CER-ETH Research Seminar, Summer Term 2006

• Monday, 5:15 pm to 7:00 pm (exceptions: June 14 and 28, 2006)
  ETH Zurich, Room ZUE G1 (Zürichbergstr. 18)

• Everyone who is interested is cordially invited!

• If you would like to receive our weekly invitation via e-mail, or if you have any other question, please send an e-mail to Karen Pittel.

Please note: The presentation of Richard Baldwin has been rescheduled from June 12 to June 26!

Didier Sornette: Finite-Time Singularities in Population, Economic and Financial Time Series: the End of the Growth Era?

Contrary to common belief, both the Earth human population as well as its economic output have grown faster than exponential for most of the known history and most strikingly in the two last centuries. Indeed, this accelerating growth is consistent with a spontaneous divergence at the same critical time 2052 ±10 and with the same fractal patterns. This can be convincingly explained by an interplay between population, capital and technology producing an "explosion" in the population and in the economic output, even if the individual dynamics do not. To illustrate the concept theoretically, we use the theoretical framework of Romer's and Kremer's models in a multivariate set-up of coupled nonlinear ordinary differential equations for the population, capital, R&D and technology.

This tremendous pace of growth has led to increasing worries about its sustainability as well as raising concerns that the human culture as a result may cause severe and irreversible damage to ecosystems, global weather systems, etc. On the other hand, the optimists expect that the innovative spirit of mankind will be able to solve such problems and the economic development of the World will continue as a succession of revolutions, e.g., the Internet, bio-technological and other yet unknown innovations replacing the agricultural, industrial, medical and information revolutions of the past. The existence of a spontaneous divergence around 2050 has the surprising consequence that even the optimistic view needs to be revised, since an acceleration of the growth rate contains endogenously its own limit in the form of a singularity, which can be interpreted as a transition to a qualitatively new behavior. Mankind may already have entered this transition phase along one of several possible paths leading to the new regime which can be one among several scenarios.

Ragnar Torvik: A Political Economy Theory of the Soft Budget Constraint

Why do soft budget constraints exist and persist? In this paper we argue that the prevalence of soft budget constraints can be best explained by the political desirability of softness. We develop a political economy model where politicians cannot commit to policies that are not ex post optimal. We show that because of the dynamic commitment problem inherent in the soft budget constraint, politicians can in essence commit to make transfers to entrepreneurs which otherwise they would not be able to do. This encourages such entrepreneurs to vote for them. Though the soft budget constraint may induce economic inefficiency, it may be politically rational because it influences the outcomes of elections. In consequence, even when information is complete, politicians may fund bad projects which they anticipate they will have to bail out in the future.

Wolfgang Buchholz: Fair Burden-Sharing in Cooperative Provision of Public Goods

Providing (global) public goods as climate change mitigation has become a major topic in international politics. To attain efficient solutions ooperation between states is required which in reality is hard to establish. But also in the "new" theory of public goods, that has evolved during the ast 20 years, a deeper concern for cooperative outcomes is lacking. The focus has been on non-cooperative behavior, and the main solution concept in the cooperative case still is the venerable Lindahl equilibrium. We therefore want to develop a general approach to fair cooperation and burden-sharing rules in the standard public-good model, which includes not only the Lindahl equilibrium but also other solution concepts as Moulin's egalitarian-equivalent solution. In this framework the effects of income changes and increased participation are analyzed, and the normative foundations of specific solution concept are discussed.

John C.V. Pezzey: Mechanisms for Abating Global Emissions under Uncertainty

We give theoretical, partial equilibrium comparisons of a tax with thresholds, tradable targets ('emissions trading' or ET), and non-tradable targets, as mechanisms to abate well-mixed ('global') emissions from many parties, under independent uncertainties in both future business-as-usual emissions and marginal abatement costs. All three mechanisms are revenue-neutral, and use flexible thresholds or targets indexed continuously to parties’ activity levels. We analyse both risk-neutral or risk-averse behaviour. Key theoretical results are that because of emissions uncertainty, there is no simple Weitzman (1974) rule for choosing between 'prices' (a tax) to 'quantities' (ET); under ET, marginal abatement cost uncertainty is a benefit, compared to certainty; and under risk aversion, any mechanism with more expected welfare also gives more expected abatement. We apply our theory to global greenhouse gas abatement in 2020, using an 18-region numerical simulation model with new uncertainty estimates. Key global, empirical results are that under either risk behaviour, a tax dominates ET, which hugely dominates non-tradable targets; and under risk aversion, an optimally indexed tax gives about 120% more welfare and 40% more abatement than unindexed ET, while optimally indexed ET achieves nearly half of these improvements.

Wolfgang Schade: How Important is Transport? Approaches and Estimates of Economic Impacts of Transport and Transport Policy of the EU

Policy makers often assume that additional benefits exist beyond those benefits measured by the state-of-the-art CBA approach applied to transport policies that is based on measuring dis-/benefits on transport networks. Hence, the UK government commissioned a study to the SACTRA Committee to find out about the size of potentially additional effects respectively the total indirect effects, which occur outside the transport system due to transport policies. The study used a stylized spatial computable general equilibrium (CGE) model to identify indirect effects and concluded that indirect effects could be negative or positive and that they would be small. Since, the discussion is still ongoing this paper presents an alternative approach to measure indirect effects of transport policies and to shed light on the question of the size of those indirect effects. Applying the integrated economy - transport - environment assessment model ASTRA the indirect effects of seleted European transprot policies are analysed and compared to their indirect effects. The conclusions drawn differ from SACTRA in that sense that much larger indirect effects of large-scale policies could be expected e.g. due to the consideration of dynamic mechanisms und fully-flechted transport policies.

Richard Baldwin: Trade and Growth with Heterogeneous Firms

This paper explores the impact of trade on growth when firms are heterogeneous. We find that greater openness produces anti-and pro-growth effects. The Melitz-model selection effects raises the expected cost of introducing a new variety and this tends to slow the rate of new-variety introduction and hence growth. The pro-growth effect stems from the impact that freer trade has on the marginal cost of innovating. The balance of the two effects is ambiguous with the sign depending upon the exact nature of the innovation technology and its connection to international trade in goods and ideas. We consider five special cases (these include the Grossman-Helpman, the Coe-Helpman and Rivera-Batiz-Romer models) two of which suggest that trade harms growth; the others predicting the opposite.

Alfred Greiner: Foreign Direct Investment Under International Competition: When Is It Optimal to Invest Abroad?

In this paper we analyze dynamic incentives of a firm to invest in production facilities in a less developed country with lower wage costs and lower productivity. Foreign investment induces that, due to technological spillovers, productivity of local firms in the foreign country increases. Firms from both regions compete on the same oligopolistic market. We show that there is one steady state with a positive stock of foreign direct investment in the less developed region and, in addition, there is a continuum of (neutrally stable) steady states where the firm never invests abroad. We analyze effects of variations of parameters on the steady state values, numerically study transitional dynamics and give a picture of the global dynamics. Finally, we analyze how the speed of technology transfer and the wage level in the home country affect total labor income earned in the home country.