guarding the guardians good government requires some restraints on the powerful but how can those be impose if there is no one above them this paper studies the equilibrium allocation of power and resources established by self interested incumbents under the threat of rebellions from inside and outside the group in power commitment to uphold individuals rights can only be achieved if power is not as concentrated as incumbents would like it to be ex post power sharing endogenously enables incumbents to commit to otherwise time inconsistent laws by ensuring more people receive rents under the status quo and thus want to defend it

efficiency and equilibria in complementary teams abstract this paper considers a team or partnership where the partners effort levels enter as strict complements in the production function the existence of a linear budget balancing sharing mechanism is demonstrated which implements the team s efficient outcome as a nash equilibrium this result is in contrast to a result derived in holmstrom 1982

classical thermodynamics and economic general equilibrium theory abstract a long history of analogy making between neoclassical economics and physical thermodynamics has unfortunately served to obscure two important relations between the two fields their definitions of equilibria stem from essentially the same three axioms for the mathematical representations of systems while the classes of transformation each has chosen to emphasize and their responses to the problem of path dependence have led them to very different interpretations of duality in those representations despite these conventional differences we show that economies in which all agents have preferences quasi linear in some good have a trading constraint structure isomorphic to the structure of physical systems with classical thermodynamic equations of state exact equivalents of thermodynamic potentials including entropy can be constructed and function as the economic counterparts to free energies quasi linear economies are the most general in which the walrasian idea of price formation as an analog of force balance can be realized more general economic models raise the same methodological problems as more complex physical models that exhibit path dependence we show how the degree of aggregatability of an economic model corresponds to which properties of equilibria retain path independence and to the extent to which a social welfare function exists a new contour money metric utility defines the maximal generalization of social welfare functions in arbitrary economies but depends on the endowments and composition of the economy in non quasi linear cases and is limited to one dimensional contours of equilibria in non aggregatable cases the differences between economic and thermodynamic methodology lies in the economic focus on the irreversible movement from initial disequilibrium endowments to equilibrium through voluntary trade in contrast to the thermodynamic recognition that only reversible transformations lead to measurement of system structure the consequences of respecting reversibility for economic method are sketched and alternative interpretations of the walrasian notion of wealth preservation are presented

on the optimal management of transboundary renewable resources a comment on munro s paper in a number of bargaining situations parties involved will not be able to form strictly or juridically binding contracts hence in analysing problems of finding equilibrium contracts one has to rely on time or subgame consistency in the paper a simplified version of a model by munro is used to derive a self enforcing sharing agreement of exploiting a transboundary renewable resource the properties of such an agreement differ from those proposed by munro a propos de la gestion optimale de ressources renouvelables trans nationales un commentaire sur le memoire de gordon r munro dans nombre de situations de negociation les parties en presence ne peuvent en arriver a des contrats qui engagent strictement ou juridiquement en analysant les problemes pour en arriver a des contrats d equilibre il faut s en remettre a un engagement coherent pour un moment ou un sous jeu dans ce memoire l auteur utilise une version simplifiee d un modele de munro pour deriver un accord de partage que les parties vont honorer dans l exploitation d une ressource renouvelable trans nationale les proprietes d un tel accord sont differentes de celles auxquelles en arrive munro

on the notion of time consistency a comment abstract it is the purpose of this paper to show that the concept of time consistency is not uniquely defined in the economics literature in non causal models holly and zarrop s 1983 time consistency concept differs from the corresponding concept by kydland and prescott 1977 a policy sequence which according to kydland and prescott is time consistent is time inconsistent in holly and zarrop s terms whereas a plan which is consistent in the sense of holly and zarrop is inconsistent in the sense of kydland and prescott

breaking up a research consortium inter firm r d collaborations through contractual arrangements have become increasingly popular but in many cases they are broken up without any joint discovery we provide a rationale for the breakup date in r d collaboration agreements more specifically we consider a research consortium initiated by a firm a with a firm b b has private information about whether it is committed to the project or a free rider we show that under fairly general conditions a breakup date in the contract is a second best optimal screening device for firm a to screen out free riders with the additional constraint of renegotiation proofness a can only partially screen out free riders entry by some free riders makes sure that a does not have an incentive to renegotiate the contract ex post we also propose empirical strategies for identifying the three likely causes of a breakup date adverse selection moral hazard and project non viability

induced innovation evolutionary theory and path dependence sources of technical change the i960s to the i98os were very productive of new theory and empirical insights into the sources of technical change in the i96os and i970s major attention focused on the implications of changes in demand and relative factor prices on the rate and direction of technical change in the late i 970s and early i980s attention shifted to evolutionary models inspired by a revival of interest in schumpeter s insights into the process of economic development since the early i98os these have been complemented by the development of historically grounded path dependent models of technical change each of these models has contributed substantial insight into the sources of technical change this paper was motivated by a perception that each of the three research agendas is approaching a dead end the three models induced evolutionary and path dependent represent elements of a more general theory that has not yet been invented ruttan 1996 a in a closing comment i suggest some steps toward the development of a more general theory of the sources of technical change

