econometric estimation of foresight tax policy and investment in the united states we develop a method for measuring the foresight agents have we first dichotomize an agent s information at current date t into knowledge up to date t 1 f and expectations after t 1 f we then form a residual based test statistic that allows us to compare prediction errors for econometric models based on different values of f we illustrate the method examining investment around tax reforms to measure the foresight firms have about tax policy in this illustration current investment appears to reflect currently available information but little foresight other than foresight of enacted policy changes

taxes housing and capital accumulation in a two sector growing economy abstract it is sometimes argued that the favorable tax treatment afforded to housing may lead to an oversupply of housing at the expense of capital this issue is examined in the context of a growing two sector economy in the basic model where the rate of time preference is constant and labor is instantaneously sectorally mobile the long run response of the capital stock to a tax on housing depends upon the relative capital intensities of the two sectors while the long run relative asset price of housing remains unchanged the robustness of these propositions to changes in the model are considered taxes on capital are also analyzed

inflation tax rates and investment with endogenous financial behavior since modigliani and miller s 24 famous article there has been an extensive theoretical debate over the role of corporate financial policy in determining real investment 3 5 8 13 22 27 28 auerbach 1 and feldstein green and sheshinski 9 assume that an interior debt to total capital ratio exists at the firm level which minimizes the cost of funding investment this position can be theoretically justified if one allows for the presence of default risk with incomplete financial markets 3 bankruptcy costs 5 13 or corporate tax shield substitutes for debt 5 miller 22 on the other hand downplays the importance of capital market imperfections and argues that while in an economy with personal and corporate taxes an interior corporate sector debt ratio will exist at the firm level the choice of financial mix remains irrelevant despite the theoretical attention devoted to this topic virtually no attempts have been made to establish an empirical model for the debt ratio such a model could prove useful in explaining asset yields and real investment or more ambitiously in testing the alternative theories of financial policy determination mentioned above the lack of effort in this area is surprising since many economists apparently believe that the debt ratio is quite important in determining real capital formation and resource allocation 7 10 11 12 20 26 theory alone cannot be used to support this contention since even if one does not accept the modigliani miller reasoning and believes instead that financial policy is chosen optimally the effect of a change in financial policy on the cost of funds will be approximately to the first order zero this is a direct consequence of the envelope theorem which states that a marginal change in a choice variable leaves the objective function unchanged only an empirical study of discrete changes can determine the importance of financial policy for real investment in a recent study 25 we estimated a reduced form model of the corporate sector debt ratio the evidence in that paper supports the notion that increases in the nominal interest rate will encourage firms to increase their debt ratio due to the tax advantages of bond financing and that

international cooperation behind the veil of uncertainty the case of transboundary acidification the complexities of international environmental problems are only poorly understood hence decision makers have to negotiate about abatement measures even though they do not know the true model of the ecological system and have only a rough idea about the costs and benefits of their action it will be analysed to what extent this kind of model uncertainty where players do not only have incomplete information about the payoff functions of the other players but also about their own payoff function affects the prospects of international cooperation using a simple game theoretic model it is shown how countries can use the veil of uncertainty to hide their distributional interests the arguments are based on a deviation from the common prior assumption which seems particularly questionable in a setting comprising various countries with different cultural and scientific backgrounds finally the model will prove useful to quantitatively and qualitatively illustrate the central role of model uncertainty in the negotiations of the first sulphur protocol signed to combat transboundary acidification

international effects of tax reforms in an open economy with international capital flows there is an equivalence relation between income tax consumption tax international borrowing tax and an external interest earning tax this paper analyzes tax reform involving shifts between income and consumption taxes in this setting it is shown that the real effects of such revenue neutral tax reform depend critically on the country s current account position and the nature of the reform in particular whether the world interest rate rises or falls as a consequence of a budget deficit depends on the tax system in force the analysis provides a clear rationale for the international coordination of tax policies copyright 1989 by royal economic society

joint management of emission abatement and technological innovation for stock externalities we investigate how emission abatement and technological innovation provide different solutions to reduce pollutant emissions in the case of a stock externality emission abatement leads to a smooth and continuous adjustment of emissions conversely technological innovation has to be interpreted as an option on a less polluted environment and can justify the use of a pollution threshold above which it is optimal to start a research and development programme for a less polluting technology it is shown that technological innovation interferes with the traditional emission abatement approach the optimal abatement level is logically lowered once the less polluting technology is available nevertheless a temporary increase in emissions is optimal during the research and development period the usual pigouvian tax system proves to remain an efficient corrective instrument a numerical application to the greenhouse effect is provided

causes for an asymmetric relation between the price of crude oil and refined petroleum products we revisit the issue of asymmetries in the relation between the price of crude oil and refined petroleum products in the united states an econometric analysis of monthly data indicates that the asymmetric relation between the price of crude oil and motor gasoline is generated by refinery utilization rates and inventory behavior the asymmetric relation between the price of crude oil and home heating oil probably is generated by contractual arrangements between retailers and consumers together these results imply that price asymmetries may be generated by efficient markets under these conditions there is little justification for policy interventions to reduce or eliminate price asymmetries in motor gasoline and home heating oil markets

explaining output volatility the case of taxation this paper presents strong empirical evidence that the observed heterogeneity of output volatility across countries and over time is partly endogenous in particular based on a closed form solution we obtain a long run equilibrium relationship between taxes and output volatility in the stochastic neoclassical growth model by showing that asymptotically the variance of output growth rates is affected by the level of taxes without affecting the mean we estimate the tax semi elasticities on output volatility and provide convincing empirical evidence that taxes are important to understand differences in output volatility among oecd countries

