What to Value and How? Ecological Indicator Choices in Stated Preference Valuation

The ecological literature accepts that many policy outcomes cannot be observed directly and must be characterized using indicators. Multiple indicators can often be used to communicate similar ecological outcomes. Previous studies using alternative indicators in stated preference surveys suggest that welfare estimates may be indicator-dependent, casting doubt on whether welfare estimates are sufficiently reliable for cost benefit analysis. We suggest that the reason for such indicator dependence may be that indicators used in these prior studies represented different outcomes valued by respondents. This possibility underscores the need for greater attention to selection of indicators and their properties within stated preference survey design. This paper develops a model introducing the concept of outcome equivalent indicators, defined as indicators that provide alternative representations of identical underlying outcomes. To assess empirically whether welfare estimates are indeed robust to indicator choice when alternative indicators are expected to be outcome equivalent, we analyze data from a choice experiment estimating willingness to pay for migratory fish restoration in Rhode Island, USA. Results demonstrate that welfare estimates are robust to the use of alternative ecological indicators within stated preference scenarios.     

How relevant are nominal contracting schemes for monetary policy?

Due to the scarcity of pertinent evidence, there is currently no general agreement on how to introduce nominal rigidities into monetary macroeconomic models. We examine the role of alternative assumptions about the wage and price setting mechanisms for the assessment of the welfare costs of nominal rigidities and the performance of alternative monetary policy rules in an otherwise standard New Keynesian general equilibrium model. We find that the choice of a particular price and wage setting scheme matters quantitatively for the welfare costs of nominal rigidities. However, the ranking of the welfare costs associated with alternative wage and price setting schemes is robust to changes in the monetary policy rule, and the ranking of the welfare costs associated with alternative monetary policy rules is robust to changes in the wage and price setting scheme. The difference between sticky nominal contracts and sticky information matters more than the difference in the age distribution of prices wages and information implied by alternative price and wage setting schemes.     

Merger policy,entry, and entrepreneurship

We assess the impact of merger policy on entry and entrepreneurship. When faced with uncertainty about its prospects, and foreseeing that it may wish to leave the market should profitability prove poor, a rational entrant considers possible exit routes. Horizontal merger reduces competition post-merger which, all else being equal, lowers welfare; but merger also provides a valuable exit route. By facilitating exit and thus raising the value of entry, more lenient merger policy may stimulate entry sufficiently that welfare is increased overall. We calculate the optimal merger policy in the form of a low, but positive, profitability threshold below which merger is permitted despite the adverse impact on post-merger competition. This may be viewed as an extension of the “failing firm defence” to include ailing, low profitability firms as well as imminently failing ones. Merger policy is compared with an entry subsidy, and the implications of strategic firm behaviour for the choice of merger policy are also examined.     

ON INTERNATIONAL MIGRATION AND THE SOCIAL WELFARE FUNCTION

In defining optimum population, economists have used two distinct concepts of the social welfare function: the Millian and the Benthamite. Although analytically the issue of the welfare impact of international migration is closely related to the concept of optimum population, the migration analysis has been based almost exclusively on the Benthamite welfare function. As its point of departure, the present note explores the implications of the alternative Millian welfare function for migration analysis.
An interesting aspect of the results derived from the present exercise is that they are in sharp contradiction with the results based on the Benthamite social welfare function. This highlights the sensitivity of the results to the welfare criteria used and the need for greater caution in policy formulation.     

Monetary policy and noise traders: A welfare analysis

This paper studies the choice of monetary policy regime in a small open economy with noise traders in forex markets. We focus on two simple rules: fixed exchange rates and inflation targeting. We contrast the above two rules against optimal policy with commitment under productivity shocks. In general, the presence of noise traders increases the desirability of a fixed exchange rate regime. We also evaluate the welfare impact of Tobin taxes in this milieu. These taxes help unambiguously in the absence of productivity shocks; their welfare impact under productivity shocks depends on the monetary regime in place and trade elasticity between domestic and foreign goods.     

The Simple Analytics of Illicit Drug Policy

The impact of alternative drug policy objectives, specifically harm reduction/harm minimisation or prohibition, is unclear. The literature is confusing. This article conceptualises the causal connection between drug consumption and health harm (or reduced health status) then clarifies the implication of ‘drug related harm’. By applying some geometrical tools from economics, the choice of policy objective is analysed. The preferences of policy advocates are then incorporated. Policy advocates are conceived as arguing that decision‐makers and consumers should adopt their preferences between drugs and health harm. With this approach, the difference between alternative drug policies, in particular prohibition and harm minimisation/reduction, is demonstrated.     