a statistical equilibrium model of competitive firms abstract we find that the empirical density of firm profit rates measured as returns on assets is markedly non gaussian and reasonably well described by an exponential power or subbotin distribution we start from a statistical equilibrium model that leads to a stationary subbotin density in the presence of complex interactions among competitive heterogeneous firms to investigate the dynamics of firm profitability we construct a diffusion process that has the subbotin distribution as its stationary probability density this leads to a phenomenologically inspired interpretation of variations in the shape parameter of the subbotin distribution which essentially measures the competitive pressure in and across industries our findings have profound implications both for the previous literature on the persistence of profits as well as for understanding competition as a dynamic process our main formal finding is that firms idiosyncratic efforts and the tendency for competition to equalize profit rates are two sides of the same coin and that a ratio of these two effects ultimately determines the dispersion of the equilibrium distribution

rational expectations and the effect of exchange rate intervention on the exchange rate a theoretical model is proposed in which the exchange rate is affected by current and capital account transactions and the central bank intervenes in the foreign exchange market by buying and selling foreign exchange the effects of this intervention on the exchange rate are explored under the assumption that exchange rate expectations are formed rationally and solutions are obtained for the perfect and imperfect foresight cases the paper concludes with a discussion of the non optimality of time inconsistent policies when exchange rate expectations are rational

testing for the presence of some features of increasing returns to adoption factors in energy system dynamics an analysis via the learning curve approach the purpose of this paper is to explain the sources of energy system lock in it presents a comparative analysis of the respective contributions of some features of increasing returns to adoption factors i e learning by doing learning by searching and returns to scale effects in explaining the technological change dynamics in the energy system the paper is technically based on a critical analysis of the learning curve approach econometric estimation of learning and scale effects inherent to seven energy technologies were performed by the use of several learning curve specifications these specifications permit to deal with some crucial issues related to the learning curve estimation which are associated with the problem of omitted variable bias the endogeneity effects and the choice of learning indicators results show that dynamic economies from learning effects coupled with static economies from scale effects are responsible for the lock in phenomena of the energy system they also show that the magnitude of such effects is correlated with the technology life cycle maturity in particular results point out that 1 the emerging technologies exhibit low learning rates associated with diseconomies of scale which are argued to be symptomatic of the outset of the deployment of new technologies characterized by diffusion barriers and high level of uncertainty 2 the evolving technologies present rather high learning rates meaning that they respond quickly to capacity expansion and r d activities development 3 conventional mature technologies display low learning rates but increasing returns to scale implying that they are characterized by a limited additional diffusion prospects

the maximum entropy distribution of an asset inferred from option prices this paper describes the application ofthe principle of maximum entropy to the estimation of the distribution of an underlying asset from a set of option prices the resulting distri bution is least committal with respect to unknown or missing information and is hence the least prejudiced the maximum entropy distribution is the only information about the asset that can be inferred from the price data alone an extension to the principle of mini mum cross entropy allows the inclusion of prior knowledge of the asset distribution we show that the maximum entropy distribution is able to accurately fit a known density given simulated option prices at different strikes

on equilibrium for overlapping generations organizations a necessary feature for equilibrium is that beliefs about the behavior of other agents are rational and indi viduals maximize we argue that in stationary olg environments this implies that any future generation in the same situation as the initial generation must do as well as the initial generation did in that situation we conclude that the existing equilibrium concepts in the literature do not satisfy this condition we then propose an alternative equilibrium concept organizational equilibrium that satisfies this condition we show that equilibrium exists it is unique and it improves over autarky without achieving optimality moreover the equilibrium can be readily found by solving a maximization program rios rull thanks the national science foundation for grant sbr 9309514 and the university of pennsylvania re search foundation for their support prescott thanks the national science foundation for grant sbr 9996201 we thank julio davila igor livshits larry jones dan silverman and attendants at seminars in the penn macro lunch group federal reserve bank of minneapolis cornell penn state university macro theory conference the univer sity of rochester ucla and the 1999 midwest theory meetings for comments the views expressed herein are those of the authors and not necessarily those of the federal reserve bank of minneapolis or the federal reserve system

business cycle dynamics under rational inattention we develop a dynamic stochastic general equilibrium dsge model with rational inattention and compare its predictions to data households and decision makers in firms have limited attention and optimally allocate their attention rational inattention is the only source of slow adjustment the model matches the empirical impulse responses to monetary policy shocks and aggregate technology shocks at the same time profit losses and utility losses from inattention are very small furthermore it matters whether one uses this model or a conventional dsge model for policy analysis

time consistent fiscal policy and government cash flow abstract this short paper provides an interpretation and some extensions of lucas and stokey s results on optimal fiscal policy the discussion relies heavily on the concept of government cash flow which is related but not equal to the budget surplus time consistency of the optimal policy requires that a positive cash flow is used to buy up some debt of each maturity and contingency

subgame perfect cooperative agreements in a dynamic game of climate change abstract we model climate change as a dynamic game and prove existence of a unique subgame perfect nash equilibrium spne that is also markov perfect we interpret this unique spne as the business as usual bau equilibrium and show that if the countries are not sufficiently symmetric then the familiar trigger strategy equilibria may not be pareto improvements over the bau equilibrium and may even lack efficiency properties we then motivate and introduce a subgame perfect cooperative agreement as an improvement over the bau equilibrium in the sense that every country or coalition of countries is better off in every subgame irrespective of the extent of heterogeneity of the countries we characterize subgame perfect cooperative agreements and identify sufficient conditions for their existence we show that direct or indirect transfers between countries to balance the costs and benefits of controlling climate change are a necessity and not a matter of approach