the role of uncertainty and learning for the success of international climate agreements abstract transnational externalities e g transboundary pollution trade contagious diseases and terrorism warrant coordination and cooperation between governments but this proves often difficult one reason for the meager success is the public good character of many of these economic problems encouraging free riding another reason one might suspect is uncertainty surrounding most environmental problems and in particular climate change this provides often an excuse for remaining inactive paradoxically some recent papers have concluded just the opposite the veil of uncertainty can be conducive to the success of international environmental cooperation in this paper we explain why and under which conditions this can be true however we argue that those conditions are the exception rather than the rule most important we suggest a mechanism for those conditions where learning has a negative effect on the success of cooperation which removes this effect or even turns it into a positive effect our results apply beyond the specifics of climate change to similar problems where cooperation generates positive externalities

unfunded liabilities and uncertain fiscal financing we develop a rational expectations framework to study the consequences of alternative means to resolve the unfunded liabilities problem the projected exponential growth in federal social security medicare and medicaid spending with no known plan for financing the transfers resolution requires specifying a probability distribution for how and when monetary and fiscal policies will change as the economy evolves through the 21st century beliefs based on that distribution determine the existence of and the nature of equilibrium we consider policies that in expectation combine reaching a fiscal limit some distorting taxation modest inflation and some reneging on the government s promised transfers in the equilibrium inflation targeting monetary policy and debt targeting tax policy cannot anchor expectations on those target variables expectational effects are always present but need not have large impacts on inflation and interest rates in the short and medium runs in the economy s stationary distribution the capital stock may grow or shrink and substantial probability falls on little or no reneging

optimal learning on climate change why climate skeptics should reduce emissions climate skeptics typically argue that the possibility that global warming is exogenous implies that we should not take additional action towards reducing emissions until we know what drives warming this paper however shows that even climate skeptics have an incentive to reduce emissions such a directional change generates information on the causes of global warming since the optimal policy depends upon these causes they are valuable to know although increasing emissions would also generate information that option is inferior due its irreversibility we show that optimality can even imply that climate skeptics should actually argue for lower emissions than believers

risk the financial market and macroeconomic equilibrium growing recognition of the importance of stock market phenomena to the real economy underscores the need for models linking exogenous uncertainty asset market performance and the rest of the economy in an optimizing framework without certainty equivalence this paper constructs a three agent model with continuous time stochastic variables uncertain private production and government expenditure and forward looking rational agents the growth rate of output physical capital accumulation financial asset returns and uncertain inflation are determined as functions of the exogenous uncertainty in the economy analysis of the model finds that increased risk associated with government policy often reverses in an explainable way the conventional comparative static predictions of nonstochastic macro models

uncertainty learning and international environmental policy coordination in this paper we construct a simple model of global warming which captures a number of key features of the global warming problem i environmental damages are related to the stock of greenhouse gases in the atmosphere ii the global commons nature of the problem means that these are strategic interactions between the emissions policies of the governments of individual nation states iii there is uncertainty about the extent of the future damages that will be incurred by each country from any given level of concentration of greenhouse gases but there is the possibility that at a future date better information about the true extent of environmental damages may become available an important aspect of the problem is the extent to which damages in different countries may be correlated in the first part of the paper we consider a simple model with two symmetric countries and show that the value of perfect information is an increasing function of the correlation between damages in the two countries in both the cooperative and non cooperative equilibria however while the value of perfect information is always non negative in the cooperative equilibrium in the non cooperative equilibrium there is a critical value of the correlation coefficient below which the value of perfect information will be negative in the second part of the paper we construct an empirical model of global warming distinguishing between oecd and non oecd countries and show that in the non cooperative equilibrium the value of perfect information for oecd countries is negative when the correlation coefficient between environmental damages for oecd and non oecd countries is negative the implications of these results for international agreements are discussed

fundamental irreversibilities in stock externalities abstract this paper concerns the irreversibility effect in stock externalities in an environment of uncertainty with learning taking place one may wish to under emit today to avoid potential environmental irreversibilities alternatively one may wish to under invest in pollution control capital avoiding investments in sunk capital that turn out to be wasted the paper develops theoretical results on the tension between these two effects and separates risk aversion from the irreversibility effect the paper also presents a simple example in climate change policy

environmental consciousness and moral hazard in international agreements to protect the environment abstract a group of countries that can potentially commit to cooperation to protect the environment are identified as environmentally conscious countries conditions are examined under which they can provide self financing side payments too a second group of less environmentally conscious countries so that the two groups form a global or partial stable coalition that agrees to reduce emissions a mechanism that detects cheating is also developed in order to induce the desired emissions even when the emissions level of an individual country cannot be observed by the rest of the participating countries

domestic and foreign disturbances in an optimizing model of exchange rate determination abstract this paper analyzes the effects of various disturbances of domestic and foreign origin in a small open economy under imperfect capital mobility in which the behavioral relationships are divided from optimization by the private sector in this model the domestic economy jumps instantaneously to its new equilibrium following a change in either the domestic monetary growth rate or domestic fiscal policy in response to a disturbance in either the foreign interest rate or inflation rate the economy undergoes an initial partial jump towards its new equilibrium which it thereafter approaches gradually the implications of these results for exchange rate adjustments and the insulation properties of flexible exchange rates are discussed

looking for a guide to protect the environment the development of the precautionary principle abstract if the precautionary principle is to become the guide of the international community for environmental protection policies an economic interpretation of the principle is in order the analysis of case studies and a survey of the recent decision theoretic literature show the lack of a fully satisfactory economic model more generally various theoretical and empirical results show that the principle cannot be assumed to apply a priori though it has been proposed by international treaties as a rule of thumb for situations of scientific uncertainty the precautionary principle could actually be inefficient

