Ecological-economic viability as a criterion of strong sustainability under uncertainty

Strong sustainability, according to the common definition, requires that different natural and economic capital stocks be maintained as physical quantities separately. Yet, in a world of uncertainty this cannot be guaranteed. To therefore define strong sustainability under uncertainty in an operational manner we propose to use the concept of viability. Viability means that the different components and functions of a dynamic, stochastic system at any time remain in a domain where the future existence of these components and functions is guaranteed with sufficiently high probability. We develop a unifying and general ecological-economic concept of viability that encompasses the traditional ecological and economic notions of viability as special cases. It provides an operational criterion of strong sustainability under a mild form of uncertainty and for medium spatial and temporal scales. We illustrate this concept and demonstrate its usefulness by applying it to livestock grazing management in semi-arid rangelands.     

A critical review of multi-criteria decision making methods with special reference to forest management and planning

This paper provides a review of research contributions on forest management and planning using multi-criteria decision making (MCDM) based on an exhaustive literature survey. The review primarily focuses on the application aspects highlighting theoretical underpinnings and controversies. It also examines the nature of the problems addressed and incorporation of risk into forest management and planning decision making. The MCDM techniques covered in this review belong to several schools of thought. For each technique, a variety of empirical applications including recent studies has been reviewed. More than 60 individual studies were reviewed and classified by the method used, country of origin, number and type of criteria and options evaluated. The review serves as a guide to those interested in how to use a particular MCDM approach. Based on the review, some recent trends and future research directions are also highlighted.     

The cost of natural capital consumption: Accounting for a sustainable world economy

The System for integrated Environmental and Economic Accounting (SEEA) has been criticized in this journal for ignoring the benefits of ecosystem services for human well-being. This paper argues that extended national accounts should not attempt measuring economic welfare. Rather, they could and should assess the environmental sustainability of economic activity as the cost of natural capital consumption. The global application of SEEA concepts and methods demonstrates the feasibility of international green accounting. For the world economy, sustainability costs run to about 3 trillion US$ or 6% of world GDP. Large variations at national and regional levels suggest that conventional economic indicators may significantly overstate economic progress in some parts of the world. Data gaps and lack of data comparability affect these first estimates. National and international statistical services should be more aggressive in greening the national accounts. More prudent and more sustainable economic policies might be the result.     

Ecosystem services and regional development: An application to Sweden

This study carries out interregional comparisons of development and sustainable use of natural capital with and without inclusion of non-marketed ecosystem services. A simple dynamic model of an open economy shows that appropriate adjustment of conventional income accounts includes flow and stock components, but excludes explicit entrance of pollution. Calculations are made for Swedish regions and for two types of ecosystem services — pollution sequestration and recreational services — provided by three types of ecosystems: forests, agricultural landscape and wetlands. When comparing the adjusted and non-adjusted regional income accounts it is shown that the two measurements generate significantly different pictures of regional income and growth; regions that are traditionally considered as relatively less growth promoting are shown to hold important sources of wealth from natural capital, while counties that are rich in conventional accounts fall behind when adjusting for values of changes in natural capital.     

Optimal annuitization, uncertain survival probabilities, and maxmin preferences

We consider a life-cycle model with bequest motives, and assume that the individual does not know his/her survival probability and has maxmin utility preferences; we show that it is optimal not to annuitize but to purchase pure life insurance policies instead.     

Natural capital, subjective well-being, and the new welfare economics of sustainability: Some evidence from cross-country regressions

The measurement of natural capital and its management during the economic development process are important aspects of the capital approach to sustainable development. However, the assessment of social welfare in terms of genuine savings (or changes in total wealth per capita) is arguably too limited. This paper tries to make a case for the incorporation of subjective well-being measures in debates about sustainable development by exploring the macro-level relationship between subjective well-being and natural capital in a cross-country setting. It is tested whether natural capital per capita is correlated with subjective well-being in a sample of fifty-eight developed and developing countries, using natural capital data from the World Bank's Millennium Capital Assessment. Bivariate regressions indicate that it is. When multiple regression models are estimated that include (a) major country-level determinants of subjective well-being (GNI per capita, social capital, income distribution, unemployment, inflation), and (b) regional dummy variables for ex-Soviet Union and Latin American countries, the positive correlation remains. The role of data outliers is carefully explored, and the sensitivity of the results to the use of alternative subjective well-being measures (i.e. life satisfaction, happiness, and a combined life satisfaction and happiness index) is investigated. This does not change the nature of the results. The findings arguably strengthen the case for a ‘new welfare economics of sustainability’ that takes subjective well-being measures into account.     

