Optimal Afforestation Contracts with Asymmetric Information on Private Environmental Benefits

We investigate the problem of subsidising afforestation when private information exists with respect to the level of private utility derived from the project. We develop a simple model that allows for an intelligent design of contracts when information is asymmetric. The model involves the Principal and two groups of agents (landowners): a green' group deriving high private utility from the projects and a conventional' group deriving lower utility. Afforestation projects may be produced in different environmental quality, and we distinguish between two cases, a high quality and a low quality project. We find that the optimal set of contracts under asymmetric information involves two different contracts. One in which green landowners are somewhat overcompensated for projects of high quality, and one where conventional landowners are offered contracts including lower quality projects, compared to the symmetric case, but with compensation equal to his indifference payment. It is the ability to reduce quality requirements along with subsidies offered that allows for revelation of the private information. Finally, we discus how the results obtained may be used in the implementation of incentive schemes

Land, Environmental Externalities and Tourism Development

In a two sectors dynamic model we analyze the process of tourism development based on the accumulation of capital (building of tourism facilities) and the reallocation of land from traditional activities to the tourism sector. The model incorporates the conflict between occupation of the territory by the tourism facilities, other productive activities and availability of cultural, natural and environmental assets that are valued by residents and visitors. We characterize the process of tourism development in two settings: the socially optimal solution and a situation where the costs of tourism expansion are external to the decision makers, where externalities on residents as well as intraindustry externalities are considered. Regarding the optimal solution, we show that it is optimal to limit tourism expansion before it reaches its maximum capacity even in a context where the economic attractiveness of tourism relative to other productive sectors rise continuously. However, in this context and when all the costs of tourism development are externalities the only limit to tourism quantitative expansion is its maximum capacity determined by the availability of land. Finally, we show that excessive environmental degradation from the future generations' point of view is not a problem of discounting the future but rather a problem of externalities that affects negatively the current and future generations

Equilibrium with a Market of Permits

In this paper we present the main results of three original studies on the equilibrium with a market of tradeable permits in a static framework. In first study, we have considered an international equilibrium of two countries which depend on the quantity of permits to each country. The allocation is efficient if and only if it is proportional to efficient labor. A redistribution in favor of the less developed country implies a redistribution to this country but leads to a dilemma with efficiency. In the second study, we analyze the consequences of the choice between giving free permits to firms and other possibilities. We show that for equalizing incomes of production factors with there marginal productivities, each factor should receive a quantity of free permits proportional to its contribution to production. In the third study, we consider the partial equilibrium of an industry where each firm is characterized by a parameter combining production efficiency and pollution effect. We define a theoretical indicator of environmental efficiency and we analyze its properties

Assessing the Effectiveness of Tradable Landuse Rights for Biodiversity Conservation: An Application to Canada's Boreal Mixedwood Forest

Ecological reserve networks are an important strategy for conserving biodiversity. One approach to selecting reserves is to use optimization algorithms that maximize an ecological objective function subject to a total reserve area constraint. Under this approach, economic factors such as potential land values and tenure arrangements are often ignored. Tradable landuse rights are proposed as an alternative economic mechanism for selecting reserves. Under this approach economic considerations determine the spatial distribution of development and reserves are allocated to sites with the lowest development value, minimizing the cost of the reserve network. The configuration of the reserve network as well as the biodiversity outcome is determined as a residual. However cost savings can be used to increase the total amount of area in reserve and improve biodiversity outcomes. The appropriateness of this approach for regional planning is discussed in light of key uncertainties associated with biodiversity protection. A comparison of biodiversity outcomes and costs under ecological versus economic approaches is undertaken for the Boreal Forest Natural Region of Alberta, Canada. We find a significant increase in total area protected and an increase in species representation under the TLR approach

A Climate-Change Policy Induced Shift from Innovations in Energy Production to Energy Savings

We develop an endogenous growth model with capital, labor and energy as production factors and three productivity variables that measure accumulated innovations for energy production, energy savings, and neutral growth. All markets are complete and perfect, except for research, for which we assume that the marginal social value exceeds marginal costs by factor four. The model constants are calibrated so that the model reproduces the relevant trends over the 1970-2000 period. The model contains a simple climate module, and is used to assess the impact of Induced Technological Change (ITC) for a policy that aims at a maximum level of atmospheric CO2 concentration (450 ppmv). ITC is shown to reduce the required carbon tax by about a factor 2, and to reduce costs of such a policy by about factor 10. Numerical simulations show that knowledge accumulation shifts from energy production to energy saving technology

Modelling Dynamic Conditional Correlations in WTI Oil Forward and Futures Returns

This paper estimates the dynamic conditional correlations in the returns on WTI oil one-month forward prices, and one-, three-, six-, and twelve-month futures prices, using recently developed multivariate conditional volatility models. The dynamic correlations enable a determination of whether the forward and various futures returns are substitutes or complements, which are crucial for deciding whether or not to hedge against unforeseen circumstances. The models are estimated using daily data on WTI oil forward and futures prices, and their associated returns, from 3 January 1985 to 16 January 2004. At the univariate level, the estimates are statistically significant, with the occasional asymmetric effect in which negative shocks have a greater impact on volatility than positive shocks. In all cases, both the short- and long-run persistence of shocks are statistically significant. Among the five returns, there are ten conditional correlations, with the highest estimate of constant conditional correlation being 0.975 between the volatilities of the three-month and six-month futures returns, and the lowest being 0.656 between the volatilities of the forward and twelve-month futures returns. The dynamic conditional correlations can vary dramatically, being negative in four of ten cases and being close to zero in another five cases. Only in the case of the dynamic volatilities of the three-month and six-month futures returns is the range of variation relatively narrow, namely (0.832, 0.996). Thus, in general, the dynamic volatilities in the returns in the WTI oil forward and future prices can be either independent or interdependent over time

On Coalition Formation with Heterogeneous Agents

We propose a framework to analyze coalition formation with heterogeneous agents. Existing literature defines stability conditions that do not ensure that, once an agent decides to sign an agreement, the enlarged coalition is feasible. Defining the concepts of refraction and exchanging, we set up conditions of existence and enlargement of a coalition with heterogeneous agents. We use the concept of exchanging agents to give necessary conditions for internal stability and show that refraction is a sufficient condition for the failure of an enlargement of the coalition. With heterogeneous agents we can get a situation where a group of members of an unstable coalition does not deviate, neither within the coalition nor within the extended coalition. Hence, the possibilities of agreement are richer than in the standard analysis with homogeneous agents. Examples of industrial economics are used for illustration, and an application to climate change negotiations is discussed in more detail

Asymmetric Labor Markets, Southern Wages, and the Location of Firms

This paper studies the behavior of firms towards weak labor rights in developing countries (South). A less than perfectly elastic labor supply in the South gives firms oligopsonistic power tempting them to strategically reduce output to cut wages. In an open economy, competitors operating in perfectly competitive labor markets meanwhile enjoy less aggressive competitors and raise output. Finally, competition effect reduces the ex-post output of a relocating firm. These effects reduce relative profitability of the South casting doubts on traditional beliefs that multinationals are attracted to regions with lower wages. Adopting a minimum wage unambiguously enhances Southern competitiveness and welfare