green commuting and gasoline taxes in the united states abstract this paper analyzes how gasoline tax rates are related to the time workers in the united states spend commuting by private car public transport or with other physical modes of transport our identification strategy relies on both inter state differences and time variations in gasoline taxes using the american time use surveys for the years 2003 2015 we find that higher gasoline tax rates are related to less time spent in commuting furthermore higher gasoline taxes are related to less commuting by private car and more commuting by public transport and or a physical mode of transport walking or cycling our results highlight the importance of gasoline taxes in the consumption of energy for personal transport as higher gasoline taxes are related to a greater use of green modes of transport showing that fuel taxes are important for good environmental management

an intertemporal general equilibrium analysis of financial crowding out a policy model and an application to australia abstract this paper constructs a two period perfect foresight general equilibrium model that analyzes crowding out private investment is debt financed while government deficits are financed by money and debt the existence of equilibrium is demonstrated and the model is applied to australia for 1981 1982 the last years for which australia had a fixed exchange rate a benchmark solution is derived and two counterfactual simulations are carried out small increases in real government spending are found not to lead to crowding out while an increase in the debt financed portion of the government s budget deficit does lead to crowding out

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

growth effect of taxes in an endogenous growth model to what extent do taxes affect economic growth abstract this paper presents an endogenous growth model comprising of financial human and physical capital and incorporating major features of a general tax system technology and preference parameter values in the model are chosen to fit the actual growth experiences of the united states and a rapidly growing east asian nic using the calibrated model i assess the role of differences in taxes and other variables in explaining the difference in growth rates the main findings are i the difference in tax systems across countries explains a significant proportion around 30 of the difference in growth rates ii the difference in preferences explains at most 4 and iii differences in labor income tax debt equity ratio and inflation can be important in explaining the growth difference further i evaluate the contribution of the monetary factor to the growth rate gap and the growth effect of us tax reforms e g revenue neutral changes in relative tax structure

redistributive taxation in a simple perfect foresight model abstract we investigate the redistributive potential of capital taxation in an intertemporal maximizing model of capital formation first even unanticipated redistributive capital taxation is severely limited in its effectiveness since it depresses wages second under any convergent redistributive tax policy which maximizes a paretian social objective the capital income tax will converge to zero independent of the factor supply elasticities these results are independent of workers holdings of capital

regulation with anticipated learning about environmental damages a regulator anticipates learning about the relation between environmental stocks and economic damages for a model with linear quadratic abatement costs and environmental damages and a general learning process we show analytically that anticipated learning decreases the optimal level of abatement at a given information set if learning causes the regulator to eventually decide that damages are higher than previously thought learning eventually increases abatement learning also favors the use of taxes rather than quotas using a model that is calibrated to describe the problem of global warming we show numerically that anticipated learning causes a significant reduction in first period abatement and a small increase in the preference for taxes rather than quotas even if the regulator s initial priors about environmental damages are much too optimistic he is able to learn quickly enough to keep the expected stock trajectory near the optimal trajectory

climate change mitigation and adaptation with uncertainty and learning one of the major issues in climate change policy is how to deal with the considerable uncertainty that surrounds many of the elements some of these uncertainties will be resolved through the process of further research this process of learning raises a crucial timing question should society delay taking action in anticipation of obtaining better information or should it accelerate action because we might learn that climate change is much more serious than expected much of the analysis to date has focussed on the case where the actions available to society are just the mitigation of emissions and where there is little or no role for learning we extend the analysis to allow for both mitigation and adaptation we show that including adaptation weakens the effect of the irreversibility constraint and so for this model makes it more likely that the prospect of future learning should lead to less action now to deal with climate change we review the empirical literature on climate change policy with uncertainty learning and irreversibility and show that to date the effects on current policy are rather small though this may reflect the particular choice of models employed

stochastic control for economic models past present and the paths ahead abstract on the 30th anniversary of a meeting between engineers and economists at princeton university to discuss the potential application of stochastic control methods to economics this paper provides a review of past present and paths ahead the events surrounding some of the key developments of the past are described along with a discussion of the present state of the research and of paths for future research the paper is structured around the primary methods for solving quadratic linear economic stochastic control models namely open loop classical control handcrafted feedback rules optimal feedback min max control optimal feedback rules with parameter uncertainty and dual control the paper also includes a discussion of software developments in economic stochastic control modeling

irreversible abatement investment under cost uncertainties tradable emission permits and emissions charges abstract a major concern with tradable emission permits is that stochastic permit prices may reduce a firm s incentive to invest in abatement capital or technologies relative to other policies such as a fixed emissions charge however under efficient permit trading the permit price uncertainty is caused by abatement cost uncertainties which affect investment under both permit and charge policies we develop a rational expectations general equilibrium model of permit trading and irreversible abatement investment to show how cost uncertainties affect investment under permits we compare the resulting investment incentive with that under charges after controlling for the assumption that random shocks affect the abatement cost linearly we find that firms investment incentive decreases in cost uncertainties but more so under emissions charges than under permits therefore tradable permits in fact may help maintain firms investment incentive under uncertainty

correlated equilibrium as an expression of bayesian rationality if it is common knowledge that the players in a game are bayesian utility maximizers who treat uncertainty about other players actions like any other uncertainty then the outcome is necessarily a correlated equilibrium random strategies appear as an expression of each player s uncertainty about what the others will do not as the result of willful randomization use is made of the common prior assumption according to which differences in probability assessments by different individuals are due to the different information that they have where information may be interpreted broadly to include experience upbringing and genetic makeup copyright 1987 by the econometric society

