AD-DICE: an implementation of adaptation in the DICE model

Integrated Assessment Models (IAMS) have helped us over the past decade to understand the interactions between the environment and the economy in the context of climate change. Although it has also long been recognized that adaptation is a powerful and necessary tool to combat the adverse effects of climate change, most IAMS have not explicitly included the option of adaptation in combating climate change. This paper adds to the IAM and climate change literature by explicitly including adaptation in an IAM, thereby making the trade-offs between adaptation and mitigation visible. Specifically, a theoretical framework is created and used to implement adaptation as a decision variable into the DICE model. We use our new AD-DICE model to derive the adaptation cost functions implicit in the DICE model. In our set-up, adaptation and mitigation decisions are separable and AD-DICE can mimic DICE when adaptation is optimal. We find that our specification of the adaptation costs is robust with respect to the mitigation policy scenarios and parameter values. Our numerical results show that adaptation is a powerful option to combat climate change, as it reduces most of the potential costs of climate change in earlier periods, while mitigation does so in later period

Frontiers of Climate Change Economics

The economics of climate change is an active field of research. The contributions to a Special Issue are put in context of the literature, and it is suggested that second-best issues such as carbon leakage and the Green Paradox need to be complemented with a political economy analysis of why certain instruments are politically infeasible and with intra- and intergenerational analyses of the impact of climate policy. A case is also made for more empirical work on the gradual and catastrophic damages of global warming

First M87 Event Horizon Telescope results: VIII. Magnetic field structure near the Event Horizon

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Supplier evasion of a buyer's audit: Implications for motivating supplier social and environmental responsibility

Prominent buyers' brands have been damaged because their suppliers caused major harm to workers or the environment, e.g., through a deadly factory fire or release of toxic chemicals. How can buyers motivate suppliers to exert greater care to prevent such harm? This paper characterizes a "backfiring condition" under which actions taken by prominent buyers (increasing auditing, publicizing negative audit reports, providing loans to suppliers) motivate a supplier to exert greater effort to pass the buyer's audit by hiding information and less care to prevent harm. Intuitively appealing actions for a buyer (penalizing a supplier for harming workers or the environment, or for trying to deceive an auditor) may be similarly counterproductive. Contrary to conventional wisdom, squeezing a supplier's margin (by reducing the price paid to the supplier or increasing wages for workers) motivates the supplier to exert greater care to prevent harm-under the backfiring condition. Whereas the necessary and sufficient condition depends on the relative convexity of the supplier's hiding cost function, a simple sufficient condition is that the supplier is likely to successfully hide information from the auditor, in equilibrium. Anecdotal evidence suggests that the backfiring condition is prevalent or becoming increasingly so. Similar insights apply to mitigation of unauthorized subcontracting

Implications of renegotiation for optimal contract flexibility and investment

In a stylized model of biopharmaceutical contract manufacturing, this paper shows how the potential for renegotiation influences the optimal structure of supply contracts, investments in innovation and capacity, the way scarce capacity is allocated, and firms' resulting profits. Two buyers contract for capacity with a common manufacturer. Then, the buyers invest in innovation (product development and marketing) and the manufacturer builds capacity. Finally, the firms may renegotiate to allow a buyer facing poor market conditions to purchase less than the contractual commitment and a buyer facing favorable conditions to purchase more. We show that renegotiation can greatly increase the firms' investments and profits, provided that the contracts are designed correctly. Failing to anticipate renegotiation leads to contracts that allow too much flexibility in the buyer's order quantity, and perform poorly relative to contracts designed to anticipate renegotiation. We provide clear conditions under which quantity flexibility contracts with renegotiation coordinate the system. Where quantity flexibility contracts fail, employing tradable options improves performance. © 2007 INFORMS

On the value of input efficiency, capacity efficiency, and the flexibility to rebalance them

Acommon characteristic of basic material manufacturers (which account for 85% of all industrial energy use) and of cleantech manufacturers is that they are price takers in their input and output markets. Variability in those prices has implications for how much a manufacturer should invest in three fundamental types of process improvement. Input price variability reduces the value of improving input efficiency (output produced per unit input) but increases that of capacity efficiency (the rate at which a production facility can convert input into output). Output price variability increases the value of capacity efficiency, but it increases the value of input efficiency if and only if the expected margin is small. Moreover, as the expected input cost rises, the value of input efficiency decreases. A third type of process improvement is to develop flexibility in input efficiency versus capacity efficiency (the ability to respond to a rise in input cost or fall in output price by increasing inputefficiency at the expense of capacity efficiency). The value of this flexibility decreases with variability in input and output prices if and only if the expected margin is thin. Together, these results suggest that a carbon tax or cap-and-trade system may reduce investment by basic material manufacturers in improving energy efficiency. © 2013 INFORMS

Testing by competitors in enforcement of product standards

Firms have an incentive to test competitors' products to reveal violations of safety and environmental standards, in order to have competitors' products blocked from sale. This paper shows that testing by a regulator crowds out testing by competitors, and can reduce firms' efforts to comply with the product standard. Relying on competitor testing (i.e., having the regulator test only to verify evidence of violations provided by competitors) is most effective in large or concentrated markets in which firms have strong brands and high quality, and for standards that are highly valued by consumers. Under those conditions, firms tend to test competitors' products and exert high compliance effort. Conversely, unless compliance is highly valued by consumers, a firm with low quality does not draw testing from competitors, and so does not comply. Enforcing a product standard through competitor testing encourages entry by such low-quality, noncompliant firms and can reduce quality investment by incumbents. Stripping offending products of labels (such as "Energy Star"), instead of blocking them from the market, eliminates the problem of entry by low-quality, noncompliant firms, but may reduce incumbents' compliance efforts

Implications of renegotiation for optimal contract flexibility and investment

In a stylized model of biopharmaceutical contract manufacturing, this paper shows how the potential for renegotiation influences the optimal structure of supply contracts, investments in innovation and capacity, the way scarce capacity is allocated, and firms' resulting profits. Two buyers contract for capacity with a common manufacturer. Then, the buyers invest in innovation (product development and marketing) and the manufacturer builds capacity. Finally, the firms may renegotiate to allow a buyer facing poor market conditions to purchase less than the contractual commitment and a buyer facing favorable conditions to purchase more. We show that renegotiation can greatly increase the firms' investments and profits, provided that the contracts are designed correctly. Failing to anticipate renegotiation leads to contracts that allow too much flexibility in the buyer's order quantity, and perform poorly relative to contracts designed to anticipate renegotiation. We provide clear conditions under which quantity flexibility contracts with renegotiation coordinate the system. Where quantity flexibility contracts fail, employing tradable options improves performance. © 2007 INFORMS