market forces and aircraft safety thecaseofthedc 10 the may 25th 1979 chicago dc 10 crash provides the opportunity to test an important proposition in the theory of consumer product safety can market forces provide safety when products are too complex to permit buyer prepurchase inspection this paper combines economic theory with modern finance theory to measure the cost of the crash to shareholders of the plane s manufacturer mcdonnell douglas the results indicate that the dc 10 crash resulted in a 200 million loss to mcdonnell douglas stockholders and that this amount exceeds any reasonable estimate of regulatory or liability costs

losses from effluent taxes and quotas under uncertainty recent theoretical papers by adar and griffin j environ econ manag 3 178 188 1976 fishelson j environ econ manag 3 189 197 1976 and weitzman rev econ studies41 477 491 1974 show that different expected social losses arise from using effluent taxes and quotas as alternative control instruments when marginal control costs are uncertain key assumptions in these analyses are linear marginal cost and benefit functions and an additive error for the marginal cost function to reflect uncertainty in this paper empirically derived nonlinear functions and more realistic multiplicative error terms are used to estimate expected control and damage costs and to identify empirically the mix of control instruments that minimizes expected losses

credible spatial preemption it is often argued that incumbent firms may deter entry by preemptive investment in new goods we show that these conclusions are reversed when multiproduct incumbentfirms may exit in response to entry once entrants are in an industry an incumbent will often want to withdraw some goods to prevent competition with the entrant from reducing profits on other goods such a reaction makes entry more attractive to a potential entrant the equilibrium industry structure is less likely to be monopolistic as the goods are better substitutes as exit costs are low and as the competition between producers of the same good is more intense

regulating stock externalities under uncertainty abstract using a simple analytical model incorporating benefits of a stock costs of adjusting the stock and uncertainty in costs we uncover several important principles governing the choice of price based policies e g taxes relative to quantity based policies e g tradable permits for controlling stock externalities as in weitzman rev econom stud 41 4 1974 477 the relative slopes of the marginal benefits and costs of controlling the externality continue to be critical determinants of the efficiency of prices relative to quantities with flatter marginal benefits and steeper marginal costs favoring prices but some important adjustments for dynamic effects are necessary including correlation of cost shocks across time discounting stock decay and the rate of benefits growth applied to the problem of greenhouse gases and climate change we find that a price based instrument generates several times the expected net benefits of a quantity instrument

sunspot equilibria and periodic cycles under idiosyncratic uncertainty abstract this paper investigates how some intrinsic uncertainty affects the existence of sunspot equilibria and deterministic cycles in an overlapping generations model in the model there exists an intrinsic idiosyncratic uncertainty under which each individual has a small probability of losing consumption goods due to the law of large numbers this uncertainty causes no fundamental macroeconomic fluctuation however since it may change the dynamic stability the model may have both stationary sunspot equilibria and deterministic cycles even if the degree of relative risk aversion is small in particular these equilibria can exist even if the probability of loss is negligible

equilibrium policy in an overlapping generations economy abstract this paper offers a mechanism for reducing the number of stationary equilibria that arise in a simple two period lived overlapping generations economy since each equilibrium is associated with a different combination of monetary and fiscal policies i assume that at each date the agent in his second period of life determines how that period s monetary and fiscal instruments will be set i show that the set of stationary equilibria where this occurs is a proper and nonempty subset of the set of stationary competitive equilibria and that at least one such equilibrium is a pareto optimum

should renewable energy policy be renewable political flexibility brings about trade offs for policy makers aiming to support the deployment of renewable energy sources res on the one hand it allows incorporating new information on ex ante uncertain benefits and costs of res policy on the other hand it may deter res investments this paper scrutinizes how these trade offs play out economically and politically when res policy makers choose the degree of flexibility as well as the instruments to implement flexibility the analysis builds on a theoretical framework distinguishing between flexibility by design and by adjustment it is complemented by a discussion of three case studies res support schemes in germany and the united kingdom and the eu emissions trading scheme theoretical as well as empirical results suggest that the politically chosen degree of flexibility by policy design may be sub optimally low in contrast flexibility by policy adjustment is often excessively high

stationary sunspot equilibria in a finance constrained economy abstract stationary sunspot equilibria are shown to exist in a production economy with infinite lived agents when it is not possible to borrow against future wage income equilibrium fluctuations exhibit persistence over time scales of the same order of magnitude as observed business cycles an active fiscal policy that stabilizes aggregate money expenditures can prevent such fluctuations

