Second-best World Research Articles

Second-Best Stare Decisis

If judges disagree about the proper interpretation of the law, can they find common ground in the treatment of precedent?The doctrine of stare decisis weighs the value of legal continuity against the value of legal accuracy. But that analysis is complicated by pervasive disputes over the implications of legal error. Likewise, the scope of a precedent’s impact in future cases depends on underlying assumptions about the ends and means of legal interpretation. When those assumptions vary among judges, so too will applications of stare decisis.For stare decisis to promote the continuity and impersonality of law, it requires an analytical framework designed not for an idealized world of interpretive consensus, but rather for a second-best world of interpretive pluralism.Second-best stare decisis emphasizes doctrinal factors whose content does not depend on adherence to any particular interpretive methodology. The second-best approach also contemplates structural solutions, such as supermajority voting requirements, for promoting collaboration across methodological lines. Finally, second-best stare decisis pursues compromises that emphasize the common ground among competing schools of interpretation. The result is a reconceptualized doctrine of stare decisis that seeks to transcend interpretive disputes and underscore a court’s status as a unified institution working across time — an institution that is something different, and something greater, than its individual members.

Self-financed efficiency incentives: case study of Mexico

Numerous countries use public funds to subsidize residential electricity for a variety of socioeconomic objectives. These subsidies lower the value of energy efficiency to the consumer while raising it for the government. Further, while it would be especially helpful to have stringent Minimum Energy Performance Standards (MEPS) for end uses in this environment, they are hard to strengthen without imposing a cost on ratepayers. In this second-best world, where the presence of subsidies limits the government’s ability to strengthen standards, we find that efficiency-induced savings in subsidy payments can be a significant source of financing for energy efficiency incentive programs. Here, we introduce the Lawrence Berkeley National Laboratory (LBNL) Energy Efficiency Revenue Analysis (LEERA) model to estimate the greatest appliance efficiency improvements that can be achieved in Mexico by the revenue neutral financing of incentive programs from savings in subsidy payments yielded by the same efficiency improvements. We analyze Mexico’s tariff structures and the long-run marginal cost of supply to calculate the marginal savings for the government from appliance efficiency. We find that these avoided subsidy payments alone can provide enough revenue to cover the full incremental manufacturing cost of refrigerators that are 29 % more efficient and televisions that are 36 % more efficient than baseline models. For room air conditioners (ACs), the same source of financing can contribute up to one third of the incremental manufacturing cost of a model that is 10 % more efficient than baseline. We analyze the sensitivity of our results to the most important parameters and find our main conclusion that efficiency-induced avoided subsidy payments will contribute significantly to financing efficiency incentive programs in Mexico to be significant and robust.

The Pain and Gain of Offshoring: The Effects of Tax Progression in a Segmented Labour Market

Over the previous two decades, many OECD countries have lowered the degree of progressivity in their tax structures. In this paper, I investigate labour tax progression in a world characterised by a segmented labour market where the higher-paying jobs are rationed due to (i) oligopolistic market structures, (ii) insider-oriented unions and (iii) international offshoring. In this second-best world, a revenue-neutral decrease in the progressivity of the tax schedule promotes higher domestic (net-of-tax) wage inequality where a shrinking fraction of workers provides the tax revenue to finance the redistribution to an increasing share of lower-wage workers. However, as the tax reform involves an increase in the offshoring intensity, which may translate into a cost advantage for the domestic average consumer, the overall welfare effect is ambiguous. It is shown that the negative effects dominate if trade unions are sufficiently insider-oriented.

Failure to achieve stringent carbon reduction targets in a second-best policy world

Legislation to decarbonise energy systems within overall greenhouse gas reduction targets represents an immense and unprecedented energy policy challenge. However there is a dichotomy between this level of policy ambition and prior modelling studies that find such targets economically, technologically and socially feasible under idealised ―first-best policies. This paper makes a significant contribution to current analytical efforts to account for realistic ―second-best climate mitigation policy implementation. This is achieved via a technical classification of secondbest common mode issues at a detailed national level: both internal (behavioural change, infrastructure implementation) and external (new technologies, resource availability). Under a combinatory second-best scenario, meeting targets greater than a 70% reduction in CO2 by 2050 entail costs above a subjective barrier of 1% of GDP, while extreme mitigation scenarios (>90% CO2 reduction) are infeasible. These high costs are equally due to disappointing progress in behavioural and technological mitigation efforts. Expensive second-best mitigation scenarios can still rely on extreme assumptions including the full deployment of the UK‘s offshore wind resource or the complete diffusion of energy efficiency measures in end-use sectors. By demonstrating the fragilities of a low carbon energy system pathway, policy makers can explore protective and proactive strategies to ensure targets can actually be met. Additionally, systematic analysis of failure in stringent long term decarbonisation scenarios teaches energy analysts about the trade-offs in model efficacy vs. confidence.

