the housing market impacts of shale gas development using data from pennsylvania and an array of empirical techniques to control for confounding factors we recover hedonic estimates of property value impacts from nearby shale gas development that vary with water source well productivity and visibility results indicate large negative impacts on nearby groundwater dependent homes while piped water dependent homes exhibit smaller positive impacts suggesting benefits from lease payments results have implications for the debate over regulation of shale gas development jel l71 q35 q53 r31 technological improvements in the extraction of oil and natural gas from unconventional sources have transformed communities and landscapes and brought debate and controversy in the policy arena shale gas plays underlying the populated northeastern united states were thought to be uneconomical less than ten years ago but now contribute a major share of us gas supply 1 natural gas has been hailed as a bridge to energy independence and a clean future because of its domestic sourcing and compared with coal and petroleum derivatives its smaller carbon footprint and reduced emissions of other pollutants e g particulates sulfur dioxide car

nonrenewable resources with switching costs abstract this paper considers a firm s decision to commence or to suspend extraction of a nonrenewable resource when there are start up or shut down costs for a given level of reserves the critical price that would cause an inactive mine to be opened exceeds the price that would induce an active mine to be closed as one would expect greater switching costs cause firms to be less inclined to change status this impact can be substantial even for modest switching costs possible implications of switching costs are considered including the potential for firms to abandon mines with economically valuable remaining reserves

testing the option value theory of irreversible investment this article statistically tests the option theory of irreversible investment using contingent claims valuation we derive the value of options to invest in capacity where the projects are endogenous to the economic circumstances prevailing at the investment date we then test whether decisions made by canadian copper mines are compatible with the trigger price implied by the theory our model explains investment size and timing satisfactorily from a statistical and an economic point of view simulations with a mean reverting process suggest that the results do not depend crucially on the assumption that price follows a geometric brownian motion

the influence of private contractual failure on regulation the case of oil field unitization an analysis of the interdependence between regulation and private contractual failure reveals that the feasible range of regulation is restricted by the same forces that block private agreement the focus of the study is oil field unitization regulation in oklahoma texas and wyoming federal lands from 1948 through 1975 despite large potential gains from unitization private negotiations fail because of lease heterogeneities and information problems regarding lease value estimates in response the federal and state governments have adopted strikingly different policies to encourage unitization with different results only the federal government s regulations are effective because they surmount information problems texas has the least successful regulation the paper argues that the policy differences are due to the political influence of small firms that benefit from nonunitized production 25 references 2 tables

setting standards for credible compliance and law enforcement in this paper we examine the setting of optimal legal standards to simultaneously induce parties to invest in care and to motivate law enforcers to detect violators of the law the strategic interaction between care providers and law enforcers determines the degree of efficiency achieved by the standards our principal finding is that some divergence between the marginal benefits and marginal costs of providing care is required to control enforcement costs further the setting of standards may effectively substitute for the setting of fines when penalties for violation are fixed in particular maximal fines may be welfare reducing when standards are set optimally nous considerons dans cet article la determination en information incomplete de normes legales optimales pour a la fois inciter les citoyens a faire preuve de diligence prevention et motiver les agents de la paix a veiller au respect des lois l interaction strategique entre citoyens et agents de la paix determine l efficacite des normes choisies notre resultat principal est a l effet qu un ecart entre benefices marginaux et couts marginaux de la diligence est necessaire afin de reduire les couts d application des lois de plus les normes peuvent etre un substitut aux amendes lorsque les penalites pour infraction sont fixes des amendes maximales peuvent en particulier etre contre indiquees lorsque les normes sont optimalement determinees

a value added approach to household production the special case of meal preparation a value added approach for valuing household production is presented with application to household processing of foods into meals data are from the 1977 1978 usda household food consumption survey the cost of input food is subtracted from estimates of the value of output meals to yield value added within households this amounts to an estimated 7 percent of the u s gnp that is unaccounted for value added was negatively associated with female employment household size household income and age of householder had small but statistically significant positive associations with value added the mean net value added through meal preparation was 33 82 per week when fuel and capital charges were subtracted

pollution markets with imperfectly observed emissions i study the advantages of pollution permit markets over uniform emission or technology standards when the regulator has incomplete information on firms emissions and costs of production and abatement e g air pollution in large cities because the regulator observes only each firm s abatement technology but neither its emissions nor its output there are cases in which standards can lead to lower emissions and hence welfare dominate permits if permits are optimally combined with standards in many cases this hybrid policy converges to the permits alone policy but almost never to the standards alone policy

incentive compatible regulation of foreign owned subsidiaries a tax simulation for the jamaican bauxite industry abstract in 1974 jamaica replaced the corporate income tax on multinationals in the bauxite sector with a production levy on bauxite in order to increase tax revenue the results were mixed tax revenue jumped initially but the multinationsl quickly started shifting production elsewhere we model jamaica s taxation problem assuming that it has incomplete information about the multinationals costs and derive the optimal incentive compatible tax mechanism we simulate and compare the effects on output and tax revenue of the actual and the incentive compatible tax regimes and conclude that there might be substantial benefits to implementing an incentive mechanism

evaluating natural resource investments notwithstanding impressive advances in the theory of finance over the past 2 decades practical procedures for capital budgeting have evolved only slowly the standard technique which has remained unchanged in essentials since it was originally proposed see dean 1951 bierman and smidt 1960 derives from a simple adaptation of the fisher 1907 model of valuation under certainty under this technique expected cash flows from an investment project are discounted at a rate deemed appropriate to their risk and the resulting present value is compared with the cost of the project this standard textbook technique reflects modern theoretical developments only insofar as estimates of the discount rate may be obtained from crude application of single period asset pricing theory but see brennan 1973 bogue and roll 1974 turnbull 1977 constantinides 1978 the inadequacy of this approach to capital budgeting is widely acknowledged although not widely discussed its obvious deficiency is its the evaluation of mining and other natural resource projects is made particularly difficult by the high degree of uncertainty attaching to output prices it is shown that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such projects but also to determine the optimal policies for developing managing and abandoning them the approach may be adapted to a wide variety of contexts outside the natural resource sector where uncertainty about future project revenues is a paramount concern

