globalization and emerging markets with or without crash we analyze the effects of financial and trade globalization on the likelihood of financial crashes in emerging markets while trade globalization always makes crashes less likely financial globalization may make them more likely especially when trade costs are high pessimistic expectations can be self fulfilling and lead to a collapse in demand for goods and assets such a crash comes with a current account reversal and drops in income and investment lower income countries are more prone to such demand based financial crises a quantitative evaluation shows our model is consistent with the main stylized facts of financial crashes in emerging markets

economic hysteresis in hog production german hog production only responds in a very limited way to price fluctuations in the pork market the hog production concentrates on a few regions though it is not bound to special natural conditions such as soil quality furthermore the volume of production does not vary over time relatively high market risks sunk costs and the flexibility of the decision maker to defer investments characterize decision problems in hog production thus the real option approach is chosen to explain the inertia in production capacity by the use of panel data of specialized hog farms from the german farm accountancy data network an empirical investment model is estimated formally the model has the structure of a generalized ordered probit model this approach allows to test for economic hysteresis in the adjustment of hog production capacity the results confirm that uncertainty and flexibility widen the optimal range of inaction

sovereign default risk and the u s equity market i develop a two country general equilibrium model with firms governments and endogenous default decisions this paper shows that the risk of sovereign default abroad is important in the explanation of the level and the volatility of u s equity returns the intuition is that negative economic shocks deteriorate the fiscal situation of foreign governments thereby increasing the risk of a sovereign default that would trigger a local contraction in economic growth the rise in the risk of an economic slowdown abroad amplifies the direct eect of these shocks on the level and the volatility of equity returns in the u s through i a decrease in the present value of future firm earnings due to the unfavorable adjustment of the real exchange rate for u s exporters and ii a fall in u s equity prices that originates from the investors incentive to rebalance their portfolio towards risk free securities the amplification eect is strongest during periods of financial distress when the risk of corporate default is high in the u s a structural estimation of the model provides strong support for this prediction using monthly data for brazil and the u s over the period 1994 2008

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

the tree cutting problem in a stochastic environment the case of age dependent growth abstract harvest policies are derived for growing biological assets e g forests livestock subject to stochastic age dependent growth and price uncertainty the task posed is analyzed as a continuous time optimal stopping problem for diffusion processes both single and ongoing rotation problems are considered qualitative comparative static and numerical results are provided

technology adoption under uncertainty take up and subsequent investment in zambia technology adoption often requires multiple stages of investment as new information emerges agents may abandon a technology that was profitable in expectation we use a field experiment to vary t

rescaling contraction with a lower cost technology when revenue declines abstract a mature oil field rescaled contraction describes a switch to a technological alternative more appropriate for the depleted state of an underlying resource off shore oil rigs are an illustration since the original technological scale designed for very large output flows becomes inappropriate as the operational efficiency declines later in life and facing a dwindling output flow so a more appropriate extraction technology becomes economic a real option representation is formulated on a stochastic oil price and deteriorating output volume we consider investment divestment decisions both separately and jointly which have different implications for government policies and also option values the resulting model yields analytical or semi analytical results indicating that immediate switching to the lower cost technology could sometimes be hastened as the price volatility increases depending on the current revenue if divestment and switching are considered jointly however greater volatility could also promote hysteresis

land use change with spatially explicit data a dynamic approach most of the economic literature that uses spatially explicit data to estimate the determinants of land use change is limited to static models and cross sectional data sets recent attempts to move to a more dynamic analysis include using panel data sets and survival analysis in this study we use a discrete choice dynamic model of land use where the agent s choices are regarded as the solution to a dynamic optimization problem the irreversibility of some decisions expectations about future prices and forward looking behavior of the land operator can all be accounted for our results show that a model specification that incorporates some of the complexities of the decision process improves upon results found in the existing literature first prediction accuracy of land use change is superior to any of the existing models second we demonstrate that models that do not account for transactions costs tend to overestimate the effects of changes in transportation costs

carbon subsidies taxes and optimal forest management we consider the effect of carbon credit payment schemes on forest owners land use and harvest decisions we study two possible credit allocation regimes one where credits are allocated according to the actual amount of carbon sequestered by the trees on a piece of land and another where credits are allocated according to the long run potential to sequester carbon on the land using a real options model with uncertain future timber prices we examine the effect on the timing of harvests and the replanting abandonment decision we show that both schemes discourage deforestation compensating growers for actual carbon sequestration leads to longer rotation periods between harvests while basing compensation only on the long run potential level of sequestration induces shorter rotation periods the former scheme leads to greater benefits of carbon sequestration at lower cost than the latter scheme although inducing moderate levels of sequestration is expensive under both schemes the cost falls dramatically when the level of payments climbs above some threshold indeed providing the payments are sufficiently generous carbon credit payment schemes offer an effective means of increasing carbon sequestration

swedish norwegian tradable green certificates scheme design flaws and perceived investment barriers abstract the eu commission recommends using market based support schemes for renewable electricity projects one example is the swedish norwegian tradable green certificate scheme we examine whether design features in the norwegian part of this scheme specifically the scheme s short duration and the way it is to be abruptly terminated contribute to investors perceptions of barriers we apply econometric techniques on primary data collected in two surveys of norwegian investors in hydropower and we use real options theory to predict and interpret investors responses we show that 1 immediately after the scheme was introduced investors are eager to lock in future subsidies by investing immediately and concerned with factors that may delay the completion of their projects 2 as the certificate deadline neared investors have become increasingly pessimistic and concerned with economic and risk barriers investors in big hydropower plants with regulation reservoirs are particularly concerned with the risk of not completing their projects in time to gain the right to sell certificates these findings are consistent with the predicted responses to the scheme design derived from real options theory in contrast to earlier studies we find no difference in responses to the scheme design across investor types

insights on the effect of land use choice the perpetual option on the best of two underlying assets abstract we consider the effect of land use choice on speculative land value and on development timing as reflected in the optimal hurdle ratio which triggers immediate development we find that land use choice i e multiple use zoning may add over 40 to land value under typical economic circumstances the conditions for optimal development of the land become markedly more difficult to achieve higher hurdle ratio required when the two land uses have similar values indeed a rational indecision result obtains in theory development will never occur when the two land use choices have equal value