uncertain lifetimes retirement and economic welfare the effect of increased life expectancy on retirement age is ambiguous because a change in the survival probability is analogous to a change in intertemporal prices it is shown that the decision to retire earlier or later depends on the old age saving behavior early retirement could emerge if one saves in old age it is also shown that the effect of intertemporal substitutions arising from the imperfection of the annuity market could produce a tilt to the reservation wage profile which in turn makes early retirement possible copyright 1991 by the london school of economics and political science

does classical competition explain the statistical features of firm growth abstract we propose a statistical equilibrium model where the tendency for competition to equalize profit rates results in an exponential power or subbotin distribution the model supports and extends recent evidence on the laplace distribution of firm growth rates

technology development and the environment abstract in an attempt to achieve the positive externalities from a more knowledge intensive economy many developing countries have emphasized improvements in their science and technology st a substitution of energy for other factors of production and greater energy consumption by households our findings underscore the importance of considering the economy wide implications of a technology policy recognizing that better technology does not necessarily imply a cleaner environment

sustainable plans and mutual default this paper presents a simple general equilibrium model of optimal taxation in which both private agents and the government can default on their debt as a benchmark we consider ramsey equilibria in which the government can precommit to its policies at the beginning of time but in which private agents can default we then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we adapt abreu s 1988 optimal trigger strategies to completely characterize the entire set of sustainable equilibria in particular we show that when there is sufficiently little discounting and government consumption fluctuates enough the ramsey allocations and policies in which the government never defaults can be supported by a sustainable equilibrium by way of an example we show that the larger the variance of government consumption the easier it is to support good outcomes we also show for moderate discount factors that in the best sustainable equilibrium tax rates are more volatile and debt is smaller than in the ramsey equilibrium

moral hazard and optimal contract form for r d cooperation abstract this paper aims to explain the use of different governance modes for r d cooperation we argue that ex ante cross licensing agreements are preferred to r d joint ventures if potential synergy effects are negligible and the double moral hazard problem caused by unobservable r d effort can be solved by an appropriate royalty scheme it is shown that the first best effort decisions are implementable by a cross licensing agreement if royalty payments are based on r d success however if the payments have to be based on actual know how transfer because r d success is not verifiable there are cases where joint ventures are necessary to induce optimal r d effort

toward a new conception of the environment competitiveness relationship accepting a fixed trade off between environmental regulation and competitiveness unnecessarily raises costs and slows down environmental progress studies finding high environmental compliance costs have traditionally focused on static cost impacts ignoring any offsetting productivity benefits from innovation they typically overestimated compliance costs neglected innovation offsets and disregarded the affected industry s initial competitiveness rather than simply adding to cost properly crafted environmental standards can trigger innovation offsets allowing companies to improve their resource productivity shifting the debate from pollution control to pollution prevention was a step forward it is now necessary to make the next step and focus on resource productivity

optimal technology policy under asymmetric information in a research joint venture abstract we analyze the optimal technology policy to solve a free riding problem between the members of an rjv assuming that government intervention is subject to an additional adverse selection problem caused by its inability to distinguish the value of the potential innovation although subsidies and monitoring may be equivalent policy tools to solve firms free riding problem they imply different social losses if the government is not able to distinguish perfectly the value of the potential innovation the advantage of monitoring tools relative to subsidies is proved to depend on which type of information the government can obtain about firms r d performance

contractual incompleteness and the optimality of equity joint ventures firms engaged in the pooling of complementary skills often choose the equity joint venture ejv over alternative profit sharing arrangements this paper addresses the issue of how equity shares are different from profit shares it is shown that in settings of contractual incompleteness marketable equity ownership when compared to non transferable profit sharing contracts provides better ex ante incentives to the parties involved by mitigating ex post hold up problems among other things the prevalence of the 51 49 or 50 50 ejv in which one party has 51 percent or 50 percent equity shares is explained

the strong sequential core for stationary cooperative games abstract infinite time horizon stationary cooperative games are considered where at each date the instantaneous ntu game is determined by the state of nature the strong sequential core selects those utility streams that no coalition can improve upon by deviating at any moment in time the main result of the paper states that the strong sequential core is non empty provided that i the instantaneous ntu games in all states are additively b balanced ii at least one of these games is strongly additively b balanced and iii the discount factor is close enough to one

an analysis of cooperative research and development i analyze the effects of cooperative research whereby member firms agree to share the costs andfruits of a research project before they undertake it in this model industrywide agreements tend to have socially beneficial effects when the degree ofproduct market competition is low when there are r d spillovers in the absence of cooperation when a high degree of sharing is technologically feasible and when the agreement concerns basic research rather than development activities i show that a royalty free cross licensing agreement among any number offirms lowers the equilibrium level of innovation even though it increases the efficiency of r d through sharing

