On optimality, endogeneous discounting and wealth accumulation

We endogenize the discount rate via a broad measure of wealth and provide empirical evidence that wealth the discount rate negatively. We demonstrate that the Pontryagin conditions require positive felicity for intuitive results, whereas the concavity of the Hamiltonian requires negative felicity for optimality. This dilemna also holds for the endogenizations of Obstfeld (1990) and followers. We solve the model with positive felicity and resolve when optimality is possible. We discuss the impact on technological change, savings and convergence which are more in line with empirics. Finally, we discuss time consistency of a planner who cannot predict his preferences.Endogenous time preference, Stability, Optimal growth, Recursive utility

Endogenous Discounting via Wealth, Twin-Peaks and the Role of Technology

The articles gives new answers to the following questions : One, what can be potential source of the twin-peaks of economi growth ? Two, why were some of the countries that were believed to belong to the group of low steady state countries (like Taiwan, South Korea, Japan, etc) able to reach a convergence path which led them to a high steady state ? We endogenize the time preference rate via a broad measure of wealth and provide empirical evidence that wealth affects the discount rate negatively. We provide sufficient conditions for multiplicity of equilibria and demonstrate how endogenous discounting via wealth leads to the twin-peaks of economic growth. We prove that improvements in technology can help avoid the Twin-peaks.Endogenous time preference, Recursive utility, Twin-peaks of economic growth

The dynamics of Environmentalism and the Environment

We study the relationship between environmental preferences and the environment. Preferences are transmitted intergenerationally and through social interactions, where we assume that agents are more likely to adopt environmental preferences the larger the amount of pollution. In the basic setting we find that both converge non-monotonically towards an interior steady state. When including technical change we notice that there will be no change in the steady state level of the environment unless technical change is sufficiently strong, which stands in stark contrast to the literature. Upon introducing environmental laws we find that these may lead to a virtually pollution-free environment. This happens if environmental laws are implemented when public support is strong enough. 1 Department of Economics, Ecole Polytechnique, 91128 Palaiseau Cedex, France. email: [email protected]. tel: 0033 169333038. The author kindly acknowledges the helpful comments by two anonymous referees.

Endogenous discounting via wealth, Twin-Peaks and the role of technology

We endogenize the discount rate via wealth and provide evidence that wealth affects the discount rate negatively. We give a necessary and sufficient condition for endogenous discounting to lead to the Twin-Peaks of economic growth and show that improvements in technology help avoid them.endogenous discounting, Twin-Peaks of economic growth, multiple equilibria.

When does financial sector (in)stability induce financial reforms?

The article studies whether financial sector (in)stability had an effect on reforms in the financial sector in a large cross-country panel from 1990 to 2005. We forward the theory that countries are more likely to liberalize their financial sectors in times of financial stability. We argue that politicians are less likely to undertake financial reforms if they face a strong lobby in the financial sector which is able to block reforms that are not in its interest. Our empirical results suggest that financial instability leads to regulations, while financial stability is found to induce liberalizations. We also find that weaker financial lobbies are unable to block financial reforms while strong lobbies can effectively stop reforms.Financial reforms; interest group theory; financial stability; financial crises

Technological opportunity, long-run growth and convergence

We derive an R&D-based semi-endogenous growth model where technological progress depends on the available amount of technological opportunity. Incremental innovations provide direct increases in the knowledge stock but they reduce technological opportunity and thus the potential for further improvements. Technological opportunity can be renewed only by radical innovations (which have no direct impact on factor productivity). Investigating the model for its implications on economic growth leads to two basic observations. One, in the long-run, a balanced growth path with a consstant and semi-endogenous long-run economic growth rate exists only in a specific knife-edge case which implies that technological opportunity and knowledge grow at equal rates. Two, the transition need not be monotonic. Specifically, we show under which conditions our model generates endogenous business cylces via complex dynamics without uncertainty.Technological opportunity, incremental innovation, radical innovation, endogenous busuness cycles, balanced growth, Andronov-Hopf bifurcation, complex dynamics

Habit in Pollution. A Challenge for Intergenerational Equity

In this article we extend the recent literature on overlapping generations and pollution by allowing each generation’s utility to depend on past levels of pollution. To conform with the literature on habit in consumption we call this extension habit in pollution. Habit in pollution can visualize itself as either a concern for the flow of pollution only, or for the stock, or anything in between. We show that habit in pollution has not only significant consequences for the level of pollution and capital, but also for the evolution of utility over time. We observe that habit in pollution can lead to violations of two standard criteria of sustainability, which suggests that habit in pollution can be another source of intergenerational inequity.

Economic development and losses due to natural disasters: the role of risk

We show that the relationship between wealth and economic losses due to natural disasters is strongly linked to disaster risk. We first build an analytical model that demonstrates how countries that face a low hazard of disasters are likely to see first increasing losses and then decreasing ones with increasing economic development. At the same time, countries that face a high hazard of disasters are likely to experience first decreasing losses and then increasing ones with increasing economic development. We then use a cross country panel dataset in conjunction with a risk exposure index to investigate whether the data is consistent with the predictions from the model. As suggested by our model, we generally find an inverse ushaped link between losses and wealth for low and medium hazard countries, but a u-shaped relationship for high hazard countries.Economic development, disasters, risk, uncertainty, hazard index

Pollution perception: An inquiry into intergenerational equity

In this article we extend the recent literature on overlapping generations with a pollution sector by allowing generations to have a certain pollution perception with regards to the stock of pollution. Pollution perception, assumed to be part of the generations' preferences, can be either a concern for the flow of pollution only, or for the stock, or anything in between. We analyse the different steady states for their implications on intergenerational equity. Our main result is that if generations are only partly concerned with the actual stock of pollution, then periodic cycling will occur. We use the concept of Intergenerational Moral Intuition to analyse this periodic cycling. Our main policy conclusion is that decision makers who would like to achieve intergenerational equitable outcomes must either use the maximin criterion or take decisions spanning several generations in order to avoid the period cycling effect.

Climate Policy Must Favour Mitigation Over Adaptation

In climate change policy, adaptation tends to be viewed as beingas important as mitigation. In this article we present a simple yet generalargument for which mitigation must be preferred to adaptation.The argument rests on the observation that mitigation is a public goodwhile adaptation is a private one. This implies that the more one disaggregatesthe units in a social welfare function, i.e. the more one teasesout the public good nature of mitigation, the lower is average incomeand thus less money (per region, country or individual) is available foradaptation and mitigation. We show that, while this reduces incentivesto invest in the private good adaptation, it increases incentivesto invest in the public good mitigation since even small contributionsof everyone can have significant impacts at the large. Conclusively,private adaptation thus must be viewed as a significant loss to globalwelfare. When taking this result to the data we find that a representativepolicy maker who relies on world-aggregated data would invest inboth adaptation and mitigation, just as the previous literature recommends.However, a representative policy maker who relies on countryleveldata, or data at further levels of disaggregation, would optimallyonly invest in mitigation