is it punishment sovereign defaults and the decline in trade sovereign defaults are associated with declines in defaulting countries trade are these declines the result of trade sanctions as the trade sanctions argument of sovereign borrowing would suggest we devise an empirical strategy to evaluate this issue based on the idea that if trade sanctions are causing the declines bilateral trade with creditor countries should fall more than trade with other countries we find that this is not the case the analysis does not yield much evidence of broader punishment strategies including a league of major creditors either these results contradict the predictions of the trade sanctions theory of sovereign borrowing

enduring impacts of land retirement policies evidence from the conservation reserve program we examine the persistence of cropland retirements induced by the conservation reserve program crp the largest u s conservation program we analyze micro data on observed land use choices following crp contract expiration over 1995 1997 and predict that 42 of crp acres would not have been returned to crops within a year if the program had expired in 1997 these results indicate that temporary cropland retirement payments under crp generate land use changes that often extend beyond contract periods the analysis suggests that targeted signing bonuses for first time enrollees would increase the longer term impacts of crp and perhaps other incentive based land use programs

on the contribution of game theory to the study of sovereign debt and default this paper reviews the lessons learned from the application of the tools of game theory to the theoretical study of sovereign debt and default we focus on two main questions first we review answers to the most fundamental question in the theory of sovereign debt given that there is no supranational institution for enforcing the repayment of debts why do countries ever repay their debts second we review theories of the process by which sovereign debts are restructured with a view to answering the following question why does the process of sovereign debt restructuring appear so inefficient the first question raises issues in the design of self enforcing contracts and on the credibility of threats to punish a country in default the second question involves applications of the theory of bargaining in environments where the parties to a bargain cannot commit to honour the terms of the bargain or even commit to enter into negotiations in the first place copyright 2013 oxford university press

productivity change under an individual transferable quota management system this is a scanned version of a published article the author 2012 published by oxford university press on behalf of the agricultural and applied economics association the original can be found at http www aaea org publications ajae to the best of our knowledge one or more authors of this paper were federal employees when contributing to this work

sovereign debt defaults insights from history history provides many insights to address the issue of sovereign debt defaults this article first presents a detailed account of defaults in historical perspective it then discusses the solutions devised in the past to address sovereign debt crises and puts these into perspective with today s answers when crises occur finally the paper stresses the role of history when the events studied do not occur frequently and when archival data may shed new light on the process of the resolution of crises the impact of odious debts declarations of state succession and of international relations on sovereign defaults and on their settlement is thus also addressed copyright 2013 oxford university press

sovereign defaults by currency denomination abstract this paper explores the drivers of sovereign default in 100 countries over the period 1996 2012 we build a new data set of sovereign defaults and find that default events for local and foreign currency bonds are equally likely however governments default under different economic and financial conditions depending on the currency in which bonds are issued the explained variation in default probability rises from 43 to 62 when we account for differences in currency denomination we also provide evidence that global factors and market sentiment which are known to drive sovereign spreads do not help explain the probability of sovereign default hence these factors appear to affect the price of sovereign credit risk although not the risk itself

the additionality problem with offsets optimal contracts for carbon sequestration in forests abstract carbon offsets are a frequently discussed tool for reducing the costs of an emissions reduction policy however offsets have a basic problem stemming from asymmetric information sellers of offsets have private information about their opportunity costs leading to concerns about whether offsets are additional non additional offsets can undermine a cap and trade program or if the government purchases them directly result in enormous government expenditures we analyze contracts for carbon sequestration in forests that mitigate the asymmetric information problem landowners are offered a menu of two part contracts that induces them to reveal their type under this scheme the government is able to identify ex post how much additional forest each landowner contributes and minimize ex ante its expenditures on carbon sequestration to explore the performance of the contracting scheme we conduct a national scale simulation using an econometric model of land use change the results indicate that for an increase in forest area of 61 million acres government expenditures are 5 3 billion lower under the contracting approach compared to a uniform subsidy offered to all landowners this compares to an increase in private opportunity costs of just 110 million dollars under the contracts thus the contracting scheme is preferable from society s perspective

globalization and risk sharing we study the effects of globalization on risk sharing and welfare like the previous literature we assume that governments cannot commit to enforce the repayment of debts owed by their citizens unlike the previous literature we assume that governments cannot discriminate between domestic and foreign creditors when enforcing debt payments this creates novel interactions between domestic and international trade in assets i increases in domestic trade raise the benefits of enforcement and facilitate international trade in fact in our set up countries can obtain international risk sharing even in the absence of default penalties ii increases in foreign trade raise the costs of enforcement and hamper domestic trade as a result globalization may worsen domestic risk sharing and lower welfare we show how these effects depend on various characteristics of tradable goods and explore the roles of borrowing limits debt renegotiations and trade policy

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

impacts of carbon based policy instruments and taxes on tropical deforestation the impacts of carbon payments and income taxes on curbing tropical forest loss are analyzed under a market equilibrium framework the supply of cleared forest land was derived by using a two period utility maximization model when the carbon sequestration of a private forestholder is credited the land demand was derived from the profit maximization problem of a cash crop farmer the model was applied to data from the humid chaco eco region of paraguay the results indicate that taxes on cash crop and forestry incomes may in fact be ineffective in curbing forest loss carbon payments however would effectively reduce forest clearing in the context studied a carbon payment of 30 per ton of carbon would limit deforestation to 10 of existing forest cover a reversible carbon crediting system in which a forestholder can redeem a credited forest seems to substantially increase at least in the short run the effectiveness of carbon payments carbon payments could also complement the tax on cash crop income in curbing tropical forest loss an effective policy to combat tropical deforestation should therefore jointly consider forestry and cash crop sectors

