Industry dynamics: Foundations for models with an infinite number of firms

This paper explores the connection between three important threads of economic research offering different approaches to studying the dynamics of an industry with heterogeneous firms. Finite models of the form pioneered by Ericson and Pakes (1995) capture the dynamics of a finite number of heterogeneous firms as they compete in an industry, and are typically analyzed using the concept of Markov perfect equilibrium (MPE). Infinite models of the form pioneered by Hopenhayn (1992), on the other hand, consider an infinite number of infinitesimal firms, and are typically analyzed using the concept of stationary equilibrium (SE). A third approach uses oblivious equilibrium (OE), which maintains the simplifying benefits of an infinite model but within the more realistic setting of a finite model. The paper relates these three approaches. The main result of the paper provides conditions under which SE of infinite models approximate MPE of finite models arbitrarily well in asymptotically large markets. Our conditions require that the distribution of firm states in SE obeys a certain “light-tail” condition. In a second set of results, we show that the set of OE of a finite model approaches the set of SE of the infinite model in large markets under a similar light-tail condition.     

Principles for a European Union''s Public Debt

The EU has neither the power to tax nor the right to run a public debt. We analyze if the EU should receive the right for public indebtedness. We make use of the normative theory of public indebtedness and of positive political economy analysis. Our normative analysis identified specific cases for an appropriate use of public indebtedness. According to the political economy analysis, a misuse of public debt may be possible. As the implementation of strict constitutional constraints can limit this misuse, we propose the assignment of a right to public borrowing to the EU within tight constitutional restrictions.     

Specifications of Social Welfare in Economic Studies of Climate Policy: Overview of Criteria and Related Policy Insights

An important assumption in economic studies of climate policy is the social welfare function. This paper shows that applying distinct decision or social welfare criteria can result in different optimal policies of climate control, notably if climate change impacts are uncertain. First, decision criteria in current climate-economic studies are reviewed. Next, the most important alternatives are discussed, including their (mathematical) formalization and incorporation in economy-climate models. Most of these alternative criteria suggest more stringent climate policies to be optimal than the standard discounted utilitarianism approach. However, several important welfare criteria have not or hardly seen any application in the economic analysis of climate policy. We conclude that there is clear need for systematic research on this theme, for which the current review provides a solid basis.     

Should the Good and the Selfish be Taxed Differently?*

In this paper, we consider an environment where individual actions have externalities and two types of agents exist: agents with social preferences (the good) and selfish agents. Selfish agents have pay‐off functions that do not take into account social welfare. The pay‐off of an agent is a linear combination of social welfare and the pay‐off of a selfish agent. We demonstrate that the corrective tax rates that maximize social welfare do not depend on the degree of social preferences. Hence, the good and the selfish should not be taxed differently.