Samaritan vs rotten kid: Another look

We set up a two-stage game with sequential moves by one altruistic agent and n selfish agents. The rotten kid theorem states that the altruist can only reach her first best when the selfish agents move before the altruist. The Samaritan's dilemma, on the other hand, states that the altruist can only reach her first best when she moves before the selfish agents. We find that in general, the altruist can reach her first best when she moves first, if and only if a selfish agent's action marginally only affects his own payoff. The altruist can reach her first best when she moves last if and only if there is just one commodity involved. When the altruist cannot reach her first best when she moves last, the outcome is not Pareto efficient either.

GOOD AND BAD EQUILIBRIA WITH THE INFORMAL SECTOR

We examine whether an economy can have a bad (small or no formal sector, high taxes) as well as a good (small or no informal sector, low taxes) equilibrium. When the government maximizes instantaneous formal sector welfare, this can occur if the elasticity of average to marginal cost for the public good is less than one. More regard for the informal sector leads to a worse equilibrium, and a higher prevalence of multiple equilibria.

Samaritan versus rotten kid: another look

We set up a two-stage game with sequential moves by one altruist and n selfish agents. The Samaritan's dilemma (rotten kid theorem) states that the altruist can only reach her first best when the selfish agents move after (before) the altruist. We find that in general, the altruist can reach her first best when she moves first if and only if a selfish agent's action marginally affects only his own payoff. The altruist can reach her first best when she moves last if and only if a selfish agent cannot manipulate the price of his own payoff

Liberalizing Trade in Environmental Goods

Trade liberalization in environmental goods is high on the agenda of the current Doha round. We examine its effects in a model with one domestic downstream polluting firm and two upstream firms (one domestic, one foreign). The domestic government sets the emission tax rate after the outcome of R&D is known. The upstream firms offer their technologies to the downstream firm at a flat fee. The effect of liberalization on the domestic upstream firm's R&D incentive is ambiguous. Liberalization usually results in cleaner production, which allows the country to reach higher welfare. However this increase in welfare is typically achieved at the expense of the environment (a backfire effect). Thus our results cast doubt on the hoped-for "win-win-win" outcome of trade liberalization in environmental goods.Pollution abatement technology, R&D, trade and environment, trade liberalization, backfire effect

Group rewards and individual sanctions in environmental policy

We examine an incentive scheme for a group of agents, where all agents are rewarded if the group meets its target. If the group does not meet its target, only the agents that meet their individual target are rewarded. In environmental policy, the EU burden sharing agreement and the UK Climate Change Agreements feature this incentive scheme. There is only a difference in outcome between group and individual rewards if emissions are stochastic. Group rewards generally lead to higher expected emissions than individual rewards. The attraction of the group reward scheme may lie in its fairness and its tough-looking targets.Team incentive scheme, stochastic pollution, UK Climate Change Agreements

Permit Trading and Credit Trading: A Comparison of Cap-Based and Rate-Based Emissions Trading under Perfect and Imperfect Competition

This paper compares emissions trading based on a cap on total emissions (permit trading) and on relative standards per unit of output (credit trading). Two types of market structure are considered: perfect competition and Cournot oligopoly. The e?ect of combining the two schemes is also discussed. We ?nd that output and abatement costs are higher under credit trading. Combining the two schemes may give an increase in welfare. With perfect competition, permit trading always leads to higher welfare than credit trading. With imperfect competition, credit trading may out perform permit trading. Environmental policy can lead to both entry and exit of ?rms. Entry and exit have a profound impact on the performance of the schemes, especially under imperfect competition. We ?nd that it may be impossible to implement certain levels of total industry emissions. Under credit trading several levels of the relative standard can achieve the same total level of emissions.emissions trading, entry and exit, permit allocation, tradable performance standards

Group Rewards and Individual Sanctions in Environmental Policy

We examine an incentive scheme for a group of agents, where all agents are rewarded if the group meets its target. If the group does not meet its target, only the agents that meet their individual target are rewarded. In environmental policy, the EU burden sharing agreement and the UK Climate Change Agreements feature this incentive scheme. There is only a difference in outcome between group and individual rewards if emissions are stochastic. Group rewards generally lead to higher expected emissions than individual rewards. The attraction of the group reward scheme may lie in its fairness and its tough-looking targets.Team Incentive Scheme, Stochastic Pollution, UK Climate Change Agreements

Strictness of Environmental Policy and Investment in Abatement

In this paper we model an oligopoly where .rms invest in abatement technologies and emissions are taxed by the government. We show that a stricter environmental policy does not necessarily lead to an increase in .rms.R&D investment into cleaner production methods. In fact, the emission-to-output ratio may be a U-shaped function of the environmental damage parameter. This result holds both when the government can commit and in the social optimum. When the government cannot commit, this relationship is ambiguous except in markets with few .rms. Our results further suggest that if the emission-to-output ratio is decreasing throughout, output is a U-shaped function of the environmental damage.Environmental innovation; environmental taxation; commitment; oligopoly

Technology choice and environmental regulation under asymmetric information

We focus on the incentives of an industry with a continuum of small firms to invest in a cleaner technology under two environmental policy instruments: tradable emission permits and emission taxation. We assume asymmetric information, in that the firms' abatement costs with the new technology are either high or low. Environmental policy is set either before the firms invest (commitment) or after (time consistency). Under commitment, the welfare comparison follows a modified Weitzman rule, featuring reverse probability weighting for the slope of the marginal abatement cost curve. Both instruments can lead to under- or overinvestment ex post. Tradable permits lead to less than optimal expected new technology adoption. Under time consistency, the regulator infers the cost realization and implements the full-information social optimum

Partial International Emission Trading

In a model inspired by the EU Emissions Trading Scheme, non-cooperative countries allocate their emissions to internationally trading and non-trading sectors. Each country is better off with trading than without, and aggregate welfare is maximized with all sectors in the trading scheme. We simulate the effects of expanding the trading scheme in a two-country model with quadratic abatement costs. If only the original trading sector is asymmetric between countries, the welfare change is always positive and the same in both countries. If only the additional trading sector is asymmetric, one country might lose, but there is an aggregate welfare gain. If only the non-trading sector is asymmetric, both countries always gain.International emission trading; EU Emission Trading Scheme