termination clauses in partnerships abstract we show that when designing a partnership agreement partner firms may prefer not to specify how to allocate the commonly owned assets should there be an early termination of the contract by not including such a clause firms induce litigation before a court with positive probability firms create this ex post inefficiency in order to increase the levels of non contractible investments i e increase the ex ante efficiency the absence of an asset allocation clause works as a discipline device that mitigates the hold up problem within the partnership in our set up no other contract but that without an asset allocation clause can credibly create an ex post inefficiency

economic growth international competitiveness and environmental protection r d and innovation strategies with the warm model abstract it is often argued that policies designed to protect the environment may harm economic growth moreover if introduced unilaterally by a given country they may reduce the competitiveness of domestic firms these arguments are generally based on the assumption that environmental protection has to be achieved through the introduction of emission charges e g a carbon tax however three issues need to be raised first the tax is not the only policy instrument and is not the most efficient one that can be used to reduce polluting emissions secondly even when a tax policy is implemented it is important to assess the feedback effects induced by recycling the tax revenue thirdly and most importantly the role of technical progress cannot be neglected therefore there may exist a policy mix that provides firms with the correct incentives to adopt energy saving technologies and to invest in environment friendly r d the first two issues have partly been explored both in the theoretical and empirical literature the third issue i e the role of incentives to technical progress still lacks adequate quantitative assessment this is why a new model has been developed which endogenizes technical progress and its effects and feedbacks on economic energy and environmental variables using warm an econometric general equilibrium model for the european union and for each member country this paper presents simulation results up to 2015 of the effects of some industrial environmental policies which are aimed at protecting the environment without necessarily damaging competitiveness and economic growth the results show that policies that stimulate environmental r d technological innovation and diffusion may provide firms with the correct incentives to avoid damaging the environment while preserving their competitiveness in the market moreover such a policy based both on r d subsidies and on innovation incentives may not worsen the public sector budget balance as a result of the positive effects on economic growth

frontiers in the economics of energy efficiency abstract energy efficiency has become an essential instrument to obtain effective greenhouse gas mitigation and reduced energy dependence this introductory article contextualizes the contributions of the supplemental issue by showing the new setting for energy efficiency economics and policy discussing the role of price instruments to promote energy savings presenting new approaches for energy efficiency policies and placing energy efficiency within a wider energy and environmental framework

mitigating factors assessing the costs of reducing ghg emissions abstract the debate over the costs of ghg emission reduction has become more complex recently as disagreements over the existence of economic and environmental double dividends have been added to discussions over the existence of a negative cost potential we argue that basic assumptions about economic efficiency the sub optimality of the baseline and the rate of technical change are more important than model structure and we underline the importance of the timing of decisions for determining the costs moreover the use of a single baseline no policy scenario and several policy intervention scenarios may be fundamentally misleading in the longer term simply because the very idea of a business as usual scenario is deeply problematic ultimately the debate turns on political judgments about the desirability of alternative development paths

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

the rate of time preference and dynamic economic analysis strong restrictions on the structure of preferences are a central feature in the received theory of intertemporal allocation in fact most of the modern literature concerned with capital theoretic problems represents preferences by a functional in which an additive utility function is discounted by a constant rate of time preference this specification is attractive because it is analytically tractable in dynamic models and it clearly delineates how tastes and opportunities interact to determine an economy s household s paths of consumption and capital formation however its rigid structure constancy of time preference severely limits the conclusions and explanatory power of the corresponding models this paper considers a class of utility functionals in continuous time which have the appealing feature that the rate of time preference depends systematically on an index of aggregate future consumption the more flexible structure embodied in these functionals leads to important generalizations and

technologies energy systems and the timing of co2 emissions abatement an overview of economic issues abstract this paper provides an overview of economic issues involved in timing limitations on co2 emissions from energy systems it highlights issues relating to technology availability development and diffusion and the inertia of energy systems as being particularly important the paper sets this in the context of wider uncertainties surrounding the problem and briefly considers other aspects relevant to timing the paper is stimulated by the debate in the usa about optimal abatement paths in particular recent claims that it would be economically preferable to defer such abatement action in favour of measures that support technology development but do not affect emission trends for many years this paper categorizes the various economic issues involved and concludes that for each economic argument that has been advanced to justify deferring emission constraints there are counter vailing economic arguments that could be used in support of rapid near term emissions abatement rational policy lies between these extremes a policy of deferring all emissions abatement exposes economic systems and industries as well as the environment to significantly greater costs and risks than those arising from a more balanced approach furthermore the modelling studies that have been used to justify deferring emissions abatement do so because they embody the economic factors favourable to delay and largely neglect the countervailing issues to the point where their results have little relevance to the overall problem of timing emissions abatement

research joint ventures vs cross licensing agreements an agency approach abstract in this paper two broad categories of organizing a cooperative r d project are compared a research joint venture rjv and a cross licensing agreement cla in a non deterministic r d setting including asymmetric information we show that an rjv is more efficient in providing incentives it allows to capture existing synergies and facilitates the dissemination of the partners know how which is socially desirable however contrary to a cla an rjv faces the risk of opportunistic behavior by the partners regarding the provision of their know how to the venture which could lead a cla to perform more efficiently and in some cases this organization turns out to be superior

