, and this delay can be economically significant; however, the investment, when eventually made, will be larger in size. Overall, it is not appropriate to ignore either the firm’s ability to choose investment size or its option to use debt financing, when modeling the investment decision.     

Sex and environmental policy in the U.S. House of Representatives

Using LCV score data, we find that female legislators favor stricter environmental policies than do their male counterparts. Moreover, gender-corrected estimates suggest that voters do not push environmental policy towards the middle, but rather select the ideologically closest candidate.     

Mobile termination rates and the receiver-pays regime

The European Commission has recently invited national regulatory authorities to decrease access charges to the cost of an efficient operator. Some large operators warned regulators and users that cutting access charges could result in the US style business model, where mobile users pay for both making and receiving calls. I show that mobile operators charge for incoming calls when the access charge is below cost even if receivers can hang up. In such a case profits are neutral with respect to the level of the access charge. I further show that ‘bill and keep’ is a constrained social optimum when the call externality is strong, even if receivers pay and can hang up. Finally, I discuss the policy implications of these results.     

Short- and long-term impact of remarkable economic events on the growth causes of China–Germany trade in agri-food products

This paper focuses on a systematic quantitative discussion of the short- and long-term impact of remarkable economic events on international trade in a two-stage framework. Firstly, procedures based on dummy variables are proposed to detect structural breaks, types and sizes of jumps caused by such events. Then we propose to apply a hierarchical CMS (Constant Market Share) model to all sub-periods determined by the detected change points to study the short- and long-term impact of those events on growth causes. Application to China–Germany trade in agri-food products shows that China's accession to WTO had a negative short-term impact on corresponding series. But its long-term impact on China's export competitiveness was clearly positive. The short-term impact of the EU's CAP (Common Agricultural Policy) reform on Germany's exports to China was also negative. Its long-term impact on export competitiveness was sometimes positive and sometimes negative. The financial crisis of 2008 caused a significant reduction of China's agri-food exports to Germany. But Germany's exports to China in 2009 were not affected by the financial crisis as much.     

Contracting for tacit knowledge: the provision of technical services in technology licensing contracts

Recent research on the economic payoff from new technology has emphasized the importance of tacit knowledge or know-how. This paper shows that arm's length contract can overcome the problems in contracting for know-how by bundling complementary inputs with know-how in a technology package, and leveraging the superior enforceability of contracts over the latter. In the empirical part of this paper, the relationship between bundling and transfer of know-how is analyzed, using Indian data. The results imply that tied sales of inputs may increase the efficiency of contracts involving the transfer of know-how. A striking result, in the context of the current North-South debates on intellectual property rights, is the packaging of patents with know-how.     

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.     

On the optimality of optimal income taxation

The Mirrleesian model of income taxation restricts attention to simple allocation mechanism with no strategic interdependence, i.e., the optimal labor supply of any one individual does not depend on the labor supply of others. It has been argued by Piketty (2009) [12] that this restriction is substantial because more sophisticated mechanisms can reach first-best allocations that are out of reach with simple mechanisms. In this paper, we assess the validity of Piketty?s critique in an independent private values model. As a main result, we show that the optimal sophisticated mechanism is a simple mechanism, or, equivalently, a Mirrleesian income tax system.     

Regulatory policies toward local exchange companies under emerging competition: guardrails or speed bumps on the information highway?

The Telecommunications Act of 1996 provides a fundamental shift in the policy parameters within which regulators are to implement telecommunications policy. Within the parameters established by the Act, however, considerable discretion remains on the part of those charged with the task of implementing the law. In this paper, we identify a set of policy guideposts based on sound economic principles that can be used by regulators to implement the Act. Specifically, these competition-enabling policies will foster the goals of promoting and protecting competition.     

Informational size and incentive compatibility with aggregate uncertainty

In McLean and Postlewaite (Econometrica 56, 1992, p. 2421), we analyzed pure exchange economies with asymmetrically informed agents. We defined a notion of informational size and showed that, when the aggregate information of all agents resolves nearly all the uncertainty regarding the state of nature, the conflict between incentive compatibility and (ex post) efficiency can be made small if agents have sufficiently small informational size. This paper investigates the relationship between informational size and efficiency for the case in which nontrivial aggregate uncertainty is present, i.e., when significant uncertainty about the world persists even when the information of all agents is known.     

Incentives and the structure of teams

This paper studies the relationship between moral hazard and the matching structure of teams. We show that team incentive problems may generate monotone matching predictions in the absence of complementarities in the production technology. Second, we analyze how complementarity in the underlying technology affects the matching predictions arising due to moral hazard. We find that (i) even when the production technology is strongly complementary, the incentive problem may lead to formation of negatively sorted teams; (ii) as the degree of complementarity increases, the optimal matching structure may switch from positive to negative, solely due to the need to provide incentives.     

Misery loves company: Social regret and social interaction effects in choices under risk and uncertainty

Extensive field evidence shows individuals? decisions in settings involving uncertainty depend on their peers? decisions. One hypothesized cause of peer group effects is social interaction effects: an individual?s utility from an action is enhanced by others taking the same action. We employ a series of controlled laboratory experiments to study the causes of peer effects in choice under uncertainty. We find strong peer group effects in the laboratory. Our design allows us to rule out social learning, social norms, group affiliation, and complementarities as possible causes for the observed peer group effects, leaving social interaction effects as the likely cause. We use a combination of theory and empirical analysis to show that preferences including “social regret” are more consistent with the data than preferences including a taste for conformity. We observe spillover effects, as observing another?s choice of one risky gamble makes all risky gambles more likely to be chosen.     

Growth, income taxes and consumption aspirations

In a Barro-type economy with exogenous consumption aspirations, raising income taxes favors growth even in the presence of lump-sum taxes. Such a policy is compatible with the behavior of private consumption, income taxes and growth rates observed in actual economies.     

The econometric critique of computable general equilibrium modeling: the role of functional forms

Computable general equilibrium (CGE) models are among the most influential tools in applied economics. However, some serious questions have been raised about the empirical validity of these models. The core of the critique is that the parameter selection criteria are unsound and the use of first-order (CES class) functional forms imposes influential restrictions on the model's structure. A formal summary of the case against standard CGE modeling is presented, as is an alternative econometric-based modeling strategy which answers the critique. We then present a comparative CGE modeling experiment designed to assess the role of function forms. It is found that choice of functional forms affects not only industry-specific results, but aggregate results as well, even for small policy shocks.     

The impact of bilateral investment treaties on foreign direct investment

This paper uses a large panel of OECD data on stocks of outward foreign direct investment (FDI) to evaluate the impact of bilateral investment treaties. For several variants of the knowledge capital model of multinationals, we demonstrate that investment treaties exert a significant positive effect on outward FDI, if they actually are implemented. Moreover, even signing a treaty has a positive, although lower and in most specifications insignificant, effect on FDI. Journal of Comparative Economics 32 (4) (2004) 788–804.     

Public pricing of final and intermediate goods in the presence of externalities

The purpose of this paper is to investigate the impact of externalities on pricing decisions by a public or a private regulated firm selling both final and intermediate goods. The externalities generate feedbacks in demand that affect both consumers and producers. The model is very general in that it does not impose constant returns to scale on private production, allows for distributional effects of both the publicly determined prices and private sector profits, and captures the general equilibrium effects of public pricing. Socially optimal pricing rules are derived, and the relation of the results with previous models of pricing in the presence of externalities is investigated.