the impact of possible climate catastrophes on global warming policy abstract recent studies on global warming have introduced the inherent uncertainties associated with the costs and benefits of climate policies and have often shown that abatement policies are likely to be less aggressive or postponed in comparison to those resulting from traditional cost benefit analyses cba yet those studies have failed to include the possibility of sudden climate catastrophes the aim of this paper is to account simultaneously for possible continuous and discrete damages resulting from global warming and to analyse their implications on the optimal path of abatement policies our approach is related to the new literature on investment under uncertainty and relies on some recent developments of the real option in which we incorporated negative jumps climate catastrophes in the stochastic process corresponding to the net benefits associated with the abatement policies the impacts of continuous and discrete climatic risks can therefore be considered separately our numerical applications lead to two main conclusions i gradual continuous uncertainty in the global warming process is likely to delay the adoption of abatement policies as found in previous studies with respect to the standard cba however ii the possibility of climate catastrophes accelerates the implementation of these policies as their net discounted benefits increase significantly

the home bias of the poor foreign asset portfolios across the wealth distribution abstract this paper documents how the share of foreign stocks in us household portfolios rises with the ratio of financial wealth to non financial income this is both because wealthier households are more likely to participate in foreign asset markets and because portfolio shares of participants increase with financial wealth but decrease with non financial income a simple standard two country general equilibrium model shows that hedging of terms of trade movements and non financial income risk produces non trivial heterogeneity in portfolios across the wealth and income distribution within countries that is qualitatively in line with this evidence

the greenhouse effect damages costs and abatement the buildup of so called greenhouse gases in the atmosphere co2 in particular appears to be having an adverse impact on the global climate this paper briefly reviews current expectations with regard to physical and biological effects their potential costs to society and likely costs of abatement for a worst case scenario it is impossible to assess in economic terms the full range of possible non linear synergistic effects in the most favorable although not necessarily likely case of slow paced climate change however it seems likely that the impacts are within the affordable range at least in the industrialized countries of the world in the third world the notion of affordability is of doubtful relevance making the problem of quantitative evaluation almost impossible we tentatively assess the lower limit of quantifiable climate induced damages at 30 to 35 per ton of co2 equivalent worldwide with the major damages being concentrated in regions most adversely affected by sea level rise the non quantifiable environmental damages are also significant and should by no means be disregarded the costs and benefits of 1 reducing cfc use and 2 reducing fossil fuel consumption as a means of abatement are considered in some detail this strategy has remarkably high indirect benefits in terms of reduced air pollution damage and even direct cost savings to consumers the indirect benefits of reduced air pollution and its associated health and environmental effects from fossil fuel combustion in the industrialized countries range from 20 to 60 per ton of co2 eliminated in addition there is good evidence that modest e g 25 reductions in co2 emissions may be achievable by the u s and by implication for other countries by a combination of increased energy efficiency and restructuring that would permit simultaneous direct economic benefits savings to energy consumers of the order of 50 per ton of co2 saved a higher level of overall emissions reduction possibly approaching 50 could probably be achieved at little or not net cost by taking advantage of these savings we suggest the use of taxes on fossil fuel extraction or a carbon tax as a reasonable way of inducing the structural changes that would be required to achieve significant reduction in energy use and co2 emissions to minimize the economic burden and create a political constituency in support of the approach we suggest the substitution of resource based taxes in general for other types of taxes on labor income real estate or trade that are now the main sources of government revenue while it is conceded that it would be difficult to calculate the optimal tax on extractive resources we do not think this is a necessary prerequisite to policy making in fact we note that the existing tax system has never been optimized according to theoretical principles and is far from optimal by any reasonable criteria

it s not now or never implications of investment timing and risk aversion on climate adaptation to extreme events abstract public investment into risk reduction infrastructure plays an important role in facilitating adaptation to climate impacted hazards and natural disasters in this paper we provide an economic framework to incorporate investment timing and insurance market risk preferences when evaluating projects related to reducing climate impacted risks the model is applied to a case study of bushfire risk management we find that optimal timing of the investment may increase the net present value npv of an adaptation project for various levels of risk aversion assuming risk neutrality while the market is risk averse is found to result in an unnecessary delay of the investment into risk reduction projects the optimal waiting time is shorter when the insurance market is more risk averse or when a more serious scenario for climatic change is assumed a higher investment cost or a higher discount rate will increase the optimal waiting time we also find that a stochastic discount rate results in higher npvs of the project than a discount rate that is assumed fixed at the long run average level

option value empirical evidence from a case study of recreation and water quality a procedure for measuring option value and other preservation values of water quality is developed and applied to a case study area in the south platte river basin colorado benefits from water based recreation activities are the focus of the study the results provide an empirical test and confirmation of weisbrod s proposal that option value and other preservation values represent important social benefits and should be added to the aggregate consumer surplus of recreation activities to determine the total benefit of environmental amenities to society in the absence of such an estimate insufficient resources would be allocated by society to preservation of unique environments such as pristine mountain streams where mineral and energy development may irreversibly degrade water quality

the experience curve option value and the energy paradox abstract this paper develops a model to explain the energy paradox the inclination of households and firms to require very high internal rates of return in order to make energy saving investments the model abstracts from many features of such investments to focus on their irreversibility the uncertainty of their future payoff streams and the investor s anticipation of future technological advance in this setting the decision to invest in energy saving technology can be delayed providing option value in addition delay allows the potential investor to cash in on future experience curve effects with the passage of time firms gain practical knowledge in producing and installing the energy saving technology enabling them to reduce the technology s up front cost per unit of energy saved we incorporate these fundamentals into a stochastic model where the investment s discounted benefits follow geometric brownian motion to demonstrate the model s capabilities we generate simulation results for photovoltaic systems that highlight the experience curve effect as a fundamental reason why households and firms delay making energy saving investments until internal rates of return exceed values of 50 and higher consistent with observations in the economics literature we also explore altruistic motivations for energy conservation and the model s implications for both additionality and the design of energy conservation policy