market incentives for safe commercial airline operation using a sample of nearly all fatal u s airline accidents between 1960 and 1985 this paper attempts to quantify the costs that airlines incur due to crashes the potential costs include those due to loss of life and equipment tort liability increased regulatory oversight and loss of demand as consumers turn away from products perceived to be unsafe examination of the deviations from expected demand following accidents reveals little or no effect prior to airline deregulation and weak indication of a response to recent crashes these results are consistent with the changes in an airline s equity value following an accident which are statistically significant but quite small relative to the total social cost of the accident

correlated uncertainty and policy instrument choice abstract for two decades environmental economists have generally maintained that benefit uncertainty is irrelevant for choosing between price and quantity instruments but that cost uncertainty matters with the identity of the efficient instrument depending upon the relative slopes of the marginal benefit and cost functions but in the presence of simultaneous correlated uncertainty such policy instrument recommendations may be inappropriate with plausible values of relevant parameters the conventional identification of a price instrument will be reversed to favor instead a quantity instrument the opposite reversal from the choice of a quantity instrument to a price instrument seems less likely to occur

innovation and industry evolution the theoretical literature on innovation has been concerned with a single innovation produced by a number of identical agents by contrast we consider a market in which one firm is the current incumbent while the remaining firms are challengers moreover we consider a sequence of innovations so that success does not imply that the successful firm reaps monopoly profits forever after but only until the next better innovation is developed we begin with a fully optimizing behavioral model and derive the equivalent of the schumpeterian process of creative destruction that is a firm enjoys temporary monopoly power but is soon overthrown by a more inventive challenger the essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process the fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers goods the new methods of production or transportation the new markets the new forms of industrial organization that capitalist enterprise creates schumpeter 1942 pp 82 83

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

efficiency improvement from restricting the liquidity of nominal bonds abstract in a monetary search model with nominal bonds agents face matching taste shocks but they cannot insure borrow or trade against such shocks a government imposes a legal restriction that prohibits bonds from being used to buy a subset of goods i show that this legal restriction can increase the society s welfare in contrast to the literature this efficiency role persists in the steady state and even when the households cannot trade assets after receiving the shocks moreover it can exist when the friedman rule is available and when the restriction is only obeyed by government agents

stabilizing competitive business cycles abstract we study how stylized monetary proportional money transfers fiscal lump sum money transfers and public expenditure policies may eliminate endogenous deterministic cycles and stationary markov sunspot equilibria in a simple version of the overlapping generations model we also present new constructive methods for analyzing stationary markov sunspot equilibria in such a framework

a clower constraint model of unbacked money abstract the stylized monetary facts 1 money growth causes inflation 2 inflation is bad 3 money demand depends upon the nominal interest rate 4 the real interest rate equals a parametrically fixed rate of time preference and 5 investment depends upon the real interest rate are produced in a grandmont younes modified clower constraint model of money inflation is distorting but is no one s intertemporal rate of substitution inflation discourages trade but not investment as a by product the friedman hypothesis that the optimal deflation equals the rate of time preference is confirmed in the model

the real bills doctrine versus the quantity theory a reconsideration two competing monetary policy prescriptions are analyzed within the context of overlapping generations models the real bills prescription is for unfettered private intermediation or central bank operations designed to produce the effects of such intermediation the quantity theory prescription in contrast is for restrictions on private intermediation designed to separate money from credit although our models are consistent with quantity theory predictions about money supply and price level behavior under these two policy prescriptions the models imply that the quantity theory prescription is not pareto optimal and the real bills prescription is

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

commitment versus discretion in climate and energy policy to decarbonize the power sector policy makers need to commit to long term credible rules for climate and energy policy otherwise risk of opportunistic policy making will impair investments into low carbon technologies however the future benefits and costs of decarbonization are subject to substantial uncertainties thus there may also be societal gains from allowing policy makers the discretion to adjust the policies as new information becomes available we examine how this trade off between policy commitment either unconditional or state contingent and discretion affects the optimal intertemporal design of market based instruments in the power sector using a dynamic partial equilibrium model we show that commitment to a state contingent level of ambition for the market based instrument leads to higher welfare than both unconditional commitment and discretion with benefit uncertainty the choice between the practically more feasible approaches of unconditional commitment and discretion is analytically ambiguous a basic numerical illustration suggests that policy discretion may outperform unconditional commitment in terms of welfare however this result is reversed when only a limited fraction of benefit uncertainty resolves in reasonable time when future policy makers have own agendas or when investors are risk averse with cost uncertainty policy discretion is welfare superior if the government can commit to a technology deployment target

