Optimal Policy Design Research Articles

Health Prevention and Savings: How to Deal with Fatalism?

In this paper, we first analyze the trade-off between primary prevention and savings when individuals face health (long-term care) risk. We suppose that there is no private insurance market for this risk and consider two risk management tools: primary prevention and savings. We emphasize the role of risk perception and, more precisely, we focus our discussion on the existence of a type of individuals that we call fatalists. Secondly, we analyze the role of risk perception on long-term care public policy. We propose to combine subsidies for prevention with a social insurance co-payment for long-term care expenditures. We show that the presence of fatalists is crucial in the optimal policy design.

A Note on Imperfect Credibility

We explore how outcomes of optimal monetary policy with loose commitment (Schaumburg and Tambalotti, 2007; Debortoli and Nunes, 2010) can be observationally equivalent, or interpretable as outcomes of deeper optimal policy under sustainable plans (Chari and Kehoe, 1990). Both interpretations of “imperfect credibility” in optimal monetary policy design are attempts to rationalize outcomes that lie in between the conventional extremes of optimal policy under commitment and under discretion. In a standard monetary-policy framework, when we match impulse responses of inflation and the output gap to large enough markup shocks, we find that a small probability (1 – a = 0.05) of replanning in the quasi/loose commitment world corresponds to N = 18 in the N-period punishment optimal sustainable monetary policy, in terms of observable outcomes. For plausible cases of loose-commitment model economies (with a between 0.77 and 1) we can find an observationally equivalent sustainable-plan economy indexed by some N.

Antitrust exemptions for joint R&D improve patents

Investments in scientific and technological knowledge depend on the level of excludability. In this study, based on a game-theoretic analysis of discrete public goods, it is shown that pure excludability and pure non-excludability are equally inefficient, whereas the socially optimal level of excludability is a function of the benefits and costs of the knowledge investment, where it lies between the two extremes. This result illustrates the challenges and dangers of intellectual property rights policy. Allowing for voluntary R&D cooperation, the optimal level of excludability becomes an interval, typically between the two extremes. Thus, R&D cooperation can make intellectual property rights perform more efficiently and alleviate the problem of optimal policy design. This also demonstrates that knowledge commons can be provided efficiently through voluntary cooperation when imperfect property rights give partial excludability. Therefore, R&D cooperation and intellectual property rights should be considered as complementary rather than as separate and alternative policy measures.

The New Economic Component of EMU: A Lawful and Effective Design?

This analysis aims to set out clearly and succinctly the legal arrangements for macro-economic governance in EMU, legal challenges to that regime and different ways of assessing that new regime. It focuses on changes introduced from 2010, the year when the euro area crisis, and the response to it, began, and on changes to the law other than those concerning provision of sovereign debt loan assistance. The analysis first presents the (many) key EMU acronyms before outlining in four diagrams what is new in EMU by looking at what changes have been made since 2010. It outlines what further proposals in this area are included in the Five Presidents’ Report of June 2015. It then briefly examines three central legal challenges with the current regime: competence, compatibility and complexity. Finally it raises issues of the effectiveness of the EU macro-economic governance regime by considering three assessments: too early to say, abject failure or triumph of pragmatic intelligence. These raise questions of optimal policy design. The four diagrams accordingly provide the foundation for understanding the current regime, further proposed changes, legal challenges and issues of effectiveness.

Animal spirits and optimal monetary policy design in the presence of labour market frictions

Using a New Keynesian DSGE model with labour market frictions, we compare outcomes for backward-looking animal spirits expectations with rational expectations after technology and demand shocks. For optimal monetary policy, major differences arise only for technology shocks, and discretionary policy performs better than commitment policy under animal spirits expectations. If Taylor rule parameters are chosen to best replicate optimal monetary policy outcomes, inflation targeting is only appropriate for technology shocks, particularly for large labour frictions, while targeting only economic activity is appropriate for demand shocks. Fault tolerance analysis shows high costs from failing to identify true animal spirits expectations and technology shocks.

Optimal Public Information Dissemination. Introducing Multiplier Effects into a Generalized Beauty Contest

We develop a two-period generalized beauty contest to study the optimal level of publicity when disclosed information is subject to multiplier effects. We build upon the static case, where all agents receive a private signal about an unknown fundamental state and only a fraction of all agents receive an additional public signal. However, in our model, agents no longer act simultaneously; rather, agents informed by both signals act in the first period, while those uninformed act in the second period and learn about the public signal through a multiplier signal. We show that in the unique equilibrium of our sequential game, informed agents overreact more strongly to public signals. The optimal dissemination of public information is thus considerably lower than the static case suggests. Multiplier effects might decrease overall welfare if coordination incentives are sufficiently strong. Our results hold relevance for the optimal information policy design of public authorities.

