Risk Aversion, Intergenerational Equity and Climate Change

The paper investigates a climate-economy model with an iso-elastic welfare function in which one parameter measures relative risk-aversion and a distinct parameter measures resistance to intertemporal substitution.We show both theoretically and numerically that climate policy responds differently to variations in the two parameters. In particular, we show that higher but lower leads to increase emissions control. We also argue that climate-economy models based on intertemporal expected utility maximization, i.e. models where = , may misinterpret the sensitivity of the climate policy to risk-aversion.     

Preferences in the Future

Environmental economics has been much occupied with the discount rate, which is the value of future costs and benefits relative to present costsor benefits. But at least as important is the question of whatshould be discounted, that is, what the value of those future environmentalbenefits is to future generations. This paper analyzes the role for futurepreferences and discusses the state of knowledge. I argue that theappropriate discount rate is the market one, and that the real problemis determining future willingness-to-pay. This approach makes clearerthe connection between discounting and the valuation debate.This paper focuses on two features that have been prominent in that debate:existence value and reference dependence. I argue that thereis a vital connection between the two constructs and that this link yieldsimportant implications for future willingness-to-pay.     

Learning for Innovation and the Skill Premium

The computer revolution took very long to pay off in productivity growth in the computer-using sectors. The relative wage of skilled workers, however, has risen sharply from the early days of the computer revolution onward. As skilled workers wages reflect their productivity, the two observations together pose a puzzle.This paper provides a micro-based explanation for the long diffusion period of the computer revolution. The general equilibrium model of growth zooms in on the research process and provides an explanation for sluggish growth with booming relative wages of the skilled. Technological progress in firms is driven by research aimed at improving the production technology (innovation) and by assimilation of ideas or principles present outside the firm (learning). A new General Purpose Technology (GPT) like the computer revolution generates an initial slowdown in economic growth and an increase in the skill premium.Acknowledgement I am indebted to Theo van de Klundert for suggestions and encouragement. Suggestions by Jan Boone, Bas Jacobs, Patrick Francois, Henri de Groot, Lex Meijdam, Niek Nahuis Sjak Smulders, Harald Uhlig and anonymous referees have contributed to the paper.     

Produktionsfunktionen für die österreichische Landwirtschaft

Ohne ZusammenfassungAusgearbeitete Fassung von Teilen eines Vortrages, gehalten am 7. Juni 1957 in der Nationalökonomischen Gesellschaft in Wien.     

Climate Policies and Induced Technological Change: Which to Choose, the Carrot or the Stick?

Policies to reduce emissions of greenhousegases such as CO₂, will affect the rate andpattern of technological change in alternativeenergy supply and other production processes.Imperfections in markets for non-pollutingtechnologies imply that a decentralised economydoes not deliver a socially optimal outcome,and this could justify policy interventionssuch as subsidies. This paper considers thewelfare effects of technology subsidies as partof a carbon abatement policy package. We arguethat the presence of spillovers in alternativeenergy technologies does not necessarily implythat subsidy policies are welfare improving. Weillustrate this point in the context of ageneral equilibrium model with two forms ofcarbon-free energy, an existing alternative energy which is a substitute for carbon-basedfuels, and new vintage energy which providesa carbon-free replacement for existing energyservices. Subsidisation of alternative energyon the grounds of spillover effects can bewelfare-worsening if it crowds-out new vintagetechnologies.     

Policy instruments for curbing CO2 emissions: The case of the Netherlands

Taxes may seem to be the most attractive instrument for curbing the emissions of carbon dioxide. This paper, however, argues that environmental taxes involve a number of serious complications — especially in an open economy riddled with market imperfections like the Netherlands. Therefore, a wide-ranging policy mix is called for. As far as households and sheltered sectors are concerned, regulation can continue to play a major role. Within the context of unilateral policies aimed at exposed sectors, the combination of subsidies and voluntary agreements may be more cost effective than the tax instrument.This paper was prepared for a conference on Energy Taxation in Europe organized by the Stichting voor Economisch Onderzoek (SEO) and held on December 13, 1991 in Amsterdam, the Netherlands. The author would like to thank Sijbren Cnossen, Jarig van Sinderen and one anonymous referee for helpful comments on an earlier draft.     

How Large are the Welfare Gains from Technological Innovation Induced by Environmental Policies?

