A market mechanism for electric power transmission

As competition is introduced into the electric power industry, access and pricing policy for transmission will play a pivotal role in shaping future market structure and performance. The externalities associated with the loop flow phenomenon in an electric power network constitute a significant barrier to the formation of efficient markets for electricity and transmission services. In this paper, we present a new approach to the design of an efficient market mechanism for transmission access that resolves these externalities. Under a trading rule that combines the Coasian and the Pigouvian principles to resolution of externalities, property rights are defined so that a competitive market could be established for transmission services and electricity to achieve a social optimum within a power pool. We characterize a dynamic trading process which is Lyapunov stable and always converges to a competitive equilibrium. Finally, we discuss some practical applicability and long-term investment issues.The authors are indebted to Charles Clark, Shmuel Oren, Pravin Varaiya, Robert Wilson, Felix Wu, and two referees for helpful comments and suggestions and particularly to William Hogan for many incisive comments and constructive suggestions. An earlier version of this paper was presented at the Annual Meeting of International Association of Energy Economists in Washington D.C., June 20, 1995, and at the Joint LBS/IFORS International Symposium on Energy Models for Policy and Planning in London on July 18–20, 1995. This paper does not represent the views of EPRI or its members. The authors remain solely responsible for the errors in this paper.     

Habit Formation, Catching Up with the Joneses, and Economic Growth

Our objective is to investigate how alternative assumptions about preferences affect the process of economic growth. To do this, we analyze a neoclassical growth model under three alternative preference specifications: (i) time separable, (ii) catching up with the Joneses, and (iii) habit formation. Departing from the time separable specification leads to important differences in the dynamic structure, the adjustment path followed by key economic variables, the correlation patterns implied by the time series generated by the model, and the speed of convergence to the new steady state. In the catching up with the Joneses economy the differences arise from a consumption externality, while in the habit formation economy the difference arises from the fact that agents not only smooth consumption but also its rate of change.     

Equilibrium selection in global games with strategic complementarities

We study games with strategic complementarities, arbitrary numbers of players and actions, and slightly noisy payoff signals. We prove limit uniqueness: as the signal noise vanishes, the game has a unique strategy profile that survives iterative dominance. This generalizes a result of Carlsson and van Damme (Econometrica 61 (1993) 989-1018) for two-player, two-action games. The surviving profile, however, may depend on fine details of the structure of the noise. We provide sufficient conditions on payoffs for there to be noise-independent selection.     

CUTTING CARBON EMISSIONS AT A PROFIT (PART I): OPPORTUNITIES FOR THE UNITED STATES

This article identifies and corrects shortcomings in recent modeling studies on the economics of reducing greenhouse gas emissions in the United States. The major assessments of the Kyoto Protocol—by the U.S. Energy Information Administration, the Clinton White House Council of Economic Advisers, the U.S. Department of Energy Interlaboratory Working Group, and the Stanford Energy Modeling Forum—are found to be seriously incomplete. Each study omits one or several of four major cost-reducing policy options, resulting in cost estimates that are far too pessimistic.
In the present study, these shortcomings are overcome through the integrated evaluation of all major cost-cutting policy options within a coherent least-cost framework. Three domestic policies—a national carbon cap and permit trading program, productivity-enhancing market reforms and technology programs, and recycling of permit auction revenues into economically advantageous tax cuts—are combined with international emissions allowance trading.
This analysis shows that an integrated least-cost strategy for mitigating U.S. greenhouse gas emissions would produce an annual net output gain of roughly 0.4% of GDP in 2010 and about 0.9% of GDP in 2020. On a cumulative net present value basis, the United States would gain $250 billion by 2010 and $600 billion by 2020. International flexibility mechanisms (including emissions trading) are of only secondary significance in realizing these productivity, output, and welfare gains.     

Anti-insurance: Analysing the Health Insurance System in Australia

This paper develops a model to analyse the Australian health insurance system when individuals differ in their health risk and this risk is private information. In Australia private insurance both duplicates and supplements public insurance. We show that, absent any other interventions, this results in implicit transfers of wealth from those most at risk of adverse health to those least at risk. At the social level, these transfers represent a mean preserving spread of income, creating social risk and lowering welfare – what we call anti-insurance. The recently introduced rebate on private health insurance can improve welfare by alleviating anti-insurance.     

Consumption externalities, production externalities, and efficient capital accumulation under time non-separable preferences

The effects of consumption and production externalities on economic performance under time non-separable preferences are examined both theoretically and numerically. We show that a consumption externality alone has long-run distortionary effects if and only if labor is supplied elastically. With fixed labor supply, it has only transitional distortionary effects. Production externalities always generate long-run distortions, irrespective of labor supply. The optimal tax structure to correct for the distortions is characterized. We compare the implications of this model with those obtained when the consumption externality is contemporaneous. While some of the long-run effects are robust, there are also important qualitative and quantitative differences, particularly along transitional paths.     

A Picture of Male and Female Unemployment among Britain's Ethnic Minorities

Using a sample of around one million observations, formed by combining two micro datasets from the 1991 Census of Population, the paper explores male and female unemployment differences across Britain's ethnic minorities. The large sample size allows a detailed multivariate analysis of females for the first time. Unemployment differences are not simply the result of characteristic differences or discrimination by the white majority. The empirical work shows that there are equally wide discrepancies in female unemployment rates, compared with males, between the white majority and the non-white ethnic minorities. Of particular interest is the comparison between UK born and foreign born ethnic minorities. Unemployment rates among the former tend to be considerably higher, but this is accounted for by characteristic differences. Thus there is no evidence that the UK born are doing worse, as the raw data suggest, but they do not seem to be becoming better assimilated either.     

Context-Sensitive Benefit Transfer Using Stated Choice Models: Specification and Convergent Validity for Policy Analysis

Benefit transfer has been an important, practical policy tool appealing to government agencies, especially when time or budget is constrained. However, the literature fails to support convergent validity of benefit transfer using the stated-preference method. This empirical study conducts four convergent validity assessments of benefit transfer using the choice modeling method and data from Rhode Island and Massachusetts, regarding coastal land management. The comparisons evaluate how individual characteristics improve benefit transfer and yield insights relevant to research specifications to produce studies adaptable for transfer applications. Empirical tests show benefit transfer using choice modeling may be acceptable, and even empirically valid, depending on the policy objectives and the context.     

Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders

Do large investors increase the vulnerability of a country to speculative attacks in the foreign exchange markets? To address this issue, we build a model of currency crises where a single large investor and a continuum of small investors independently decide whether to attack a currency based on their private information about fundamentals. Even abstracting from signalling, the presence of the large investor does make all other traders more aggressive in their selling. Relative to the case in which there is no large investor, small investors attack the currency when fundamentals are stronger. Yet, the difference can be small, or non-existent, depending on the relative precision of private information of the small and large investors. Adding signalling makes the influence of the large trader on small traders' behaviour much stronger.     

An error-correction model for forecasting changes in foreign currency futures spreads

The foreign currency futures pricing model of Amin and Jarrow (1991) is used to develop a model that predicts the primary determinants of foreign currency futures spreads. Our data set consists of daily observations of futures prices, spot exchange rates, and Eurocurrency LIBOR for the British pound and Japanese yen from January 2, 1990 to December 31, 2004. Using a 5-year moving window methodology, we find repeated evidence of cointegration between the futures spread, spot exchange rates, and interest rates over ten different estimation periods. An errorcorrection model is used to develop a trading strategy that generates significant out-of-sample profits.