conservation payments under risk a stochastic dominance approach conservation payments can be used to preserve forest and agroforest systems to explain landowners land use decisions and determine appropriate conservation payments it is necessary to focus on revenue risk marginal conditional stochastic dominance rules are used to derive conditions for determining the conservation payments required to guarantee that the environmentally preferred land use dominates an empirical application to shaded coffee protection in the biologically important choco region of west ecuador shows that conservation payments required for preserving shaded coffee areas are much higher than those calculated under risk neutral assumptions further the extant distribution of land has strong impacts on the required payments

repatriation of debt in the euro crisis with the beginning of the euro crisis the long standing trend of european financial integration reversed investors unwound cross border positions of debt obligations and increased holdings of locally issued debt in other words debt obligations were repatriated we use data on bank portfolios to document three new empirical regularities of the financial disintegration i repatriation affected mainly debt of crisis countries ii repatriation affected mainly public debt iii the public debt of crisis countries that was not repatriated was reallocated to large and politically influential countries within the euro area we read these results in light of standard theories of cross border portfolio allocation and argue that the sum of these patterns constitutes evidence for the secondary market theory of public debt

options uncertainty and sunk costs an empirical analysis of land use change abstract in a real option model of land conversion incorporating return uncertainty and sunk costs optimal conversion thresholds are significantly higher than those from expected net present value models not accounting for these factors empirical tests of conversion from agriculture to forest suggest that landowners value the option to convert when making conversion decisions higher uncertainty in returns to all potential uses and lower correlation between shocks to agricultural and forest returns decreases the likelihood of conversion estimates indicate a significant impact on conversion decisions with approximations of option values ranging from 7 to 81 of the expected value of the land asset

linear programming models for firm and industry performance programming models of technology are enjoying a revival in several strands of literature one such strand is the growing literature devoted to the assessment of firm performance based on the work of farrell 1957 and the later popularized by charnes cooper and rhodes 1978 under the name of data envelopment analysis dea for an early programming model see boles 1966 a second strand of literature seeks to model the industry production function and is associated with johansen 1972 fbrsund and hjalmarsson 1987 and aigner and chu 1968 a third strand of literature uses programming techniques such as nonparametric tests of regularity conditions in production see afriat 1972 hanoch and rothschild 1972 diewert and parkan 1983 and varian 1984 one of the purposes of this paper is to examine the relationship between the first two areas i e analysis of firm and industry programming models of technology and performance in order to compare the industry and firm models we restate them in a general programming form and ignore issues of functional form examination of these models in primal and dual form reveals that the industry approach constructs technology from firm data but allows hypothetical reallocation of aggregate resources across firms to yield an industry function the firm models also construct technology from the data on all firms in the sample industry but do not allow for reallocation of inputs across firms this suggests a natural hybrid an industry model which allows for both firm specific inputs and inputs which can be reallocated across firms the paper unfolds as follows we begin by presenting a stylized version of the aigner and chu and johansen models of industry production we

sovereign defaults information investment and credit abstract why would a sovereign government immune from bankruptcy procedures and with few assets that could be seized in the event of a default ever repay foreign creditors and correspondingly why do foreign creditors lend to sovereigns this paper finds general conditions under which even in the absence of sanctions lending to sovereigns can emerge in a single shot game furthermore it shows that positive borrowing can be sustained both in pooling and separating equilibria in this way it makes clear that neither sanctions nor reputation considerations the two classical explanations are necessary to enforce repayment information revelation is the crucial mechanism for these results the repayment default decision is interpreted as a signal used by the government to communicate information to domestic and foreign agents about the fundamentals of the economy governments repay to affect agents expectations about them a default through its effect on expectations about fundamentals can generate a decline in foreign and domestic investment and a credit crunch in domestic credit markets governments repay to avoid these costs but may default in equilibrium when hit by a negative shock

supply of cellulosic biofuel feedstocks and regional production pattern interest in cellulosic biofuels has grown due to recent concerns about the impact of expanding production of corn ethanol on food prices and the greater potential of cellulosic biofuels to mitigate climate change the energy independence and security act eisa of 2007 limits the production of corn ethanol to 56 billion liters after 2015 and mandates the production of at least 80 of the 136 billion liters of ethanol from non corn starch based cellulosic feedstocks by 2022 the biomass research and development act of 2000 had established an even more ambitious goal of using biomass to replace the equivalent of 30 of current petroleum consumption by 2030 and estimated that this would require 1 billion dry short tons of biomass annually u s department of energy usdoe 2003 biomass can be obtained from several different sources including forest resources crop residues woody biomass and perennial grasses a usda usdoe report perlack et al 2005 examined the technical feasibility of sustaining this supply of biomass and the land resources that would be required under alternative scenarios with yield enhancing and other technological changes in conventional crops and perennial bioenergy crops the study estimated that 0 54 to 1 billion dry tons of agricultural crop based biomass could be obtained annually from cropland idle cropland and cropland pasture with moderate to high productivity gains in crop productivity residue collection and tillage practices

official debt restructurings and development abstract despite the frequency of official debt restructurings little systematic evidence has been produced on their characteristics and implications using a dataset covering more than 400 paris club agreements this paper fills that gap it provides a comprehensive description of the evolving characteristics of these operations and studies their impact on debtors the progressive introduction of new terms of treatment gradually turned the paris club from an institution primarily concerned with preserving creditors claims into an instrument to foster development in the world s poorer nations among other objectives our study finds that more generous restructuring conditions involving nominal relief are associated with an acceleration of per capita gdp growth and with a reduction in poverty and inequality we also find that countries receiving nominal relief tend to receive lower aid flows subsequently the opposite being the case for countries receiving high reductions in the net present value of their obligations but no nominal haircuts

impacts of random noise and specification on estimates of capacity derived from data envelopment analysis abstract data envelopment analysis dea is widely used to estimate the efficiency of firms and has also been proposed as a tool to measure technical capacity and capacity utilization cu random variation in output data can lead to downward bias in dea estimates of efficiency and consequently upward bias in estimates of technical capacity this can be particularly problematic for industries such as agriculture aquaculture and fisheries where the production process is inherently stochastic due to environmental influences this research uses monte carlo simulations to investigate possible biases in dea estimates of technically efficient output and capacity output attributable to noisy data and investigates the impact of using a model specification that allows for variable returns to scale vrs we demonstrate a simple method of reducing noise induced bias when panel data is available we find that dea capacity estimates are highly sensitive to noise and model specification analogous conclusions can be drawn regarding dea estimates of average efficiency

