Sharing the Cost of Global Warming

Due to meteorological factors, the distribution of the environmental damage due to climate change bears no relationship to that of global emissions. We argue in favor of offsetting this discrepancy, and propose a “global insurance scheme” to be financed according to countries’ responsibility for climate change. Because GHG decay very slowly, we argue that the actual burden of global warming should be shared on the basis of cumulated emissions, rather than sharing the expected costs of actual emissions as in a Pigovian taxation scheme. We characterize new versions of two well-known cost-sharing schemes by adapting the responsibility theory of Bossert and Fleurbaey (1996) to a context with externalities. Du fait de phénomènes météorologiques, la répartition des dommages environnementaux est indépendante de celle des émissions de gaz à effet de serre (GES). Nous explorons la possibilité de corriger cette inadéquation via un « fonds assuranciel global », financé en fonction de la responsabilité de chaque pays concernant les changements climatiques. Étant donné la très longue durée de vie de plusieurs GES dans l'atmosphère, nous avançons que les dommages observés doivent être partagés en fonction des émissions cumulées, plutôt que de partager les coûts futurs espérés des émissions actuelles, comme le ferait une taxe pigouvienne. Nous employons la théorie de la responsabilité de Bossert et Fleurbaey (1996), adaptée à un contexte avec externalités, pour caractériser de nouvelles versions de deux mécanismes de partage connus.climate change, cost sharing, responsibility, compensation , changements climatiques; partage de coûts, responsabilité, compensation

Coordination and Cooperation in Investment Timing with Externalities ?

We characterize sequential (preemption) and simultaneous (coordination) equilibria, as well as joint-value maximizing (cooperation) solutions, in a model of investment timing allowing for externalities in both flow pro...ts and investment costs. For two ex-ante symmetric ...rms, either preemption or attrition occur depending on the size of the investment externality. Coordination is less likely with more discounting, as in a repeated game, and more likely with higher growth and volatility. Optimal cooperation involves either monopoly or duopoly investment, the latter being either symmetric or asymmetric. Finally, these characterizations are validated by applications to standard speci...cations of capacity accumulation and of R&D investment. In the former setup, coordination is likelier if installed capacities and lumpy investments are both large. With R&D input choices, if investment synergies are large, coordination and cooperation result in the same outcomes.Investment Timing; Real Options; Simultaneous Equilibrium; Joint-Value Maximization; Cooperation; Investment Externalities

A Model of Partial Regulation in the Maritime Ferry Industry

In this paper, we study how maritime ferry industries should be regulated. This is a fundamental issue in so far as maritime transport between islands and mainland is a service of general interest. We argue that the policy design crucially depends on the goals the collectivity pursues (pure e¢ ciency, fairness) as well as on the relevant industry structure (monopoly, oligopoly). We show that the regulator needs to prevent ine¢ cient crowding out, whenever room exists for access of new providers to former monopolies. By properly allocating tra¢ c across shippers, the regulated firm's budget constraint can then be relaxed. We subsequently shed light on the implications of adopting the territorial continuity principle to boost social fairness. We establish that the incumbent's public service obligations dump the entrant's incentives to provide connections in the low season; conversely, soft competition encourages the entrant to operate in the high season, when it pockets a net rent. As to customers, our model predicts that the islanders, whose consumption is partly subsidized by the non-residents, patronize the incumbent and that liberalization directly benefits the non-residents who switch to the entrant.Maritime transport; Price and frequency; Partial regulation; Territorial

Coordination and Cooperation in Investment Timing with Externalities ?

