Resource extraction and uncertain tipping points

A global planning problem is analyzed for extracting an exhaustible resource like oil when resource extraction - the only source for current consumption - also generates additions to the stock of GHGs that influence the likelihood of hitting a threshold representing climate change. We derive conditions for optimal extraction when we take into account joint emissions that accumulate to a stock that is governing the planner's beliefs of facing a climate change that will involve a loss in the production capacity of the global economy. Except for "annuity of the continuation payoff", which is the stationary rate of welfare after a climate change, the optimality conditions are very similar to the results found in Loury (1978) - where optimal extraction of a non-renewable resource of unknown size was analyzed. Not surprisingly we find that extraction has a cost ("environmental cost") beyond the standard opportunity cost ("resource rent"), implying a lower rate of extraction as long as no threshold has been hit, compared to the risk-free case. Such saving has an expected rate of return along an optimal strategy should be balanced against the standard required rate of return - the Keynes- Ramsey-Cass-Koopmans-condition

Environmental regulation under asymmetric information with type-dependent outside option

We consider how a benevolent regulator should regulate a polluting export industry when the industry, having private information about its abatement efficiency, has an option to move its operations abroad, with a type-dependent outside option rent. The paper focuses on the case where outside option is negatively correlated with abatement efficiency, implying unilateral incentives for overstating abatement efficiency. Because lump-sum taxation is ruled out, rent will have a social cost which is also affected by foreign ownership to the industry. It is demonstrated that optimal regulation calls for excessive pollution among the participating types (relative to complete information), for the purpose of rent extraction, while types being excluded are the ones with the higher outside option (the least efficient types). We also demonstrate that with a higher foreign ownership share, the larger is the set of excluded types, while overpollution should be reduced

Domestic environmental policy under asymmetric information: The role of foreign ownership, outside options and market power

We analyse environmental policy under asymmetric information in a context where a homepolluting firm, selling its final output solely in a foreign market with some market power, has an option to bypass domestic regulation through setting up new plants in a jurisdiction offering lenient environmental standards. The hidden characteristics are emission intensity and outside option, assumed perfectly correlated, so that the firm has a type-dependent reservation utility. There is mixed ownership to the firm; a fraction is owned by foreigners whose welfare does not enter the home government’s objective function. The home government has a limited set of policy instruments; in fact only net emissions can be taxed. The familiar trade-off between efficiency and rent extraction will involve over-pollution, with (possibly) a subset of the most emission-intensive firm types being induced to relocate. This effect is reinforced by increased foreign ownership, as the cost of leaving rent then increases. (Ownership has no real impact under complete information.) Weaker market power, due to increased competition at the world market, will work in the same direction, but now there is a counteracting effect due to a lower outside option

Incentive Contracts for Public Health Care Provision under Adverse Selection and Moral Hazard

The author will in this paper analyse the issue of payment reforms for a public health care system, where public hospitals offer treatment. Any health care system should provide treatment so as to maximise expected social welfare. The implementation of this outcome, through the way private og public health care providers or hospitals are compensated for the cost of providing services, has been a policy issue in a number of countries. Many payment reforms are now based on a (high-powered) DRG-price system, so as to induce cost consciousness. The hospitals are privately informed about the diseases of each patient and offer treatment with a stochastic outcome, while cost control cannot be verified. Ex post outcome and realised cost of treatment can be verified, with cost depending on treatment intensity, cost-reducing effort and the type of disease. With a disease-contingent transfer, the hospital is able to capture a rent, which has a social cost due to tax distortions and because rent has no direct weight in the welfare function. When type of treatment can be verified, treatment should be less intensive than under complete information, if marginal cost of treatment is disease-dependent. However, rent extraction is accomplished not only by a less aggressive treatment (which has a negative impact on the likelihood for recovery), but also by offering a cost-reimbursement scheme, without any recovery-contingent bonus. When treatment is unverifiable, induced treatment should again be below the first-best level. This solution is implemented through a combination of a recovery-contingent bonus (declining in severity) and cost sharing (with the fraction of cost being reimbursed by the government being increasing in severity).Public health care; hospital expenses

Resource depletion and capital accumulation under catastrophic risk: The role of stochastic thresholds and stock pollution

