Self-enforcing international environmental agreements with a stock pollutant

In this paper the stability of an International Environmental Agreement (IEA) among N identical countries that emit a pollutant are studied using a two-stage game. In the first stage each country decides noncooperatively whether or not to join an IEA, and in the second stage signatories jointly against nonsignatories determine their emissions in a dynamic setting defined in continuous time. A numerical simulation shows that a bilateral coalition is the unique self-enforcing IEA independently of the gains coming from cooperation and the kind of strategies played by the agents (open-loop or feedback strategies). We have also studied the effects of a minimum participation clause finding that for this case a self-enforcing IEA just consists of the number of countries established in the clause.JEL Classification: C73, D62, Q28 Corresponding author : Santiago J. RubioThis paper is based on chapter four of Begoña Casinos Ph. Dissertation. Financial support from the Instituto Valenciano de Investigaciones Económicas, the Ministerio de Ciencia y Tecnología under grant BEC2000-1432 and Fundación BBVAis gratefully acknowledged. We also appreciate the helpful comments of three anonymous referees, whose suggestions improved the paper. Regarding any remaining inadequacies, the usual caveat applies.     

The Climate Policy Hold‐Up: Green Technologies,Intellectual Property Rights,and the Abatement Incentives of International Agreements

The success of global climate policies over the coming decades depends on the diffusion of “green” technologies. Using a simple model, we highlight a conflict between international environmental agreements (IEAs) on emissions reductions and international systems of intellectual property rights (IPRs) on abatement technologies. When IPRs are strong and global, IEA signatories anticipate rent extraction by innovators. This hold‐up effect reduces abatement, potentially to levels below those of non‐signatories, and it reduces the number of signatories to self‐enforcing IEAs. We explore policy options that respect existing property rights, but avoid the strategic interaction between signatories to an IEA and innovators.     

Uncertainty,Learning and Heterogeneity in International Environmental Agreements

This paper concerns the formation of International Environmental Agreements under uncertainty about environmental damage with different models of learning (complete learning, partial learning or no learning). The results of the existing literature are generally pessimistic: the possibility of either complete or partial learning generally reduces the level of global welfare that can be achieved from forming an IEA relative to no learning. That literature regards uncertainty as a parameter common to all countries, so that countries are identical ex ante as well as ex post. In this paper we extend the literature to the case where there is no correlation between damage costs across countries; each country is uncertain about a particular parameter (in our case the benefit-cost ratio) drawn from a common distribution but, ex post, each country’s realized parameter value is independently drawn. Consequently, while countries remain identical ex ante, they may be heterogeneous ex post. We show that this change reinforces the negative conclusions about the effects of partial learning on international environmental agreements, but, under certain conditions, moderates the negative conclusions about the effects of complete learning.     

Self-enforcing International Environmental Agreements with Costly Monitoring for Compliance

Theoretical analyses of international environmental agreements (IEAs) have often employed the concept of self-enforcing agreements to predict the number of parties to such an agreement. The term self-enforcing, however, is a bit misleading. The concept refers to the stability of cooperative agreements, not to enforcing compliance with these agreements once they are in place. In this paper we analyze an IEA game in which parties to an agreement finance an independent monitor who audits the compliance performance of the members of an agreement. These audits reveal instances of noncompliance so they can be sanctioned. We find that costly monitoring of compliance limits the circumstances under which international cooperation to protect the environment is worthwhile, but when IEAs do form they will often involve greater participation than IEAs that do not require costly monitoring. Consequently, costly monitoring of IEAs can produce higher international environmental quality. Moreover, under certain conditions, aggregate welfare is higher when IEAs require costly monitoring.      

The Impact of Climate Change on the Balanced Growth Equivalent: An Application of <Emphasis Type="Italic">FUND</Emphasis>

The Stern Review added balanced growth equivalents (BGE) to the economic climate change research agenda. We first propose rigorous definitions of the BGE for multiple regions and under uncertainty. We show that the change in the BGE is independent of the assumed scenario of per capita income. For comparable welfare economic assumptions as the Stern Review, we calculate lower changes in BGE between a business as usual scenario and one without climate impacts with the model FUND than the Stern Review found with the model PAGE. We find that mitigation policies give even lower changes in BGE and argue that those policy choices should be the focus of the research effort rather than total damage estimates. According to our results, the current carbon tax should be below $55/tC. Sensitivity analyses show that the Stern Review chose parameters that imply high impact estimates. However, for regionally disaggregated welfare functions, we find changes in BGE that are significantly higher than the results from the Stern Review both for total damage as for policy analysis. With regional disaggregation and high risk aversion, we observe fat tails and with that very high welfare losses.      