Working paper GATE 2011-28We characterize sequential (preemption) and simultaneous (coordination) equilibria, as well as joint-value maximizing (cooperation) solutions, in a model of investment timing allowing for externalities in both flow pro...ts and investment costs. For two ex-ante symmetric ...rms, either preemption or attrition occur depending on the size of the investment externality. Coordination is less likely with more discounting, as in a repeated game, and more likely with higher growth and volatility. Optimal cooperation involves either monopoly or duopoly investment, the latter being either symmetric or asymmetric. Finally, these characterizations are validated by applications to standard speci...cations of capacity accumulation and of R&D investment. In the former setup, coordination is likelier if installed capacities and lumpy investments are both large. With R&D input choices, if investment synergies are large, coordination and cooperation result in the same outcomes

Strategic Reneging in Sequential Imperfect Markets

This paper investigates the incentives to manipulate sequential markets by strategically reneging on forward commitments. We first study the behavior of a dominant firm in a two-period model with demand uncertainty. Our results show that sequential markets may be a source of inefficiencies. We then test the model’s predictions using occurrences of reneging on long-term commitments in Alberta’s electricity market. We implement a machine learning approach to identify and evaluate manipulations. We find that a dominant supplier increased its revenues by $35 million during the winter of 2010-11, causing Alberta’s electricity procurement costs to increase by above$330 million (20%)

Politiques climatiques: cessons de vouloir payer pour esquiver nos responsabilités !

We explore an alternative to existing economic instruments to tackle climate change: carbon liabilities. Such liabilities would hold countries responsible for future climate damage to the tune of their emissions over time. The prospect of having to repay this carbon debt over time is enough to discipline emitters, leading to the efficient emissions level. Contrary to existing instruments, our scheme does not rest on a consensus regarding the discount factor nor about climate forecasts; this, together with its reliance on observed damage, allows for better international participation as well as to a fairer division of costs and risks

Accounting for Needs when Sharing Costs

We introduce needs in the rate-setting problem for essential services, like water or electricity. The goal is to ensure that households with higher needs are not penalized, all the while holding them responsible for their consumption. We show that conventional methods like monetary subsidies cannot achieve this goal in a budget-balanced way. Instead, we characterize axiomatically two families of cost-sharing rules, each favoring one aspect—compensation or responsibility—over the other. A focal solution, dubbed the utility-free solution, emerges as a desirable compromise when households differ only in their needs. We identify specific variants of these rules that protect small consumers from the cost externality imposed by larger consumers. Lastly, we show how one can implement these schemes with realistic informational assumptions; i.e., without making explicit interpersonal comparisons of needs and consumption

A liability approach to climate policy: A thought experiment

We observe that a Pigovian climate policy need not exact full payment of the social cost of carbon upon emission to yield optimal incentives. Following this insight, we propose the creation of a carbon liabilities market to address climate change. Each period, countries would be made liable for their share of responsibility in current climate damage. This yields first-best emissions patterns. Also, because liabilities could be traded like financial debt, it decentralizes the choice a discount rate as well as beliefs about the severity of the climate problem. From an informational standpoint, implementation relies only on realized harm and on the well-documented emission history of countries, unlike a carbon tax or tradable permits scheme, which are based on a sum of discounted expected future marginal damage. We offer a discussion of the differences between a liability scheme and a carbon tax along the dimensions of information, participation, commitment, intergenerational fairness, and exposure to risk

One Lab, Two Firms, Many Possibilities: on R&D outsourcing in the biopharmaceutical industry

We draw from documented characteristics of the biopharmaceutical industry to construct a model where two firms can choose to outsource R&D to an external unit, and/or engage in internal R&D, before competing in a final market. We investigate the tension between internal and outsourced operations, the distribution of profits among market participants, and the incentives to coordinate outsourcing activities or to integrate R&D and production. Consistent with the empirical evidence, we find that: (i) internal and external operations are neither substitutes nor complements in general, as each firm’s in-house effort level can be reduced or stimulated by the external unit’s activities, depending on the nature of R&D returns; (ii) an aggregate measure of technological externalities drives the distribution of industry profits, with higher returns to the external unit for development (clinical trials) than for research (drug discovery); (iii) in the latter case, the delinkage of investment incentives from industry value, and the vulnerability of investors’ returns to negative shocks, both suggest the abandonment of projects with economic and medical value as a likely consequence of outsourcing; (iv) upstream entry is stimulated by the long-run perspective for founders of a research biotech, more than of a clinical services unit, to extract – or reappropriate – industry profits by selling the equity to a client firm