how does aversion to intertemporal variation affect hedging behavior standard models of hedging behavior assume that hedgers wish to minimize net price variation they treat variation as risk and fail to distinguish random variation at a specific point in time from pre determined intertemporal variation recursive utility differentiates between random and nonrandom variation by allowing the elasticity of intertemporal substitution eis to be imperfect the inverse of the eis measures the hedger s aversion to intertemporal variation and is distinct from aversion to risk optimal hedge ratios decline toward zero as aversion to intertemporal variation increases these results may help explain why hedgers commonly hedge less than recommended by standard models

optimal growth with many consumers abstract a method is described for constructing all pareto optimal allocations for a dynamic economy with many heterogeneous consumers under certainty in which both the technology and consumer preferences are recursive but preferences need not be additively separable over time optimal perfect foresight competitive equilibrium allocations are obtained through the study of a dynamic program for an economy with one consumption good sufficient conditions are given for the existence of a unique interior stationary distribution of consumption and wealth for a two person exchange economy sufficient conditions are given for the global asymptotic stability of the unique interior stationary point

global equilibrium dynamics with stationary recursive preferences abstract we study the global dynamics of capital accumulation for a general two sector model which is not necessarily convex and where preferences of an infinitely lived agent are stationary but not additively separable we obtain monotonicity and convergence results for capital under normality assumptions on preferences and factor intensity assumptions on technology we then derive results on oscillatory dynamics under alternative factor intensity conditions or under the assumption of inferiority of future utilities finally in an exchange model with two agents we show that utilities will be monotonic or oscillatory depending on the normality or inferiority of the preferences

back to the future rethinking auctions for renewable electricity support abstract the effectiveness and cost effectiveness of two main types of instruments feed in tariffs and quotas with tradable green certificates have usually been compared in the literature on renewable electricity promotion due to negative past experiences with a third instrument auctions this instrument has been broadly dismissed in academics and until recently also in policy practice however and based on an in depth review of experiences with auction schemes for renewable electricity around the world this paper argues that some of the problems with auctions in the past can be mitigated with the appropriate design elements and that indeed auctions can play an important role in the future implementation of renewable electricity support instruments around the world the paper provides a proposal for the coherent integration of several design elements

habit formation and exhaustible resource risk pricing abstract this paper studies the risk pricing implications of introducing habit formation in consumption in a model that encompasses growth with nonrenewable resources and capital markets it is shown that the expected return on nonrenewable resource stocks incorporates both short run and long run risk factors the short run risk factor is associated with shocks to current surplus consumption growth the long run risk factor reflects the investor s desire to hedge against long run shocks to future surplus consumption prospects long run habit risk premium the model is tested using energy commodities index and us aggregate real per capita consumption data and the results confirm that habit enters significantly in the pricing equation by entertaining a long run time varying risk coefficient compared to results obtained with a no habit formation model time separable preferences we found that long run future prospects of surplus consumption constitute a forward looking risk factor to be taken into account in explaining the dynamics of energy prices under uncertainty

the value of biodiversity as an insurance device this paper presents a benchmark stochastic endogenous growth model of an agricultural economy producing food requires land and increasing the share of total land devoted to farming mechanically reduces the share of land devoted to biodiversity conservation however safeguarding a greater number of species guarantees through spatial exchanges better ecosystem services which in turn ensure lower volatility of agricultural productivity the optimal conversion conservation rule is explicitly characterized as well as the total value of biodiversity in terms of the welfare gain from biodiversity conservation and the marginal value of biodiversity in terms of risk premium reduction namely its insurance value the epstein zin weil specification of preferences allows us to disentangle the effects of risk aversion and aversion to fluctuations

a complete characterization of optimal growth paths in an aggregated model with a non concave production function the convexity of technology has played a crucial role in economic analyses of optimal one sector growth problems for example two of the key results on the traditional model of ramsey 1928 that have relied on the convexity of the technology are that optimal intertemporal growth involves moving monotonically towards a unique steady state as in cass 1965 koopmans 1965 and that the value function is a concave differentiable function of the initial capital stock as in benveniste and scheinkman 1979

estimating intertemporal preferences for natural resource allocation in this article we show how the degree of risk aversion discounting and preference for intertemporal substitution for a natural resource manager can be structurally estimated within a recursive utility framework we focus on the management of a reservoir in california and test the data for consistency with a recursive utility model specification versus standard time additive separability the results show that the data are consistent with a risk averse manager with recursive preferences the data also reject time additive separability with or without risk aversion such as the standard constant relative risk aversion utility model the improvement in model fit when recursive preferences are used is notable natural resource management problems are typically stochastic and dynamic in nature by virtue of the characteristics of the underlying physical or biological processes that govern the evolution of the resource this has been the reason for a number of empirical applications of dynamic programming within the natural resource literature as chronicled by williams however the tendency of researchers to use risk neutral expected net present value epv objective functions when modeling natural resource problems has caused policy makers to be somewhat skeptical of the real world relevance of resource economics analysis 1 given the uncertainty facing the decision maker in each period of the planning horizon due to the realization of stochastic shocks we would expect risk aversion and intertemporal substitution to feature prominently in the characterization of intertemporal preferences