disclosure strategies for pollution control disclosure strategies which involve public and or private attempts to increase the availability of information on pollution form the basis for what some have called the third wave in pollution control policy after legal regulation the first wave and market based instruments the second wave while these strategies have become common in natural resource settings forest certification and organic farming for example they are less familiar in a pollution control context yet the number of applications in that context is now growing in both oecd and developing countries this survey will review what we know and don t know about the use of disclosure strategies to control pollution and conclude with the author s sense of where further research would be particularly helpful

catching the agent on the wrong foot ex post choice of monitoring abstract in a principal agent model with multiple performance measures we show that the principal benefits by choosing ex post which variables will be monitored if it is too costly for one type of agent to mimic all performance measures expected from another type the principal can hope to catch the agent on the wrong foot if the agent tries to misrepresent his type for cases of small asymmetry of information the principal can implement the first best contract for more serious asymmetries of information the first best is not implementable then the low type may be required to overproduce which is in contrast to the traditional result of second best contracting we also obtain a ranking of monitoring instruments according to the frequency of their use

structural estimation of real options models we propose a numerical approach for structural estimation of a class of discrete markov decision processes emerging in real options applications the approach is specifically designed to account for two typical features of aggregate data sets in real options the endogeneity of firms decisions the unobserved heterogeneity of firms the approach extends the nested fixed point algorithm by rust 1987 optimal replacement of gmc bus engines an empirical model of harold zurcher econometrica 55 5 999 1033 1988 maximum likelihood estimation of discrete control processes siam journal of control and optimization 26 5 1006 1024 because both the nested optimization algorithm and the integration over the distribution of the unobserved heterogeneity are accommodated using a simulation method based on a polynomial approximation of the value function and on recursive least squares estimation of the coefficients the monte carlo study shows that omitting unobserved heterogeneity produces a significant estimation bias because the model can be highly non linear with respect to the parameters

contractual responses to the common pool prorationing of crude oil production this paper examines bargaining among firms to mitigate rent dissipation following the major oil discoveries of 1926 35 because of high bargaining costs firms chose prorationing instead of consolidation and unitization and success varied the analysis also shows that prorationing took the form it did because concession such as per well quotas were required to draw in small operations and the quotas led to predictable responses regarding rent dissipation prorationing despite its costs controlled total field production and costs conserved natural reservoir energies and lengthened field life when private agreements failed the parties successfully appealed for state enforcement since similar heterogeneities influnce regulations elsewhere in the economy detailed analysis of bargaining among firms is essential for insight into the emergence of various institutional forms 33 references 3 tables

on the informational superiority of quantities over prices in the presence of an externality in this study we investigate the convexity of the profit function of a regulated firm with respect to the random shocks in the marginal costs and the demand intercept and its implications regarding information disclosure when these shocks are revealed to the firm at a future stage we illustrate that information disclosure is attained when the firm is regulated through the use of a quantity rather than a price instrument to do so we argue that increased convexity obtained under complete information is a sufficient condition as a policy implication we suggest a new argument which favors the use of quantities over prices these implications are more pronounced once we allow for multiple firms

risk sharing and incentives in norwegian petroleum extraction abstract distinguishing between idiosyncratic and systematic risk and taking into account that the government is only able to monitor the companies efforts to reduce costs and increase extraction in an imperfect way moral hazard criteria for optimal risk sharing between the norwegian government and the petroleum companies are examined the norwegian practice is compared with the theoretical recommendations and it is suggested that deviations can be explained by political constraints

valuing managerial flexibility an application of real option theory to mining investments abstract the value of managerial flexibility is assessed using data on prices costs grades reserves ore extraction and metal output for a panel of canadian copper mines a real option model is estimated and solved for project and option values most empirical researchers i consider the initial investment decision but neglect flexible operation thereafter ii assume that price is stochastic but ignore cost and reserve uncertainty and iii model price as a nonstationary stochastic process the evolution of three state variables price cost and reserves is assessed here differences in assumptions compared to others are found to lead to large differences in estimated project and option values

incentives for environmental protection this book explores the extent to which pricing incentives such as charges on emissions in contrast to regulatory standards can be shaped into a practical policy that is technically effective politically enactable administratively enforceable and equitable it also compares he advantages and disadvantages of this approach to those that characterize the policy of compliance to regulatory standards and it identifies the criteria on which either pricing mechanisms or regulatory standards should be based three case studies comprise the heart of the book one investigates carcinogenic chemical emissions another audits the tradeoffs in controlling aircraft noise near major airports and the third treats the protection of air quality from pollution by primarily stationary sources the case studies are introduced by a chapter that gives numerous examples of possible pricing approaches and identifies common lessons that the three diverse studies reinforce the studies are followed by a chapter which is based on interviews with congressional staff environmentalists and industrial lobbyists and other interest groups in washington revealing their assessments of pricing mechanisms in environmental protection thomas c schelling and his co authors david harrison jr albert l nichols robert repetto and steven j kelman are all affiliated with the kennedy school of government harvard university the book is fifth in the series regulation of economic activity

dynamic taxation of non renewable natural resources under asymmetric information about reserves optimal regulation is developed for a case with type dependent dynamics in costs in exploiting nonrenewable natural resources a government faces the problem that extraction companies possess private information about the size of the reserves optimal contracts in a two period framework distort both the extent and the pace of depletion the regulatory optimum is implementable by a menu of tangent planes generated by license fees and royalties or by a corporate income tax system containing type dependent depletion allowances and tax exempted income levels if the terminal time is endogenized it is optimal also to distort the number of extraction periods

