Unbalanced growth

Abstract.  We study a model designed to understand the concept of unbalanced growth. We define leading sectors to be those that raise the profits from industrialization for other sectors the most. We identify the leading sectors and show that subsidizing them in sequence will raise welfare if the future is not discounted too strongly.     

Volatility spill-overs in commodity spot prices: New empirical results

The classical rational expectations model of commodity markets implies that expected spot price risk is an explanatory variable in spot price regressions; and also that inventory carryover, which is reduced by a larger price variance, creates autoregressive conditional heteroscedastic processes in spot prices. In order to falsify/verify this theory, it has typically been assumed that the square root of the conditional variance of spot prices, a proxy for spot price risk, enters the conditional mean function of spot prices. Based on this simple representation, a typical but counter intuitive outcome has been that spot price risk has an insignificant impact on spot prices, see, e.g., Beck (Beck, S., 1993. A Rational Expectations Model of Time Varying Risk Premia in Commodities Futures Markets: Theory and Evidence. International Economic Review 34, 149–168, Beck, S., 2001. Autoregressive Conditional Heteroskedasticity in Commodity Spot Prices. Journal of Applied Econometrics 16, 115–132). In this paper, we propose an alternative functional relationship (from GARCH(1,1) to GARCH(1,1)-AR(m)) between spot price risk and spot prices that is fully supported by the classical rational expectations model, and based on this new representation we are able to provide stronger empirical support for Muth's rational expectation theory.     

Attitudes Toward Catastrophe

In light of climate change and other global threats, policy commentators sometimes urge that society should be more concerned about catastrophes. This paper reflects on what society’s attitude toward low-probability, high-impact events is, or should be. We first argue that catastrophe risk can be conceived of as a spread in the distribution of losses. Based on this conception, we review studies from decision sciences, psychology, and behavioral economics that explore people’s attitudes toward various social risks. Contray to popular belief, we find more evidence against than in favor of catastrophe aversion—the preference for a mean-preserving contraction of the loss distribution—and discuss a number of possible behavioral explanations. Next, we turn to social choice theory and examine how various social welfare functions handle catastrophe risk. We explain why catastrophe aversion may be in conflict with equity concerns and other-regarding preferences. Finally, we discuss current approaches to evaluate and regulate catastrophe risk.     

An ecological economic simulation model for assessing fire and grazing management effects on mesquite rangelands in Texas

In the southern Great Plains of North America, fire exclusion has contributed to many rangelands converting from native grassland to woody shrublands dominated by mesquite (Prosopis glandulosa Torr.) and cactus (Opuntia spp.), threatening ecosystem health and human livelihoods in the region. Prescribed fire is the least expensive method of treating mesquite and other undesirable plants, but its role is as a maintenance treatment to prolong the life of more expensive brush control treatments. Using a simulation model of a hypothetical 1000 ha ranch, we evaluate the biological and economic implications of management scenarios involving the regular application of summer fire to reduce mesquite and cactus over a 30-year time period. We compared the model output with experimental data to corroborate model output before evaluating various management scenarios over a range of stocking rates. Scenarios included (a) varying initial range condition, (b) different frequencies of summer burning, and (c) different initial amounts of mesquite brush. Model simulations corroborated field data sufficiently well to give confidence in the output of the model. In our simulations the option of not treating to reduce brush and cactus had a major negative impact on range condition, secondary productivity and profitability. In contrast, all simulated fire treatments improved range condition, productivity and profitability except when initial range condition was poor. Initial range condition and stocking rate were the major factors affecting both productivity and profitability. Compared to other factors over which managers have short-term control, frequency of burning and the initial amount of mesquite cover, had a relatively minor impact. Simulations indicated that the highest level of profit consistent with maintaining or improving range condition was attained when individual animal production was 92-95% that of the maximum production per animal, a situation invariably associated with relatively low stocking rates.     