Location-quality-aware policy optimisation for relay selection in mobile networks

Relaying can improve the coverage and performance of wireless access networks. In presence of a localisation system at the mobile nodes, the use of such location estimates for relay node selection can be advantageous as such information can be collected by access points in linear effort with respect to number of mobile nodes (while the number of links grows quadratically). However, the localisation error and the chosen update rate of location information in conjunction with the mobility model affect the performance of such location-based relay schemes; these parameters also need to be taken into account in the design of optimal policies. This paper develops a Markov model that can capture the joint impact of localisation errors and inaccuracies of location information due to forwarding delays and mobility; the Markov model is used to develop algorithms to determine optimal location-based relay policies that take the aforementioned factors into account. The model is subsequently used to analyse the impact of deployment parameter choices on the performance of location-based relaying in WLAN scenarios with free-space propagation conditions and in an measurement-based indoor office scenario.

Intellectual Property Rights and Innovation: Evidence from Health Care Markets

Executive SummaryA long theoretical literature has analyzed optimal patent policy design, yet there is very little empirical evidence on a key parameter needed to apply these models in practice: the relationship between patent strength and research investments. I argue that the dearth of empirical evidence on this question reflects two key challenges: the difficulty of measuring specific research investments and the fact that finding variation in patent protection is difficult. I then summarize the findings of two recent studies that have made progress in starting to overcome these empirical challenges by combining new data sets measuring biomedical research investments with novel sources of variation in the effective intellectual property protection provided to different inventions. The first study, Budish, Roin, and Williams (2015a), documents evidence consistent with patents affecting the rate and direction of research investments in the context of cancer drug development. The second study, Williams (2...

Distributed Interference Management Policies for Heterogeneous Small Cell Networks

We study the problem of distributed interference management in a network of heterogeneous small cells with different cell sizes, different numbers of user equipments (UEs) served, and different throughput requirements by UEs. We consider the uplink transmission, where each UE determines when and at what power level it should transmit to its serving small cell base station (SBS). We propose a general framework for designing distributed interference management policies, which exploits weak interference among non-neighboring UEs by letting them transmit simultaneously (i.e., spatial reuse), while eliminating strong interference among neighboring UEs by letting them transmit in different time slots. The design of optimal interference management policies has two key steps. Ideally, we need to find all the subsets of non-interfering UEs i.e., the maximal independent sets (MISs) of the interference graph, but this is computationally intractable even when solved in a centralized manner. Then, to maximize some given network performance criterion subject to UEs' minimum throughput requirements, we need to determine the optimal fraction of time occupied by each MIS, which requires global information (e.g., all the UEs' throughput requirements and channel gains). In our framework, we first propose a distributed algorithm for the UE-SBS pairs to find a subset of MISs in logarithmic time (with respect to the number of UEs). Then we propose a novel problem reformulation which enables UE-SBS pairs to determine the optimal fraction of time occupied by each MIS with only local message exchange among the neighbors in the interference graph. Despite the fact that our interference management policies are distributed and utilize only local information, we can analytically bound their performance under a wide range of heterogeneous deployment scenarios in terms of the competitive ratio with respect to the optimal network performance, which can only be obtained in a centralized manner with NP complexity. Remarkably, we prove that the competitive ratio is independent of the network size. Through extensive simulations, we show that our proposed policies achieve significant performance improvements (ranging from 160% to 700%) over state-of-the-art policies.

Should a country invest more in human or physical capital?

Should a country invest more in human or physical capital? Using a two-sector overlapping generations setting with endogenous growth driven by human capital accumulation, we prove that relative factor intensity between sectors drastically shapes the welfare analysis: two identical laissez-faire economies with different sectoral capital shares may generate physical capital excess or scarcity, with respect to the optimum. The design of optimal policy depends on the sectoral properties and the social planner discount rate.

Dealing with the Dutch disease: Fiscal rules and macro-prudential policies

We evaluate from a welfare perspective three policy alternatives frequently proposed to deal with Dutch-disease problems originated from cyclical movements in commodity prices. Namely, fiscal rules for government expenditures, capital controls, and taxes to domestic lending. To this end, we develop a DSGE model of a small open economy with a sectoral decomposition that features three distinctive characteristics: financial frictions, a learning-by-doing externality in the industrial sector, and a fraction of households being non-Ricardian (credit constrained). The first two features induce inefficient relocations after commodity shocks, while the later is relevant to study the role of fiscal rules. We calibrate the model using Chilean data, applying an impulse-response-matching approach. For each of the policy tools, we analyze optimal simple rules from a welfare (Ramsey) perspective, describing how different households rank the several policy alternatives, and studying how each of the models features shape the optimal policy design. A general conclusion of the analysis is that the included Dutch-disease inefficiencies are of limited quantitative relevance in analyzing the desirability of these policies from a welfare perspective.