Neutrality and Non‐Neutrality of Money In A Classical‐Type Model

Abstract. This paper modifies the simple classical model by introducing capacity utilization that varies across the course of the business cycle. By making the capacity usage a choice variable that turns out to be sensitive to changes in the price level, we show that the classical model loses its fundamental feature, namely the neutrality of money. In our generalized framework, a rise in money supply improves upon all the real variables if the economy suffers from excess capacity, as in recessions and depressions. We demonstrate that our model describes the various economic cross‐currents during the Great Depression extremely well. Thus, monetary policy emerges with an activist role even in a generally classical setting.     

Happiness, freedom and control

How do people value freedom of choice? Drawing on economics and psychology the paper provides an hypothesis and empirical evidence on how individuals may value freedom of choice and derive utility from it. It is argued that the degree of perceived control that individuals have over choice – a construct known as the locus of control in psychology – regulates how we value freedom of choice. People who believe that the outcome of their actions depends on internal factors such as effort and skills (the ‘internals’) have a greater appreciation of freedom of choice than people who believe that the outcome of their actions depends on external factors such as fate or destiny (the ‘externals’). We find some evidence in support of this hypothesis using a combination of all rounds of the World and European Values Surveys. A variable that measures freedom of choice and the locus of control is found to predict life satisfaction better than any other known factor such as health, employment, income, marriage or religion, across countries and within countries. We show that this variable is not a proxy of happiness and measures well both freedom of choice and the locus of control. ‘Internals’ are found to appreciate freedom of choice more than ‘externals’ and to be happier. These findings have important implications for individual utility, social welfare and public policies.     

Choice and individual welfare

We propose an abstract method of systematically assigning a “rational” ranking to non-rationalizable choice data. Our main idea is that any method of ascribing welfare to an individual as a function of choice is subjective, and depends on the economist undertaking the analysis. We provide a simple example of the type of exercise we propose. Namely, we define an individual welfare functional as a mapping from stochastic choice functions into weak orders. A stochastic choice function (or choice distribution) gives the empirical frequency of choices for any possible opportunity set (framing factors may also be incorporated into the model). We require that for any two alternatives x and y, if our individual welfare functional recommends x over y given two distinct choice distributions, then it also recommends x over y for any mixture of the two choice distributions. Together with some mild technical requirements, such an individual welfare functional must weight every opportunity set and assign a utility to each alternative x which is the sum across all opportunity sets of the weighted probability of x being chosen from the set. It therefore requires us to have a “prior view” about how important or representative a choice of x at a given situation is.     

Lexicographic choice under variable capacity constraints

In several matching markets, to achieve diversity, agents' priorities are allowed to vary across an institution's available seats, and the institution is let to choose agents in a lexicographic fashion based on a predetermined ordering of the seats, called a (capacity-constrained) lexicographic choice rule. We provide a characterization of lexicographic choice rules and a characterization of deferred acceptance mechanisms that operate based on a lexicographic choice structure under variable capacity constraints. We discuss some implications for the Boston school choice system and show that our analysis can be helpful in applications to select among plausible choice rules.     

THE CHOICE OF APPORTIONMENT FACTORS UNDER FORMULA APPORTIONMENT*

This paper investigates the choice of apportionment factors under a corporate tax system of Formula Apportionment. In contrast to perceived wisdom, we show that the apportionment formula contains both mobile (capital) and immobile (labor) factors, regardless of whether the formula is determined decentrally by jurisdictions or centrally by a central planner. The central planner uses the formula as a corrective instrument to internalize fiscal externalities. We calibrate the model to the European Union and show that replacing the current system of Separate Accounting by Formula Apportionment would substantially increase tax revenue and welfare under both centralized and decentralized formula choices.     

