uncertainty and endogenous technical change in climate policy models until recently endogenous technical change and uncertainty have been modeled separately in climate policy models in this paper we review the emerging literature that considers both these elements together taken as a whole the literature indicates that explicitly including uncertainty has important quantitative and qualitative impacts on optimal climate change technology policy

fat tails exponents extreme uncertainty simulating catastrophe in dice abstract the problem of low probability catastrophic risk is increasingly central to discussion of climate science and policy but the integrated assessment models iams of climate economics rarely incorporate this possibility what modifications are needed to analyze catastrophic economic risks in an iam we explore this question using dice a well known iam we examine the implications of a fat tailed probability distribution for the climate sensitivity parameter a focus of recent work by martin weitzman and the shape of the damage function one of the issues raised by the stern review forecasts of disastrous economic outcomes in dice can result from the interaction of these two innovations but not from either one alone

scientific ambiguity and climate policy economic evaluation of climate policy traditionally treats uncertainty by appealing to expected utility theory yet our knowledge of the impacts of climate policy may not be of sufficient quality to be described by unique probabilistic beliefs in such circumstances it has been argued that the axioms of expected utility theory may not be the correct standard of rationality by contrast several axiomatic frameworks have recently been proposed that account for ambiguous knowledge in this paper we apply static and dynamic versions of a smooth ambiguity model to climate mitigation policy we obtain a general result on the comparative statics of optimal abatement and ambiguity aversion and then extend our analysis to a more realistic dynamic setting where we introduce scientific ambiguity into the well known dice model of the climate economy system for policy relevant exogenous mitigation policies we show that the value of emissions abatement increases as ambiguity aversion increases and that this ambiguity premium can in some plausible cases be very large in these cases the effect of ambiguity aversion on welfare is comparable to that of other much studied welfare parameters thus ambiguity aversion may be an important neglected aspect of climate change economics and seems likely to provide another argument for strong abatement policy

climate change policy under polar amplification abstract polar amplification is an established scientific fact which has been associated with the surface albedo feedback and with heat and moisture transport from the equator to the poles in this paper we unify a two box climate model which allows for heat and moisture transport from the southern region to the northern region with an economic model of welfare optimization our main contribution is to show that by ignoring spatial heat and moisture transport and the resulting polar amplification the regulator may overestimate or underestimate the tax on greenhouse gas emissions the direction of bias depends on the relations between marginal damages from temperature increase in each region we also determine the welfare cost when a regulator mistakenly ignores polar amplification numerical simulations confirm our theoretical results while ballpark estimates indicate that the tax bias could be as high as 20 while welfare cost could reach 2 of global effective steady state consumption

rationalizing hyperbolic discounting abstract we show that if agents are uncertain about their discount rates it may be rational for them to discount the distant future hyperbolically rather than exponentially our findings thus may rationalize a common observation in experimental work which indicates that people discount the future at hyperbolic rates we show that under some assumptions uncertainty over hazard rates may lead to non constant discounting but not imply dynamically inconsistent behavior under other assumptions uncertainty over discount rates can lead to dynamically inconsistent behavior like violating planned consumption profiles by bringing consumption forward

the social ecology of the post fordist global city economic restructuring and socio spatial polarisation in the toronto urban region numerous authors have asserted that globalisation and occupational changes associated with post fordist economic restructuring have led to a growth in intraurban social disparity and even polarisat

industrial shift skill mismatch and income inequality a decomposition analysis of changing distributions in the oslo region this paper examines changing income inequality in the oslo region between 1993 and 2000 adopting a decomposition approach the analysis reveals that both earnings inequality and post tax inequalit

asymmetric effects of the business cycle on carbon dioxide emissions abstract long term carbon dioxide emissions forecasts rely on the assumption that the economic growth rate is constant over long time horizons and exclude the business cycle thereby ignoring a fundamental component of the macroeconomy this paper considers how the business cycle affects emissions forecasts and shows the implicit assumption in current forecasts that the elasticity of emissions is constant with respect to gdp is wrong in the united states emissions fall more sharply when gdp declines than they rise when gdp increases this is partly due to a decrease in industrial energy intensity as gdp declines a simulation shows that accounting for the business cycle results in 5 lower cumulative emissions through 2050 relative to the baseline forecast

on welfare frameworks and catastrophic climate risks recent theoretical work in the economics of climate change has suggested that climate policy is highly sensitive to fat tailed risks of catastrophic outcomes weitzman 2009 68 such risks are suggested to be an inevitable consequence of scientific uncertainty about the effects of increased greenhouse gas concentrations on climate criticisms of this controversial result fall into three categories the first suggests that it may be irrelevant to cost benefit analysis of climate policy the second challenges the fat tails assumption and the third questions the behavior of the utility function assumed in the result this paper analyses these critiques and suggests that those in the first two categories have formal validity but that they apply only to the restricted setup of the original result which may be extended to address their concerns they are thus ultimately unconvincing critiques in the third category are shown to be robust however they open up new ethical and empirical challenges for climate economics that have thus far been neglected how should we value catastrophes as a society i demonstrate that applying results from social choice to this problem can lead to counterintuitive results in which society values catastrophes as infinitely bad even though each individual s utility function is bounded finally i suggest that the welfare functions traditionally used in climate economics are ill equipped to deal with climate catastrophes in which population size changes drawing on recent work in population ethics i propose an alternative welfare framework with normatively desirable properties which has the effect of dampening the contribution of catastrophes to welfare

