Third-degree price discrimination,quality choice,and welfare

Employing an endogenous quality choice model, we reconsider the effect on welfare of monopolistic third-degree price discrimination. We prove that price discrimination always enhances welfare, mainly because the quality improvement owing to price discrimination increases consumer surplus. Moreover, we show that third-degree price discrimination benefits all parties, including consumers in the higher priced market if the preference differences between markets are sufficiently large.     

Export- and Import-Specific Habit Formation

By incorporating good-specific habit formation into the consumption of export and import goods, I examine the dynamic adjustment of a small country to a permanent terms-of-trade deterioration. With differences in the strength of habit formation between export and import goods, the shock affects net output through countervailing income and substitution effects. Unlike in the existing literature, adjacent complementarity is neither necessary nor sufficient for the shock to reduce net foreign assets. When consuming export goods is more habit forming than is consuming import goods, the resulting asymmetric inertia of exports and imports leads the current account to exhibit a J-curve.     

Evaluating Temporary Certified Emission Reductions in Reforestation and Afforestation Programs

This article investigates the efficiency of the temporary certified emission reductions (tCERs) system that attempts to internalize the carbon sequestration function of the forest under the Clean Development Mechanism of the Kyoto Protocol. We find that the regulations creating tCERs partially internalize the carbon sequestration function of the forest. The amount of carbon re-released into the atmosphere, due to timber harvest, and sequestered, after the project period, is not internalized in the private landowner’s decision, which induces shorter rotation intervals than socially optimal. Furthermore, the carbon sequestered during the project is over-credited because credits are counted based on accumulated carbon instead of marginally sequestered carbon, which induces longer rotations intervals. Simulation results for the Philippines and Tanzania show that the difference in social welfare between the tCERs system and a socially optimal policy is only about 2% because of the countervailing effect of the inefficiencies on rotation interval choices.     

Pricing Options With Curved Boundaries1

This paper provides a general valuation method for the European options whose payoff is restricted by curved boundaries contractually set on the underlying asset price process when it follows the geometric Brownian motion. Our result is based on the generalization of the Levy formula on the Brownian motion by T. W. Anderson in sequential analysis. We give the explicit probability formula that the geometric Brownian motion reaches in an interval at the maturity date without hitting either the lower or the upper curved boundaries. Although the general pricing formulae for options with boundaries are expressed as infinite series in the general case, our numerical study suggests that the convergence of the series is rapid. Our results include the formulae for options with a lower boundary by Merton (1973), for path-dependent options by Goldman, Sossin, and Gatto (1979), and for some corporate securities as special cases.