Optimal codesign of nonlinear control systems based on a modified policy iteration method.

This brief studies the optimal codesign of nonlinear control systems: simultaneous design of physical plants and related optimal control policies. Nonlinearity of the optimal codesign problem could come from either a nonquadratic cost function or the plant. After formulating the optimal codesign into a nonconvex optimization problem, an iterative scheme is proposed in this brief by adding an additional step of system-equivalence-based policy improvement to the conventional policy iteration. We have proved rigorously that the closed-loop system performance can be improved after each step of the proposed policy iteration scheme, and the convergence to a suboptimal solution is guaranteed. It is also shown that under certain conditions, this additional policy improvement step can be conducted by solving a quadratic programming problem. The linear version of the proposed methodology is addressed in the context of linear quadratic regulator. Finally, the effectiveness of the proposed methodology is illustrated through the optimal codesign of a load-positioning system.

Simulations of Technology-induced and Crisis-led Stochastic and Chaotic Fluctuations in Higher Education Processes: A Model and a Case Study for Performance and Expected Employment

AbstractThis paper presents a simple model of the provision of higher educational services that considers and exemplifies nonlinear, stochastic, and potentially chaotic processes. I use the methods of system dynamics to simulate these processes in the context of a particular sociologically interesting case, namely that of the Turkish higher education sector during the recent global economic crisis. I undertake simulations for two variables, namely for the quality-adjusted performance and the technology-induced expected employment. Simulations for the quality-adjusted performance display stochastic fluctuations around a modestly rising deterministic trend. Chaotic performance trajectories are shown to be possible for certain parameter values; however, given the historical experience and observed current tendencies in higher education in Turkey, they appear to be highly unlikely. Simulations for expected employment indicate that increases in the levels of technology utilization in education could lead to improved perceptions of employment prospects and potentially help to increase the level of employment in the economy.Keywords: Stochastic simulation * Chaotic patterns * Education * TurkeyJEL codes: I21 * I23(ProQuest: ... denotes formulae omitted.)Education has a number of complexity-generating, interrelated features that present considerable challenges to the orthodox economic theory. First, it creates, for individuals in particular and society in general, positive dynamic externalities that are too enormous to ignore and too difficult to measure and internalize. In the presence of such externalities, underproduction of output or services is a likely intertemporal outcome, leading to inefficiency at the societal level. Second, education creates interdependencies for the strategically interacting agents that make atomistically optimizing behavior problematic, producing a wide range of possibilities for cooperation and competition with complicated patterns of stability and optimality. Third, it involves a wide range of nonlinearities that are prone to potentially chaotic behavior. A small change in the initial conditions could produce significant differences in outcomes over time. Fourth, it has, in part, certain indeterminate, stochastic, and/or fundamentally uncertain dimensions that render the educational outcomes open-ended and only partially predictable.There are a number of works in the literature that explore the selected dimensions of these complexities. Among these are Barlas, Diker, and Polat (1997); Barlas and Diker (2000); Hazlett (2000); De Fraja (2002); Marginson (2007); Kara (2007; 2013); Viaene and Zilcha (2009); Loomis and Rodrigues (2009); Eckwert and Zilcha (2012); Budge, Beale, and Lynas (2013); Velasco (2014); Aasen, Proitz, and Sandberg (2014); Schumacher, Dias, and Tebaldi (2014); and Kuziemko (2014).The topics covered by these works range from the dynamic and strategic issues in education to the design of optimal education policies. Needless to say, each work was certainly limited in scope and focused a particular aspect of education. Barlas and Diker (2000) focused, for instance, on the longterm, dynamic, strategic management problems, such as growing student/faculty ratios, poor teaching quality, and low research productivity (p. 331). The analysis they present could be considerably enriched by a proper account of positive externalities associated with education. Such externalities are indicated in Hazlett (2000). The creation of such education-induced spillover benefits has a lot to do with the public and private investment in education, the public and private organization of education, and creative designs of optimal educational policies, which are explored, however partially, in many works including De Fraja (2000), Marginson (2007) and Eckwert and Zilcha (2012).Within this general stream of research education, there are many saddle issues that are delicately dealt with. …

