CONSISTENCY AND OPTIMALITY IN A DYNAMIC GAME OF POLLUTION CONTROL I: COMPETITION

I model the interaction between a regulator and polluting firms as a Stackelberg differential game in which the regulator leads. The firms create pollution, which results in a stock externality. I analyze the intertemporal effects of alternate pollution control measures in a competitive industry. The principal issue here concerns the dynamic inconsistency of the optimal solution. Inter alia, I compare the steady state levels of pollution under optimal and under time consistent policies. Forthcoming in Environmental and Resource Economicsenvironmental, regulation, tax, dynamic, game, Environmental Economics and Policy, Q25, H32, D62,

Education, Redistribution, and the Threat of Brain Drain

This paper analyzes the relationship between brain drain, human capital accumulation and individual net incomes in the presence of a redistributional tax policy, credit market constraints, administrative costs of tax collection, and lack of government commitment. We characterize how decreasing migration costs for skilled workers affect the time-consistent policies of a government that wants to shift resources from skilled to unskilled workers. In our main result we show that a decline in migration costs is Pareto improving when migration costs are high, but have ambiguous effects when these costs are low. Moreover, mobility costs and human capital accumulation are positively correlated.

Trade policies, time consistency, quality reversals and exit in vertically integrated industries.

The impact of strategic trade policies, such as import tariffs and domestic output subsidies, is studied in a vertically differentiated duopoly. Firms first choose quality and then compete in quantities or prices in the home market. If the government is unable to commit to a policy the domestic firm then chooses its quality strategically in order to alter the market structure in its favor. Time consistent subsidies are always positive and result in a domestic monopoly as the foreign firm exits the market. Time consistent tariffs are also positive and ensure that the domestic firm always produces the high quality good. Commitment to a subsidy results in greater domestic welfare than under non-commital. Except for the case when, under price competition and the domestic firm producing the low quality good under free trade, non-commital under tariffs by the domestic government is welfare improving.Vertical differentiation; Time consistent policies; Commitment; Import tariffs; Output subsidies; Quality reversals; Exit;

Demographic transition, intergenerational transfers and the increase in public and national debts

This paper investigates time consistent policies and reforms of intergenerational transfers. If the weight the Government gives to the living elderly is low enough, successive Governments will implement policies with equitable results across generations, even if their social welfare function is not equitable with the unborn. The ratio of Government public debt to GDP will not change over time, and the consumption flows of successive generations will grow at the natural rate of the economy. However, if the Government gives a higher weight to the elderly, the ratio of public debt to GDP will increase over time. Then, future generations will have to pay higher and higher taxes and consume less and less. Demographic transition does not interfere with these results although it makes every consumer poorer. However, there is the possibility that the weight of the elderly in Government preferences has increased recently, and that some Western democracies are entering a process of increasing public indebtedness and immiserisation of future generations.intergenerational transfers ; pay-as-you-go pension system ; overlapping generation model ; time consistent policies

Europe's clean technology investment challenge

Development and deployment of clean-energy technologies is crucial if climate targets are to be met cost-effectively. The European Union already has a plan that deals with these issues: the Strategic Energy Technology Plan, which has become central to the achievement of the EU's ambitions. In a period of constrained public finances, if governments want to leverage the necessary private innovation for clean-energy technologies, they will have to provide well-designed time-consistent policies, reducing commercial and financial risk through a combination of consistent carbon pricing, regulations and public funding, which will have to give a sizable and consistent push to early-stage clean-energy technologies, with a clear exit strategy. But first and foremost, governments should establish a sufficiently high and long-term predictable carbon price. The design of the EU emissions trading system and the distribution of carbon allowances should take into account more explicitly its power to leverage innovation. A move to a 30 percent EU emissions reduction target, which would involve a tighter emissions cap and fewer allowances being auctioned, would result would result in a higher carbon price and provide greater incentives for innovation.

Time-consistent consumption taxation

We characterise optimal fiscal policies when the government has access to consumption taxation but cannot credibly commit to future policies, in a calibrated Real Business Cycle model of the United States economy. Contrary to the case where only labour and capital income are taxed, the optimal time-consistent policies are remarkably similar to their Ramsey counterparts, as long as the capital income tax causes some distortion within the period. The welfare gains from commitment are negligible, while they are substantial without consumption taxation. Further, the welfare gains from taxing consumption are much higher without commitment. These results suggest that the policy-maker's ability to commit is of secondary importance if consumption is taxed optimally

Dynamic Aspect of Growth and Fiscal Policy

We develop an endogenous growth model driven by externalities of both private capital and public infrastructure. The government levies distortionary taxation to finance a publicly provided consumption good and public infrastructure. Firms face adjustment costs. We first study the steady state, focusing in detail on the non-Ricardian aspects of the model. We then examine the optimal and time-consistent policies in a linear-quadratic approximation of the model. Although the time consistent equilibrium is also sub-optimal in terms of steady-state welfare, it does yield higher growth, through an accumulation of assets by the state and a cut of government consumption.endogenous growth, fiscal policy, time inconsistency.

Habits, Market Power, and Policy Selection

This paper examines monopolistic behavior in a framework with habit formation and consumer commitment. We show that time consistent output and pricing policies yield di®erent market outcomes. Policy selection determines the strategic properties of the producer's intra-personal game: current and future quantities are strategic com- plements, while current and future prices are strategic substitutes. In both a simple two-period model and an in¯nite-horizon model, we ¯nd that pricing policies allow the monopolist to attain higher equilibrium pro¯ts.Habit persistence, monopoly, time consistency