risk aversion intergenerational equity and climate change the paper investigates a climate economy model with an iso elastic welfare function in which one parameter measures relative risk aversion and a distinct parameter measures resistance to intertemporal substitution we show both theoretically and numerically that climate policy responds differently to variations in the two parameters in particular we show that higher but lower leads to increase emissions control we also argue that climate economy models based on intertemporal expected utility maximization i e models where may misinterpret the sensitivity of the climate policy to risk aversion

how connected is the global sovereign credit risk network abstract this paper estimates the global network structure of sovereign credit risk by applying the diebold yilmaz connectedness methodology on sovereign credit default swaps scdss the level of credit risk connectedness among sovereigns which is quite high is comparable to the connectedness among stock markets and foreign exchange markets in the aftermath of the recent financial crises that originated in developed countries emerging market countries have played a crucial role in the transmission of sovereign credit risk while developed countries and debt ridden developing countries have played marginal roles secondary regressions show that both trade and capital flows are important determinants of pairwise connectedness across countries the capital flows became increasingly important after 2013 while the effect of trade flows decreased during the crisis and did not recover afterwards

precautionary principle and robustness for a stock pollutant with multiplicative risk the interest shown by policy makers and economists in the precautionary principle indicates the importance of model uncertainty in global warming policy i show that through robust control policy makers can implement the precautionary principle to regulate a stock pollutant and i analyze its effect on expected steady state pollution taxes stocks and welfare the paper is broadly comprised of a theoretical part and an application to global warming policy i find that 1 an increase in either uncertainty about the model or risk about abatement cost increases expected steady state pollution taxes 2 a robust policy is preferred for any level of model uncertainty and this preference increases for either higher model uncertainty or higher multiplicative risk and 3 the effect on expected steady state pollution taxes and stock of introducing model uncertainty is relatively small for high levels of model uncertainty these results advocate using robust policies for a stock pollutant in the presence of model uncertainty

the social cost of carbon emissions seven propositions determining the social cost of carbon emissions scc is a crucial step in the economic analysis of climate change policy as the us government s recent decision to use a range of estimates of the scc centered at 77 tc or equivalently 21 tco2 in cost benefit analyses of proposed emission control legislation underlines this note reviews the welfare economics theory fundamental to the estimation of the scc in both static and intertemporal contexts examining the effects of assumptions about the typical agent s pure rate of time preference and elasticity of marginal felicity of consumption production and mitigation technology and the magnitude of climate change damage on estimates of the scc we high light three key conclusions i an estimate of the scc is conditional on a specific policy scenario the details of which must be made explicit for the estimate to be meaningful ii the social discount rate relevant to intertemporal allocation decisions also depends on the policy scenario and iii the scc is uniquely defined only for policy scenarios that lead to an efficient growth path because marginal costs and benefits of emission mitigation diverge on inefficient growth paths we illustrate these analytical conclusions with simulations of a growth model calibrated to the world economy authors abstract

social polarisation in global cities theory and evidence this paper examines the debate over social polarisation in global cities it focuses on the claims made by sassen that the processes of economic change in such cities are leading to a growing polar

economic growth effects of alternative climate change impact channels in economic modeling despite increasing empirical evidence of strong links between climate and economic growth there is no established model to describe the dynamics of how different types of climate shocks affect growth patterns here we present the first comprehensive comparative analysis of the long term dynamics of one time temporary climate shocks on production factors and factor productivity respectively in a ramsey type growth model damages acting directly on production factors allow us to study dynamic effects on factor allocation savings and economic growth we find that the persistence of impacts on economic activity is smallest for climate shocks directly impacting output and successively increases for direct damages on capital loss of labor and productivity shocks related to different responses in savings rates and factor specific growth recurring shocks lead to large welfare effects and long term growth effects directly linked to the persistence of individual shocks endogenous savings and shock anticipation both have adaptive effects but do not eliminate differences between impact channels or significantly lower the dissipation time accounting for endogenous growth mechanisms increases the effects we also find strong effects on income shares important for distributional implications this work fosters conceptual understanding of impact dynamics in growth models opening options for links to empirics

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

the agnostic s response to climate deniers price carbon with the election of president trump climate deniers feel emboldened and moved from the fringes to the centre of global policy making we study how an agnostic approach to policy based on pascal s wager and allowing for subjective prior probability beliefs about whether climate deniers are right prices carbon using the dice integrated assessment model we find that assigning a 10 chance of climate deniers being correct lowers the global price on carbon in 2020 only marginally from 21 to 19 per ton of carbon dioxide if policymakers apply nordhaus discounting and from 91 to 84 per ton of carbon dioxide if they apply stern discounting agnostics reflection of remaining scientific uncertainty leaves climate policy essentially unchanged the robustness of an ambitious climate policy also follows from using the max min or the min max regret principle letting the coefficient of relative ambiguity aversion vary from zero corresponding to expected utility analysis to infinity corresponding to the max min principle we show how policy makers deal with fundamental climate model uncertainty if they are prepared to assign prior probabilities to different views of the world being correct allowing for an ethical discount rate and a higher market discount rate and for a wide range of sensitivity exercises including damage uncertainty we show that pricing carbon is the robust response under rising climate scepticism

