CER-ETH Research Seminar, Spring 2017

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 Christian Waibel.

Speakers

Guido Tabellini

This paper studies how voters' selective ignorance interacts with policy design by political candidates. Small groups and voters with extreme preferences are more influential than under full information, divisive issues attract most attention and public goods are underfunded. Rational inattention can also explain the role of parties as labels, why competing candidates do not always converge on the same policies, why efficient reforms are more likely in recessions and how the poor are politically empowered by welfare programs. This is important because if policy distortions are driven by inattention, then some of them can be mitigated at relatively small costs.

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Fabrizio Mazzonna

This study uses a spatial regression discontinuity design to identify the effects of the misalignment between social and biological time resulting from the conflict between social constructs such as time zones and work schedules and the timing of natural light which affects our physiological processes. Exploiting the discontinuity in the timing of natural light at a time-zone boundary, we find that an extra hour of natural light in the evening reduces sleep duration by an average of 19 minutes and increases the likelihood of reporting insufficient sleep. Natural light affects individual bedtime, but social schedules are not responsive to social schedules. Using data drawn from multiple sources, we find that the timing of natural light has significant effects on health outcomes (e.g., obesity, diabetes, certain types of cancer) and economic performance (e.g., per capita wages). We provide an estimate of the productivity losses associated with these effects.

Bard Harstad

We analyze a repeated game in which countries are polluting and investing in technologies. While folk theorems point out that the rst best can be sustained as a subgame-perfect equilibrium when the players are suciently patient, we de- rive the second-best equilibrium when they are not. This equilibrium is distorted in that countries over-invest in technologies that are "green" (i.e., strategic sub-stitutes for polluting) but under-invest in adaptation and "brown" technologies (i.e., strategic complements to polluting). Particularly countries that are small or benefit little from cooperation will be required to invest in this way. With uncer-
tainty, such strategic investments reduce the need for a long, costly punishment phase and the probability that it will be triggered. The framework is consistent with the evolution from the 1997 Kyoto Protocol to the 2015 Paris Agreement.

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Christian Gollier

When a policy is evaluated, the rate at which future costs and benefits should be discounted depends upon their maturity and risk profile. When the shocks to the growth rate of consumption per capita are persistent, it is socially desirable to use a decreasing term structure of risk-free discount rates, and an increasing term structure of risk premia. We characterize these term structures when the representative agent has Epstein-Zin-Weil preferences and when log consumption follows an AR(1) process. We calibrate the model for 248 countries and economic zones of the World Bank database. We show that the efficient evaluation rules of long investment projects are very heterogeneous across countries. Using standard estimations of the preference parameters, the country-average 1-year and 20-year risk-free discount rates −1.42% and −3.27%. The 1-year and 20-year aggregate risk premia are respectively 4.21% and 7.12%. This study stresses both the necessity to use country-specific discount rates and the importance of estimating the risk profile of long-dated investment projects.

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Pierre Picard

This paper analyzes the optimal insurance for low probability - high severity accidents, such as nuclear catastrophes, both from theoretical and applied standpoints. We show that the risk premium of such catastrophic events may be a non-negligible proportion of individuals’ wealth when the index of absolute risk aversion is sufficiently large in the accident state, and we characterize the optimal asymptotic insurance coverage when the probability of the accident tends to zero. In the case of the limited liability of an industrial firm that may cause large scale damages, the limit corporate insurance contract corresponds to a straight deductible indemnification rule, in which victims are ranked according to the severity of their losses. As an application of these general principles, we consider the optimal corporate liability insurance for nuclear risk, in a setting where the risk is transferred to financial markets through catastrophe bonds. A model calibrated with French data allows us to estimate the optimal liability upper limit of a nuclear energy producer. This leads us to the conclusion that the upper limit adopted in 2004 through the revision of the Paris Convention is probably lower than the socially optimal level.

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Rick van der Ploeg

We use a macro DSGE model with AK growth, energy use and costs of global warming to derive analytically a simple rule for the optimal price of carbon. We show the effects of uncertainty in the rate of economic growth, the carbon stock, the climate sensitivity and damages, and highlight the effects of aversion to risk, aversion to intertemporal fluctuations, and climate betas. We allow for skewness and mean reversion in the climate sensitivity and damage coefficients, and show how our simple rule is affected by the convexity of damages. We calibrate the various types of economic and climate uncertainties and account for the impact of each on them on the optimal price of carbon. Finally, we stress that our method of perturbations and separating time scales does not require the use of Monte Carlo simulations and gives explicit insights into the key determinants of the optimal carbon price under uncertainty.