the empirical content of the roy model this paper clarifies and extends the classical roy model of self selection and earnings inequality the original roy model based on the assumption that log skills are normally distributed is shown to imply that pursuit of comparative advantage in a free market reduces earnings inequality compared to the earnings distribution that would result if workers were randomly assigned to sectors aggregate log earnings are right skewed even if one sectoral distribution is left skewed most major implications of the log normal roy model survive if differences in skills are log concave however few implications of the model survive if skills are generated from more general distributions we consider the identifiability of the roy model from data on earnings distributions the normal theory version is identifiable without regressors or exclusion restrictions sectoral distributions can be identified knowing only the aggregate earnings distribution for general skill distributions the model is not identified and has no empirical content with sufficient price variation the model can be identified from multimarket data cross sectional variation in regressors can substitute for price variation in restoring empirical content to the roy model

a multivariate sample selection model estimating cigarette and alcohol demands with zero observations heckman s sample selection model is generalized to the multivariate case and used to estimate demands for cigarettes beer and wine by individuals in the united states the specification allows correlations between the error terms of multiple selection and level equations and nests the popular bivariate sample selection model and two part model empirical results suggest that the proposed model performs better than the restricted specifications differentiated effects of variables on probabilities and levels of consumption also suggest rejection of the tobit system gender differences are present and demographic variables are more important than income in determining consumption of cigarettes beer and wine

the irreversibility effect in environmental decisionmaking we provide a new more general definition for the irreversibility effect and demonstrate its relevance to problems involving environmental and other decisions under uncertainty we establish several analytical and numerical results that suggest both that the effect holds more widely than generally recognized and that an existing result epstein s theorem giving a sufficient condition for determining whether the effect holds can be applied more widely than previously indicated in particular to problems involving intertemporally nonseparable benefit functions we further show that a low elasticity of intertemporal substitution will however result in failure of the effect

treatment effects and informative missingness with an application to bank recapitalization programs this paper extends conventional treatment models to allow for missing outcomes endogeneity and discrete data the new methodology is employed to evaluate the effectiveness of bank recapitalization programs and their ability to resuscitate the financial system many policies and programs that are the foci of economic research operate under selection mechanisms or decision structures that must be accommodated by econometric models to ensure proper inference however the complexities involved in modeling selection equations and treatment response data have restricted attention to single equation models the dangers of improper modeling are bias and misrepresentation of the population of interest these issues are prevalent in the analysis of lender of last resort lolr policies which underlies the application in this paper treatment models consider two subgroups in the data the treated group and the control or untreated group this formulation when applied to an lolr study divides the sample into banks that receive loans from the lolr and banks that do not receive loans complications arise because an initial selection mechanism the application step of the recapitalization process is ignored avoiding the question of whether the bank applied for assistance from the lolr erroneously groups banks that do not apply for assistance with those that are declined assistance thus the untreated group comprises

global warming irreversibility and learning a number of economists have argued that the literature on the irreversibility effect implies that current abatement of greenhouse gas emissions should be greater when there is the possibility of obtaining better information in the future about the potential damages from global warming than when there is no possibility of obtaining better information in this paper we show that even the simplest model of global warming does not satisfy either of epstein s 1980 sufficient conditions so it is not possible to use epstein s analysis to tell whether the irreversibility effect applies to models of global warming we derive an alternative sufficient condition for the irreversibility effect to hold

the role of uncertainty and learning for the success of international climate agreements abstract transnational externalities e g transboundary pollution trade contagious diseases and terrorism warrant coordination and cooperation between governments but this proves often difficult one reason for the meager success is the public good character of many of these economic problems encouraging free riding another reason one might suspect is uncertainty surrounding most environmental problems and in particular climate change this provides often an excuse for remaining inactive paradoxically some recent papers have concluded just the opposite the veil of uncertainty can be conducive to the success of international environmental cooperation in this paper we explain why and under which conditions this can be true however we argue that those conditions are the exception rather than the rule most important we suggest a mechanism for those conditions where learning has a negative effect on the success of cooperation which removes this effect or even turns it into a positive effect our results apply beyond the specifics of climate change to similar problems where cooperation generates positive externalities