the impacts of international tourism demand on economic growth of small economies dependent on tourism abstract this paper studies the impacts on economic growth of a small tourism driven economy caused by an increase in the growth rate of international tourism demand we present a formal model and empirical evidence the ingredients of the dynamic model are a large population of intertemporally optimizing agents and an ak technology representing tourism production the model shows that an increase in the growth of tourism demand leads to transitional dynamics with gradually increasing economic growth and increasing terms of trade in our empirical application an econometric methodology is applied to annual data of antigua and barbuda from 1970 to 2008 we perform a cointegration analysis to look for the existence of a long run relationship among variables of economic growth international tourism earnings and the real exchange rate the exercise confirms the theoretical findings

the economic effects of production taxes in a stochastic growth model this paper analyzes the effects of stochastic taxes on production in simple stochastic growth model in so doing the paper explicitly examines the importance of uncertainty on the decisions of individual agents this importance is emphasized by comparing economic outcome to various realizations of tax rates under uncertainty and perfect foresight copyright 1990 by american economic association

a dynamic theory of factor taxation many important questions in macroeconomics concern the impact of taxation and spending policies on private resource allocation one approach typified by robert hall 1971 and william brock and stephen turnovsky 1981 is to use dynamic general equilibrium models to address basic issues in fiscal and tax policy the objective is to explicitly examine macroeconomic issues without embracing the market imperfections fixed prices missing markets money illusion etc found in conventional macroeconomic analysis there is currently great interest in dynamic fiscal policy problems this decade has already seen two major adjustments in tax policy and many attempts to substantially alter spending patterns the result of this tumult has been unprecedented peacetime deficits and much uncertainty about what measures will ultimately be used to bring the budget into balance in this paper i discuss the impact of alternative fiscal policies in a dynamic general equilibrium model i examine the shortrun effects of fiscal policy changes the efficiency cost of alternative dynamic tax policies the effects of uncertain policy formation and the redistributive effects of factor taxation

risk averse mitigation decisions in an unpredictable climate system risk aversion plays a central role in the decisions made in the face of uncertainties and climate change mitigation should be no exception however the interlinkage of risk aversion and climate change uncertainties has hardly been investigated numerically in part because of the computational difficulties of stochastic optimization in this paper we apply the numerical techniques of stochastic optimization to the economic modeling of climate change with the aim of modeling the decision preferences of a risk conscious agent in the face of unpredictable climate change the model underlines the critical role played by the risk aversion parameter in determining the effects of uncertainties on mitigation not only in level but also in sign

providing global public goods under uncertainty abstract we study how uncertainty and risk aversion affect international agreements to supply global public goods we consider a benchmark model with homogeneous countries and linear payoffs when countries directly contribute to a public good uncertainty tends to lower signatories efforts but may increase participation despite risk aversion uncertainty may improve welfare in contrast when countries try to reduce a global public bad uncertainty tends to increase signatories efforts and decrease participation in that case an ex ante reduction of uncertainty may have a large positive multiplier effect on welfare

multiple capital inputs q and investment spending despite their explicit treatment of dynamics and solid theoretical basis investment models based on the brainard tobin q have recorded a generally disappointing empirical performance when the q model is expanded to recognize the possibility that the value of the firm depends on two or more capital inputs with differing adjustment cost technologies the econometric equation following from optimizing behavior includes q as well as a set of additional explanatory variables the importance of these omitted variables is assessed and the capital homogeneity assumption for equipment and structures implicit in conventional q models is rejected the multi capital q model is then extended in two ways i adding inventory research and development and labor as quasi fixed factors and ii exploring the sensitivity of the instrumental variables estimates to normalization we conclude that the multi capital q model is a useful extension that overcomes an important omitted variables problem in the conventional q framework

learning and stock effects in environmental regulation the case of greenhouse gas emissions abstract this paper concerns the optimal regulation of greenhouse gases that lead to global climate change in particular we focus on uncertainty and learning which over time resolves uncertainty we present an empirical stochastic model of climate economy interactions and present results on the tension between postponing control until more is known vs acting now before irreversible climate change takes place uncertainty in our model is in the damage caused by global warming the results suggest that a temporary carbon tax may dominate a permanent one because a temporary tax may induce increased flexibility

designing climate mitigation policy this us paper provides an exhaustive review of critical issues in the design of climate mitigation policy by pulling together key findings and controversies from diverse literatures on mitigation costs damage valuation policy instrument choice technological innovation and international climate policy the authors begin with the broadest issue of how high assessments suggest the near and medium term price on greenhouse gases would need to be both under cost effective stabilization of global climate and under net benefit maximization or pigouvian emissions pricing the remainder of the paper focuses on the appropriate scope of regulation issues in policy instrument choice complementary technology policy and international policy architectures

2 00 gas studying the effects of a gas tax moratorium there are surprisingly few estimates of the effects of sales taxes on retail prices especially at the firm level we consider the temporary suspension and subsequent reinstatement of the gasoline sales tax in illinois and indiana following a price spike in 2000 earlier laws set the timing of the reinstatements providing plausibly exogenous changes in the tax rates using a unique dataset of daily prices at the gas station level 70 of the tax suspension is passed on to consumers in the form of lower prices while 80 100 of the tax reinstatements are passed on to consumers some evidence suggests that these short run pass through estimates are smaller near the state borders with the tax reinstatements associated with relatively higher prices up to an hour s drive into neighboring states

tax analysis in a real business cycle model on measuring harberger triangles and okun gaps abstract a tax distorted real business cycle model is parameterized calibrated and solved numerically in an attempt to measure the size of harberger triangles relative to okun gaps in particular the model constructed is used to study quantitatively the impact of various distortional government tax and subsidy schemes it is shown that the government can use tax policy to stabilize cyclical fluctuations and this is done for the economy being studied the benefits of implementing such a stabilization policy are calculated and compared with the size of the welfare gains realized from reducing various tax distortions