Biodiversity conservation, loss of natural capital and interest rates

It is argued that there is neither regular relationship between changes in the level of the market rate of interest and variations in the rate of biodiversity loss nor does such a regular relationship occur between alterations in the market rate of interest and changes in the rate of natural resource extraction. However, some texts suggest otherwise. Microeconomic examples are given in which a rise in the market rate of interest results in increased biodiversity loss and others in which it does not. It is also posited that the rate of biodiversity loss (as well as the rate of natural resource extraction) tends to rise with the level of aggregate investment and aggregate economic activity. It is demonstrated, using macroeconomic models, that the market rate of interest can increase or decrease with a rise in aggregate investment and also with an increase in the level of aggregate economic activity. Therefore, changes in biodiversity loss (and in the rate of natural resource extraction) are independent of variations in the market rate of interest in macroeconomic models.     

When prices hardly matter: Incomplete insurance contracts and markets for repair goods

This paper looks at markets characterized by the fact that the demand side is insured. In these markets, a consumer purchases a good to compensate consequences of unfavorable events, such as an accident or an illness. Insurance policies in most lines of insurance base indemnity on the insured's actual expenses, i.e., the insured would be partially or completely reimbursed when purchasing certain goods. In this setting, we discuss the interaction between insurance and repair markets by focusing, on one hand, upon the development of prices and the structure of markets with insured consumers, and, on the other hand, the resulting backlash on optimal insurance contracting. We show that even in the absence of ex post moral hazard the extension of insurance coverage will lead to an increase in prices as well as to a socially undesirable increase in the number of repair service suppliers if repair markets are imperfect.     

Financial opening, deposit insurance, and risk in a model of banking competition

We study the impact of competition on banks’ risk-taking behavior under different assumptions about deposit insurance and the dissemination of information. While financial opening increases banks’ riskiness, a risk-based deposit insurance or, alternatively, the public disclosure of financial information, are likely to mitigate this effect. Moreover, the limiting cases of uninsured but fully informed depositors, and risk-based full deposit insurance, yield the same equilibrium risk level. Although the welfare consequences of increased competition depend on its impact on risk, financial opening unambiguously improves welfare as we approach the limiting cases.     

The effect of climate change on optimal wetlands and waterfowl management in Western Canada

Warmer temperatures and a decrease in precipitation in the 21st century could severely deplete wetlands in the prairie pothole region of western Canada. In this study, we employ linear regression analysis to determine the casual effect of climate change on wetlands in this region, with temperature, precipitation and the standardized precipitation index (SPI) used to predict the effect of potential climate change on wetlands. We then use a waterfowl-wetlands bioeconomic model to solve for socially optimal levels of duck harvests and wetlands retention under current climate conditions and various climate change scenarios. The model maximizes benefits to hunters plus the amenity values of ducks to non hunters and the non-market ecosystem benefits of wetlands. Results indicate that climate change could decrease wetlands by between 7 and 47%, and that the optimal number of wetlands to retain could decrease by as much as 38% from the baseline climate.     

Flooding risk and housing values: An economic assessment of environmental hazard

Climate change, the ‘boom and bust’ cycles of rivers, and altered water resource management practice have caused significant changes in the spatial distribution of the risk of flooding. Hedonic pricing studies, predominantly for the US, have assessed the spatial incidence of risk and the associated implicit price of flood risk. Using these implicit price estimates and their associated standard errors, we perform a meta-analysis and find that an increase in the probability of flood risk of 0.01 in a year is associated to a difference in transaction price of an otherwise similar house of - 0.6%. The actual occurrence of a flooding event or increased stringency in disclosure rules causes ex-ante prices to differ from ex-post prices, but these effects are small. The marginal willingness to pay for reduced risk exposure has increased over time, and it is slightly lower for areas with a higher per capita income. We show that obfuscating amenity effects and risk exposure associated with proximity to water causes systematic bias in the implicit price of flood risk.     

Herding in delegated portfolio management: When is comparative performance information desirable?

We address the issue of investors’ asset allocation decisions when portfolio management is delegated to an agent. Contrary to predictions from traditional financial theory, it is shown that investors may not induce their manager to allocate funds to the asset with the highest return. Instead they may herd in their asset allocation decision and induce trade in a particular asset, because another manager is trading in it and despite the presence of a more profitable alternative. Doing so allows investors to write an efficiency-improving relative-performance contract. On the other hand, herding leads investors to design wage contracts strategically, resulting in more aggressive and thus less profitable trade in equilibrium. We show that herding occurs, when the cost of information is high, information precision is low and when managers are sufficiently risk averse. Moreover, when investors can decide whether or not to disclose information about their manager's performance, they will not do so.     

Direct evidence of risk aversion as a source of advantageous selection in health insurance

Using the self-stated degree of risk aversion regarding health from the GSOEP we find some evidence for risk aversion being a source of advantageous selection. Risk averse men more often procure supplementary insurance for hospital visits despite needing the additional coverage less.     

