the design of environmental markets what have we learned from experience with cap and trade this article reviews the design of environmental markets for pollution control over the past 30 years and identifies key market design lessons for future applications the focus is on a subset of the cap and trade systems that have been implemented planned or proposed around the world three criteria led us to the selection of systems for review first among the broader class of tradable permit systems our focus is exclusively on cap and trade mechanisms thereby excluding emission reduction credit or offset programmes second among cap and trade mechanisms we examine only those that target pollution abatement and so we do not include applications to natural resource management such as individual transferable quota systems used to regulate fisheries third we focus on the most prominent applications those that are particularly important environmentally economically or both

time consistent public policy in this paper we study how a benevolent government that cannot commit to future policy should trade off the costs and benefits of public expenditure we characterize and solve for markov perfect equilibria of the dynamic game between successive governments the characterization consists of an inter temporal first order condition a generalized euler equation for the government and we use it both to gain insight into the nature of the equilibrium and as a basis for computations for a calibrated economy we find that when the only tax base available to the government is capital income an inelastic source of funds at any point in time the government still refrains from taxing at confiscatory rates we also find that when the only tax base is labour income the markov equilibrium features less public expenditure and lower tax rates than the ramsey equilibrium

representative democracy and capital taxation abstract in this paper we study a political model of capital taxation voters who differ in their relative shares of capital and labor income choose tax policy under majority rule we compare two political regimes direct democracy where the voters vote directly on the policy and representative democracy where they elect a representative who then chooses policy in both regimes some form of commitment by the voters is necessary to avoid excessive taxation of capital but the necessary commitment under representative democracy corresponds closely to that provided by the actual institutions of most democracies

bankable permits for the control of environmental pollution abstract intertemporal trading of emission permits banking is often identified as one of three promising market mechanisms for controlling pollution along with averaging and trading surprisingly the efficiency properties of permit banking systems have not been investigated using a simple optimal control model this paper investigates firms incentives for banking or borrowing emission permits and compares the emission and output streams firms would choose with the socially optimal solution we find that in many cases firms will suboptimally choose excessive damage and output levels in early periods and correspondingly too few in later periods if given the opportunity to freely move emissions between time periods we propose a simple alternative trading scheme we term modified banking that counters this problem and should be no more difficult for an environmental authority to implement than a straigth banking system

optimal social security with imperfect tagging workers are exposed to the risk of permanent disability we rely on a dynamic mechanism design approach to determine how imperfect information on health should optimally be used to improve the trade off between inducing the able to work and providing insurance against disability after deriving the fi rst order conditions to this problem we calibrate the model to the u s economy and run a numerical simulation the government should offer back loaded incentives and make strategic use of the difference between the age at which disability occurs and the age of eligibility to disability bene ts also the able who are mistakenly tagged as disabled should be encouraged to work until some early retirement age this makes a decrease in the strictness of the disability test desirable which would reduce the number of disabled who are not awarded the tag and hence improve insurance finally we show how the first best allocation of resources can asymptotically be implemented by making strategic use of the disability test

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

dynamic nonlinear income taxation with quasi hyperbolic discounting and no commitment this paper examines a dynamic model of nonlinear income taxation in which the government cannot commit to its future tax policy and individuals are quasi hyperbolic discounters who cannot commit to future consumption plans the government has both paternalistic and redistributive objectives and therefore uses its taxation powers to maximize a utilitarian social welfare function that reflects individuals true long run preferences under first best taxation quasi hyperbolic discounting exerts no effect on the level of social welfare attainable under second best taxation quasi hyperbolic discounting increases resp decreases the level of social welfare attainable when separating resp pooling taxation is optimal in stark contrast to previous studies this result implies that some individuals can actually be better off in the long run as a result of their short run impatience

equilibrium price dynamics of emission permits this article presents a stochastic equilibrium model for environmental markets that allows us to study the characteristic properties of emission permit prices induced by the design of today s cap and trade systems we characterize emission permits as highly nonlinear contingent claims on economy wide emissions and reveal their hybrid nature between investment and consumption assets our model makes predictions about the dynamics and volatility structure of emission permit prices the forward price curve and the implications for option pricing in this market empirical evidence from existing emissions markets shows that the model explains the stylized facts of emission permit prices and related derivatives

an interim evaluation of sulfur dioxide emissions trading ide iv of the 1990 clean air act amendments established the first large scale long term environmental program to rely on tradable emissions permitscalled allowances in this program to control pollution this program was designed to cut acid rain by reducing sulfur dioxide so2 emissions from electric generating plants to about half their 1980 level beginning in 1995 it is of interest both as a response to an important environmental issue and as a landmark experiment in environmental policy this experiment comes at a particularly important time since emission trading is under serious consideration with strong u s backing for use to deal with global climate change by curbing emissions of carbon dioxide co2 the economic stakes in climate change surpass those in acid rain by several orders of magnitude intergovernmental panel on climate change 1996 this article summarizes the results to date of our ongoing empirical analysis of compliance costs and allowance market performance under the u s acid rain program