optimal investments using empirical dynamic programming with application to natural resources a number of problems arise when dynamic programming is applied to investment problems attempts have been made to circumvent these problems by using continuous time models where the state process is generated by a stochastic differential equation in this article the authors assume that the state process is described by a discrete markov time series model with empirically determined transition probabilities standard computer algorithms can then be used to obtain optimal policies they apply their methods to two examples in natural resources one of which has previously been analyzed by m j brennan and e s schwartz 1985 using continuous time models the authors show that the optimal policies depend critically on the specification of the state process and to a certain extent on the discretization level used in the markov approximation copyright 1989 by the university of chicago

dynamic mechanism design for a global commons we model dynamic mechanisms for a global commons countries value both consumption and conservation of an open access resource a country s relative value of consumption to conservation is privately observed and evolves stochastically an optimal quota maximizes world welfare subject to being implementable by perfect bayesian equilibria with complete information the optimal quota is first best it allocates more of the resource each period to countries with high consumption value under incomplete information the optimal quota is fully compressed identical countries receive the same quota even as environmental costs and resource needs differ this is true even when private information is negligible

the effects of farm commodity and retail food policies on obesity and economic welfare in the united states many commentators claim that farm subsidies have contributed significantly to the obesity epidemic by making fattening foods relatively cheap and abundant and symmetrically that taxing unhealthy commodities or subsidizing healthy commodities would contribute to reducing obesity rates in this article we use an equilibrium displacement model to estimate and compare the economic welfare effects from a range of hypothetical farm commodity and retail food policies as alternative mechanisms for encouraging consumption of healthy food or discouraging consumption of unhealthy food or both we find that compared with retail taxes on fat sugar or all food or subsidies on fruits and vegetables at the farm or retail levels a tax on calories would be the most efficient obesity policy a tax on calories would have the lowest deadweight loss per pound of fat reduction in average adult weight and would yield a net social gain once the impact on public health care expenditures is considered

a simple auction mechanism for the optimal allocation of the commons efficient regulation of the commons requires information about the regulated firms that is rarely available to regulators e g cost of pollution abatement this paper proposes a simple mechanism that implements the first best for any number of firms a uniform price sealed bid auction of an endogenous number of transferable licenses with a fraction of the auction revenues given back to firms paybacks which rapidly decrease with the number of firms are such that truth telling is a dominant strategy regardless of whether firms behave non cooperatively or collusively the mechanism also provides firms with incentives to invest in socially optimal r d jel d44 d62 d82 q28 regulatory authorities generally find that part of the information they need for implementing an efficient regulation is in the hands of those who are to be regulated regulating externalities such as access to common resources e g clean air water streams fisheries etc is a good example environmental regulators for example know little about firms pollution abatement costs so without communicating with firms they would be unable to establish the efficient level of pollution a number of mechanisms have been proposed for inducing firms to reveal their private information but for different reasons

when to pollute when to abate intertemporal permit use in the los angeles nox market we study intertemporal trading of nitrogen oxides permits in southern california s reclaim program we model reclaim s distinct intertemporal features two overlapping permit cycles and two overlapping compliance cycles in the model competitive equilibrium is cost effective and firms have an incentive to delay abatement from 1994 to 2006 reclaim facilities traded intertemporally by using permits of the opposite cycle we test two theoretical propositions delayed abatement and trading across cycles with a difference in differences estimator and show weak though inconclusive support of the theory the theoretical and empirical results are relevant to cap and trade programs with potential for overlapping permit cycles jel q58

government intervention in production and incentives theory a review of recent contributions national science foundation the commissariat general du plan and the center for energy policy research at m i t

double dipping in environmental markets abstract there is an increasing tendency to use markets to induce the provision of environmental services as such markets increase in scope potential market participants might sell multiple environmental services the question we consider here is whether participants in such markets should be allowed to sell credits in more than one market simultaneously some have argued in favor of such double dipping because it would make the provision of environmental services more profitable in practice however most programs do not allow double dipping we show that if the optimal level of pollution abatement is sought then double dipping maximizes societal net benefits however if pollution policies are set in a piecemeal fashion then the caps for each market are unlikely to be optimal and in this second best setting a policy prohibiting double dipping can lead to greater social net benefits we explore conditions under which a single market policy is preferred or equivalently where piecemeal policies are likely to yield particularly inefficient outcomes

extracting information or resource the hotelling rule revisited under asymmetric information we characterize the optimal extraction path when a concessionaire has private information on the initial stock of resource under asymmetric information a virtual hotelling rule describes how the resource price evolves over time and how extraction costs are compounded with information costs along an optimal extraction path in sharp contrast with the case of complete information elds which are heterogeneous in terms of their initial stocks follow di erent extraction paths some resource might be left unexploited in the long run as a way to foster incentives the optimal contract may sometimes be implemented through royalties and license fees with a market of concessionaires asymmetric information leads to a virtual her ndahl principle and to a new form of heterogeneity across active concessionaires under asymmetric information the market price converges faster to its long run limit exhibiting more stability

on countervailing incentives abstract this paper extends and unifies previous work on optimal contracts under countervailing incentives shedding light in particular on the relation between countervailing incentives and pooling inflexible rules our main result is that the nature of the optimal contract depends crucially on whether the agent s utility is quasiconcave or quasiconvex in the private parameter the optimal contract is separated in the former case and it may entail pooling in the latter case journal of economic literature classification number d82

