addressing leakage in the eu ets border adjustment or output based allocation the eu ets has been criticised for threatening the competitiveness of european industry and generating carbon leakage i e increasing foreign greenhouse gas emissions two main options have been put forward to tackle these concerns border adjustments and output based allocation i e allocation of free allowances in proportion to current production we compare various configurations of these two options as well as a scenario with full auctioning and no border adjustment against this background we develop a model of the main sectors covered by the eu ets electricity steel cement and aluminium we conclude that the most efficient way to tackle leakage is auctioning with border adjustment which generally induces a negative leakage a spillover this holds even if the border adjustment does not include indirect emissions if it is based on eu rather than foreign specific emissions or for some values of the parameters if it covers only imports another relatively efficient policy is to combine auctioning in the electricity sector and output based allocation in exposed industries especially if free allowances are given both for direct and indirect emissions i e those generated by the generation of the electricity consumed although output based allocation is generally less effective than border adjustment to tackle leakage it is more effective to mitigate production losses in the sectors affected by the ets which may ease climate policy adoption c 2011 elsevier b v all rights reserved

reforms of environmental policies in the presence of cross border pollution and public private clean up we construct a two country model where pollution from production is transmitted across borders pollution abatement is undertaken by both private producers and the public sector we characterize nash optimal levels of the policy instruments in the two countries emission taxes and funds allocated for public abatement activities we examine the implications of a number of multilateral policy reforms one of our findings is that the magnitude of the beneficial effect of a reform depends on the scope of the reform if it is restricted to a subset of policy instruments then the efficacy of environmental policy reform can be greatly undermined

punishment strategies in repeated games evidence from experimental markets abstract an experiment is designed to provide a snapshot of the strategies used by players in a repeated price competition game with a random continuation rule one hundred pairs of subjects played the game over the internet with subjects having a few days to make their decisions in each round occasionally subjects are asked to enter one period ahead pricing strategies instead of prices according to the elicited strategies between 90 and 95 of subjects punish less harshly in their initial response to a deviation than implied by the grim trigger strategy and do so in a way that depends on the size of the other subject s deviation future earnings are highest for subjects adopting the tit for tat strategy even after controlling for a subject s past earnings punishment strategies are generally softer and more graduated than implied by a grim trigger strategy and do better as a result

the limits of competition housing insurance in switzerland abstract in switzerland there are seven cantons where the housing insurance market is competitive while in the 19 others there are local state monopolies this paper compares the price performance relationship of these different market forms it is shown that for a very similar product the state monopolies charge 70 lower prices that they spend substantially more on fire prevention and that they have much lower damage rates one of the main reasons for the higher prices of the private insurance companies is the fact that they spend considerably more on sales and administrative costs the housing insurance market is thus a classic example of a situation where state monopoly outperforms private sector competition

should a carbon tax be differentiated across sectors abstract if some but not all countries are cooperating to reduce co2 emissions one could make the following argument a high carbon tax for carbon intensive tradeable sectors in the cooperating countries will reduce the production of goods from these sectors and therefore co2 emissions in the cooperating countries however this will to a large extent be counteracted by increased production of such goods in the countries that have no climate policy and since it is only total co2 emissions from all countries that are relevant for the climate there is no point in a policy that simply relocates co2 emissions from the cooperating countries to the countries that have no climate policy according to this line of reasoning carbon intensive tradeable sectors should thus face a lower carbon tax than other sectors of the economy this paper shows that a carbon tax should not be differentiated across sectors in the economy provided one can use import and export tariffs on all traded goods it is also shown that such a differentiation of carbon taxes is optimal for the cooperating countries if they are prevented from using tariffs on the traded goods however informational or political factors constraining the use of tariffs are likely also to constrain the possibility of differentiating carbon taxes between sectors

tariffs versus quotas in the presence of imperfect competition and cross border externalities we consider trade policies intended to affect the production of a foreign monopolist that generates negative externalities we derive the optimal tariff and optimal import quota and examine which policy measure should be used to maximize domestic welfare we find that if the domestic government does not have full information on the foreign firm s production method and if cross border externalities exist import quotas are in some cases preferable to tariffs otherwise however tariffs are preferable to quotas jel classification f13 f18 droits de douane versus contingentements quand il y a concurrence imparfaite et effets externes trans frontaliers les auteurs examinent les politiques commerciales qui veulent affecter la production d un monopoleur etranger qui engendre des effets externes negatifs on definit le droit de douane optimal et le contingentement optimal des importations et on determine quelle politique devrait etre utilisee pour maximiser le niveau de bien etre au niveau national il appert que si le gouvernement national n a pas une information complete sur les methodes de production de la firme etrangere et si les effets externes traversent les frontieres un contingentement des importations est preferable dans certains cas a des droits de douanes autrement cependant les droits de douane constituent la solution preferable

endogenous international joint ventures and the environment abstract this paper examines the welfare effects of emission taxes under a choice between an international joint venture jv and a full ownership fdi foreign direct investment by parent firms from a developed country the north and a developing country the south as well as their location and share decisions if the south has a poor abatement technology its best policy is to impose a relatively high emission tax to attract a full ownership fdi if it has a good abatement technology the best policy is to impose a relatively low emission tax to attract the jv furthermore deregulation of foreign ownership of the jv improves the quality of the environment

