new publication: The consequences of a one-sided externality in a dynamic, two-agent framework

Just before the summer break I get this nice news in my mailbox:

Dear Prof. Ingmar Schumacher,

I am pleased to inform you that your paper has been accepted for publication in the European Journal of Operational Research.

So what is this paper about? It is a theoretical contribution together with Professor Georg Müller-Fürstenberger from the University of Trier on how inter-regional externalities can become overwhelmingly crucial if one considers a dynamic setting.

This is the abstract:

We develop a dynamic model where all agents contribute to a global externality, but only those in a specific region suffer from it. We model this in a dynamic setting via a two agent, non-cooperative overlapping generations model and analyze the consequences for economic growth and intertemporal choices. We find that multiple steady states may result from this asymmetry. In particular, if the agent who is affected by the externality has to spent a large share of his income to offset it,  then he may be stuck in an environmental poverty trap. We provide conditions for the existence of, and local convergence to, the equilibria, as well as a condition for the global convergence to the poverty trap.

While, in addition to maintenance expenditures, externalities tend to be addressed via studying taxes, investment in R&D or alike, we focus on capital market integration. Specifically, agents in the affected region can open up their capital market to enable capital inflows. We investigate whether an open capital market improves or worsens their welfare. While we do find that capital market integration eliminates the environmental poverty trap, we show that capital market integration is not always in both agents’ interest. In particular, we provide conditions under which the agents prefer autarkic or integrated capital markets.

You can download the latest version of our paper HERE.

And here is some information on my co-author: Georg Müller-Fürstenberger is a Professor at the University of Trier and currently its vice president. He received his Ph.D. from the University of Heidelberg, then worked at the University of Bern and since 2006 he has been a professor at the University of Trier. He works on environmental, regional and computational economics, and has, among many others, published in journals such as the Journal of Economic Dynamics and Control, Ecological Economics, and Resource and Energy Economics. In his spare time he enjoys mountainbiking and trains hard to keep up with the younger generation – though as we all know, this is just a race against time…

 

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