endogenous growth convexity of damage and climate risk how nordhaus framework supports deep cuts in carbon emissions to slow or not to slow nordhaus 1991 was the first economic appraisal of greenhouse gas emissions abatement and founded a large literature on a topic of worldwide importance we offer our assessment of the original article and trace its legacy in particular nordhaus s later series of dice models from this work many have drawn the conclusion that an efficient global emissions abatement policy comprises modest and modestly increasing controls we use dice itself to provide an initial illustration that if the analysis is extended to take more strongly into account three essential elements of the climate problem the endogeneity of growth the convexity of damage and climate risk optimal policy comprises strong controls

on the persistence of cross country inequality measures we examine inequality persistence in a multicountry unbalanced panel using a battery of stationarity and long run memory tests inequality is measured by the gini indices of income inequality results suggest that we cannot reject a unit root in inequality measures this applies to both gross and net indices thus while redistributive measures have reduced the level of inequality they have not sufficiently modified its apparent unit root a more likely conclusion is that inequality measures are exceptionally persistent if not strictly a unit root we also introduce a new panel stationarity test useful for series subject to unknown structural breaks

climate change policy under polar amplification abstract polar amplification is an established scientific fact which has been associated with the surface albedo feedback and with heat and moisture transport from the equator to the poles in this paper we unify a two box climate model which allows for heat and moisture transport from the southern region to the northern region with an economic model of welfare optimization our main contribution is to show that by ignoring spatial heat and moisture transport and the resulting polar amplification the regulator may overestimate or underestimate the tax on greenhouse gas emissions the direction of bias depends on the relations between marginal damages from temperature increase in each region we also determine the welfare cost when a regulator mistakenly ignores polar amplification numerical simulations confirm our theoretical results while ballpark estimates indicate that the tax bias could be as high as 20 while welfare cost could reach 2 of global effective steady state consumption

as bad as it gets how climate damage functions affect growth and the social cost of carbon the paper analyzes the effects of varying climate impacts on the social cost of carbon and economic growth we use polynomial damage functions in a model of an endogenously growing two sector economy the framework includes nonrenewable natural resources which cause greenhouse gas emissions pollution stock harms capital and reduces economic growth we find a big effect of the selected damage function on the social cost of carbon and a significant impact on the growth rate in our calibration a quartic damage function raises the social cost of carbon by more than a factor of ten compared to the linear function in the social optimum the growth rate remains positive even when the damage function is highly convex we test the robustness of the results by adding pollution decay lowering the elasticity of intertemporal substitution and addressing uncertainty which does not alter our results we find that high marginal climate damages require stringent climate policies but do not preclude positive economic growth despite convexity provided that policies are designed in an efficient manner

climate change policy what do the models tell us very little a plethora of integrated assessment models iams have been constructed and used to estimate the social cost of carbon scc and evaluate alternative abatement policies these models have crucial flaws that make them close to useless as tools for policy analysis certain inputs e g the discount rate are arbitrary but have huge effects on the scc estimates the models produce the models descriptions of the impact of climate change are completely ad hoc with no theoretical or empirical foundation and the models can tell us nothing about the most important driver of the scc the possibility of a catastrophic climate outcome iam based analyses of climate policy create a perception of knowledge and precision but that perception is illusory and misleading jel c51 q54 q58

synergizing china s energy and carbon mitigation goals general equilibrium modeling and policy assessment abstract in this work we enrich the technical details of the energy sector by extending the conventional framework of computable general equilibrium cge modeling and we take into account uncertainty regarding fossil fueled technologies and endogenous nonfossil energy technological change which provides us with formidable benefits to explore the policy synergy of china s multiple energy development and carbon control targets we find that carbon pricing policy plays a consistently negative role in economic growth while the economic impacts of nonfossil investment incentives differ in their policy stringency compared to energy intensity reduction goals that could be easily attained given the baseline effort achieving carbon peaking targets may be relatively difficult without additional policy intervention and the policy efforts required to reach energy consumption control targets in 2030 and nonfossil energy development targets in 2050 are even stricter this research also identifies significant policy effect differences in carbon pricing and nonfossil investment incentives