An intertemporal optimal strategy for accumulation of reversible capital and management of an exhaustible resource is analyzed for a global economy when resource depletion generates discharges that add to a stock pollutant that affects the likelihood for hitting a tipping point or threshold of unknown location, causing a random disembodied technical regress. We characterize the optimal strategy by imposing the notion precautionary tax on current extraction. Such a tax will internalize future expected damages or expected welfare loss should a threshold be hit. With reversible capital the presence of a stochastic threshold should speed up accumulation as long as no threshold is hit so as to build up a buffer or stock for future consumption should a threshold be hit

A discrete-choice model approach to optimal congestion charge

We model the choice of transportation mode in a simplified Hotelling-like city, with a fixed number of total travellers, fixed road capacity and with no trade-off between when to travel and the time spent in a queue. A person that chooses to take her own car will inflict a congestion cost on all travellers. To get the travellers to internalise these external costs, a congestion charge has to be imposed. We derive an optimal congestion charge within in a discrete-choice framework, with a benevolent government maximising expected tax-adjusted social surplus. The congestion charge to be imposed on private driving, beyond the opportunity cost - equal to the fare on public transportation - is shown to be a weighted average of a Ramsey-like term (capturing the goal to raise public revenue) and a Pigou-term capturing the environmental cost of a person's private driving. This property is similar to the optimal environmental tax derived by Sandmo (1975). However, the behavioural assumption underlying the present framework is quite different from the standard theory of consumer choice adopted by Sandmo

From macro growth to disaggragated production studies

Professor Leif Johansen (1930 - 1982) made significant contributions to a large number of fields in economics. A short survey of his contributions is presented. The main focus in the paper is on his growth - production program constituting an important part of his research. The key concepts are embodied technical change, irreversibility, sunk cost, rigidities and heterogeneity. The impact of these factors on the nature of economic growth at the macro level is the point of departure of gradually disaggragating the level of analysis right down to the individual firm. An important tool for the analysis for dynamic structural change at the industry level is the short-run function capturing the underlying heterogeneity of the technologies of the firms within an industry. Technical rigidities represent constraints on how an economy develops from the level of a single industry up to the aggregated macro level of an economy

Climate change, catastrophic risk and the relative unimportance of discounting

Discounting in the presence of catastrophic risk is a hotly debated issue, in particular with respect to climate change. Many scientists and laymen concerned with potentially catastrophic impacts feel that if an increase in the discount rate drastically increases the likelihood of catastrophic outcomes, this discredits economic cost-benefit calculations. This paper argues that this intuition is sound and that if cost-benefit calculations are done within a model that encompasses the type of catastrophic risk that these scientists worry about, the resulting stabilization target will only be slightly influenced by the discount rate. This is shown within a stylized model of a risk neutral decision maker facing a problem with a catastrophic threshold with unknown location

Resource depletion and capital accumulation under catastrophic risk: Policy actions against stochastic thresholds and stock pollution

An intertemporal optimal strategy for accumulation of reversible capital and management of an exhaustible resource is analyzed for a global economy when resource depletion generates discharges that add to a stock pollutant that affects the likelihood for hitting a tipping point or threshold of unknown location, causing a randomdisembodied technical regress. We characterize an optimal strategy by imposing the notion precautionary tax on current extraction for preventing a productivity shock driven by stock pollution and a capital subsidy to promote capital accumulation so as to build up a buffer for future consumption opportunities should the threshold be hit. The precautionary tax will internalize the expected welfare loss should a threshold be hit, whereas the capital subsidy will internalize the expected post-catastrophic long-run return from current capital accumulation

Genetic testing and repulsion from chance

A central theme in the international debate on genetic testing concerns the extent to which insurance companies should be allowed to use genetic information in their design of insurance contracts. We analyze this issue within a model with the following important feature: A person’s well-being depends on the perceived probability of becoming ill in the future in a way that varies among individuals. We show that both tested high-risks and untested individuals are equally well off whether or not test results can be used by insurers. Individuals who test for being low-risks, on the other hand, are made worse off by not being able to verify this to insurers. This implies that verifiability dominates nonverifiability in an ex-ante sense