the economics of a blend mandate for biofuels a biofuel blend mandate may increase or decrease consumer fuel prices with endogenous oil prices depending on relative supply elasticities biofuel tax credits always reduce fuel prices tax credits result in lower fuel prices than under a mandate for the same level of biofuel production if tax credits are implemented alongside mandates then tax credits subsidize fuel consumption instead of biofuels this contradicts energy policy goals by increasing oil dependency co 2 emissions and traffic congestion while providing little benefit to either corn or ethanol producers these social costs will be substantial with tax credits costing taxpayers 28 7 billion annually by 2022 copyright 2008 oxford university press

the excise tax effects of the property tax abstract this paper constructs a theory of how differences across regions in property tax rates affect product prices and factor prices for a model where labor and capital are perfectly mobile between regions it is shown that consumers residing in different regions face the same nontraded good prices even when property tax rates differ across regions

efficiency and equalization payments in a federal system of government a synthesis and extensions of recent results this paper investigates the rationale for a system of equalization transfers in a federal system of government the existing sources of inefficiency of resource allocation in economies with more than one level of government are synthesized in the framework of a simple decentralized multiprovince model with mobile factors of production the sources of inefficiency arise first because migrants respond at the margin to incorrect signals owing to the phenomena of rent sharing and fiscal exterality and second because of global rather than local inefficiencies the model is then extended to consider the role of the federal government in providing intergovernmental transfers in the face of such inefficiencies in addition to synthesizing the sources of inefficiency in federal models the equity arguments for equalization are briefly recounted efficacite et paiements de perequation dans un systeme federal de gouvernement synthese et extensions de certains resultats recents ce memoire examine la logique qui soustend un systeme de paiements de perequation dans un systeme fdderal de gouverement les auteurs utilisent un modele simple d un systeme multi provincial decentralise avec des facteurs de production mobiles pour definir les sources d inefficacite dans l allocation des ressources dans les dconomies qui possedent plus d un niveau de gouvernement ces inefficacites proviennent de ce que d abord ceux qui se deplacent le font en reponse a la marge a des signaux incorrects engendres par le partage de la rente sur la base de la residence et par les phenomenes d exteralites fiscales elles sont aussi le resultat d inefficacites globales plutot que locales dans le cadre de ce modele les auteurs analysent le role du gouvernement federal effectuant des transferts inter gouverementaux pour corriger ces inefficacites en plus de presenter une synthese des sources d inefficacite dans les regimes federaux les auteurs font un bref rappel en passant a l ensemble des arguments fondes sur l equite qu on utilise pour rationaliser les paiements de perequation this paper is a linear combination of two papers presented at the may 1982 meetings of the canadian economics association in halifax entitled the case for equalization payments by the authors and recent developments in the theory of regional economic policy in canada by boadway the authors are grateful for comments by the discussants jim johnson and baxter macdonald and by jack mintz brian scarfe gerard belanger david sewell tom courchene and the referees we are especially heavily indebted to dan usher for many stimulating comments and suggestions while the work was in progress some of the above persons will undoubtedly disagree with the emphasis we have chosen to put on various aspects of the analysis for policy purposes support for some of this work has been provided by the economic council of canada and is gratefully acknowledged canadian journal of economics revue canadienne d economique xv no 4 november novembre 1982 printed in canada imprimd au canada 0008 4085 82 0000 0613 01 50 1982 canadian economics association this content downloaded from 207 46 13 127 on wed 12 oct 2016 04 27 47 utc all use subject to http about jstor org terms 614 robin boadway and frank flatters

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

on the capitalization of land improvement projects abstract a model of two cities is presented to provide sufficient conditions for the value of a capital improvement to be underestimated by the change in land rents

innovation subsidies versus consumer subsidies a real options analysis of solar energy abstract given the interest in the commercialization of affordable clean energy technologies we examine the prospects of solar photovoltaics pv we consider the question of how to transition to a meaningful percentage of solar energy in a sustainable manner and which policies are most effective in accelerating adoption this paper develops a stochastic dynamic model of the adoption of solar pv in the residential and commercial sector under two sources of uncertainty the price of electricity and cost of solar the analytic results suggest that a high rate of innovation may delay adoption of a new technology if the consumer has rational price expectations we simulate the model across alternative rates technological change electricity prices subsidies and carbon taxes it is shown that there will be a displacement of incumbent technologies and a widespread shift towards solar pv in under 30 years and that this can occur without consumer incentives and carbon pricing we show that these policies have a modest impact in accelerating adoption and that they may not be an effective part of climate policy instead results demonstrate that further technological change is the crucial determinant and main driver of adoption further results indicate that subsidies and taxes become increasingly ineffective with higher rates of technological change