education policies and taxation without commitment we study the implications of limited commitment on education and tax policies set by benevolent governments consistent with real world practices a government can decide to subsidize different levels of education at different rates a lack of commitment however affects the optimal structure of education subsidies the direction of the effect depends on how labor taxes are designed with linear labor tax rates and a transfer for redistribution subsidies become more progressive by contrast if the government is only constrained by informational asymmetries when designing taxes subsidies become more regressive

mercantilism as strategic trade policy the anglo dutch rivalry for the east india trade this paper interprets seventeenth century mercantilism in light of recent theories of strategic trade policy long distance international commerce during the mercantilist period was undertaken chiefly by state chartered monopoly trading companies and was therefore conducted under conditions of imperfect competition the economic structure of the anglo dutch rivalry for the east india trade provides an excellent illustration of an environment in which the profit sharting motive for strategic trade policies exists dutch supremacy in the early east india trade was facilitated by a managerial incentive scheme in the monopoly charter that enabled it to achieve a stackelberg leadership position against the english using data from the east india trade around 1620 in a cournot duopoly model i find that the managerial incentives yielded greater dutch profits than would have been obtained from a standard profit maximizing objective and that the scope for other strategic trade policies was clearly present

social contracts as assets a possible solution to the time consistency problem this paper presents a new solution to the time consistency problem that appears capable of enforcing ex ante policy in a variety of settings in which other enforcement mechanisms do not work the solution involves formulating a social contract institution or agreement that specifies the optimal ex ante policy the social contract is effectively sold by succesive old generations to successive young generations who pay for the social contract through the payment of taxes both old and young generations have an economic incentive to fulfill the social contract for the old generation breaking the social contract makes the social contract valueless and the generation suffers a capital loss by not being able to sell it for the young generation the economic advantage of purchasing the existing social contract exceeds its price as well as the economic gain from setting up the a new social contract

an emission saved is an emission earned an empirical study of emission banking for light duty vehicle manufacturers abstract this paper presents results of an empirical study of emission banking for light duty vehicle manufacturers an intertemporal model of manufacturers choices is combined with econometrically estimated abatement cost functions to simulate the cost savings and emission effects of an averaging trading and banking marketable permit system relative to command and control regulations while the cost savings of such a system are estimated to be modest the intertemporal emission effects may be sizable the sensitivity of the results to discount rates abatement cost functions and model specifications is also explored

time consistent optimal fiscal policy this article studies the properties of optimal fiscal policy in a stochastic growth model when the government cannot commit itself beyond the next period s capital income tax rate we find that the results contrast markedly with those under full commitment first capital income tax rates are very high 65 on average versus close to zero on average under full commitment second labor income taxes are rather low on average about 12 versus a value of around 31 under full commitment finally labor income taxes are quite volatile whereas under full commitment their standard deviation is essentially zero

time to build and the real options channel of residential investment abstract a standard real options model predicts that time to build investment could be delayed by uncertainty over future revenue we quantify the first order importance of this mechanism in the 2002 2011 housing boom bust cycle by developing and estimating a model of sequential irreversible investment with stochastic bottlenecks we find that the main driver of construction delays during the boom is construction bottlenecks however further delay in construction during the bust is caused by an increase in uncertainty which grew by 21 6 between 2002 and 2009 the model can account for more than one third of the decline in residential investment between 2002 and 2009

redistributive taxation in a simple perfect foresight model abstract we investigate the redistributive potential of capital taxation in an intertemporal maximizing model of capital formation first even unanticipated redistributive capital taxation is severely limited in its effectiveness since it depresses wages second under any convergent redistributive tax policy which maximizes a paretian social objective the capital income tax will converge to zero independent of the factor supply elasticities these results are independent of workers holdings of capital

education and optimal dynamic taxation the role of income contingent student loans we study the optimal design of integrated education finance and tax systems the distribution of wages is endogenously determined by the costly education decisions of heterogeneous individuals before labor market entry consistent with empirical evidence this human capital investment decision is risky we find that an integrated education and tax system in which the government provides education loans to young individuals coupled with income contingent repayment can always be designed in a pareto optimal way we present a simple empirically driven application of the framework to us data in which individuals make a college entry decision we find the optimal repayment schemes for college loans can be well approximated by a schedule that is linearly increasing in income up to a threshold and constant afterwards so although the full optimum could lead to complicated non linear schedules in theory very simple instruments can replicate it fairly well the welfare gains from income contingent repayment are significant