The Economics of Financing Higher Education

Participation in higher education has increased considerably over the last decades. The resulting budgetary pressure, in combination with the recent financial crisis, has led to reforms in the financing schemes for higher education many countries. These reforms often shift a substantial share of the costs towards students and their parents. Not only have tuition fees increased, but new modes of financing — for example, fees and grants that depend on study progress, or loan repayments that are contingent on future income — are increasingly introduced as well.Participation in higher education is unlikely to decline in the future and the resulting budgetary pressure is therefore likely to stay. In addition, other budgetary needs, in particular the financing of health care and pensions, are higher on the political agenda in many countries. Ad hoc reforms in the financing of higher education can alleviate some of the budgetary needs in the short-run, but there is a great need to design structural policies that are sustainable in the long run as well.The current review spells out economic arguments to guide our thinking about the financing of higher education. Such a review is not only useful to the current public debate in many countries, it also provides a well-timed update of the current academic literature. First, some of the older arguments, like externalities and signalling, turn out to be difficult to validate empirically, while others, e.g., credit constraints, have become more important over time. We review the empirical literature with special attention to the causal evidence that has become increasingly available over the last years. Second, recent insights from behavioural economics provide new arguments for intervention in higher education. Additionally, multiple recent studies in the public finance literature have analyzed the pros and cons of different innovative financing schemes, such as income-contingent loans and graduate taxes. We integrate the theoretical and empirical findings of behavioural economics and public finance in the current review.The starting point of our analysis in section 2 is the following question: do we need government intervention in higher education? The second welfare theorem provides a clear answer. If there are no market failures, if individuals behave rationally, and if non-distortive lump-sum transfers are feasible, then there is no need for government intervention other than redistribution based on lump-sum transfers.The obvious next question is: do these assumptions hold? Economic arguments for government intervention may arise if one of the assumptions fail. Insurance, credit, education and labour markets — all highly revelant to higher education — may malfunction in the absence of government intervention. In addition, there is ample evidence that individuals do not always behave rationally, and students turn out to be no exception. Finally, although non-distortive lump-sum transfers are (first) best, they are not feasible in reality.In sections 3, 4, and 5 we discuss market failures (incomplete insurance, credit constraints, externalities, and signalling), behavioural failures (misprediction, positional goods, and peer interactions), and first-best failures (distortions, perverse redistribution, and fiscal externalities). In each section we identify the theoretical problem, analyze the consequences for participation in higher education, and provide the available empirical evidence.The final section seeks to answer one last question: how should educational subsidies and redistribution policies look like? In section 6 we first take stock and identify the failures that we consider essential for an optimal policy design. Afterwards, we discuss the pros and cons of the different financing modes (general taxation, classical loans, income-contingent loans, and graduate taxes) in more detail.We focus on the economics of financing higher education, so other fields (e.g., psychology and educational sciences), other interventions (e.g., regulation), other educational levels (e.g., compulsory education), and other tasks of higher education (e.g., research) only enter the discussion if deemed essential. In addition, the current review is limited to the study of demand side aspects (versus supply and governance). In particular, we mainly focus on the participation decision (versus effort and success) in higher education from a welfare point of view (versus a political economy view).

AN ANALYTICAL AND NUMERICAL SEARCH FOR BIFURCATIONS IN OPEN ECONOMY NEW KEYNESIAN MODELS

We explore bifurcation phenomena in the open-economy New Keynesian model developed by Galí and Monacelli in 2005. We find that the open economy framework brings about more complex dynamics, along with a wider variety of qualitative behaviors and policy responses. Introducing parameters related to the open economy structure affects the values of bifurcation parameters and changes the location of bifurcation boundaries. As a result, the stratification of the confidence region, as previously seen in closed-economy New Keynesian models, remains an important research and policy risk to be considered in the context of the open-economy New Keynesian functional structures. In fact, econometrics and optimal policy design become more complex within an open economy. Dynamical inferences need to be qualified by the risk of bifurcation boundaries crossing the confidence regions. Policy design needs to take into consideration that a change in monetary policy can produce an unanticipated bifurcation, without adequate prior econometrics research.

Heterogeneous Expectations, Optimal Monetary Policy, and the Merit of Policy Inertia

The design and analysis of optimal monetary policy is usually guided by the paradigm of homogeneous rational expectations. Instead, we examine the dynamic consequences of design and implementation strategies, when the actual economy features expectational heterogeneity. Agents have either rational or adaptive expectations. Consequently, the central bank's ability to achieve price stability under heterogeneous expectations depends on its objective and implementation strategy. An expectations‐based reaction function, which appropriately conditions on private sector expectations, performs exceptionally well. However, once the objective introduces policy inertia, popular strategies have similar determinacy properties, but they are less operational. This finding calls for new implementation strategies under interest rate stabilization.

