Welfare Reducing Research Articles

Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime

We study the role of the exchange rate regime, reserve accumulation, and sterilization policies in the macroeconomics of aid surges. Absent sterilization, a peg allows for almost full aid absorption — an increase in the current account deficit net of aid—delivering the same effects as those of a flexible regime but with a necessary increase in inflation. Regardless of the regime, policies that limit absorption—and result in large accumulation of reserves—are welfare reducing: they help reduce the real appreciation (and inflation under the peg), but at the expense of reducing private consumption and investment, and therefore medium-term growth.

Commitment, Deficit Ceiling, and Fiscal Privilege

This study analyzes how commitment to a deficit ceiling can affect private agents´ political efforts, as well as overall welfare, in a hard- and a soft-budget regime, using a two-period model simulating a present and a future generation and a government. In the hard-budget regime, the government imposes the deficit ceiling before the present generation´s interest group decides the quantity of personal fiscal privileges. Since in the soft-budget regime the government cannot commit itself to the deficit ceiling ex ante, the present generation exerts intense political efforts for personal fiscal privileges. We explore the interesting possibility that the soft-budget regime leads to an overall welfare reduction for both generations, and hence, the commitment to a deficit ceiling benefits even rent-seeking private agents.

Carbon Policy in a High-Growth Economy: The Case of China

There is widespread concern that an international agreement on stringent climate policies will not be reached because it would imply too high costs for fast growing economies like China. To quantify these costs we develop a general equilibrium model with fully endogenous growth. The framework includes disaggregated industrial and energy sectors, endogenous innovation, and sector-specific investments. We find that the implementation of Chinese government carbon policies until 2020 causes a welfare reduction of 0.3 percent. For the long run up to 2050 we show that welfare costs of internationally coordinated emission reduction targets lie between 3 and 8 percent. Assuming faster energy technology development, stronger induced innovation, and rising energy prices in the reference case reduces welfare losses significantly. We argue that increased urbanization raises the costs of carbon policies due to altered consumption patterns.

Effects of high-speed rail and airline cooperation under hub airport capacity constraint

This paper analyzes the effects of cooperation between a hub-and-spoke airline and a high-speed rail (HSR) operator when the hub airport may be capacity-constrained. We find that such cooperation reduces traffic in markets where prior modal competition occurs, but may increase traffic in other markets of the network. The cooperation improves welfare, independent of whether or not the hub capacity is constrained, as long as the modal substitutability in the overlapping markets is low. However, if the modal substitutability is high, then hub capacity plays an important role in assessing the welfare impact: If the hub airports are significantly capacity-constrained, the cooperation improves welfare; otherwise, it is likely welfare reducing. Through simulations we further study the welfare effects of modal asymmetries in the demands and costs, heterogeneous passenger types, and economies of traffic density. Our analysis shows that the economies of traffic density alone cannot justify airline–HSR cooperation.

Adverse Selection and Inertia in Health Insurance Markets: When Nudging Hurts.

This paper investigates consumer inertia in health insurance markets, where adverse selection is a potential concern. We leverage a major change to insurance provision that occurred at a large firm to identify substantial inertia, and develop and estimate a choice model that also quantifies risk preferences and ex ante health risk. We use these estimates to study the impact of policies that nudge consumers toward better decisions by reducing inertia. When aggregated, these improved individual-level choices substantially exacerbate adverse selection in our setting, leading to an overall reduction in welfare that doubles the existing welfare loss from adverse selection.