sovereign debt repurchases no cure for overhang troubled debtor countries do not gain by repurchasing external bank debt at market discount even if a buyback would stimulate investment by relieving debt overhang the reason is that buybacks allow creditors to reap more than 100 percent of any efficiency gains that might result from increased investment we show that open market buybacks provide a benchmark for evaluating more complex negotiated buyback deals by comparing any given deal with a hypothetical market buyback of the same size one can derive upper and lower bounds on the gain to the country we apply our model to the 1990 mexican debt deal

debt and default in the 1930s causes and consequences abstract this paper studies interwar experience with external debt and default it begins with a description of the contours of international borrowing and lending in the 1920s we then use some empirical models from recent literature on the 1970s to describe the interwar data macroeconomic variables for over 20 countries are related to cross section variations in borrowing and debt during the period from the end of the 1920s to 1938 the paper then considers the incidence and correlates of sovereign default for 1934 1938 using regression to determine the association between standard measures of economic structure and performance and subsequent interruptions to debt service such variables as the magnitude of the debt burden the deterioration of the terms of trade during the great depression and the stance of monetary and fiscal policies provide a remarkably accurate explanation of the incidence of default we go on to provide a long run perspective on default and on the remedies available to creditors the provisions of loan contracts are reviewed with an eye toward analyzing the scope for renegotiation the discussion emphasizes the contrast between the regime of bond finance that prevalied in the interwar years and the current regime of bank lending we analyze the roles of governments banks and bondholders protective committees in the negotiation process we then present new estimates of the ex post realized rates of return on british and american foreign lending in the 1920s this empirical analysis uncovers a striking contrast in the returns realized on loans floated in the two countries while the nominal internal rate of return on dollar loans was less than 1 per annum the comparable return on sterling loans was in excess of 5 the paper concludes with a discussion of factors which help to account for this dramatic difference

the effect of agricultural policies on land use and environmental quality in this paper i consider the environmental quality gains that may be achieved by reducing agricultural income supports a new methodology is developed to estimate land use shares in an application to wisconsin milk price support reductions result in shifts of marginal agricultural land to forest reducing soil erosion and providing off site water quality improvements the environmental benefits are estimated to be at least as large as the decreased welfare burden on consumers and taxpayers indicating a central role for environmental quality considerations in motivating policy reforms and a more efficient means of achieving the environmental quality goals of land retirement programs

ex ante implications of sovereign default i study how the possibility of default on external debts affects other capital allocation decisions in a small open economy in the model default has an option value derived from the randomization over ex post default regimes which depends on country specific productivity shocks this feature of default reduces incentives for ex ante diversification which would reduce exposure to the productivity shock as a result if the economys debt to capital ratio is allowed to cross a fixed threshold identified in the model the unique equilibrium exhibits an allocation of capital that is less productive in expectation and more volatile than in a benchmark model without default the model therefore captures a number of salient features of emerging and less developed countries where low levels of international risk sharing have gone hand in hand with frequent and recurring default events

how not to pay field experimental evidence on the design of redd payments abstract payments for ecosystem services pes can use many design features we investigate the impact of payment conditionality types i e different specifications when to pay and when not to pay for pes on deforestation and agricultural production in a lab in the field experiment our experiment also tests variations in contract period and payment volatility we designed a highly visual simulation game to characterize the decision situation of a cattle rancher in brazil the player can expand extensive pasture by deforestation or intensify existing pasture the model includes both a land and a capital constraint we applied the game in an economic framed lab in the field experiment in tocantins brazil payments conditional on forest carbon stock lead to slow but steady deforestation while payments conditional on forest carbon stock change suppressed deforestation more strongly but payments conditional on stock increase cattle production while payments conditional on stock change have no effect on production thus depending on the level of leakage either type of conditionality can be more cost effective in reducing global carbon emissions contracts with limited periods lead to strong deforestation after the end of the payment period payment volatility had no significant effect

property tax policy and land use change in this study we analyze the effect of property taxes on changes between agricultural forestry conservation reserve program and developed land uses in louisiana we estimate a random parameters logit model of land use conversion from the national resources inventory plot data our results indicate that land use changes are inelastic with respect to property taxes simulation shows that current use valuation policy while slowing down development of rural lands also affects changes between rural land uses