do financial reforms help stabilize inequality abstract we explore the relationship between financial reforms and income inequality using a panel of 29 countries in 1975 2005 we extend panel unit root tests to allow for the presence of some financial reform covariates and further suggest an associated but novel semi parametric approach results demonstrate that although both gross and net gini indices follow a unit root process this picture can change when financial reform indices are accounted for in particular while gross gini coefficients are generally not stabilized by financial reforms net measures are more likely to be thus financial reforms enacted in the presence of a strong safety net would seem preferable

effective climate policies in a dynamic north south model abstract the paper develops a two region endogenous growth model with climate change affecting the countries capital stocks negatively we compare two different policies aimed at supporting less developed countries climate mitigation by developed countries which moderates the increase in stock pollution and hence capital depreciation and income transfers in the tradition of development aid under a mild set of assumptions we find that active climate policies are more efficient for developed economies and also remarkably better for developing countries than additional development aid the main reason is the difference between the two policies with respect to their effects on economic growth the results are robust with respect to possible model extensions

the structure of economic modeling of the potential impacts of climate change grafting gross underestimation of risk onto already narrow science models scientists describe the scale of the risks from unmanaged climate change as potentially immense however the scientific models because they omit key factors that are hard to capture precisely appear to substantially underestimate these risks many economic models add further gross underassessment of risk because the assumptions built into the economic modeling on growth damages and risks come close to assuming directly that the impacts and costs will be modest and close to excluding the possibility of catastrophic outcomes a new generation of models is needed in all three of climate science impact and economics with a still stronger focus on lives and livelihoods including the risks of large scale migration and conflicts

the dynamics of foreign direct investments in land and pollution accumulation following the recent increase of foreign direct investments in land this paper studies their possible effects on the development of a local economy to this aim we use a two sector model external and local with heterogeneous agents external investors and local land owners we assume that both sectors are negatively affected by pollution but only the external sector is polluting the local government can tax the external sector s production activities to finance environmental defensive expenditures we first examine the equilibria that emerge in the model from the dynamics of pollution and physical capital and then investigate the conditions for the coexistence of the two sectors and the impact of the external sector on the revenues of the local population using numerical simulations we show that a revenue increasing path may occur only if the pollution tax is high enough and the impact of the external sector on pollution is low enough otherwise foreign direct investments may end up impoverishing the local population

the potential impacts of climate change on capital in the 21st century abstract an endogenous growth model with a simple climate system is used to examine the potential impacts of climate change on the capital to net income ratio and the net of depreciation share of income to capital a measure of wealth concentration and income distribution between capital and labour respectively over the next two centuries if climate change only directly affects production as usually assumed the capital to net income ratio will increase as compared to what it would be in the absence of climate change the capital to income ratio will increase even further if climate change affects labour productivity in both cases the increase in the ratio after 2100 is due to the stock of capital being depleted at a lower rate than net income is falling however the capital to net income ratio will be lower and eventually fall if damage from climate change increases the depreciation rate of capital this decline is marginally reduced if climate change impacts both capital and labour productivity in the case where climate change impacts the depreciation of capital the ratio after 2100 is falling because the stock of capital is destroyed faster than net income is falling furthermore climate change reduces the net share of income accruing to capital in all scenarios with dramatic changes in the case of climate change affecting the depreciation of capital emissions abatement almost completely mitigates these impacts on the capital to net income ratio and the net share of income to capital

exchange economies and loss exposure experiments exchange economies were created in which individuals faced losses if people are risk seeking in the losses as predicted by prospect theory then due to the nonconvexity the competitive equilibria are all on the boundaries of the edgeworth box the experimental results are that risk seeking behavior is observed in many people and appears in markets as predicted in addition market behavior is consistent with answers to hypothetical questionnaires contrary to prospect theory risk seeking seems to diminish with experience preferences in the market setting are not labile and risk seeking preferences are not simply a result of framing effects copyright 1997 by american economic association

heterogeneous agents and the implications of the markowitz model of utility for multi prize lottery tickets abstract the purpose in this letter is to demonstrate employing two parametric forms of the markowitz model of utility that heterogeneity of preferences of markowitz agents can contribute towards an explanation of why lotteries typically have multiple rather than single prizes

determining the social cost of carbon under damage and climate sensitivity uncertainty this article quantifies the impact on optimal climate policy of both damage elasticity and equilibrium climate sensitivity uncertainty under separable preferences for risk and intergenerational inequality the primary findings are as follows 1 such preferences can depress the social cost of carbon scc when calibration aims at matching actual economic outcomes countering the prevailing view that the scc is greater with separable than with conventional entangled preferences 2 damage elasticity uncertainty has larger effects on climate policy than equilibrium climate sensitivity uncertainty even under high impact tail risk of the latter 3 risk aversion decisively strengthens optimal climate policy under joint damage and climate sensitivity uncertainty than with a single source of uncertainty alone indeed failing to account for the interaction between damage and climate sensitivity uncertainty underestimates the cost of climate change by more than us dollars 1 trillion