taxes cost and demand shifters as determinants in the regional gasoline price formation process evidence from spain abstract this paper examines the pass through of regional tax changes and spot price variations to regional gasoline prices in spain it also analyzes the impact of all major cost and demand shifters that contribute to regional gasoline price formation to address these research issues a reduced form price equation using monthly time series cross sectional tscs data from january 2004 through december 2008 is estimated strong and consistent evidence of full shifting of regional tax changes to regional gasoline prices is found gasoline spot price changes are more than proportionally passed through to retail prices in addition the empirical evidence shows on the one hand that regional gasoline price differences before taxes continue to be quite narrow and on the other hand that there is still a margin for larger gasoline price differences among regions this suggest that traditional practices from the monopoly era i e relatively uniform regional gasoline prices persist after the market has been liberalized which may have been facilitated by the strong and uniform presence of the major spanish based refining companies in the retail sector over the whole country

the equity premium in brock s asset pricing model abstract in this paper we combine dynamic programming methods with projection methods for solving stochastic growth models as an application of these methods we solve brock s asset pricing model with a variety of parameterizations we focused on finding parameterizations that result in an equity premium that is high relative to the variation in consumption we show both analytically and numerically that the equity premium can be higher in a production based asset pricing model than it is in the consumption based asset pricing model even when the real output level is the same in both models

uncertainty learning and heterogeneity in international environmental agreements this paper concerns the formation of international environmental agreements under uncertainty about environmental damage with different models of learning complete learning partial learning or no learning the results of the existing literature are generally pessimistic the possibility of either complete or partial learning generally reduces the level of global welfare that can be achieved from forming an iea relative to no learning that literature regards uncertainty as a parameter common to all countries so that countries are identical ex ante as well as ex post in this paper we extend the literature to the case where there is no correlation between damage costs across countries each country is uncertain about a particular parameter in our case the benefit cost ratio drawn from a common distribution but ex post each country s realized parameter value is independently drawn consequently while countries remain identical ex ante they may be heterogeneous ex post we show that this change reinforces the negative conclusions about the effects of partial learning on international environmental agreements but under certain conditions moderates the negative conclusions about the effects of complete learning

tax changes and phase diagrams for an overlapping generations model the literature evaluating tax changes within an intertemporal general equilibrium framework subdivides into representative agent and overlapping generations formulations papers in the former class have developed techniques analogous to those routine for static analyses i show that the same general approach works for the overlapping generations model the context is the system from auerbach and kotlikoff s dynamic fiscal policy the proposed methodology allows one to examine stability and determinancy issues for the model it deals precisely with small policy changes and it can easily handle bundles of changes i present comparative static results for comparison with existing work

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

the environmental and macroeconomic effects of socially responsible investment abstract we analyze the effects of socially responsible investment and public abatement on environmental quality and the economy in a continuous time dynamic growth model featuring optimizing households and firms environmental quality is modeled as a renewable resource consumers can invest in government bonds or firm equity since investors feel partly responsible for environmental pollution when holding firm equity they require a premium on the return to equity we show that socially responsible investment behavior by households partially offsets the positive effects on environmental quality of public abatement policies

distortions and intertemporal welfare in a small open economy introducing intertemporal considerations into the open economy theory of distortions and welfare does not alter the fundamental conclusions drawn in static models dynamic welfare is evaluated for a small open economy which is in transition from one steady state to another because of a change in the distortion we demonstrate that if the change moves the new steadystate capital stock away from the socially optimal level trade intervention is superior to free trade this result holds even though the new steady state under trade intervention is pareto inferior to that under free trade

alternative forms of government expenditure financing a comparative welfare analysis this paper derives criteria for evaluating the impact of an increase in government expenditure on both the time path of instantaneous utility and overall welfare under alternative forms of tax financing these consist of three factors the first is the direct crowding out effect which reflects the utility differential between the government expenditure being undertaken and the private consumption it is displacing the second describes the intertemporal trade off between the effect on the short run rate of capital accumulation and the resulting change in the the long run capital stock the final term is due to the distortion arising from the pre existence of a tax on wage income copyright 1992 by the london school of economics and political science

the incidence of taxes a dynamic macroeconomic analysis abstract this paper analyzes the incidence of various tax changes using the intertemporal optimizing framework developed by brock and turnovsky the model contains a reasonably complete specification of the corporate sector in which firms have the choice of financial structure it also allows for a range of government financial policies although only one is considered in detail both the short run and the long run effects of changes in the personal income capital gains and corporate profit tax rates are analyzed it is shown that the effects of tax changes a vary between the short and long run b the effects of tax changes depend critically upon the financial structure adopted by forms and c may also depend upon government financial policy

econometric estimation of foresight tax policy and investment in the u s we develop a method for measuring the foresight agents have we first dichotomize an agent s information at current date t into knowledge up to date t 1 f and expectations after t 1 f we then form a residual based test statistic that allows us to compare prediction errors for econometric models based on different values of f we illustrate the method examining investment around tax reforms to measure the foresight firms have about tax policy in this illustration current investment appears to reflect currently available information but little foresight other than foresight of enacted policy changes

incidence of federal and state gasoline taxes the federal specific gasoline tax falls equally on consumers and wholesalers whereas state specific taxes fall almost entirely on consumers the consumer incidence of state taxes is greater in states that use relatively little gasoline

consumption externalities habit formation and equilibrium efficiency we analyze the welfare properties of the competitive equilibrium in a capital accumulation model where individual preferences are subject to both habit formation and consumption spillovers using an additive specification for preferences according to which the argument in the utility function is a linear combination of present and past values of own consumption and consumption spillovers we analyze the circumstances under which these spillovers are a source of inefficiency it is shown that consumption externalities have to interact with habits in order to generate an inefficient dynamic equilibrium finally we characterize optimal tax policies aimed at restoring efficient decentralized paths