bending the learning curve abstract the aim of this paper is to improve the application of the learning curve a popular tool used for forecasting future costs of renewable technologies in integrated assessment models iams first we formally discuss under what assumptions the traditional ols estimates of the learning curve can deliver meaningful predictions in iams we argue that the most problematic of them are the absence of any effect of technology cost on its demand reverse causality and the ability of iams to predict all determinants of cumulative capacity next we show that these assumptions can be relaxed by modifying the traditional econometric method used to estimate the learning curve the new estimation approach presented in this paper is robust to the two problems identified but preserves the reduced form character of the learning curve finally we provide new estimates of learning curves for wind turbines and pv technologies which are tailored for use in iams our results suggest that the learning rate should be revised upward for solar pv our estimate of learning rate for wind technology is almost the same as the traditional ols estimates

disclosing own subsidies in cooperative research projects abstract this paper analyzes in a theoretical framework including asymmetric information and uncertainty first why firms participating in cooperative research projects may be interested in hiding information about own subsidies to their partners and second whether the public disclosure of subsidies would be welfare improving we show that the answers to those questions depend mainly on whether the efforts are strategic complements or substitutes and on the way in which the firms ex ante share the total expected profits from the project

optimal contracts for teams in a team subject to both adverse selection each member s ability is known only to himself and moral hazard effort cannot be observed optimal contracts are under certain conditions linear in the team s output the outcome is the same whether the principal observes just the total output or each individual s contribution thus monitoring is not needed to prevent shirking by team members instead the role of monitoring is to discipline the monitor production is a collective enterprise by workers in a firm or firms in a joint venture the synergy that is the reason for the team s existence may mean that an individual s contribution to the team s output is not distinguishable so that it is impossible to pay him according to his own productivity how should the principal remunerate the team members so as to maximize his own profit in this paper we analyze incentives in teams with asymmetric information both adverse selection each member s ability is known only to himself and moral hazard effort cannot be observed directly holmstrom 1982 showed that in a team model with moral hazard the principal can ensure an outcome arbitrarily close to the full information ideal by using a contract that punishes each team member arbitrarily severely whenever team output falls below some target however this seems to be an unrealistically drastic way of solving the moral hazard problem in our model we in effect prevent the principal from using such a contract by introducing adverse selection in addition to moral hazard and by assuming that ability and effort interact in such a way that the principal is unable to disentangle an agent s effort from his ability under the assumption that the principal and the team members are risk neutral we shall show that the principal can implement his information constrained optimum simply by offering each agent a payment linear in the team s output although the essential feature of our analysis is the interaction between adverse selection and moral hazard this result can be understood by first considering the special case in which the agents abilities are common knowledge in this case the moral hazard problem can be completely solved the principal can do as well as he

technological progress and sustainable development what about the rebound effect abstract sustainability concepts that rest on the idea of resource or energy efficiency improvements due to technological progress tend to overestimate the potential saving effects because they frequently ignore the behavioral responses evoked by technological improvements efficiency improvements also affect the demand for resources and energy and often an increase in efficiency by 1 will cause a reduction in resource use that is far below 1 or sometimes it can even cause an increase in resource use this phenomenon is commonly labeled the rebound effect which is well known among energy economists but never attracted much attention in ecological economics the paper starts with the traditional neoclassical analysis of the rebound effect in a partial equilibrium framework that concentrates on the demand of one particular energy service such as mobility or room temperature it also provides an overview of some of the main empirical studies based on this model that mostly confirm the existence of the rebound effect but are controversial about its actual importance however we have to go beyond the neoclassical single service model in order to take care of the variety of possible feedback affecting energy use the paper presents two important expansions of the single service model in order to show the potential relevance of the rebound effect to ecological economics first it is shown that in a multi services model it proves to be difficult to make general statements about the relevance of the rebound effect in this case the overall effect of an increase in energy efficiency on total energy use depends on the on the assumptions about the substitutability between the services considered and the direction of the income effect second the paper also tries to take care of the fact that changes in resource use or energy use are frequently just side effects of other forms of technological progress especially technological change of a time saving nature can have a large influence on energy use as many time saving devices for example faster modes of transport require an increase in energy consumption that is frequently reinforced by a rebound effect with respect to time this effect will be especially strong when wages are high and at the same time energy prices are low as is currently the case in most industrialized countries consequently the paper also provides a strong argument for the introduction of energy taxes

the economics of changing course implications of adaptability and inertia for optimal climate policy this paper reviews evidence that energy technologies and systems adapt over time to accommodate external pressures that technical innovation and systemic change in the energy sector is largely induced by need and restrained by potentially large transitional costs a simple integrated model of optimal greenhouse gas abatement over time is presented in which the abatement cost depends on both fixed and transitional elements it is shown that the optimal current response and long run prospects differ radically between the classical economic case in which the cost of a given cutback in emissions is fixed exogenously and the adaptive case in which the response is ultimately adaptive but heavily constrained by inertia ie low fixed but high transitional cost if energy systems are indeed to a large degree adaptive the results demonstrate that as compared with the classical non adaptive case long run stabilization of atmospheric co2 may be optimal even with moderate damages from climate change greater near term abatement efforts are justified and the cost of a given delay in response may be several times higher neglect of the issue of induced technical change and other adaptive responses may invalidate the policy implications drawn from most integrated assessment models developed to date