irreversible abatement investment under cost uncertainties tradable emission permits and emissions charges abstract a major concern with tradable emission permits is that stochastic permit prices may reduce a firm s incentive to invest in abatement capital or technologies relative to other policies such as a fixed emissions charge however under efficient permit trading the permit price uncertainty is caused by abatement cost uncertainties which affect investment under both permit and charge policies we develop a rational expectations general equilibrium model of permit trading and irreversible abatement investment to show how cost uncertainties affect investment under permits we compare the resulting investment incentive with that under charges after controlling for the assumption that random shocks affect the abatement cost linearly we find that firms investment incentive decreases in cost uncertainties but more so under emissions charges than under permits therefore tradable permits in fact may help maintain firms investment incentive under uncertainty

balanced budget redistribution as the outcome of political competition this paper models balanced budget redistribution between socio economic groups as the outcome of electoral competition between two political parties equilibrium is unique in the present model and a sufficient condition for existence is given requiring that there be enough stochastic heterogeneity with respect to party preferences in the electorate the validity of hotelling s principle of minimum differentiation and of director s law are examined under alternative hypotheses concerning administrative costs of redistributions and voter s possibilities both of abstaining from voting and of becoming campaign activists for one of the parties the policy strategy of expected plurality maximization is contrasted with the strategy of maximizing the probability of gaining a plurality incomes are fixed and known so lump sum taxation is feasible however constraints on tax transfer differentiation between individuals are permitted in the analysis

the economics of pollution permit banking in the context of title iv of the 1990 clean air act amendments abstract this paper presents a model of the collective emission permit banking behavior of electricity generating units affected by title iv of the clean air act amendments of 1990 a rigorous treatment of the constraint that pollution permits cannot be borrowed from future allocations is introduced this approach enables an analysis of the impact of future changes in electricity demand regulations and technologies on the present permit price and emissions level the effect of uncertainty on the banking behavior is also explored

incentives in corporations evidence from the american whaling industry in the 1830s when whaling was a prosperous american industry a number of whaling corporations were chartered all of them were short lived this paper analyzes the failure of corporations in the american whaling industry and argues that the corporate form was unable to create the incentives requisite for success in whaling most nineteenth century whaling ventures were owned by a small number of local investors and were configured to provide powerful incentives for their managers the effect of the corporate form on productivity is analyzed using a newly collected panel data set of 874 whaling voyages many whaling corporations were managed by individuals who had previously or would subsequently manage ventures with the usual ownership structure using an individual fixed effects framework i identify a strong negative effect of the corporate form on productivity

a model of intertemporal emission trading banking and borrowing abstract this paper provides a general treatment of emission trading banking and borrowing in an intertemporal continuous time model using optimal control theory the decentralized behavior of firms is shown to lead to the least cost solution attainable under joint cost minimization explicit solutions for the time paths of emissions and permit prices are derived when firms are allowed to both bank and borrow and when firms are only allowed to bank emission permits the policy implications of emission banking and borrowing are discussed

the commitment value of funding pensions abstract this paper studies how funding public pensions can improve policy outcomes when short sighted governments cannot commit we focus on sustainable plans where optimal nonlinear pensions are not reneged on by sequential governments funding pensions is a commitment mechanism it implies lower contributions than does the second best policy which reduces temptation to over redistribute later and to misuse revealed private information funding may be preferable even if the population growth rate is higher than the rate of return on assets second best optimal policies are also more likely to be renegotiation proof under fully funded pensions

emissions trading systems with cap adjustments abstract emissions trading systems etss with fixed caps lack provisions to address systematic imbalances in the supply and demand of permits due to changes in the state of the regulated economy we propose a mechanism which adjusts the allocation of permits based on the current bank of permits the mechanism spans the spectrum between a pure quantity instrument and a pure price instrument we solve the firms emissions control problem and obtain an explicit dependency between the key policy stringency parameter the adjustment rate and the firms abatement and trading strategies we present an analytical tool for selecting the optimal adjustment rate under both risk neutrality and risk aversion which provides an analytical basis for the regulator s choice of a responsive ets policy