the costs of carbon sequestration a revealed preference approach increased concem by policy makers with the threat of global climate change has brought with it considerable attention to the possibility of encouraging the growth of forests as a means of sequestering carbon dioxide national academy of sciences nas 1992 james p bruce et al 1996 1 the kyoto protocol to the united nations framework convention on climate change 1997 which establishes emission reduction targets for the united states and other industrialized nations states that carbon sequestration can be used by participating nations to achieve their targets moreover even before the kyoto agreement this approach had become an explicit element of both u s and intemational climate policies u s department of energy 1991 united nations general assembly 1992 william j clinton and albert gore 1993 this high level of interest has been due in part to suggestions that sufficient lands are available to use the approach to mitigate a substantial share of annual carbon dioxide c02 emissions greg marland 1988 daniel a lashof and dennis a tirpak 1989 mark c trexler 1991 and claims that growing trees to sequester carbon is a relatively inexpensive means of combating climate change roger a sedjo and allen m solomon 1989 daniel j dudek and alice leblanc 1990 nas 1992 in other words the serious attention given by policy makers to carbon sequestration can partly be explained by implicit assertions about respective marginal cost functions i develop and demonstrate a method by which the costs of carbon sequestration can be estimated on the basis of evidence from landowners behavior when confronted with the opportunity costs of alternative land uses the simplest of previous economic analyses derived single point estimates of average costs associated with particular sequestration levels marland 1988 sedjo and solomon 1989 dudek and leblanc 1990 edwin s rubin et al 1992 omar masera et al 1995 often it has been assumed that land opportunity costs are zero g van kooten et al 1992 j k winjum et al 1992 new york state energy office 1993 robert k dixon et al 1994 another set of studies essentially engineering costing models has constructed marginal cost schedules by using information on revenues and costs of production for altemative uses on representative types or locations of land and then sorting these in ascending order of cost robert j moulton and kenneth r richards 1990 richards et al 1993 simulation models include a model of the lost profits due to removing land from agricultural production peter j parks and ian w hardie 1995 a mathematical programming model of the agricultural sector and the timber market richard m adams et al 1993 a related model incorporating the effects of agricultural price support programs j m callaway and bruce mccarl 1996 and a dynamic simulation model of forestry susan swinehart 1996 lastly an analysis by andrew j plantinga 1995 adopts land use elasticities from an econometric study to estimate sequestration costs we draw on some of the best features of the previous studies including the carbon levelization method of moulton and richards john f kennedy school of government harvard university 79 john f kennedy street cambridge ma 02138 and resources for the future richard newell supplied excellent research assistance and valuable comments on a previous version were provided by lawrence goulder william nordhaus andrew plantinga kenneth richards two anonymous referees participants in seminars at the universities of california at los angeles and santa barbara the university of maryland the university of michigan the university of texas harvard university stanford university yale university resources for the future and the national bureau of economic research the author alone is resdonsible for any errors 1 after fossil fuel combustion deforestation is the second largest source of carbon dioxide emissions estimates of annual global emissions from deforestation range from 0 6 to 2 8 billion tons compared with slightly less than 6 0 billion tons annually from fossil fuel combustion cement manufacturing and natural gas flaring combined r a houghton 1991 t m smith et al 1993

conservation payments under uncertainty the decision of whether to retain forest or convert to another land use is affected by uncertainty over future land use returns this paper examines the design of conservation payments to landowners under uncertainty payments are either indexed to the returns from deforestation agriculture or to a market value associated with forest nonuse benefits payment size depends on the degree of correlation between payments and agricultural returns and their relative volatility market based payments for reducing emissions from deforestation and degradation redd are simulated for brazilian soybean growers payments indexed to carbon prices are larger than those indexed to international soybean prices

the intensity and timing of investment the case of land the authors model the decision to replace durable capital when intensity is variable decisions of this type include land redevelopment decisions where the density of residential or commercial development is a choice variable as well as capital replacement decisions where capacity is variable the authors provide a general yet simple formation of the problem using an optimal stopping framework they characterize the value of the project the timing of investment and the intensity of development the authors show that intensity interacts in important ways with timing taxes and project values the ability to vary intensity raises hurdle rents and delays development decisions copyright 1994 by american economic association

targeting incentives to reduce habitat fragmentation the fragmentation of wildlife habitat has long been recognized as a principal threat to terrestrial biodiversity in this paper we develop a theoretical model to analyze the spatial targeting of incentives for the restoration of forested landscapes when land quality is spatially heterogeneous and wildlife habitat can be enhanced by reducing fragmentation we consider a regulator who uses subsidies to encourage the conversion of private agricultural land to forest on a pre defined set of landscapes the regulator can observe land use choices but not the opportunity costs on individual land parcels the important insight to emerge from the theoretical analysis is that solutions at or near corners are a strong possibility on each landscape either none or all of the agricultural land should be converted to forest corner solutions are directly linked to the spatial process determining habitat benefits to verify the theoretical insight we present a simulation of the effects of incentive based policies on the spatial distribution of forests in south carolina the empirical methodology integrates an econometric model of land use change with gis based landscape simulations the empirical findings strongly support our conjecture regarding corner solutions and the optimal targeting policy is shown to produce substantial welfare gains over a spatially uniform incentive

option exercise games an application to the equilibrium investment strategies of firms under the standard real options approach to investment under uncertainty agents formulate optimal exercise strategies in isolation and ignore competitive interactions however in many real world asset markets exercise strategies cannot be determined separately but must be formed as part of a strategic equilibrium this article provides a tractable approach for deriving equilibrium investment strategies in a continuous time cournot nash framework the impact of competition on exercise strategies is dramatic for example while standard real options models emphasize that a valuable option to wait leads firms to invest only at large positive net present values the impact of competition drastically erodes the value of the option to wait and leads to investment at very near the zero net present value threshold copyright 2002 oxford university press

investment in competitive equilibrium the optimality of myopic behavior there is an extensive literature on the optimal irreversible investment strategy of a solitary firm facing an exogenous price process this paper shows that the investment strategies that this literature derives may be optimal in competitive equilibrium even though the price process is now endogenous this provides a simple means for computing equilibrium investment strategies

land price volatility in a geographically dispersed market historical evidence and theory lead to a hypothesis that land price variation increases with distance to market this hypothesis is tested with county data from five cornbelt states during the period 1969 to 1987 when price changes were unusually large our data support the hypothesis in the 70s prices increased more in the western cornbelt than in the eastern cornbelt in the 80s the western cornbelt experienced the more precipitous price declines our hypothesis explains why great plains farmers have experienced greater financial problems during times of stress than have many other farmers

permanent and temporary policy incentives for conservation under stochastic returns from competing land uses rapid conversion of private land for agricultural and urban use has raised concern worldwide over the loss of ecological services to inform conservation policy we model privately optimal land use decisions using a real options framework that assumes both the ecological and commercial values of land are stochastic and that land conversion is irreversible we analyze permanent and temporary land conservation policy incentives using this dynamic framework to guide policy makers interested in designing efficient payment mechanisms to achieve ecological preservation goals we find that while the financial cost of temporary policy incentives is generally much lower than permanent policy incentives this difference is very small in scenarios with high discount rates and lower uncertainties in conversion returns and lower expected trend in conservation returns alternately the financial cost of temporary conservation is substantially lower than that of permanent conservation when the expected trend in conservation returns and uncertainties in conservation and conversion returns is high and the discount rate is low comparison with net present value and single source uncertainty models indicates that the presence of a second uncertainty increases the option value of delaying conversion and shows that permanent and temporary policy incentives based on either of the two simpler models can be seriously misguided if multiple uncertainties are present we illustrate the analytical results with a case study of tropical deforestation in indonesia where private landowners can either conserve forests and earn carbon credits or convert to palm oil agriculture and earn profits from the sale of palm oil

