A straightforward generalization of the simple net present value rule that correctly predicts when to invest in two classes of projects that can be delayed is derived. The first class consists of projects for which the option to delay derives its value exclusively from uncertainty about interest rates. It is shown that the optimal rule for investing in such projects is to simply multiply the discount rate of the project by the ratio of the mortgage rate to the riskless rate and then use this new rate as the discount rate in a standard net present value analysis. The other class of investment opportunities that is considered is the firm's option to expand. It is shown that it is only optimal for the firm to expand when a particular call option on the firm's stock has no time value. The fact that mortgage bonds (in the form of GNMAs) and stock options are actively traded implies that these rules have potentially important practical and empirical value. Besides their simplicity, the rules have the added advantage that they do not depend on a maintained assumption on the dynamics of interest rates in the economy.
Generational accounting is a relatively new method of long-term fiscal planning and analysis. This paper presents a selection of the latest generational accounting results for 22 countries.
This paper explores investment fluctuations due to discrete changes in a plant's capital stock. The resulting aggregate investment dynamics are surprisingly rich, reflecting the interaction between a replacement cycle, the cross-sectional distribution of the age of the capital stock, and an aggregate shock. Using plant-level data, lumpy investment is procyclical and more likely for older capital. Further, the predicted path of aggregate investment that neglects vintage effects tracks actual aggregate investment reasonably well. However, ignoring fluctuations in the cross-sectional distribution of investment vintages can yield predictable nontrivial errors in forecasting changes in aggregate investment.
A surprisingly large amount of otherregarding behavior is the common finding of experiments on bargaining, public goods, and trust. Elizabeth Hoffman et al. ( hereafter, HMS ) ( 1996 ) have provided an insightful analysis of why experimental results deviate from game theoretic predictions in dictator games. The authors conclude that individuals’ dispositional knowledge about social norms and reciprocity is activated by decreasing social distance even though the dictator game explicitly excludes reciprocal sanctioning possibilities by experimental design. We challenge this conclusion. While HMS (p. 654) define social distance to be ‘‘the degree of reciprocity that subjects believe exist within a social interaction,’’ we argue that social distance influences otherregardedness independent of any norms of social exchange. When social distance decreases, the ‘‘other’’ is no longer some unknown individual from some anonymous crowd but becomes an ‘‘identifiable victim’’ (Thomas C. Schelling 1968). In order to discriminate between reciprocity-based and identifiabilitybased other-regardedness, we also used the dictator game and varied the degree of social distance. An anonymous treatment is com-
Discrepancies in International Data: An Application to China-Hong Kong Entrepot Trade by Robert C. Feenstra, Wen Hai, Wing T. Woo and Shunli Yao. Published in volume 89, issue 2, pages 338-343 of American Economic Review, May 1999
Scale economies and agglomeration externalities are alleged to be important determinants of economic growth. To assess these effects, we outline and estimate a microfoundations model based on a dynamic cost function specification. This model provides for the separate identification of the impacts of externalities and cyclical utilization on short- and long-run scale economies and input substitution patterns. We find that scale economies are prevalent in U.S. manufacturing, cost savings and scale effects often attributed to internal inputs may be due to external factors, and supply-side agglomeration effects are greater than demand-side, especially in the long run.