Do parents drink their children’s welfare? Intra-household allocation of time between market labour, domestic work and child care in Russia

Abstract The aim of this paper is to investigate whether parental alcohol consumption leads to a reduction of child welfare. To this end, we analyse whether alcohol consumption decreases parents’ time spent looking after children and working. Using the Russia Longitudinal Monitoring Survey, we estimate a model of intra-household allocation of time for mono-nuclear families with children under fifteen years of age. We find that fathers’ alcohol consumption has a negative impact on their weekly hours spent doing child care, while no significant effect is observed for mothers’ alcohol consumption. JEL codes D1; I1; J13; J22

Developing a modified conceptual model for health impact assessment towards Ecological Public Health

Background Methodologies for risk and impact assessment of human and environmental health effects often incorporate the use of conceptual models for problem framing and for the identification and evaluation of interventions. As the understanding of the intricate relationships between human health and the environment grows - particularly with regard to humans as part of ecosystems - the need for integration across scientific and professional disciplines and policy communities increases. Aims Through linking environmental health and ecosystem services, we aim to address inefficiencies introduced by discipline and policy barriers and so foster mutual understanding and improvements to human health and well-being. Methods/Results We propose the “Ecosystem-Enriched Driver-Pressure-State-Exposure-Effect (eDPSEEA) model,” to overcome the fragmentation of scientific disciplines and policy areas. It recognises positive and negative connections between the health of both humans and the environment. eDPSEEA incorporates socio-economic and other contextual modifiers of exposure and exposure-effect relationships, and recognises the importance of feedback-loops, trade-offs, and synergies between actions. As an illustration, we discuss how air pollution effects on human health and wider implications can be addressed using eDPSEEA. Conclusions Using the example of air pollution, we highlight the need to account for second order effects on human health via ecosystem services. Furthermore, we show socio-economic context is vital to account for distributional effects and modifiers for exposure-effect-relationships. We also recognise the potential for positive health and well-being effects (e.g. through green or blue space). Quantifications of effects which omit these positive aspects are potentially misleading, wrongly implying an overall reduction in societal welfare. Also it is vital to considerwhere measures to address an issue may create new problems.

Entry, Profit and Welfare under Asymmetric R&D Costs

We show the effects of entry of a new firm on the profits and welfare when the firms share the same initial cost of production but differ in terms of the costs of undertaking R&D. Considering a Cournot oligopoly model with innovation and linear demand and production costs, we show that entry reduces the profits of the incumbent firms and it can be welfare reducing.

Quota Enforcement in Resource Industries: Self-Reporting and Differentiated Inspections

Quotas are frequently used in the management of renewable resources and emissions. However, in many industries there is concern about their basic effectiveness due to non-compliance. We develop an enforcement model of a quota-regulated resource and focus on a situation with significant non-compliance and exogenous constraints on fines and enforcement budget. We propose a new enforcement system based on self-reporting of excess extraction and explicit differentiation of inspection rates depending on compliance history. We use differentiated inspections to induce firms to self-report excess extraction. This system increases the effectiveness of the quota by allowing the regulator to implement a wider range of aggregate extraction targets than under traditional enforcement, while ensuring an efficient allocation of extraction. In addition, inspection costs can be reduced without reductions in welfare.

Costs of Low Productivity: Intensive and Extensive Margins

This paper discusses welfare costs of a decrease in productivity and argues that there are two important channels which cause a reduction in welfare: a decrease in output per firm (intensive margin) and a decrease in number of operating firms (extensive margin). Traditional Dixit-Stiglitz monopolistic competition framework with constant elasticity of substitution utility and common productivity across firms fail to capture the extensive margin. To address this problem, this paper introduces “continuum-quadratic” utility (i.e. linear demand system) while keeping the other assumptions unchanged and finds that lowering productivity affects not only the intensive but extensive margin as well.

Price discrimination via information provision

We study price discrimination where different prices are offered as a bundle with different levels of information about a product. The seller’s price discrimination induces high valuation buyers to purchase a good without information and low valuation buyers to purchase with information. Our analysis highlights several interesting results about price discrimination: (i) the seller’s choice of information provision is the combination of full information and no information, (ii) products can be cheaper without information provision than with information provision, (iii) as a result of price discrimination, prices can be more dispersed as buyers’ valuations become largely similar, and (iv) the high valuation buyers purchase a damaged good and may earn negative surplus. Furthermore, we investigate under which circumstances price discrimination is more profitable than uniform pricing. We show that a decline in transportation costs which facilitate price discrimination can be welfare reducing.

