Negative externalities and evolutionary implementation

game theory;externalities

Negative externalities as the engine of growth in an evolutionary context

We present a simple growth model which has two original features: the strategic context considered, which is an evolutionary game, and the growth mechanism described, in which growth is caused by negative externalities. The emphasis in this growth mechanism is evidently different from that placed on positive externalities by current endogenous growth models. In this model welfare depends on three goods: leisure, a free environmental renewable resource, and a non-storable output. The environmental resource is subject to negative externalities, that is, it is deteriorated by the production of the output. Faced with a forced reduction of the resource, agents may react by increasing the labor supply in order to produce and consume substitutes for the diminishing resource, i. e. they can raise their defensive expenditures. The increase in production and consumption that follows, i.e. growth, generates a further deterioration of the environmental resource, thus giving rise to a self-feeding growth process. The conditions under which multiple equlibria and Pareto-worsening growth dynamics arise, are analysed. Beside showing the logical possibility that negative externalities are the engine of growth, we suggest that the case analysed may be of practical relevance, i.e., that negative externalities may play an important role in many episodes of growth. This role is widely recognized by social sciences other than economics. We suggest that the model may be interpreted as a push development model and that it may also contribute to explain some aspects of growth in advanced countries

Two-Sided Markets with Negative Externalities

This paper analyses a two-sided market in which two platforms compete against each other. One side, the advertisers, exerts a negative externality on the ther side, the users. It is shown that if platforms can charge advertisers only, a higher degree of competition for users can lead to higher profits because competition on the advertisers' side is reduced. If platforms can charge users as well, profits might increase or decrease, the latter because of increased competition through the additional instrument of the user fee. Nevertheless the equilibrium with user fee is more efficient.Negative Externalities ; Price Competition ; Two-Sided Markets

Efficient Bidding with Externalities

We implement a family of efficient proposals to share benefits generated in environments with externalities. These proposals extend the Shapley value to games with externalities and are parametrized through the method by which the externalities are averaged. We construct two slightly different mechanisms: one for environments with negative externalities and the other for positive externalities. We show that the subgame perfect equilibrium outcomes of these mechanisms coincide with the sharing proposals.Implementation, Externalities, Bidding, Shapley Value.

Selling a Single Item with Negative Externalities

We consider the problem of regulating products with negative externalities to a third party that is neither the buyer nor the seller, but where both the buyer and seller can take steps to mitigate the externality. The motivating example to have in mind is the sale of Internet-of-Things (IoT) devices, many of which have historically been compromised for DDoS attacks that disrupted Internet-wide services such as Twitter. Neither the buyer (i.e., consumers) nor seller (i.e., IoT manufacturers) was known to suffer from the attack, but both have the power to expend effort to secure their devices. We consider a regulator who regulates payments (via fines if the device is compromised, or market prices directly), or the product directly via mandatory security requirements. Both regulations come at a cost---implementing security requirements increases production costs, and the existence of fines decreases consumers' values---thereby reducing the seller's profits. The focus of this paper is to understand the \emph{efficiency} of various regulatory policies. That is, policy A is more efficient than policy B if A more successfully minimizes negatives externalities, while both A and B reduce seller's profits equally. We develop a simple model to capture the impact of regulatory policies on a buyer's behavior. {In this model, we show that for \textit{homogeneous} markets---where the buyer's ability to follow security practices is always high or always low---the optimal (externality-minimizing for a given profit constraint) regulatory policy need regulate \emph{only} payments \emph{or} production.} In arbitrary markets, by contrast, we show that while the optimal policy may require regulating both aspects, there is always an approximately optimal policy which regulates just one

Multinationals and Linkages: An Empirical Investigation

Several recent papers have used plant-level data and panel econometric techniques to carefully explore the existence FDI externalities. One conclusion that emerges from this literature is that it is difficult to find evidence of positive externalities from multinationals to local firms in the same sector (horizontal externalities). In fact, many studies find evidence of negative horizontal externalities arising from multinational activity while confirming the existence of positive externalities from multinationals to local firms in upstream industries (vertical externalities). In this paper we explore the channels through which these positive and negative externalities may be materializing, focusing on the role of backward linkages. In particular, we criticize the common usage of the domestic sourcing coefficient as an indicator of a firm?s linkage potential and propose an alternative, theoretically derived indicator. We then use plant-level data from several Latin American countries to compare multinationals? linkage potential to that of domestic firms. We find that multinational?s linkage potential in Brazil, Chile and Venezuela is higher than for domestic firms. For Mexico, we cannot reject the hypothesis that foreign and local firms have similar linkage potential. Finally, we discuss the relationship between this finding and the conclusions that emerge from the recent empirical literature.Foreign Direct Investment, Multinational Firms, Linkages, Spillovers, Economic Development.

Home country versus cross-border negative externalities in large banking organization failures and how to avoid them

This paper examines the negative externalities that may occur when a large bank fails, describes the nature of those externalities, and explores whether they may be greater in a case involving a large cross-border banking organization. The analysis suggests that the chief negative externalities are associated with credit losses and losses due to liquidity problems, and these losses are critically affected by how promptly an insolvent institution is closed, how quickly depositors gain access to their funds, and how long it takes borrowers to reestablish credit relationships. While regulatory delay and forbearance may affect the size and distribution of losses, the likely incident of systemic risk and the negative externalities are more associated with the structure of the applicable bankruptcy laws and methods available to resolve a failed institution and quickly get it operating again. This circumstance implies that regulatory concerns about systemic risk should be directed first at closing institutions promptly, reforming bankruptcy statutes to admit special procedures for handling bank failures, and providing mechanisms to give creditors and borrowers prompt and immediate access to their funds and lines of credit.

Under-connected and Over-connected Networks

Since the seminal contribution of Jackson & Wolinsky 1996 [A Strategic Model of Social and Economic Networks, JET 71, 44-74] it has been widely acknowledged that the formation of social networks exhibits a general conflict between individual strategic behavior and collective outcome. What has not been studied systematically are the sources of inefficiency. We approach this omission by analyzing the role of positive and negative externalities of link formation. This yields general results that relate situations of positive externalities with stable networks that cannot be “too dense” in a well-defined sense, while situations with negative externalities tend to induce “too dense” networks.Networks, Network Formation, Connections, Game Theory, Externalities, Spillovers, Stability, Efficiency

Fiscal Federalism and Electoral Accountability

We study the efficient allocation of spending and taxation authority in a federation in which federal politicians are exposed to electoral uncertainty. We show that centralization may, but need not, result in a loss of electoral accountability. We identify an important asymmetry between positive and negative externalities and show that centralization may not be efficient in economies with positive externalities even when regions are identical and centralization does not entail a loss of accountability. We also show that decentralization can only Pareto dominate centralization in economies with negative externalities.fiscal federalism, local public goods, externalities, performance voting, turnout uncertainty, electoral accountability

A Total Social Factor Productivity Index for the UK Food Chain Post-Farm Gate

The UK post-farm gate food chain comprises manufacturing, wholesaling , retailing and catering. Current turnover is around £250 billion per annum. Total factor productivity measures the ratio of inputs to outputs. However, most studies have only included the marketable inputs and outputs within the system. Following criticisms of the negative effects of the food chain this paper adopts a n index based approach to measuring Total Social Factor Productivity, which includes the major externalities within the food chain. Generally, whilst TFP growth rates are low over the period 1998-2002, these have reduced even further when negative externalities are included.Food Chain, Total Factor Productivity, Total Social Factor Productivity, Externalities, Industrial Organization, Productivity Analysis, Q56,