applying real options in investment decisions relating to environmental pollution abstract this study focuses on how to assess the optimal environmental investment decisions under economic and ecological uncertainty and establishes the continuous time model using the real option approach to optimize environmental pollution policy unlike traditional cost benefit analysis this work extends the model of pindyck r s 2002 optimal timing problems in environmental economics journal of economic dynamics and control 26 9 10 1677 1697 and attempts to identify the storage threshold of pollution stocks and the optimal timing for implementing environmental pollution decisions

trying to explain home bias in equities and consumption investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest a phenomenon called equity home bias in the absence of this bias investors would optimally diversify domestic output risk using foreign equities therefore consumption growth rates would tend to co move across countries even when output growth rates do not empirically however consumption growth rates tend to have a lower correlation across countries than do output growth rates a phenomenon i call consumption home bias in this paper i discuss these two biases and their potential relationship as suggested by the literature

double co2 and beyond benefits costs and compensation abstract economic decisions over what action if any to take concerning the greenhouse effect tend to revolve around the social discount rate implicitly the debate concerns how to attribute intertemporal weights to welfare and implies a moral stance that is rarely given explicit recognition refocusing on the outcomes of current actions emphasises the role of compensation a conflict is apparent between the view that the current generation need be unconcerned over the loss or injury caused to future generations because they will benefit from advances in technology investments in both man made and natural capital and direct bequests and the requirement to avoid harming the innocent changes in units of welfare cannot be viewed as equivalent regardless of their direction in general doing harm is not cancelled out by doing good the result is a rejection of the potential compensation principle which underlies the current economic stance and a reconsideration of the acceptability of compensation altogether the concept of human rights and a non utilitarian perspective are used to show how cost benefit analysis denies the existence of inalienable rights and economics limits the moral considerability of harm

consequences of a carbon tax on household electricity use and cost carbon emissions and economics of household solar and wind abstract the study was conducted to determine the consequences of a carbon tax equal to an estimated social cost of carbon of 37 2 mg on household electricity cost and to determine if a carbon tax would be sufficient to incentivize households to install either a grid tied solar or wind system u s department of energy hourly residential profiles for five locations 20 years of hourly weather data prevailing electricity pricing rate schedules and purchase prices and solar panel and wind turbine power output response functions were used to address the objectives two commercially available household solar panels 4 kw 12 kw two wind turbines 6 kw 12 kw and two price rate structures traditional meter smart meter were considered averaged across the five households the carbon tax is expected to reduce annual consumption by 4 4 552 kwh year for traditional meter households and by 4 9 611 kwh year for households charged smart meter rates the carbon tax increases electricity cost by 19 202 year for a household cost of 202 year the carbon tax is expected to reduce social costs by 11 annual carbon tax collections of 234 household are expected adding the carbon tax was found to be insufficient to incentivize households to install either a solar panel or wind turbine system installation of a 4 kw solar system would increase the annual cost by 1546 247 and decrease co 2 emissions by 38 2526 kg valued at 94 household the consequence of a carbon tax would depend largely on how the proceeds of the tax are used

quasi option value some misconceptions dispelled abstract we discuss a couple of important issues in the recent literature on quasi option value we show that the assertion that quasi option value can be negative in a model with independent learning is based on confusion between quasi option value which is always positive and the net benefit of preservation of a natural environment subject to development which is not we also explore the significance of different assumptions about the nature of learning and show that the result that quasi option value is positive is surprisingly robust

the changing climate of climate change economics climate change economics is now four decades old much of what it has achieved as a field of academic enquiry can be linked back to issues of integrated assessment modelling this paper shows that the standard approach is going through a major change in scope as of the last five years the conventional focus on determining optimal mitigation paths based on modelling the social cost of carbon is being enlarged to embrace promising new waves of research these are 1 the economics of insurance against catastrophic risks 2 the economics of trade and climate and 3 the economics of climate change adaptation the paper helps to bridge the gap between economics and climate policy by showing that the analytical toolkit of climate change economics has shifted towards more realistic representations of climatic policy

home bias in equity portfolios inflation hedging and international capital market equilibrium we test whether the home bias in equity portfolios is caused by investors trying to hedge inflation risk the empirical evidence is consistent with this motive only if investors have very high levels of risk tolerance and equity returns are negatively correlated with domestic inflation we then develop a model of international portfolio choice and equity market equilibrium that integrates inflation risk and deadweight costs using this model we estimate the levels of costs required to generate the observed home bias in portfolios consistent with different levels of risk aversion for a level of risk aversion consistent with standard estimates of the domestic equity market risk premium these costs are about a few percent per annum greater than observable costs such as withholding taxes thus the home bias cannot be explained by either inflation hedging or direct observable costs of international investment unless investors have very low levels of risk aversion article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

the sign and size of option value we adapt the theoretical state preference model to value nonmarket public goods under individual uncertainty about use illustrating with an assessment of willingness to pay to prevent acid rain lake damage in the northeast united states individual

the option value of renewable energy the case of climate change decision makers receive mixed signals from the investment literature on when it is appropriate to develop renewable energy technology substitutes for fossil fuels this question is becoming more important as attention has become focused on climate change with the assumptions that information is revealed as time passes and the new technologies take a long time to develop renewable energy alternatives are more attractive than they appear on the basis of the net present value criterion that ignores option value option value represents the value of flexibility to use or discard new technologies

management of transnational commons coordination publicness and treaty formation this paper focuses on the formation of treaties to manage transnational commons when efforts must be coordinated among a minimal sized group so as to make cooperation worthwhile by focusing on mixed strategy equilibria we are con cerned with instances where the intentions of others are uncertain the number of required participants the pattern of payoffs transaction costs and the underlying technology of public supply aggregation are key factors behind the achievement of coordina tion we apply our analysis to explain the outcome of negotiations on stratospheric ozone depletion global warming acid rain and tropical deforesta tion jel q20 d70