hysteresis due to irreversible exit addressing the option to mothball abstract this paper analyses the following hitherto understudied feature in real switching options a firm has a mothballing option and an option to permanently abandon if the firm finds itself in an operating mode with a price just above the abandonment threshold it is unclear whether to exercise the abandonment option or to exercise the mothballing option if the price goes down the firm may exit but surprisingly if it goes up it may mothball we find that two different strategies could be optimal one where mothballing is not a viable option and one where mothballing does occur in the latter case a hysteresis region arises in which the firm produces at a loss while a further price decrease induces exit and a sufficient price increase results in the firm entering the mothballing stage mothballing being optimal requires sufficiently large values of the price trend and the uncertainty parameter

a dynamic model of cleanup estimating sunk costs in oil and gas production the environmental remediation required to permanently decommission most industrial projects is an expensive irreversible investment real options literature shows that temporary closure has value under uncertainty however even if there is no intention to restart operations there is an incentive to label a closure as temporary to avoid having to remediate ongoing or future environmental externalities i estimate a dynamic discrete choice model of closure under price and quantity uncertainty to evaluate the likelihood of reactivation the model reveals that the option to temporarily close is being widely used to avoid environmental remediation of oil and gas wells in canada

the new economics of organization over the last ten years or so an important new approach to the study of organizations has emerged within economics it is perhaps best characterized by three elements a contractual perspective on organizational relationships a theoretical focus on hierarchical control and formal analysis via principal agent models this paper provides political scientists with an overview of the new economics of organization and explores its implications for the study of public bureaucracy so far positive political theory has not contributed much to our understanding of public bureaucracy in part this is due to the unsympathetic treatment that rational modeling and most other modes of quantitative analysis have long received from students of public administration the other side of the coin however is that positive theorists have not made much of an effort to develop theories of bureaucracy their concerns have centered around two basic mechanisms of social choice voting and markets and they have devoted little systematic attention to a third mechanism that is clearly important for understanding how societies and other aggregates make collective decisions this third and relatively unexplored mechanism is hierarchy movement toward a positive theory of hierarchies would fill a serious gap in the social choice literature while at the same time making a theoretical contribution that strikes to the essence of public bureaucracy indeed of all organizations in fact significant steps toward a positive theory of hierarchies have very recently been taken but by economists not political scientists in small numbers of course economists made contributions to the study of public bureaucracy some time ago with the pioneering works of downs 1967 tullock 1965 and niskanen 1971 but this new wave of theoretical work is different it is already a large complex body of literature that is the focus of innovation and excitement among a growing number of economists and it reflects an unusual degree of theoretical coherence and cumulative effort work in this tradition tends to receive orientation from a distinctive economic approach to the analysis of organizations an approach perhaps best characterized by three elements a contractual perspective on organizational relationships a focus on hierarchical control and formal analysis via principal agent models this approach has emerged from recent attempts to move beyond the neoclassical theory of the firm which assumes away all organizational considerations to a theory of economic organizations that can explain why firms corporations and other enterprises behave as they do propo

verifiable and non verifiable anonymous mechanisms for regulating a polluting monopolist abstract optimal regulation of a polluting natural monopolist must correct for both external damages and market power to achieve a social optimum existing non bayesian regulatory methods require knowledge of the demand function while bayesian schemes require knowledge of the underlying cost distribution we introduce mechanisms adapted to use less information our p rice based s ubsidy ps mechanisms give the firm a transfer that matches or approximates the incremental surplus generated each period the regulator need not observe the abatement activity or know the demand cost or damage functions of the firm all of the mechanisms induce the firm to price at marginal social cost either immediately or asymptotically

strategies for promoting healthier food choices between 1960 and 2004 the proportion of americans meeting standard criteria for obesity increased from 13 percent to 31 percent katherine m flegal et al 2002 and it has been proposed that if this trend is not reversed obesity may soon overtake smoking as the leading preventable cause of death ali h mokdad et al 2004 consequently obesity is now one of the major causes of rising health care costs eric a finkelstein christopher j ruhm and katherine m kosa 2005 empirical analyses suggest that an increase in caloric intake rather than a change in calorie expenditure is responsible for much of the trend david m cutler edward l glaeser and jesse m shapiro 2003 the main policy response to what is often referred to as the obesity epidemic has been to enhance access to information the most prominent example of such a policy is the nutrition labeling and education act united states food and drug administration 1994 but recently the tactic has been receiving more attention after new york city required restaurants with 15 or more outlets to post the caloric content of each food item next to its price on menu boards lawmakers and independent companies alike are now following new york city s lead kim severson 2008 however there is little evidence that information alone does much to improve diet jayachandran n variyam and aq 1 the psychology of food consumption

the value of time ten studies are used to document that time is valued in accordance with a double kinked value function there is a zone of indifference for small time gains losses increasing marginal utility disutility for moderate time gains losses and diminishing marginal utility disutility for large time gains losses moderate amounts of time exhibit increasing marginal utility disutility because larger blocks of time provide a more diverse set of usage opportunities it is only when it is difficult to imagine how more less time would be beneficial detrimental that there is diminishing marginal utility disutility for time thus time valuation shows increasing marginal utility when there is a time deficit but diminishing marginal utility when there is a time surplus these findings have implications for how other resources might be valued

on optimal extraction under asymmetric information over reclamation costs abstract polluting exhaustible resource extraction ends with costly reclamation and producers have better information about future reclamation costs than the regulator this paper analyzes optimal contract between the regulator and the mining firm in a two stage model in which extraction and pollution generation is followed by reclamation with asymmetric information over reclamation costs the contract consists of a pollution tax and a mechanism used for cost information revelation and it extracts all the profit from the highest cost type leaves profits for the more efficient types and dictates a reclamation effort that is lower than the complete information effort it is further shown that the optimal pollution tax under asymmetric information can be lower or higher than the tax under complete information in addition the exclusion of the most expensive types is analyzed the results can help to design policies that improve the existing ones by saving public funds by improving the state of the environment and by excluding those mining operations that do not produce net benefits for the society

