Model-based financial regulations impair the transition to net-zero carbon emissions

Investments via the financial system are essential for fostering the green transition. However, the role of existing financial regulations in influencing investment decisions is understudied. Here we analyse data from the European Banking Authority to show that existing financial accounting frameworks might inadvertently be creating disincentives for investments in low-carbon assets. We find that differences in the provision coverage ratio indicate that banks must account for nearly double the loan loss provisions for lending to low-carbon sectors as compared with high-carbon sectors. This bias is probably the result of basing risk estimates on historical data. We show that the average historical financial risk of the oil and gas sector has been consistently estimated to be lower than that of renewable energy. These results indicate that this bias could be present in other model-based regulations, such as capital requirements, and possibly impact the ability of banks to fund green investments

Is it time to reboot welfare economics? Overview

The contributions of economists have long included both positive explanations of how economic systems work and normative recommendations for how they could and should work better. In recent decades, economics has taken a strong empirical turn as well as having a greater appreciation of the importance of the complexities of real-world human behaviour, institutions, the strengths and failures of markets, and interlinkages with other systems, including politics, technology, culture, and the environment. This shift has also brought greater relevance and pragmatism to normative economics. While this shift towards evidence and pragmatism has been welcome, it does not in itself answer the core question of what exactly constitutes “better”, and for whom, and how to manage inevitable conflicts and trade-offs in society. These have long been the core concerns of welfare economics. Yet, in the 1980s and 1990s, debates on welfare economics seemed to have become marginalized. The articles in this special symposium of Fiscal Studies engage with the question of how to revive normative questions as a central issue in economic scholarship

Model-based financial regulation challenges for the net-zero transition

Current model-based financial regulations favour carbon-intensive investments. This is likely to disincentivize banks from investing in new low-carbon assets, impairing the transition to net zero. Financial regulators and policymakers should consider how this bias may impact financial system stability and broader societal objectives

Is it time to reboot welfare economics? Overview

AbstractThe contributions of economists have long included both positive explanations of how economic systems work and normative recommendations for how they could and should work better. In recent decades, economics has taken a strong empirical turn as well as having a greater appreciation of the importance of the complexities of real‐world human behaviour, institutions, the strengths and failures of markets, and interlinkages with other systems, including politics, technology, culture and the environment. This shift has also brought greater relevance and pragmatism to normative economics. While this shift towards evidence and pragmatism has been welcome, it does not in itself answer the core question of what exactly constitutes ‘better’, and for whom, and how to manage inevitable conflicts and trade‐offs in society. These have long been the core concerns of welfare economics. Yet, in the 1980s and 1990s, debates on welfare economics seemed to have become marginalised. The articles in this Fiscal Studies symposium engage with the question of how to revive normative questions as a central issue in economic scholarship.</jats:p

Is it time to reboot welfare economics? Overview

The contributions of economists have long included both positive explanations of how economic systems work and normative recommendations for how they could and should work better. In recent decades, economics has taken a strong empirical turn as well as having a greater appreciation of the importance of the complexities of real-world human behaviour, institutions, the strengths and failures of markets, and interlinkages with other systems, including politics, technology, culture, and the environment. This shift has also brought greater relevance and pragmatism to normative economics. While this shift towards evidence and pragmatism has been welcome, it does not in itself answer the core question of what exactly constitutes “better”, and for whom, and how to manage inevitable conflicts and trade-offs in society. These have long been the core concerns of welfare economics. Yet, in the 1980s and 1990s, debates on welfare economics seemed to have become marginalized. The articles in this special symposium of Fiscal Studies engage with the question of how to revive normative questions as a central issue in economic scholarship

Financial support provided by the Project on Innovation in Markets and Organization at the MIT Sloan School of Management. We thank Bob Gibbons and Nelson Repenning for helpful suggestions. Getting Big Too Fast: Strategic Dynamics with Increasing Returns

Abstract Prior research on competitive strategy in the presence of increasing returns suggests that early entrants can achieve sustained competitive advantage by pursuing Get Big Fast (GBF) strategies: rapidly expanding capacity and cutting prices to gain market share advantage and exploit positive feedbacks faster than their rivals. Yet a growing literature in dynamics and behavioral economics, and the experience of firms during the 2000 crash, raise questions about the GBF prescription. Prior studies generally presume rational actors, perfect foresight and equilibrium. Here we consider the robustness of the GBF strategy in a dynamic model with boundedly rational agents. Agents are endowed with high local rationality but imperfect understanding of the feedback structure of the market; they use intendedly rational heuristics to forecast demand, acquire capacity, and set prices. These heuristics are grounded in empirical study and experimental test. Using a simulation of the duopoly case we show GBF strategies become suboptimal when market dynamics are rapid relative to capacity adjustment. Under a range of plausible assumptions, forecasting errors lead to excess capacity, overwhelming the cost advantage conferred by increasing returns. We explore the sensitivity of the results to assumptions about agent rationality and the feedback complexity of the market. The results highlight the risks of incorporating traditional neoclassical simplifications in strategic prescriptions and demonstrate how disequilibrium behavior and bounded rationality can be incorporated into strategic analysis to form a dynamic, behavioral game theory amenable to rigorous analysis