long run trends in energy related external costs this paper considers how energy related external costs change through time it focuses on one of the key periods in the history of energy after a period of declining coal prices and soaring consumption which fuelled the second industrial revolution the nineteenth century british economy was externalising the social costs of energy production and consumption on a massive scale rising from 25 in the 1820s an estimated 60 70 of the average social costs of coal were externalised in the 1880s imposing damages close to 20 of gdp the eventual decline in air pollution concentration around 1900 occurred fifty years later than was broadly socially optimal this experience highlights the evolution of the demand for and supply of environmental quality in the context of economic growth and the nature of related market and government failures implying the necessity for adaptation rather than encouraging mitigation this experience may offer lessons for climate analysis and policy making

term premia on euro rates there are at least two statistically firm results regarding international money and capital markets the first is the theory of interest rate parity is empirically valid for euro interest rates 8 the second is forward exchange rates are poor very likely biased predictors of future spot exchange rates 1 3 10 12 13 the former is a comforting finding in that it assures there are no unexploited arbitrage profits the latter is troubling to some because it might be a symptom of an inefficient market that interest rate parity holds suggests international exchange and money market arbitrageurs are fully exploiting all profit opportunities they are behaving rationally that forward exchange rates fail to predict future spot rates at least unbiasedly suggests the existence of some unknown mechanism which robs predictive ability in a naive rational expectations view of the world the failure of forward rates to be unbiased predictors of future spot rates implies either that there is some difference between interest rate pairs other than inflationary expectations or that forward rates do not capture expected inflation differences in any simple way see 9 this paper addresses the first issue if there are differences in interest rate pairs which do not solely reflect expected inflation divergences this must show up as a difference in real interest rates such could be the result of actual instantaneous real rates of identical risk being unequal in magnitude or what is more likely differences in term premia between interest rate pairs when periods greater than say one day are used in interest rate parity and forward rate prediction tests if there are differential term premia in interest rate pairs of say one month or longer then forward exchange rates will mispredict the future spot exchange rate by that margin

tariffs and quotas in a spatial duopoly this paper applies a model similar to those used in benson and hartigan 2 and greenhut greenhut and kelly 11 to examine the relative impacts of a tariff and a quota in a domestic market characterized by spatially distributed consumers significant transportation costs and oligopolisticly interdependent domestic and foreign producers our predictions diverge from those derived in nonspatial trade models based on perfectly competitive monopoly and oligopoly market structures thus we establish three propositions to highlight the major differences bhagwati 3 4 demonstrated that tariffs and quotas are not equivalent in the presence of a domestic monopoly in a partial equilibrium model the implication was that imperfectly competitive markets eliminated the possibility of tariff quota equivalence so the choice of trade restrictions became an important policy question our first and perhaps least interesting proposition is that complete tariff quota equivalence can arise in an imperfectly competitive spatial market if the tariff and quota do not induce different price conjectural variations on the part of the duopolists full equivalence does not arise under the likely circumstance that entrepreneurial behavior is influenced by the trade barrier chosen however in a separate proposition we extend benson and hartigan s 2 result that a tariff can lead to the metzler 15 paradox a fall in domestic price after imposition of the tariff in a partial equilibrium spatial oligopoly model to an import quota this contrasts strikingly with falvey s 8 analysis and tower s 20 modifications which established that the metzler paradox cannot occur with an import quota in a perfectly competitive general equilibrium model 2 it also contrasts with panagariya 18 who devised a general equilibrium model

can revenue maximizing export taxes yield higher welfare than welfare maximizing export taxes abstract in this paper we show that commodity exporting countries may obtain a higher welfare under revenue maximizing export taxes than under welfare maximizing export taxes this result cannot be obtained in the traditional two country models

averting catastrophes the strange economics of scylla and charybdis faced with numerous potential catastrophes nuclear and bioterrorism mega viruses climate change and others which should society attempt to avert a policy to avert one catastrophe considered in isolation might be evaluated in cost benefit terms but because society faces multiple catastrophes simple cost benefit analysis fails even if the benefit of averting each one exceeds the cost we should not necessarily avert them all we explore the policy interdependence of catastrophic events and develop a rule for determining which catastrophes should be averted and which should not jel d61 q51 q54