option valuation of claims on real assets the case of offshore petroleum leases this paper extends financial option theory by developing a methodology for the valuation of claims on a real asset an offshore petroleum lease several theoretical and practical problems not present in applying option pricing theory to financial assets are addressed most importantly we show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset petroleum reserves the advantages of this approach over conventional discounted cash flow techniques are emphasized the methodological development provides important insights for both company behavior and government policy promising empirical results are reported

a well based cost function and the economics of exhaustible resources the case of natural gas abstract a cost function for natural gas production is estimated using a pool of data from 29 wells statistically exact tests are performed for parameter stability across locations formations wells and producing firms costs are determined to be inversely related to remaining recoverable reserves and marginal costs of production are decreasing in all cases theoretical implications of these cost characteristics on optimal exhaustible resource extraction are analyzed although marginal cost is decreasing production effects on the resource stock imply that an interior production path may be optimal conditions under which production optimally occurs at the capacity bound are delineated and optimal interior production paths are characterized

efficiency inducing taxation for polluting oligopolists abstract we show that there exists a time independent tax rule that guides polluting oligopolists to achieve the socially optimum production path the optimal tax is dependent on the current pollution stock and it may be negative when the pollution stock is low a surprising result is that the optimal tax rule may give firms a subsidy for an initial time interval even though under laissez faire their output always exceeds the socially optimal output this subsidy however induces firms to produce less than they would under laissez faire

measuring the welfare effects of nutrition information cost benefit analysis justifies regulations altering the amount of health related information presented to consumers the current method of benefit analysis the cost of avoided illness is limited it assumes the benefits of health related information are adequately represented by changes in illnesses the manuscript develops a benefit estimation method to measure the welfare impacts of providing nutrient information nutrient labeling significantly affects purchase behaviour but may not lead to increased consumption of health foods nutrient labeling may increase welfare without any change in health risk thus the cost of avoided illness approach can underestimate the social benefits of providing nutrient information copyright 2001 oxford university press

using cost observation to regulate firms the paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier 1 has superior information about the cost of the project and 2 invests in cost reduction the main result states that under risk neutrality the supplier announces an expected cost and is given an incentive contract linear in cost overruns this optimal contract moves toward a fixed price contract as the announced cost decreases an investment choice is then introduced and the use of a rate of return regulation is studied

entitling the pollutee liability versus standard under private information this paper considers and compares two different legal means full liability and standard to reduce and to regulate pollution at a local level accounting for private information about benefits and costs the familiar polluter pays principle makes the polluter liable for any damage since the courts lack information about the true damage the pollutee can and presumably will overstate this damage nevertheless voluntary arrangements bypassing the courts exist e g for coasean reasons however such out of court arrangements fail to improve in many cases the inefficient allocation of pollution due to agency costs given these unsatisfactory consequences of the polluter pays principle even after allowing for contracts around the law we propose a modification of standards the pollutee is entitled that a certain standard is satisfied yet can trade this right for financial compensations contracts induced by this legal rule are countervailing the optimal mechanism switches between subsidies and payments and first best efficiency holds at both ends and this characteristic allows such a privatized standard to track the first best quite well and often better than the polluter pays principle this relative ranking under private information is the opposite of the one that holds under uncertainty here liability dominates the standard

optimal forestry contracts under asymmetry of information in this paper i analyze optimal royalty contracts in forestry when the harvesting firm has private information on the cost of harvesting this infinite horizon forest rotation model with asymmetry of information on the cost parameter results in a dynamic incentive problem depending on whether the costs are correlated over time or not the firm either receives rent or receives no rent associated with the continuation part of the rotation choice i characterize the optimal contract explicitly in both cases i also examine the loss in expected welfare surplus resulting from the use of a linear contract instead of the more general non linear contract

internationally mobile firms and tax policy abstract this paper analyses how the government should tax internationally mobile firms the analysis finds that if tax authorities are unable to observe firms true mobility and domestic and foreign profitability are uncorrelated then 1 information rents are acquired by immobile inefficient firms and 2 the optimal policy will stimulate investment in the immobile sector compared to the complete information case another result of the paper is that the optimal allocation is implementable within the framework of a corporate income tax system where mobile firms self select more unfavourable capital allowances than immobile firms

resource extraction with a carbon tax and regime switching prices exercising your options this paper develops a model of a profit maximizing firm with the option to exploit a non renewable resource choosing the timing and pace of development the resource price is modelled as a regime switching process which is calibrated to oil futures prices a hamilton jacobi bellman equation is specified that describes the profit maximization decision of the firm the model is applied to a problem of optimal investment in a typical oils sands in situ operation and solved for critical levels of oil prices that would motivate a firm to make the large scale investment needed for oil sands extraction as well as to operate mothball or abandon the facility regime shifts can have an important effect on the optimal timing of investment and extraction the paper examines the effect of several carbon tax schemes on optimal timing of construction production and abandonment a form of green paradox is identified

a complete solution to a class of principal agent problems with an application to the control of a self managed firm this paper considers a class of principal agent problems which have the following features 1 there is adverse selection because the principal ignores the value of one parameter of the agent s true characteristics 2 leaving aside the information parameter the principal s welfare as well as the agent s welfare depend on two types of variables observable to both of them the first ones possibly multidimensional are called action variable s and the second one which is one dimensional has in general the meaning of a money transfer 3 the principal is a stackelberg leader of the two person game he can commit himself to decision rules which are admissible on informational grounds he optimizes within the adequate class taking into account besides the agent s reaction one constraint which has generally the meaning of an individual rationality constraint and sometimes of a feasibility constraint the optimization is limited to the class of non stochastic mechanisms 4 the problem can also receive an alternative interpretation the principal faces a continuum of agents of unknown characteristics the distribution being known however stylized principal agent problems of this type have often been considered in the economic literature in particular the reader will later be able to recognize that the standard income tax model a la mirrlees 1971 the quality or quantity choice model of the monopolist a la mussa and rosen 1978 or maskin and riley 1982 and the model of government regulation of the private monopolist of baron and myerson 1982 all belong to