Cumulative causation in the formation of a technological innovation system: The case of biofuels in the Netherlands

Despite its worldwide success, the innovation systems approach is often criticised for being theoretically underdeveloped. This paper aims to contribute to the conceptual and methodological basis of the (technological) innovation systems approach. We propose an alteration that improves the analysis of dynamics, especially with respect to emerging innovation systems. We do this by expanding on the technological innovation systems and system functions literature, and by employing the method of ‘event history analysis’. By mapping events, the interactions between system functions and their development over time can be analysed. Based on this it becomes possible to identify forms of positive feedback, i.e. cumulative causation. As an illustration of the approach, we assess the biofuels innovation system in The Netherlands as it evolved from 1990 to 2007.     

A Suggested Interpretation of Some Experimental Results on Preplay Communication

M. Rabin (1994, J. Econ. Theory63, 370-391) proposes a model of behavior in two-person complete-information games with preplay communication, using non-equilibrium notions in the spirit of rationalizability to derive lower bounds on players' expected payoffs when players have unlimited communication opportunities. This paper adapts Rabin's model so that it can be used to analyze the results of the experiments of R. Cooper et al. (1989, Rand J. Econ.20, 568-587) on structured preplay communication in the Battle of the Sexes and the results of the unstructured bargaining experiments of Roth, Malouf, and Murnighan. Adding empirically motivated restrictions that allow the model to predict the payoff effects of changes in bounded communication possibilities like those in the experiments, it is shown that the data from both experiments are generally consistent with Rabin's model, and with the predictions of the extended model. Journal of Economic Literature Classification Numbers: C70, C72, C78, C91.     

How Media Coverage of Corporate Social Irresponsibility Increases Financial Risk

Research summary: This article explores the relationship between corporate social irresponsibility (CSI) and financial risk. We posit that media coverage of CSI generates risk by providing conditions that increase the potential for stakeholder sanctions. Through analyzing an international panel of 539 firms during 2008–2013, we find that firms receiving higher CSI coverage face higher financial risk. We show that the reach of the reporting media outlet is a critical condition for this relationship. Once the outlet has a high reach, the severity of CSI coverage is a boundary condition that further reinforces the effect. Our findings complement existing theory about the risk‐mitigating effect of corporate social responsibility by illuminating the risk‐generating effect of CSI coverage. For executives, these insights suggest complementary strategies for corporate risk management. Managerial summary: This article examines the effect of negative news on financial risk. It shows that negative media articles regarding environmental, social, and governance (ESG) issues increase a firm's credit risk. It also provides a detailed analysis of the impact of an article's reach and severity, i.e., how many readers are exposed to the article and how harshly it criticizes the firm. The results allow to quantitatively assess the risk that emanates from negative ESG news. For executives, three strategies are derived for limiting a firm's exposure to this risk: balancing corporate social responsibility programs with operational safety programs, reporting suboptimal environmental and social performance transparently and proactively, and avoiding acquisition targets and markets with a legacy of negative news. Copyright © 2017 John Wiley & Sons, Ltd.     

Oil shocks and the dynamics of substitution adjustments of industrial fuels in the US

This paper investigates substitution among such alternate fuels as coal, natural gas, and electricity during the actual oil price increases of 1970s. These substitution adjustments are assumed to be dynamic and modelled by a partial adjustment structure. This dynamic structure is incorporated into a translog cost technology. Short- and long-run price elasticities are estimated by identifying inter- and intra-industry variations. The models are estimated with a sample of 88 pooled observations, including distillate and residual oils purchased by eleven 2-digit manufacturing groups (1974-81). Models are estimates are strictly negative. These own price elasticities range from (long-to short-run) –2.93 to –2.55 for distillate oil, –0.698 to – 1.53 for residual oil, –0.533 to 0.011 for coal, –0.235 to –0.213 for natural gas, to –0.888 to –0.845 for electricity. Estimastes of both short-run and long-run cross-price elasticities suggest that coal and electric energy are the prominent substitutes for fuel oils. While the relationship between the latter and natural gas remains largely complementary.