opportunity and social mobility the fact that the children of rich parents have better economic prospects than the children of poor parents unequal opportunity is generally thought to be one of the weak points of modem capitalist societies the ability of the descendants of poor families to eventually become rich and the descendants of rich families to eventually become poor social mobility is commonly considered to be one of the strong points of these societies here i argue that both of these characteristics are in fact necessary implications of an efficient societal arrangement when incentives to work hard must be provided i argue this point using a generational version of the model of phelan and townsend 1991 an infinitely repeated general equilibrium economy with incentive constraints in my model each household s stochastic output is a function of its level of effort since effort is assumed to be costly and privately observed households can shirk higher than minimal effort levels must be induced by making a household s present or future consumption dependent on the household s observed output history a large literature considers models similar to this including green 1987 atkeson and lucas 1992 phelan 1994 1995 wang 1995 hopenhayn and nicolini 1997 khan and ravikumar 2002 the main difference between the economies in that literature and here is that here instead of a household consisting of a single infinitely lived individual a household consists of a sequence of altruistically linked individuals a familial dynasty each of whom lives for one period this difference affects the appropriate societal ranking of allocations when households consist of a single infinitely lived individual allocations can be ranked according to their implied distributions of ex ante lifetime utilities if one allocation delivers a distribution of ex ante utilities dominated by another allocation then the first allocation is inefficient however if a household consists of a sequence of altruistically linked individuals then the appropriate ranking of allocations is no longer obvious how those in the first generation rank allocations will in general differ from how their descendants rank allocations this paper addresses this conflict between generations by ranking allocations according to a rawlsian veil of ignorance criterion rawls 1971 that is here society seeks to maximize the expected dynastic utility utility including altruism toward descendants of an individual who does not know into which generation he will be born and the identity or output levels of his ancestors 1 i argue that this corresponds to a societal ranking which does

on the dual risk model with parisian implementation delays in dividend payments abstract in this paper we study the dual compound poisson risk process which is suitable for a business that pays expenses at a constant rate over time and earns random amount of income at random times in contrast to the usual dividend barrier strategy e g avanzi gerber and shiu 2007 in which any overshoot over a pre specified barrier is paid immediately to the company s shareholders as a dividend it is assumed that dividend is payable only when the process has stayed above the barrier continuously for a certain amount of time d known as the parisian implementation delay in dassios and wu 2009 under such a modification the laplace transform of the time of ruin and the expected discounted dividends paid until ruin are derived motivated by the erlangization technique e g asmussen avram and usabel 2002 of approximating a fixed time using an erlang distribution we also analyze the case where the delay d is replaced by an erlang random variable numerical illustrations are given to study the effect of parisian implementation delays on ruin related quantities and to demonstrate the good performance of erlangization interestingly unlike the traditional barrier strategy it is found that the optimal dividend barrier maximizing the expected discounted dividends does depend on the initial surplus level

international coordination of fiscal policy in limiting economies we examine the limiting behavior of cooperative and noncooperative fiscal policies as countries market power goes to zero we show that these policies converge if countries raise revenues through lump sum taxation however if there are unremovable domestic distortions such as distorting taxes there can be gains to coordination even when a single country s policy cannot affect world prices these results differ from the received wisdom in the optimal tariff literature the key distinction is that contrary to the tariff literature the spending decisions of governments are explicitly modeled

nonlinear capital taxation without commitment we study efficient nonlinear taxation of labor and capital in a dynamic mirrleesian model incorporating political economy constraints policies are chosen sequentially over time without commitment our main result is that the marginal tax on capital income is progressive in the sense that richer agents face higher marginal tax rates

a simpler theory of optimal capital taxation abstract this paper develops a theory of optimal capital taxation that expresses optimal tax formulas in sufficient statistics we first consider a simple model with utility functions linear in consumption and featuring heterogeneous utility for wealth in this case there are no transitional dynamics the steady state is reached immediately and has finite elasticities of capital with respect to the net of tax rate this allows for a tractable optimal tax analysis with formulas expressed in terms of empirical elasticities and social preferences that can address many important policy questions these formulas can easily be taken to the data to simulate optimal taxes which we do using u s tax return data on labor and capital incomes second we show how these results can be extended to the case with concave utility for consumption the same types of formulas carry over by appropriately defining elasticities we show that one can recover all the results from the simpler model using a new and non standard steady state approach that respects individual preferences even with a fully general utility function

exchange rate regimes and international trade evidence from the classical gold standard era in this paper we show that the spread of the classical gold standard in the late nineteenth century increased international trade flows this positive effect was compounded whenever a group of countries formed a monetary union applying the gravity model of trade to more than 1 100 country pairs during the 1870 1910 period we find that two countries on gold would trade 60 percent more with each other than with countries on a different monetary standard moreover a monetary union would more than double bilateral trade flows our findings are relevant for current discussions on alternative monetary arrangements for the twenty first century