pure strategy nash equilibrium in a group formation game with positive externalities abstract this paper identifies a domain of payoff functions in no spillover noncooperative games with positive externality which admit a pure strategy nash equilibrium since in general a nash equilibrium may fail to exist in order to guarantee the existence of an equilibrium we impose two additional assumptions anonymity and order preservation the proof of our main result is carried out by constructing for a given game g a potential function over the set of strategy profiles in such a way that the maximum of yields a nash equilibrium in pure strategies of g journal of economics literature classification numbers c72 d62 h73

equilibrium pollution taxes in open economies with imperfect competition abstract this paper argues that imperfect competition in global markets creates a strategic interaction between governments that can lead to the inefficient distortion of pollution taxes this distortion can be decomposed into a rent capture effect and a pollution shifting effect the rent capture effect lowers equilibrium taxes as each country attempts to gain a competitive advantage over its trading partner and thereby capture foreign rent through net exports the pollution shifting effect raises equilibrium taxes as each country attempts to transfer production and its associated pollution to the other country this effect vanishes if pollution is perfectly transboundary because shifted pollution causes as much damage to the domestic environment as does domestic pollution the net effect on symmetric equilibrium taxes is negative except in the special case of perfect competition with no transboundary pollution in this case the two effects are mutually offsetting and the nash equilibrium is efficient when pollution is at least partially transboundary there also arises the usual transboundary externality and this reinforces the negative net strategic effect giving rise to equilibrium taxes that are lower than what is globally efficient

international trade and environmental quality a survey abstract international trade has been incorporating various aspects of environmental issues since 1970 the extent to which environmental problems might affect many facets of trade or vice versa has been the subject of considerable debate over these years in this article we have attempted to establish some of the links between international trade and environmental quality by performing a comprehensive literature review we discuss issues such as establishing direct and indirect effects of international trade on environmental quality effects of trade on economic development environmental quality and energy and their relation with each other and finally the role of governments and international organizations in this context studies have so far revealed some linkages between trade and environment through conventional trade theory however interactions between international trade and types of pollution their sink and assimilative capacity need to be analyzed using a general equilibrium approach currently very little knowledge and agreement on the nature of interactions between trade theories development process and environmental quality exist existing studies have shown that the structure of environmental regulations should be modified to reflect the existence of trade under imperfect competition therefore further research on the interaction between new trade theory and environmental regulation is needed also theoretical and quantitative analysis regarding the effects of environmental regulations on competitiveness and location decision is needed the intensity and type of environmental measures vary across issues and countries therefore harmonizing environmental measures creates an inefficient atmosphere and to assume that trade restrictions will either improve or reverse the environmental damages is a serious mistake given the dynamic and intricate nature of the problem trade and environment debate continues despite vast research and poses a challenge for researchers and policy makers in the foreseeable future

pricing and capital allocation in catastrophe insurance abstract this paper studies multi line pricing and capital allocation by insurance companies when solvency matters to consumers capital is costly to hold and the average loss is uncertain in this environment product quality concerns lead firms to diversify across markets and charge high prices for risk that threatens company solvency even if the risk is unrelated to other asset risk price differences across markets are traced to differences in capital required at the margin to maintain solvency finally the paper shows that capital costs have significant effects on catastrophe insurance markets because of high marginal capital requirements

the efficiency cost of protective measures in climate policy despite recent achievements towards a global climate agreement climate action to reduce greenhouse gas emissions remains quite heterogeneous across countries energy intensive and trade exposed eite industries in industrialized countries are concerned on stringent domestic emission pricing that puts them at a competitive disadvantage against producers of similar goods in other countries with more lenient emission regulation this paper focuses on climate policy design in the united states of america us and compares the economic implications of four alternative protective measures for us eite industries i output based rebates ii exemptions from emission pricing iii energy intensity standards and iv carbon intensity standards using a large scale computable general equilibrium model we quantify how these protective measures affect competitiveness of us eite industries we find that protective measures can improve common trade related competitiveness indicators such as revealed comparative advantage or relative world trade shares but at the same time may lead to a decline in the output value for eite industries because of negative income effects the economy wide cost of emission abatement under protective measures increase as compared to uniform emission pricing stand alone such that the gains of protective measures for eite exports may be more than compensated through losses in domestic eite demand

coordinating climate and trade policies pareto efficiency and the role of border tax adjustments abstract this paper explores the role of trade instruments in globally efficient climate policies focusing on whether or not some form of border tax adjustment bta is warranted when carbon prices differ internationally the analysis shows that while there is no case for bta when all instruments can be freely deployed pareto efficiency does require a form of bta when carbon taxes in some countries are constrained its purpose then is to partly counteract the impact on emissions of inappropriate carbon pricing there or equivalently to undo the trade distortions such pricing creates the required form of bta is generally complex but a special case is identified in which it optimally has the simple structure envisaged in practical policy discussions it is also shown that the efficiency case for bta depends critically on whether climate policies are pursued by carbon taxation or by cap and trade