valuing non market valuation studies using meta analysis a demonstration using estimates of willingness to pay for water quality improvements abstract a common refrain in the environmental economics literature is the need for additional estimates of environmental and natural resource values yet economists have paid little formal attention to the value of information voi provided by non market valuation studies and whether this value justifies the cost we develop a novel voi model to quantify the benefit of non market valuation studies conducted to expand the body of value estimates in the literature and hence available for use in policy analyses the approach is designed to capitalize on information available through preexisting valuation meta data and can be applied to any valuation meta regression that is suitable to inform policy decisions we illustrate the approach for a prototype nationwide water quality improvement policy in the united states assuming that policy benefits are evaluated using benefit transfer based on a meta regression model of willingness to pay our results suggest that when evaluating nationwide water quality regulations with uncertain net benefits the voi from a typical water quality valuation study will almost certainly exceed the cost we also examine how voi varies with study design features and information gaps in the literature thereby illustrating how the approach can inform research priorities

a cost benefit analysis of slowing climate change there are many conflicting views regarding the true dimensions of the climate change problem often these viewpoints are based on different estimates of key parameters with little indication as to why parameter estimates vary so much and which ones might be the more reliable the prospects for a co ordinated strategy to tackle climate change appear dim little consensus has emerged for example regarding the costs of abating carbon emissions some take the view that considerable improvements in energy efficiency are available at negative cost by setting minimum efficiency standards for vehicles and domestic appliances e g mills et al 1991 others regard the macroeconomic costs of even small reductions in carbon emissions as substantial manne and richels 1993 in the judgement of other researchers a proportion of carbon emissions arise purely as a result of institutional failings either at a regional level in the subsidies paid to fossil fuel energy producers in the erroneous belief that this promotes economic growth shah and larsen 1994 in failure to deal with air pollution glomsrod et al 1992 and vehicle congestion in urban areas hughes 1994 or at a global level in failing to make appropriate transfers to those countries whose forests contain rich biodiversity which we would wish to preserve pearce 1991

the rhetorics of ecological economics since the early 1980s there has been a lively discussion about the rhetoric of economics ecological economists however so far have not tried to incorporate this discussion into their work this paper is a first step towards including the discourse on rhetoric into the self awareness of ecological economics after a brief outline of what this discourse is about the importance of metaphors as one aspect of rhetoric is examined connections of the rhetorical discourse to ecological economics as a post normal science are shown it is argued that two rhetorics of ecological economics can be distinguished internal and external rhetoric while the former refers mostly to methodological issues the latter is of particular importance for the political impact that ecological economics can have finally some suggestions for research are made

regulatory actions under adjustment costs and the resolution of scientific uncertainty food system regulators often decide whether to ban existing practices or approve new technologies without conclusive scientific evidence on possible damage and knowing that resolution is likely in the future in a model with three decision points and stochastic resolution of uncertainty we study interactions between expected losses due to regulation and information availability when a regulator is deciding on an early reversible ban and on a later reversible ban adjustment costs create inertia concerning intermediate signals such that earlier decisions are not overturned and also a bias against imposing an early ban the prospect of more later stage information can increase or decrease the incentive to ban early but research decreases the incentive to ban early

energy projects in iceland advancing the case for the use of economic valuation techniques to evaluate environmental impacts decision making in iceland has occurred without reference to economic valuations of the environmental impacts of energy projects environmental impact assessments a legal requirement for nearly all energy projects in iceland since 1994 have played an important role in identifying the environmental impacts of energy projects and proposing mitigation measures however a purely qualitative description of environmental impacts is insufficient to ensure that they are accounted for equivalently with all of the other costs and benefits of a proposed project instead as monetary information concerning the welfare gains or losses of proposed projects is not currently required to be provided to the licensing body orkustofnun there is the potential for sub optimal decision making to occur as this paper sets out a broad variety of non market valuation techniques already exist and could be applied to estimate the value of environmental benefits sacrificed to accommodate such developments these methods and their outcomes could be incorporated within mandatory cost benefit assessments for proposed icelandic energy projects communicating an estimate of the full welfare implications of approvals to decision makers and the public alike and fulfilling an oecd demand for the country to commence such processes

the economics of controlling stock pollutants an efficient strategy for greenhouse gases abstract optimal control theory is applied to develop an efficient strategy to control stock pollutants such as greenhouse gases and hazardous waste the optimal strategy suggests that at any time the marginal costs of abatement should be equated with the present value of the marginal damage of timely unabated emission the optimal strategy calls for increasingly light abatement over time as the pollutant stock accumulates the optimal policy applied to greenhouse gases suggests moderate abatement efforts at present with the potential for much greater future efforts

optimal climate policy is a utopia from quantitative to qualitative cost benefit analysis abstract the dominance of quantitative cost benefit analysis cba and optimality concepts in the economic analysis of climate policy is criticised among others it is argued to be based in a misplaced interpretation of policy for a complex climate economy system as being analogous to individual inter temporal welfare optimisation the transfer of quantitative cba and optimality concepts reflects an overly ambitious approach that does more harm than good an alternative approach is to focus the attention on extreme events structural change and complexity it is argued that a qualitative rather than a quantitative cba that takes account of these aspects can support the adoption of a minimax regret approach or precautionary principle in climate policy this means implement stringent ghg reduction policies as soon as possible

do trade costs in goods market lead to home bias in equities abstract two of the main puzzles in international economics are the consumption and the portfolio home biases we solve for international equity portfolios in a two country two good stochastic equilibrium model with trade costs in goods markets we show that introducing trade costs as suggested by obstfeld and rogoff obstfeld m rogoff k 2000a the six major puzzles in international macroeconomics is there a common cause nber macroeconomics annual 15 is not sufficient to explain these two puzzles simultaneously on the contrary we find that trade costs create a foreign bias in portfolios for reasonable parameter values this result is robust to the addition of non tradable goods for standard calibrations of the preferences

the determinants of cross border equity flows abstract we explore a new panel data set on bilateral gross cross border equity flows between 14 countries 1989 1996 we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions gross transaction flows depend on market size in source and destination country as well as trading costs in which both information and the transaction technology play a role distance proxies some information costs and other variables explicitly represent information transmission an information asymmetry between domestic and foreign investors and the efficiency of transactions the geography of information is the main determinant of the pattern of international transactions while there is weak support in our data for the diversification motive once we control for the informational friction we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings

environmental services as a strategy for sustainable development in rural amazonia abstract rural amazonians especially indians extractivists and other forest dwellers desperately need something that they can sell sale of material commodities taken from the rainforest is the focus of most attempts to encourage sustainable development for these populations but the mother lode waiting to be tapped is not a material commodity but rather the forest s environmental services converting services like biodiversity maintenance carbon storage and water cycling into monetary flows that can support a population of forest guardians requires crossing a series of hurdles reliable quantification of the magnitude of services being offered is a first necessity how to convert forest environmental services into an income stream and how to convert this stream into a foundation for sustainable development in rural amazonia is a great challenge effort should be focused on tapping environmental services as a long term strategy for maintaining both rainforest and its population in addition to progressing toward long term goals immediate measures are needed to support the population and to avoid further loss of forest

mutual funds flows and the geography of contagion abstract this paper studies the dynamics and geography of investments made by international mutual funds located in advanced markets i identify precise global and regional dynamics in equity and bond flows very few countries receive or lose funding in isolation i also find strong evidence of global contagion when financial conditions in developed markets change emerging markets funding is heavily affected i illustrate this finding by deriving contagion maps showing where contagion spreads and with what intensity in general the results suggest that push effects from advanced market investors affect massively developing countries and expose them to sudden stops and surges

the eclectic paradigm of international production a restatement and some possible extensions this article reviews some of the criticisms directed towards the eclectic paradigm of international production over the past decade and restates its main tenets the second part of the article considers a number of possible extensions of the paradigm and concludes by asserting that it remains a robust general framework for explaining and analysing not only the economic rationale of economic production but many organisational and impact issues in relation to mne activity as well

when black meets green a review of the four pillars of india s energy policy abstract india is one of the most important global players in the energy sector in terms of production and consumption the way in which the country shapes its energy policy not only affects india itself but also the global climate action on the one hand india led by pm narendra modi declares the commitment to pro climate actions including the enhancement of the energy efficiency and renewable capacity on the other hand the development of india s conventional energy sector coal was indicated as one of the reasons for the us exit from the paris agreement this dilemma lead to a discussion on the shape of india s energy policy seen from the climate s standpoint in this context the article discusses the pillars of india s energy policy presented by modi in 2016 the main energy pillars access efficiency sustainability and security are juxtaposed with the previous indian strategic documents concerning the energy sector including electricity national electricity policy of 2005 draft national energy policy of 2017 a climate energy policy analysis is extended by legal comments on indian energy law as a result the article draws a picture of india s energy policy and climate agenda in black conventional energy and green renewable capacity colours

cooperation and subgame perfect equilibria in global pollution problems with critical threshold the paper examines the issue of international pollution control under a dynamic framework involving heterogeneous countries and a critical threshold we propose an appealing specification for this type of problem and its novelty is illustrated by the fact that countries use linear strategies in equilibrium although their utility and damage functions are highly convex the stock of pollution under cooperation is always lower surprisingly emissions are always higher in distant periods under the cooperative scenario and we show through examples that this is a significant finding rather than some marginal effect it is also shown that the efficient allocation of pollution abatement is driven only by the respective technologies of the countries finally a dynamic transfer scheme allowing to implement the cooperative solution is proposed

stress testing the equity home bias a turnover analysis of eurozone markets abstract shifts in equity turnover happen on and around holidays because rationally bounded investors become distracted their pattern reveals a persistent equity home bias even in the eurozone a stress test case for the survival of this bias given the high level of economic and financial development and integration in this area the bias is greater for small caps because investors are reluctant to hold this class of foreign asset our study corroborates calendar anomalies in trading volumes but refutes the hypothesis regarding turnover sensitivity to stock returns common in the empirical and theoretical literature based on investor heterogeneity and short sale constraints our results reveal vanishing cost asymmetries in taking long rather than short positions

flexibility learning and irreversibility in environmental decisions a bayesian approach the bayes decision is characterized and studied for a two period decision problem involving a proposed resource development project it is assumed that development is irreversible and that expectations about benefits and costs during the second period vary with experiences resulting from the first period action the amount and types of learning achieved depend upon the particular action taken during the first period flexible sequential decision procedures are compared with fixed once and for all decisions it is shown that under this specification optimal development decisions are not necessarily more conservative when a sequential procedure is used the possibility of reneging on a fixed decision is formally specified and studied

an optimal greenhouse tax in an optimal growth model in the past several years economists have developed a body of research concerning optimal economic policy in response to the possibility of global warming due to greenhouse gas ghg emissions contributors include nordhaus 9 10 11 12 poterba 14 manne and richels 8 cline 1 jorgenson slesnick and wilcoxen 6 goulder 3 4 gaskins and weyant 2 in this paper we attempt to assist policy makers who face the practical problem of estimating the magnitude of the socially optimal initial greenhouse gas tax and the corresponding magnitude of emission control to do this we adapt the optimal growth framework developed by nordhaus 12 in his dice model to investigate the initial optimal tax and emissions control as well as their evolution over a long planning horizon we perform sensitivity analysis not included in his monograph