policy uncertainty and the optimal investment decisions of second generation biofuel producers abstract uncertainty has been cited as one possible explanation for the lackluster performance of the renewable fuel standard which was enacted to encourage investment in the production of advanced biofuel the unpredictability of conventional fuel markets makes the revenues and costs associated with biofuel production uncertain in addition policy uncertainty in the form of annual revisions and adjustments to the program make the cost of complying with the renewable fuel standard uncertain this paper is the first to decompose the aggregate uncertainty facing biofuel producers and isolate the effect of fuel market uncertainty and policy uncertainty on the decision to enter and exit the biofuel market results indicate that the uncertainty in the conventional fuel markets and the uncertainty in status of the renewable fuel standard program influence incentives to enter and exit the biofuel market in different ways annual adjustments to the standard coupled with the unpredictable expiration and reinstatement of blender tax credits can work to discourage investment in biofuels and undermine effectiveness of the program

evaluating natural resource investments notwithstanding impressive advances in the theory of finance over the past 2 decades practical procedures for capital budgeting have evolved only slowly the standard technique which has remained unchanged in essentials since it was originally proposed see dean 1951 bierman and smidt 1960 derives from a simple adaptation of the fisher 1907 model of valuation under certainty under this technique expected cash flows from an investment project are discounted at a rate deemed appropriate to their risk and the resulting present value is compared with the cost of the project this standard textbook technique reflects modern theoretical developments only insofar as estimates of the discount rate may be obtained from crude application of single period asset pricing theory but see brennan 1973 bogue and roll 1974 turnbull 1977 constantinides 1978 the inadequacy of this approach to capital budgeting is widely acknowledged although not widely discussed its obvious deficiency is its the evaluation of mining and other natural resource projects is made particularly difficult by the high degree of uncertainty attaching to output prices it is shown that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such projects but also to determine the optimal policies for developing managing and abandoning them the approach may be adapted to a wide variety of contexts outside the natural resource sector where uncertainty about future project revenues is a paramount concern

a general equilibrium analysis of property tax incidence abstract mieszkowski s 1972 analysis of the new view of property tax incidence dealt with a model of an economy containing only one sector and three factors in which labor was immobile brueckner 1981 incorporated an equal utility condition into his general equilibrium analysis of property tax incidence to take worker mobility into account his model however did not have capital as an input factor and the benefits of public expenditure were ignored this paper extends previous research by using a general equilibrium model of an economy with two sectors three factors and multiple communities both capital and labor are assumed to be mobile and brueckner s labor mobility condition is modified to include public expenditure effects while the results of the analysis support the new view they qualify the original mieszkowski studies in many aspects the model also sheds light on tax incidence in no tax communities which was often ignored in earlier studies

the implications of competition among jurisdictions does tiebout need politics the paper investigates whether compensation among local jurisdiction is by itself sufficient to ensure efficient provision of local public goods jurisdictions have fixed boundaries and each has an entrenched government with the power to tax and supply the public good residents can move costlessly among jurisdictions it is shown that competition among numerous jurisdictions is not sificient to guarantee public sector efficiency though residents can vote with their feet land is immobile hence governments can unsurp some land rents for their own ends increasing the number of jurisdictions limits but cannot completely eliminate the ability to exercise discretionary governmental power

indirect distributional effects in benefit cost analysis of small projects small public projects perturb the equilibrium prices of many commodities generating small real income changes pecuniary externalities for many households the analy sis of this paper shows that even extremely small price changes on t he order of 1016 can have distributional effects that are far from n egligible e g 10 percent of project outlays it is shown that at least in some simple cases the benefit cost analyst can accommodate these effects without measuring the actual price changes if certain key empirical parameters such as demand and supply elasticities are known copyright 1988 by royal economic society

blending under uncertainty real options analysis of ethanol plants and biofuels mandates abstract the value of a representative ethanol producer that benefits from both low and high gasoline prices in the short run is modeled ethanol producers make a modest competitive profit in the mandate induced region of production a low price of gasoline increases the demand for blend ethanol and consequently increases the profit of ethanol producers on the other hand when gasoline becomes costlier than ethanol the capacity constraints of the biofuels sector bind and ethanol producers gain large quasi monopoly margins this is an interesting example of a market where two commodities are complement up to a point and then substitute after that we postulate the value of an ethanol producer as a strangle option consisting of two real options the option to substitute gasoline at times of expensive crude oil and the option to expand supply of blend at times of cheap gasoline using a dynamic model we show that the higher volatilities of crude oil and ethanol costs increase biofuels firms value we also find non monotonic relationships between the value of an ethanol plant and several underlying variables including gasoline price level we estimate the value provided by a 10 blend mandate to be around 150 000 000 for a representative ethanol unit our results offer a novel view of oil and feedstock price risks in contrast to the common belief that considers those risks as a negative factor for the biofuels sector