Identifying the sources of energy use change: Multiple calibration decomposition analysis and structural decomposition analysis

Decomposition methodologies are requisite to identify the sources of changes in energy use or carbon dioxide emissions. This paper is an inquiry into the theoretical properties of such decomposition methodologies. The study first presents our new decomposition methodology – the Multiple Calibration Decomposition Analysis (MCDA) – as a tool for the investigation. Then, it theoretically reexamines an established decomposition methodology – the Structural Decomposition Analysis proposed by Casler and Rose (1998). Subsequently, the study empirically investigates the properties of both methodologies, applying them to an actual case: the changes in energy use and carbon dioxide emissions in Japan during the oil crises period, when the oil price had a significant influence on the economy. The result shows that understanding the theoretical properties of decomposition methodologies is essential for a precise interpretation of empirical results.     

The effect of ambiguous risk, and coordination on farmers' adaptation to climate change — A framed field experiment

The risk of losses of income and productive means due to adverse weather can differ significantly among farmers sharing a productive landscape, and is of course hard to estimate, or even “guesstimate” empirically. Moreover, the costs associated with investments in reduced vulnerability to climatic events are likely to exhibit economies of scope. We explore the implications of these characteristics on farmer's decisions to adapt to climate change using a framed field experiment applied to coffee farmers in Costa Rica. As expected, we find high levels of risk aversion, but even using that as a baseline, we further find that farmers behave even more cautiously when the setting is characterized by unknown or ambiguous risk (i.e. poor or non-reliable risk information). Secondly, we find that farmers, to a large extent, coordinated their decisions to secure a lower adaptation cost, and that communication among farmers strongly facilitated coordination.     

Insurance,credit, and technology adoption: Field experimental evidencefrom Malawi

Does production risk suppress the demand for credit? We implemented a randomized field experiment to ask whether provision of insurance against a major source of production risk induces farmers to take out loans to adopt a new crop technology. The study sample was composed of roughly 800 maize and groundnut farmers in Malawi, where by far the dominant source of production risk is the level of rainfall. We randomly selected half of the farmers to be offered credit to purchase high-yielding hybrid maize and groundnut seeds for planting in the November 2006 crop season. The other half of farmers were offered a similar credit package, but were also required to purchase (at actuarially fair rates) a weather insurance policy that partially or fully forgave the loan in the event of poor rainfall. Surprisingly, take-up was lower by 13 percentage points among farmers offered insurance with the loan. Take-up was 33.0% for farmers who were offered the uninsured loan. There is suggestive evidence that reduced take-up of the insured loan was due to farmers already having implicit insurance from the limited liability clause in the loan contract: insured loan take-up was positively correlated with farmer education, income, and wealth, which may proxy for the individual's default costs. By contrast, take-up of the uninsured loan was uncorrelated with these farmer characteristics.     

Saving rates and portfolio choice with subsistence consumption

We analytically show that a common across rich/poor individuals Stone-Geary utility function with subsistence consumption in the context of a simple two-asset portfolio-choice model is capable of qualitatively and quantitatively explaining: (i) the higher saving rates of the rich, (ii) the higher fraction of personal wealth held in risky assets by the rich, and (iii) the higher volatility of consumption of the wealthier. On the contrary, time-variant “keeping-up-with-the-Joneses” weighted average consumption which plays the role of moving benchmark subsistence consumption gives the same portfolio composition and saving rates across the rich and the poor, failing to reconcile the model with what micro data say.     

The effects of irreversibility on the timing and intensity of lumpy investment

This paper examines how changes in irreversibility of investment affect the timing and intensity of lumpy investment. We develop a continuous-time model wherein a firm is endowed with a perpetual option to invest in a project at any time by incurring a partially reversible investment cost at that instant. The amount of the investment cost is directly related to the intensity of investment that is endogenously chosen by the firm at the instant when the investment option is exercised. We show that higher irreversibility of investment induces the firm to raise its optimal investment trigger, thereby deferring the undertaking of the project. Furthermore, we show that changes in irreversibility of investment have no impact on the firm's optimal investment intensity due to two opposing effects that exactly offset each other. Finally, we show that higher irreversibility of investment reduces the value of the investment option and, therefore, makes the firm less valuable.     

Environmental regulation and trade openness in the presence of private mitigation

Acknowledging the differential ability of individuals to privately mitigate the consequences of domestic pollution for their health is essential for an understanding of their demands for regulation of the environment and of trade in dirty goods, and for analysis of the implications of these demands for equilibrium policy choices. In a small open economy with exogenous policy, we first explain how private mitigation at a cost results in an unequal distribution of the health consequences of pollution in a manner consistent with epidemiologic studies, and consequently how the benefits and costs of trade in dirty goods interact with choices concerning private mitigation to further polarize the interests of citizens concerning environmental stringency. The economy is then embedded in a broader political economy setting, and simulated to investigate the role of private mitigation in shaping political equilibria. We show that when citizens can choose between mitigating the health consequences of domestic pollution privately and reducing pollution through public policy, the same polarization of interests underlies equilibrium policy choices in both democratic and autocratic regimes.