Commodity taxes under uncertainty

This paper considers the relative distorting effect on output of commodity taxes, specific and ad valorem, in a situation where a firm faces revenue uncertainty. It is shown generally that this effect depends both on the precise nature of the firm's revenue uncertainty and on the degree of its risk aversion. More specifically, the distorting effect of each tax is characterised for a selection of objective functions and uncertain environments. These characterisations are compared in order to show the influence of alternative specifications on the relative distorting effect.     

Entry and growth in a perfectly competitive vintage model

A perfectly competitive vintage-knowledge model of Schumpeterian growth is introduced to study the relation between growth, technology-lifetime, entry, and productivity-dispersion. The incentive to innovate is generated by the productivity-dispersion (latent in traditional vintage models) between new and old plants, rather than by monopoly rents. The model has a unique steady-state REE with endogenous growth. The endogenous extent of entry constitutes a buffer, dampening the effect of research-efficiency and completely neutralizing the effect of population size or population growth rates on per-capita income levels and growth rates. Variations of research-efficiency lead to a negative relation between growth and vintage-lifetime and a non-monotonic relation between growth and productivity-dispersion.     

Commodity taxes and welfare under endogenous market conduct

We consider consumption taxes in a model of endogenous Cournot versus Bertrand competition. It is argued that when the choice of unit versus ad valorem taxes affects longer-term decisions beyond the customary price or quantity decisions, the mix of the two taxes co-determines market conduct. This gives ad valorem taxes an anti-competitive effect that harms ad valorem taxes’ efficiency in comparison with unit taxes. We show that a mix of the taxes—or a unit tax alone if we compare one or the other of the taxes—is sometimes welfare superior on account of consumer-price and tax revenue effects. A practical implication of our findings is that pass-through rates are only sometimes useful guides for policy. In fact, we show when the proper response to demand for higher revenue is a higher unit tax rate and a lower ad valorem tax rate.     

Price-making in a competitive market

An attempt is made to analyze the behavior of a price-maker in a purely competitive market. Assuming the price-maker maximizes expected profit subject to the constraint of satisfying periodic excess demand, we derive characteristics of his optimal prices as they depend on current state variables and then obtain properties of the expectation and variance of the long-run stationary probability distribution of price.     

Constant returns to scale and competitive equilibrium under uncertainty

This paper considers the implications of the assumption of constant returns to scale in expected utility maximizing models of the competitive firm or industry in which markets for risk are absent. Under widely used assumptions about risk preferences it is shown that with constant returns to scale average profits are more than necessary to cover the implicit costs of risk-bearing. When the free entry of identical firms is possible this assumption about technology is shown to be incompatible with the assumption that entrepreneurs are risk averse.     

Non-discriminating renegotiation in a competitive insurance market

A variant of the Rothschild-Stiglitz model of a competitive insurance market is considered, where each uninformed firm is allowed to renegotiate the contracts that its customers initially sign, subject to the restriction that renegotiated contracts be offered to all the firm's customers. Such non-discriminating renegotiation is shown to weaken the profitability of cream skimming to the extent that there exists a unique equilibrium outcome. This outcome is that of Miyazaki and Spence i.e., the incentive-compatible pair of zero-profit contracts, if efficient; and the incentive-compatible, zero-profit pair of contracts maximizing low-risk utility, otherwise.     

On a general equilibrium model of the incidence of the corporation tax under uncertainty

This paper addresses two issues. First, we demonstrate that when there is uncertainty in a general equilibrium model of a large country the usual rule for the auctioneer, that of searching for a set of relative prices at which excess demand in each market is zero, is no longer appropriate. It is suggested that the setting of expected demand to expected supply in each market would be a convenient generalization. Secondly, results on the incidence of the corporation income tax when there is uncertainty in the corporate sector, and alternatively when there is uncertainty in the noncorporate sector, are presented.     

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.     

Forecasting volatility in the Chinese stock market under model uncertainty

Volatility forecasting is an important issue in empirical finance. In this paper, the main purpose is to apply the model averaging techniques to reduce volatility model uncertainty and improve volatility forecasting. Six GARCH-type models are considered as candidate models for model averaging. As to the Chinese stock market, the largest emerging market in the world, the empirical study shows that forecast combination using model averaging can be a better approach than the individual forecasts.     

The optimal insurance contract in a competitive market

The author reviews some earlier work on optimal insurance contracts by Arrow and Mossin. He then shows that some results in this work carry over to any premium system which satisfies the additivity condition inherent in a competitive market.     

Timing of decisions and the competitive firm under input price uncertainty

This paper studies the behavior of a competitive firm faced with input price uncertainty when the ex ante decision variable is output, not the quantities of the inputs. Highly unconventional results are obtained about the effects of uncertainty and of marginal increases in risk.     

On the theory of the competitive labor-managed firm under price uncertainty

The short-run behavior of a labor-managed firm under competitive assumptions and price uncertainty is analyzed assuming risk aversion. It is compared with its behavior under certainty and the behavior of a capitalist-managed firm under price uncertainty. It is shown that a risk-averse labor-managed firm employs more labor than a risk-neutral labor-managed firm. Generally, uncertainty is seen to have greater impact on the behavior of a labor-managed firm than on the behavior of a capitalist-managed firm. Except under constant risk aversion, the behavior of a labor-managed firm under price uncertainty is less predictable than that of a capitalist-managed firm.     

A general equilibrium model of the incidence of corporation income tax under uncertainty

In this paper we investigate the incidence of the corporation income tax in terms of a two-sector, general equilibrium model, where production decisions are made under uncertainty. The conventional result, derived originally by Harberger (1962), is that if the corporate sector is the capital-intensive sector, then capital must bear a greater burden of the tax, in proportion to its initial share in national income, than labor. This result continues to hold unambiguously under uncertainty only if the relative and the absolute risk aversion of the corporations are non- increasing in profits. Otherwise, the Harberger result may not hold.     

Respondent uncertainty in a contingent market for carbon offsets

The main objective of this paper is to provide additional empirical evidence of what explains respondent uncertainty in contingent valuation (CV) and how this in turn affects stated willingness to pay (WTP). Air travelers asked to pay a carbon travel tax to offset carbon emissions from flying were asked how likely it is that they will actually pay if the tax is voluntary. When changing the market compliance imperative from a mandatory carbon tax to a voluntary contribution, a third of all air travelers consider it unlikely they will actually pay their stated WTP amount. An ordered probit estimation approach is applied to identify the sources of respondent uncertainty. Besides the bid price, respondent sense of responsibility and belief in the effectiveness of the voluntary carbon market are among the main reasons for the experienced uncertainty.