the incidence of regional taxes in a general equilibrium framework abstract a six region general equilibrium model of the united states is presented and used to evaluate the incidence of state local business taxes because this formulation allows for labor and capital mobility the provision of public goods distinctions between household and business level taxes and the interaction of state local and federal tax systems numerical analysis is particularly appropriate simulations show that capital improvements generally bear the average economy wide burden of business taxes levied on them regardless of whether a multilateral or unilateral policy change is considered or whether the alternative tax is imposed on immobile resources or household income however for other factors of production both mobile andimmobile the effects vary across scenarios a demonstration that incidence should not be thought of as a single outcome or value

changing the name of the game rsa indigenous and inward investors and the national assembly for wales the recent rejection of british aerospace s bae application for 25m in regional selective assistance rsa for its broughton facility in north wales and subsequent granting of 19 5m in other aid packages has highlighted an important policy issue now facing development areas across the uk in particular how do governments balance the ability of foreign investors to lever increasingly scarce economic development resources from central coffers on a continuing almost automatic basis against the new policy agenda which is focusing to a much higher degree on the needs of indigenous firms using a new database on rsa to contrast the fortunes of bae with those of several prominent inward investors this article illustrates the complex political economy that now surrounds grant decisions in post devolution uk

capitalization and the theory of local public finance the tiebout literature is incomplete this paper argues because it has not fully accounted for the capitalization of local fiscal variables into house values the paper explains why capitalization arises why it persists in long run equilibrium how it affects both residential location and the outcome of local voting and why it interferes with the efficiency of a system of local governments the analysis which is based on the main tiebout assumptions plus a property tax combines a model of household bids in a housing market with a median voter model of local public service determination

real investment options with multiple sources of rare events abstract we value real investment options when the underlying asset follows a mixed jump diffusion process involving various types sources of rare events jumps these jumps are assumed independent of each other with each type having a log normally distributed jump size and a random poisson distributed arrival time they may represent uncertainties about the arrival and impact on the underlying investment of new information concerning technological innovation competition political risk regulatory effects and other sources an analytic solution is presented for european claims call or put options with multiple sources of jumps a discrete time markov chain methodology implemented within a finite difference scheme is proposed for the valuation of american as well as european options the approach is also applicable to financial options with multiple types of rare events the approach is illustrated through valuing complex real options with compound features involving interactions between optimal investment and subsequent operating decisions specifically we value a growth option and an extension option

geometric brownian motion and structural breaks in oil prices a quantitative analysis the purpose of this paper is to present a quantitative analyses of oil price s path we try to argue that despite its parsimony and simplicity geometric brownian motion can perform well as a proxy for the movement of oil prices and for a state variable to evaluate oil deposits we base our argument on evidences of very low speed of mean reverting or long half life since unit root tests only can reject its null hypothesis in a sample longer than 100 years on the other hand we reject the null hypothesis of unit root with two endogenous breaks showing that the usual rejection can be attributed to omitted structural breaks we conclude that the average half life of oil price between 4 and 8 years depending on the model chosen is long enough to allow a good approximation as a geometric brownian motion

labor mobility and the incidence of the residential property tax abstract this paper analyzes the incidence of the residential property tax in an economy with two communities workers are perfectly mobile so that their utility levels are equal in the two communities in equilibrium the property tax is modeled as an ad valorem tax on housing services

fiscal disequilibrium in developing countries abstract fiscal equilibrium necessitates that permanent government expenditures be covered by permanent government revenues the concept of permanent goverment expenditures and revenues takes into account future revenue from capital investments as well as temporary windfalls hence equilibrium may exist despite temporary imbalance between revenue and expenditure the causes of disequilibrium can be classified into five categories export boom price inelastic tax system public enterprise performance increased expenditure produced by political exigencies or administrative weaknesses and worsening terms of trade in practice unrealistic customs valuations specific as opposed to ad valorem taxes and administrative difficulties have been the most common sources of declining government revenue as a percentage of gross domestic product increased subsidies both to consumer goods and to public enterprises as well as inadequate control mechanisms have been the most frequent causes of rising government expenditure