This paper examines whether the welfare gains from technological innovation that reduces future abatement costs are larger or smaller than the Pigouvian welfare gains from optimal pollution control. The relative welfare gains from innovation depend on three key factors—the initially optimal level of abatement, the speed at which innovation reduces future abatement costs, and the discount rate. We calculate the welfare gains from innovation under a variety of different scenarios. Mostly they are less than the Pigouvian welfare gains. To be greater, innovation must reduce abatement costs substantially and quickly and the initially optimal abatement level must be fairly modest.     

Endogenous uncertainty in a general equilibrium model with price contingent contracts

Summary This paper views uncertainty and economic fluctuations as being primarily endogenous and internally propagated phenomena. The most important Endogenous Uncertainty examined in this paper is price uncertainty which arises when agents do not have structural knowledge and are complelled to make decisions on the basis of their beliefs. We assume that agents adopt Rational Beliefs as in Kurz [1994a]. The trading of endogenous uncertainty is accomplished by using Price Contingent Contracts (PCC) rather than the Arrow-Debreu state contingent contracts. The paper provides a full construction of the price state space which requires the expansion of the exogenous state space to include the state of beliefs. This construction is central to the analysis of equilibrium with endogenous uncertainty and the paper provides an existence theorem for a Rational Belief Equilibrium with PCC. It shows how the PCC completes the markets for trading endogenous uncertainty and lead to an allocation which is Pareto optimal. This paper also demonstrates that endogenous uncertainty is generically present in this new equilibrium.This research was supported in part by the Fondazione Eni Enrico Mattei of Milan, Italy, and by the National Science Council of Taiwan. The authors thank Carsten K. Nielsen for valuable suggestions.     

Accumulation and compensation turnpikes in a leontief model

Summary The paper considers a model of an economy with after-effects: any production activity generates some subsequent expenses, like compensation of residual damages. Internalizing the after-effects in production costs at the time they are generated proves to substantially change the shape of long-term programs. It results from an interaction of two components corresponding to the conflicting goals: the fastest growth of production, and the most rapid decrease of residual damages. Each component has its own turnpike, so that the model has two dynamic equilibria. Respectively, shadow prices are a combination of two components: accumulation prices declining over time, and compensation prices that are growing. In some cases this may result in negative market interest rates.I am grateful to Ilya Kaganovich for many valuable discussions of the model, to Leonid Polterovich for a helpful hint, and to Robert Becker for encouragement and discussions. I acknowledge helpful comments made by Kenneth Arrow, Roy Gardner, Andreu Mas-Colell. The paper benefited greatly from the detailed comments of anonymous referees.     

应对气候变化挑战的全球合作框架思考——写在哥本哈根会议开幕之际

在过去的一个世纪里,地球平均气温上升了0.74摄氏度,导致海平面在20世纪末加速上升。科学家提出证明,来自交通、工业和农业排放的二氧化碳、甲烷及其他温室气体在大气中会阻碍热量释放,使全球温度上升,造成气候变化,带来干旱、洪水、海平面上升等潜在破坏。有鉴于此,本文通过建立一个全球合作框架来解决这个问题就变得极为重要而且迫切。合作框架的设计不仅要尽量做到公平和公正,而且要考虑合作框架的便利性,降低实施的难度,力争做到可持续、可发展。     

Discounting in a world of limited growth

This paper explores the consequences fordiscounting of assuming limits to growth. One of the main determinants of the discount rate is the rate of economic growth. If growth rates decline in the future then the discount rate should not be constant but also decline over time. In fact, we would then need not a single discount rate but rather a variable discount schedule. This would imply higher present values for the distant future. The paper analyses how discount rates would vary with different assumptions about the patterns of growth and the pure rate of time preference.An earlier version of this paper was presented at the conference ECOLOGICAL ECONOMICS, Stockholm, August 1992. I am grateful for valuable comments from Partha Dasgupta, Gunnar Köhlin, Karl-Göran Mäler, Mike Young and two anonymous referees.     

The rational regulator's pricing response to enhanced opportunities to “bypass” the public telephone network

Various technological innovations make it profitable—given regulated service prices—for large business customers of local telephone companies to invest in private equipment and reduce their reliance on the public telephone network. Such bypass possibilities reduce demands and increase demand elasticities for regulated business services. The politics of state telephone regulation motivate two specifications of regulatory objectives—specifications designed to reveal positive implications of bypass for regulated prices. One views the regulator as practicing so-called residual pricing, and a generalization assumes that the regulator balances the interests of competing pressure groups. Implications for interpretation of political rhetoric and for future modeling are discussed.     