the impact of r d on innovation for wind energy in denmark germany and the united kingdom this paper examines the impact of public research and development r d support on cost reducing innovation for wind turbine farms in denmark germany and the united kingdom uk first we survey the literature in this field the literature indicates that in denmark r d policy has been more successful than in germany or the uk in promoting innovation of wind turbines furthermore such studies point out that subsidy induced capacity expansions were more effective in the uk and denmark in promoting cost reducing innovation than in germany the second part of the paper describes the quantitative analysis of the impact of r d and capacity expansion on innovation this is calculated using the two factor learning curve 2flc model in which investment cost reductions are explained by cumulative capacity and the r d based knowledge stock time series data were collected for the three countries and organized as a panel data set the parameters of the 2flc model were estimated focusing on the homogeneity and heterogeneity of the parameters across countries we arrived at robust estimations of a learning by doing rate of 5 4 and a learning by searching rate of 12 6 the analysis underlines the homogeneity of the learning parameters enhancing the validity of the 2flc formulation

time consistency of fiscal and monetary policy the problem of time inconsistency arises from two different sources first as shown by guillermo a calvo 1978 the re is an incentive for each government to engage in an initial unanti cipated inflation second as discussed by robert e lucas and nancy l stokey 1983 there is an incentive for each government to deviat e from the path of taxes announced by the preceding government in th is paper it is shown that these two sources of time inconsistency ca n be removed by a particular method of debt management involving bot h nominal and indexed government bonds of various maturities copyright 1987 by the econometric society

utility over time the homothetic case the purpose of this paper is to show how the economics of choice over time can be strengthened by introduction of restrictive assumptions namely additivity and homotheticity of utility we consider applications to labor supply 2 savings behavior and long run distribution and welfare measurement labor supply is mainly a function of the ratio of non labor income to the wage rate savings generally increase with increases in the rate of interest in the long run distribution is not much dependent upon initial wealth and instead is mainly determined by attitudes towards time in the long run the as if social utility function is often well measured by consumer surplus the applications appear to be strong therefore it is appropriate to begin with a general argument for the main assumptions to be imposed two early contributions to the economics of time are by becker 1 and koopmans 111 the former presents a general framework without any specific assumptions about utility over time at most there is a homogeneous technology to produce consumption from goods and time pollak and wachter 131 koopmans 1 l adds highly intuitive assumptions to show utility additive and discounted over time koopmans analysis could be extended to cases where utility is additive merely between remote time periods see rader 15 pp 161 1851 this would correspond to the realistic case where the influence of distant consumption on preferences is negligible additivity must be reinterpreted in terms of a shifting environment of current consumption plus consumption sufficiently contiguous in time the analysis following could be adapted to this most compelling case merely adding utility over time does have implications for demand for example if complementaries occur between two goods they must occur between many others e g 15 pp 228 2331 however the results are meager and insufficient for the kind of analysis economists generally want to apply therefore we are led to add the assumption of homotheticity namely 219 0022 0531 81 050219 18 02 00 o

information theoretic approaches in economics economics has seen a recent rise in interest in information theory as an alternative framework to the conventional notion of equilibrium as a fixed state such as walrasian market clearing general equilibrium the information theoretic approach is predicated on the notion of statistical equilibrium se that takes a distribution over all possible states as an equilibrium and therefore predicts the endogenous fluctuations of the system along with its central tendency simultaneously for this reason se approaches can explain the observed data without relying on arbitrary assumptions about random noise and provide useful insights for many interesting economic problems that conventional methods have not been able to satisfactorily deal with in this paper we review the key elements of information theory focusing on the notions and applications of entropy and se in economics particularly paying attention to how entropy concepts open up a new frontline of economic research

subgame perfect cooperation in an extensive game abstract we propose a new solution concept for games in extensive form that incorporates both cooperation and subgame perfection from its definition and properties the new solution concept named the subgame perfect core is a refinement of the core of an extensive game in the same sense as the set of subgame perfect nash equilibria is a refinement of the set of nash equilibria to further characterize the subgame perfect core we show that each subgame perfect core payoff vector can be implemented as a non cooperative solution as it is a subgame perfect nash equilibrium payoff vector of an extensive form game that is closely related to the original game we also motivate and introduce a related concept of subgame perfect strong nash equilibrium of an extensive game that is coalition proof

accounting for technical progress in aggregate energy demand abstract researchers have not reached a consensus on how to account for technical progress when modeling aggregate energy demand some include a time trend in a dynamic model while others omit the trend in a model that disallows for long run income effects we show that the latter approach can be directly tested as a nested case of the former so that model selection need not be made a priori solely on theoretical grounds using annual data over 1960 1990 we find that long run income effects are not significant however including a time trend improves the model s fit while rendering much more credible long run price elasticities

spatial and temporal efficiency in climate policy applications of fund fund is an integrated assessment model of the interactions between climate and economy nine world regions emit greenhouse gases and suffer damages from climate change a number of greenhouse gas emission reduction policies are compared including optimal and cost effective strategies strategies with early and late abatement and strategies with and without international co operation the analyses confirm that co operation matters resulting in substantially lower costs or higher welfare the real commitments of policy targets based on an absolute level e g 1990 emissions are hard to estimate because of the uncertainties in the baseline postponing action conflicts with minimising costs and maximising welfare but so does sharp emission reduction at the short term as proposed in the kyoto protocol