Effects of Exclusion from a Conservation Policy: Negative Behavioral Spillovers from Targeted Incentives

A critical issue in the design of incentive mechanisms is the choice of whom to target. For forests, the leading rules are (1) target locations with high ecosystem-service density; (2) target additionality, i.e., locations where conservation would not occur without the incentive; and, (3) at least effectively reward previous private choices to conserve forest. We use a field experiment to examine the changes in contributions to forest conservation when we introduce each of these selection rules. For individuals who are selected, we find that targeting additionality (rule 2) is the only scheme to increase contributions. However, that selection rule intentionally excludes those who contributed most previously, and it is the only one to generate significant “behavioral leakage,” i.e., negative spillovers or a decrease in contributions by those who are excluded (and who face no price or income changes). Our results demonstrate a tradeoff in targeting and a challenge for optimal policy design.

Expectations and optimal monetary policy: A stability problem revisited

A landmark result in the optimal monetary policy design literature is that fundamental-based interest rate rules invariably lead to rational expectations equilibria (REE) that are not stable under adaptive learning. In this paper, we make a novel information assumption that private agents cannot observe aggregate fundamental shocks, and use simple linear forecasting rules for learning. We find that with fundamental-based rules, there exist limited information equilibria that are stable under learning. Moreover, there are multiple equilibria. Learning can be used as a selection tool to identify a unique equilibrium.

Optimal and Long-Term Dynamic Transport Policy Design: Seeking Maximum Social Welfare through a Pricing Scheme

ABSTRACT This article presents an alternative approach to the decision-making process in transport strategy design. The study explores the possibility of integrating forecasting, assessment and optimization procedures in support of a decision-making process designed to reach the best achievable scenario through mobility policies. Long-term evaluation, as required by a dynamic system such as a city, is provided by a strategic Land-Use and Transport Interaction (LUTI) model. The social welfare achieved by implementing mobility LUTI model policies is measured through a cost-benefit analysis and maximized through an optimization process throughout the evaluation period. The method is tested by optimizing a pricing policy scheme in Madrid on a cordon toll in a context requiring system efficiency, social equity and environmental quality. The optimized scheme yields an appreciable increase in social surplus through a relatively low rate compared to other similar pricing toll schemes. The results highlight the different considerations regarding mobility impacts on the case study area, as well as the major contributors to social welfare surplus. This leads the authors to reconsider the cost-analysis approach, as defined in the study, as the best option for formulating sustainability measures.

La Reserva Federal de Estados Unidos y el Banco de Inglaterra: Propiedad, estructura e 'independencia'

<p><strong>Resumen </strong></p> <p>Este ensayo explora la fundación y desarrollo de la Reserva Federal (Fed) de Estados Unidos (US) y el Banco de Inglaterra (BI), en la perspectiva del debate reciente de la independencia de la banca central y el diseño de la política monetaria óptima. Se muestra que los creadores de la Fed fueron agudamente conscientes de que estaban fundando un banco central (basado en algún grado en el BI al punto en que había evolucionado). Por esto fueron conscientes del poder potencial que la institución podría tener, de manera que la cuestión del control e influencia fue central. De forma interesante, los padres fundadores finalmente optaron por la independencia de los intereses del dinero de Wall Street en lugar de la independencia del Estado. La reputación de la Fed de competencia política e independencia se debe mucho más al papel de sus fuertes presidentes en años recientes que a cualquier diseño formal.</p> <p>En contraste, el BI fue fundado como un banco privado. Preocupaciones sobre su independencia no jugaron ningun papel en su historia temprana y solamente surgieron después de que había adquirido, paso a paso, las responsabilidades de un banco central. Las primeras preocupaciones serias sobre su independencia fueron durante el periodo de entreguerras cuando se pensaba que el Banco estaba demasiado atento en su apoyo al papel de Londres como centro de finanzas internacionales, a expensas de los intereses de la economía doméstica. En parte por esa razón fue nacionalizado en 1947. Cuando se otorgó su independencia operacional en 1997, se le quitaron dos de sus responsabilidades para evitar conflictos de interés.</p> <p>Lo que enseña la historia de los bancos es, primero, que la independencia del gobierno no es lo esencial para alcanzar una política óptima, sino la libertad de perseguir una sola prioridad, y segundo, que la efectividad con la cual eso se lleva a cabo tiene poco o nada que ver con leyes, actas constitutivas, y estatutos.</p>