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new working paper

I have a new working paper, co-authored with Guy Meunier from INRA in Paris, with the long but clear title “The importance of considering optimal government policy when social norms matter for the private provision of public goods“. In the social norms literature that is concerned with the private provision of public goods we always see some arguments for policy interventions. However, these policy interventions are introduced as an exogenous tool void of any welfare analysis. As a result of these exogenous policies the literature focused on whether these policies crowd out or crowd in private contributions. Much of the experimental literature has thus focused also on crowding in our crowding out. Even the fashionable topic of nudging is concerned with this. However, it should be clear that the usefulness of a policy should not be measured based on whether or not a policy crowds in or out private contributions. Instead, the yardstick should be a question of optimality – in some cases a policy maker may want to crowd in contributions, in others (s)he may crowd out contributions. As long as we know that the policy choice is an optimal one, then we frankly shouldn’t care whether or not there is crowding in or out! This is the starting point for our paper.

In the paper we develop quite a few results, but one of the most important ones is that an optimal policy not necessarily induces the full contribution equilibrium, even if that full contribution equilibrium is otherwise welfare maximizing. Thus, we show that the original argument used in the literature, namely that a policy should induce the full contribution equilibrium, is not correct once one takes an optimal policy into account. This, obviously, has many implications for policy interventions when social norms and public goods interact. We also discuss social traps, government debt, path dependency, multiplicity of equilibria and the importance of parameter stability.

The abstract:

Social pressure can help overcome the free rider problem associated with public good provision. In the social norms literature concerned with the private provision of public goods there seems to be an implicit belief that it is best to have all agents adhere to the `good’ social norm. We challenge this view and study optimal government policy in a reference model (Rege, 2004) of public good provision and social approval in a dynamic setting. We discuss the problem with the standard crowding in and out argument and analyze the relationship with Pigouvian taxes. We show that even if complete adherence to the social norm maximizes social welfare it is by no means necessarily optimal to push society towards it. We stress the different roles of the social externality and the public good problem. We discuss the role of the cost of public funds and show how it can create path dependency, multiplicity of optimal equilibria and optimal paths, and discuss the role of parameter instability. We argue that extreme care must be taken when formulating policies and subsequent results will fully depend on this formulation.

Paper link: “The importance of considering optimal government policy when social norms matter for the private provision of public goods

Enjoy reading the paper, and comments are obviously warmly welcome!

 

Some information on my co-author: Guy Meunier is a Senior Research Fellow at the French Agricultural Research Institute (INRA), and belongs to the Food and Social Sciences Unit (ALISS). He is an Associated Researcher at the Department of Economics of the Ecole Polytechnique, Paris, and a member of the steering committee of the Chair Energy & Prosperity. His articles have been published, among many others, in the Journal of Public Economic Theory, Journal of Environmental Economics and Management, Resource and Energy Economics, and the Review of Industrial Organization.

 

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Together with a co-author of mine, Martin Henseler from the Universite du Havre, France, I have a new working paper entitled “The impact of temperature on production factors”. We believe that the results significantly update previous studies on the impact of climatic variables on production factors and GDP growth and help policy makers to more clearly understand which impacts from climatic changes are likely to matter most in the future. Furthermore, these results should help to more carefully calibrate the damage functions in integrated assessment models.

Here is the abstract:

In a recent econometric study Burke et al. (2015) find that temperature affects economic growth non-linearly. We extend their analysis by investigating the influence of temperature on the main components of production, namely total factor productivity, capital stock and employment. Our panel dataset includes observations on 103 countries for the period 1961-2010. We confirm Burke et al. (2015) assumption that the main impacts of temperature arise in total factor productivity, which is significantly negatively affected for high levels of temperature. Neither capital nor employment seem to be affected by temperature. However, we find that temperature impacts rich and poor differently, with the poor being significantly more strongly impacted for higher temperature levels. These results hold across all components of production. We find these results to be robust across different cutoff points dividing the rich and poor samples, continue to hold if we use temperature anomaly instead of temperature, and also apply for further robustness exercises. The findings provide empirical evidence for negative impacts of temperature on poor countries and support the political and scientific discussions of mitigation policies and climate change impacts.

Here is the link to the paper

I have a new working paper which is joint work with Fabien Prieur (see further information below) who just accepted a professor position at the University of Nanterre in Paris, France. Our paper is entitled “[t]he role of conflict for optimal climate and immigration policy”, and we show the following:

In this article we investigate the role that internal and external conflict plays for optimal climate and immigration policy. Reviewing the empirical literature, we put forward five theses regarding the link between climate change, migration, and conflict. Based on these theses, we then develop a theoretical model in which we take the perspective of the North who unilaterally chooses the number of immigrants from a pool of potential migrants that is endogenously determined by the extent of climate change. Accepting these migrants allows increases in local production which not only increases climate change but also gives rise to internal conflicts. In addition, those potential migrants that want to move due to climate change but that are not allowed to immigrate may induce external conflict. While we show that the external and internal conflict play a significant yet decisively different role, it is the co-existence of both conflicts that makes policy making difficult. Considering only one conflict induces significant immigration but no mitigation. Allowing for both types of conflict, then depending on parameters, either a steady state without immigration but with mitigation will be optimal, or a steady state with a larger number of immigrants but less mitigation. Furthermore, we find the possibility of Skiba points, signaling that optimal policy depends on initial conditions, too. During transition we examine the substitutability and complementarity between the mitigation and immigration policy.