on the design of optimal grandfathering schemes for emission allowances to meet its commitment under the kyoto protocol the eu plans to implement an emissions trading system whith grandfathering of allowances besides having distributional impacts the choice of the grandfathering scheme may affect efficiency if firms anticipate how future allocations depend on upcoming decisions in this paper we determine central design rules for optimal grandfathering within a simple two period model we find that for small open trading systems where allowance prices are exogenous first best second period grandfathering schemes must not depend on firm specific decisions in the first period second best schemes correspond to a ramsey rule of optimal tax differentiation and are generally based on both previous emissions and output however ofr closed emissions trading systems i e endogeneous allowance prices firstand second best rules coincide and must not depend on previous output levels they consist of an assignment proportional to the emissions in the first period plus a term which does not depend on firm specific decisions in either of the two periods

international trade and the environment policy reform in a polluted small open economy abstract this paper investigates sufficient conditions for welfare improving policy reforms in a small open economy facing many trade and pollution distortions we investigate and compare reform in tax regimes quota regimes and mixed regimes where some pollutants are regulated with taxes and others with quotas it is also shown that the welfare benefits of reforming pollution policy are greater in an economy with international factor mobility than in an economy not subject to such mobility

on the effects of unilateral environmental policy on offshoring in multi stage production processes in the last decades supply chains emerged that stretch across many countries this has been explained with decreasing trade and communication costs we extend the literature by analyzing if and how unilateral environmental regulation induces offshoring to unregulated jurisdictions we first apply an analytical partial equilibrium model of a two stage production process that can be distributed between two countries and investigate unilateral emission pricing and its supplementation with border carbon taxes to get a more comprehensive picture we subsequently apply a computable general equilibrium model that includes a better representation of international supply chains we find heterogeneous but mostly positive effects of a unilateral carbon emission reduction by the european union on the degree of vertical specialisation of european industries and explain these differences by heterogeneity in the emission intensity and pre policy vertical specialisation of sectors border taxes are successful in protecting upstream industries but with negative side effects for downstream industries

tariffs and the adoption of clean technology under asymmetric information this paper examines the effect of a tariff on the decision of a foreign monopolist to adopt clean technology which reduces the flow of a negative cross border externality the clean technology increases the marginal cost of production relative to the dirty technology but only the firm knows the extent of the increase under complete information despite its protectionist motivation the importing country s optimal tariff induces the firm to adopt the clean technology if and only if it is globally efficient to do so under incomplete information this efficiency property is disrupted and the firm biases its choice in favour of dirty technology jel classification f13 f18 ce memoire examine l effet d un tarif douanier sur la decision d un monopoleur etranger d adopter une technologie qui reduise le flux d effets externes negatifs a travers la frontiere la technologie propre accroit le cout marginal de production par rapport a ce qu il serait avec une technologie salissante mais seule l entreprise connait la taille de cet accroissement en regime d information complete malgre ses motivations protectionnistes le tarif optimal du pays importateur entraine l entreprise a adopter la technologie propre si et seulement si c est globalement efficient de le faire en regime d information incomplete cette propriete est perturbee et l entreprise tend a faire ses choix en faveur de la technologie salissante

subgame perfect reaction function equilibria in discounted duopoly supergames are trivial abstract this paper is concerned with infinitely repeated duopoly games with discounting a question which has been open since friedman s rev econ stud 35 1968 257 272 reaction function article is settled for a general class of games the question is wheter nontrivial reaction function equilibria can be subgame perfect this question is answered in the negative such equilibria must be trivial in the sense of prescribing the stage game noncooperative equilibrium actions in every period independent of prior history

trade transboundary pollution and foreign lobbying in this paper we explore the use of trade policy in addressing transboundary stock pollution problems such as acid rain and water pollution we show that a tariff determined by the current level of accumulated pollution can induce the time path of emissions optimal for the downstream polluted country but if the upstream polluting country can lobby the downstream government to impose lower tariffs distortions brought by corruption and foreign lobbying lead to a rise in the upstream country s social welfare and to a decrease in social welfare in the downstream country thus the usefulness of trade policy as a tool for encouraging cooperation and internalizing transboundary externalities depends critically on the degree of governments susceptibility to foreign political influence

repeated contests a general parameterization abstract contests often involve players vying for the same prize year after year this paper characterizes equilibrium effort both individual and aggregate in a general parameterization of such repeated contests

environmental and resource economics a canadian retrospective the paper reviews research contributions to environmental and resource economics by scholars in canada we focus mainly on work from the past 25 years but also highlight earlier pathbreaking work we begin by looking at broad trends in research both internationally and within canada we then review canadian contributions to various topics in the field canadians have played a leading role in the development of the field especially in resource economics international environmental economics and the valuation of environmental amenities

plant location wind direction and pollution policy under offshoring we examine pollution policy in a unified three country framework with the country in the middle playing double roles as both a polluter and a victim we find that government preference over profits and consumer surplus to be important and so is environmentalism in particular the most downwind country has the least incentives to control pollution under oligopoly several additional undesirable scenarios may arise due to the interaction between wind direction and the incentive trade offs in rent shifting and pollution control we analyse the mechanisms behind and provide policy guidance

asymmetric information in insurance general testable implications several recent articles on empirical contract theory and insurance have tested for a positive correlation between coverage and ex post risk as predicted by standard models of pure adverse selection or pure moral hazard we show here that the positive correlationproperty can be extended to general setups competitive insurance markets and cases where risk aversion is public we test our results on a french dataset our tests confirm that the estimated correlation is positive they also suggest the presence of market power