setting environmental policy when experts disagree how can a decision maker assess the potential of environmental policies when a group of experts provides divergent estimates on their effectiveness to address this question we propose and analyze a variant of the well studied alpha maxmin model in decision theory in our framework and consistent to the paper s empirical focus on renewable energy r d investment experts subjective probability distributions are allowed to be action dependent in addition the decision maker constrains the sets of priors to be considered via a parsimonious measure of their distance to a benchmark average distribution that grants equal weight to all experts while our model is formally rooted in the decision theoretic framework of olszewski rev econ stud 74 567 595 2007 it may also be viewed as a structured form of sensitivity analysis we apply our framework to original data from a recent expert elicitation survey on solar energy the analysis suggests that more aggressive investment in solar energy r d is likely to yield significant dividends even or rather especially after taking expert ambiguity into account

on modeling and interpreting the economics of catastrophic climate change with climate change as prototype example this paper analyzes the implications of structural uncertainty for the economics of low probability high impact catastrophes even when updated by bayesian learning uncertain structural parameters induce a critical tail fattening of posterior predictive distributions such fattened tails have strong im plications for situations like climate change where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages this paper shows that the economic consequences of fat tailed structural uncertainty along with unsureness about high temperature damages can readily outweigh the effects of discounting in climate change policy analysis

information contagion and bank herding we show that the likelihood of information contagion induces profit maximizing bank owners to herd with other banks when bank loan returns have a common systematic factor the cost of borrowing for a bank increases when there is adverse news on other banks since such news conveys adverse information about the common factor the increase in a bank s cost of borrowing relative to the situation of good news about other banks is greater when bank loan returns have less commonality in addition to the systematic risk factor hence banks herd and undertake correlated investments so as to minimize the impact of such information contagion on the expected cost of borrowing competitive effects such as superior margins from lending in different industries mitigate herding incentives

building risk into the mitigation adaptation decisions simulated by integrated assessment models this paper proposes an operationally simple and easily generalizable methodology to incorporate climate change damage uncertainty into integrated assessment models iams first uncertainty is transformed into a risk measure by extracting damage distribution means and variances from an ensemble of socio economic and climate change scenarios then a risk premium is computed under different degrees of risk aversion quantifying what society would be willing to pay to insure against the uncertainty of the damages our estimates show that the premium for the risk is a potentially significant addition to the standard average damage but highly sensitive to the attitudes toward risk in the last research phase the risk premium is incorporated into the climate change damage function of a widely used iam which shows consequently a substantial increase in both mitigation and adaptation efforts reflecting a more precautionary attitude by the social planner interestingly adaptation is stimulated more than mitigation in the first half of this century while the situation reverses afterwards

social polarisation economic restructuring and welfare state regimes the central argument of this paper is that it is misconceived to view social polarisation of occupational structure and incomes in global cities as either inevitable or as a direct product of econo

why the far distant future should be discounted at its lowest possible rate abstract a critical feature of the distant future is currently unresolvable uncertainty about what will then be the appropriate rate of return on capital to use for discounting this paper shows that there is a well defined sense in which the lowest possible interest rate should be used for discounting the far distant future part of any investment project some implications are discussed for evaluating long term environmental projects or activities like measures to mitigate the possible effects of global climate change

learning and climate feedbacks optimal climate insurance and fat tails we study the effect of potentially severe climate change on optimal climate change policy accounting for learning and uncertainty in the climate system in particular we test how fat upper tailed uncertainty over the temperature change from a doubling of greenhouse gases the climate sensitivity affects economic growth and emissions policy in addition we examine whether and how fast uncertainties could be diminished through bayesian learning our results indicate that while overall learning is slow the mass of the fat tail diminishes quickly since observations near the mean provide evidence against fat tails we denote as partial learning the case where the planner rejects high values of the climate sensitivity with high confidence even though significant uncertainty remains fat tailed uncertainty without learning reduces current emissions by 38 relative to certainty indicating significant climate insurance or paying to limit emissions today to reduce the risk of very high temperature changes is optimal however learning reduces climate insurance by about 50 the optimal abatement policy is strongly influenced by the current state of knowledge even though greenhouse gas ghg emissions are difficult to reverse non fat tailed uncertainty is largely irrelevant for optimal emissions policy

sovereign spreads in the eurozone which prospects for a eurobond in this paper we provide new evidence on the determinants of sovereign yield spreads and market sentiment effects in the eurozone in order to evaluate the rationale for a common eurobond jointly guaranteed by eurozone member states we find that default risk is the main driver of yield spreads suggesting small gains from greater liquidity fiscal fundamentals matter in the pricing of default risk but only as they interact with other countries yield spreads that is with the global risk that the market perceives more importantly the impact of this global risk variable is not constant over time a clear sign of contagion driven by shifts in market sentiment this evidence points to a discontinuity in the disciplinary role of financial markets if markets can stay irrational longer than a country can stay solvent then the role of yield spreads on national bonds as a fiscal discipline device is considerably weakened and issuing eurobonds can be economically justified carlo favero and alessandro missale

post industrialisation job opportunities and ethnocentrism a comparison of twenty two dutch urban economies this article assesses the consequences of the transition to a post industrial urban economy for labour demand and ethnocentrism in the 22 dutch urban agglomerations using municipal level data as well as surveys it is shown that the labour market of the least post industrial cities yields low labour demand for lower educated urbanites upgrading professionalisation thesis while the labour market of the most post industrial cities yields high labour demand for lower educated urbanites polarisation thesis it is furthermore found that lower educated natives in the former are more ethnocentric than in the latter however contrary to what is often claimed in urban studies and the social sciences at large this proves not to be driven by job scarcity in the least post industrial cities the article concludes with suggestions on what might be responsible for this finding