removing distortions in the u s ethanol market what does it imply for the united states and brazil we analyze the impact of trade liberalization and removal of the federal tax credit in the united states on ethanol markets using a multimarket international ethanol model we find that u s trade barriers have been effective in protecting the ethanol industry under current policy there is separability of the u s ethanol market from world markets with trade liberalization the ethanol market deepens making it less susceptible to price volatility the effect of trade liberalization extends beyond ethanol markets affecting agricultural markets the results show that the impact of removal of the tax credit overrides the impact of the tariff removal copyright 2008 oxford university press

balance of payments output and prices in tanzania abstract this paper examines the relationship between changes in international reserves and changes in output prices and monetary balances in tanzania using annual data for 1962 86 a short run macroeconomic model of the balance of payments is formulated and estimated in which output and prices are endogenized and the behaviors of the monetary and fiscal authorities are explicitly modeled the estimation results are used to examine the relative effectiveness of alternative policy instruments on the key macroeconomic variables of the model the monetary variables appear to have played a relatively significant role in the development of prices but they were only marginally significant in the process of balance of payments adjustment the simulation results indicate that a tradeoff existed between faster economic growth and better balance of payments performance

using real option analysis to quantify ethanol policy impact on the firm s entry into and optimal operation of corn ethanol facilities abstract ethanol crush spreads are used to model the value of a facility which produces ethanol from corn a real option analysis is used to investigate the effects of model parameters on the related managerial decisions of i how to operate the facility through optimal switching from idled to operational status and ii the decision to enter into the project given its expected real option net present value we present evidence of increased correlation between corn and ethanol prices perhaps as a result of government policy which has induced more players to enter into the market this paper investigates the subsequent negative effects on firms further this paper illustrates the impact of an abrupt change in government policy as what happened in january 2012 on a firm s decision to enter the business

taxation and the tiebout model the differential effects of head taxes taxes on land rents and property taxes on the theory of state and local public finance is the seminal paper by charles tiebout 1956 tiebout constructed a multijurisdictional model in which independent local governments offer a wide variety of expenditure and tax policies and perfectly mobile consumers reveal their preferences for local public goods through their choice of residential community he argued that under such circumstances local public service provision would be efficient the tiebout model has formed the basis of a vast number of subsequent articles in the state and local public finance literature and has also been very influential in urban and regional economics the efficiency properties of various tiebout type models of local public good provision have been examined and the role of politics in these models has been debated at length in this literature of more direct relevance to this paper however is the fact that although tiebout had little to say directly about taxation simply assuming the existence of head taxes subsequent analyses have used adaptations of this model to examine the effects of local head taxes land taxes and property taxes it is the literature on the efficiency and distributional effects of alternative local taxes that is the subject of this survey 1

estimating the influence of u s ethanol policy on plant investment decisions a real options analysis with two stochastic variables abstract u s ethanol policies have contributed to changes in the levels and the volatilities of revenues and costs facing ethanol firms the implications of these policies for optimal investment behavior are investigated through an extension of the real options framework that allows for the consideration of volatility in both revenue and cost components as well as the correlation between them the effects of policy affecting plant revenues dominate the effects of those policies affecting production costs in the absence of these policies much of the recent expansionary periods would have not existed and market conditions in the late 1990s would have led to some plant closures we also show that regardless of plant size u s ethanol policy has narrowed the distance between the optimal entry and exit curves implying a more narrow range of inactivity and indicative of a more volatile evolution for the industry than would have existed otherwise

the incidence of heterogeneous residential property taxes abstract in an economy with multiple tax jurisdictions the distribution of the burden of heterogeneous residential property taxes is shown to depend on the elasticity of demand for housing the elasticity of substitution between land and capital in housing production the elasticity of supply of land to individual tax jurisdictions and the degree of population mobility between tax jurisdictions it is demonstrated that the excise effects of the residential property tax may not cancel across jurisdictions and the average rate of tax may overstate or understate the burden on residential capital

clubs local public goods and transportation models a synthesis abstract clubs local public goods and transportation models are analyzed within a unified model the emphasis is on the derivation of optimal allocation pricing and the size of the sharing group we derive the conditions under which optimal prices will yield surplus or deficit as well as those under which competitive provision will be efficient given heterogeneous tastes we prove that segregation according to tastes is generally efficient although several cases where this result does not hold are also discussed we show that the existing literature is unnecessarily restrictive and that the unified approach suggested here considerably extends the existing analysis of clubs local public goods and the transportation problems

