Institutional Quality and Growth

I analyze the dynamic interaction between civil society organizations and the government in a representative developing economy. Government fails to establish efficient institutions by favoring corruption. On its side, civil society exerts pressure to constrain government to cease corruption. I distinguish between an authoritarian government and an unrestrictive one: the latter does not repress protests from the civil society while the former implements punishment mechanisms. I demonstrate analytically the existence of a unique locally stable equilibrium by solving a linear quadratic differential game for three regimes: respectively, the optimal control problem, noncooperative, and cooperative game. Everything remaining constant; numerical assessment indicates that both civil monitoring and government pressure always increase as the government’s ability to extract rents and the effectiveness of institutions increases. The government pressure also increases with an increase in the marginal utility of rent. Both government pressure and civil society's monitoring effort decrease with the increase in the cooperation weight. Total Factor Productivity effects always dominate the detrimental effect of civil monitoring on growth, except when the government’s capacity of rent extraction increases in the second regime and under some restrictions in the first. In a nutshell, I show that civil society contributes to the improvement of institutions fostering growth.     

Inequality, Growth, and the Dynamics of Social Segmentation

In this paper, we investigate the link between the dynamics of society segmentation into communities and the growth process, based on a simple human capital growth model. Using coalition theory, we study the socioeconomic dynamics of an economy over time, characterize it and prove that the economy converges to a steady state partition that may be segmented. Eventually the whole economy tends to a balanced growth path, exhibiting persistent inequality in the case of segmentation. We then provide sufficient conditions on initial inequality and the technology parameters generating local and global externalities for obtaining a segmented society in the long run. On the whole, the relationship between inequality and growth cannot be assessed without taking into consideration the stratification phenomena at work in society over time.     

Double Irreversibility and Environmental Policy Timing

The timing of environmental policy typically takes place within a framework in which uncertainty over the future impact of pollution and two different kinds of irreversibilities interact. The first kind of irreversibility concerns the sunk cost of environmental degradation; the second is related to the sunk cost of environmental policy. Clearly, the two irreversibilities pull in opposite directions: policy irreversibility leads to more pollution and a less/later policy, while environmental irreversibility generates less pollution and a more/sooner policy. Using a real option approach and an infinite time horizon model, this paper considers both irreversibilities simultaneously. The model first is developed by paying particular attention to the option values related to pollution and policy adoption. The environmental policy we consider consists in increasing the natural assimilation rate. Solving the model in closed form then provides solutions for both the optimal pollution level and the optimal environmental policy timing. Finally, we provide a numerical example with the purpose of appraising which irreversibility has the prevailing effect and what is the overall impact of both irreversibilities on pollution and policy timing.     

Optimal Emission Policy under the Risk of Irreversible Pollution

We consider an optimal consumption and pollution problem that has two important features. Environmental damages due to economic activities may be irreversible and the level at which the degradation becomes irreversible is unknown. Particular attention is paid to the situation where agents are relatively impatient and/or do not care a lot about the environment and/or Nature regenerates at low rate. We show that the optimal policy of the uncertain problem drives the economy in the long run toward a steady state while, when ignoring irreversibility, the economy follows a balanced growth path accompanied by a perpetual decrease in environmental quality and consumption, both asymptotically converging toward zero. Therefore, accounting for the risk of irreversibility induces more conservative decisions regarding consumption and polluting emissions. In general, however, we cannot rule out situations where the economy will optimally follow an irreversible path and consequently will also be left, in the long run, with an irreversibly degraded environment.