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

political regimes and economic growth arguments that relate regimes to growth focus on property rights pressures for immediate consumption and the autonomy of dictators while everyone seems to agree that secure property rights foster growth it is controversial whether democracies or dictatorships better secure these rights the main mechanism by which democracy is thought to hinder growth is pressure for immediate consumption which reduces investment only states that are institutionally insulated from such pressures can resist them and democratic states are not the main argument against dictatorships is that authoritarian rulers have no interest in maximizing total output these views are summarized in turn

home bias in open economy financial macroeconomics standard theory would predict that investors hold a well diversified portfolio of equities across the world but despite the process of financial globalization investors still hold a disproportionate share of local equities in their portfolio the equity home bias french and poterba 1991 we review the various explanations of this puzzling phenomenon in the context of recent developments in macroeconomic modelling that have allowed to incorporate sophisticated international portfolio choices in standard two country general equilibrium models we refer to this literature as open economy financial macroeconomics we focus on three broad classes of explanations i hedging motives in frictionless financial markets real exchange rate and non tradable income risk ii asset trade costs in international financial markets such as transaction costs differences in tax treatments between national and foreign assets iii informational frictions and behavioural biases these recent developments raise the need for new portfolio facts beyond the equity home bias and we will present some new evidence on cross border asset holdings across different types of assets equities bonds and bank lending we also present some new micro data on institutional holdings of equity at the fund level these data should inform macroeconomic modelling of the open economy and a growing literature of models of delegated investment

managing risks from climate impacted hazards the value of investment flexibility under uncertainty abstract incomplete knowledge about climate change and the related uncertainty in climate prediction makes adaptation inherently difficult we introduce a real options framework to determine the optimal adaptation to catastrophic risk that takes into account climate change uncertainty the framework can be used to select the optimal adaptation project from a number of alternative projects or to determine the optimal investment sequence of the considered projects in applying the model to the management of bushfire risk at a local government area we find that the framework can significantly increase the value of adaptation investment above the current net present value and also improve upon deterministic dynamic models we also find that it is important to consider sequential investment to preserve investment flexibility under the uncertainty of climate change when decision makers can afford multiple investment projects the loss associated with the use of a simple net present value rule can be substantial and it is important to use a deterministic dynamic model or a real options model

a sketch of the economics of the greenhouse effect over the last decade scientists have studied extensively the greenhouse effect which holds that the accumulation of carbon dioxide co2 and other greenhouse gases ghgs is expected to produce global warming and other significant climatic changes over the next century see stephen schneider 1989 the present study presents an economic approach for analyzing policies to slow climate change

quasi option value and climate policy choices in the climate change issue the environmental irreversibility risk of an acceleration of mitigation policies if the worst happens has to be balanced with the investment irreversibility risk of over cautious policies to explore this balance we define an option value for a precautionary climate policy using the simplest decision making model we expose how option value relates to the expected value of future information using quantitative data from an integrated assessment model we find that most of the time the environmental irreversibility dominates the investment irreversibility for all cases explored here the order of magnitude of the option value was significant about 50 of the opportunity cost

information and the concept of option value this paper examines the arrow fisher henry concept of option value and analyzes its properties including its relationship to the value of information and the effects of increasing uncertainty about the future consequences of irreversible development it is shown that this option value is distinct from but bounded by the value of information in the overall decision problem also it is distinct from a concept of option value that appears in b s bernanke quart j econom 98 85 106 1983 however when there is a continuum of development levels rather than a binary choice between full development and no development some of these conclusions need to be modified

institutional investors and long term investment evidence from chile developing countries are trying to develop long term financial markets and institutional investors are expected to play a key role this paper uses unique evidence on the universe of institutional investors from the leading case of chile to study to what extent mutual funds pension funds and insurance companies hold and bid for long term instruments and which factors affect their choices the paper uses monthly asset level portfolios to show that despite the expectations mutual and pension funds invest mostly in short term assets relative to insurance companies the significant difference across maturity structures is not driven by the supply side of debt or tactical behavior instead it seems to be explained by manager incentives related to short run monitoring and the liability structure that combined with risk factors tilt portfolios toward short term instruments even when long term investing yields higher returns thus the expansion of large institutional investors does not necessarily imply longer term markets

nonuse values in benefit cost analysis benefit cost analysis bca is a pragmatic realization of the theory of welfare economics much of the research associated with bca has sought to expand the types of benefits that can be measured in dollar terms with this research there has been a progressive movement of goods and services from the set without measures usually designated as intangibles in bca terminology to the set with for example the recreational services provided by projects associated with dams for hydroelectric power or flood control were regarded as intangible until the development of the travel cost model for estimating the demand for outdoor recreation sites one of the current frontiers in bca research is associated with modeling and measuring nonuse benefits in contrast to the past efforts with intangibles research on this topic has remained controversial with few direct effects on the practice of applied welfare economics there are two principal reasons for this outcome first there has not been an accepted set of definitions for nonuse benefits and second applied studies with empirical estimates of nonuse benefits have until recently been non existent clearly these problems are related a consistent set of definitions is a necessary prerequisite for empirical implementation i will argue that consistent definitions for nonuse benefits have been elusive because the conceptual frameworks used in the literature to describe its primary components option value and existence values are not mutually consistent in the process of demonstrating this result i will describe the elements of a consistent framework for treating both use and nonuse benefits and apply it in explaining some of the problems with the available empirical estimates of nonuse benefits

imperfect financial integration and asymmetric information competing explanations of the home bias puzzle this paper shows that imperfect financial integration and informational asymmetries are not competing theories but rather complementary ideas to a single explanation of the home bias puzzle we develop a rational expectations model of asset prices with investors that face informational constraints and find that informational advantages arise endogenously as a response to small financial frictions we also present empirical evidence that i international financial frictions are correlated to observed patterns of us investors attention and that ii the attention us investors allocate to foreign stocks helps explain home bias towards those countries even after controlling for financial integration levels ce memoire montre que l integration financiere imparfaite et l information asymetrique ne sont pas des theories concurrentes mais plutot des idees complementaires a l interieur d une resolution unifiee de l enigme du biais en faveur du marche domestique on developpe un modele d anticipations rationnelles des prix des actifs face a des investisseurs confrontes a des contraintes informationnelles et on decouvre que les avantages informationnels emergent de maniere endogene en reponse a de petites frictions financieres on montre empiriquement que i les frictions financieres internationales sont co reliees aux patterns d attention observes des investisseurs des etats unis et que ii l attention portee par les investisseurs americains aux marches financiers etrangers aide a expliquer le biais en faveur du marche domestique de ces pays meme apres avoir pris en compte les niveaux d integration financiere

excess returns and official intervention some cross country evidence this paper presents a simple model of foreign exchange market intervention which shows that such intervention introduces positive structure into exchange rate changes evidence linking this structure to observable filter rule profits is also provided