Contrasting Attitudes towards Animal Welfare Issues within the Food Chain.

Simple SummaryIntensive systems have been increasingly considered to be responsible for a dramatic reduction in animal welfare. As a consequence, large segments of animal welfare-sensitive consumers have been identified. On the other hand, price conscious consumers, if accepting higher prices, are more likely to require explicit justification of returns in quality. Therefore, scientifically validated monitoring systems for assessing the welfare of farm animals have been developed in order to provide a certification system, allow the differentiation of animal-based products through constant and reliable signaling systems, and promote animal welfare friendly farming systems.Intensive systems have facilitated the production of animal-based products at relatively low prices. On one hand, these methods have been increasingly considered to be responsible for a dramatic reduction in animal welfare, as indicated by the high prevalence of stereotypies in sows, brittle bones in hens, lameness in broilers and short life span in dairy cattle. As a consequence, large segments of animal welfare-sensitive consumers have been identified. On the other hand, price conscious consumers, if accepting higher prices, are more likely to require explicit justification of returns in quality. Therefore, scientifically validated monitoring systems for assessing the welfare of farm animals have been developed in order to provide a certification system, allow the differentiation of animal-based products through constant and reliable signaling systems, and promote animal welfare friendly farming systems.

Can Horizontal Mergers Without Synergies Increase Consumer Welfare? Cournot and Bertrand Competition Under Uncertain Demand

Abstract We analyze the welfare effects of horizontal mergers in a model wherein firms produce differentiated products and possess asymmetric information about uncertain market demand. Mergers do not bring about synergies or cost savings, but do allow firms to share their market demand information. We find that under Cournot competition, mergers without synergies could increase expected consumer surplus and social welfare, provided that market volatility is sufficiently large. The parameter spaces in which mergers are beneficial to consumers and society widen when products are more differentiated. In contrast, under Bertrand competition, mergers are always welfare reducing regardless of the degree of market volatility and extent of product differentiation. The driving force for the contrasting results lies in opposing welfare effects of information sharing in the contexts of quantity and price setting.

Market equilibrium in the presence of green consumers and responsible firms: A comparative statics analysis

This paper analyzes how the interaction between green consumers and responsible firms affects the market equilibrium. The main result is that a higher degree of responsibility of consumers and/or firms may both increase and decrease the total abatement and the social welfare. In general an increment in the degree of CSR of a firm entails an increase of its total clean-up and a reduction of the aggregate abatement of its rival. When the rival firm has a high degree of CSR this second effect is stronger than the first and total abatement falls down. At the same time, when the degree of consciousness of consumers and/or firms is very high, responsible firms overprovide environmental quality: in such case a further increment in the level of social responsibility of a market actor may trigger an increase of firms’ total clean-up but a reduction in social welfare.

Economy-wide impacts of biofuels in Argentina

Argentina is one of the world's largest biodiesel producers and the largest exporter, using soybeans as feedstock. Using a computable general equilibrium model that explicitly represents the biofuel industry, this study carries out several simulations on two sets of issues: (i) international markets for biofuel and feedstock, such as an increase in prices of soybean, soybean oil, and biodiesel, and (ii) domestic policies related to biofuels, such as an introduction of biofuel mandates. Both sets of issues can have important consequences to the Argentinean economy. The simulations indicate that increases in international prices of biofuels and feedstocks would increase Argentina's gross domestic product and social welfare. Increases in international prices of ethanol and corn also can benefit Argentina, but to a lesser extent. The domestic mandates for biofuels, however, would cause small losses in economic output and social welfare because they divert part of biodiesel and feedstock from exports to lower-return domestic consumption. An increase in the export tax on either feedstock or biodiesel also would lead to a reduction in gross domestic product and social welfare, although government revenue would rise.