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

averting risk in the face of large losses bernoulli vs tversky and kahneman abstract prospect theory asserts that people display risk attraction in high probability losses but our subjects tend to avoid fair risks for large 30 to 90 high probability 80 real losses vindicating bernoulli s view that risk aversion is the dominant attitude

carbon prices for the next hundred years this paper examines the socially optimal pricing of carbon emissions over time when climate change impacts are unknown potentially high consequence events the carbon price tends to increase with income but learning about impacts or their absence decouples the carbon price from income growth the price should grow faster than the economy if the past warming is not substantial enough for learning the true long run social cost it grows slower than the economy as soon as the warming generates information about events that could have arrived but have not done so a quantitative assessment shows that the price grows roughly at the rate of the economy for the next 100 years

optimal taxes on fossil fuel in general equilibrium we analyze a dynamic stochastic general equilibrium dsge model with an externality through climate change from using fossil energy our central result is a simple formula for the marginal externality damage of emissions or equivalently for the optimal carbon tax this formula which holds under quite plausible assumptions reveals that the damage is proportional to current gdp with the proportion depending only on three factors i discounting ii the expected damage elasticity how many percent of the output flow is lost from an extra unit of carbon in the atmosphere and iii the structure of carbon depreciation in the atmosphere thus the stochastic values of future output consumption and the atmospheric co2 concentration as well as the paths of technology whether endogenous or exogenous and population and so on all disappear from the formula we find that the optimal tax should be a bit higher than the median or most well known estimates in the literature we also formulate a parsimonious yet comprehensive and easily solved model allowing us to compute the optimal and market paths for the use of different sources of energy and the corresponding climate change we find coal rather than oil to be the main threat to economic welfare largely due to its abundance we also find that the costs of inaction are particularly sensitive to the assumptions regarding the substitutability of different energy sources and technological progress

prospect theory much ado about nothing prospect theory is a paradigm challenging the expected utility paradigm one of the fundamental components of prospect theory is the s shaped value function the value function is mainly justified by experimental investigation of the certainty equivalents of prospects confined either to the negative or to the positive domain but not of mixed prospects which characterize most actual investments we conduct an experimental study withmixed prospects using for the first time recently developed investment criteria called prospect stochastic dominance psd and markowitz stochastic dominance msd we reject the s shaped value function showing thatat least 62 76 of the subjects cannot be characterized by such preferences we find support for the markowitz utility function which is a reversed s shaped function exactly the opposite of the prospect theory value function it is possible that the previous results supporting the s shaped value function are distorted because the prospects had only positive or only negative outcomes presenting hypothetical situations which individuals do not usually face and which are certainly not common in financial markets

optimum growth and carbon policies with lags in the climate system we study the optimal carbon tax in an economy in which climate change stemming from polluting non renewable resource affects the economy s growth potential our main contribution is to introduce and explore the natural time lag of the climate system between emissions and damages to capital accumulation in an endogenous growth setting this allows us to investigate how optimal climate policy and its interplay with climate dynamics affect long run growth and the transition of the economy towards it without pollution decay a higher speed of emissions diffusion steepens the growth profile of the economy with pollution decay this leads to lower short run but higher long run economic growth during transition poor understanding of the emissions diffusion process leads to suboptimal carbon taxes resource extraction and growth

the endowment effect and intertemporal choice a laboratory investigation we present a laboratory investigation of intertemporal choice i e elicited discount rates allowing for the influence of the endowment effect consistent with the previous literature we hypothesize that the endowment effect in an intertemporal choice setting results in substantially higher discount rates relative to when individuals treat the resources in question as found money our results support this hypothesis and our experimental design provides a new protocol for conducting choice experiments wherein the endowment effect is an important determinant of behaviour l effet de dotation et le choix inter temporel une analyse en laboratoire on presente une analyse en laboratoire de choix inter temporels i e de taux d escompte permettant a l effet de dotation de jouer selon les conventions dans la litterature specialisee on fait l hypothese que l effet de dotation dans un contexte de choix inter temporel resulte en des taux d escompte substantiellement plus eleves que quand les individus traitent les ressources comme de la monnaie trouvee les resultats supportent l hypothese et le design de l experience fournit un protocole pour mener des experiences de choix ou l effet de dotation est un determinant important du comportement