Free trade and the burden of domestic policy

Abstract. Consider a small economy facing accession to a exogenously defined trade agreement. Before accession, the government controls trade and pollution policy. After accession, it retains control over pollution policy, but must allow free trade in all goods. This is a choice many governments face while joining trade agreements today. They decide whether greater market access to other members is more valuable than control over trade policy. I ask two questions. All else being equal what happens to environmental policy after accession? Second, what affects the choice of accession and how does this choice impact aggregate welfare? I show that a loss in control over trade policy alters the political incentives determining environmental policy. Before accession, producers can transfer a portion of their burden of environmental regulation to consumers through price increases. After accession the same regulation is borne entirely by producers. Owing to the change in burden, there exist plausible conditions under which the adoption of free trade can lead to more stringent environmental regulation, a reduction in the preferential treatment of special interest groups, and an increase in aggregate welfare.     

COLLUSION AND ANTITRUST DETECTION*

This paper investigates the impact of antitrust policy on the strategic choice of product specification when firms can collude with respect to prices, cannot collude with respect to location and may have their collusion ended if it is detected by the antitrust authority. Depending on the aggressiveness of the antitrust authority, different location configurations may emerge in equilibrium. Extremely aggressive and extremely lax policies lead to the least efficient outcomes while the configuration maximizing social welfare is obtained by an intermediate policy.     

COMPLEMENTARY MEASURES TO FOREIGN AID: TAIWAN AND THE PRC UNDER DIPLOMATIC RIVALRY

The competition on foreign aid, as a means for securing foreign policy and other benefits by the donor, can lead to diplomatic rivalry. This article utilizes a game theoretic model to analyze the existing rivalry for foreign aid and international status between Taiwan and the People's Republic of China. Similar to the role of political contributions in the public choice theory, foreign aid is taken a means of international lobbying, to realize the donor's objective. Research results, based on the policy effect consideration, indicates that the equilibrium aid policy, which is endogenously determined, renders an inability on the part of the donors, which affects the recipient's optimal foreign policy. How does a donor obtain favorable outcomes when such rivalry exists? Strengthening diplomatic endeavors to realize the access effect has been proved an effective method. Analytical results have shown that this method not only complements aid rivalry but also increases the welfare of the donor.     

The Impact of Foreign Direct Investment on Home and Host Countries with Endogenous R&D

The paper analyzes the impact of FDI on home and host countries, when firms compete both in the choice of international strategy and in R&D. A two-country, two-firm model is used. The problem is structured as a three-stage game in which firms must decide: the mode of foreign expansion; how much to invest in R&D; how much to sell in each market. It is shown that in high-technology sectors a policy of attracting inward FDI may increase welfare in both the home and host countries. The effect on host-country welfare is found to be more beneficial if technological spillovers are national, instead of international, in scope.     

Why Can’t I keep my Surname? The Fairness and Welfare of the Japanese Legal System

This study examines the welfare and fairness implications of Japan’s current policy on marriage surnames versus the proposed revised family law, which would enable husbands and wives to retain their premarital surnames. The study compares welfare in these two legal states, with a married couple’s welfare dependent on marriage-surname choice. It reviews the external preferences of anti-revisionists by the fairness criteria of impersonality or extended sympathy. Utilizing web-based survey data, the study conducts nonparametric rank analysis and parametric analysis of willingness to pay (WTP) for surname retention and legal support. Moreover, it conducts a structural equation analysis via a multiple indicators multiple causes (MIMIC) model, incorporating surname attachment and fairness as latent variables. The study shows that the revised law can increase welfare and that external disutility of the legal revision is invalid on fairness grounds.     

ADAPTIVE LEARNING AND MONETARY POLICY IN AN OPEN ECONOMY: LESSONS FROM JAPAN

Abstract. Motivated by Japan's economic experiences in recent decades, we incorporate adaptive learning into an open economy dynamic stochastic general equilibrium model to examine the volatility and welfare impact of alternative monetary policies. Comparing four Taylor‐styled policy rules that reflect Japan's monetary policy debates, we first show that imperfect knowledge and the associated learning process induce higher volatility in the economy and that explicit exchange rate stabilization is unwarranted. Moreover, contrary to results under the rational expectation paradigm, we find that while tight inflation controls raise output volatility, they can improve overall welfare under learning by smoothing inflation fluctuations.     