optimal environmental management in the presence of irreversibilities abstract we consider an environment of a fixed size that can be converted to another use this conversion can be made in steps but it is irreversible the future benefits per unit from the original use and from the alternative use follow a diffusion process for a fairly general case we show that the value function must be the unique viscosity solution to the associated hamilton jacobi bellman equation we also exhibit several properties of the solution for the case of constant relative risk aversion between 0 and 1 and a log linear diffusion for the benefits journal of economic literature classification numbers c61 d90 q30

tobin s q investment and the endogenous adjustment of financial structure abstract should q theory be modified to take account of financial structure this paper analyzes a general equilibrium q model where financial structure affects firm value agency costs and taxes combine to yield an interior solution for the endogenous debt equity ratio although q is still a sufficient statistic for investment the endogenous adjustment of financial structure alters the relation between the interest rate and investment in this model an increase in the corporate tax rate could either raise or lower the steady state capital stock furthermore both q and investment could jump in opposite directions to that of their steady state values

capital income taxation and perfect foresight abstract this paper develops a perfect foresight model of capital income taxation in a representative household neoclassical one sector framework the household sector is based on intertemporal utility maximization the main result is the equivalence of a perfect foresight solution and an artificial central planning solution if there is no tax this is the equivalence of a market equilibrium and social optinum the equivalence result is used to deduce the implications of a partial tax reform policy it is shown that a partial reform increases capital at each time following the initial period of the program

technological change and the superneutrality of money note the study of the effect of the supply of money on real economic variables has had a long history in economic research sidrauski 8 was the first to demonstrate that in the context of an intertemporal maximizing model with real money balances in the utility function the rate of monetary expansion did not influence the steady state capital stock or the real rate of interest this result termed the superneutrality of money contrasted sharply with previous models which did not use such an optimizing framework 1 subsequent studies have shown that the superneutrality result can be altered if some of the assumptions of the sisrauski model are modified if money is a productive input 3 5 or if the labor supply is endogenous 1 then the real rate of interest or the capital labor ratio is not invariant to the monetary growth 2 however no one has yet examined the effect of differing money growth when technological change is present this omission seems especially serious since superneutrality properties apply to the comparative steady state behavior of the economy 3 4 this note attempts to fill this gap by demonstrating that even the simple forms of technological change will in general nullify the superneutrality result and that the real rate of interest and the capital labor intensity will depend on the parameters of the utility function in particular it is shown that only if the utility function is of the class exhibiting constant relative risk aversion in all arguments will the superneutrality of money be valid

global warming endogenous risk and irreversibility this paper develops two period analytical and numerical models to study the question given a stock of greenhouse gases that poses a risk of future damages of unknown magnitude and the possibility of learning about damages how do sunk abatement capital and a nondegradable stock of greenhouse gases affect optimal first period investment we show that both affect investment the former negatively and the latter positively additionally endogenous risk the risk of damages dependent on the stock of gases results in an increase in optimal investment for any level of capital sunkness or greenhouse gas degradability quantitatively the effect of sunk capital is stronger than the effect of greenhouse gas irreversibility or that of endogenous risk

can uncertainty alleviate the commons problem global commons problems such as climate change are often affected by severe uncertainty the paper examines the effect of uncertainty on pollution emissions and welfare in a strategic context we find that emissions are always lower under uncertainty than under certainty reflecting risk reducing considerations we show that uncertainty can have a net positive impact on the welfare of risk averse polluters we extend the analysis to increases in risk increases in risk aversion and to risk heterogeneity jel d81 c72 q54 h23

communicating trade offs amid controversial science decision support for climate policy abstract the paper considers the decision that arises in climate policy where there is expert disagreement about the correct scientific model and where a group of stakeholders needs to agree on a common policy target policy choice is posed as a decision under knightian uncertainty where decision makers lack grounds for assigning a particular probability distribution across contending forecasting models the decision is then framed as one of balancing two competing objectives that plausibly align with the dominant concern of stakeholders from each side in the policy debate a decision criterion is proposed to identify options for compromise that balance these objectives in different ways the criterion spans three standard non bayesian decision criteria policies generated by the criterion are combined with visual tools to communicate what s at stake in an environmental policy decision in which stakeholders disagree both about scientific models and about the relative importance of risks to the environment versus risks to economic growth the approach summarizes information that could be useful to policy makers tasked with negotiating a compromise the framework is applied to climate policy using dice 2007 nordhaus 2008 the results highlight a basic asymmetry between the mistake of doing too little and that of doing too much that suggests a strong argument for avoiding the current status quo of global inaction

fuel tax incidence and supply conditions abstract the incidence of taxes on consumers and producers plays a central role in evaluating energy tax policy yet the literature testing the main predictions of the tax incidence model is sparse in this paper we examine the pass through rate of state gasoline and diesel taxes to retail prices and importantly we estimate the dependence of pass through on factors constraining the gasoline and diesel supply chains we consider several factors that alter the elasticity of supply including within state heterogeneity in gasoline content requirements refinery capacity utilization inventory constraints and variation in the demand for untaxed uses of diesel in general we find that in periods of time when the supply chain is constrained and the constraint is plausibly unrelated to shifts in demand the pass through rate of fuel taxes declines we describe several potential implications for tax policy including tax breaks during peak driving season and during times of supply disruptions such as after major hurricanes

the effects of taxes and dividend policy on capital accumulation and macroeconomic behavior abstract this paper analyzes the macrodynamic effects of changes in various tax rates in an intertemporal optimizing framework two aspects emphasized include the role of dividend policy and the behavior of the stock market both permanent and temporary tax changes are considered with the transitional adjustment paths being characterized in detail the contrast between the short run and long run effects is highlighted in particular an increase in any of the tax rates will cause short run employment to fall and with the capital stock fixed instantaneously the capital labor ratio immediately rises over time as the capital stock declines the capital labor ratio falls