Knowledge Questions: Hayek,Keynes and Beyond

This paper discusses the knowledge problem in terms of both the use and generation of knowledge. This is analyzed in the context of Hayek's failure to respond to the Keynes Challenge—the claim that markets fail to produce relevant knowledge—by suggesting that in the aftermath of The General Theory he was not well-positioned to address that problem. Ironically, his post-World War II work in cognitive psychology, The Sensory Order, offers a theory of the generation of knowledge which can provide a useful analogy for understanding the generation of market-level knowledge.     

Zur Frage der Wirtschaftsmacht

Ohne ZusammenfassungNach einem in der Nationalökonomischen Gesellschaft in Wien am 27. April 1954 gehaltenen Vortrag.     

Power,luck and the right index

Summary We have pointed out the theoretical drawbacks of the traditional indices for measuring a priori voting power inasmuch as they are implied in considering the coalition value a private good. This criticism caused us to view the coalition outcome as a public good. From this aspect and additional considerations with respect to power, luck, and decisiveness, we obtained a story describing the characteristics of an adequate measure of a priori voting power. These characteristics were found to be fulfilled by an index presented by Holler (1978). Through the above analysis this index has received its theoretical justification. An independent view of this index was then provided by means of an axiomatic characterization. This characterization makes possible abstract comparison of the index with previously established private good indices.While we have restricted our attention to simple games, the index presented can be generalized to provide a value on games in characteristic function form. We leave this topic for future conideration.     

The Welfare Effects of Allowance Banking in Emissions Trading Programs

Permitting allowance banking in emissions trading programs can reduce expected compliance costs by giving capped firms flexibility to adjust the time path of abatement and to hedge against future uncertainty. Recent literature suggests that this compliance cost dividend is significant (Fell and Morgenstern Environ Resour Econ 47:275–297, 2010). Allowance banking may yield an environmental dividend (a) if the growth rate of marginal damages from emissions is less than the discount rate and (b) if emissions are lower in the short run as firms bank permits for use in later periods. A discrete, stochastic dynamic programming model is considered to simulate the two dividends of allowance banking in the context of the most recent Federal United States greenhouse gas cap-and-trade legislation. Simulation results show that under a range of parameter values, the environmental dividend has the same order of magnitude as the compliance cost dividend. Under the central set of parameters, allowance banking increases expected present value of benefits by about $350$ million dollars per year of the program. The environmental dividend, however, is completely eliminated if capped firms can borrow permits from future periods without limit.     

Incentive compatibility and the quantity-setting competitive firm under demand uncertainty

This paper examines the tie between the popular black box neoclassical quantity-setting firm under demand uncertainty and a firm with a rudimentary but explicit employee relation organizational structure in which workers are offered fixed wages for following management directives. Surprisingly, the quantity-setting firm unambiguously mimics optimal employment relation hiring and work rules when the contract is incentive-compatible ex post. The attitude toward risk is shown to be the key determinant of whether or not the quantity-setting firm replicates the optimal employment relation contract when ex post incentive-compatibility is relaxed.     

Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development

We estimate the respective contributions of institutions, geography, and trade in determining income levels around the world, using recently developed instrumental variables for institutions and trade. Our results indicate that the quality of institutions trumps everything else. Once institutions are controlled for, conventional measures of geography have at best weak direct effects on incomes, although they have a strong indirect effect by influencing the quality of institutions. Similarly, once institutions are controlled for, trade is almost always insignificant, and often enters the income equation with the wrong (i.e., negative) sign. We relate our results to recent literature, and where differences exist, trace their origins to choices on samples, specification, and instrumentation.     

Fairness in a tradeable-permit treaty for carbon emissions reductions in Europe and the former Soviet Union

This paper evaluates the distributional implications of alternative permit allocations in a tradeable permit regime for carbon emissions reductions (20% below baseline) in 2010 for a region consisting of Europe and the states of the former Soviet Union (FSU). Participation in such a regime is expected to hinge on the fairness of the distributional consequences. We find that initial permit allocations by populationand/or GDP are unlikely to induce participation by most countries of Eastern Europe and FSU because of the net costs involved. We identify a set of initial allocations that would at least compensate these countries. A fair treatment of the countries in Western Europe (WE) is here one which equalizes net costs perGDP. For a wide set of cost functions for carbon emission reductions, the cost gains that WE would reap from a tradeable permit system relative to unilateral reductions by WE as a group are found to be on the order of 85 percent. This would imply, among other things, a significant increase in WE'scapacity to make further emissions reductions.