Research Seminar, Winter Term 2005/2006

ETH Zurich
Winter Term 2005/2006

Monday, 5:15 pm to 7:00 pm
ETH Zurich, Room ZUE G 1 (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.

 

Luca Deidda: "Banks, Financial Markets and Growth"

We analyze the interaction between bank and market finance in a model where bankers gather information through monitoring and screening. We show that, if a market is established characterized by a disclosure law such that entrepreneurs wishing to raise market finance can credibly disclose their sources of financing, this might undermine bankers' incentive to screen, even when screening is efficient. Correspondingly, other things being equal, the change from a bank-based system to one in which market-finance and bank-finance coexist might have an adverse affect on economic growth. Consistent with this result, our empirical findings suggest that, although both bank and stock market development have a positive effect on growth, the growth impact of bank development is reduced by the development of the stock market.

Ralph Winkler: "Now or never: Environmental protection under hyperbolic discounting"

In this paper I extend the well known result that hyperbolically discounting agents tend to postpone costs into the future. In a simple model I show that without mandatory commitment, no investment in environmental protection is undertaken over the whole time horizon, no matter whether the decision makers are naive or sophisticated, although investment seemed optimal from an ex ante point of view. This result questions the application of hyperbolic discounting in cost-benefit analysis and gives rise to concern as it is consistent with unsatisfactory policy performance in solving long-term environmental problems.

Adriaan van Zon: General Purpose Technologies in a Multi-Level Love-of-Variety Production Function Setting with Decreasing Returns to Variety

GPTs embody a groundbreaking idea in an ensemble of individual components. That idea is often the result of basic research. GPTs generally co-exist, i.e. the newest GPT does not necessarily replace an older one. Their co-existence is a direct indication that GPTs complement each other to some extent, either in generating more consumer utility directly, or in enabling a more productive use of available resources. Their co-existence also implies that no GPT can become so efficient in generating consumer utility that it drives out other GPTs completely.
We try to model these “stylised GPT features” by combining the Ethier (1982) Love-of-Variety production structure (also present in the Romer (1990) model) with the R&D production structure of the Aghion and Howitt (1992) model. We generalise the Ethier production function used in Romer (1990) in several ways. First, we allow for a multi-level nesting of the overall production structure. At the lowest level of aggregation, individual intermediates are re-interpreted as the components of a GPT. We break the symmetry between intermediates present in the Romer (1990) model by assuming that the most productive components are invented first. Expanding a GPT by inventing still further components then runs into decreasing returns to variety and a slowdown of growth, but also to reduced profit incentives regarding a further expansion of the GPT under consideration. The latter increases the relative profitability of basic research on the first component of a new GPT, and the increased level of basic R&D raises the probability that (the first component of) a new GPT will actually arrive. The highest level of aggregation combines GPTs into the ‘macro-economic’ production structure. Further generalisations are made with respect to the various elasticities of substitution between components within individual GPTs as well as between GPTs.
In this setting, growth is completely endogenous and it will follow a cyclical pattern, where upturns in the cycle are initiated by endogenously arriving GPTs and slowdowns of growth are due to the expansion of GPTs that run into decreasing returns to expansion. Using this set-up, we are able to describe the different roles of basic and applied R&D in generating growth, as well as their interplay resulting in cyclical growth. We try to find R&D policies that may promote growth on the one hand, and mitigate the amplitude of the corresponding growth cycles on the other.

Till Requate: Subsidies for Wind Power to Surf Down the Learning Curve?

We develop a model with two types of competing firms in the electricity market, a fossil fuel utility producing emission and clean wind tubine operators. We account for the vertical structure of the wind sector by introducing wind turbine producers engaged in learning by doing and selling their turbines to the operators. First we look for the instruments which implement first best allocations in a decentralized economy. Second, we consider the case where the regulator is not able to charge optimal emission taxes but is able to subsidize electricity output generated by wind power. We derive second best optimal subsidies and their implications on prices, output, the number of firms and environmental damage. A main result is that in the case of purely private learning second best optimal subsidies should only account for the environmental damage but are not necessary to spur learning.

Rüdiger Pethig: Optimal pest control in agriculture

Based on economic methodology we model an ecosystem with two species in predator-prey relationship: mice feed on grain and grain feeds on a resource. With optimizing behaviour of individual organisms a short-run ecosystem equilibrium is defined and characterized that depends on the farmer’s use of fertilizer and on the mice population which, in turn, is affected by pesticides. In that way, a microfounded agricultural production function is derived. Linking a sequence of short-run ecosystem equilibria yields the growth function of the mice population which is thus derived rather than assumed. In each period the farmer harvests all grain in excess of some given amount of seed. If she maximizes her present-value profits, optimal farming is shown to depend on the prices of pesticide and grain. It is either optimal to use no pesticide or a moderate amount of pesticide or to apply a chattering control. Pest eradication is never optimal. On the other hand, if the farmer takes into account steady state mice populations only, it may be optimal to eradicate mice or to use no or a moderate amount of pesticide depending on prices as well as on the shape of the grain production function which is determined by micro parameters of grain reproduction.

Claudia Kemfert: German Energy Policy for Competitiveness and Sustainability – Challenges and Opportunities

Die Energiepolitik nimmt in Deutschland eine zentrale Rolle ein. Im Zuge des politischen Umstrukturierungsprozesses bekommt die Energiepolitik aus zwei wesentlichen Gründen eine Schlüsselfunktion: in der Stromerzeugung stehen bis zum Jahre 2020 aus Altersgründen umfangreiche Neuinvestitionen an.. Zudem spielt der Wettbewerb sowohl auf dem Strom- als auch auf dem Gasmarkt eine entscheidende Rolle. Darum sind heutige energiepolitische Entscheidungen richtungsweisend: Der politische Instrumentenmix muss das Zieldreieck Versorgungssicherheit, Wettbewerbsfähigkeit und Umweltverträglichkeit im Auge haben. Um dies zu erreichen, müssen heute konkrete und verbindliche Emissionsminderungsziele vorgeschrieben werden, zudem müssen die erneuerbaren Energien weiterhin gefördert werden. Eine Verlängerung der Laufzeiten der Atomkraftwerke um weitere 10 Jahre kann die notwendige Zeit geben, erneuerbare Energien aber auch eine umweltschonende Kohleverstromung (CCS) wettbewerbsfähig zu machen. Jedoch müssen die erneuerbaren Energien im Rahmen des EEG weiterhin gefördert werden. Die CCS Technologie muss weiter erforscht werden. Hierzu sollten die Kohlesubventionen in die Erforschung der CCS Technologie fließen.

German energy policy is crucial. It is so important not only because of the political restructuring process in Germany but especially because the German electricity production sector faces the challenge of replacing old power plants and because the gas sector needs competition. In order to achieve long-term sustainable development, a policy instrument mix
that focuses on long-term goals is crucial. German energy policy must increase competition between energy companies but also aims to give substantial incentives for secure and environment-friendly energy production. To reach these goals, concrete emissions reduction targets and promotion of renewable energy are necessary. Extending the lifetime of nuclear power plants could provide the necessary time to make innovative and climate-friendly technologies competitive.