edgeworth equilibria in production economies abstract an edgeworth equilibrium is an allocation that belongs to the core of every n fold replica of the economy in this work we study the properties of edgeworth equilibria for economies with production and infinite dimensional commodity spaces under some relatively mild conditions we establish among other things that 1 edgeworth equilibria exist 2 every edgeworth equilibrium is a quasi equilibrium and 3 an allocation is an edgeworth equilibrium if and only if it can be decentralized by a price system

optimally derived fixed rules and indicators abstract monetary targets have come to be regarded as inadequate for the conduct of short term monetary policy both among theoreticians and practitioners of policy in this paper two approaches are put forward analysed and evaluated for improving the performance of monetary targets according to the first approach simple rules for monetary targets are derived within an optimisation framework these rules related to ultimate targets are simple so that they can be announced and are flexible so that they are subject to revision when the economy drifts away from its course due to unexpected shocks the second approach is based on indicators and complements monetary targets with exchange rate targets through a simple feedback law for determining interest rate policy the advantage of this feedback law is that it provides the mechanism through which policy is to be revised in response to shocks if such a feedback law is announced private economic agents have the means of distinguishing discretionary and arbitrary changes of policy from those which are needed to bring the economy back to the announced and committed course this approach is used to analyse and extend the suggestions in the house of commons report on international monetary arrangements the common ground between the two approaches is an optimisation framework with respect to the parameters of either the fixed simple rules or the simple feedback laws this is discussed in section 1 the approach of deriving simple fixed rules is illustrated in a monetarist model in which there is a link between private sector expectations and the credible announcement of monetary targets the model is explained in section 2 and simple fixed rules are discussed in section 3 the performance of simple rules for monetary targets is evaluated in terms of a minimax strategy with model uncertainty between the monetarist model and a keynesian model without the assumption of announcement effects this is discussed in section 4 optimal feedback laws are derived and analysed in section 5 the parameter sensitivity of these feedback laws with respect to the model and the objective function as well as their behaviour under shocks is also examined

technological change in economic models of environmental policy a survey this paper provides an overview of the treatment of technological change in economic models of environmental policy numerous economic modeling studies have confirmed the sensitivity of mid and long run climate change mitigation cost and benefit projections to assumptions about technology costs in general technical progress is considered to be a noneconomic exogenous variable in global climate change modeling however there is overwhelming evidence that technological change is not an exogenous variable but to an important degree endogenous induced by needs and pressures hence some environmenteconomy models treat technological change as endogenous responding to socio economic variables three main elements in models of technological innovation are i corporate investment in research and development ii spillovers from r d and iii technology learning especially learning by doing the incorporation of induced technological change in different types of environmental economic models tends to reduce the costs of environmental policy accelerates abatement and may lead to positive spillover and negative leakage

technological change and the timing of mitigation measures we use a coupled carbon cycle and energy systems engineering model to analyze the future time path of carbon emissions under an illustrative co2 concentration stabilization limit of 550 ppm our findings confirm the emission pattern as found by wre global emissions rise initially pass through stabilization in order to decline in the second half of the 21st century we show that for a given co2 concentration target emission trajectories within an intertemporal optimization framework depend mainly on two factors the discount rate and the representation of technological change as either static or dynamic we obtain a similar near term emission time path as wre when using a model with static technology and a discount rate of 7 we obtain a trajectory with lower emissions in the near term when using a lower discount rate and or treating technology dynamics endogenously in the model we briefly outline a model that endogenizes technological change through learning curves we then compare differences in emission trajectories between alternative model formulations of technological change they are sufficiently small as to be of secondary importance when compared to treating co2 concentration stabilization as an inter temporal optimization problem or not whereas our results confirm the computational results of wre we arrive nonetheless at different policy conclusions if long term emission reduction is the goal we cannot follow business as usual even in the short term action needs to start now action does not necessarily mean aggressive short term emission reductions but rather enhanced r d and technology demonstration efforts that stimulate technological learning these are the necessary preconditions that long term reduction targets can be met with improved technology and at costs lower than today we close by pointing out two further critical issues uncertainty and the possible mismatch between the world of economic models and that of climate policy

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

the existence of competitive equilibrium over an infinite horizon with production and general consumption sets although many theorems have been proved on the existence of competitive equilibrium in production economies with an infinite set of goods and a finite set of consumers nearly all suff er from a major defect the consumption possibility sets are required t o equal the positive orthant this rules out trade in personal service s and it does not allow for substitutions between goods on the subsistence boundary using methods similar to b peleg and m e yaari 1970 the authors show both equilibrium existence and core equivalence for economies with production and general consumption sets copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