Thoughts on Rental Housing and Rental Housing Assistance

The United States has long exhibited enthusiasm for homeownership. The converse of this is that it has tended to neglect rental housing. This article seeks to do the following: (1) explain why rental housing is desirable; (2) lay out the policies that favor owneroccupied housing; (3) discuss current subsidy programs for rental housing, with particular emphasis on programs that are not simply legacies of past policy; and (4) examine how these programs might be improved or reformed. It argues that in a second-best world of restrictive zoning and preferences for ownership, rental subsidies may be justified on both equity and efficiency grounds.

The REMIND-R model: the role of renewables in the low-carbon transformation—first-best vs. second-best worlds

Can near-term public support of renewable energy technologies contain the increase of mitigation costs due to delays of implementing emission caps at the global level? To answer this question we design a set of first and second best scenarios to analyze the impact of early deployment of renewable energy technologies on welfare and emission timing to achieve atmospheric carbon stabilization by 2100. We use the global multiregional energy–economy–climate hybrid model REMIND-R as a tool for this analysis. An important design feature of the policy scenarios is the timing of climate policy. Immediate climate policy contains the mitigation costs at less than 1% even if the CO2 concentration target is 410 ppm by 2100. Delayed climate policy increases the costs significantly because the absence of a strong carbon price signal continues the carbon intensive growth path. The additional costs can be decreased by early technology policies supporting renewable energy technologies because emissions grow less, alternative energy technologies are increased in capacity and their costs are reduced through learning by doing. The effects of early technology policy are different in scenarios with immediate carbon pricing. In the case of delayed climate policy, the emission path can be brought closer to the first-best solution, whereas in the case of immediate climate policy additional technology policy would lead to deviations from the optimal emission path. Hence, technology policy in the delayed climate policy case reduces costs, but in the case of immediate climate policy they increase. However, the near-term emission reductions are smaller in the case of delayed climate policies. At the regional level the effects on mitigation costs are heterogeneously distributed. For the USA and Europe early technology policy has a positive welfare effect for immediate and delayed climate policies. In contrast, India looses in both cases. China loses in the case of immediate climate policy, but profits in the delayed case. Early support of renewable energy technologies devalues the stock of emission allowances, and this effect is considerable for delayed climate policies. In combination with the initial allocation rule of contraction and convergence a relatively well-endowed country like India loses and potential importers like the EU gain from early renewable deployment.

The costs of climate policies in a second-best world with labour market imperfections

This article explores the critical role of labour market imperfections in climate stabilization cost formation, using a dynamic recursive energy—economy model that represents a second-best world with market imperfections and short-run adjustment constraints along a long-term growth path. The degree of rigidity of the labour markets is a central parameter, and a systematic sensitivity analysis of the model results confirms this. When labour markets are represented as highly flexible, the model results are in the usual range of the existing literature; that is, less than 2% GDP losses in 2030 for a stabilization target at 550 ppm CO2 equivalent. However, when labour market rigidities are accounted for, mitigation costs increase dramatically. Accompanying measures are identified, namely labour subsidies, which guarantee against the risk of large stabilization costs in the case of high rigidities of the labour markets. This complements the usual view that mitigation is a long-term matter that depends on technology, innovation, investment and behavioural change. The results support the view that mitigation is also a shorter-term issue and a matter of transition with regard to the labour market.

International Tax Coordination for a Second-Best World (Part III)