alliances preferential trading arrangements and international trade c oncerns about the stability of the international trading system have become widespread in recent years many observers feel that the relatively liberal system forged after world war ii is being undermined by the proliferation of preferential trading arrangements these concerns have spawned a great deal of empirical research much of which has found that such arrangements exert a substantial effect on trade flows yet these studies have neglected the role political military alliances play in shaping patterns of commerce this omission is important because there is ample reason to expect that alliances guide trade flows and preferential trading arrangements often are comprised of allies as a result extant analyses risk confusing the effects of alliances and preferential trading arrangements on commerce and systematically overstating the effects of the latter in this study we analyze the effects of alliances and preferential trading arrangements on bilateral trade flows both factors are likely to promote trade among members but we argue that the interaction between them is central to explaining patterns of commerce the combination of an alliance which creates political incentives for participants to engage in trade and a commercial institution which liberalizes trade among members is expected to provide a considerable impetus to commerce among parties to both 1

voting over selfishly optimal nonlinear income tax schedules abstract majority voting over selfishly optimal nonlinear income tax schedules proposed by a continuum of individuals who have quasilinear in consumption preferences is considered roell 2012 has shown that individual preferences over these schedules are single peaked in this article a complete characterization of selfishly optimal schedules is provided each selfishly optimal schedule has a bunching region in a neighborhood of the proposer s skill type coincides with the maxi max schedule below this region and coincides with the maxi min schedule above it using techniques introduced by vincent and mason 1967 the bunching region is identified by solving an unconstrained optimization problem information about the optimal schedules is used to provide a relatively simple proof of single peakedness the condorcet winning tax schedule features marginal tax rates that are negative resp positive on the maxi max resp maxi min part of the schedule except at the endpoints of the skill distribution where they are zero

tax and education policy in a heterogeneous agent economy what levels of redistribution maximize growth and efficiency this paper studies the effects of progressive income taxes and education finance in a dynamic heterogeneous agent economy such redistributive policies entail distortions to labor supply and savings but also serve as partial substitutes for missing credit and insurance markets the resulting tradeoffs for growth and efficiency are explored both theoretically and quantitatively in a model that yields complete analytical solutions progressive education finance always leads to higher income growth than taxes and transfers but at the cost of lower insurance overall efficiency is assessed using a new measure that properly reflects aggregate resources and idiosyncratic risks but unlike a standard social welfare function does not reward equality per se simulations using empirical parameter estimates show that the efficiency costs and benefits of redistribution are generally of the same order of magnitude resulting in plausible values for the optimal rates aggregate income and aggregate welfare provide only crude lower and upper bounds around the true efficiency tradeoff

business cycles and emission trading with banking abstract we propose an emission cap adjustment policy for an emission trading system ets that allows banking of allowances for later use and faces business cycle uncertainty the forward looking banking decisions cause a commitment problem with respect to regulator s next period allowance supply decision we tackle the commitment problem by focusing on the markov equilibrium of the policy the equilibrium policy has a surprisingly simple structure combining features from both price and quantity instruments the regulator s ability to choose a new cap for each period does not render banking obsolete but on the contrary makes banking an integral part of the equilibrium policy using data from the eu ets to calibrate the model we solve the markov equilibrium policy for the case of carbon emissions regulation and compare markov policies with and without the possibility to bank allowances a counterfactual analysis of the eu ets during the period of 2009 2013 shows that the optimal markov policy would have led to a steadier allowance price level and a stricter emission regulation than what was actually observed in the eu ets

time to build and fluctuations in bulk shipping abstract this paper explores the nature of fluctuations in world bulk shipping by quantifying the impact of time to build and demand uncertainty on investment and prices we examine the impact of both construction lags and their lengthening in periods of high investment activity by constructing a dynamic model of ship entry and exit a rich dataset of secondhand ship sales allows for a new estimation strategy resale prices provide direct information on value functions and allow their nonparametric estimation we find that moving from time varying to constant to no time to build reduces prices while significantly increasing both the level and volatility of investment jel g31 l11 l62 l92

politically credible social insurance abstract this paper considers the political credibility of allocations in settings with dynamic private information it embeds a benchmark dynamic moral environment into political economy games which feature repeated voting over mechanisms optimal politically credible allocations are shown to solve virtual planning problems with social discount factors in excess of the private one

collateral damage trade disruption and the economic impact of war abstract conventional wisdom in economic history suggests that conflict between countries can be enormously disruptive of economic activity especially international trade we study the effects of war on bilateral trade with available data extending back to 1870 using the gravity model we estimate the contemporaneous and lagged effects of wars on the trade of belligerent nations and neutrals controlling for other determinants of trade as well as the possible effects of reverse causality we find large and persistent impacts of wars on trade national income and global economic welfare we also conduct a general equilibrium comparative statics exercise that indicates costs associated with lost trade might be at least as large as the conventionally measured direct costs of war such as lost human capital as illustrated by case studies of world wars i and ii