strategic information acquisition and the mitigation of global warming abstract we consider the strategic role of uncertainty and information acquisition for the mitigation of global warming before the countries decide on their contribution to a mitigation of global warming they may invest in information about the country specific benefit of reductions of the emissions of greenhouse gases we show that information acquisition has a substantial strategic value countries may prefer not to learn their benefit of climate protection even if information acquisition does not involve a direct cost this strategic information choice may further decrease the efficiency of the public good provision

debt and distortionary taxation in a simple perfect foresight model abstract we examine the real effects of a temporary substitution of debt for distortionary income taxation we find that such a policy may reduce consumption increase investment and reduce interest rates these results arise even though we examine the same model used by barro where temporary substitution of debt for lump sum taxes was shown to have no real effects we show that these anti keynesian effects on consumption are as significant as various pro keynesian effects such as finite lives hence the impact of debt is an empirical issue and ricardian neutrality appears to be a reasonable benchmark

uniform labor income taxation and economic efficiency abstract this paper uses a two period representative agent optimal taxation model to characterize government tax policy when the interest rate is determined in equilibrium and is affected by policy choices it shows that dynamic tax smoothing may not be optimal and the response of the interest rate with respect to policy choices is extremely important in characterizing government s tax policy

taking one for the team is collective action more responsive to ecological change debate persists around the timing of risk reduction strategies for large scale ecological change for three reasons risks are difficult to predict they involve irreversibilities and they impact multiple jurisdictions the combination of these three factors creates a general class of filterable spatial dynamic externalities fsde in which one person s risk reduction investments reduce or filter undesirable events experienced by others and underestimates the option value placed on being able to respond to new information about the consequences of ecological change by focusing on the optimal intervention decision we illustrate how and when the opposing forces created by an fsde will lead to a divergence in private and collective risk reduction strategies we use bioinvasions as our motivating example the bioinvasion first hits one jurisdiction and that jurisdiction s risk reduction investment reduces the risk faced by all other jurisdiction we find that efforts to internalize the full benefits of risk reduction investments may have unintended consequences on the responsiveness of environmental policy there is a social welfare gain from asking the first jurisdiction to delay a risk reduction investment to internalize the option values of all at risk jurisdictions

specifications of social welfare in economic studies of climate policy overview of criteria and related policy insights an important assumption in economic studies of climate policy is the social welfare function this paper shows that applying distinct decision or social welfare criteria can result in different optimal policies of climate control notably if climate change impacts are uncertain first decision criteria in current climate economic studies are reviewed next the most important alternatives are discussed including their mathematical formalization and incorporation in economy climate models most of these alternative criteria suggest more stringent climate policies to be optimal than the standard discounted utilitarianism approach however several important welfare criteria have not or hardly seen any application in the economic analysis of climate policy we conclude that there is clear need for systematic research on this theme for which the current review provides a solid basis

pass through of motor gasoline taxes efficiency and efficacy of environmental taxes abstract to investigate the efficacy and efficiency of environmental taxes i analyze the rate at which taxes on motor gasoline are passed to consumers by estimating two cointegrating vector autoregression models for each of six states for state models that specify the retail price of motor gasoline without taxes exclusion tests suggest that taxes on motor gasoline are not passed to consumers on a one for one basis for state models that specify the retail price of motor gasoline including taxes results indicate that taxes are passed to wholesale prices in florida and massachusetts on a one for one basis and are passed to retail prices with a mark up in florida massachusetts new york and ohio and are not fully passed through in washington state specific rates of pass through differ from results suggested by theory and fixed effects estimators which may be biased by the presence of nonstationary data and the assumption that the rate of pass through is the same across states rates of pass through greater than one transfer 12 2 billion from consumers to retailers in fl 2 3 billion in ma and 19 2 billion in ny during the sample period which represent 10 7 6 0 and 23 9 of total expenditures on regular motor gasoline

perfect competition urbanization and tax incidence in the retail gasoline market i introduction in applied tax incidence studies it is typically assumed that prices respond one for one to changes in sales and excise taxes chernick and reschovsky 1997 pechman 1985 shepard 1976 state of wisconsin department of revenue 2004 wiese rose and schluter 1995 zupnick 1975 is this assumption reasonable despite the fundamental role of tax incidence in the study of public finance there is surprisingly little empirical analysis that sheds light on who bears the burden of taxes in this article we examine the incidence of state gasoline excise taxes using monthly price data for all 50 states in the united states over the period 1984 1999 our estimation results generally indicate full shifting of gasoline taxes to the final consumer with changes in gasoline taxes fully reflected in the tax inclusive gasoline price almost instantly we also find that the incidence of excise taxes depends on the competitiveness of retail gasoline markets e g urban vs rural markets gasoline markets in urban states typically exhibit full shifting but those in rural states demonstrate somewhat less than full shifting although the issue of sales and excise tax incidence has received considerable attention over the years most research has focused on tax incidence theory and the standard conclusion of much of this theoretical analysis is that consumers bear the full burden of any sales and excise taxes 1 based primarily on this theoretical foundation most applied incidence studies assume that sales and excise taxes are fully reflected in consumer prices and the distribution of tax burdens across income classes necessarily reflects this assumption however actual empirical testing of this assumption of full forward shifting has been surprisingly sparse 2 in important recent research poterba 1996 and besley and rosen 1999 have conducted empirical analyses of the incidence of excise taxes poterba 1996 uses city specific clothing and personal care price data covering the 1947 1977 and the 1925 1939 periods to examine the degree to which state and local retail sales taxes are shifted to consumers with two data sets based on bureau of labor statistics bls city specific consumer price indices using these bls data on tax inclusive prices poterba 1996 constructs quarterly price indices for each of 28 standard metropolitan statistical areas smsas many of these 28 smsas experienced significant changes in sales tax rates and poterba 1996 uses these tax shocks to determine the incidence of sales taxes his estimation results are somewhat variable but in general he finds for the postwar period that taxes are fully shifted to consumers in some cases he finds limited evidence of overshifting although it is never possible to reject the null hypothesis that prices rise point for point with the changes in the tax and he also finds that full shifting typically though not always occurs in the first quarter of the tax change poterba 1996 also examines tax incidence for individual smsas during the depression era and his results indicate significant differences across metropolitan areas in the degree of tax shifting for example prices on women s clothing in chicago show significant overshifting but atlanta shows negative shifting a result that does not seem plausible besley and rosen 1999 also examine the incidence of sales taxes using price data for 12 narrowly defined commodities in 155 different u s cities using quarterly price data for the period 1982 1990 issued by the american chamber of commerce researchers association accra 3 they not only find full shifting for a number of commodities but also find overshifting for more than half the products a result they attribute to imperfect competition in the retail sector while this recent empirical research has significantly expanded our understanding of the actual nature of sales and excise tax incidence we believe that our work here on gasoline excise taxes makes several contributions to the empirical literature