the commercial banking firm a simple model a commercial bank must decide its volume of illiquid loans and investments without full knowledge of its deposits in case withdrawals exceed its defensive position in liquid assets the bank incurs extra costs in meeting reserve requirements penalties in borrowing or losses in disposing of illiquid assets in case of good luck on deposits an unnecessarily large defensive position sacrifices profits from more remunerative but less liquid assets the paper presents a simple model of this precautionary portfolio decision by a profit maximizing bank the effects of variations in monetary policy banking regulations and competitive structure are traced reserve requirements access to central bank credit deposit interest rate ceilings monopolistic power in loan and deposit markets relative importance of capital and time deposit liabilities size and nature of illiquidity penalties and degree of deposit uncertainty commercial banks are the most important kind of financial intermediary their liabilities are the closest privately issued substitutes for government currency demand deposits serve as means of payment generally acceptable for most transactions for several reasons depositors bear very little of the risks of the loans the banks make there are economies of scale in pooling of default risks specific to borrowers and in specialized administration and appraisal of the loans the banks shareholders assume the residual risk only after their equity is wiped out would depositors claims be jeopardized finally the government stands behind bank deposit liabilities both as lender of last resort to tide banks over crises of illiquidity and as insurer of deposits against the contingency of insolvency government monetary and credit policy operates mainly through the commercial banking system and this is the main reason today to give special attention to commercial banks historically the first reason for government intervention in the banking business was to protect depositors or in older times bank note holders against the risks of bank illiquidity and insolvency but the public regulations and institutions established for this purpose can also be used to regulate credit markets in the interests of economic stabilization maintenance of the value of the currency or other government objectives as the protective purpose of government intervenscand j of economics 1982 this content downloaded from 207 46 13 172 on fri 07 oct 2016 06 13 42 utc all use subject to http about jstor org terms

a simple dynamic general equilibrium model abstract we analyse a single sector economy with h 1 infinitely lived agents that operate in a continuous time framework utility functions are recursive but not additive both efficient and perfect foresight competitive equilibrium allocations are considered the existence and stability of such allocations are investigated locally i e in a neighbourhood of steady state allocations the model is shown to be useful for explaining the distribution of wealth and consumption across agents and for analysing the way in which wealth redistribution can affect the dynamics of aggregate economic variables

investment and the dynamic cost of income uncertainty the case of diminishing expectations in agriculture this paper studies optimal investment and the dynamic cost of income uncertainty applying a stochastic programming approach the motivation is given by a case study in finnish agriculture investment decision is modelled as a markov decision process extended to account for risk a numerical framework for studying the dynamic uncertainty cost is presented modifying the classical expected value of perfect information to a dynamic setting the uncertainty cost depends on the volatility of income e g with stationary income the dynamic uncertainty cost corresponds to a dynamic option value of postponing investment the numerical investment model also yields the optimal investment behavior of a representative farm the model can be applied e g in planning investment subsidies for maintaining target investments in the case study the investment decision is sensitive to risk

a dynamic analysis of land prices a dynamic model of land prices is developed it derives arbitrage asset prices under nonadditive dynamic preferences risk aversion and transaction costs the model nests as special cases risk neutrality time additive preferences the static capital asset pricing model capm as well as the dynamic consumption based capm the model is applied to the analysis of u s land prices for the period 1950 96 the econometric results provide evidence showing that u s land price patterns are inconsistent with risk neutrality or with the static capm model no strong evidence was found against time additive preferences the econometric findings indicate that both risk aversion and transaction costs have significant effects on land prices

pros and cons of exposing renewables to electricity market risks a comparison of the market integration approaches in germany spain and the uk abstract the article examines how renewable electricity res e producers are integrated into the electricity market under the support legislations and regulatory frameworks of germany spain and the uk focus is on wind power which faces the highest market integration challenge of all res e the analysis shows that the three countries follow contrasting approaches of exposing res e producers to the market risks of forward electricity markets balancing markets and system planning requirements risk exposure is highest in the uk and lowest in germany from a policy maker s perspective there is a trade off between a high risk and a low risk approach when res e face high market risks a higher level of financial support is required to stimulate res e development than in a low risk environment but the exposure to market risks may also give an incentive to make efficient use of the respective market thus limiting the indirect costs to society the special characteristics of wind energy however put natural limits to the response of wind power plants to market prices and locational price signals and will increasingly influence electricity markets and grid infrastructure these interdependencies should be recognised in the design of res e policies and market regulations