optimal storage by crop producers when post harvest marketing strategies are restricted by disallowing speculative purchases sales out of storage becomes an irreversible decision and the dynamic marketing problem becomes analogous to the optimal exercise of a financial option the optimal marketing strategy is to hold at low prices and to sell at high prices with a cutoff price function marking the boundary between low and high prices a method for estimating the cut off price function is developed and applied to illinois soybean prices the decision rule is demonstrated to result in substantial gains from storage copyright 2002 oxford university press

property tax and inter municipal migration in canada a multivariate test of the tiebout hypothesis this paper tests the causal ordering between property taxes and inter municipal migration using both bivariate and multivariate methods empirical results based on annual data for post war canada 1940 84 support the tiebout tullock hypothesis which implies that differential local tax system and public services induce inter comunity migration inter alia local spending and taxation are not therefore fully capitalized in property values the bivariate tests based on the granger sims test and hsiao s procedure indicate an instantaneous bidirectional causality between property taxes and migration but the multivariate granger test supports only a unidirectional causality from property taxes to migration

an economic analysis of local inducements for business abstract this paper presents a theoretical and preliminary empirical examination of various local real estate subsidies to business local governments can subsidize the structure capital land or both at a particular urban site standard microeconomic theory is used to investigate the effects of subsidy programs on the structure land ratio the employment land ratio and the amount of real estate taxes collected at the site in question it is concluded that municipalities may benefit from subsidies to businesses even if those businesses would have located in the municipality without the subsidy

option valuation of claims on real assets the case of offshore petroleum leases this paper extends financial option theory by developing a methodology for the valuation of claims on a real asset an offshore petroleum lease several theoretical and practical problems not present in applying option pricing theory to financial assets are addressed most importantly we show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset petroleum reserves the advantages of this approach over conventional discounted cash flow techniques are emphasized the methodological development provides important insights for both company behavior and government policy promising empirical results are reported

biofuels and food security the biofuel market created the linkage between energy and agricultural market prices biofuel policies and energy prices set the floor price of feedstock prices and the energy prices and the upper limit of the biofuel blend ratio can decide the ceiling of feedstock prices on the other hand biofuels can also transmit price volatility from energy to agricultural markets despite not always being the cause of price volatility of feedstock and related agricultural commodity prices brazilian bioethanol can play a crucial role in stabilizing the sugar market one of the most crucial problems for increasing biofuel production is the competition with food and food related demand and agricultural resources the definition of competition between biofuels and food can be divided into two dimensions the competition with food and food related demand and the competition with the agricultural resources the feedstock of the second generation biofuels can compete with food and food related demand and agricultural resources the development of second generation biofuels may not solve the problems associated with the competition between biofuels and food however the competition between biofuels and food doesn t always have a negative impact on food security the competition and food security impact on different dimensions biofuels can contribute to agricultural and rural development and can have a positive impact on a national and sub national level but they can also have a negative impact on household levels in the same country international action is required to monitor whether biofuels can have a negative impact on food security and nutrition security at national sub national and household levels biofuels should be compatible with and must not threaten food security the fao in collaboration with other international organizations will have the responsibility of monitoring the impact of biofuels on food security and proposing policy recommendations to individual countries based on the results of the monitoring

the effect of sample size on european union s renewable energy investment drivers abstractmacroeconomic modelling results based on relatively varying sample sizes may lead to incoherent results such effects have not been adequately understood in the renewable energy literature regarding the european union eu this study focuses on the comparison of results obtained for renewable energy investment drivers for solar and wind energy investments on different samples of eu countries including all eu 27 former eu 15 and 11 high renewable investment eu countries the study used a random effect panel data modelling approach over the period 1995 2011 for studying the impact of the levelized cost regulation perception carbon emissions and climatic condition on wind and solar investments over the three samples the results demonstrate the importance of trustable regulation schemes to ensure that regulation will not have a significant negative effect on investment showing also the need to further extend the model to include support schemes as fundamental drivers for investment

commodity prices and unit root tests price theory suggests that commodity prices should be stationary series yet tests for unit roots rather frequently imply that these prices are not stationary this seeming inconsistency is investigated by applying alternative specifications of unit root tests to prices of corn soybeans barrows and gilts and milk the preponderance of evidence suggests that nominal prices do not have unit roots but the results are sensitive to the specification of the test equation accounting for a structural change that shifts the mean appears to be an important issue in unit root tests