pricing uncertainty induced by climate change geophysicists examine and document the repercussions for the earth s climate induced by alternative emission scenarios and model specifications using simplified approximations they produce tractable characterizations of the associated uncertainty meanwhile economists write highly stylized damage functions to speculate about how climate change alters macroeconomic and growth opportunities how can we assess both climate and emissions impacts as well as uncertainty in the broadest sense in social decision making we provide a framework for answering this question by embracing recent decision theory and tools from asset pricing and we apply this structure with its interacting components to a revealing quantitative illustration

are policymakers ambiguity averse we investigate the ambiguity preferences of a unique sample of real life policymakers at the paris un climate conference cop21 we find that policymakers are generally ambiguity averse using a simple design we are moreover able to show that these preferences are not necessarily due to an irrational behaviour but rather to intrinsic preferences over unknown probabilities exploring the heterogeneity within our sample we also show that the country of origin and the degree of quantitative sophistication affect policymakers attitudes towards compound risk but not towards ambiguity robustness results are obtained in a lab experiment with a sample of university students

managing catastrophic climate risks under model uncertainty aversion we propose a robust risk management approach to deal with the problem of catastrophic climate change that incorporates both risk and model uncertainty using an analytical model of abatement we show how aversion to model uncertainty influences the optimal level of mitigation we disentangle the role of preferences from the structure of model uncertainty which we define by means of a simple measure of disagreement across models with data from an expert elicitation about climate change catastrophes we quantify the relative importance of these two effects and calibrate a numerical integrated assessment model of climate change the results indicate that the structure of model uncertainty and specifically how model disagreement varies in abatement is the key driver of optimal abatement and that model uncertainty warrants a higher level of climate change mitigation this paper was accepted by manel baucells decision analysis

global warming and a potential tipping point in the atlantic thermohaline circulation the role of risk aversion the risk of catastrophes is one of the greatest threats of climate change yet conventional assumptions shared by many integrated assessment models such as dice lead to the counterintuitive result that higher concern about climate change risks does not lead to stronger near term abatement efforts this paper examines whether this result still holds in a refined dice model that employs the epstein zin utility specification and that is fully coupled with a dynamic tipping point model describing the evolution of the atlantic thermohaline circulation thc risk is captured by the possibility of a future collapse of the circulation and it is nourished by fat tailed uncertainty about climate sensitivity this uncertainty is assumed to resolve in the middle of the second half of this century and the near term abatement efforts which are undertaken before that point of time can be adjusted afterwards these modelling choices allow posing the question of whether aversion to this specific tipping point risk has a significant effect on near term policy efforts the simulations however provide evidence that it has little effect for the more likely climate sensitivity values a collapse of the circulation would occur in the more distant future in this case acting after learning can prevent the catastrophe implying the remarkable insensitivity of the near term policy to risk aversion for the rather unlikely and high climate sensitivity values the expected damage costs are not great enough to justify taking very costly measures to safeguard the thc our simulations also provide some indication that risk aversion might have some effect on near term policy if inertia limiting the speed of decarbonisation is accounted for as it is highly uncertain how restrictive this kind of inertia will be future research might investigate the effects of risk aversion if additional uncertainty about inertia is considered

pollution control with uncertain stock dynamics when and how to be precautious abstract the precautionary principle pp applied to environmental policy stipulates that in the presence of uncertainty society must take robust preventive action to guard against worst case outcomes it follows that the higher the degree of uncertainty the more aggressive this preventive action should be this normative maxim is explored in the case of a stylized dynamic model of pollution control with uncertain in the knightian sense stock dynamics using the robust control framework of hansen and sargent 12 optimal investment in damage control is found to be increasing in the degree of uncertainty thus confirming the conventional pp wisdom optimal mitigation decisions however need not always comport with the pp in particular when damage control investment is both sufficiently cheap and sensitive to changes in uncertainty damage control investment and mitigation may act as substitutes and a pp with respect to the latter can be unambiguously irrational the theoretical results are applied to a calibrated linear quadratic model of climate change the analysis suggests that a reversal of the pp with respect to mitigation while theoretically possible is very unlikely

determining the social cost of carbon under damage and climate sensitivity uncertainty this article quantifies the impact on optimal climate policy of both damage elasticity and equilibrium climate sensitivity uncertainty under separable preferences for risk and intergenerational inequality the primary findings are as follows 1 such preferences can depress the social cost of carbon scc when calibration aims at matching actual economic outcomes countering the prevailing view that the scc is greater with separable than with conventional entangled preferences 2 damage elasticity uncertainty has larger effects on climate policy than equilibrium climate sensitivity uncertainty even under high impact tail risk of the latter 3 risk aversion decisively strengthens optimal climate policy under joint damage and climate sensitivity uncertainty than with a single source of uncertainty alone indeed failing to account for the interaction between damage and climate sensitivity uncertainty underestimates the cost of climate change by more than us dollars 1 trillion

foreign direct investment and international migration to dutch cities this article assesses separately the push pull factor explanations in sassen s theory on migration from newly industrialising countries to cities in oecd countries the push factor explanation argues that foreign direct investments spawn migration flows to the country from which these investments stem the pull factor explanation revolves around demand for low skilled workers in cities due to the clustering of advanced producer services it is found that dutch investment flows indeed function as a push factor for migration to dutch cities but that the local settlement of immigrants is not related to the clustering of advanced producer services