the spillover effects of biofuel policy on participation in the conservation reserve program abstract this paper studies the spillover effects of rising biofuel production on participation in the conservation reserve program landowner participation decisions are modeled using a real options framework we develop a land use decision model that captures biofuel driven structural changes in market demand and derive threshold conditions that trigger participation in the program we then quantify the impacts of biofuel production on participation at both the national and state levels using monte carlo simulations the model is also used to analyze how changes in the persistence of the biofuel production boom and in the volatility of farming returns affect conservation participation decisions policy implications of the results are discussed

an empirical examination of the timing of land conversions in the presence of farmland preservation programs using a panel of parcel level data we estimate a hazard model and find strong evidence that the mere existence of an option to preserve farmland delays decisions to convert farmland to developed uses by about six years a reduction in median conversion time of 12 to 43 depending on parcel size where such delays allow local governments to improve infrastructure or implement stricter growth control measures benefits of a preservation option may be even more long term also increases in the variance of returns to development tended to slow conversion for parcels with all but the highest lot capacities copyright 2008 oxford university press

vessel entry exit behavior in the gulf of mexico shrimp fishery given the heterogeneous nature of the fishing fleet and complex vessel behavior traditional marginalist supply models are not well suited for modeling vessel mobility a discrete choice model is utilized here to predict the probability that a vessel will enter exit or remain in the gulf of mexico shrimp fishery based on a myopic profit maximization criterion the multinomial logit model indicates that fisherman behavior is not influenced by stock variability the crowding externality as represented by size of fishing fleet exhibits a strong negative impact on the probability of entry independent of changes in abundance exvessel prices or harvest costs the gulf of mexico shrimp fishery was not an autonomous system of fishing vessels as initially believed

sovereign default risk and commitment for fiscal adjustment abstract this paper studies fiscal policy in a model of sovereign debt and default a time inconsistency problem arises since the price of past debt cannot be affected by current fiscal policy and governments cannot credibly commit to a certain path of tax rates debtor countries choose suboptimally low fiscal adjustments an international organization capable of designing a contract that coaxes debtors into a tougher fiscal stance via the provision of cheap senior lending in times of crisis can work as a commitment device and improve social welfare

assessing technical efficiency in commercial fisheries the mid atlantic sea scallop fishery despite the extensive effort to research issues of allocative efficiency in fisheries little empirical analysis of technical efficiency te in fisheries exists this study examines vessel efficiency using a stochastic production frontier based on a sample of sea scallop vessels operating in the mid atlantic between 1987 and 1990 estimates of te are computed and compared with input usage resource conditions economic performance and recently imposed regulations the analysis suggests that owners and captains only partially compensate for changes in resource conditions through the use of labor and fishing effort and recent regulations may improve overall te in the short run

biological conservation in dynamic agricultural landscapes effectiveness of public policies and trade offs with agricultural production article i nfo land use change and land management intensification are major drivers of biodiversity loss especially in agricultural landscapes that cover a large and increasing share of the world s surface incentive based agri environmental policies are designed to influence farmers land use decisions in order to mitigate environmental degradation this paper evaluates the effectiveness of agri environmental schemes for biological conservation in a dynamic agricultural landscape under economic uncertainty we develop a dynamic ecological economic model of agricultural land use and spatially explicit population dynamics we then relate policies subsidies to grassland taxation of agricultural intensity to the ecological outcome probability of persistence of a species of interest we also analyze the associated trade offs between agricultural production in value and biological conservation in probability of persistence at the landscape scale

production and spatial distribution of switchgrass and miscanthus in the united states under uncertainty and sunk cost abstract the u s cellulosic biofuel mandate has not been enforced in recent years uncertainty surrounding the enforcement of the mandate in addition to high production and harvest cost have contributed to a delay in the widespread planting of bioenergy crops such as switchgrass and miscanthus previous literature has shown that under uncertainty and sunk cost an investment threshold is further increased due to the value associated from holding the investment option in this paper we extend the previous literature by applying a real option switching model to bioenergy crop production first we calculate the county level break even price which triggers a switching away from traditional field crops corn soybeans and wheat to bioenergy crops under various scenarios differing by commodity prices production cost and biomass price expectations we show that the resulting break even prices at the county level can be substantially higher than previously estimated due to the inclusion of the option value in a second step we identify counties that are most likely to grow switchgrass or miscanthus by simulating a stochastic biomass price over time our results highlight two issues first switchgrass or miscanthus are not grown in the midwest under any scenario under low agricultural residue removal rates biomass crops are mostly grown in the southeast second under the assumption of a high removal rates bioenergy crops are not grown anywhere in the u s since the cellulosic biofuel mandate can be covered by agricultural residues

are there spatial spillovers in the adoption of clean technology the case of organic dairy farming this paper examines spatial spillovers associated with the adoption of organic dairy farming we hypothesize that neighboring farmers can help to reduce the uncertainty of organic conversion by lowering the fixed costs of learning about the organic system a spatially explicit 10 year panel dataset of more than 1 900 dairy farms in southwestern wisconsin is used as input into a reduced form econometric model of the decision to convert to organic production using an identification strategy that exploits the panel aspect of the micro dataset we find evidence that the presence of neighboring organic dairy farms affects the conversion decision

gains from trade and the sovereign bond market abstract increasing international flows of goods services and financial assets have been shown to increase a country s welfare through various channels this paper studies how a country s access to a bond market affects its welfare gains from international trade we do so by incorporating a sovereign bond market into a simple armington 1969 s trade model while standard trade models suggest surprisingly small gains from trade our model implies that introducing channels through a sovereign bond market greatly magnifies the gains from trade key mechanisms in the model are confirmed by data and the results are found to be robust to a variety of considerations

