CER-ETH Research Seminar, Spring Term 2021

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 contact Britz Volker.

Speakers

Geir Asheim

Title: Efficiency when future identities are unobservable: Can the Pareto principle be used to evaluate climate policies?

Abstract: Climate change is an externality since those who emit greenhouse gases do not pay the long-term negative consequences of their emissions. In view of the resulting inefficiency, it has been claimed that climate policies can be evaluated by the Pareto principle. However, climate policies lead to different identities of future people, implying that the Pareto principle is not applicable. Assuming that there are infinitely many future people whose identities are not observable, we show that Suppes-Sen dominance whereby ranked streams are compared plays an important role. Under weak additional assumptions we justify an efficiency definition where a feasible policy a is said to be efficient if there exists no alternative feasible policy b that Pareto dominates a for existing people and Suppes-Sen dominates a for future people, with at least one of the two being strict. We illustrate the consequences of this efficiency definition for policy choice.

Francesco Caselli

Title: Executive Pay Caps, Efficiency, and Inequality

Abstract: --not provided by the speaker--

Tim Boonen

Title: No-betting Pareto equilibria with rank-dependent utility

Abstract: In a pure-exchange economy with no aggregate uncertainty, we characterize in closed-form and in full generality Pareto-optimal allocations between two agents who maximize rank-dependent utilities (RDU). We then derive a necessary and sufficient condition for Pareto optima to be no-betting allocations (i.e., deterministic allocations or full insurance allocations). This condition depends only on the probability weighting functions of the two agents, and not on their (concave) utility functions. Hence with RDU preferences, it is the difference in probabilistic risk attitudes given common beliefs, rather than heterogeneity or ambiguity in beliefs, that is a driver of trade. As by-product of our analysis, we answer the question of when sunspots matter in this economy.

Martin Quaas

Title: Risk externalities and precaution: Theory and evidence

Abstract: We study a commons problem under uncertainty, where individual actions extert risk externalities by affecting the risks of future damage events for all. This applies to climate change, where the actions are the countries’ carbon dioxide emissions causing the threat of climate damage, as well as to the COVID-19 pandemic, where physical social contacts cause the risk of an infection with the coronavirus. We theoretically show that for risk- averse agents, an extra risk on the individual damage induces more precautionary actions in Nash equilibrium. Similarly, for prudent agents an extra risk in all states of the world induces more precautionary actions in Nash equilibrium. We show that small extra risks may increase welfare in Nash equilibrium and derive a condition on the relationship between actions and damage probability and the opportunity costs of precaution for this result to occur. We empirically study individual (financial) risk taking and (health-related) precautionary effort using data from an online panel experiment, in-cluding an incentivized portfolio investment task, at three points in time over the course of the COVID-19 pandemic with more than 5,000 participants, representative for the German population. Exploiting variation in the number of COVID-19 infections across time and space, our fixed effects estimation suggests that the local COVID-19 prevalence has a positive effect on health-related precautionary effort, and a negative effect on financial risk taking. We find that an increase in the local number of infected persons per 100,000 residents by 1 percent decreases investments by 0.022 percent on average. Our results point towards important roles of background health risks for financial risk taking, and of individual risk attitudes for the welfare loss due to risk externalities.

Jean-Charles Rochet

Title: Taxing Financial Transactions

Abstract:  Financial Transactions Taxes (FTT) are usually justified as a way to limit « excessive » speculation and reduce volatility on imperfect financial markets. We adopt another approach by assuming instead that financial markets are perfect but that the tax system is imperfect. In such a context, we show that a FTT generically improves the allocation of resources by rebalancing the tax system. The intuition is that richer people not only save more, but they also trade more on secondary financial markets. Taxing both savings and transactions is more efficient than taxing only one of them. If the government has a fixed budget, implementing a FTT allows to reduce income taxes and stimulate savings. However, the government might use the FTT as a way to increase its budget, which may be detrimental to the richest taxpayers.

Elettra Agliardi

Title: A structural model for corporate green bonds

Abstract: A novel corporate structural model is developed to understand the determinants of green bond prices and the so-called ‘greenium’, that is, the premium that bondholders are willing to pay to invest in green securities rather than conventional ones. The presence of a greenium makes green bonds relatively cheap vehicles to fund environmentally sustainable projects and thus contributes to the shift to a green economy. Yet, evidence on the greenium is mixed and the determinants of green bond yields are not fully understood. In this model two sources of uncertainty are introduced, that is, of cash flows of the firm and of the effectiveness of the financed green projects. The adoption of two risk factors brings in some mathematical complexity but allows for a better modelling of the multi-facet nature of these financial instruments. Our model is rich enough to generate both a positive and a negative premium, as both have been detected in the empirical literature. Thus, we shed light on possible heterogeneity concerning the existence of a greenium in the green bond universe. Moreover, we show how green bonds affect the issuer’s creditworthiness and study their impact on investors’ portfolio allocation.

Tore Ellingsen

Title: TBA

Abstract: --not provided by the speaker--

Ralph Winkler

Title: Rational Consumer Choice? The Case of Household Food Waste

Abstract: Recent advances in behaviorial economics raise serious doubts about the rationality of consumers' behaviour in consumption decisions. Food consumption looks like a prime example: food purchased by consumers that ultimately goes to waste increases rapidly in developed countries and amounts to sizeable monetary losses. Yet, we argue that observed food waste patterns may be an efficient by-product of food consumption. To this end, we first develop a simple household model of food and non-food consumption, in which food waste occurs due to the interplay of three characteristics: (i) households experience satiation in food consumption and can discard any excess food at no cost. (ii) At the time of food purchase, they are uncertain about their satiation point. (iii) They can invest costly effort into an information technology to reduce this uncertainty. In particular, our model predicts that expected food waste increases in the opportunity cost of effort. Second, we test our theoretical model empirically using 2016 food consumption data of approximately 60,700 U.S. citizens obtained from the Nielsen Homescan database. In particular, we analyze the relationship between shopping frequency and purchased food quantities. Employing an instrumental variable approach to circumvent possible issues of endogeneity, we find that a marginal increase in the yearly number of grocery shopping trips reduces the quantity of food purchased, which is in line with our theory of rational food waste and particularly contradicts behavioral explanations of food waste like impulsive shopping. Our findings have important consequences for the design of policies aimed at reducing consumer food waste.

Huseyin Yildirim

Title: TBA

Abstract: --not provided by the speaker--