price regulation in property liability insurance a contingent claims approach a discrete time option pricing model is used to derive the fair rate of return for the property liability insurance firm the rationale for the use of this model is that the financial claims of shareholders policyholders and tax authorities can be modeled as european options written on the income generated by the insurer s asset portfolio this portfolio consists mostly of traded financial assets and is therefore relatively easy to value by setting the value of the shareholders option equal to the initial surplus an implicit solution for the fair insurance price may be derived unlike previous insurance regulatory models this approach addresses the ruin probability of the insurer as well as nonlinear tax effects

non trivial subgame perfect duopoly equilibria can be supported by continuous reaction functions abstract this paper demonstrates that non trivial subgame perfect duopoly equilibria can be supported by continuous reaction functions when previous period actions of both firms are arguments of reaction functions continuity imposes essentially no restrictions on the set of equilibria

externalities in international trade the case for differential tariffs abstract this paper examines the economic justification for the use of differential tariffs to control for positive and negative externalities embodied in traded products in particular economic efficiency requires that taxes and subsidies should be applied to internalize external costs or benefits it is argued that products such as timber minerals and agricultural products that produce large negative environmental externalities should be differentially tariffed to either provide an incentive to cease destructive practices or provide funding for amelioration examples from the mining and agricultural sectors are used to demonstrate the magnitude of tariffs required to offset the estimated environmental damage products with embedded cultural content are used as examples of exports that may possess positive externalities and should be subject to a subsidy

unilateral climate policy with production based and consumption based carbon emission taxes this paper characterizes a sub global climate coalition s unilateral policy of reaching a given climate damage reduction goal at minimum costs following eichner and pethig j environ econ manag 2013 we set up a two country two period model in which one of the countries represents a climate coalition that implements a binding ceiling on the world s first period emissions the other country is the rest of the world and refrains from taking action the coalition can make use of production based carbon emission taxes in both periods as in eichner and pethig j environ econ manag 2013 but here we consider consumption based carbon emission taxes as an additional instrument the central question is whether and how the coalition employs the consumption based taxes along with the production based taxes in its unilateral cost effective ceiling policy all cost effective policies identified analytically and numerically consist of a mix of both types of taxes implying that there is a tax mix which is less expensive for the coalition than stand alone consumption based or stand alone production based taxes with full cooperation both taxes are perfect substitutes in our model but in case of unilateral action they are imperfect substitutes because coalition s total welfare loss from two different but moderate distortions is smaller than that from a single but severe distortion

tariffs and environmental taxes in the presence of environmental r d it is generally held that trade liberalization results in less stringent environmental regulations which suggests that policies regulating trade and the environment are positively correlated this paper examines whether this monotonic relationship still holds true when pollution reducing environmental research and development erd ii an environmental tax instrument only and iii both regulatory instruments to correct for distortions relating to trade and the environment we find that if it is not possible to abate pollution completely through er d then the monotonic relationship between tariffs and environmental taxes is sustained however if it is possible to fully abate pollution through er d then the optimal tariff environmental tax may not increase monotonically with taxes tariffs when both environmental taxes and tariffs are employed these two policies may be strategic substitutes a positive relationship between tariffs and environmental taxes may not be applicable

up the average cost curve inefficient entry and the new protectionism abstract a two country model is developed in which each country produces one good with increasing returns the goods being perfect or imperfect substitutes with cournot nash behavior and free entry certain restrictive trade policies have effects opposite to their favorable effect under noentry assumptions import tariffs and export subsidies lead to inefficient entry that raises rather than decreases the average production cost of and price charge by the domestic industry with negative welfare consequences we argue that these predictions of our model are closely consistent with extensive canadian data on entry exit and firms responses to trade liberalization

greenhouse gas emission controls and firm locations in north south trade this paper studies greenhouse gas emission ghg controls in the presence of international carbon leakage through international firm relocation in a new economic geography model with two countries north and south only north sets a target for ghg emissions we compare the consequences of emission quotas and emission taxes under trade liberalization on location of two manufacturing sectors with different emission intensities and degrees of carbon leakage with low trade costs further trade liberalization increases global emissions by facilitating carbon leakage regulation by quotas leads to spatial sorting resulting in less carbon leakage and less global emissions than regulation by taxes

comment on what drives bank competition some international evidence the question of bank competition is vitally important for a number of reasons the essential role of bank credit and other financial services as an input in the production of most other goods and services places banks in a unique and influential position such that any allocative inefficiency or other market distortions in banking are almost certain to be felt throughout the economy moreover recent history has provided numerous instances where the textbook paradigm of atomistic competition has proven inadequate as a policy guide for efficient banking either because there are simply too few banks to rely on sheer numbers as a guarantee of vigorous competition as in canada or because of evidence that there can be such a thing as too much competition in banking as suggested by several studies or because of instances where nearly competitive pricing has been observed in markets containing only one or two banks or because conversely substantially noncompetitive pricing has sometimes been deduced in banking products such as credit cardswith thousands of suppliers thus the study of bank competition remains an urgent field of research claessens and laeven 2004 this issue of jmcb make two key contributions here first they extend a proven empirical method to an unprecedentedly large and varied crosscountry sample second they offer the logical and policy relevant additional step of seeking to identify factors associated with variations in measured conduct this step is needed to assess the empirical validity of the traditional structure conductperformance paradigm in their sample and is especially important where that paradigm is found lacking as a predictor of bank conduct indeed although the authors