a public policy aid for bioenergy investment case study of failed plants abstract recent failures of renewable energy plants have raised concerns regarding government s role in providing credit subsidies and have harmed the long run development of renewable energy the major reason for these failures lies in government loan appraisers not having a model that addresses these root causes and instead relying on traditional net present value npv analysis what is required is a model representing entrepreneurs investment decision processes when faced with uncertainty irreversibility and flexibility that characterize renewable energy investments the aim is to develop such a model with a real options analysis roa criterion as the foundation a case study comparing npv with roa decisions for 50 and 100 million gallon ethanol plants is used as a basis for future development of a template government loan appraisers can use for evaluating the feasibility of renewable energy investments

how does corruption affect public debt an empirical analysis summary this paper investigates the relationship between corruption the shadow economy and public debt it additionally examines whether the shadow economy increases the adverse effects of corruption on public debt the model is empirically tested for 126 countries over 1996 2012 using ordinary least squares ols fixed effects system generalized method of moments gmm and instrumental variable estimation and two measures of corruption the transparency international corruption perceptions index and the kaufmann et al corruption index results confirm that increased corruption and a larger shadow economy lead to an increase in public debt results additionally indicate that the shadow economy magnifies the effect of corruption on public debt suggesting that they act as complements results also suggest that a larger shadow economy reduces tax revenues and thus increases public debt similarly higher government expenditure enhances the effects of corruption on government debt hence reducing corruption should be a primary policy goal of governments given the complementarity detected between corruption and the shadow economy reducing corruption would also lead to a fall in the size of the shadow economy and public debt reducing corruption will also minimize the adverse effects of corruption on government debt through government expenditure

pigou tiebout property taxation and the underprovision of local public goods abstract pigou s proposition that the use of distorting taxes rather than neutral head taxes reduces public service levels is examined in this paper a simple model with a national system of competing local governments is utilized to demonstrate that the use of a distorting property tax on mobile capital decreases the level of residential public services the case where public services are an intermediate producer good is also considered

jump processes in commodity futures prices and options pricing empirical evidence shows that log return relatives on commodity futures prices are not normally distributed this departure from normality seems to be caused by large price changes occurring in the commodity markets with the arrival of important new information this suggests that a jump diffusion model may be a plausible choice for modeling the stochastic process underlying commodity option prices merton 1976a develops a jump diffusion option pricing model assuming that jump risk is unsystematic however the jump diffusion model developed by bates 1991 is more appropriate for commodity option pricing since it allows jump risk to be systematic in this article recent transactions data on futures and futures options are used to test out of sample options using american versions of black s diffusion and bates s jump diffusion models the results show that bates s model performs considerably better than black s model jump diffusion asian option prices are also shown to differ considerably from geometric brownian motion asian option prices

what do we know about investment under uncertainty recent theoretical developments relating to investment under uncertainty have highlighted the importance of irreversibility for the timing of investment expenditures and their expected returns this has subsequently stimulated a growing empirical literature which examines uncertainty and threshold effects on investment behaviour this paper presents a review of this literature a variety of methods have been used to investigate the empirical implication of irreversibility in investment the majority focusing on the relationship between investment flows and proxy measures of uncertainty a general conclusion is that increased uncertainty at both aggregate and disaggregate levels leads to lower investment rates this suggests that there is an irreversibility effect under which greater uncertainty raises the value of the call option to delay a commitment to investment this effect appears to dominate any positive impact on investment arising from the fact that greater uncertability under certain circumstances increases the marginal profitability of capital the methods used raise a number of issues which call into question the reliability of the findings and these are addressed in the paper however if such irreversibility effects are present then their omission from traditional investment models casts doubt on the efficacy of such specifications jel classification d81 d92 e22

designing tax policy in federalist economies an overview abstract the emerging economic federations of the european union russia and south africa along with the established federations in australia canada and the united states confront the task of designing the institutions for federal fiscal policy this paper reviews the literature on the design of tax policy in federalist economies we conclude that taxation by lower level governments can lead to significant economic inefficiencies and inequities the usual assignment view of federalis recommends central government policies for example resident based taxation or grants in aid to correct these failures these recommendations assume that the central government will act as a benevolent social planner the political economy view of federalism suggests that this assumption is in error and that additional federalist institutions must be considered alternative legislative structures and constitutional rules are considered