tough love and intergenerational altruism tough love and intergenerational altruism this article develops and studies a tough love model of intergenerational altruism we model tough love by modifying the barro becker standard altruism model in two ways first the child s discount factor is endogenously determined so lower childhood consumption leads to a higher discount factor later in life second the parent evaluates the child s lifetime utility with a constant high discount factor our model predicts that parental transfers will fall when the child s discount factor falls this is in contrast with the standard altruism model which predicts that parental transfers are independent of exogenous changes in the child s discount factor

incremental protection and efficient political choice between tariffs and quotas this paper offers a new political economy explanation for the increasing use in recent years of quotas instead of or in combination with tariffs as a form of trade protection we show that under domestic monopoly the comparative efficiency of tariffs and quotas in achieving political objectives will vary depending on the nature of the mark et and the level of protection at high levels of protection quotas can become more politically efficient than tariffs we also show that at low levels of protection a price equivalent quota may not exist

operative gift and bequest motives the ricardian equivalence theorem which is the proposition that changes in the timing of lump sum taxes have no effect on assumption or capital accumulation depends on the exist of operative altruistic motives for intergenerational transfers these transfers can be bequests from parents to children or gifts from children to parents in order for the ricardian equivalence theorem to hold one of these transfer motives must be operative in the sense that the level of the transfer is not determined by a corner solution resulting from a binding non negativity constraint this paper derives conditions that determine whether the bequest motive will be operative the gift motive will be operative or neither motive will be operative in a model in which consumers are altruistic toward their parents and their children this abstract was borrowed from another version of this item

dynamic consistency and regret abstract individuals often report that they regret not having saved more for retirement this fact raises concerns about the financial security of retirees and about the adequacy of traditional economic models in making predictions that are consistent with regret about having saved too little for retirement we provide an overview of four discounted utility models and examine their implications for the optimal level of retirement savings all of these models exhibit dynamically consistent decision making and some also feature backward discounting in order to generate regret about past saving decisions in our preferred parameterization with both forward and backward discounting a 66 year old at retirement will consider the optimal level of retirement savings to be almost twice as large as what was actually saved even though actual saving decisions are dynamically consistent across the entire life cycle compared to a model setting with fixed retirement adding choice over retirement timing compounds the regret that individuals experience about past saving decisions

reconciling sustainability systems theory and discounting abstract most definitions of sustainability imply that a system is to be maintained at a certain level held within certain limits into the indefinite future sustainability denies run away growth but it also avoids any decline or destruction this sustainability path is hard to reconcile with the renewal cycle that can be observed in many natural systems developing according to their intrinsic mechanisms and in social systems responding to internal and external pressures systems are parts of hierarchies where systems of higher levels are made up of subsystems from lower levels renewal in components is an important factor of adaptation and evolution if a system is sustained for too long it borrows from the sustainability of a supersystem and rests upon lack of sustainability in subsystems therefore by sustaining certain systems beyond their renewal cycle we decrease the sustainability of larger higher level systems for example schumpeter s theory of creative destruction posits that in a capitalist economy the collapse and renewal of firms and industries is necessary to sustain the vitality of the larger economic system however if the capitalist economic system relies on endless growth then sustaining it for too long will inevitably borrow from the sustainability of the global ecosystem this could prove catastrophic for humans and other species to reconcile sustainability with hierarchy theory we must decide which hierarchical level in a system we want to sustain indefinitely and accept that lower level subsystems must have shorter life spans in economic analysis inter temporal discount rates essentially tell us how long we should care about sustaining any given system economists distinguish between discount rates for individuals based on personal time preference lower discount rates for firms based on the opportunity cost of capital and even lower discount rates for society for issues affecting even higher level systems such as global climate change many economists question the suitability of discounting future values at all we argue that to reconcile sustainability with inter temporal discounting discount rates should be determined by the hierarchical level of the system being analyzed

anti dumping laws production location and prices in a three country model of international trade the price effects of anti dumping laws and of tariffs in the presence of anti dumping laws may be counter intuitive the application of an anti dumping law may lead to a decline in the price of an imported good in the protecting country or an increase in the price of the good in the original host country the imposition of an import tariff in the presence of an anti dumping law may result in a decline in domestic price of the import in the policy active country