cross border externalities and trade liberalization the strategic control of pollution the authors examine international trade in a commodity whose production creates a negative externality for the importing country and they consider the nations strategic policy choices when they can restrict trade and when they are bound by a free trade agreement when pollution abatement technology is available the exporting country induces its adoption despite national indifference to the externality in order to reduce the tariff in a free trade agreement environmental policy is used to exploit monopoly power in trade an alternative policy instrument a process standard is introduced national competition in controlling emissions leads to very restrictive antipollution measures we examine international trade in a commodity whose production creates a negative externality for the importing country and we consider the nations strategic policy choices when they can restrict trade and when they are bound by a free trade agreement when pollution abatement technology is available the exporting country induces its adoption despite national indifference to the externality in order to reduce the tariff in a free trade agreement environmental policy is used to exploit monopoly power in trade an alternative policy instrument a process standard is introduced national competition in controlling emissions leads to very restrictive anti pollution measures

between a rock and a hard place a trade theory analysis of leakage under production and consumption based policies without a comprehensive global climate agreement carbon leakage remains a contentious issue consumption based pricing of emissions which could in practice be implemented with a full border tax adjustment bta has been forwarded as an option to increase the effectiveness of unilateral climate policy this paper questions the economic rationale behind this approach using a theoretical 2 times 2 trade model in which leakage occurs through terms of trade effects we show analytically first that consumption based pricing of emissions does not necessarily result in less leakage than production based policies second the sign of the optimal unilateral carbon tariff depends on the carbon intensity differential between the foreign country s exporting and non exporting sectors and not on the differential between home s and foreign s exporting sectors as implied by the full bta approach third based on empirical data for the year 2004 our model implies that full bta applied by the european union on e g imports from and exports to china would by shifting china s production from the export sector with a relatively low carbon intensity towards the more carbon intensive non export sector actually increase leakage

greenhouse gas emission controls in an open economy to examine how greenhouse gas emission controls affect a country s industrial and trade structures this article presents an open economy model that has both ricardian and heckscher ohlin features we specifically compare emission quotas emission taxes and emission standards the patterns of production and trade critically hinge on those policy tools it is shown that a domestic emission control may lead to carbon leakage and may not reduce the world emissions and that emission standards may work as a hidden production subsidy toward an emission intensive industry

estimating welfare in insurance markets using variation in prices we provide a graphical illustration of how standard consumer and producer theory can be used to quantify the welfare loss associated with inefficient pricing in insurance markets with selection we then show how this welfare loss can be estimated empirically using identifying variation in the price of insurance such variation together with quantity data allows us to estimate the demand for insurance the same variation together with cost data allows us to estimate how insurers costs vary as market participants endogenously respond to price the slope of this estimated cost curve provides a direct test for both the existence and the nature of selection and the combination of demand and cost curves can be used to estimate welfare we illustrate our approach by applying it to data on employerprovided health insurance from one specific company we detect adverse selection but estimate that the quantitative welfare implications associated with inefficient pricing in our particular application are small in both absolute and relative terms

taxing consumption to mitigate carbon leakage this is a post print version of an article published in environmental and resource economics made available in accordance with the copyright policy of the journal publisher no commercial re distribution or re use is allowed this version may contain minor differences from the journal s pdf version

natural catastrophe insurance when should the government intervene this paper develops a theoretical framework for analyzing the decision to provide or buy insurance against the risk of natural catastrophes in contrast to conventional models of insurance the insurer has a non zero probability of insolvency which depends on the distribution of the risks the premium rate and the amount of capital in the company when the insurer is insolvent each loss reduces the indemnity available to the victims thus generating negative pecuniary externalities our model shows that government provided insurance will be more attractive in terms of expected utility as it allows these negative pecuniary externalities to be spread equally among policyholders however when heterogeneous risks are introduced a government program may be less attractive in safer areas which could yield inefficiency if insurance ratings are not chosen appropriately

the existence of nash equilibria in reaction functions for dynamic models of oligopoly consider cournot s stability analysis of his mineral spring duopoly cournot 1838 each of the two firms believes that its rival s output in the next period will simply equal that observed currently profit maximization yields reaction functions which are explicitly dynamic and are assumed to govern the actual evolution of the system cournot proved that the system is asymptotically stable in this simplest case cournot s result was shown by theocharis 1960 not to generalize to three or more firms fisher 1961 discusses more general cost and demand functions than those used by cournot even in the case considered by cournot however there is an obvious conceptual objection each firm s output will generally vary from one period to the next flagrantly violating its rival s conjecture some of james friedman s work especially 1968 1973 1976 and 1977 might best be viewed as an attempt to eliminate this delusional quality from dynamic models of oligopoly consider a typical duopoly scenario with two firms making repeated simultaneous quantity determinations friedman more commonly discusses price setting models but these are straightforwardly analogous each firm believes that the other firm s behavior is determined only by the quantity pair selected in the previous period in friedman s work as distinct from cournot s these beliefs are ultimately required to be consistent with the other firm s actual behavior for example firm 2 believes that firm l s output in the current period is given as

