Observable restrictions of general equilibrium models with financial markets

This paper examines whether general equilibrium models of exchange economies with incomplete financial markets impose restrictions on prices of commodities and assets given the stochastic processes of dividends and aggregate endowments. We show that the assumption of time-separable expected utility implies restriction on the cross-section of asset prices as well as on spot commodity prices. However, a relaxation of the assumption of time separability will generally destroy these restriction.     

The impact of environmental regulation on productivity in German industries

The objective of this paper is to adjust a traditional total factor productivity (TFP) measure for the direct effect of environmental regulation on material and capital input. For this purpose we consider the fact that part of material input and pollution abatement capital have not been used to increase output but to cover the cost of using the environment as a factor of production. Therefore TFP growth rates are lower if part of the material input is allocated to abatement activities instead of producing output. We propose to treat compliance with environmental regulation as an unproductive input linked to the use of productive material input. Our aim is to answer and discuss two questions: How to measure the effect of environmental regulation on TFP, and does the effect matter. We examine data from 1975–1991 for ten pollution intensive German industries.We would like to thank Cornelia Oßwald for valuable research assistance. We are especially grateful to two anonymous referees for many helpful comments.     

Cross-country differences in monetary policy execution and money market rates’ volatility

Volatility patterns in overnight interest rates display differences across industrial countries that existing models—designed to replicate the features of individual countries’ markets—cannot account for. This paper presents an equilibrium model of the overnight interbank market that matches cross-country differences in patterns in interest volatility by incorporating differences in how central banks manage liquidity in response to shocks. Our model is consistent with central banks’ practice of rationing access to marginal facilities when the objective of stabilizing short-term interest rates conflicts with another high-frequency objective, such as an exchange rate target.     

Commitment and choice of partner in a negotiation with a deadline

This paper analyses the effects of partially revocable endogenous commitments of a seller in a negotiation with a deadline. In particular, we examine when commitment is a source of strength, a source of inefficiency and when it does not affect the bargaining outcome at all. We show that when commitment possesses a minimum amount of irrevocability this crucially determines the bargaining outcome. In the bilateral bargaining case, commitment becomes a source of inefficiency since it causes a deadline effect. In the choice of partner framework, however, the deadline effect disappears and there is an immediate agreement and, moreover, commitment becomes a source of strength since it increases the seller's equilibrium payoff by triggering off competition between the buyers.     

Econometric analysis of linearized singular dynamic stochastic general equilibrium models

In this paper I propose an alternative to calibration of linearized singular dynamic stochastic general equilibrium models. Given an a-theoretical econometric model as a representative of the data generating process, I will construct an information measure which compares the conditional distribution of the econometric model variables with the corresponding singular conditional distribution of the theoretical model variables. The singularity problem will be solved by using convolutions of both distributions with a non-singular distribution. This information measure will then be maximized to the deep parameters of the theoretical model, which links these parameters to the parameters of the econometric model and provides an alternative to calibration. This approach will be illustrated by an application to a linearized version of the stochastic growth model of King, Plosser and Rebelo.     

Nominal bargaining power, selection protocol, and discounting in legislative bargaining

The comparative static predictions of the Baron and Ferejohn [Baron, D.P., and Ferejohn, J.A., (1989). Bargaining in legislatures, American Political Science Review 83 (4), 1181-1206] model better organize behavior in legislative bargaining experiments than Gamson's Law. Regressions similar to those employed in field data produce results seemingly in support of Gamson's Law (even when using data generated by simulating agents who behave according to the Baron-Ferejohn model), but this is determined by the selection protocol which recognizes voting blocks in proportion to the number of votes controlled. Proposer power is not nearly as strong as predicted in the closed rule Baron and Ferejohn model, as coalition partners refuse to take the small shares given by the continuation value of the game. Discounting pushes behavior in the direction predicted by Baron and Ferejohn but has a much smaller effect than predicted.     

Critical factors in computing externalities for electricity resources

The New York State Environmental Externalities Cost Study and computerized externality model (EXMOD) are used to examine the specification of methods design and application factors in the computation of electricity externalities. We report the sensitivity of externality estimates with alternative specifications for 15 different factors in the analysis, including the selection of facility type, site, and operating characteristics; air emission assumptions and air modeling procedures; dose-response assumptions; economic valuation assumptions; and other modeling procedures and assumptions. Many of the factors that most influence externality computations can be well specified in the analysis, such as the facility type, age, characteristics, emission rates, whether there is SO₂ trading, and the inclusion of long range impacts. Most significant among the factors for which there remains significant scientific uncertainty are the selection and application of air dispersion models, selection of air pollution thresholds for health impacts, reduced life span risks associated with ozone exposure and with long-term exposure to PM₁₀, values for CO₂ damages, and the value to be applied to increased risks of reduced life span for individuals age 65 or older.     

Private R&;D and Spillovers in European Agriculture

The objective of this paper is to present econometric evidence of the effects of economic incentives, public policies, and institutions on national aggregate private agricultural R&D investments. The main hypothesis we will test in this paper is whether agricultural R&D spillovers represent a disincentive for national private R&D. More specifically, we will test if the spillovers function, which is a determinant of private R&D, follows a quadratic form and if private R&D is determined by the role of incentives and institutions.A previous draft of this paper was presented at the 57th International Atlantic Economic Conference, Lisbon, Portugal, 10–14 March 2004. Comments from participants have been very useful to improve the paper.     

Monetary regimes and the co-ordination of wage setting

A recent literature argues that a strict monetary regime may reduce equilibrium unemployment by disciplining wage setters, as wage setters abstain from raising wages to avoid a monetary contraction. However, in this literature the wage setters are assumed not to co-ordinate their wage setting. The present paper argues that precisely because a strict monetary regime may discipline the unco-ordinated wage setting, thus lowering unemployment in the unco-ordinated outcome, it also reduces wage setters’ incentives to co-ordinate. It is shown that an accommodating monetary regime may reduce equilibrium unemployment, via the strengthening of the wage setters’ incentives to co-ordinate.     

Tradeable permits,missing markets,and technology

This paper examines the effects of missing markets, heterogeneous pollutants, and the pollution technology of firms on the efficacy of transferable pollution permits. Under the assumption of perfect competition in all markets, we show that if firms can substitute among pollutants, then setting the optimal number of permits for only one pollutant will not, in general, lead to an efficient outcome. The degree of the inefficiency will depend on the information set available to the regulator and the substitutability among pollutants by firms. When establishing transferable pollution rights regulators should, therefore, consider the technology of firms. If firms discharge pollutants in the same fixed proportions, then the regulator need only set a market for one of the pollutants to ensure an efficient outcome. Where firms can substitute among pollutants, however, establishing a market for only one pollutant provides an incentive for firms to substitute to unregulated ones. This is an important policy issue as substitutability among pollutants within and across production processes may dampen the dynamic advantages of a tradeable permit policy.