import sensitive products and perverse tariff rate quota liberalization this paper shows that a tariff rate quota s trq minimum access expansion can perversely trigger domestic price increases often trqs have prohibitive over quota tariffs to mimic import quotas in providing minimum market access in the wto s doha round it is likely that countries using trqs will avoid aggressive tariff reductions if they increase the quota portion of trqs we show that when the import price lies between the unit cost of production and the price received by domestic upstream firms an increase in import quota as a share of domestic production may cause an increase in the domestic retail price une expansion de l acces minimum au marche d un contingent tarifaire ct peut generer des augmentations perverses de prix internes souvent les ct ont des tarifs hors contingent prohibitifs pour reproduire les effets des quotas a l importation tout en garantissant un acces minimum au marche dans le cycle de doha de l omc il est probable que les pays utilisant des ct vont pouvoir eviter des reductions importantes de tarifs si le contingent des ct est augmente nous montrons qu une augmentation du contingent defini comme une fraction de la production interne peut engendrer une augmentation du prix interne des detaillants si le prix des importations se situe entre le cout unitaire de production et le prix interne des firmes en amont

time consistency and time invariance in collective intertemporal choice abstract recent work on collective intertemporal choice suggests that non dictatorial social preferences are generically time inconsistent we argue that this claim conflates time consistency with two distinct properties of preferences stationarity and time invariance while time invariance and stationarity together imply time consistency the converse does not hold although non dictatorial social preferences cannot be stationary they may be time consistent if time invariance is abandoned if individuals are discounted utilitarians revealed preference provides no guidance on whether social preferences should be time consistent or time invariant nevertheless we argue that time invariant social preferences are often normatively and descriptively problematic

the social discount rate what discount rate should be applied to social investments it is standard to use the market interest rate thereby respecting private preferences we show that application of this revealed preference criterion rests on faith not on logic it is justified only if preferences over all choices including past choices are time invariant the conditions for this to be true are stringent under more reasonable conditions policy makers should be more patient than private citizens whose choices define the most short sighted pareto optimum

a note on dynamic monopoly pricing under consumption externalities we analyze dynamic monopoly pricing under consumption externalities focusing on pricing under negative externalities we also attempt to generalize models in the previous literature which encompass both negative and positive externalities by incorporating a consumer s discount factor for past sales as a parameter analyzing our model reveals oscillation as the optimal price path in the presence of negative externalities

social discounting and intergenerational pareto the most critical issue in evaluating policies and projects that affect generations of individuals is the choice of social discount rate this paper shows that there exist social discount rates such that the planner can simultaneously be i an exponential discounting expected utility maximizer ii intergenerationally pareto that is if all individuals from all generations prefer one policy project to another the planner agrees and iii strongly non dictatorial that is no individual from any generation is ignored moreover to satisfy i iii if the time horizon is long enough it is generically sufficient and necessary for social discounting to be more patient than the most patient individual s long run discounting independent of the social risk attitude

foreign subsidiary transfer pricing and tariffs in the transfer pricing literature horst 12 concludes that the multinational firm mnf will generally charge a low transfer price ltp while other authors are ambivalent on this question this paper shows that less than whole ownership over the subsidiary generally makes the mnf change its transfer pricing strategy from desiring a ltp to wanting a high transfer price htp the conditions for an htp are fairly broad so that we are more likely to observe it than has been suggested in the literature the mnf literature also presumes that the host country loses revenue due to an htp however this view ignores the effects of tariffs on a government s revenue if tariff revenue is included an htp can increase the host country s revenue

consistent climate policies what are the optimal climate policies when time preferences deviate from the standard exponential discounting and decision makers cannot commit to future policies we show that with time declining discounting the delay and persistence of climate impacts provide a commitment device to policy makers we quantify the commitment value in a climate economy model by solving time consistent markov equilibrium capital and emission taxes explicitly the returns on capital and climate investments are no longer equal leading to a large increase in the emission tax compared to a benchmark with equalized returns the commitment value increases the tax by a factor of 20 in our quantitative assessment