switching to perennial energy crops under uncertainty and costly reversibility we study a farmer s decision to convert traditional cropland into land for growing dedicated energy crops taking into account sunk conversion costs and uncertainties in crop returns the optimal decision rules differ significantly from the expected net present value rule which ignores uncertainties and from real options models that allow only one way conversion into energy crops these models also predict drastically different patterns of land conversions into and out of energy crops over time using corn soybean rotation and switchgrass as examples we show that the model predictions are sensitive to assumptions about stochastic processes of the returns government policies might have unintended consequences subsidizing conversion costs into switchgrass may not much affect proportions of land in switchgrass in the long run

a model of sequential investment abstract this paper specifies a model of a two stage sequential investment where the stages take time to complete it presents algebraic solutions for an individual firm s optimal sequential investment with costless suspension without suspension in the intermediate case of costly suspension and for aggregate investment with suspension the first stage trigger is below the second stage trigger for sufficiently long lags and high levels of output price uncertainty thus the firm may carry out exploratory investment we also evaluate the comparative statics of investment and show how the patterns of project costs and lags affect the incentive to invest

crop based biofuel production with acreage competition and uncertainty this paper examines the role of uncertain crude oil prices uncertain crop yields and competition for acreage on corn soybean and switchgrass prices under biofuel production mandates we find enforcement of the cellulosic mandate is costly in that it raises equilibrium prices of all three crops through competition for acreage however crude oil prices largely determine industry profitability even in the face of high crop prices further we find that uncertainty in crude oil prices and crop yields causes higher corn soybean and switchgrass prices compared to a baseline with no uncertainty

harvest decisions and asset valuation for biological resources exhibiting size dependent stochastic growth optimal harvest rules and preharvest valuation procedures are derived for biological assets with stochastic size dependent growth in a stochastic price environment these issues are analyzed as continuous time optimal stopping problems both the single rotation and ongoing rotations problems are addressed the sensitivity of harvest and valuation rules is assessed the results are compared with those derived from a myopic look ahead procedure and with the corresponding findings for age dependent growth copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

dea based predictors for estimating fleet size changes when modelling the introduction of rights based management the introduction of individual transferable quotas itqs into a fishery is going to change not only the amount of catch a fleet can take but often also changes the fleet structure particularly if total allowable catches are decreased this can have an impact on the economic social and environmental outcomes of fisheries management management strategy evaluation mse modelling approaches are recognised as the most appropriate method for assessing impacts of management but these require information as to how fleets may change under different management systems in this study we test the applicability of data envelopment analysis dea based performance measures as predictors of how a fishing fleet might change under the introduction of itqs and also at different levels of quota in particular we test the assumption that technical efficiency and capacity utilisation are suitable predictors of which boats are likely to exit the fishery we also consider scale efficiency as an alternative predictor we apply the analysis to the torres strait tropical rock lobster fishery that is transitioning to an itq based management system for one sector of the fishery the results indicate that capacity utilisation technical efficiency and scale efficiency are reasonable indicators of who may remain in the fishery post itqs we find that the use of these measures to estimate the impacts of lower quota levels provides consistent fleet size estimates at the aggregate level but which individual vessels are predicted to exit is dependent on the measure used

opportunity for profitable investments in cellulosic biofuels research efforts to allow large scale conversion of cellulose into biofuels are being undertaken in the us and eu these efforts are designed to increase logistic and conversion efficiencies enhancing the economic competitiveness of cellulosic biofuels however not enough attention has been paid to the future market conditions for cellulosic biofuels which will determine whether the necessary private investment will be available to allow a cellulosic biofuels industry to emerge we examine the future market for cellulosic biofuels differentiating between cellulosic ethanol and drop in cellulosic biofuels that can be transported with petroleum fuels and have equivalent energy values we show that emergence of a cellulosic ethanol industry is unlikely without costly government subsidies in part because of strong competition from conventional ethanol and limits on ethanol blending if production costs of drop in cellulosic biofuels fall enough to become competitive then their expansion will not necessarily cause feedstock prices to rise as long as local supplies of feedstocks that have no or low valued alternative uses exist then expansion will not cause prices to rise significantly if cellulosic feedstocks come from dedicated biomass crops then the supply curves will have a steeper slope because of competition for land

the effect of time to build on strategic investment under uncertainty we show that time to build which creates a lag between the decision to invest and production is an important element of industry structure we study a multiperiod investment game where there is demand uncertainty adding time to build to the model alters the classic tradeoff between making strategic commitments and exploiting the option to wait furthermore time to build gives rise to novel equilibria in which firms invest incrementally which contrasts with most prior work on multiperiod investment games in which firms invest only once we show how time to build affects firm heterogeneity investment timing the option value of waiting the evolution of prices and social welfare copyright 2003 by the rand corporation

rural land use traditional agriculture or forestry the signing of the kyoto protocol and the official recognition of forestry s capacity to sequester carbon has prompted considerable interest within the european union in forestry as a competing land use application however despite large increases in grants to forestry afforestation rates in certain eu countries are below national targets in this paper we employ a real options model to theoretically explain why farmers may be slow to switch land from traditional agriculture to forestry the theoretical model is then used to motivate an empirical dynamic panel data model and both models are applied to irish data

sovereign credit spreads under good bad governance abstract this paper explores how sovereign credit spreads vary with the level of governance an analysis of 74 countries over the 2001 2016 period shows that sovereign credit default swap cds spreads decrease with government effectiveness particularly in countries exhibiting severe default risk high indebtedness and poor economic conditions we formulate a theoretical explanation for these findings using a structural model in which governments adjust default and debt policies based on their abilities to collect and use fiscal revenues the theory posits that more effective governments have less incentive to default and thus benefit from narrower credit spreads although they may choose higher indebtedness levels