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

regulation of stock externalities with correlated abatement costs we study a dynamic regulation model where firms actions contribute to a stock externality the regulator and firms have asymmetric information about serially correlated abatement costs with price based policies such as taxes or if firms trade quotas efficiently the regulator learns about the evolution of both the stock and costs this ability to learn about costs is important in determining the ranking of taxes and quotas and in determining the value of a feedback rather than an open loop policy for a range of parameter values commonly used in global warming studies taxes dominate quotas regardless of whether the regulator uses an open loop or a feedback policy and regardless of the extent of cost correlation

a price discrimination analysis of monetary policy monetary policy is analysed within a model that appeals to legal restrictions on private intermediation to explain the coexistence of currency and interest bearing default free bonds the interaction between such legal restrictions and monetary policy is illustrated in a version of the overlapping generations model the model shows that legal restrictions and the use of both currency and bonds permit the government to levy a nonlinear inflation tax and that such a tax may be better in terms of the pareto criterion than a linear inflation tax

cooperation on climate change mitigation abstract we analyze conditions under which it is possible to achieve efficient mitigation of greenhouse gas emissions with a self enforcing international agreement in which all countries find it in their self interest to abide by the agreement we model the choice of emissions by countries as a dynamic game we use a two part punishment scheme for deviations from an agreement that is renegotiation proof and show when this scheme supports the efficient outcome as a subgame perfect equilibrium using numerical examples we show that an efficient subgame perfect equilibrium exists for a range of reasonable parameter values the existence of such equilibrium may be non monotonic in the discount rate and the ratio of slope of marginal abatement cost and marginal damages

dynamic regulation design without payments the importance of timing abstract we consider a two period model of optimal regulation of a firm subject to marginal compliance cost shocks the regulator faces an asymmetric information problem the firm knows current compliance costs but the regulator does not both the regulator and the firm are uncertain about future costs in our basic framework the regulator may not offer payments to the firm we show that the regulator can vary the strength of regulation over time to induce the firm to reveal its costs and increase welfare in the optimal mechanism the regulator offers stronger weaker regulation in the first period and weaker stronger regulation in the second period if the firm reports low high compliance costs in the first period low cost firms expect compliance costs to rise in the future and thus prefer weaker regulation in the second period high cost firms expect costs to fall in the future and thus prefer regulation which becomes stricter over time thus the regulator offers the low high cost firms slightly weaker stronger regulation in the second period in exchange for much stronger weaker regulation in the first period thereby timing the regulation if the regulator can make payments then the optimal mechanism to some degree times the regulation as long as a positive marginal cost of funds exists if the marginal cost of funds is high enough then under the optimal mechanism the regulator will not use payments and use our timing mechanism exclusively

information spillovers incumbency and conservatism abstract this paper studies the relationship between the existing ventures of a firm and its incentives to undertake new ventures we argue that whenever a firm undertakes a new venture it does so with the risk that information associated with that venture will reflect on all of the firm s products if the costs of bad news exceed the benefits of good news the firm will be less likely to undertake the venture this is the case in our model in which an incumbent risks losing monopoly status in an established market should its new venture fail thus incumbency can breed conservatism

chaotic dynamics in a cash in advance economy abstract this paper introduces sufficient conditions for the existence of deterministic cycles and chaos in cash in advance models building on the earlier work of woodford 1994 chaotic equilibria are shown to be particularly likely in the cash in advance model because of a unique characteristic of such models a discontinuous derivative in the difference equation map at the satiation level of real balances the existence of a kink means that chaotic equilibria may exist without implausibly large curvatures in the utility function since a chaotic time series that makes use of the kink would sometimes exhibit zero nominal interest rates the paper also gives an example of chaos in which nominal interest rates remain strictly positive

sunspot equilibria rational bubbles in a model of money in the utility function abstract sunspot equilibria are constructed in brock s 1975 model of money in the utility function serial correlations of real balances and the nominal interest rate in these equilibria can be either positive or negative the example here suggests that local sunspots are more likely to exist when the agent s discount rate is small and that serial correlations in local sunspots when they exist are inversely related to the rate of money growth it is also shown that stationary sunspots may exist even when equilibrium cycles do not

taxes and quotas for a stock pollutant with multiplicative uncertainty we compare taxes and quotas when firms and the regulator have asymmetric information about the slope of firms abatement costs damages are caused by a stock pollutant we calibrate the model using cost and damage estimates of greenhouse gasses taxes dominate quotas as with additive uncertainty this model with multiplicative uncertainty allows us to compare expected stock levels under the two policies and to investigate the importance of stock size and the magnitude of uncertainty on the policy ranking