a review of the stern review on the economics of climate change the stern review calls for immediate decisive action to stabilize greenhouse gases because the benefits of strong early action on climate change outweighs the costs the economic analysis supporting this conclusion consists mostly of two basic strands the first strand is a formal aggregative model that relies for its conclusions primari ly upon imposing a very low discount rate concerning this discount rate aspect i am skeptical of the review s formal analysis but this essay points out that we are actual ly a lot less sure about what interest rate should be used for discounting climate change than is commonly acknowledged the review s second basic strand is a more intuitive argument that it might be very important to avoid possibly large uncertain ties that are difficult to quantify concerning this uncertainty aspect i argue that it might be recast into sound analytical reasoning that might justify some of the review s conclusions the basic issue here is that spending money to slow global warming should perhaps not be conceptualized primarily as being about consump tion smoothing as much as being about how much insurance to buy to offset the small change of a ruinous catastrophe that is difficult to compensate by ordinary savings

portfolio choices and asset prices the comparative statics of ambiguity aversion we investigate the comparative statics of more ambiguity aversion as defined by klibanoff marinacci and mukerji 2005 in the context of the static two asset portfolio problem it is not true in general that more ambiguity aversion reduces the demand for the uncertain asset we exhibit some sufficient conditions to guarantee that ceteris paribus an increase in ambiguity aversion reduces the demand for the ambiguous asset and raises the equity premium for example this is the case when the set of plausible distributions of returns can be ranked according to the monotone likelihood ratio order we also show how ambiguity aversion distorts the price kernel in the alternative portfolio problem with complete markets for contingent claims

carbon prices for the next hundred years this paper examines the socially optimal pricing of carbon emissions over time when climate change impacts are unknown potentially high consequence events the carbon price tends to increase with income but learning about impacts or their absence decouples the carbon price from income growth the price should grow faster than the economy if the past warming is not substantial enough for learning the true long run social cost it grows slower than the economy as soon as the warming generates information about events that could have arrived but have not done so a quantitative assessment shows that the price grows roughly at the rate of the economy for the next 100 years

discounting the distant future how much do uncertain rates increase valuations abstract we demonstrate that when the future path of the discount rate is uncertain and highly correlated the distant future should be discounted at significantly lower rates than suggested by the current rate we then use two centuries of us interest rate data to quantify this effect using both random walk and mean reverting models we compute the certainty equivalent rate that summarizes the effect of uncertainty and measures the appropriate forward rate of discount in the future under the random walk model we find that the certainty equivalent rate falls continuously from 4 to 2 after 100 years 1 after 200 years and 0 5 after 300 years at horizons of 400 years the discounted value increases by a factor of over 40 000 relative to conventional discounting applied to climate change mitigation we find that incorporating discount rate uncertainty almost doubles the expected present value of mitigation benefits

optimal taxes on fossil fuel in general equilibrium we analyze a dynamic stochastic general equilibrium dsge model with an externality through climate change from using fossil energy our central result is a simple formula for the marginal externality damage of emissions or equivalently for the optimal carbon tax this formula which holds under quite plausible assumptions reveals that the damage is proportional to current gdp with the proportion depending only on three factors i discounting ii the expected damage elasticity how many percent of the output flow is lost from an extra unit of carbon in the atmosphere and iii the structure of carbon depreciation in the atmosphere thus the stochastic values of future output consumption and the atmospheric co2 concentration as well as the paths of technology whether endogenous or exogenous and population and so on all disappear from the formula we find that the optimal tax should be a bit higher than the median or most well known estimates in the literature we also formulate a parsimonious yet comprehensive and easily solved model allowing us to compute the optimal and market paths for the use of different sources of energy and the corresponding climate change we find coal rather than oil to be the main threat to economic welfare largely due to its abundance we also find that the costs of inaction are particularly sensitive to the assumptions regarding the substitutability of different energy sources and technological progress

cultural amenities and unemployment in dutch cities disentangling a consumerist and productivist explanation for less educated urbanites varying unemployment levels across urban economies previous studies on the advanced economies have shown that unemployment levels of the less educated are low in cities with high employment shares in the advanced producer services scholars have consistently interpreted this finding according to sassen s polarisation thesis this article confronts this production based interpretation with a competing consumption based explanation which focuses on the role of cultural amenities analysing data on 22 dutch metropolitan agglomerations between 1996 and 2008 it is shown that in line with consumerists notions of richard florida advanced producer services settle in cities that are rich in cultural amenities instead of the other way around as classical labour follows capital explanations imply yet only advanced producer services prove to reduce the unemployment levels of the less educated meaning that the polarisation thesis and not the theory on cultural amenities is a valid explanation for the low level of unemployment in post industrial cities

a 4 stated dice quantitatively addressing uncertainty effects in climate change we introduce a version of the dice 2007 model designed for uncertainty analysis dice is a wide spread deterministic integrated assessment model of climate change climate change long term economic development and their interactions are highly uncertain the quantitative analysis of optimal mitigation policy under uncertainty requires a recursive dynamic programming implementation of integrated assessment models such implementations are subject to the curse of dimensionality every increase in the dimension of the state space is paid for by a combination of exponentially increasing processor time lower quality of the value or policy function approximations and reductions of the uncertainty domain the paper promotes a state reduced recursive dynamic programming implementation of the dice 2007 model we achieve the reduction by simplifying the carbon cycle and the temperature delay equations we compare our model s performance and that of the dice model to the scientific aogcm models emulated by magicc 6 0 and find that our simplified model performs equally well as the original dice model our implementation solves the infinite planning horizon problem in an arbitrary time step the paper is the first to carefully analyze the quality of the value function approximation using two different types of basis functions and systematically varying the dimension of the basis we present the closed form continuous time approximation to the exogenous discretely and inductively defined processes in dice and we present a numerically more efficient re normalized bellman equation that in addition can disentangle risk attitude from the propensity to smooth consumption over time