output spillovers from changes in sovereign credit ratings this research examines how a sovereign rating revision of one country influences the economic growth rates of other countries rating revisions have significant output spillover effects a one notch upgrade downgrade prompts on average a significant downward revision of about 0 03 0 07 in the consensus forecast of annual economic growth rates of other countries in the two month period after the event the spillovers are transmitted through direct and indirect trade and financial linkages between event and non event countries the evidence indicates that a predominance of differential common spillovers leads upgrades downgrades to produce adverse output effects for other countries

strategic models of sovereign debt renegotiations the sovereign debt literature has often implicitly assumed that all the power in the bargaining game between debtor and creditor lies with the latter this paper explores that assumption by analyzing three game theoretic models of debt renegotiations in two of the models both of which are built on the traditional one sector growth model all the subgame perfect equilibria have an extreme form in which the game s surplus is captured by the creditor the third game has many subgame perfect equilibria that do not have this feature however the roles of various assumptions in all three games are examined

the fundamentals of land prices and urban growth abstract in a very simple model in which capital is durable and landowners have perfect foresight the price of urban land has four additive components the value of agricultural land rent the cost of conversion the value of accessibility and the value of expected future rent increases a growth premium in rapidly growing cities the growth premium may easily account for half of the average price of land and may create a large gap between the price of land at the boundary minus conversion cost and the value of agricultural land rent

getting more carbon bang for your buck in acre state brazil abstract acre state in brazil is at the forefront of efforts to institutionalize jurisdictional scale policies that aim to reduce emissions from deforestation and forest degradation redd given limited redd funds and uncertain returns from alternative land uses this paper estimates the minimum incentive payment acre s government would have to pay forest landowners in each of its 22 municipalities to ensure forest conservation despite lower profits but with lower conversion costs and more stable returns over time relative to corn and coffee production cattle pasture generates the highest returns in 19 municipalities municipalities are ranked according to their relative policy costs a ranking which is compared to the distribution of forest carbon stocks across acre finally the relative cost per tonne of carbon is derived which enables the identification of a group of 13 municipalities with the greatest potential for carbon bang for a given buck

investment under uncertainty does competition matter abstract empirical applications of real options models in competitive environments implicitly exploit the optimality of myopic planning in a seminal paper leahy j v 1993 investment in competitive equilibrium the optimality of myopic behavior quarterly journal of economics 108 1105 1133 shows that the optimal investment strategy of a myopic planner who ignores market entries and exits of competitors as well as the resulting price effects constitutes a market equilibrium under rather general conditions as a result the calculation of optimal investment strategies is simplified considerably because competition does not have to be taken into account in this paper however we demonstrate by using simulation experiments that myopic planning may lead to non optimal investment strategies this is due to the fact that it is difficult or even impossible to specify the correct or equivalent price process for the myopic investor using real world data we quantify the degree of suboptimality and propose measures to reduce the error

sovereign risk and secondary markets conventional wisdom says that in the absence of default penalties sovereign risk destroys all foreign asset trade we show that this conventional wisdom rests on one implicit assumption that assets cannot be retraded in secondary markets without this assumption foreign asset trade is possible even in the absence of default penalties this result suggests a broader perspective regarding the origins of sovereign risk and its remedies sovereign risk affects foreign asset trade only if default penalties are insufficient and secondary markets work imperfectly to reduce its effects one can either increase default penalties or improve the working of secondary markets jel f34 g12 g15

structural estimation of the stochastic dynamic decision problems of resource users an application to the timber harvest decision abstract this paper examines a method for structural estimation of the stochastic dynamic decision problems of resource users the method involves nesting a stochastic dynamic programming algorithm within a maximum likelihood routine an application to the timber harvest decision indicates that owners of slash pine plantations in southeast georgia use a low discount rate and treat timber price as a random walk moreover the harvest decision is apparently dominated by profit shocks overlooked in the usual models of the harvest decision

the costs of sovereign default theory and empirical evidence economic policymakers sometimes perceive a sovereign default as a jump into the unkown the main piece of information missing is what the costs of the default are going to be assessing these costs correctly is crucial for evaluating how far a country should go to avoid a default this paper analyzes the main sources of the costs of default discussed in the theoretical literature and evaluates the empirical evidence on the matter i classify these potential sources in three groups 1 sanctions imposed as penalties by creditors 2 costs related to the information content of default and 3 costs related to domestic agents sovereign bond holdings i then present a simple model that captures the main intuition behind each of them a review of the empirical evidence suggests that while the costs generated in the aftermath of defaults by traditional mechanisms such as trade sanctions or exclusion from credit markets have not been significant in recent decades costs deriving from information revelation and the impact on domestic bondholders particularly the banking system have become major consequences of sovereign defaults

adjustment of consumers durables stocks evidence from automobile purchases this paper tests an optimal s s rule in household durable purchases and examines directly the resulting aggregate expenditure dynamics the observed decision rule responds to income uncertainty and growth as predicted by an s s model resulting from transactions costs tests against liquidity constraints find that about half the households purchase according to an optimal s s rule aggregating the s s rule over households produces a cross section distribution of durables holdings the empirical distribution is similar to that predicted theoretically as is its response to aggregate shocks furthermore simulations of aggregate expenditure based on the household distribution exhibit dynamics consistent with those observed in the 1980s

time to build option value and investment decisions abstract investment decisions and outlays are often made sequentially for example the rate at which construction proceeds is usually flexible and can be adjusted with the arrival of new information traditional discounted cash flow methods which treat the pattern of investment as fixed ignore this flexibility and understate the value of the project this paper uses contingent claims analysis to derive optimal decision rules and to value such investments we determine the effects of time to build opportunity cost and uncertainty on the investment decision for reasonable parameter values we show how a simple npv rule can lead to gross errors

unintended impacts of public investments on private decisions the depletion of forested wetlands by affecting relative economic returns infrastructure investments can induce major changes in private land use the authors find that 30 percent of forested wetland depletion in the mississippi valley has resulted from private decisions induced by federal flood control projects despite explicit federal policy to preserve wetlands the model aggregates individual land use decisions using a parametric distribution of unobserved land quality dynamic simulations are used to quantify the impacts on wetlands of federal projects and other factors copyright 1990 by american economic association