market forces and commercial aircraft safety this paper investigates the wealth impact on aircraft manufacturers of crashes involving their aircraft the author attempts to separate out the regulatory tort law and endogenous market components of these costs using stock market data the results indicate that on average the manufacturer suffers a wealth loss of 21 3 million as the result of a fatal crash in which the structural integrity of the aircraft is at issue the analysis suggests that not all of this amount can be attributed to regulatory or tort law mechanisms and that market forces play a role in providing air travel safety copyright 1987 by blackwell publishing ltd

two period cycles in a three period overlapping generations model abstract we study the properties of two period monetary cycles in simple pure exchange overlapping generations economies in which the households live for three periods we demonstrate that these economies can support cycles under a much broader and arguably more plausible range of assumptions than the analogous two period economies we show that economies that fail the well known grandmont econometrica 53 1985 995 condition can have cycles and that economies that satisfy the condition can fail to have cycles in addition we show that economies can have monetary cycles when they do not have conventional monetary steady states and when aggregate demand for assets is not decreasing in the real return rate at a gross real rate of unity

legal restrictions sunspots and peel s bank act the real bills doctrine versus the quantity theory reconsidered this paper considers two questions i what is the purpose of legal restrictions intended to separate money from credit markets and ii is such a separation desirable it is argued that historical legal restrictions meant to achieve such a separation were designed to preclude the occurrence of sunspot equilibria it is also shown that a coherent model can be constructed in which sunspot equilibria exist in the absence of legal restrictions but not if money and credit markets are separated nevertheless there is no obvious welfare justification for such a separation

dynamic taxes and quotas with learning we compare dynamic taxes and quotas when a regulator and non strategic firm have asymmetric information the regulator learns by using either a tax or a quota that can be slack with a tax the information asymmetry is resolved in one period optimal learning using a quota is less transparent but we show that learning never takes place gradually in the first period the regulator either acts myopically or he tries to improve his information but he never experiments in subsequent periods we use this result to assess the informational advantage of taxes compared to quotas under asymmetric information

price discriminating monetary policy a nonuniform pricing approach abstract this paper establishes that a version of the bryant and wallace 1984 price discrimination analysis of monetary policy can be viewed as a special case of the spence 1977 nonuniform pricing model to this end a general equilibrium model is constructed with heterogeneous agents and a government that faces an informational restriction the government must finance an exogenously determined stationary deficit by issuing bonds or currency with quantity dependent prices in addition to generalizing the bryant and wallace model the analysis accomplishes the following i the informational restriction helps justify the ruling out of lumpsum taxation a crucial assumption of the bryant and wallace model and ii the analysis provides insight into nonuniform pricing in a simple general equilibrium model with heterogeneous agents

the role of stocks and shocks concepts in the debate over price versus quantity recent literature showed that the choice between a price or quantity control depends in part on the dynamic structure of cost uncertainty temporary shocks to abatement cost favors the use of a price control while permanent shocks favor a quantity control unfortunately the importance of this assumption to the optimal choice has not yet received wide attention among economists we analyze the regulatory sproblem in an alternative setting and reproduce these results our contribution is the simplicity of the model and the accessibility of the results which reinforce the critical role played by the assumed structure of uncertainty

when should bank regulation favor the wealthy many economies restrict and in some cases severely restrict the access of poor agents to savings opportunities this paper suggests conditions under which there are good reasons to do so from the perspective of all agents including the poor journal of economic literature classification numbers e44 e50

legal restrictions sunspots and cycles abstract an economy in which legal restrictions prevent private agents from issuing close substitutes for money is examined specifically in a model with borrowing and lending agents are prevented from acquiring privately issued liabilities in amounts smaller than some minimum dollar denomination an economy is then constructed which has no sunspot equilibria absent such a restriction in the presence of the restriction however conditions sufficient to rule out equilibrium 2 cycles also imply the existence of stationary sunspot equilibria this is the case even though all agents have savings functions that are non decreasing in relevant rates of return

interest rates in a credit constrained economy when households face credit constraints in an economy with inside as well as outside money stationary equilibrium real interest rates are below the household rate of time preference they also depend significantly upon household risk aversion the demand for inside versus outside money bank costs bank reserves inflation and the marginal productivity of capital and capital depreciation rates in addition changes in financial variables affect per capita capital and output to a greater extent when households are credit constrained copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association