asymmetric tax policy responses in large economies with cross border pollution we build a model of cross border pollution between two large open economies one importing the polluting good and the other exporting it and derive their non cooperative trade and environmental tax policies we show among other things that 1 in response to a bilateral reduction in trade taxes by both countries the former country s optimal policy is to lower its nash emissions tax while the latter s is to raise it and 2 in response to an increase in emissions tax rates by both countries the former country s optimal reaction is to raise its nash import tariff while the latter s is to reduce its nash export tax that is in the present context freer trade leads the exporting country to adopt stricter while the importing country laxer environmental tax policies

comparing policies to combat emissions leakage border carbon adjustments versus rebates we explore conditions determining which anti leakage policies might be more effective complements to domestic greenhouse gas emissions regulation we consider four policies that could be combined with unilateral emissions pricing to counter effects on international competitiveness a border charge on imports a border rebate for exports full border adjustment and domestic output based rebating each option faces different potential legal hurdles in international trade law each also has different economic impacts while all can support competitiveness none is necessarily effective at reducing global emissions nor is it possible to rank order the options effectiveness depends on the relative emissions rates elasticities of substitution and consumption volumes we illustrate these results with simulations for the energy intensive sectors of three different economies the united states canada and europe although most controversial full border adjustment is usually most effective but output based rebating for key manufacturing sectors can achieve many of the gains

subgame perfect equilibrium with continuous reaction functions abstract earlier efforts by friedman examined infinite horizon oligopolies trying and failing to show existence of subgame perfect nash equilibria with the firms strategies being continuous reaction functions here in a typical game theoretic model with discounting we prove the existence of such equilibria the equilibrium strategies mimic trigger strategies in their method of operation but are continuous so that small defections from equilibrium actions result in small per period punishments we prove our results by constructing equilibria in a fashion analogous to that found in proofs of folk theorems in repeated games

rational insurance purchasing consideration of contract nonperformance much of the analysis of rational insurance purchasing and hedging strategies has been undertaken on the basis of the expected utility hypothesis this decision framework has been used to reformulate the bernoulli principle that a risk averter rationally would fully insure at a fair premium other applications include the analysis of insurance at unfair premiums mossin 1968 and smith 1968 the effects of state dependent utility on the rational insurance purchase cook and graham 1977 the effects of risky background wealth doherty and schlesinger 1983 and mayers and smith 1983 and the design of the optimal insurance policy raviv 1979 such analyses have been conducted on the assumption that insurance policies are free of insolvency default risk this assumption stands in sharp contrast to the actuarial literature in which the insolvency risk or probability of ruin is a central focus of attention

the transition from monopoly to competition the case of housing insurance in baden wurttemberg abstract in 1992 the european community decided to abolish the housing insurance monopolies in germany in baden wurttemberg this has led to the end of an institution that was more than two centuries old the purpose of the paper is to analyse the very negative consequences this step has had for consumers particular emphasis is placed on two points 1 a the important increase in prices due to the additional costs imposed by competition and 2 b the difficulty of maintaining the global coverage against natural damages that was one of the hallmarks of the monopoly situation

cross border pollution terms of trade and welfare we construct a two good general equilibrium model of international trade for two small open economies where pollution from production is transmitted across borders governments in both countries impose emission taxes non cooperatively within this framework we examine the effect of changes in the degree of cross border pollution on nash emission taxes emission levels and welfare we do so under two scenarios when changes in cross border pollution do not affect domestic pollution non strategic and when they do strategic we also examine the effect of changes in international terms of trade on pollution and welfare when cross border pollution is non strategic

tacit collusion with price matching punishments abstract tacit collusion is explored under a strategy in which loosely speaking firms match the lowest price set by any firm in the previous period conditions are provided under which this strategy supports collusive outcomes in a subgame perfect equilibrium in contrast to traditional results the highest collusive price is always lower than the monopoly price it corresponds to the unique nash equilibrium price when upward and downward price deviations are matched our paper provides a game theoretic interpretation of the old kinked demand curve theory which unlike earlier attempts does not depart from standard timing assumptions to do so

market discipline in property casualty insurance evidence from premium growth surrounding changes in financial strength ratings analysis of abnormal premium growth surrounding changes in financial strength ratings for a large panel of property casualty insurers generally indicates significant premium declines in the year of and the year following rating downgrades consistent with greater risk sensitivity of demand premium declines were concentrated among commercial insurance which has narrower guaranty fund protection than personal insurance premium declines were greater for firms with low pre downgrade ratings and especially pronounced for firms falling below an a rating there is no evidence of moral hazard in the form of rapid commercial or personal lines premium growth following downgrades of a or low rated insurers

the pricing of options with default risk this paper considers the pricing of options with default risk the comparative statics of such options can differ from those of ordinary options and early exercise of such american call options can be optimal several examples of options with default risk are considered traditionally it has been assumed that options have no default risk such an assumption is reasonable when one studies options traded on an organized exchange in the u s default on such options would require as cox and rubinstein 5 put it a very sudden and strong movement in stock prices one considerably more extreme than any on record p 71 however many options and financial assets containing option like payoffs are sold by firms that have limited assets for such options default is often a possibility that must be taken seriously in this paper we study how options subject to default risk which we hereinafter call vulnerable options are priced it turns out that many of the well established results of the option pricing literature see e g smith 12 and references therein do not hold for vulnerable options in particular the value of a vulnerable european option can fall with time to maturity with the interest rate and with the variance of the underlying asset furthermore it may pay to exercise early a vulnerable american option on a non dividend paying asset