self regulation taxation and public voluntary environmental agreements an increasingly popular instrument for solving environmental problems is the public voluntary agreement va in which government offers technical assistance and positive publicity to firms that reach certain environmental goals prior papers treat such agreements as a superior low cost instrument that can be used to preempt a threat of traditional inefficient regulation we present a more general model in which public vas may instead be weak tools used when political opposition makes environmental taxes infeasible we explore the conditions under which taxes public vas and unilateral industry actions are to be expected and the welfare implications of the various instruments notably we also show that welfare may be reduced by the introduction of public vas 2002 elsevier b v all rights reserved

fossil fuels stock externalities and backstop technology the hotelling exhaustible resource model is extended to include stock pollution and nonpolluting backstop technology it is shown that an optimal energy consumption strategy typically includes a regime in which the two energy sources are consumed simultaneously along this regime fossil fuel consumption decreases and backstop consumption increases together fossil fuel and backstop consumption may form eleven optimal regime combinations a decrease in the backstop price decreases the initial level of optimal emission tax

on efficiency inducing taxation for a non renewable resource monopolist the problem of using taxes to induce a monopolist supplier of a non renewable resource to extract efficiently has been solved under the assumption that the government has perfect information about the monopolist s cost function and reserves and is able to precommit to an entire sequence of taxes over time we extend this literature by constructing an efficiency inducing tax mechanism that does not require the government to have any information about the cost function or reserves and which does not require it to precommit to a sequence of taxes over time

implementing second best environmental policy under adverse selection abstract a key obstacle to practical application of mechanism design theory to regulation is the difficulty of obtaining consistent beliefs regarding information that theoretical models assume to be commonly held this article presents a solution to this problem by developing an easily implemented empirical methodology with which the government can use available data to develop beliefs regarding the technology and distribution of types in a regulated sector characterized by hidden information results are used to calibrate a second best land conservation mechanism and evaluate its cost relative to simpler alternatives

on reducing the windfall profits in environmental subsidy programs investment subsidies are widely used to induce adoption of new technologies that can lower the marginal cost of reducing emissions to economize on these subsidies governments would like to distinguish between firms that need to receive a subsidy to adopt a new technology and firms that would adopt that technology even without subsidies we show that policies consisting of a menu of emission taxes and investment subsidies can potentially induce firms to self select

optimal resource royalties with unknown and temporally independent extraction cost structures the authors study optimal nonrenewable resource royalty contracts when the extracting agent has private information on costs this is a dynamic incentive problem in which the repeated relationship between the principal and the agent is constrained by initial reserves commitment is limited to one period and costs are intertemporally independent compared with full information extraction information asymmetry shifts production to the future when the optimal contract requires exhaustion in two periods when exhaustion by all types in two periods is not warranted the effect on the terminal period is ambiguous and the output of even the lowest cost firm is always distorted copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

buying time and saving time strategies for managing household production time buying strategies used more often by employed wife families than nonemployed wife families were purchase of child care meals away from home and disposable diapers time saving strategies used by employed wives were preparing fewer meals at home reduced time in household production and reduced time in leisure wife s employment made no difference in time spent in household production by other family members

the entry deterring effects of inflexible regulation this paper investigates the signalling role of tax policy in promoting or hindering the ability of a monopolist to practise entry deterrence we show that environmental policy can facilitate the incumbent firm s concealment of information from potential entrants thus deterring entry and yet entail welfare improvements furthermore we demonstrate that entry deterrence is more likely to arise when environmental regulation cannot be rapidly revised across time if market conditions change inflexible regimes than when regulatory agencies can adjust environmental policy over time les effets de dissuasion de l entree d une reglementation inflexible ce texte examine le role de signalisation d une politique fiscale qui promeut ou reduit l habilete d un monopole a pratiquer la dissuasion de l entree de concurrents on montre qu une politique environnementale peut faciliter la dissimulation d information par la firme en place vis a vis les concurrents potentiels et donc les dissuader d entrer et pourtant engendrer des ameliorations de bien etre de plus on montre que la dissuasion de l entree est davantage susceptible d emerger quand la reglementation environnementale ne peut pas etre revisee rapidement dans le temps si les conditions de marche se modifient regimes inflexibles que quand les agences de reglementation environnementales peuvent ajuster la politiques dans le temps

extraction costs and the economics of nonrenewable resources the study questions the fundamental assumption of the standard aggregate exploration extraction model of nonrenewable resources that extraction costs and the level of reserves are inversely related it also raises questions about the model s conclusions regarding exploration incentives and the valuation of reserves an empirically tested disaggregate model is presented that suggests that exploration activity occurs from firms attempting to balance marginal extraction plus user costs at the intensive and extensive margins exploration is carried out until the marginal discovery cost of a deposit equals its present asset value and a u shaped price path is indicated

getting rid of trans fats in the us diet policies incentives and progress artificial trans fats in foods increase chronic disease risk in the us population federal nutrition label regulation enacted in 2003 requires mandatory disclosure of trans fat content on packaged foods this action created incentives for the food industry to reduce trans fats both in response to consumer demand and through competition to maintain product reputation subsequent public actions include a ban on trans fat use in new york city restaurants and lawsuits against food companies which created further incentives to remove trans fats especially in the food service industry industry has reformulated packaged foods and found substitutes for restaurant fry oils and trans fats are disappearing from the us food supply market response extends throughout the supply chain and has spurred research to alter oilseed crop characteristics the widespread and relatively rapid industry response likely has improved the quality of us diets and demonstrates the potential for policy actions to spur such improvements