uncertainty learning and international environmental policy coordination in this paper we construct a simple model of global warming which captures a number of key features of the global warming problem i environmental damages are related to the stock of greenhouse gases in the atmosphere ii the global commons nature of the problem means that these are strategic interactions between the emissions policies of the governments of individual nation states iii there is uncertainty about the extent of the future damages that will be incurred by each country from any given level of concentration of greenhouse gases but there is the possibility that at a future date better information about the true extent of environmental damages may become available an important aspect of the problem is the extent to which damages in different countries may be correlated in the first part of the paper we consider a simple model with two symmetric countries and show that the value of perfect information is an increasing function of the correlation between damages in the two countries in both the cooperative and non cooperative equilibria however while the value of perfect information is always non negative in the cooperative equilibrium in the non cooperative equilibrium there is a critical value of the correlation coefficient below which the value of perfect information will be negative in the second part of the paper we construct an empirical model of global warming distinguishing between oecd and non oecd countries and show that in the non cooperative equilibrium the value of perfect information for oecd countries is negative when the correlation coefficient between environmental damages for oecd and non oecd countries is negative the implications of these results for international agreements are discussed

investment risks under uncertain climate change policy abstract this paper describes results from a model of decision making under uncertainty using a real options methodology developed by the international energy agency iea the model represents investment decisions in power generation from the perspective of a private company the investments are subject to uncertain future climate policy which is treated as an external risk factor over which the company has no control the aims of this paper are to i quantify these regulatory risks in order to improve understanding of how policy uncertainty may affect investment behaviour by private companies and ii illustrate the effectiveness of the real options approach as a policy analysis tool the study analysed firms investment options of coal and gas fired power plants and carbon capture and storage ccs technologies policy uncertainty is represented as an exogenous event that creates uncertainty in the carbon price our findings indicate that climate policy uncertainty creates a risk premium for power generation investments in the case of gas and coal fired power generation the risk premium would lead to an increase in electricity prices of 5 10 in order to stimulate investment in the case of ccs the risk premium would increase the carbon price required to stimulate investment by 16 37 compared to a situation of perfect certainty the option to retrofit ccs acts as a hedge against high future carbon prices and could accelerate investment in coal plant this paper concludes that to minimise investment risks in low carbon technologies policy makers should aim to provide some long term regulatory certainty

fundamental irreversibilities in stock externalities abstract this paper concerns the irreversibility effect in stock externalities in an environment of uncertainty with learning taking place one may wish to under emit today to avoid potential environmental irreversibilities alternatively one may wish to under invest in pollution control capital avoiding investments in sunk capital that turn out to be wasted the paper develops theoretical results on the tension between these two effects and separates risk aversion from the irreversibility effect the paper also presents a simple example in climate change policy

the dynamics of belief in climate change and its risks in business organisations abstract this paper presents a simulation model of the formation of the belief in climate change of a business organisation using a systems dynamics approach understanding how businesses form their belief on the issue of climate change is of paramount importance given the key role of beliefs and cognitive characteristics in the triggering and shaping of organisational adaptation processes the main assumption of the model is that the dynamics of belief is driven by the perceived actual and potential changes in competitiveness as a consequence of climate impacts rather than by the growth of an ecological business conscience the model has been built using the stella software program and it is based upon theoretical hypotheses drawn from behavioural studies of organisations and evolutionary theories of economic change

providing global public goods under uncertainty abstract we study how uncertainty and risk aversion affect international agreements to supply global public goods we consider a benchmark model with homogeneous countries and linear payoffs when countries directly contribute to a public good uncertainty tends to lower signatories efforts but may increase participation despite risk aversion uncertainty may improve welfare in contrast when countries try to reduce a global public bad uncertainty tends to increase signatories efforts and decrease participation in that case an ex ante reduction of uncertainty may have a large positive multiplier effect on welfare

learning and stock effects in environmental regulation the case of greenhouse gas emissions abstract this paper concerns the optimal regulation of greenhouse gases that lead to global climate change in particular we focus on uncertainty and learning which over time resolves uncertainty we present an empirical stochastic model of climate economy interactions and present results on the tension between postponing control until more is known vs acting now before irreversible climate change takes place uncertainty in our model is in the damage caused by global warming the results suggest that a temporary carbon tax may dominate a permanent one because a temporary tax may induce increased flexibility

sample selection and treatment effect estimation of lender of last resort policies this article develops a framework for estimating multivariate treatment effect models in the presence of sample selection the methodology deals with several important issues prevalent in policy and program evaluation including application and approval stages nonrandom treatment assignment endogeneity and discrete outcomes this article presents a computationally efficient estimation algorithm and techniques for model comparison and treatment effects the framework is applied to evaluate the effectiveness of bank recapitalization programs and their ability to resuscitate the financial system the analysis of lender of last resort lolr policies is not only complicated due to econometric challenges but also because regulator data are not easily obtainable motivated by these difficulties this article constructs a novel bank level dataset and employs the new methodology to jointly model a bank s decision to apply for assistance the lolr s decision to approve or decline the assistance and the bank s