a critique of tiebout s theory of local public expenditures the last section of this paper presents a rigorous version of tiebout s theory of local public goods it is shown that equilibria exist and are pareto optimal this rigorous theory follows closely the more rigorous part of tiebout s work this rigorous theory makes a number of very special assumptions which make local public goods essentially private the body of this paper presents a series of examples which show that if one tries to generalize the rigorous version of tiebout s theory in a number of interesting directions then equilibria may no longer exist or may not be pareto optimal the conclusion is that tiebout s idea does not lead to a satisfactory general theory of local public goods the goal of this paper is to point out that tiebout s notion of equilibrium with local governments does not have the nice properties of general competitive equilibrium except under very restrictive assumptions tiebout 39 suggested that there are competitive forces which tend to make local governments allocate resources in a pareto optimal fashion consumers choose to live in those towns with the mix of taxes and public goods they prefer local governments choose this mix so as to attract inhabitants this idea may seem intriguing for it suggests that the invisible hand solves an important part of samuelson s perplexing public goods problem 32 tiebout in fact makes an argument which is nearly rigorous i give a rigorous version of his argument at the end of the paper however in this rigorous version so many restrictive assumptions are made that public goods become essentially private in the body of the paper i give a series of examples with which i try to convince the reader that one is forced to adopt tiebout s restrictive assumptions the idea is that if one changes any of his assumptions then either equilibria may not exist or may not be pareto optimal my examples are presented in the context of a general class of tiebout models i consider several subclasses one of which is the special case considered by tiebout in each of the subclasses except that considered by tiebout i give a counterexample either to the existence of equilibrium or to its pareto optimality the subclasses are so chosen that the difficulties they reveal would be shared by any reasonable tiebout model which differed from his special case i believe that my examples controvert tiebout s suggestion 39 last paragraph that his theory compares favorably with competitive equilibrium theory most of the examples in this paper have already appeared in the literature i cite related work as i go along what is new here is that i assemble the examples in a unified argument

tax reform implications for the state local public sector he tax reform act of 1986 should provide valuable information which will allow economists to distinguish among competing models of the determinants of state and local spending and taxes this paper outlines the implications of current public finance theory and empirical work for the direction and where possible likely magnitudes of the effects of the tax bill after it is fully in effect in 1988 we analyze separately the effects of the bill on the level and distribution of state and local spending and on the mix of revenue sources employed by state and local governments the effects of the tax reform in this area will be fairly small we expect state and local spending to fall by between 0 9 percent and 1 9 percent with the lower end of the range the more plausible a reduction in the number of itemizers taxpayers who will be unable to deduct their state and local income and property taxes will account for about half of this change the elimination of sales tax deductibility which also makes citizens pay more for state and local government accounts for slightly more than a third of the decrease in spending finally reductions in marginal tax rates which make the deductions for income and property taxes worth less to taxpayers who continue to itemize accounts for the rest moreover states will probably shift away from sales taxes toward deductible sources of revenue thereby making the effect of the tax reform on state spending smaller still the conclusion that aggregate spending is unlikely to change very much does not imply that the tax reform act is unimportant to the state and local public sector the fiscal and economic circumstances of state and local governments vary enor

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

compensating differences and interregional wage differentials interregional differences in average wages and earnings have been observed particularly in the north and south of the united states ever since the mid 1800s that observation has motivated several empirical attempts to determine the source of those differentials measured both in nominal and real terms and to explain why they have been maintained over time the general conclusion reached by the overwhelming majority of these studies is that the labor market has not eliminated these wage differentials even in the face of substantial interregional migration this result has at least two alternative interpretations first it would appear to contradict the theory of compensating differences as applied to the labor market thaler and rosen 1975 which stresses that under the assumptions of perfect information free geographic and intersectoral labor mobility and homogeneous consumer tastes the nominal wage rates of workers who have similar human capital characteristics live and work in similar environments and experience similar living costs are driven to equality second this result may only reflect an aggregation error in other words there may be several types of labor that are each paid different equilibrium wage rates and comprise different percentages of the workforce in each region even if the real wage paid to each class of workers is interregionally invariant a situation that instead would support the theory of compensating differences failure to distinguish accurately between labor types could produce the illusion of a wage differential this paper considers the two alternative interpretations given above as to why interregional wage differentials might exist hedonic real wage equations are estimated for four regions of the united states using observations on individual household heads drawn from the 1976 panel study in income dynamics psid this sample is of interest because the 1976 psid data contain unusually detailed measures of education work experience and occupation as well as information on workplace and job characteristics thus a more complete specification of the wage equation is permitted and the possibility of aggregation error is reduced particularly in comparison with other interregional wage differential studies several of these studies for example have been based on aggregate data from the census of manufactures fuchs and perlman 1960 gallaway 1963 scully 1969 and coelho and ghali 1971 which provide no direct measurements on the human capital of workers the remainder of the discussion is organized into three sections section ii specifies the wage equation and describes the psid data section iii then reports empirical results which are consistent with the findings based on aggregate data of bellante 1979 and coelho and ghali 1971 in that they support the theory of compensating differences more specifically for full time workers the rewards to attributes relevant in determining real wages apparently are interregionally invariant however because this result conflicts with most previous research on interregional wage differentials based on aggregate data and virtually all such research based on microdata welch 1966 hanoch 1967 hanushek 1973 1981 hirsch 1978 and sahling and smith 1983 a number of empirical comparisons are made between the present study and the approaches taken by other investigators conclusions and implications are drawn out in section iv