accounting for global warming risks resource management under event uncertainty abstract optimal management of atmospheric pollution is discussed with a special emphasis on the uncertainty concerning the occurrence of undesirable events associated with the greenhouse effect the uncertainty considered here stems from our ignorance of the exact pollution level required to trigger the event rather than from the genuinely stochastic nature of the processes involved taking atmospheric pollution level as the state variable it is found that uncertainty implies the existence of an equilibrium interval within which the emission rate of the greenhouse gases should be kept equal to the natural removal rate of these gases processes initiated outside the equilibrium interval must converge monotonically to its nearest endpoint the determination of the interval requires no knowledge of the optimal policy in contrast ignoring event occurrence risk implies a single equilibrium level attracting the optimal process from any initial level

public economics as if time matters climate change and the dynamics of policy abstract tony atkinson played a crucial role in shaping modern public economics but throughout his life challenged whether we were making the right assumptions and were building models which captured the essence of the issues under examination this paper examines questions discussed with tony concerning public policy to foster change where the pace and nature of change are critical to any serious policy assessment the primary example is climate change the paper argues that subjects such as the dynamics of innovation of potentially immense and destabilising risks and of political economy together with technicalities around non linearities and dynamic increasing returns all of which are at the heart of the challenge of climate change will require a series of focused models for their investigation attempts to build integrated assessment models iams for the analysis of climate change have been largely misplaced and omit key effects and questions of the above kind intertemporal issues and values are at the core of policy towards climate change and the paper shows that much of the intertemporal economic analysis of the issues around climate change has been misguided and has ridden roughshod over the analytical underpinnings and the underlying ethics of discounting where major decline is possible discounting is fiercely endogenous and where capital markets are imperfect and risk intense discount rates cannot be read off from markets notwithstanding the modelling difficulties and the challenging research agenda the paper argues that the urgency of the problem for example world infrastructure will double in the next 15 20 years and there are major dangers of lock in of dirty and damaging capital require strong action and we know enough about policy to begin travelling down the path of an attractive low carbon transition

a general model for co2 regulation the case of denmark abstract for both economic political and administrative reasons a mixed design of permit market bubble and tax may be preferable for co 2 regulation in the case of denmark a co 2 market should be introduced for the private manufacturing sector and an administratively set co 2 bubble should be introduced for the public electricity sector permits should then be devaluated in year 2005 by 20 a co 2 tax should be correctly set at a level of 50 in year 2005 for households the transportation sector and private firms not participating in the co 2 market this model may guide future energy policies in other countries as well

home bias at the fund level this paper presents new stylized facts on the distribution of the home bias at the fund level we find i a large heterogeneity in the degree of home bias across mutual funds ii a positive correlation between the size of funds and home bias and iii a positive correlation between the size of funds the number of foreign countries and the number of sectors in which they invest these facts constitute a challenge for existing theories this abstract was borrowed from another version of this item

information immobility and the home bias puzzle many argue that home bias arises because home investors can predict home asset payoffs more accurately than foreigners can but why does global information access not eliminate this asymmetry we model investors endowed with a small home information advantage who choose what information to learn before they invest surprisingly even when home investors can learn what foreigners know they choose not to investors profit more from knowing information others do not know learning amplifies information asymmetry the model matches patterns of local and industry bias foreign investments portfolio outperformance and asset prices finally we propose new avenues for empirical research

uncertainty capital flows and maturity mismatch abstract this paper explores a how the financial uncertainty generated by volatile international capital flows interacts with maturity mismatch on the balance sheets of nonfinancial firms to increase the volatility of output investment and total factor productivity tfp in emerging market economies i build a model of a small open economy in which financial frictions force firms to fund long term projects with short term debt in response to changes in the level of uncertainty regarding the availability of foreign borrowing firms adjust their long term investment contributing to the volatility of investment and output as well as generating endogenous fluctuations in aggregate productivity using data from a panel of major emerging markets i show that the volatility of portfolio debt flows negatively affects output by dampening investment while the volatility of equity flows which do not generate maturity mismatch has no effect consistent with the mechanism in the model the negative impact of capital flow volatility is larger at low levels of financial development and in industries with longer time to build lags my estimates imply that shocks to capital flow volatility account for one fifth of the excess output volatility of the emerging markets in my sample relative to a set of small open advanced economies

the economics of sequential choice applied to quasi option value abstract this paper develops a general model that can be used to determine the value of sequential forecasts the model is used 1 to examine the interacting effects of strategies for coping with environmental uncertainty and 2 to explore the relationship between the theories of sequential choice and quasi option value the framework presented bridges these two schools of thought and provides a tool for evaluating one time e g climate change or repetitive e g pollution forecasts of environmental damage

buying greenhouse insurance the economic costs of carbon dioxide emission limits in recent years a growing concern that the increasing accumulation of greenhouse gases will lead to undesirable changes in global climate has resulted in a number of proposals both in the united states and internationally to set physical targets for reducing greenhouse gas emissions but what will these proposals cost based on the authors earlier ground breaking work buying greenhouse insurance outlines a way to think about greenhouse effect decisions under uncertainty it describes an insightful model for determining the economic costs of limiting carbon dioxide emissions produced by burning fossil fuels and provides a solid analytical base for rethinking public policy on the farreaching issue of global warming manne and richels present region by region estimates of the costs that would underlie an international agreement using a computer model known as global 2100 they analyze the economic impacts of limiting c02 emissions under alternative supply and conservation scenarios the results clearly indicate that a reduction in emissions is not the sole policy response to potential climate change following a summary of the greenhouse effect its likely causes and possible consequences manne and richels take up issues that concern the public at large they provide an overview of global 2100 look at how the u s energy sector is likely to evolve under businessas usual conditions and under carbon constraints and describe the concept of greenhouse insurance they consider possible global agreements including an estimate of benefits that might result from trading in an international market in emission rights they conclude with a technical description directed toward modeling specialists alan manne is professor of operations research at stanford university richard richels is director of the energy analysis and planning department at the electric power research institute

