Overlapping Generations or Infinitely-Lived Agents: Intergenerational Altruism and the Economics of Global Warming

Do we need an overlapping generations model for the economics of global warming? To answer this question, an infinitely-lived agent (ILA) approach and an overlapping generations (OLG) model are contrasted. ILA and OLG can be viewed as polar representations of intergenerational altruism. With ILA an immortal agent acts through his investment/savings decisions as trustee on the behalf of the future generations. With OLG, agents need not behave altruistic. They simply save during working years and dissave completely during retirement. Nevertheless, ILA and OLG must not differ in their implication for greenhouse policy. Greenhouse gas abatement is a straightforward alternative to physical capital formation and, even without altruism, each age cohort has an incentive to provide current abatement in order to reduce future damages attributable to climate change. Indeed, under reasonable assumptions and parameter values, our simulations reveal such an invariance result. Provided carbon taxes are the only policy tool and tax revenues are recycled through socially mandated rules, projections of economic growth, climate change and energy consumption are only insignificantly affected by the choice of approach.     

The Price of Correlation Risk: Evidence from Equity Options

We study whether exposure to marketwide correlation shocks affects expected option returns, using data on S&P100 index options, options on all components, and stock returns. We find evidence of priced correlation risk based on prices of index and individual variance risk. A trading strategy exploiting priced correlation risk generates a high alpha and is attractive for CRRA investors without frictions. Correlation risk exposure explains the cross-section of index and individual option returns well. The correlation risk premium cannot be exploited with realistic trading frictions, providing a limits-to-arbitrage interpretation of our finding of a high price of correlation risk.     

Political Cycles: Issue Ownership and the Opposition Advantage

In modern democracies, common wisdom suggests that political parties alternate in power due to voters' disappointment. The aim of this paper is to show that parties' turnover may be due to voters' "satisfaction." Our model is built on two main assumptions: Parties "own" different issues, and investments in the provision of public goods create a linkage between successive elections. We show that no party can maintain itself in power forever when the median voter is moderate enough. This result holds when the parties' main objective is to win the election and is compatible with a large range of candidates subobjectives that may change from one election to the next. We also provide some novel welfare implications. Whereas rent-seeker candidates always dominate reelection-concerned candidates in one public good models, rent-seeker candidates may be welfare improving compared with reelection-concerned candidates.     

Directed Networks with Spillovers

We study noncooperative network formation in two types of directed networks. In the first type, called the model with global spillovers, the payoff of a player depends on the number of links she forms as well as the total number of links formed by all other players. In the second type, called the model with local spillovers, the payoff of a player depends on the number of links she forms and the total number of links formed by her immediate neighbors, as well as the number of links formed by players outside her neighborhood. For both classes of games we investigate the existence of pure strategy Nash equilibria and characterize the Nash networks under a number of different second order conditions on the payoff function.     

Commodity Tax Competition with Constrained Taxes

This paper examines a symmetric Nash equilibria of a two-country model of fiscal competition with a continuum of taxable commodities in each country. The innovation is to impose a uniformity restriction that there can be only two rates of tax on the different commodities, a positive rate and the zero rate. The main results characterize, under two alternative modes of taxation, the equilibrium fiscal rules chosen by countries, i.e., the level of the positive rate and the set of taxed commodities. Under the origin principle, it appears that the equilibrium fiscal base is narrower than the optimal one and the tax rate is too high. In contrast, under the destination principle, the optimal rule is implemented.     

Asymmetric Information and Adverse Selection in Mauritian Slave Auctions

Information asymmetry is a necessary prerequisite for testing adverse selection. This paper applies this sequence of tests to Mauritian slave auctions. The theory of dynamic auctions with private and common values suggests that when an informed participant is known to be active, uninformed bidders will be more aggressive and the selling price will be higher. We conjecture that observable family links between buyer and seller entailed superior information and find a strong price premium when a related buyer purchased a slave, indicative of information asymmetry. We then test for adverse selection using sale motivation. Our results indicate large discounts on voluntary as compared to involuntary sales. Consistent with adverse selection, the market anticipated that predominantly low-productivity slaves would be brought to the market in voluntary sales.     

Historical Patterns of Inequality and Productivity around Financial Crises

To understand the determinants of financial crises, previous research focused on developments closely related to financial markets. In contrast, this paper considers changes originating in the real economy as drivers of financial instability. To this end, I assemble a novel data set of long-run measures of income inequality, productivity, and other macrofinancial indicators for advanced economies. I find that rising top income inequality and low productivity growth are robust predictors of crises, and their slow-moving trend components largely explain these relations. Moreover, recessions that are preceded by such developments are deeper than recessions without such ex ante trends.