explaining deindustrialization globalization failure or success although sociologists have expressed growing interest in globalization they have devoted little sustained empirical attention to the many claims made in its name i focus on the link that has been drawn between globalization and the deindustrialization of the advanced industrial societies to examine this i employ a pooled time series of cross sections data set that combines observations on 18 oecd nations across the 1968 1992 period fixed effects regression models that control for unmeasured country specific effects reveal support for arguments that implicate foreign direct investment and north south trade in the declining percentage of the labor force employed in manufacturing in the oecd countries regression results also show that deindustrialization across this period is largely explained by a model that combines an attention to the post golden age troubles of northern manufacturing with classic generalizations of the process of development interpretation of the empirical findings is tempered by an exercise in counterfactual history which reveals that deindustrialization would have been considerable in these countries even if the upswings in direct investment and southern imports had not occurred or if the performance of the manufacturing sector had been stronger

prioritarianism and climate change prioritarianism is the ethical view that gives greater weight to well being changes affecting individuals at lower well being levels this view is influential both in moral philosophy and in theoretical work on social choice where it is captured by a social welfare function swf summing a concave transformation of individual well being numbers however prioritarianism has largely been ignored by scholarship on climate change this article compares utilitarianism and prioritarianism as frameworks for evaluating climate policy it reviews the distinctive normative choices that are required for the prioritarian approach specifying a ratio scale for well being if the prioritarian swf takes the standard atkinson form determining the degree of concavity of the transformation function i e the degree of social inequality aversion and choosing between ex ante and ex post prioritarianism under conditions of risk the article also sketches some of salient implications of a prioritarian swf for climate policy with respect to the social cost of carbon the social discount rate optimal mitigation and the dismal theorem finally it discusses the issue of variable population

measuring financial asset return and volatility spillovers with application to global equity markets we provide a simple and intuitive measure of interdependence of asset returns and or volatilities in particular we formulate and examine precise and separate measures of return spillovers and volatility spillovers our framework facilitates study of both non crisis and crisis episodes including trends and bursts in spillovers and both turn out to be empirically important in particular in an analysis of sixteen global equity markets from the early 1990s to the present we find striking evidence of divergent behavior in the dynamics of return spillovers vs volatility spillovers return spillovers display a gently increasing trend but no bursts whereas volatility spillovers display no trend but clear bursts

post industrialization job opportunities and ethnocentrism in this article we assess the consequences of the transition to post industrial urban economy for labour demand and ethnocentrism in the 22 dutch urban agglomerations using municipal level data as well as surveys we show that the labour market of the least post industrial cities yields low labour demand for lower educated urbanites upgrading professionalisation thesis while the labour market of the most post industrial cities yields high labour demand for lower educated urbanites polarisation thesis it is furthermore found that lower educated natives in the former are more ethnocentric than in the latter however contrary to what is often claimed in urban studies and the social sciences at large this proves not to be driven by job scarcity in the least post industrial cities the article concludes with suggestions on what might be responsible for this finding

asset commonality debt maturity and systemic risk we develop a model in which asset commonality and short term debt of banks interact to generate excessive systemic risk banks swap assets to diversify their individual risk two asset structures arise in a clustered structure groups of banks hold common asset portfolios and default together in an unclustered structure defaults are more dispersed portfolio quality of individual banks is opaque but can be inferred by creditors from aggregate signals about bank solvency when bank debt is short term creditors do not roll over in response to adverse signals and all banks are ine ciently liquidated this information contagion is more likely under clustered asset structures in contrast when bank debt is long term welfare is the same under both asset structures

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

robustness and u s monetary policy experimentation we study how a concern for robustness modifies a policy maker s incentive to experiment a policy maker has a prior over two submodels of inflationunemployment dynamics one submodel implies an exploitable trade off the other does not bayes law gives the policy maker an incentive to experiment the policy maker fears that both submodels and his prior probability distribution over them are misspecified we compute decision rules that are robust to misspecifications of each submodel and of the prior distribution over submodels we compare robust rules to ones that cogley colacito and sargent 2007 computed assuming that the models and the prior distribution are correctly specified we explain how the policy maker s desires to protect against misspecifications of the submodels on the one hand and misspecifications of the prior over them on the other have different effects on the decision rule

temperature and growth a panel analysis of the united states this paper documents that seasonal temperatures have significant and systematic effects on the u s economy both at the aggregate level and across a wide crosssection of economic sectors this effect is particularly strong for the summer an increase of 1 f in the average summer temperature is associated with a reduction in the annual growth rate of state level output of 0 15 to 0 25 percentage points when these estimates are combined with projected increases in seasonal temperatures it is found that a reduction of u s economic growth by up to one third could occur over the next century

unravelling the global city debate on social inequality a firm level analysis of wage inequality in amsterdam and rotterdam in this article an assessment is made of the consequences of globalisation for urban wage inequality using data on employers in the dutch cities of amsterdam and rotterdam it is shown that simpl