geology or economics testing models of irreversible investment using north sea oil data this paper tests the main implications of models of irreversible investment using data from operations in the oil fields in the north sea discrete time hazard regression models are used to ascertain the influence of economic variables the expected price of oil the variance of the price of oil and the level of reserves on the lag between the discovery of a field and the decision to develop the field we are able to control for heterogeneity in the data by incorporating variables which account for both the geological features of each field and individual operator characteristics the results indicate that the expected price of oil and the level of reserves are important in influencing the appraisal duration but that the variance of the oil price is not variables capturing the non economic features of the individual fields are also found to be significant factors affecting the appraisal lag copyright 1994 by royal economic society

the polluter pays versus the pollutee pays principle under asymmetric information abstract this paper compares the pollutee pays principle with the polluter pays principle in a model of one sided externalities and asymmetric information even allowing for mitigation through contracts pollution reductions traded for subsidies or compensations will not result in the perfect information social optimum but will bias the outcome favoring the one with the property right while the pollutee pays principle allows for global incentive mechanisms such voluntary arrangements are severely restricted for the polluter pays principle indeed these conditions for an out of court settlements low damage and large benefits from pollution somehow contradict the polluter pays principle

dynamic regulation of quality we develop a dynamic regulation model of quality provision where maintenance efforts and quality shocks have a durable impact when the regulator contracts with a sequence of agents asymmetric information can lead to overprovision of quality reflecting a dynamic rent extraction effect when the regulator contracts with a single agent the efficiency of their relationship depends on the regulator s ability to transfer rents across periods hiring a single agent with unlimited liability is socially preferable to hiring a sequence of agents even when no commitment is feasible by contrast shorter franchises are socially preferable if the agent has limited liability

information and the coase theorem abstract some economists think the coase theorem implies a lot about the proper scope of government intervention in the economy and about the welfare consequences of laissez faire others see it as a mere tautology that if people negotiate efficiently then every outcome will be efficient the coase theorem is important only if we believe that efficient negotiation is likely of course we can attribute inefficiencies to bargaining imperfection but it may not be useful to do so such attitudes sometimes seem to depend more on ideology than on reason this article gives one economist s reasoned view it discusses the coase theorem as a decentralization result and why decentralization results are interesting it considers mechanism design for revealing private information and describes the problems of centralization should the coase theorem should be viewed as a second best result property rights are more efficient than some reasonable alternative does the coase theorem recommend an institution or make

efficiency and applicability of economic concepts dealing with environmental risk and ignorance abstract the paper examines the efficiency and applicability of various economic concepts dealing with environmental uncertainty their applicability is analysed by classifying environmental uncertainty according to different criteria using such a structure it can be shown that while the economic concepts are able to deal satisfactorily with some types of environmental uncertainty they are unable to deal with others adequately the analysis of efficiency distinguishes between environmental risk in which the decision maker is aware of the distribution function of the random variables and ignorance in which the decision maker does not know the relevant distribution functions the concept of a risk premium proposed by siebert the policy recommendation to promote integrated technologies and the environmental assurance bonding system developed by costanza and perrings are examined in terms of efficiency and applicability the analysis reveals the following i the application possibilities of the three concepts differ significantly ii a concept which concentrates on the reduction of risk may lead to an increase in ignorance iii while an economic concept may be efficient in the context of risk it can be inefficient when ignorance exists iv a trade off exists between the possibility to precisely state whether an economic concept is efficient and the scope of its applicability

private vs public regulation political economy of the international environment minimum standards set by a world environmental organization weo and ngo labelling are promoted as alternative approaches to international environmental protection we explore the potential inter play between these two approaches when the weo is subject to pressure from producers we find that if weo and ngo schemes are mutually exclusive then the existence of an ngo alternative increases industry resistance to weo proposals and this may reduce welfare if however the schemes are run in parallel existence of the ngo lessens producer opposition to weo activities this allows the weo to be bolder in its proposals which is good for welfare

protecting the environment when costs and benefits are privately known in this survey i analyze different approaches for protecting the environment when stakeholders are privately informed about the costs and benefits of pollution reduction the presence of asymmetric information calls for some important departures from the textbook prescriptions of marketable permits and emission taxes for controlling pollution for instance it may no longer be optimal to equate the social marginal benefits to the marginal cost of cleanup in determining appropriate abatement levels i conclude this review with some suggestions for future research in this area

the importance of taste in experimental auctions consumers valuation of calorie and sweetener labeling of soft drinks a majority of purchases that consumers make are classified as repeat purchases one of the main reasons why consumers make repeat food purchases is the food s taste therefore we examined the importance of including taste testing in nonhypothetical experimental auctions specifically we used two experiments to determine consumers willingness to pay for soft drinks labeled with different calorie and sweetener information in experiment 1 participants tasted the soft drinks prior to the bidding rounds in experiment 2 participants did not taste the soft drinks prior to the bidding rounds bidding behavior for the soft drinks was significantly different between experiment 1 and experiment 2 results suggest that including taste testing in the design of experimental auctions is important to accurately capture consumers willingness to pay for foods that are purchased repeatedly results also imply that policies aimed at combating obesity by making the calorie content of foods more visible may not produce desired outcomes

on the value of commitment with asymmetric information several recent papers have emphasized that long term relationships can be efficiently governed by short term contracts provided that there is no asymmetric information at the contracting dates this excludes not only adverse selection problems but also moral hazards problems in which hidden actions generate private information over the future in this paper we show in the context of a multiperiod principal agent relationship with adverse selection that renegotiable short term contracts can be as efficient as long term renegotiation proof contracts on the other hand spot contracting may fail to achieve long run efficiency not only because of intertemporal smoothing as with symmetric information but also because of ratchet effects and time inconsistency in the optimal structure of informational rents thus some limited commitment seems to be a necessary and sufficient condition to achieve long run efficiency