energy efficiency economics and policy energy efficiency and conservation are major factors in the reduction of the environmental impact of the energy sector particularly with regard to climate change energy efficiency also contributes to reducing external dependence and vulnerabilities in the energy domain in this paper we discuss the factors that influence energy efficiency and conservation decisions and the most appropriate policies for their promotion although not all public policies seem justified we argue that specific policies for promoting energy conservation may be required preferably based on economic instruments or on the provision of information to consumers

self command in practice in policy and in a theory of rational choice an increasingly familiar occurrence for obstetricians is being asked by patients to withhold anesthesia during delivery the physician often proposes that a facemask be put beside the patient who may inhale nitrous oxide as she needs it but some determined patients ask that no such opportunity be provided if gas is available they will use it and they want not to be able to the request is interesting for decision theory and raises questions of ethics policy and physician responsibility even if the woman is merely making a mistake if she simply does not know how painful labor will be and how glad she will be even in retrospect if the pain is relieved but some women who make this request have had earlier deliveries during which they demanded anesthesia and received it they are acquainted with the pain they anticipate asking for relief and they want it withheld when they do they expect to regret afterwards any recourse to anesthesia this particular instance of attempted selfdenial has features that are special but many that are common the woman is so far as we know in good health physically and mentally she anticipates a transient period when her usual values and preferences will be suspended or inaccessible she has reasons for wanting to frustrate her own wishes at the critical time she needs cooperation she may ratify her choice afterward by expressing herself grateful that no anesthesia was offered even when requested there are ethical dilemmas and legal issues and there is conflict if say the husband disagrees with the physician in the delivery room about what his wife really wants

be careful what you calibrate for social discounting in general equilibrium abstract concerns about intergenerational equity have led to an influential practice of setting social utility discount rates based on ethical considerations rather than to match household behavior particularly in climate change economics e g stern 2006 this paper formalizes the broader policy implications of this approach in general equilibrium by characterizing jointly optimal environmental and fiscal policies in a climate economy model with differential planner household discounting first i show that decentralizing the optimal allocation requires not only high carbon prices but also fundamental changes to tax policy if the government discounts the future less than households implementing the optimal allocation requires an effective capital income subsidy a negative intertemporal wedge and in a setting with distortionary taxation an effective labor consumption tax wedge that is decreasing over time second if the government cannot subsidize capital income the constrained optimal carbon tax may be up to 50 below the present value of marginal damages the social cost of carbon due to the general equilibrium effects of climate policy on household savings third given the choice to optimize either carbon capital or labor income taxes the socially discounting planner s welfare ranking is ambiguous over a standard range of parameters overall in general equilibrium a policy maker s choice to adopt differential social discounting may thus overturn conventional recommendations for both environmental and fiscal policy

intergenerational altruism with future bias abstract we show that standard preferences of altruistic overlapping generations exhibit future bias which involves preference reversals associated with increasing impatience this underlies a conflict of interest between successive generations we explore the implications of this conflict for intergenerational redistribution when there is a sequence of utilitarian governments representing living generations and choosing policies independently over time we argue that future bias creates incentives to legislate and sustain a pay as you go pension system which every government views as a self enforcing commitment mechanism to increase future old age transfers

present bias and collective dynamic choice in the lab we study collective decisions by time discounting individuals choosing a common consumption stream we show that with any heterogeneity in time preferences utilitarian aggregation necessitates a present bias in lab experiments three quarters of social planners exhibited present biases and less than two percent were time consistent roughly a third of subjects acted as if they were pure utilitarians and the rest chose as if they also had varying degrees of distributional concerns

technology and time inconsistency policy makers have time inconsistent preferences if they fear losing power or are endowed with hyperbolic discount factors politicians may thus seek to influence future policy choices for example

discount rate and the social cost of carbon dioxide a korean forecast this paper is to forecast the korean long term social discount rate of carbon dioxide sdrc and the social cost of carbon dioxide scc it is estimated using the ramsey function savings behavior

the brain as a hierarchical organization based on recent neuroscience evidence we model the brain as a dual system organization subject to three conflicts asymmetric information temporal hori zon and incentive salience under the first and second conflicts we show that the uninformed system imposes a positive link between consumption and labor at every period furthermore decreasing impatience endogenously emerges as a consequence of these two conflicts under the first and third conflicts it becomes optimal to set a consumption cap finally we discuss the behavioral implications of these rules for choice bracketing and expense tracking and for consumption over the life cycle jel dil d74 d82 d87 d91