what do emissions markets deliver and to whom evidence from southern california s nox trading program a perceived advantage of cap and trade programs over more prescriptive environmental regulation is that enhanced compliance flexibility and cost effectiveness can make more stringent emissions reductions politically feasible however increased compliance flexibility can also result in an inequitable distribution of pollution we investigate these issues in the context of southern california s reclaim program we match facilities in reclaim with similar california facilities also located in non attainment areas our results indicate that emissions fell approximately 24 percent on average at reclaim facilities relative to our counterfactual furthermore we find that observed changes in emissions do not vary significantly with neighborhood demographic characteristics

fluctuations in uncertainty this review article tries to answer four questions i what are the stylized facts about uncertainty over time ii why does uncertainty vary iii do fluctuations in uncertainty matter and iv did higher uncertainty worsen the great recession of 2007 2009 on the first question both macro and micro uncertainty appears to rise sharply in recessions on the second question the types of exogenous shocks like wars financial panics and oil price jumps that cause recessions appear to directly increase uncertainty and uncertainty also appears to endogenously rise further during recessions on the third question the evidence suggests uncertainty is damaging for short run investment and hiring but there is some evidence it may stimulate longer run innovation finally in terms of the great recession the large jump in uncertainty in 2008 potentially accounted for about one third of the drop in gdp

on efficient distribution with private information this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers each of whom is subject to private idiosyncratic taste shocks we propose a recursive method for finding feasible allocations that are incentivecompatible and that are pareto optimal within this set the method is applied to several parametric examples we find that in an efficient allocation the degree of inequality continually increases with a diminishing fraction of the population receiving an increasing fraction of the resources we discuss the extent to which these allocations can be decentralized via market arrangements this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with private information the economy we study has a constant endowment flow of a single non storable consumption good which is to be allocated each period among a large number of consumers each period these consumers experience unpredictable idiosyncratic privately observed taste shocks affecting their marginal utility of current consumption efficiency dictates that more resources be allocated to those consumers who in any given period have a high marginal utility of current consumption

a new world order explaining the international diffusion of the gold standard 1870 1913 abstract the gold standard gradually became an international monetary regime after 1870 similarly some nations in the european union are waiting to adopt the euro while others have joined immediately what explains the timing of exchange rate regime adoption to find out the international diffusion of the gold standard is analyzed duration analysis shows that network externalities operating through trade channels the desire to decrease borrowing costs on international capital markets and the level of development matter some evidence shows that the level of exchange rate volatility or inflationist agricultural interests did not matter for the timing of adoption

ex tridenti mercatus sea power and maritime trade in the age of globalization this paper tests an implication of the hypothesis that hegemons provide increased global stability and thus promote international commerce specifically we measure the influence of naval power projections on global trade during the latter 19th and early 20th centuries a time of relative peace and robust commercial activity we use archival data on the navies of britain france the united states and germany capturing longitudinal measures of ship deployment tonnage and ship personnel first we develop an empirical naval arms race model and demonstrate that the navies of britain and france in particular responded rigorously to each other we then use our estimates of naval power projected around the world by britain and france to measure their effects on bilateral trade in a panel data gravity model results indicate that while navies had some positive impact on their own nation s trade other nations trade suffered our results show that rather than bolster globalization the first global arms race damaged commercial interests and lowered trade potential around the world

intangible investment and ramsey capital taxation the standard analysis of optimal fiscal policy aggregates different types of assets into a unique capital good and all types of capital taxes into a unique capital tax this paper considers a disaggregated framework an economy with corporate and dividend taxes where firms invest in both tangible and intangible assets which can be expensed or sweat in our setup firms can always respond to changes in the timing of taxation we find that the optimal long run policy features zero corporate taxes and positive dividend taxes with labor and dividend taxes being identical moreover the initial capital levy is relatively small

optimal government policies in models with heterogeneous agents abstract in this paper we develop a new approach for finding optimal government policies in economies with heterogeneous agents using the calculus of variations we present three classes of equilibrium conditions from government s and individual agent s optimization problems 1 the first order conditions the government s lagrange euler equation and the individual agent s euler equation 2 the stationarity condition on the distribution function and 3 the aggregate market clearing conditions these conditions form a system of functional equations which we solve numerically the solution takes into account simultaneously the effect of the government policy on individual allocations the resulting optimal distribution of agents in the steady state and therefore equilibrium prices we illustrate the methodology on a ramsey problem with heterogeneous agents finding the optimal limiting tax on total income