hotelling under pressure we show that oil production from existing wells in texas does not respond to oil prices while drilling activity and costs respond strongly to explain these facts we reformulate hotelling s class

the scope for taxation and public expenditure in an open economy in this survey of some central issues of tax and expenditure policy in an open economy we consider the implications for policy of free although not necessarily perfect international mobility of commodities capital and labour we examine the issues both from a positive and a normative point of view trying to identify both the incidence and welfare effects of international mobility one general conclusion is that tax distortions may increase in magnitude in comparison with a closed economy but they may also increase in kind as when otherwise neutral taxes become distortionary because of factor mobility

a spoonful of sugar helps the medicine go down the relationship between food prices and medical expenditures on diabetes we investigate the impact of changes in the relative price of low and high carbohydrate foods on medical expenditures for diabetes care using nielsen homescan price data merged to the 2000 2005 medical expenditure panel survey we find that an increase in low high carbohydrate food price increases decreases both the likelihood of a diabetes diagnosis and the level of medical expenditures among those with diabetes we also find small impacts of food prices on body mass index that differ by gender policy simulations suggest that subsidizing the low carbohydrate food purchases of people with diabetes could result in significant reductions in health care costs

regulating an externality generating utility environmental taxes under limited information global warming is currently an important item on most nationalenvironmental agendas in many countries coal fired electricity generatingstations represent an important source of greenhouse gases we examinehow regulations to curb emissions affect public utility pricing regulationwhen regulators act non cooperatively we show that when there is limitedinformation on fixed abatement costs an environmental regulator prefersan emission tax over an output tax or a lump sum environmental tax thepublic utility regulator prefers the lump sum tax regime

creating countervailing incentives through the choice of instruments abstract we analyze the relative efficiency of output and input incentive schemes in an agency model under adverse selection depending on the marginal rate of substitution between effort and productivity two cases of note may appear in the first one both incentive schemes imply the same ranking of agents regarding the productivity parameter in that case one instrument always dominates the other one whatever the agent s type in the second case the two schemes produce reverse rankings and the principal is always better off using a type dependent mixed strategy over the two incentive schemes if there is no restriction on mixed strategies the principal is able to implement the first best if the principal must use pure strategies she is still better off by offering contracts with type dependent monitoring instrument allowing the agent to choose the instrument enhances the principal welfare

food product composition consumer health and public policy introduction and overview of special section as efforts to improve diets in high income countries intensify attention has turned to how policies may influence diet composition the case studies in this special issue contribute to our understanding of how two main types of policies have influenced food product composition and dietary outcomes 1 policies affecting food manufacturers input costs and 2 information policy affecting competition research on the first type of policy is relatively new but suggests that us commodity policies would not be good policy instruments to influence diets except through the long run impacts of agricultural research research on the impacts of information policy continues to demonstrate that it can spur food industry competition to introduce healthier products but may not result in healthier diets international comparisons show where the us experience may have relevance for other high income countries

how social security and medicare affect retirement behavior in a world of incomplete markets this paper provides an empirical analysis of how the u s social security and medicare insurance system affect the labor supply of older males in the presence of incomplete markets for loans annuities and health insurance we estimate a detailed dynamic programming dp model of the joint labor supply and social security acceptance decision focusing on a sample of males in the low to middle income brackets whose only pension is social security the dp model delivers a rich set of predictions about the dynamics of retirement behavior and comparisons of actual vs predicted behavior show that the dp model is able to account for wide variety of phenomena observed in the data including the pronounced peaks in the distribution of retirement ages at 62 and 65 the ages of early and normal eligibility for social security benefits respectively we identify a significant fraction of health insurance constrained individuals who have no form of retiree health insurance other than medicare and who can only obtain fairly priced private health insurance via their employer s group health plan the combination of significant individual risk aversion and a long tailed pareto distribution of health care expenditures implies that there is a significant security value for these individuals to remain employed until they are eligible for medicare coverage at age 65 overall our model suggests that a number of heretofore puzzling aspects of retirement behavior can be viewed as artifacts of particular details of the social security rules whose incentive effects are especially strong for lower income individuals and those who do not have access to fairly priced loans annuities and health insurance

optimal trading ratios for pollution permit markets abstract we demonstrate a novel method for improving the efficiency of pollution permit markets by optimizing the exchange of emissions through trade under full information it is optimal for emissions to exchange according to the ratio of marginal damages under asymmetric information we derive necessary conditions for the marginal damage trading ratios to be optimal illustrate that the marginal damage trading ratios are generally not optimal and show how to improve efficiency using optimal trading ratios we calculate the optimal trading ratios for a global carbon market the gains from using optimal trading ratios rather than marginal damage trading ratios range from substantial to trivial which suggests the need for careful consideration of asymmetric information when designing permit markets

voluntary environmental agreements good or bad news for environmental protection abstract there has been growing interest in the use of voluntary agreements vas as an environmental policy tool this article uses a simple model to determine whether vas are likely to lead to efficient environmental protection we consider cases where polluters are induced to participate either by a background threat of mandatory controls the stick approach or by cost sharing subsidies the carrot approach the results suggest that the overall impact on environmental quality could be positive or negative depending on a number of factors including the allocation of bargaining power the magnitude of the background threat and the social cost of funds

optimal environmental taxation and enforcement policy abstract we study the optimal environmental taxation and enforcement policy when i the regulator does not know the firms abatement costs ii penalties for tax evasion are limited and iii monitoring of pollution is costly we show that the threat of being audited alter the usual firms incentives to over estimate their abatement costs in particular depending on the firms abatement costs the optimal policy may involve over or under deterrence compared to the full information outcome we then investigate the properties of a pollution standard we show that this policy comes close to an environmental tax once the economic incentives of the accompanying enforcement policy are considered