You can find the full paper HERE. In a post during the next days I hope to write a more policy-oriented view of this topic.

 

Some information on my co-author:

Fabien Prieur held a professor position at the University of Montpellier but has now accepted a professor position at the University of Nanterre. Fabien also holds a visiting position at Toulouse School of Economics. He is a researcher in environmental and resource economics and has published, among others, in journals such as the European Economic Review, Economic Theory,  and Journal of Economic Dynamics and Control. If you google his images then he is the guy with the beard and glasses, not the one with the gold chain and the beers…

I have a new working paper which clearly shows that a policy maker who evaluates mankind’s well-being would fully favour mitigation over adaptation. In fact, the result is that a policy maker should not invest in adaptation, because this may reduce global well-being significantly.  If you want to know more, please do read on.

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THIS is the currently latest version of the previously entitled paper `An Aggregation Dilemma’. I thank especially Reyer Gerlagh, Humberto Llavador and Gwenaël Piaser for extensive discussions and comments.

Abstract
The results in this paper show that a policy maker who ignores regional data and instead relies on aggregated integrated assessment models will strongly underestimate the carbon price and thus the required climate policy. Using a stylized theoretical model we show that, under the mild and widely-accepted assumptions of asymmetric climate change impacts and declining marginal utility, an Aggregation Dilemma may arise that dwarfs most other policy-relevant aspects in the  climate change cost-benefit analysis. Estimates based on the RICE model (Nordhaus and Boyer 2000) suggest that aggregation leads to around 26% higher total world emissions than those from a regional model. The backstop energy use would be zero in aggregated versions of the model, while it is roughly 1.3% of Gross World Product in the regionally-disaggregated models.
Though the policy recommendations from fully aggregated models like the DICE model are always used as a benchmark for policy making, the results here suggest that this should be done with the reservations raised by the Aggregation Dilemma in mind.

For anyone interested, please feel free to comment.

I am currently working on a project on aggregation issues in integrated assessment models. I noticed that there is what I call an Aggregation Dilemma in these models which can have sizable impacts on climate policy. You can find a preliminary version of the paper HERE.

I would be very happy for comments and discussions. Please also disseminate this paper to interested co-authors.

At the moment I am extending this work to country-level data, so watch out for more news soon.

Abstract:

The results in this paper show that the level of aggregation used in a social welfare function matters significantly for policy analysis. Using climate change as an example, it is shown that, under the mild and widely-accepted assumptions of asymmetric climate change impacts and declining marginal utility, an aggregation dilemma may arise that dwarfs most other policy-relevant aspects in the  climate change cost-benefit analysis. Estimates based on the RICE-99 model (Nordhaus and Boyer, 2000) suggest that aggregation leads to around 26% higher total world emissions than those from a regional model. The backstop energy use would be zero in the model which aggregates consumption in utility, while it would be 1.3% of Gross World Product in a regionally-disaggregated version. In general we observe that richer countries will be required to undertake stronger efforts toward climate policy based on the aggregated utility social welfare function and compared to both the aggregated utility function with Negishi weights and the aggregated consumption function. We propose criteria that may aid in deciding on the level of aggregation one might wish to choose depending on both positive and normative criteria. Though the policy recommendations from fully aggregated models like the DICE model are always used as a benchmark for policy making, the results here suggest that this should be done with the reservations raised by the Aggregation Dilemma in mind.

Thank you for your interest!

In this new working paper I take a shot at trying to understand how agents with optimistic beliefs about environmental disasters/costs interact with agents holding pessimistic beliefs, if those two groups of agents need to decide about the optimal level of prevention expenditure. I analyze this in a static model, in a dynamic one, but also empirically. You can download the paper HERE. Please comment and give thoughts! Thanks!!

Here is the Abstract:

We study how beliefs affect individuals’ willingness to undertake  prevention  expenditure through a  two-type, N-person  public good game and test several results empirically. We show analytically that pessimistic agents will invest more in prevention expenditure than optimists. We should how pessimistic beliefs lead to a `double deprivation’ and discuss potential issues and remedies. The more optimistic the society the lower will be its total green expenditure. We also demonstrate how small differences in beliefs may induce substantial differences in type-related prevention expenditure. The more atomistic agents are the less they will contribute to the public good.

We then use a large international survey to study determinants of prevention expenditure. We proxy beliefs through three variables, namely science optimism, eco optimism and feelings of atomism. For each variable we find, as predicted by the theoretical model, a significant relationship with the willingness to undertake prevention expenditure. However, environmental education shapes these relationships. While environmental education does not affect the relationship between eco optimism and prevention expenditure, it leads to a stronger relationship between both science optimists, and those who feel atomistic, and prevention expenditure.

Finally, we develop a dynamic game with endogenous beliefs based on the static model and discuss the main differences in the optimal choices of the agents. We find that pessimistic agents have a higher prevention expenditure compared to the static case since they take the endogenous feedback of the prevention expenditure on their beliefs into account.

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