Do Increases in Environmental Risk Reduce Welfare? A Dynamic Game Perspective

We consider the effect of an increase in the risk from pollution. We show that in the case of a flow pollution, when the number of players is sufficiently large, the result of Bramoulle and Treich, showing that a marginal increase of risk in the neighborhood of a risk-free world is welfare-improving, holds even when we consider non-marginal increases in risk and for any initial values of the risk. By contrast, in the case of a stock pollutant, we show that starting in a risk-free world a marginal increase in risk is always welfare reducing. However if the initial value of the risk is sufficiently large, the impact of an increase in risk depends on the level of the stock pollutant. In this non-negligible risk case, it is only for values of the stock of pollution that are below a certain threshold that an increase in risk can mitigate the failure from cooperation over emissions and increase welfare.

Walking Wounded – The Causal Welfare Loss of Underemployment through Overeducation

Using data from the SOEP, we analyze the well-being impact of underemployment through over-education to examine a broader definition of employment loss. Persons leaving a job through exogenous reasons but entering directly into immediate employment may not find a perfect employment match and cannot use their skills fully in the new job. We demonstrate that a down-change, although welfare reducing, may be more desirable than suffering the large welfare losses associated with unemployment whilst searching for a more suitable job match. Nonetheless, underemployed persons do not enter into the official job statistics, whilst their welfare loss due to down-change is approximately 50% of the welfare loss of entry into unemployment.

The Impact of Entry Regulation on Total Welfare: A Policy Experiment

This paper evaluates how different lengths of entry regulation impact market structure and market performance using a dynamic structural model. We formulate an oligopoly model in the tradition of Ericson and Pakes (1995) and allow entry costs to vary over time. Firms have the opportunity to produce multiple products, and decide when to enter a market, followed by production and exit decisions. Using quarterly firm-level data on the static random access memory industry from 1974 to 2003, we find that entry costs decline by more than 90% within the first three years. Our policy experiments provide evidence that the duration of entry regulation has a negative impact on consumer surplus. We also find that entry protection increases total surplus if the protection duration is either sufficiently short or sufficiently long. If entry protection duration is short, the increase in monopolist’s profits and entry cost saving dominate the reduction in consumer welfare, which affects total welfare positively. If protection duration is long, dynamic efficiency gains, i.e., the delay of subsequent entry and savings on entry costs impact total welfare positively.

Competition Among Exchanges and Enforcement Policy

In this paper, we explore how competition among stock exchanges, operated as self-regulatory organizations (SROs), affects the design of their members' surveillance. We develop a model where two for-profit SROs compete for trading volume, while brokers execute transactions on behalf of the investors and may misreport the true cash flow. The SROs can deter a fraud by announcing an investigation and imposing a monetary penalty.The success of the investigation depends upon both the amount of resources devoted to monitoring and the efficiency of monitoring technologies. We show that when contracts are incomplete and investors do not have perfect information about the monitoring efficiency, competition among exchanges induces a race to the bottom in enforcement policy and a reduction in total welfare, compared to the case of a monopolist SRO.

Competition among Exchanges and Enforcement Policy

In this paper, we explore how competition among stock exchanges, operated as self-regulatory organizations (SROs), affects the design of their members' surveillance. We develop a model where two for-profit SROs compete for trading volume, while brokers execute transactions on behalf of the investors and may misreport the true cash flow. The SROs can deter a fraud by announcing an investigation and imposing a monetary penalty.The success of the investigation depends upon both the amount of resources devoted to monitoring and the efficiency of monitoring technologies. We show that when contracts are incomplete and investors do not have perfect information about the monitoring efficiency, competition among exchanges induces a race to the bottom in enforcement policy and a reduction in total welfare, compared to the case of a monopolist SRO.