buy coal and act strategically on the fuel market abstract a coalition of given size fights climate change by a policy of purchasing fossil fuel deposits and it seeks to manipulate the fuel price in its favor assuming that non signatories are price takers in the fuel market harstad 2012 designs a policy of trading deposits that attains efficiency despite the coalition s option to act strategically in the fuel market the deposit transactions constituting that policy include the trade of deposits which the non signatories would have exploited and the coalition will exploit the present paper shows that in a proper subset of economies a simpler policy is also efficient that consists of deposit purchases for preservation only in these economies the coalition is unable to raise its welfare above the level in the benchmark case of fuel price taking in the economies where the efficient policy requires deposit transactions for exploitation the coalition is better off and the non signatories are worse off than in case of price taking

on continuous reaction function equilibria in duopoly supergames with mean payoffs abstract continuous reaction function equilibria are studied in supergames in which the stage game resembles a standard duopoly game and the evaluation relations are according to the limit of the means it is proven that collusive i e single period game non nash equilibrium stationary outcomes are supported in subgame perfect equilibrium by linear reaction function pairs conversely it is shown that linear reaction equilibria are in essence typical in the class of subgame perfect continuous reaction equilibria further the multiple equilibrium problem of the folk theorem is shown to be significantly diminished in restricting attention to subgame perfect linear reaction equilibria

fire insurance in germany a comparison of price performance between state monopolies and competitive regions abstract up until 1994 there were two different forms of organizing the fire insurance market in germany while a state monopoly applied in 13 regions a competitive market system combined with government regulation existed in the rest of the country this study identifies the effects of market forms on the price performance of insurance companies it is based on annual company data including premium revenues damage payments and general expenses for the period 1980 1994 the estimation results indicate that monopolies had a 22 percent lower markup on damage payments compared to companies in competitive regions with an average markup of 42 percent the difference may be explained by higher selling costs for companies in competitive markets indicated by a high share of commissions in total expenses

optimal environmental border adjustments under the general agreement on tariffs and trade a country choosing to adopt border carbon adjustments based on embodied emissions is motivated by both environmental and strategic incentives we argue that the strategic component is inconsistent with commitments under the general agreement on tariffs and trade gatt we extend the theory of border adjustments to neutralize the strategic incentive and consider the remaining environmental incentive in a simplified structure the theory supports border adjustments on carbon content that are below the domestic carbon price because price signals sent through border adjustments inadvertently encourage consumption of emissions intensive goods in unregulated regions the theoretic intuition is supported in our applied numeric simulations countries imposing border adjustments at the domestic carbon price will be extracting rents from unregulated regions at the expense of efficient environmental policy and consistency with international trade law

regional carbon policies in an interconnected power system how expanded coverage could exacerbate emission leakage abstract interconnected regional electricity markets are often subject to asymmetric carbon policies with partial coverage for co2 emissions while the resulting problem of carbon leakage has been well studied its mitigation has received relatively less attention we devise a proactive carbon policy via a bi level modelling approach by considering the impact of an emission cap that limits the cost of damage from a regional power market in particular a welfare maximising policymaker sets the cap when facing profit maximising producers and the damage costs from their emissions at two nodes a partial coverage policy could degrade maximised social welfare and increase total regional co2 emissions with potential for carbon leakage due to a higher nodal price difference a modified carbon policy that considers co2 emissions from both nodes tightens the cap which increases maximised social welfare and decreases total co2 emissions vis a vis the partial coverage policy albeit at the cost of greater scope for carbon leakage as it causes nodal prices to diverge as a compromise an import coverage policy implemented by california that counts only domestic and imported co2 emissions could alleviate carbon leakage at the cost of lower maximised social welfare with higher total emissions vis a vis the modified coverage policy

output based rebating of carbon taxes in a neighbour s backyard competitiveness leakage and welfare we investigate how in an open economy carbon taxes combined with output based rebating obr perform in interaction with the carbon policies of a large neighbouring trading partner analytical results suggest that whether the purpose of the obr policy is to compensate firms for carbon tax burdens or to maximize welfare accounting for global emission reductions the obr rate should be positive in policy relevant cases numerical simulations for canada with the us as the neighbouring trading partner indicate that the impact of us policies on the obr rate will depend crucially on the purpose of the canadian obr policies if for a given us carbon policy canada s aim is to restore the competitiveness of domestic emission intensive and trade exposed eite firms to the same level as before the introduction of its own carbon taxation we find that the necessary domestic obr rates will be insensitive to the foreign carbon policies however if not only the canadian carbon tax but also an equally high us tax is introduced compensatory canadian obr rates will be up to 50 lower depending on the sector and on us obr policy if the policy objective is to increase economy wide allocative efficiency welfare of canadian policies by accounting for carbon leakage the us policies will have only a minor downward pressure on desirable obr rates in canada practical choices of obr rates hardly affect overall domestic economic performance thus output based rebating qualifies as an instrument for compensating eite industries without a large sacrifice in terms of economy wide allocative efficiency