corporate climate risk management are european companies prepared abstract in recent years scholars have published numerous studies dealing with the consequences of climate change for businesses activity however a more holistic understanding of companies perceptions of and responses to physical regulatory and market related climate risks across a wider range of sectors is still missing to address this gap this paper provides an empirical analysis of corporate climate risk perception and countermeasures for companies in industries regulated and not regulated by climate policy drawing on data from the carbon disclosure project of a size matched sample of 126 european based companies it is shown that most firms feel less exposed to physical and market risks than to regulatory risks this is because physical risks are expected to materialize in the more distant future and the realization of market risks is considered rather unlikely moreover the results indicate that firms in regulated industries implement more regulatory response measures than firms that are part of non regulated industries while interestingly there are no significant differences between the two groups in exposure and responses to physical and market risks by discussing climate related risks and highlighting the significant role of regulation in spurring corporate action in the context of climate change this paper holds important implications for corporate managers and policy makers

market imperfections opportunity and sustainable entrepreneurship this research develops the argument that four types of market imperfections i e inefficient firms externalities flawed pricing mechanisms and information asymmetries at once contribute to environmental degradation and that they also provide significant opportunities for the creation of radical technologies and innovative business models we show that these opportunities establish the foundations for an emerging model of sustainable entrepreneurship one which enables founders to obtain entrepreneurial rents while simultaneously improving local and global social and environmental conditions to advance this new field we offer suggestions for a research agenda focusing on two areas the relationship between market imperfections and entrepreneurial opportunities and the emerging field of sustainable entrepreneurship

uncertainty learning and heterogeneity in international environmental agreements this paper concerns the formation of international environmental agreements under uncertainty about environmental damage with different models of learning complete learning partial learning or no learning the results of the existing literature are generally pessimistic the possibility of either complete or partial learning generally reduces the level of global welfare that can be achieved from forming an iea relative to no learning that literature regards uncertainty as a parameter common to all countries so that countries are identical ex ante as well as ex post in this paper we extend the literature to the case where there is no correlation between damage costs across countries each country is uncertain about a particular parameter in our case the benefit cost ratio drawn from a common distribution but ex post each country s realized parameter value is independently drawn consequently while countries remain identical ex ante they may be heterogeneous ex post we show that this change reinforces the negative conclusions about the effects of partial learning on international environmental agreements but under certain conditions moderates the negative conclusions about the effects of complete learning

p graph approach for gdp optimal allocation of resources commodities and capital in economic systems under climate change induced crisis conditions abstract climate change impacts may manifest via multiple pathways often leading to a shortage of resources reduction in production capacities or reduction in available labor inputs that are vital for economic activities effective climate change adaptation strategies are needed to determine the optimal allocation of scarce resources commodities or capital under crisis conditions to minimize the economic consequences in such cases it is necessary to account for structural properties of economic systems to ensure that rational distribution policies are implemented input output models are used to illustrate interdependencies among economic sectors and to assess both direct and indirect effects of disruptive events alternatively these interdependencies may be exploited for developing effective recovery efforts to minimize the ripple effects of a crisis in this paper a process graph representation of the input output model is developed to generate a rational procedure for the allocation of scarce resources commodities or capital during crisis conditions the process graph model is a graph theoretic approach originally developed for chemical process design applications the analogous problem structure allows it to be used for the input output system the method is demonstrated through several case studies to identify allocation policies geared towards reducing the impact of disruptions attributed to critical resources commodities or capital results show that depending on the economic structure the optimal allocation of scarce resources commodities or capital will satisfy the final demands of some economic sectors and reduce the production capacity of others in order to minimize the reduction of total gross domestic product though similar results can be obtained through traditional mathematical programming models the process graph platform has the advantage to visually present the distribution of scarce resources commodities or capital within the system this work is a first attempt to implement the process graph approach in the fields of economics and climate change adaptation in conclusion the process graph based approach developed in this work can be used to provide policymakers with insights in developing appropriate risk mitigation plans associated with climate change induced crisis conditions potential applications include both the development of disaster preparedness measures for anticipated disruptions as well as the implementation of real time emergency response in the midst of a crisis

can uncertainty alleviate the commons problem global commons problems such as climate change are often affected by severe uncertainty the paper examines the effect of uncertainty on pollution emissions and welfare in a strategic context we find that emissions are always lower under uncertainty than under certainty reflecting risk reducing considerations we show that uncertainty can have a net positive impact on the welfare of risk averse polluters we extend the analysis to increases in risk increases in risk aversion and to risk heterogeneity jel d81 c72 q54 h23