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

a theory of political and economic cycles abstract we develop a theoretical framework in which political and economic cycles are jointly determined these cycles are driven by three political economy frictions policymakers are non benevolent they cannot commit to policies and they have private information about the tightness of the government budget and rents our first main result is that in the most favorable equilibrium to the households distortions to production emerge and never disappear even in the long run this result is driven by the interaction of limited commitment and private information on the side of the policymaker since in the absence of either friction there are no long run distortions to production our second result is that if the variance of private information is sufficiently large there is equilibrium turnover in the long run so that political cycles never disappear finally our model produces a long run distribution of taxes distortions and turnover where these all respond persistently to temporary economic shocks

sympathy for the diligent and the demand for workfare abstract we study the role of fairness concerns in the demand for redistribution through workfare in the first part of the paper we present new evidence from a survey we show that individuals are more generous towards poor people whom they perceive to be diligent workers relative to poor people whom they perceive to be non diligent a social preference that we label sympathy for the diligent this preference is much stronger than preferences regarding other characteristics of the poor such as race nationality and disability more important we show that subjects with higher sympathy for the diligent have a stronger preference for workfare programs in the second part of the paper we incorporate our empirical findings into a model of income redistribution we consider the case of a benevolent government with fairness concerns that prioritizes the well being of individuals who exert the most effort we characterize the optimal conditions under which the government introduces work requirements even if wasteful work requirements can be optimal because they allow for a better distinction between individuals who exert great effort and individuals who do not however if the government lacks commitment power the availability of screening through work requirements leads to a lower equilibrium effort and possibly a pareto dominated allocation

sequential equilibria in a ramsey tax model this paper presents a full characterization of the equilibrium value set of a ramsey tax model more generally it develops a dynamic programming method for a class of policy games between the government and a continuum of households by selectively incorporating euler conditions into a strategic dynamic programming framework we wed two technologies that are usually considered competing alternatives resulting in a substantial simplification of the problem

entry and exit decisions based on a discount factor approach abstract entry and exit decisions under price uncertainty are discussed by a discount factor approach to investment the approach makes it possible to express the value of the firm as a function of a set of trigger prices at which investment takes place and to determine the optimal policy by simple maximization starting with a standard entry exit model by dixit 1989 entry and exit decisions under uncertainty journal of political economy 97 3 620 638 the paper expands to construction and scrapping decisions investment lags diminishing production capacity and limits to the number of lay up periods economic implications are investigated using experimental data and empirical shipping data

optimal taxation of capital income in general equilibrium with infinite lives this paper analyzes the optimal tax on capital income in general equilibrium models of the second best agents have infinite lives and utility functions which are extensions from the koopmans form the population is heterogeneous the important property of the models is the equality between the social and the private discount rates in the long run i find that the optimal tax rate is zero in the long run for a special case of additively separable utility functions i then determine the tax rates along the dynamic path and conditions that are sufficient for the local stability of the steady state

factor shares and savings in endogenous growth in models of steady investment driven growth an individual s propensity to save depends on how much of his income is drawn from accumulated factors of production capital rather than from nonaccumulated factors when agents are heterogeneous in this respect growth oriented policies have distributional consequences and in the absence of lump sum redistribution their implementation faces political constraints if the median voter is capital poor relative to the economy s representative agent political interactions tend to slow down growth when policy acts on capital s income share and tend to accelerate it when investment subsidies are the policy instrument of choice copyright 1993 by american economic association

distributive politics and economic growth a crude distinction between economics and politics would be that economics is concerned with expanding the pie while politics is about distributing it in this paper we analyze the relationship between the two we focus on how an economy s initial configuration of resources shapes the political struggle for income and wealth distribution and how that in turn affects long run growth our main conclusion is that inequality is conducive to the adoption of growth retarding policies we derive this result from a simple political economy model of growth and present cross country evidence consistent with it the key feature of our model is that individuals differ in their relative factor endowments we distinguish between two types of factors an accumulated factor called capital and a nonaccumulated factor called labor growth is driven by the expansion of the capital stock which is in turn determined by individual saving decisions long run growth is endogenous as the aggregate production function is taken to be linearly homogeneous in capital and productive government services taken together the provision of government services is financed by a tax on capital because government services are productive a small tax on

flexibility premium of emissions permits abstract investments in abatement technology are often characterised by irreversibility and significant implementation lags whereas emissions permits can be traded at any time as such abatement and emissions permit trading systems are hardly perfect substitutes we formally study the flexibility of emissions permits and propose a unified framework to rationalise the impact of both investment divestment lags and irreversibility in relation to the price of emissions permits using option pricing concepts we reformulate the technology adoption problem in terms of the technology s characteristics irreversibility and implementation lags and offer a conceptual quantification of the flexibility premium of emissions permits