exhaustibility and risk as asset class dimensions a social investor approach to capital resource economies this paper develops a framework in which asset class dimensions are extended to include both risk and exhaustibility for explaining the evolution of shadow prices of marginal units of exhaustible natural resources in capital resource economies it is shown that the pricing kernel function required for socially valuing marginal units of exhaustible resource hereafter called the exhaustion stochastic discount factor combines a factor that discounts for risk and another factor that discounts for resource exhaustion over time the social rate of return on the marginal unit of resource stock adds to the risk premium an exhaustion premium that accounts for the resource depletion over time in this setting the principle of no arbitrage holds by extending asset class dimensions to include not only a risk dimension but also an exhaustibility dimension

an aggregate measure for benefit cost analysis the kaldor hicks kh criterion has long been the standard for benefit cost analyses but it has also been widely criticized as ignoring equity and arguably moral sentiments in general we suggest the use of an aggregate measure khm instead of kh where m stands for moral sentiments khm simply adds to the traditional kh criterion the requirement that all goods for which there is a willingness to pay or accept count as economic goods this addition however runs up against objections to counting moral sentiments in general and non paternalistic altruism in particular we show these concerns are unwarranted and suggest that the khm criterion is superior to kh because it provides better information

anticipation and the valuation of delayed consumption this paper presents a model of intertemporal choice that incorporates savoring and dread i e utility from anticipat ion of delayed consumption the model explains why an individual with positive time preference may delay desirable outcomes or get unpleas ant outcomes over with quickly contrary to the prediction of convent ional formulations of intertemporal choice implications of savoring and dread for savings behavior empirical estimation of discount rate s and public policy efforts to combat myopic behavior are explored the model provides an explanation for common violations of the indepe ndence axiom as applied to intertemporal choice copyright 1987 by royal economic society

commitment and welfare abstract the standard approach to welfare analysis under dynamically inconsistent preferences is to assume that the welfare of an individual is maximized if he can commit to his initial goal we study a potential rationale for such welfare analysis in some prominent well studied examples with intertemporal tradeoffs like the choice between investing in a project now or later doing an unpleasant task now or procrastinating it until later and eating a cake we find that the commitment allocation can multiself pareto dominate the non cooperative equilibrium allocation if the number of time dated selves exceeds a low threshold while a common concern with behavioral welfare analysis is that the later selves of an individual are unfairly hurt as a result of committing the individual to his initial goal our findings indicate that this concern may be more relevant for settings where the number of sequential choices is very low

informational diversity over time and the optimality of monetary equilibria abstract the temporal realizations of a random state variable in an overlapping generations model create an informational diversity between members of different generations and require a reexamination of the optimality that competitive equilibria might display in such an environment using an optimality criterion that reflects this informational diversity we prove the optimality of competitive equilibrium in a model with a fixed stock of fiat money a single spot market and good endowments that follow a markov process the need for an optimality criterion that incorporates informational diversity is further motivated by studying the same model with the operation of complete contingent commodities markets

inequality and social discounting we explore steady state inequality in an intergenerational model with altruistically linked individuals who experience privately observed taste shocks when the welfare function depends only on the initial generation efficiency requires immiseration inequality grows without bound and everyone s consumption converges to zero we study other efficient allocations in which the welfare function values future generations directly placing a positive but vanishing weight on their welfare the social discount factor is then higher than the private one and for any such difference we find that consumption exhibits mean reversion and that a steady state cross sectional distribution for consumption and welfare exists with no one trapped at misery

tough love and intergenerational altruism this chapter develops and studies a tough love model of intergenerational altruism we model tough love by modifying the barro becker standard altruism model in two ways first the child s discount factor is endogenously determined so lower childhood consumption leads to a higher discount factor later in life second the parent evaluates the child s lifetime utility with a constant high discount factor our model predicts that parental transfers will fall when the child s discount factor falls this is in contrast with the standard altruism model which predicts that parental transfers are independent of exogenous changes in the child s discount factor