Increased concem by policy makers with the threat of global climate change has brought with it considerable attention to the possibility of encouraging the growth of forests as a means of sequestering carbon dioxide (National Academy of Sciences [NAS], 1992; James P. Bruce et al., 1996).1 The Kyoto Protocol to the United Nations Framework Convention on Climate Change (1997), which establishes emission reduction targets for the United States and other industrialized nations, states that carbon sequestration can be used by participating nations to achieve their targets. Moreover, even before the Kyoto agreement, this approach had become an explicit element of both U.S. and intemational climate policies (U.S. Department of Energy, 1991; United Nations General Assembly, 1992; William J. Clinton and Albert Gore, 1993). This high level of interest has been due, in part, to: suggestions that sufficient lands are available to use the approach to mitigate a substantial share of annual carbon dioxide (C02) emissions (Greg Marland, 1988; Daniel A. Lashof and Dennis A. Tirpak, 1989; Mark C. Trexler, 1991); and claims that growing trees to sequester carbon is a relatively inexpensive means of combating climate change (Roger A. Sedjo and Allen M. Solomon, 1989; Daniel J. Dudek and Alice LeBlanc, 1990; NAS, 1992). In other words, the serious attention given by policy makers to carbon sequestration can partly be explained by (implicit) assertions about respective marginal cost functions. I develop and demonstrate a method by which the costs of carbon sequestration can be estimated on the basis of evidence from landowners' behavior when confronted with the opportunity costs of alternative land uses. The simplest of previous economic analyses derived single point estimates of average costs associated with particular sequestration levels (Marland, 1988; Sedjo and Solomon, 1989; Dudek and LeBlanc, 1990; Edwin S. Rubin et al., 1992; Omar Masera et al., 1995). Often it has been assumed that land (opportunity) costs are zero (G. van Kooten et al., 1992; J. K. Winjum et al., 1992; New York State Energy Office, 1993; Robert K. Dixon et al, 1994). Another set of studies-essentially engineering/costing has constructed marginal cost schedules by using information on revenues and costs of production for altemative uses on representative types or locations of land, and then sorting these in ascending order of cost (Robert J. Moulton and Kenneth R. Richards, 1990; Richards et al., 1993). Simulation models include a model of the lost profits due to removing land from agricultural production (Peter J. Parks and Ian W. Hardie, 1995), a mathematical programming model of the agricultural sector and the timber market (Richard M. Adams et al, 1993), a related model incorporating the effects of agricultural price support programs (J. M. Callaway and Bruce McCarl, 1996), and a dynamic simulation model of forestry (Susan Swinehart, 1996). Lastly, an analysis by Andrew J. Plantinga (1995) adopts land-use elasticities from an econometric study to estimate sequestration costs. We draw on some of the best features of the previous studies, including the carbon levelization method of Moulton and Richards * John F. Kennedy School of Government, Harvard University, 79 John F. Kennedy Street, Cambridge, MA 02138, and Resources for the Future. Richard Newell supplied excellent research assistance; and valuable comments on a previous version were provided by Lawrence Goulder, William Nordhaus, Andrew Plantinga, Kenneth Richards, two anonymous referees, participants in seminars at the Universities of California at Los Angeles and Santa Barbara, the University of Maryland, the University of Michigan, the University of Texas, Harvard University, Stanford University, Yale University, Resources for the Future, and the National Bureau of Economic Research. The author alone is resDonsible for any errors. 1 After fossil-fuel combustion, deforestation is the second largest source of carbon dioxide emissions. Estimates of annual global emissions from deforestation range from 0.6 to 2.8 billion tons, compared with slightly less than 6.0 billion tons annually from fossil-fuel combustion, cement manufacturing, and natural gas flaring, combined (R. A. Houghton, 1991; T. M. Smith et al., 1993).
This paper employs a simple theoretical model of labor allocation within rural households given existing land arrangements in an attempt to explain why rural Chinese do not fully participate in labor migration. It first explores the mechanisms by which individual household and community characteristics affect the migration decision. Empirical results are then presented to substantiate the derived hypotheses. The paper further explores the question of whether the migration decision is permanent by analyzing the responses of household consumption to income from migration. (EXCERPT)
In an influential paper, Avinash Dixit (1987) considers a class of symmetric two-player contests in which each player’s effort, xi, influences the probability of winning a prize valued at K . 0. Letting p( x1, x2) denote the probability 1 that player 1 wins, the expected payoffs of the two players are p1 5 p( x1, x2) K 2 x1 and p2 5 [1 2 p( x1, x2)]K 2 x2. Dixit’s main result is that if there is perfect symmetry between the players and each player’s effort has a positive but diminishing marginal effect on his or her probability of winning, i.e.,
In this paper we study the quantitative impact of marginal tax rates on the distribution of income. Our methodology builds on computable general-equilibrium framework. We find that distortions from marginal tax rate changes of the sort implied by the Tax Reform Act of 1986 have sizable effects on income inequality in a reasonably quantified life-cycle setting: In our model rate changes alone capture half the increase in the pretax Gini that actually occurred between 1984 and 1989.