trade blocs trade flows and international conflict the relationship between foreign trade and political conflict has been a persistent source of controversy among scholars of international relations existing empirical studies of this topic have focused on the effects of trade flows on conflict but they have largely ignored the institutional context in which trade is conducted in this article we present some initial quantitative results pertaining to the influence on military disputes of preferential trading arrangements ptas a broad class of commercial institutions that includes free trade areas common markets and customs unions we argue that parties to the same pta are less prone to disputes than other states and that hostilities between pta members are less likely to occur as trade flows rise between them moreover we maintain that heightened commerce is more likely to inhibit conflict between states that belong to the same preferential grouping than between states that do not our results accord with this argument based on an analysis of the period since world war ii we find that trade flows have relatively little effect on the likelihood of disputes between states that do not participate in the same pta within ptas however there is a strong inverse relationship between commerce and conflict parties to such an arrangement are less likely to engage in hostilities than other states and the likelihood of a military dispute dips markedly as trade increases between them

capital taxation under political constraints this paper studies optimal dynamic tax policy under the threat of political reform a policy will be reformed ex post if a large enough coalition of citizens supports reform thus sustainable policies are those that will continue to attract enough political support in the future we find that optimal marginal capital taxes are either progressive or u shaped so that savings are subsidized for the poor and or the middle class but are taxed for the rich u shaped capital taxes always emerge when individuals political behavior is purely determined by economic motives

inequality and social discounting we explore steady state inequality in an intergenerational model with altruistically linked individuals who experience privately observed taste shocks when the welfare function depends only on the initial generation efficiency requires immiseration inequality grows without bound and everyone s consumption converges to zero we study other efficient allocations in which the welfare function values future generations directly placing a positive but vanishing weight on their welfare the social discount factor is then higher than the private one and for any such difference we find that consumption exhibits mean reversion and that a steady state cross sectional distribution for consumption and welfare exists with no one trapped at misery

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

supply constraints and housing market dynamics abstract although the volatility of house prices is often ascribed to demand side factors constraints on housing supply have important and little studied implications for housing dynamics i illustrate the strong relationship between the volatility of house prices and the regulation of new housing supply i then employ a dynamic structural model of housing investment to investigate the mechanisms underlying this relationship i find that supply constraints increase volatility through two channels first regulation lowers the elasticity of new housing supply by increasing lags in the permit process and adding to the cost of supplying new houses on the margin second geographic limitations on the area available for building houses such as steep slopes and water bodies lead to less investment on average relative to the size of the existing housing stock leaving less scope for the supply response to attenuate the effects of a demand shock my estimates and simulations confirm that regulation and geographic constraints play critical and complementary roles in decreasing the responsiveness of investment to demand shocks which in turn amplifies house price volatility

political economy of mechanisms we study the optimal mirrlees taxation problem in a dynamic economy in contrast to the standard approach where the taxation mechanism is operated by a benevolent planner with full commitment power we focus on economies in which policy decisions are made by self interested politicians who cannot commit to policies the society controls politicians using elections we show that the provision of incentives to politicians can be partly separated from redistribution across agents and that political economy constraints can be modeled as introducing additional aggregate distortions in the dynamic mirrlees problem we provide conditions under which the political economy distortions persist or disappear in the long run if the politicians are as patient as the agents the best sustainable mechanism leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear in contrast when politicians are less patient than the citizens positive aggregate labor and capital taxes remain even asymptotically we conclude by providing a brief comparison of centralized

elections and income redistribution this paper has analyzed a model of elections in which each candidate selects a reputation for the distribution of income that can be expected if he is elected the first result established that whenever there are three or more groups of voters and no single group has half or more of the voters if the candidates believe that the voters choices are determined solely by the candidates redistributional reputations then there is no electoral equilibrium the candidates expectations about the voters choices were then reformulated using a qualitative response model the next result established that this alternative model leads to the existence of electoral equilibria the remainder of the paper analyzed the nature of these equilibria for any given electorate among other things the results established that there is always a unique equilibrium provided a simple procedure for finding the precise location of this equilibrium and showed that this location implicitly maximizes the sum of the voters utility functions on the possible income distributions the penultimate sections provided some simple examples which illustrate the main results in the paper and a discussion of these results in terms of the politics of redistribution

time to build and investment the paper investigates the effect of the time to build technology on investment dynamics it explains the positive autocorrelation of investment by showing that investment is serially correlated once the time to build technology is taken into account the paper also shows that the time to build technology can explain a substantial portion of the variation in aggregate investment data using estimated marginal q the paper illustrates that investment responds asymmetrically to different levels of q a fact in favor of the irreversibility argument