venture theory a model of decision weights several theories suggest that people replace probabilities by decision weights when evaluating risky outcomes this paper proposes a model called venture theory of how people assess decision weights it is assumed that people first anchor on a stated probability and then adjust this by mentally simulating other possible values the amount of mental simulation is affected by the absolute size of payoffs the extent to which the anchor deviates from the extremes of 0 and 1 and the level of perceived ambiguity concerning the relevant probability the net effect of the adjustment i e up or down vis i vis the anchor reflects the relative weight given in imagination to values above as opposed to below the anchor this in turn is taken to be a function of both individual and situational variables and in particular the sign and size of payoffs cognitive and motivational factors therefore both play important roles in determining decision weights assuming that people evaluate outcomes by a prospect theory value function kahneman and tversky 1979 and are cautious in the face of risk fourteen predictions are derived concerning attitudes toward risk and ambiguity as functions of different levels of payoffs and probabilities the results of three experiments are reported whereas only a subset of the model s predictions can be tested in experiment 1 all fourteen are tested in experiments 2 and 3 using hypothetical and real payoffs respectively several of the model s predictions are not supported in experiment 2 but almost all are validated in experiments 1 and 3 the failures relate to the exact nature of probability payoff interactions in attitudes toward risk and ambiguity for losses the theory and results are discussed in relation to other experimental evidence future tests of the theory alternative models of risky choice and implications of venture theory for explaining further phenomena

on the potential for observational equivalence in experiments on risky choice when a power value function is assumed we demonstrate theoretically and illustrate the implications of assuming power utility when the true function is of the expo power form empirical results can appear to be consistent with cumulative prospect theory when they are in fact generated from a markowitz model

income inequality consumption credit and credit risk in a data driven agent based model abstract the issue of income inequality occupies a prominent position in the research agenda of academic and policy circles alike especially after the crisis of 2008 due to its potential causal link with the development of credit bubbles and therefore the emergence of financial crises this paper examines the long run effect of income inequality on consumption consumer credit and non performing loans through the means of a data driven agent based model the data driven nature of the model enhances its ability to match historical series and thus makes it suitable for policy simulations tailored for specific economies the analysis indicates that higher income inequality has a detrimental impact on consumption and is associated with lower volumes of consumer credit however the ratio of non performing loans as a share of total loans seems to be independent of income inequality

ambiguity and underwriter decision processes this paper provides empirical evidence that risk and ambiguity affect underwriters decisions on pricing insurance a field study of primary insurance underwriters in a random sample of commercial property and casualty insurance companies reveals that premiums are significantly higher for risks when there is either ambiguity regarding the probability of a particular event occurring and or uncertainty about the magnitude of the resulting loss the paper suggests economic and organizational rationales for this behaviour and offers several explanations as to why insurers in a competitive market can charge higher prices for ambiguous risks which promise to yield excess profits in the long run

growth renewables and the optimal carbon tax optimal climate policy is investigated in a ramsey growth model of the global economy with exhaustible oil reserves an infinitely elastic supply of renewables stock dependent oil extraction costs and convex climate damages four regimes can occur depending on the initial social cost of oil being larger or smaller than that of renewables and depending on the initial oil stock being large or small we also offer some policy simulations for the first and second regime which illustrate that with a lower discount rate more oil is left in situ and renewables are phased in more quickly we identify the conditions under which the optimal carbon tax rises or decreases subsidizing renewables without a carbon tax induces more oil to be left in situ and a quicker phasing in of renewables but oil is depleted more rapidly initially the net effect on global warming is ambiguous abstract from author

the overvaluation of purchasing power parity abstract recent panel studies of purchasing power parity have reported strong evidence of mean reversion in real exchange rates however these studies fail to control for cross sectional dependence in the data this failure has dramatic consequences raising the significance level of tests with a nominal size of 5 percent to as much as 50 percent it is shown in this paper that controlling for cross sectional dependence no evidence against the random walk null can be found in panels of up to 64 real exchange rates this finding cannot be attributed to low power as there is ample power in panels of this size to reject the unit root null