george bush versus al gore irreversibilities in greenhouse gas accumulation and emission control investment abstract this paper investigates the fundamental problem of mitigating the impacts of climate change in an environment of uncertainty and learning in particular the paper uses a stochastic version of nordhaus s dice model to show that the irreversibility of investment capital has a stronger effect than irreversibilities in climate change other than catastrophic effects the implications are that if abatement decisions are irreversible there should be less emission control today than would be optimal without taking learning into account and that policy makers should pursue control policies that are costlessly reversible a variant on the no regrets strategy

option value a conceptual overview the importance of nonuser benefits to the process of efficiently allocating natural environments was first emphasized by krutilla 15 a decade and a half ago one of the components of these nonuser benefits is option value originally introduced by weisbrod 23 as relevant for assets that might be difficult to reproduce option value has been the subject of considerable debate perhaps the simplest approach to explaining the meaning of option value is to use an example consider an individual who is uncertain whether he or she will consume the services of a particular asset in the future furthermore assume this individual is also uncertain whether the asset will be available in the future should he

induced effects and technological innovation with strategic environmental policy abstract this paper investigates an environmental policy designed to reduce the emission of pollutants under uncertainty where the agents problem is formulated as an optimal stopping problem we first analyze the single agent s case according to pindyck pindyck r s 2002 optimal timing problems in environmental economics journal of economic dynamics and control 26 1677 1697 we then extend the model to the case in which there are two competing agents therefore we consider the external economic effects that are peculiar to an agent s environmental policy decision finally we consider the effect of technological innovation the results of the analysis suggest that if there are two competing agents they implement environmental policy simultaneously furthermore the threshold for implementing environmental policy is higher when there are two agents and how long these two agents take to implement environmental policy depends on the magnitude of the external economic effect furthermore when we consider the effect of technological innovation we show that the incentive to be the leader occurs if an additional condition is satisfied

an overlapping generations model of climate economy interactions a numerically calibrated overlapping generations model of climate change and the world economy is examined in this paper in the absence of intergenerational transfers efficient rates of greenhouse gas emissions abatement rise from 16 in the present to 25 in the long run while mean global temperature increases by 7 40c relative to the preindustrial norm a utilitarian optimum which attaches equal weight to each generation s life cycle utility yields abatement rates that rise from 48 to 89 with a long run temperature increase of 3 40c a second best utilitarian path in which intergenerational transfers are by assumption institutionally infeasible also supports stringent abatement measures i introduction the infinitely lived agent framework pioneered by frank ramsey 1928 has emerged as a central structure in the economics of climate change as characterized by ipcc 1996 working group iii climate change occurs when anthropogenic emissions of greenhouse gases principally carbon dioxide but also chlorofluorocarbons methane nitrous oxide and water vapor contribute to long term increases in mean global temperature potentially disrupting ecological systems and climate dependent production activities the best known study on the economics of this subject is nordhaus 1994 dynamic model of climate and the economy dice which incorporates assumptions regarding the costs and benefits of greenhouse gas emissions in a standard one sector growth model in nordhaus analysis a 50 reduction in greenhouse gas emissions would reduce gross world output by 0 93 a doubling of greenhouse gas concentrations relative to the preindustrial norm which is expected to occur by the middle of the twenty first century would reduce output by

trend analysis of energy and climate policy environment comparative electricity production and consumption benchmark analyses of china euro area european union and united states abstract this study conducts a reality check on the electricity production and electricity consumption trends in china in the u s and in the euro area and in the eu most of our analyses cover years 1961 2011 the data is based on the world bank s database with supplementary iea database 2013 in this article we perform various trend analyses which are linked to electricity production and consumption developments these regions are major players in global climate change and climate policy our trend analyses indicate in many ways that china is now a global trend setter in climate change and climate policy upwards sloping trends were evident in the chinese energy economy however u s and the eu are still very important players trend analyses of this article indicate that the structures of electricity production and energy mixes are changing our benchmarking studies indicate that the role of renewables is increasing in electricity production and the role of oil based electricity production has drastically decreased the golden age of nuclear energy in electricity production seems to be over at least turning points can be found in trend developments empirical trade off analyses of the study verified conventional research results about high linear correlation coefficients regression models between electricity production and gdp as well as between population and gpd in all regions correlation coefficients measure the strength of association between two variables what was interesting is that our comparative analyses revealed some remarkable differences in linear regression equation coefficients one of them was that the coefficient between population and electricity production is much lower in china than in the u s or in the eu second finding was that the coefficient of the regression model describing linear relationship between gdp and electricity production is highest in china in comparison to the other regions

optimal investment in ecological rehabilitation under climate change ecological rehabilitation is subject to a variety of risks affecting the likely return on investment we propose an options approach to allocating scarce conservation funds that explicitly allows for the irreversibility of investment and risks to investment payoffs the approach captures ecosystem dynamics from extinction debt as well as ecological and climatic risks at the project scale climatic risks are introduced through three channels the effects of climate change on species loss future rehabilitation benefits and frequency of catastrophic events our results suggest that allocating voluntary rehabilitation contracts on the basis of real options criteria increases cost efficiency and delivers greater value for money for the government when compared with the conventional cost effectiveness criterion as it is illustrated for the case of box gum grassy woodland rehabilitation in australia

targets for global climate policy an overview a survey of the economic impact of climate change and the marginal damage costs shows that carbon dioxide emissions are a negative externality the estimated pigou tax and its growth rate are too low to justify the climate policy targets set by political leaders a lower discount rate or greater concern for the global distribution of income would justify more stringent climate policy but would imply an overhaul of other public policies catastrophic risk justifies more stringent climate policy but only to a limited extent

long term risk management of nuclear waste a real options approach in this paper we investigate the optimal timing for deep geological disposal of nuclear waste our model is based on the real options approach to investment under uncertainty in this context the problem is similar to the optimal exercise policy for a perpetual american spread option the potential usefulness of such a model for actual decision making on a sensitive issue is illustrated by some numerical simulations

the nobel memorial prize for william d nordhaus william d nordhaus and paul m romer received the 2018 sveriges riksbank prize in economic sciences in memory of alfred nobel this paper surveys nordhaus contributions on integrating climate change into long run macroeconomic analysis for which he was recognized with this prize