Strategic competition and optimal parallel import policy

Abstract In a two‐country Hotelling type duopoly model of price competition, we show that parallel import (PI) policy can act as an instrument of strategic trade policy. The home firm’s profit is higher when it cannot price discriminate internationally if and only if the foreign market is sufficiently bigger than the domestic one. The key mechanism in the model is that the home firm’s incentive to keep its domestic price close to the optimal monopoly price affects its behavior during price competition abroad. We also analyze the welfare implications of PI policies and show that our key insights extend to quantity competition.     

RESTRICTING EMPLOYMENT OF LOW‐PAID IMMIGRANTS: A GENERAL EQUILIBRIUM ASSESSMENT OF THE SOCIAL WELFARE IMPLICATIONS FOR LEGAL U.S. WAGE‐EARNERS

This paper builds on earlier work that used a general‐equilibrium model to show that reducing employment of unauthorized immigrants in the United States through a tighter border‐security policy lowers the average income of legal residents. Here we exploit further the detail available in the general‐equilibrium model to look at distributional effects, recognizing that the policy increases wage rates for low‐paid legal workers. We assess the social welfare effect on legal workers using a constant elasticity of substitution social welfare function. We contrast our general‐equilibrium approach to immigration analysis with the more commonly used partial‐equilibrium, econometric approach. (JEL D63, J61, C68)     

Incomplete Markets, Transitory Shocks, and Welfare

Although equilibrium allocations in models with incomplete markets are generally not Pareto-efficient, it is often argued that quantitative welfare losses from missing assets are small when time horizons are long and shocks are transitory. In this paper we use a computational analysis to show that even in the simplest infinite horizon model without aggregate uncertainty welfare losses can be substantial. Furthermore we show that in this model welfare losses from incomplete markets do not necessarily disappear when one considers calibrations of the model in which agents become very patient. We argue that when the economic model is calibrated to higher frequency data, the period persistence of negative income shocks must increase as well. In this case the welfare loss of incomplete markets remains constant even as agents' rate of time preference tends to one. Journal of Economic Literature Classification Numbers: D52, D58, D60.     

Price or Quantity? A New Irrelevance Result for Mixed Markets

Earlier studies for mixed markets have established a series of so‐called irrelevance results. While previous results relate to the attainment of the first‐best allocation for welfare, we provide a new irrelevance result in terms of the choice of strategic variable in the product market. We show that regardless of whether a public or private firm is the market leader, the leader always chooses the price contract whereas the follower is indifferent between the price contract and the quantity contract. The identity of the leader and the follower firm is therefore irrelevant for the equilibrium mode of competition. Implications for economic models in mixed market settings emerge, which are also discussed.     

WELFARE REFORM AND CHILDREN'S EARLY COGNITIVE DEVELOPMENT

In this paper, we use a dynamic structural model to measure the effects of (1) single mothers' work and welfare use decisions and (2) welfare reform initiatives on the early cognitive development of the children of the NLSY79 mothers. We use PIAT‐Math scores as a measure of attainment and show that both the mothers' work and welfare use benefit children on average. Our simulation of a policy that combines a time limit with work requirement reduces the use of welfare and increases employment significantly. These changes in turn significantly increase children's cognitive attainment. This implies that the welfare reform was not only successful in achieving its stated goals, but was also beneficial to welfare children's outcomes. In another policy simulation, we show that increasing work incentives for welfare population by exempting labor income from welfare tax can be a very successful policy with some additional benefits for children's outcomes. Finally, a counterfactual with an extended maternal leave policy significantly reduces employment and has negative, though economically insignificant, impact on cognitive outcomes. (JEL I38, J22, J18)     

Reference Dependence Effects on WTA and WTP Value Functions and Their Disparity

In this study we investigate two reference dependence effects in a choice experiment. The first is the effect of the well-known distinction between gains and losses, the second is the effect of changing the reference value on willingness to pay (WTP) and willingness to accept (WTA). The latter has to our knowledge not been studied before. We hypothesize that there are differences between WTA and WTP, and that both value functions and their disparity are affected by the absolute value of the reference point. We test our hypotheses using a choice experiment with trade-offs between changes in flood probabilities and costs. The choice experiments elicit WTP and WTA, using two flood probability reference values, yielding four separate value functions. Our findings show that a substantial WTA–WTP disparity exists, and that this disparity increases when moving away from the reference point. Also, both WTA and WTP value functions are affected by the flood probability reference value, and the WTA–WTP disparity increases when the flood probability reference point increases. Both findings suggest that welfare effects caused by changes in public good provision depend not only on the direction of change (loss aversion), but also the reference value. Moreover, our results show that the latter effect is larger for losses than for gains. We introduce the concept of reference point updating as a possible explanation for these findings.     