the welfare economics of a biofuel tax credit and the interaction effects with price contingent farm subsidies a framework is developed to analyze the effects of a biofuel consumer tax exemption and the interaction effects with a price contingent farm subsidy ethanol prices rise above the gasoline price by the amount of the tax credit corn farmers gain directly while gasoline consumers only gain from any reduction in world oil prices due to the extra ethanol production domestic oil producers lose historically the intercept of the ethanol supply curve is above the gasoline price hence part of the tax credit is redundant and represents rectangular deadweight costs that dwarf triangular deadweight cost measures of traditional farm subsidies copyright 2007 oxford university press

the general equilibrium effects of the residential property tax incidence and excess burden abstract an urban general equilibrium model is used to explore the efficiency effects and distributional consequences of the residential property tax in a model of a small open city the replacement of a nondistortionary land tax with the residential property tax reduces the land area density and population of the city the aggregate net return on land falls by an amount equal to 164 93 of total tax revenue in a model of a closed region when city q replaces the land tax with the residential property tax production and employment shift to other cities in the region the net return on land decreases in city q and increases in other cities in the region in aggregate landowners are made better off by the change in tax policy while residents are made worse off the excess burden of the property tax is computed as 6 5197 of tax revenue

using a spark spread valuation to investigate the impact of corn gasoline correlation on ethanol plant valuation article i nfo corn ethanol plants have been criticized for a number of reasons in recent years this paper provides another ground for criticizing theseplants historical corn and gasoline pricesare uncorrelated but widespread adoption of corn ethanol production might reasonably lead to future correlation between these prices we present a real options like valuation of an ethanol plant as a spark spread between the corn price and the gasoline price this analysis shows that the value of an ethanol plant monotonically decreases with increasing correlation and the optimalproductionschedulegreatlydependsonthecorrelation evenrelativelysmallnewcorrelationscanresult inasignificantproportionalvaluedecrease a50 correlationbetweencornandgasolinecausesethanolplantsto lose 10 of their value the limiting case of full correlation would lead to a 30 value loss

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

is now a good time for iowa to invest in cellulosic biofuels a real options approach considering construction lead times abstract the revised renewable fuel standard of the u s mandates a production of 16 billion gallons per year by 2022 from cellulosic biofuels iowa rich in agricultural residues like corn stover is a major player in contributing to the fulfillment of the cellulosic biofuels mandate is it a good time for iowa to start investing in cellulosic biofuels using a fast pyrolysis facility as an example we present a real options approach for valuing the investment of a new technology for producing cellulosic biofuels subject to construction lead times and uncertain fuel price we conduct a case study on iowa in which the decision maker finds the optimal investment time for the fast pyrolysis facility subject to production and distribution constraints our result indicates that the project is profitable if the facility is invested now but could be more profitable if invested later namely now it is not the optimal time for iowa to start constructing the fast pyrolysis facility we also find that the impact of the lead time on the project value is too significant to overlook the profitability of the project is sensitive to the outlook of fuel price if the future retail fuel price drops just 7 lower than forecasted by the energy information administration the investment may not be profitable the impact of the technology improvement production yield and biomass feedstock price is also analyzed using regression

a real options approach to the valuation of a forestry investment abstract the theory of real options is used to model the optimal tree harvesting decision the value of the option to harvest is estimated using a dynamic programming approach and a general numerical solution technique suitable for any type of stochastic process for prices the conditions under which the optimal harvest time is independent of price are examined in addition the impact of assuming future lumber prices are mean reverting is considered it is found that option value and optimal cutting time are significantly different under the mean reversion assumption compared to geometric brownian motion

corn ethanol plant investment a real options case study the objective of this article is to describe an investment decision using net present value and real options a case study describes the data and the corn ethanol industry so students can study a cooperative s decision of whether or not to invest in a new corn ethanol plant in 2015 nebraska an extensive set of information accompanies this case including spreadsheets with data computer software code lesson plans for teaching real options and net present value and an extensive teaching note