emissions targets and the real business cycle intensity targets versus caps or taxes for reducing greenhouse gas emissions intensity targets are attracting interest as a flexible mechanism that would better allow for economic growth than emissions caps for the same expected emissions however the economic responses to unexpected productivity shocks differ using a real business cycle model we find that a cap dampens the effects of productivity shocks in the economy on all variables except for the shadow value of the emissions constraint an emissions tax leads to the same expected outcomes as a cap but with greater volatility certainty equivalent intensity targets maintain higher levels of labor capital and output than other policies with lower expected costs and no more volatility than with no policy

case based decision theory this paper suggests that decision making under uncertainty is at least partly case based we propose a model in which cases are primitive and provide a simple axiomatization of a decision rule that chooses a best act based on its past performance in similar cases each act is evaluated by the sum of the utility levels that resulted from using this act in past cases each weighted by the similarity of that past case to the problem at hand the formal model of case based decision theory naturally gives rise to the notions of satisficing decisions and aspiration levels

the economics of the climate i review the economic characteristics of the climate problem focusing on the choice of discount rates in the presence of a stock externality risk and uncertainty ambiguity and the role of integrated assessment models iams in analyzing policy choices i suggest that iams can play a role in providing qualitative understanding of how complex systems behave but are not accurate enough to provide quantitative insights arguments in favor of action on climate issues have to be based on aversion to risk and ambiguity and the need to avoid a small but positive risk of a disastrous outcome

scientific progress and irreversibility an economic interpretation of the precautionary principle abstract we consider the problem of the optimal use of a good whose consumption can produce damages in the future scientific progress is made over time that provides information on the distribution of the intensity of damages we show that this progress induces earlier prevention effort only if prudence is larger than twice absolute risk aversion this paper thus identifies the class of quite restrictive but plausible conditions such that scientific uncertainties justify an immediate reduction of the consumption of a potentially toxic substance

post industrialisation immigration and unemployment how and why the impact of immigration on unemployment differs between dutch cities studies on the substitution thesis in advanced economies show scattered results the impact of immigration on the wages and likelihood of unemployment of the less educated varies strongly both studies on the substitution thesis itself and studies on the unequal post industrial development of urban economies suggest that this is because the substitution thesis is conditional on the type of urban economy the empirical validity of this suggestion is tested by comparing the impact of immigration on the employment level of the less educated among 22 dutch metropolitan areas the findings corroborate the central hypothesis in strong service oriented urban economies the impact of immigration on unemployment levels is mitigated because of high labour demand for the less educated

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

explaining deindustrialization how affluence productivity growth and globalization diminish manufacturing employment1 this study analyzes why the world s most economically advanced countries have deindustrialized over the last few decades previous research focuses on three causal factors 1 rising consumer affluence and its propensity to increase demand for services more than for manufactured goods 2 faster productivity growth in the manufacturing sector relative to other sectors and 3 expanding trade linkages between the north and the south of the global economy the relative importance of these factors however is not fully understood because previous research has not tested all of these explanations simultaneously nor considered the indirect channels through which global trade may cause deindustrialization this study tests the three factors with two way fixed effects regression models and panel data on 18 oecd countries from 1970 to 2003 the results indicate that each factor makes significant contributions to deindustrialization and that global trade exerts both direct and indirect effects on employment

ambiguity reasoned determination and climate change policy abstract this paper examines climate change benefit cost analysis in the presence of scientific uncertainty in the form of ambiguity the specific issue addressed is the robustness of benefit cost analyses of climate change policy alternatives to relaxation of savage s original axioms two alternatives to subjective expected utility seu are considered maximin expected utility meu and incomplete expected utility ieu among other results it is demonstrated that polar opposite recommendations can emerge in an ambiguous decision setting even if all agree on society s rate of time preference society s risk attitudes the degree of ambiguity faced and the scientific primitives we show that for a simple numerical simulation of our model an meu decision maker favors policies which immediately tackle climate change while an ieu decision prefers business as usual each agency shall assess the costs and benefits of the intended regulation and recognizing that some costs and benefits are difficult to quantify propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its cost executive order 12866 of the us president

the nobel memorial prize for william d nordhaus william d nordhaus and paul m romer received the 2018 sveriges riksbank prize in economic sciences in memory of alfred nobel this paper surveys nordhaus contributions on integrating climate change into long run macroeconomic analysis for which he was recognized with this prize

bayesian learning growth and pollution abstract environmental problems such as climate change have great uncertainties current expectations are that uncertainties about climate change will be resolved quickly we examine this hypothesis theoretically and computationally we consider bayesian learning about the relationship between greenhouse gas levels and global mean temperature changes a key uncertainty learning is non trivial because of a stochastic shock to the realized temperature we find theoretically the expected learning time which is related to the variance of the shock and the emissions policy implying a tradeoff between the benefits of controlling emissions and information we imbed the learning model into an optimal growth model with a climate sector and solve the resulting dynamic program we find computationally that learning takes on average over 90 yr far longer than currently believed

the climate beta how does climate change mitigation affect the aggregate consumption risk borne by future generations in other words what is the climate beta in this paper we argue using a combination of theory and integrated assessment modelling that the climate beta is positive and close to unity for maturities of up to about one hundred years this is because the positive effect on the climate beta of uncertainty about exogenous emissions neutral technological progress overwhelms the negative effect on the climate beta of uncertainty about the carbon climate response particularly the climate sensitivity and the damage intensity of warming mitigating climate change therefore has no insurance value to hedge the aggregate consumption risk borne by future generations on the contrary it increases that risk which justifies a relatively high discount rate on the expected benefits of emissions reductions however the stream of undiscounted expected benefits is also increasing in the climate beta and this dominates the discounting effect so that overall the net present value of carbon emissions abatement is increasing in the climate beta