competitive equilibrium cycles recently there has been a surge of interest in endogenous business cycles that arise in competitive laissez faire economies in the context of standard overlapping generations economies conditions for the existence of equilibrium cycles have been given by grandmont 1983 and by benhabib and day 1982 models of the economy with extrinsic uncertainty or sunspots that have been developed by shell 1977 and by cass and shell 1983 see also balasko 1983 can also lead to equilibrium cycles

why did the price of solar pv si feedstock fluctuate so wildly in 2004 2009 abstract great attention has been paid to the origin of observed wild price fluctuations of solar pv si feedstock in both contract and spot markets during 2004 2009 this paper sheds light on this issue and tries to resolve it by addressing the following questions what kind of structural shock is underlying the price fluctuations of pv si feedstock how can we quantify the magnitude timing and relative importance of these shocks what are their dynamic effects on the real price of pv si feedstock by carefully studying development conditions the structural decomposition of the real price of pv si feedstock is proposed exchange rate shocks production cost shocks aggregate demand shocks and demand shocks specific to feedstock markets with a structural vector autoregression model the paper quantifies and verifies the impact of structural shocks on pv si feedstock real price changes based on national data an analysis is further taken to confirm the essential role of demand shocks specific to feedstock markets in determining sharper price fluctuations during 2004 2009 the results of this study have important implications for national solar pv development which can be better promoted and administrated if structural shocks in feedstock markets can be carefully evaluated and understood

current issues in the economics of groundwater resource management the issue of groundwater management remains a practical concern in many regions throughout the world while water managers continue to grapple with the question of how to manage this resource in this article we attempt to bring the most advanced and appropriate tools to bear on the issue of resource allocation involving groundwater our objective is to demonstrate the state of the art in the literature on ways to think about this complex resource and to deal with the important economic issues emanating from its complexity we present the conceptual framework within which economists examine the elements interacting in the management of groundwater resources indicate why the role of the market is limited with respect to the price of this very complex resource and point to the mechanisms that can pull competitive groundwater price and quality graded quantity of groundwater in line with their equilibrium levels in particular we critically review economic models of groundwater use examine the potential for groundwater management discuss the difficulties encountered in the estimation of the relevant control variables of such models and identify the advantages and limitations of the instruments devised for the efficient use allocation of this resource finally we argue that devised regulatory schemes usually ignore the information and knowledge needed for their implementation and we suggest a core of conditions necessary for successful groundwater management reforms

optimal bank behavior under uncertain inflation in this paper we derive a model of the individual banking firm facing stochastic inflation the bank is considered as a depository financial intermediary operating in the primary market as a multiproduct price discriminating firm a secondary market is also considered where liquidity surpluses and deficits are traded two types of assets and liabilities are assumed deposits and loans linked to a general price level and nonlinked instruments effects of changes in the parameters such as inflation rate and

an experimental approach to climate finance the impact of auction design and policy uncertainty on renewable energy equity costs in europe abstract this paper aims at shedding some lights on how policy induced uncertainty affects the cost of capital of renewable energy power plants to this end the paper focuses on renewable energy auctions and on the ongoing brexit negotiations first the paper reviews auction frameworks across europe and discusses the impact of the different designs on project risk then a stated preference approach is leveraged to investigate how policy design and the uncertainty regarding the future arrangements between the uk and the eu contribute to determine the cost of equity for renewable energy the results show that improved auction design can help to lower the equity cost between 0 5 and 1 5 the evidence on brexit is rather weak and if anything suggests only a higher relevance of these negotiations for english based investors than for those based in eu27

price uncertainty and the price discriminating firm in international trade the firm operating in an uncertain environment was initially analyzed in detail by sandmo 1971 and by leland 1972 since these early papers many extensions to the analysis have been explored by such writers as batra and ullah 1974 mayer 1975 hartman 1976 holthausen 1976 stewart 1978 paroush and kahana 1979 anid katz and paroush 1979 this paper investigates the optimal policy of a pr ice discriminating firm which operates under pr ice uncertainty in one of two markets the main motivation for the analysis comes from the problems of a firm which sells its output both domestically and abroad such a firm often has nearly full information about the domestic market b ut faces uncertainty in foreign markets in particular the firm which has its utility defined over profits denominated in terms of domestic currency will regard the profits on its foreign sales as uncertain given excha nge rate variability even if it has full information about all other conditions in the foreign market hence the paper may be regarded both as an extension to the above mentioned analyses of the firm under uncertainty and as an attempt to throw light on the activities of firms involved in international trade the treatment being essentially of a mricroeconomic nature is clearly different from that of such writers as batra 1 975 and helpman and razin 1979 which are essentially macroeconomic treatments

