CER-ETH Research Seminar, Fall Term 2010

Everyone who is interested is cordially invited!

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Speakers

Michael Hoel

In discussions of climate policy it is often argued that a correct pricing of carbon emissions must be supplemented by policies encouraging the development of new, low-carbon technologies. A justi…cation often given for this view is that there are various market failures associated with the development of new technology. While this is no doubt true, it is not obvious that market failures associated with environmental R&D are more severe than market failures related to R&D in other sectors of the economy.
We analyze the incentives for environmental R&D versus other R&D. This is done in the context of a model with a competitive downstream sector that either produces an ordinary market good or produces "abatement". There is also an upstream sector consisting of one large innovator that sells its technology to the downstream sector. The larger the equilibrium revenue is for the innovator for a given successful development of a new technology, the larger are the R&D incentives.
For a regular market good, the price of the good is determined in the market after the technology has been developed and sold to the downstream sector. For abatement (i.e. emission reductions) the price is set by the government in the form of an emission tax. If the optimal emission tax rate is equal to the Pigovian rate, the equilibrium revenue to the innovator is the same as it is in the case of an ordinary market good, given the same cost function and the same social bene…t function for the downstream sector. However, it may be optimal for the regulator to set the emission tax at a rate that is different from the Pigovian rate. If the optimal tax rate is higher than the Pigovian rate, R&D incentives are higher for environmental R&D than for the corresponding case of an ordinary market good, and vise verse if the optimal tax rate is lower than the Pigovian rate.
Whether the optimal tax rate is higher or lower than the Pigovian rate depends on the timing of the tax setting and the pricing of the new technology. In particular, we show that if the emission tax is set after the innovator has set its price for the new technology, the optimal tax rate will be higher than (or equal to as a limiting case) the Pigovian rate. The reason for this
result is that the private marginal abatement cost is higher than the social marginal abatement cost, due to the transfer to the innovator being higher the higher is the abatement. On the other hand, if the tax is set prior to the innovator’s pricing decision, the regulator may wish to set a low emission tax in order to keep the price of the new technology low, and thereby encourage broad use of the new technology.

Leo Kaas

The introduction of firm-size into labor search models raises the question how wages are set when average and marginal product differ. We propose an alternative to the existing bargaining models by allowing firms to compete for labor. Fast growing firms do not only post more vacancies, they also post higher wages to attract more workers. Therefore, they fill each vacancy with higher probability, which is consistent with empirical regularities. Qualitatively the model also captures most other empirical regularities about firm size, job creation, and pay. In contrast to existing bargaining models that always induce inefficiencies on the intensive hiring margin, these factual implications of our model for firm dynamics are socially optimal. Social ef-
ficiency obtains on extensive and intensive margins of job creation and job destruction, both with idiosyncratic and with aggregate productivity shocks. Moreover, the planner solution allows for a tractable characterization which is useful for computational applications.

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Joel Watson

This paper develops the concept of contractual equilibrium for repeated games with transferable utility, whereby the players negotiate cooperatively over their continuation
strategies at the start of each period. Players may disagree in the negotiation phase, and continuation play may be suboptimal under disagreement. Under agreement, play is jointly optimal in the continuation game, and the players split the surplus (according to fi xed bargaining weights) relative to what they would have attained under disagreement. Contractual equilibrium outcomes also arise from subgame perfect equilibria in a class of models with noncooperative bargaining, under some assumptions on the endogenous meaning of cheap-talk messages. Contractual equilibria exist for all discount factors, and for any given discount factor all contractual equilibria attain the same aggregate utility. Patient players attain efficiency under simple sufficient conditions; necessary and sufficient conditions are also provided. The allocation of bargaining power can dramatically affect aggregate utility. The theory extends naturally to games with more than two players, imperfect public monitoring, and heterogeneous discount factors.

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Andreas Schabert

We analyze optimal monetary policy in a sticky price model where the central bank supplies money outright via asset purchases and lends money temporarily against collateral. The terms of central bank lending affect rationing of money and impact on macroeconomic aggregates. The central bank can set the policy rate and its in‡ation target in a way that implements the …first best long-run allocation, which is impossible if money were supplied in a lump-sum way (as commonly assumed). Efficient central bank lending further increases gains from macroeconomic stabilization beyond pure interest rate policy. This requires departing from a "Treasuries-only" regime.

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Antoine Bommier

We consider a formal approach to comparative risk aversion and applies it to intertemporal choice models. This allows us to ask whether standard classes of utility functions, such as those inspired by Kihlstrom and Mirman, Selden, Epstein and Zin and Quiggin are well-ordered in terms of risk aversion. Moreover, opting for this model-free approach allows us to establish new general results on the impact of risk aversion on savings behaviors. In particular, we show that risk aversion enhances precautionary savings, clarifying the link that exists between the notions of prudence and risk aversion.

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Monique Ebell

This paper documents a new set of stylized facts on the changing cyclicality of employment and participation rates over the latter part of the 20th century. I find that a) employment has become more procyclical (accounting for the declining cyclicality of labor productivity) and b) participation has gone from being acyclical until 1974 to being quite strongly procyclical from 1975. When broken down by gender, the bulk of the changes are due to increases in the cyclicality of women's employment and participation. In addition, women's employment and participation rates increased dramatically over the same period. A model of participation with an explicit household structure is presented and calibrated to US data, in order to explore whether any single factor can account for both the increase in women's participation and its increased cyclicality. I find that a decrease in the cost to having a second earner enter the labor market can achieve both, while other factors such as an increase in the relative productivity of women or changes in the disutility to labor cannot.

Katheline Schubert

Carbon tax and OPEC’s rents under a ceiling constraint

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