spite and development in a wide variety of settings spiteful preferences would constitute an obstacle to cooperation trade and thus economic development this paper shows that spiteful preferences the desire to reduce another s material payoff for the mere purpose of increasing one s relative payoff are surprisingly widespread in experiments conducted in one of the least developed regions in india uttar pradesh in a one shot trust game the authors find that a large majority of subjects punish cooperative behavior although such punishment clearly increases inequality and decreases the payoffs of both subjects in experiments to study coordination and to measure social preferences the findings reveal empirical patterns suggesting that the willingness to reduce another s material payoff either for the sake of achieving more equality or for the sake of being ahead is stronger among individuals belonging to high castes than among those belonging to low castes because extreme social hierarchies are typically accompanied by a culture that stresses status seeking it is plausible that the observed social preference patterns are at least partly shaped by this culture thus an exciting question for future research is the extent to which different institutions and cultures produce preferences that are conducive or detrimental to economic development

the impact of climate change on the balanced growth equivalent an application of fund the stern review added balanced growth equivalents bge to the economic climate change research agenda we first propose rigorous definitions of the bge for multiple regions and under uncertainty we show that the change in the bge is independent of the assumed scenario of per capita income for comparable welfare economic assumptions as the stern review we calculate lower changes in bge between a business as usual scenario and one without climate impacts with the model fund than the stern review found with the model page we find that mitigation policies give even lower changes in bge and argue that those policy choices should be the focus of the research effort rather than total damage estimates according to our results the current carbon tax should be below 55 tc sensitivity analyses show that the stern review chose parameters that imply high impact estimates however for regionally disaggregated welfare functions we find changes in bge that are significantly higher than the results from the stern review both for total damage as for policy analysis with regional disaggregation and high risk aversion we observe fat tails and with that very high welfare losses

a review of the stern review on the economics of climate change how much and how fast should we react to the threat of global warming the stern review argues that the damages from climate change are large and that nations should undertake sharp and immediate reductions in greenhouse gas emissions an examination of the review s radical revision of the economics of climate change finds however that it depends decisively on the assumption of a near zero time discount rate combined with a specific utility function the review s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of assumptions that are consistent with today s marketplace real interest rates and savings rates

optimal climate change mitigation under long term growth uncertainty stochastic integrated assessment and analytic findings abstract economic growth over the coming centuries is one of the major determinants of today s optimal greenhouse gas mitigation policy at the same time long run economic growth is highly uncertain this paper is the first to evaluate optimal mitigation policy under long term growth uncertainty in a stochastic integrated assessment model of climate change the sign and magnitude of the impact depend on preference characteristics and on how damages scale with production we explain the different mechanisms driving optimal mitigation under certain growth under uncertain technological progress in the discounted expected utility model and under uncertain technological progress in a more comprehensive asset pricing model based on epstein zin weil preferences in the latter framework the dominating uncertainty impact has the opposite sign of a deterministic growth impact the sign switch results from an endogenous pessimism weighting all of our numeric scenarios use a dice based assessment model and find a higher optimal carbon tax than the deterministic dice base case calibration

the climate change learning curve abstract the purpose of this paper is to confront economic models of climate change with the reality that limited information exists with which to form expectations about the evolution of the climate a key element in the tension between those who believe we should impose aggressive climate change mitigation policies and those who do not is the question of if we are merely in a long period of shock induced above average temperatures or if observed increases in temperature are a result of carbon emissions this paper characterizes learning dynamics resulting from the use of observations of temperature to update beliefs about two key characteristics of global climate the persistence of natural trends and the sensitivity of temperature to atmospheric carbon levels this paper shows that contrary to predictions in the literature that uncertainty may be resolved very quickly the time to learn the true processes may be in the order of thousands of years further this paper shows the effects of uncertainty on the likelihood that observations from the statistical record lead to important estimate and policy errors

credit swap valuation this review of the pricing of credit swaps a form of derivative security that can be viewed as default insurance on loans or bonds begins with a description of the credit swap contract turns to pricing by reference to spreads over the risk free rate of par floating rate bonds of the same quality and then considers model based pricing the role of asset swap spreads as a reference for pricing credit swaps is also considered

the economy climate change and infectious diseases links and policy implications this short paper provides a modeling framework for unifying the economy climate change and the outbreak of infectious diseases such as the recent covid 19 pandemic we stress that continuous growth of consumption activities capital accumulation and climate change could increase the potential of the epidemic its contact number or the probability of its arrival this framework of analysis allows us to think of infectious disease policies in two stages in the short run containment policies like social distancing could help to stop the epidemic in the medium and the long run economic policies could help to reduce the potential of the epidemic or the probability of its emergence

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

the dynamics of spillover effects during the european sovereign debt turmoil abstract in this paper we modify and extend the framework of diebold and yilmaz 2011 to quantify spillovers between sovereign credit markets and banks in the euro area spillovers are estimated recursively from a vector autoregressive model of daily changes in credit default swap cds spreads with exogenous common factors we account for interdependencies between sovereign and bank cds spreads and derive generalized impulse response functions specifically we assess the systemic effect of an unexpected shock to the creditworthiness of a sovereign or country specific bank index on other sovereigns and bank cdss between october 2009 and july 2012 channels of shock transmission from or to sovereigns and banks are summarized in a contagion index and its four components i among sovereigns ii among banks iii from sovereigns to banks and iv from banks to sovereigns we also highlight the impact of policy related events on the contagion index