The Stern Review calls for immediate decisive action to stabilize greenhouse gases because “the benefits of strong, early action on climate change outweighs the costs.” The economic analysis supporting this conclusion consists mostly of two basic strands. The first strand is a formal aggregative model that relies for its conclusions primarily upon imposing a very low discount rate. Concerning this discount-rate aspect, I am skeptical of the Review's formal analysis, but this essay points out that we are actually a lot less sure about what interest rate should be used for discounting climate change than is commonly acknowledged. The Review's second basic strand is a more intuitive argument that it might be very important to avoid possibly large uncertainties that are difficult to quantify. Concerning this uncertainty aspect, I argue that it might be recast into sound analytical reasoning that might justify some of the Review's conclusions. The basic issue here is that spending money to slow global warming should perhaps not be conceptualized primarily as being about consumption smoothing as much as being about how much insurance to buy to offset the small change of a ruinous catastrophe that is difficult to compensate by ordinary savings.

Using an accounting conservatism theory that reflects accounting's role in practice, we investigate the relation between two extensively used measures of conservatism: asymmetric timeliness of earnings and the market-to-book ratio (MTB). We predict and observe that when asymmetric timeliness is measured cumulatively over long periods, its relation with end-of-period MTB is positive. When asymmetric timeliness is measured over short periods, its dependence on beginning-of-period composition of equity value (EV) is responsible for its negative association with MTB. Further, asymmetric timeliness appears to measure conservatism more efficiently when it is estimated cumulatively over multiple periods.

The “Pessimists” and the “Optimists” disagree whether the US external deficits and the associated buildup of US net foreign liabilities are problems that require urgent attention. A warning signal should be that the debt ratio deviates significantly from the optimal ratio. The optimal debt ratio or debt burden should take into account the vulnerability of consumption to shocks from the productivity of capital, the interest rate and exchange rate. The optimal debt ratio is derived from inter-temporal optimization using Dynamic Programming, because the shocks are unpredictable, and it is essential to have a feedback control mechanism. The optimal ratio depends upon the risk adjusted net return and risk aversion both at home and abroad. On the basis of alternative estimates, we conclude that the Pessimists’ fears are justified on the basis of trends. The trend of the actual debt ratio is higher than that of the optimal ratio. The Optimists are correct that the current debt ratio is not a menace, because the current level of the debt ratio is not above the corresponding level of the optimum ratio.

This paper analyzes the pricing behavior of electricity generating firms in the restructured California market from its inception in April 1998 until its collapse in late 2000. Using detailed firm-level data, I find that conduct is fairly consistent with a Cournot pricing game for much of the sample. In summer and fall 2000, the market was slightly less competitive, yet the dramatic rise in prices was more driven by changes in costs and demand than by changes in firm conduct. The five large nonutility generators raised prices slightly above unilateral market-power levels in 2000, but fell far short of colluding on the joint monopoly price.

Abstract This study investigates the role of corporate boards following large declines in share value surrounding acquisition announcements. The results indicate that firms with independent boards are less likely to complete these value-decreasing bids, suggesting that boards influence corporate responses to information in stock prices. Board independence is also associated with unusually high frequencies of asset restructuring for bids that are completed, suggesting that independent boards promote restructuring in mergers the market believes are difficult to integrate. These results complement existing evidence on the board's exante role in averting bad outcomes by showing that independent boards intervene following value-decreasing events.

Most economic activity occurs in cities. This creates a tension between local increasing returns, implied by the existence of cities, and aggregate constant returns, implied by balanced growth. To address this tension, we develop a general equilibrium theory of economic growth in an urban environment. In our theory, variation in the urban structure through the growth, birth, and death of cities is the margin that eliminates local increasing returns to yield constant returns to scale in the aggregate. We show that, consistent with the data, the theory produces a city size distribution that is well approximated by Zipf's law, but that also displays the observed systematic underrepresentation of both very small and very large cities. Using our model, we show that the dispersion of city sizes is consistent with the dispersion of productivity shocks found in the data.

In textbook expositions of the equity-premium, riskfree-rate and equity-volatility puzzles, agents are sure of the economy's structure while growth rates are normally distributed. But because of parameter uncertainty the thin-tailed normal distribution conditioned on realized data becomes a thick-tailed Student-t distribution, which changes the entire nature of what is considered “puzzling” by reversing every inequality discrepancy needing to be explained. This paper shows that Bayesian updating of unknown structural parameters inevitably adds a permanent tail-thickening effect to posterior expectations. The expected-utility ramifications of this for asset pricing are strong, work against the puzzles, and are very sensitive to subjective prior beliefs—even with asymptotically infinite data. (JEL D84, G12)