sectors under scrutiny evaluation of indicators to assess the risk of carbon leakage in the uk and germany one of the central debates surrounding the design of the european union emissions trading scheme is the approach to address carbon leakage concerns correctly identifying the economic activities exposed to the risk of carbon leakage represents the first step in mitigating the risk effectively this paper assesses the robustness of the quantitative assessment criteria used by the european commission for phase 3 for example we apply the criteria to data for uk and germany and compare the results with the commissions assessment conducted at the aggregated eu level this reveals that sectors exposure risk to carbon leakage can vary across different member states due to differences in production processes technologies and fuel mix process emissions recycling rate differences product mix differences sector classification statistical boundaries activity allocation differences and finally difference in data quality overall we find that relative carbon intensity of sectors measured as cost increase relative to gross value added provides a robust metric the analysis also highlights the importance of using high quality and disaggregated data for this assessment

robust policies to mitigate carbon leakage abstract unilateral climate policy induces carbon leakage through the relocation of emission intensive and trade exposed industries to regions without emission regulation previous studies suggest that emission pricing combined with border carbon adjustment is a second best instrument and more cost effective than output based rebating we show that the combination of output based rebating and a consumption tax for emission intensive and trade exposed goods can be equivalent with border carbon adjustment moreover it is welfare improving for a region that implements emission pricing along with output based rebating to introduce such a consumption tax the welfare gain is particularly large if output based rebating is already implemented for a sector that is not much exposed to leakage e g due to uncertainty about exposure or due to lobbying activities thus supplementing output based rebating with a consumption tax constitutes robust policies to mitigate carbon leakage

free trade and global warming a trade theory view of the kyoto protocol this paper demonstrates how three important results in environmental economics true under mild conditions in closed economies are false or need serious amendment in a world with international trade in goods since the three results we highlight have framed much of the ongoing discussion and research on the kyoto protocol our viewpoint from trade theory suggests a re examination may be in order specifically we demonstrate that in an open trading world but not in a closed economy setting 1 unilateral emission reductions by the rich north can create self interested emission reductions by the unconstrained poor south 2 simple rules for allocating emission reductions across countries such as uniform reductions may well be efficient even if international trade in emission permits is not allowed and 3 when international emission permit trade does occur it may make both participants in the trade worse off and increase global emissions

pollution content tariffs environmental rent shifting and the control of cross border pollution this paper considers the optimal unilateral policy for a country that imports a good from a neighbouring country and is harmed by pollution generated during the production of that good if the foreign country has a variable abatement technology then home has an incentive to impose a tax on the pollution content of imports a pollution content tariff foreign regulation of pollution does not eliminate home s incentives to intervene but instead may create rent shifting opportunities by making the right to pollute a scarce asset foreign pollution quotas create rents that the home government can try to extract

transboundary pollution and the gains from trade we analyse the effects of transboundary pollution on trade patterns and welfare in a general equilibrium trade model production in a dirty industry generates pollution that negatively effects productivity both at home and abroad in a clean industry trade may lead to the spatial separation of production but the existence of transboundary pollution can offset the benefits from specialization we present a general model in which the effects of a country s pollution is country specific we analyse particular cases that correspond to an acid rain problem and a problem in which one country has a cleaner technology than the other we also present some results for small open economies to examine the effects of transboundary pollution in the absence of terms of trade effects

to b ta or not to b ta on the legality and desirability of border tax adjustments from a trade perspective this paper asks two questions concerning border tax adjustments for climate purposes when viewed from a trade perspective first under what conditions are btas possible in the wto world to address this issue the paper provides a detailed discussion of the relevant law and case law we also apply our main conclusions to what we consider to be paradigmatic cases of measures to address climate change where trade concerns are raised we conclude that the wto regime is no major obstacle to those aspiring to use btas although the allocation of the burden of proof could be a concern the second issue addressed is whether the economic literature on the desirability of btas adequately reflects concerns that have been raised in the trade policy community here we conclude that it has hardly addressed these concerns at all we also point to some aspects of btas that would need to be taken into account in a more complete analysis

public pollution abatement regional capital mobility and tax competition the environmental economics literature has ignored the effects of the interaction among capital mobility private and public pollution abatement and cross border pollution on environmental policies we analyze these effects in the context of a general equilibrium model we find among other things that i when countries are symmetric the presence of public pollution abatement makes nash equilibrium pollution taxes efficient while lump sum taxes remain inefficient and ii when countries are asymmetric both taxes are inefficient and the nash equilibrium pollution taxes depend mainly on the direction of capital mobility factor intensity and the degree of cross border pollution these results indicate that policy cooperation is more important when countries are different

emissions taxes versus intensity standards second best environmental policies with incomplete regulation the best emissions tax or emissions cap may be an inferior instrument under incomplete regulation leakage without leakage an intensity standard regulating emissions per unit of output is inferior due to an implicit output subsidy this inefficiency can be eliminated by an additional consumption tax with leakage an intensity standard can dominate the optimal emissions tax since the implicit output subsidy prevents leakage the addition of a consumption tax improves an intensity standard s efficiency may prevent leakage and may be efficient comparing intensity standards to output based updating shows that the latter dominates if updating is sufficiently flexible