a simple nonparametric approach to derivative security valuation canonical valuation uses historical time series to predict the probability distribution of the discounted value of primary assets discounted prices plus accumulated dividends at any future date then the axiomatically rationalized maximum entropy principle is used to estimate risk neutral equivalent martingale probabilities that correctly price the primary assets as well as any predesignated subset of derivative securities whose payoffs occur at this date valuation of other derivative securities proceeds by calculation of its discounted risk neutral expected value both simulation and empirical evidence suggest that canonical valuation has merit since the advent of the justly celebrated black scholes option pricing formula intense interest has focused on testing its implications there is consensus

on optimality and time consistency when expectations are rational abstract this paper explores the implications of time inconsistency for optimal economic policy making it is found that if policy makers determine policy on the assumption that expectations are adaptive when in fact they are rational economic policy can be destabilising this adds support to reservations which kydland and prescott 1977 have raised about the appropriateness of standard optimal control methods a method is proposed which is a modification of standard optimal control techniques and which allows for the endogeneity of expectations when this method is used to determine policy there is no indication that policy is destabilising

coordinating research through research joint ventures abstract in a simple model we show that a joint venture can implement the rates of investment that maximize joint profit when firms research abilities are private information this can be done with budget balance even though there are participation constraints there is no conflict between budget balance and participation constraints because firms payoffs can depend on ex post signals of abilities the conflict between budget balance and participation constraints is restored when both abilities and rates of investment are unobservable we give a condition under which the profit maximizing rates of investment can be implemented if we relax budget balance

optimal contracts when enforcement is a decision variable this paper analyzes choice theoretic costly enforcement in an intertemporal contracting model with a differentially informed investor and entrepreneur an intertemporal contract is modeled as a mechanism in which there is limited commitment to payment and enforcement decisions the goal of the analysis is to characterize the effect of choice theoretic costly enforcement on the structure of optimal contracts the paper shows that simple debt is the optimal contract when commitment is limited and costly enforcement is a decision variable theorem 1 in contrast stochastic contracts are optimal when agents can commit to the ex ante optimal decisions theorem 2 the paper also shows that the costly state verification model can be viewed as a reduced form of an enforcement model in which agents choose payments and strategies as part of a perfect bayesian nash equilibrium

macroeconomic policy evaluation and optimal control theory a critical review of some recent developments abstract this survey addresses the recent literature on the application of optimal control theory and game theory to macroeconomic policy evaluation and design this literature focuses on strategic interactions between governments and private agents engaged in dynamic non cooperative games and emphasizes such issues as precommitment credibility and reputation as important and endemic aspects of optimal policy design a dominant theme is the problem of dynamic inconsistency and the inferiority of an equilibrium in single stage full information games without commitment this may be alleviated in repeated games involving reputation effects and threat strategies designed to coerce rivals into pursuing particular strategies and to sustain a sequential equilibrium the type and characteristics of a sequential equilibrium also depend importantly upon the information structure conditioning players beliefs under uncertainty included here are separating and pooling equilibria involving notions of learning signalling and information revelation additional dimensions exist in stochastic systems which introduce other forms of uncertainty optimal control and game theory have also been applied to international macroeconomic policy design with emphasis on the potential costs and benefits of non cooperative and cooperative behaviour between countries and problems of international policy coordination

nonlinear phillips curves mixing feedback rules and the distribution of inflation and output abstract optimal nominal interest rate rules are usually set assuming that the underlying world is linear in this paper we consider the performance of optimal rules when the underlying relationship between inflation and the output gap may be nonlinear in particular if the inflation output trade off exhibits nonlinearities this will impart a bias to inflation when a linear rule is used by deriving some analytical results for the higher moments and in particular the skewness of the distribution of output and inflation we show that the sign of the skewness of the distribution of inflation and output depends upon the nature of the nonlinearity for the convex modified hyperbolic function used by chadha et al imf staff papers 39 2 1992 395 and schaling bank of england working paper series 1999 inflation is positively and output negatively skewed whereas if a concave convex form is used the skewness of inflation and output is reversed to correct this bias we propose a piecewise linear rule which can be thought of as an approximation to the nonlinear rule of schaling 1999 in order to evaluate the relevance of these results we turn to some illustrative empirical results for the us and the uk we show that this reduces the bias but at the expense of an increase in the volatility of the nominal interest rate

the recursive core core allocations may be defined for infinite horizon capital accumulation models if agents cannot trust each other in the sense of gale then agents may renege on their commitments their decisions appear time inconsistent a core allocation is a recursive core allocation provided no coalition can improve upon its consumption stream at any time given its accumulation of assets up to that period we show for every allocation of consumption in the initial core one can find a distribution of capital stocks among the agents where no coalition of agents will break the initial core contract at any date it follows that if the proper distribution of the streams of capital is achieved then the allocation in the core is also in the recursive core the latter therefore forges a link between the distribution of wealth capital the problem of trust and time consistent intertemporal contracts

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

endogenous technological change in climate change modelling this article investigates the impact on optimal co2 abatement and carbon tax levels of introducing endogenous technological change in a macroeconomic model of climate change we analyse technological change as a function of cumulative capacity as incorporated recently in energy systems models our calculations confirm that including endogenous innovation implies earlier emission reduction to meet atmospheric carbon concentration constraints however the effect is stronger than suggested in the literature moreover the development of non fossil energy technologies constitutes the most important opportunity for emission reductions optimal carbon tax levels reducing fossil energy use are lower than usually advocated