from polygyny to serial monogamy a unified theory of marriage institutions consider an economy populated by males and females both rich and poor the society has to choose one of the following marriage institutions polygyny strict monogamy and serial monogamy divorce and remarriage after having identified the conditions under which each of these equilibria exists we show that a rise in the share of rich males can explain a change of regime from polygyny to monogamy the introduction of serial monogamy follows from a further rise in either the proportion of rich males or an increase in the proportion of rich females strict monogamy is a prerequisite to serial monogamy as it promotes the upward social mobility of females more than polygyny we also show that polygyny is compatible with democracy

rise of the fiduciary state a survey of sovereign wealth fund research we survey the literature documenting the rise of sovereign wealth funds swfs which with assets under management of over 5 4 trillion at year end 2014 are a major force in global finance research papers have analyzed the evolution of swfs from stabilization funds to stand alone wealth management funds we both survey this research and show that more than 25 countries have launched or proposed new swfs since january 2008 the most salient and controversial feature of swfs is that they are state owned we survey the existing literature on state ownership and discuss what this predicts about the efficiency and beneficence of government control of swf assets we discuss the documented importance of swf funding sources oil sales revenues versus excess reserves from export earnings and survey the normative literature describing how swfs should allocate funds we then summarize the empirical literature studying how swfs actually do allocate funds across asset classes geographically and across industries we document that most swf equity investments in publicly traded firms involve cross border purchases of sizeable minority stakes median around 20 in target firms with a strong preference for investments in the financial sector next we assess empirical studies examining the impact of swf stock investments on target firm financial and operating performance and find universal support for a positive announcement period stock price increase of 1 3 this however is significantly lower than the 5 abnormal return documented for stock purchases by comparable privately owned financial investors in recent studies indicating a sovereign wealth fund discount we conclude by summarizing the lessons of swf research and pointing out unresolved issues

the puzzling evolution of the home bias information processing and financial openness abstract this paper explains the home equity bias and its puzzling evolution in a model where investors face an information constraint and have an initial local informational advantage after financial liberalization local investors have a magnified informational advantage since information processed under autarky remains useful after liberalization a gradual shift towards foreign assets occurs as the relevance of autarkic information declines over time in the long run home bias remains large due to the interaction between information and portfolio choices empirical evidence supports the main predictions of our model namely that bias increases with information capacity and decreases with financial openness

evaluating u s oil security and import reliance abstract we examine the literature that considers the consequences of u s reliance on imported oil we take an approach that covers many ideas about the costs arising from u s reliance on imported oil and we identify which of those ideas have broad support in the economics literature and which ideas have only limited support we also quantify the costs of u s reliance on imported oil using two approaches one is fairly narrow conforms to the economics view of externalities and yields small cost estimates the other is relatively expansive is favored by some policy analysts and yields much larger cost estimates we estimate these costs as expected u s economic losses over a time horizon from 2010 through 2035 while taking into account world oil market conditions market power probable oil supply disruptions and the oil market response to those supply disruptions

assessment of european union transition scenarios with a special focus on the issue of carbon leakage this paper uses the model gemini e3 to simulate and assess the transition scenario to 2020 framed by the european union in its energy climate directive and it raises several issues in this connection after a brief description of the model the paper presents the results of the scenarios mainly the values of the major indicators of carbon price both in the ets and in non ets sectors and the welfare cost of the eu policy under the various configurations considered while it is independent of the scenario in the ets sector in the non ets sector the value of carbon is very sensitive to the provisions of the directive and in particular the option of resorting to the flexibility mechanisms the welfare cost also varies significantly according to scenarios and its value for the entire eu is more than double in the scenario closest to the directive as compared to the least cost one the paper also addresses the very sensitive issue of carbon leakage and argues in favor of a new concept of net leakage the analysis shows that while carbon leakage may affect some specific sectors at the aggregate level it does not represent a real concern with a magnitude of at most a few percent of ghg abatement by annex b countries

home bias risk differential and cultural spatial spillover effects abstract this paper aims to uncover the role of heterogeneity and spillover effects of return and risk on home bias associated with common background characteristics of trading countries we adopt a spatial panel model to utilize uniquely created weight matrices and capture the spatial spillover effects of the common background characteristics a modified definition of home bias is used to explore the role of market risks associated with the common characteristics of cross border portfolio flows in an international portfolio balance model using annual panel data of 17 countries spread over three different regions i e asia europe and others for the 2002 2012 period evidence strongly supports our hypothesis that the effects of the return and risk differentials of trading countries on home bias depend on the correlation of each of the common characteristics with return and risk

the damage costs of climate change towards a dynamic representation economic assessments of climate change impacts are commonly presented as the effect of a climate change associated with a doubling of the atmospheric concentration of carbon dioxide on the current economy this paper is an attempt to express impact as a function of both climate change and socio economic change with regard to climate change issues discussed are level versus rate of change speed of adaptation speed of restoration and value adjustment and symmetry with regard to socio economic change agriculture migration and the valuation of intangible losses are addressed uncertainty and higher order impacts are treated briefly it is qualitatively argued and quantitatively illustrated that these issues matter a great deal for the damage profile over the next century a damage model based on my best guesses is presented in the appendix

short term decisions under long term uncertainty the behaviour of future policy makers substantially influences future greenhouse gas emissions uncertainty about the motives of future policy makers may thus strongly influence the climate policy strategies of current policy makers analytical and numerical analyses in this paper confirm this hypothesis if current policy makers want to constrain emissions accumulated over a prolonged period of time and if future policy makers tend with a certain chance to a less ambitious climate policy then current policy makers should intensify their efforts to reduce emissions and the cost of emission reduction in this setting if current policy makers want to meet a cumulative emission contraint in expectation then the preferred policy trajectory does not qualitatively deviate from one suggested by a standard cost effective trajectory if however the constraint is to be met with a certain probability then the importance of early action is enhanced relative to that of postponed action costs substantially increase if current policy makers want to set long term goals without the full cooperation of future policy makers