Infinite-horizon Dynamic Model Research Articles

On the economics of tropical deforestation: Carbon credit markets and national policies

This paper contributes to the economics of deforestation by presenting a formal, infinite horizon dynamic model describing the use of tropical forest resources. As an alternative to clearing the forest, a landowner has the option to sell it to an international carbon crediting program. The model is used to investigate corrective incentive programs needed to ensure a socially optimal level of forest resources. Optimal conditions for a land income tax and carbon compensation rate are derived. The paper shows that the optimality of national carbon compensation policies crucially depends on the land income taxation. In the presence of an optimal land income tax-subsidy program, the government may need to pass on to the landowners the very carbon compensation that it receives from the international community to ensure a socially optimal tropical forest stock. However, the government may need to over-transfer or under-transfer the carbon compensation depending on whether the pre-existing land income tax is below or above the optimal level, respectively. This suggests that the pre-existing sub-optimality in land income taxation in a given country can be corrected by adjusting the carbon compensation. Therefore, a carbon compensation scheme should take into account existing national policies that affect forest clearing.

Incomplete Information and Self-Fulfilling Prophecies

This paper shows that incomplete information can be a rich source of sunspots equilibria. This is demonstrated in a standard dynamic general equilibrium model of monopolistic competition … la Dixit-Stiglitz. In the absence of fundamental shocks, the model has a unique certainty (fundamental) equilibrium, but there are also multiple stochastic (sunspots) equilibria that are not mere randomizations over fundamental equilibria. In other words, sunspots can exist in infinite-horizon dynamic models with a unique saddle path steady state. In contrast to the recent sunspots literature (e.g., Benhabib and Farmer 1994), sunspots arising under incomplete information can be serially correlated and are robust to parameters associated with production technologies and preferences. Markup is always countercyclical in sunspots equilibria (which is consistent with empirical evidence) and fluctuations driven by sunspots look very similar to fluctuations driven by technology shocks.

A Dynamic Analysis of Child Labor with a Variable Rate of Discount: Some Policy Implications

Abstract This paper analyzes the problem of child labor in an infinite-horizon dynamic model with a variable rate of time preference and credit constraints. The variability in the rate of time preference leads to the possibility of multiple steady states and a poverty trap. The paper considers the long-run and short-run effects of an array of policies like enrollment subsidy, improvement in primary education infrastructure, lump-sum subsidy, and variations in loan market parameters. We distinguish between policies that reduce child labor in the long run only in the presence of a variable discount rate and other policies which work whether or not the discount rate is variable. Credit-related policies belong to the former group. Policies that reduce child labor and increase family consumption in the long run may have an adverse effect of lowering consumption in the short run.

A Dynamic Analysis of Child Labor with a Variable Rate of Discount: Some Policy Implications

This paper analyzes the problem of child labor in an infinite-horizon dynamic model with a variable rate of time preference and credit constraints. The variability in the rate of time preference leads to the possibility of multiple steady states and a poverty trap. The paper considers the long-run and short-run effects of an array of policies like enrollment subsidy, improvement in primary education infrastructure, lump-sum subsidy, and variations in loan market parameters. We distinguish between policies that reduce child labor in the long run only in the presence of a variable discount rate and other policies which work whether or not the discount rate is variable. Credit-related policies belong to the former group. Policies that reduce child labor and increase family consumption in the long run may have an adverse effect of lowering consumption in the short run.

The parametric path method: an alternative to Fair–Taylor and L–B–J for solving perfect foresight models

The parametric path method applies projection methods to compute the equilibrium time path of economic variables in infinite-horizon dynamic models. We exploit the special structure of equilibrium paths common in such models to construct a low-dimensional set of candidate solutions, and then use efficient integration and equation solution methods to find an approximate solution. Simple illustrative examples show that the parametric path method can find excellent approximations with little computational cost.

Tracing Abandoned Waste Sites: Principle Witness Regulation as an Incentive for Information Disclosure

The paper argues that the existing German and American liability rules for the cleanup of Superfund sites do not generate incentives to reveal private information on the existence of a contaminated site. It presents a infinite-horizon dynamic model of imperfect information and shows that such incentives are generated by appropriately reducing the liability share of any potentially responsible party which reveals its private information. The necessary reduction is a function of the probability of exogenous discovery and of the discount factor of the potentially responsible party. By referring to the legal literature on State's evidence, the paper analyses the problems related with different possibilities of designing the reduction rule.