The impacts of energy insecurity on household welfare in Cambodia: Empirical evidence and policy implications

This study investigates the impacts of energy insecurity on household welfare in Cambodia. The notion of energy insecurity is not well understood in the literature as well as in local contexts. This study defines household energy insecurity as the status quo derived from the interplay of inadequate and insufficient energy consumption that prevents households from meeting basic energy needs. The notion of energy insecurity can only be well understood by investigation in the local context as it varies from place to place. Households facing insufficient energy consumption may forgo many other opportunities. Once energy security has been defined in the Cambodian context, the study employs multiple regression models using the Cambodia Socio-Economic Survey Data (2015) to investigate the impacts of household energy insecurity. The study confirmed that energy insecurity has enormous negative impact on welfare of the households, with a further negative impact on the human capital formation of the children. The findings will lead to policy implications to improve household energy security, and thus impact economic, social, and environmental development.     

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)     

Incentive effects of paying demand response in wholesale electricity markets

Recently issued U.S. Federal Energy Regulatory Commission regulations require comparable treatment of demand reduction and generation in the wholesale electric market so that they are compensated at the same market clearing price. The new regulations measure demand reduction as a reduction from a “customer baseline,” a historically based estimate of the expected consumption. In this paper, we study the incentive effects on the efficiency of the demand response regulation using a static equilibrium model and a dynamic extension of the model. Our analysis provides three main results. Firstly, our analysis shows that the demand reduction payment will induce consumers to (1) inflate the customer baseline by increasing consumption above the already excessive level during normal peak periods and (2) exaggerate demand reduction by decreasing consumption beyond the efficient level during a demand response event. This result persists when applied to alternative baseline designs in a dynamic model. Secondly, we study alternative policy remedies to restore the efficiency of demand response regulation and introduce a new approach to define the customer baseline as a fixed proportion of an aggregate baseline. In particular, the aggregate baseline approach can significantly weaken or eliminate the incentive to inflate the baseline. Finally, we illustrate that if the baseline inflation problem is solved and demand and supply functions are linear, the current policy can produce a net social welfare gain. However, the welfare improvement requires that demand reduction be paid only when the wholesale price is at least twice the fixed retail rate. This argues that the policy should include a sufficiently high threshold price below which demand response is not dispatched.     

Revenue raising trade-restricting policies under uncertainty: The sub-optimality of the expected welfare criterion and some safety-first results

The analysis of trade-restricting policies under uncertainty has typically argued in favour of the specific tariff over alternative commercial policies such as the ad valorem tariff and the quota, when the raising of revenue and maintenance of consumer's welfare are the policy objectives. This paper reconsiders this result. It is demonstrated that, when the shape of the welfare probability distribution is considered explicitly, the quota may be the dominant trade-restricting policy. In addition, the analysis of trade-restricting instruments is analysed for the case where the principle of safety-first is applied to the revenue-raising objective.We should like to thank an anonymous referee for helpful comments on an earlier draft.     

Optimal Privatization and Economic Growth in a Schumpeterian Economy

This paper analyzes the growth and welfare effects of the privatization of public firms in a Schumpeterian growth model. Two alternative definitions of privatization are proposed in our model. The first is the ratio of mixed R&D firms’ equity shares owned by the household, which is dubbed vertical privatization. The second is the number of unmixed R&D firms, which is called horizontal privatization. We find that, under both definitions, privatization is beneficial to economic growth while the effect of privatization on social welfare is ambiguous. Accordingly, our analysis reveals that a partial privatization could be an optimal policy. Moreover, we also discuss how the extent of patent protection is related to optimal privatization.     

Environmental Protection and Urban Unemployment: Environmental Policy Reform in a Polluted Dualistic Economy

This paper explores sufficient conditions for the welfare‐improving environmental policy reform in the Harris–Todaro economy. A rise in the pollution tax rate in the urban manufacturing has spillover effects on the two labor market distortions: the less‐than‐optimal manufacturing employment and the urban unemployment. If both are weakened the welfare improves. Otherwise, we need to develop an alternative sufficient condition. It is shown that there exists a range of welfare‐improving pollution tax rates, and that it corresponds to the lower values of tax rate. This range may shrink by the wage subsidy policy and the technological change toward less pollution‐intensive techniques.     

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.