a system dynamic approach for exploring the effects of climate change risks on firms economic performance a number of studies have recently examined the potential relationships between climate change and the business community the majority of such studies have emphasized statistical and benchmarking techniques to identify how climate change could have implications on firms operations and their economic performance these techniques draw primary data from questionnaire surveys and corporate environmental reports in an ex post basis a fact that provide evidence in a linear probabilistic and static character these studies have provided limited insights regarding the future complex effects of climate change on corporate economic performance this paper aims to contribute to this literature by developing a dynamic model to investigate the evolutionary trends of the relationships between climate change risks financial performance and the operational processes of firms the main scope is to identify how physical regulatory reputational and litigation risks will affect day to day operations an integrated model will be established in order to improve managers and academics understanding of climate change and business performance four scenarios will also be tested to illustrate what if relationships in the presence of climate change risks finally the proposed model is based on the corporate climate change management system thinking system dynamic and stella software

scientific progress and irreversibility an economic interpretation of the precautionary principle abstract we consider the problem of the optimal use of a good whose consumption can produce damages in the future scientific progress is made over time that provides information on the distribution of the intensity of damages we show that this progress induces earlier prevention effort only if prudence is larger than twice absolute risk aversion this paper thus identifies the class of quite restrictive but plausible conditions such that scientific uncertainties justify an immediate reduction of the consumption of a potentially toxic substance

how big a problem is too big to fail a review of gary stern and ron feldman s too big to fail the hazards of bank bailouts this review essay examines whether too big to fail is as serious a problem as gary stern and ron feldman contend this essay argues that stern and feldman overstate the importance of the too big to fail problem and do not give enough credit to the fdicia legislation of 1991 for improving bank regulation and supervision however this criticism of the stern and feldman book does not detract from many of its messages the policy recommendations in their book have merit even if the too big to fail problem is currently not that serious because these policies make it less likely that a banking crisis will occur even if driven by other factors

uncertainty learning and international environmental agreements the role of risk aversion this paper analyses the formation of international environmental agreements ieas under uncertainty learning and risk aversion it bridges two strands of the iea literature i the role of learning when countries are risk neutral ii the role of risk aversion under no learning combining learning and risk aversion seems appropriate as the uncertainties surrounding many international environmental problems are large often highly correlated e g climate change but are gradually reduced over time through learning the paper analyses three scenarios of learning a key finding is that risk aversion can change the ranking of these three scenarios of learning in terms of welfare and membership in particular the negative conclusion about the role of learning in a strategic context under risk neutrality is qualified when countries are significantly risk averse then it pays them to wait until uncertainties have been largely resolved before joining an iea this may suggest why it has been so difficult to reach an effective climate change agreement

a tale of two market failures technology and environmental policy abstract market failures associated with environmental pollution interact with market failures associated with the innovation and diffusion of new technologies these combined market failures provide a strong rationale for a portfolio of public policies that foster emissions reduction as well as the development and adoption of environmentally beneficial technology both theory and empirical evidence suggest that the rate and direction of technological advance is influenced by market and regulatory incentives and can be cost effectively harnessed through the use of economic incentive based policy in the presence of weak or nonexistent environmental policies investments in the development and diffusion of new environmentally beneficial technologies are very likely to be less than would be socially desirable positive knowledge and adoption spillovers and information problems can further weaken innovation incentives while environmental technology policy is fraught with difficulties a long term view suggests a strategy of experimenting with policy approaches and systematically evaluating their success

on modeling and interpreting the economics of catastrophic climate change with climate change as prototype example this paper analyzes the implications of structural uncertainty for the economics of low probability high impact catastrophes even when updated by bayesian learning uncertain structural parameters induce a critical tail fattening of posterior predictive distributions such fattened tails have strong im plications for situations like climate change where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages this paper shows that the economic consequences of fat tailed structural uncertainty along with unsureness about high temperature damages can readily outweigh the effects of discounting in climate change policy analysis

conceptual model for corporate climate change strategy development empirical evidence from the energy sector abstract this paper proposes a conceptual model for corporate climate change strategy development it reflects the dynamic influence of climate change risks and stakeholder pressures on carbon management practices adopted and the performance perception of managers we draw our model on resource dependence theory to explain how managers apply carbon management practices to reduce ecological uncertainty caused by firms direct dependence on nature using institutional theory we describe how stakeholders influence firm reactions to climate change we test a structural equation model and run a cluster analysis of 105 brazilian energy firms the results show that companies undertake one of four different strategies ranging from a minimalist approach to the regulation shaper pressure manager or greenhouse gas emission avoiders the proposed model contributes to an understanding of the importance of embedding climate change in a business model in emerging markets