take or pay contracts for renewables deployment abstract renewables require support policies to deliver the european 20 target we discuss the requirements for least cost development and efficient operation and quantify how different schemes i allow for the development of a renewable energy technology portfolio ii reduce rent transfers to infra marginal technologies or better than marginal resource bases and iii minimise regulatory risk and thus capital costs for new projects long term take or pay contracts minimise regulatory uncertainty create appropriate incentives for location and operation allow for efficient system operation and seem compatible with european state aid we discuss how property rights legislation protects existing renewables investors and thus can ensure ongoing investment during a transition towards the new scheme

optimal groundwater extraction under uncertainty and a spatial stock externality we introduce a model that incorporates two important elements to estimating welfare gains from groundwater management stochasticity and a spatial stock externality we estimate welfare gains resulting from optimal management under uncertainty as well as a gradual stock externality that produces the dynamics of a large aquifer being slowly exhausted this groundwater model imposes an important aspect of a depletable natural resource without the extreme assumption of complete exhaustion that is necessary in a traditional single cell bathtub model of groundwater extraction using dynamic programming we incorporate and compare stochasticity for both an independent and identically distributed as well as a markov chain process for annual rainfall we find that the spatial depletion of the aquifer is significant to welfare gains for a parameterization of a section of the ogallala aquifer in kansas ranging from 2 9 to 3 01 which is larger than those found previously over the region surprisingly the inclusion of stochasticity in rainfall increases welfare gains only slightly

impact of public policy uncertainty on renewable energy investment wind power and the production tax credit abstract it is generally understood that the pattern of repeated expiration and short term renewal of the federal production tax credit ptc causes a boom bust cycle in wind power plant investment in the us this on off pattern is detrimental to the wind industry since ramp up and ramp down costs are high and players are deterred from making long term investments it is often assumed that the severe downturn in investment during off years implies that wind power is unviable without the ptc this assumption turns out to be unsubstantiated this paper demonstrates that it is not the absence of the ptc that causes the investment downturn during off years but rather the uncertainty over its return specifically it is the dynamic of power purchase agreement ppa negotiations in the face of ptc renewal uncertainty that drives investment volatility with contract negotiations prevalent in the renewable energy industry this finding suggests that reducing uncertainty is a crucial component of effective renewable energy policy the ptc as currently structured is not the only means existing or potential for encouraging wind power investment using data from a survey of energy professionals various policy instruments are compared in terms of their perceived stability for supporting long term investment

renewable financial support systems and cost effectiveness abstract this paper analyses the performance of market based and feed in tariff systems of renewable energy procurement and comments on the impact of different procurement systems on investment in renewable energy the market based british renewables obligation ro is not more cost effective compared to the german feed in tariff although the nominal rates of payment per kwh of renewable energy are higher in germany this is more than offset by lower wind speeds in germany producing a lower return on investment compared to the uk a harmonised eu wide market based system would not improve cost effectiveness and may serve to reduce rather than increase local investment in renewable energy on the other hand nationally based green electricity certificate systems like the ro are not intrinsically biased against locally owned or co operative ventures systems are needed which encourage a diversity of investment in renewable energy from local as well as institutional sources

dynamic resource management intertemporal substitution and risk aversion we consider resource management with recursive preferences these generalize expected utility while eliminating some well known difficulties monotonicity and convergence properties of optimal decision rules are established using lattice programming methods empirical applications are rangeland and groundwater management decreasing the intertemporal elasticity of substitution implies greater lower resource usage with limited abundant stocks this moderates stock evolution and stabilizes consumption increasing risk aversion implies the same or reduced usage over the state space intertemporal substitution has a substantial effect on the optimal decision rule and a moderate effect on the limiting distribution while risk aversion has a very small effect

economic and environmental effectiveness of renewable energy policy instruments best practices from india abstract renewable energy re has been identified as a key tool to counter climate change and enhance energy security countries across the globe have been promoting this sector by several policy measures however limited research has been undertaken on the economic and environmental efficacy of re policy instruments especially in context of emerging economies like india which have witnessed substantial capacity addition and have set ambitious targets to de carbonize their economy this paper identifies 25 innovative practices followed in india which have enabled accelerated re capacity addition with minimal financial obligations these include energy entrepreneurship energy democratization private sector participation hedging and apportioning re procurement use of auctions with stringent participatory norms creditworthy counter party leverage of risk capital by developmental institutions regular revision of tariffs environmental cess on polluting industries long term re purchase trajectory and incentivizing green power output results indicate high financial impact of instruments support of us 3 5 mw h over applicable tariff which gets neutralized when tax inflow is considered lower carbon abatement cost us 3 6 tco2eq depicts high environmental efficacy the paper shares best practices from india in terms of efficient use of re policy enablers which may be contextualized in other emerging economies as per the local requirements