the welfare cost of factor taxation in a perfect foresight model this paper examines the marginal efficiency cost of various factor taxes in a dynamic general equilibrium model the au thor solves for the excess burden of anticipated and unanticipated t emporary and permanent tax policies using a range of estimates for taste and technology parameters he finds excess burdens larger than those indicated by previous studies that use static models these exc ess burdens are sensitive to parameter values and timing however th e rankings of alternative tax policies turn out to be insensitive to structural parameter values copyright 1987 by university of chicago press

international macroeconomic policy coordination when policymakers do not agree on the true model the authors relax the assumption of the literature on international coordination that policymakers know the true model t wo countries will still be able to agree on a cooperative policy pack age that each believes will improve the objective function relative t o the nash noncooperative solution however the bargaining solution may move the target variables in the wrong direction these points ar e illustrated with monetary and fiscal multipliers taken from simulat ions of ten leading econometric models out of 1 000 possible combina tions of models that could represent u s beliefs non u s beliefs and the true model monetary coordination improves u s welfare in on ly 546 cases copyright 1988 by american economic association

uncertainty learning and international environmental agreements the role of risk aversion this paper analyses the formation of international environmental agreements ieas under uncertainty learning and risk aversion it bridges two strands of the iea literature i the role of learning when countries are risk neutral ii the role of risk aversion under no learning combining learning and risk aversion seems appropriate as the uncertainties surrounding many international environmental problems are large often highly correlated e g climate change but are gradually reduced over time through learning the paper analyses three scenarios of learning a key finding is that risk aversion can change the ranking of these three scenarios of learning in terms of welfare and membership in particular the negative conclusion about the role of learning in a strategic context under risk neutrality is qualified when countries are significantly risk averse then it pays them to wait until uncertainties have been largely resolved before joining an iea this may suggest why it has been so difficult to reach an effective climate change agreement

supply side reforms and learning dynamics this paper studies the nature the magnitude and the length of the transition after a capital tax cut the transition is analysed with adaptive learning under which agents do not need to adjust instantaneously to the change as with rational expectations re impulse response analysis reveals that the transition with learning is asymmetrically sensitive to the nature of the exogenous technological shock at the time of the reform if the reform coincides with a negative shock the transition to the new steady state is slow whereas if it coincides with a positive shock it is approximately the same as the one predicted by re the results imply that cutting capital income taxes before or during a recession may not be an effective means for short run fiscal stimulus

modeling the forms of international cooperation distribution versus information the problems of distribution and information impede international cooperation they arise when actors select how they will cooperate an exploration of the interaction between these problems using a limited information model of cooperation leads to six conclusions first leadership solutions to coordination problems always exist but leadership here is very different from hegemonic provision of public goods second actors can cooperate in the face of anarchy even without a shadow of the future third diffuse reciprocal strategies arise naturally in coordination problems fourth norms and institutions are intertwined within successful cooperation fifth the form of cooperation on an issue varies with the relative importance of distribution and information finally and most important distributional and informational problems interfere with each other arrangements to cooperate can successfully address one but not both of these problems

piercing the veil of uncertainty in transboundary pollution agreements this paper addresses the question of how uncertainty in costs and benefits affects the difficulty of reaching a voluntary agreement among sovereign states a measure of difficulty is constructed related to side payments necessary to make an agreement a pareto improving move using a simple model it is shown that uncertainty actually makes agreement easier

taxation and uncertainty while taxes may be certain u s tax policy has certainly not been furthermore intrinsic economic risk makes investment decisions risky therefore a serious examination of the effects of tax policy on dynamic economic behavior should consider both sources of uncertainty this paper presents a simple theoretical and computational model that can analyze both intrinsic risk and uncertain taxation furthermore it will be clear that these techniques will be useful for examining general problems of taxation and risk when studying the impact of past and or proposed tax changes one of two extreme assumptions are usually made either agents are perfectly aware of future tax policy a perfect foresight assumption or they always believe that no change will ever occur a myopic foresight assumption these two assumptions yield substantially different views of recent tax experience as alan auerbach and james hines 1987 demonstrate in a partial equilibrium context both are clearly wrong the myopic specification assumes that individuals believe at each point in time that the current tax law will surely continue forever even after they have been hit repeatedly with tax changes on the other hand it is absurd to think that in say 1977 a significant number of individuals perfectly knew the various tax changes that would occur during the following decade this paper analyzes a dynamic general equilibrium model wherein taxpayers understand the uncertainty in tax policy when making their deci