Automobile quality choice under pollution control regulation

In this paper, we develop a modified quality choice model to study the effects of various mobile-source air pollution control regulations. We have a single producer that supplies a fixed number of car types (two) but faces a spectrum of consumers differing in their valuation of car quality. The car manufacturer chooses the quality levels of the two car types as well as the sales mix between the two types and the size of the market it wishes to supply. By endogenizing both the sales mix and the market size, while still allowing quality to be a choice variable, we are able to more completely analyze the impact of any car pollution control regulation. Existing studies of this impact either focus on the model line adjustment response (shifts in the quality array) or on the price adjustment response (changes in the sales mix and market size). In allowing for both the model line and the price adjustment options, we find that the corporate average fuel efficiency (CAFE) standard is unambiguously welfare superior to the low-emission vehicle quantity constraint (LEV) and zero-emission vehicle (ZEV) programs. We also show that the effects of the CAFE standard are not equivalent to those of a fuel tax, as previously found, and that, for a given car pollution target, the former is preferred to the latter.      

A Dynamic Model for International Environmental Agreements

In this paper we develop a model that uses a dynamic framework to analyze the process through which countries join international environmental agreements (IEAs). In the model, while all countries suffer from the same environmental damage as a result of total global emissions, non-signatory countries decide on their emission levels by maximizing their own welfare, whereas signatory countries decide on their emission levels by maximizing the aggregate welfare of all signatory countries. It is assumed that signatory countries will be able to punish non-signatories, at some cost to themselves. When countries decide on their pollution emissions, they account for the evolution of the stock of pollution over time. Moreover, we propose a mechanism to describe how countries reach a stable IEA. The model is able to capture situations characterized by partial cooperation within an IEA that is stable over time. It also captures situations where all countries participate in a stable agreement, and situations where no stable agreement is feasible. Where more than one possibility coexist, the long-term outcome of the game depends on the initial conditions (i.e., the initial number of signatory countries and pollution level).     

The need for combining IEA and IE tools: The potential effects of a global ban on PVC on climate change

Over the last decades the concepts of Integrated Environmental Assessment (IEA) and Industrial Ecology (IE), both claiming to provide analyses and solutions for sustainability issues, have been developed separately as they emerged in response to questions from different policy-fields. In both fields, specific tools are used to support national and international environmental policy. The focus of IEA and IE tools, however, is different. IEA tools focus on one or a limited number of specific environmental issues. They often model the chain environmental processes with high spatial (and temporal) resolution, but have a low resolution for the material structure of the economy and only partly take into account indirect effects that occur via physical and socio-economic linkages. IE tools take into account all environmental issues related to a specific substance or product. They have a high resolution for the material structure of the economy and take into account indirect effects that occur via physical linkages, however, their environmental modelling is very limited. Both IE and IEA tools have proven to be very useful and neither is superior to the other. However, a combination of both can provide additional information that can be used for more effective policy making. We use the case of a hypothetical world-wide ban on PVC to show that a measure that is not directly related to climate change could still have significant climate effects. This indirect effect is a result of the linkages of material flows in society. We show that IEA tools are not well suited to include these types of effects and that IE tools can fill this gap partially. What is really needed is a broader systems perspective that takes into account the full range of possible side-effects of environmental policy measures.     

Pareto violations of parliamentary voting systems

It has been known for a long time that many binary voting rules can select a Pareto dominated outcome, that is an outcome such that there exists some other alternative which is preferred by every voter. In this paper, we show that some of these rules can select an outcome Pareto dominated in a much stronger sense. Furthermore, our main results are concerned with the evaluation of the likelihood of Pareto dominated outcomes under four social choice rules commonly used in Parliaments or in committees. Given a set of four alternatives and a set of n individuals, we assume anonymous profiles and using analytical methods we compute the proportion of profiles at which the Pareto criterion is violated. Our results show that one should not be especially worried about the existence of the possibility as such. We are grateful to two anonymous referees for very helpful remarks and suggestions.