In the first two parts of this article (1 World Tax Journal 1 (2009), p. 67 and 2 World Tax Journal 1 (2010), p. 65) the author has laid out basic elements of an international world order for the taxation of business profits. Under the assumption that no general principles (ability-to-pay or benefit principle) preordain the allocation of taxing rights among countries, this framework should take into account the mechanics of tax competition among jurisdictions, as well as the internal business model of internationally active corporations. Insofar, the article pleads for a “continuity approach” which tries to avoid sudden switches of tax treatment which might prevent efficient allocation of resources within a business framework. In particular he proposes international tax allocation on a “sales and services” basis exceeding the traditional permanent establishment threshold, he compares treatment for incorporated and non-incorporated establishments and advocates equal treatment of controlling and portfolio shareholdings. Source taxation of interest and royalties may contribute to the “continuity approach” in order to keep all kinds of business income within the same tax treatment, but this is not advisable as far as tax competition goes. In this third part of the article, the choice of business organization by multinational enterprises is the object of the analysis. The starting point is the current “arm’s length vs. formulary apportionment” debate. The author pleads for an extended version of the arm’s length standard which he sees to be in line with the “continuity approach” as it interferes as little as possible with business decisions such as “make or buy”, “integrate or non-integrate” or the choice between a corporate group and a unitary enterprise. Nevertheless, while the allocation of income to the corporate entities within a multinational group should follow the contractual arrangements between the parties at arm’s length, this should not be the last word: the non-resident related party should be taxed on “synergy rents” it derives from the group structure, in particular the use of intangibles and other production factors relying on sunk specific investment. Insofar, the personal allocation of income and the territorial allocation of revenue should not automatically correspond; it is up to the source state to tax rents derived by the non-resident party as far as tax competition allows such a move.

Innovation and Environmental Policy: Clean vs. Dirty Technical Change

We study a two sector endogenous growth model with environmental quality with two goods and two factors of production, one clean and one dirty. Technological change creates clean or dirty innovations. We compare the laissez-faire equilibrium and the social optimum and study first- and second-best policies. Optimal policy encourages research toward clean technologies. In a second-best world, we claim that a portfolio that includes a tax on the polluting good combined with optimal innovation subsidy policies is less costly than increasing the price of the polluting good alone. Moreover, a discriminating innovation subsidy policy is preferable to a non-discriminating one.

Optimal tax rules and public sector efficiency with an externality in an overlapping generations model

This paper examines optimal tax rules and public sector efficiency, integrating them in a second-best world with pollution by using an overlapping generations model. The second-best world is characterized by the comparative statics of green preferences. The main results obtained are as follows. First, the marginal cost of public funds may be reduced by the externalities, regardless of the choice of taxes. Second, optimal environmental and non-environmental tax rules are additively and directly affected by the dynamic efficiency of capital accumulation per unit labour (DECAL), and indirectly by it, through the efficiency of the public sector. Environmental taxes going beyond Pigovian ones may be welfare-improving if the DECAL is improved by the environmental tax. Even optimal non-environmental tax rules should additively and directly counter the dynamics of pollution to consider the income effects of the optimal tax system for the future. Third, the “additivity property,” or the “principle of targeting,” does not hold even in the absence of incentive compatibility constraints. The essential reasons for this are clarified as follows: distortions that should be countered by taxes; that is, the income effects of the optimal tax system and the DECAL in this model, break the equality between optimal environmental taxes and the externalities measured by governments. Finally, growing environmental concerns may, in fact, increase pollution. The inverse relationship between environmental and labour income taxes may not hold.

Clinical Prescribing (and Off-Label Use) in a Second-Best World

Clinical Prescribing (and Off-Label Use) in a Second-Best World

Climate policies in a second-best world—A case study on India

The aim of this article is to analyze the potential for synergies between climate policies and development in a case study on India focusing on the power sector sub-optimalities. To do so, we use Imaclim-R, a dynamic recursive energy–economy model that represents a second best world with market imperfections and short-run adjustments constraints along a long-term growth path. The analysis suggests (i) global carbon pricing induces prohibitive macroeconomic costs for the Indian economy, even in the case of significant financial transfers associated with a global cap-and-trade system and a ‘Contraction and Convergence in 2100’ allocation scheme and (ii) the most cost efficient climate policies are not uniform carbon pricing only. The implementation of domestic policies suited to the national context, for instance targeting sub-optimalities in the power sector for India, allows reducing significantly the macroeconomic costs induced by international mitigation policies.

International Tax Coordination for a Second-Best World (Part I)

International business taxation has become the object of debate in recent years. The allocation of taxing rights between residence and source countries is challenged. Time-honoured rules which address different types of business profits, like sales and services, royalties and interest, in different ways, are put to the test. Profit attribution under the arm’s length principle faces the alternative of formulary apportionment. Moreover, international tax competition takes its toll: while some countries exert their tax jurisdiction as far as possible, other countries are no longer willing to tax capital income at all cost and prefer an attractive tax environment for investors. This (two-part) article analyses the value of legal and economic principles for international tax coordination and proposes a “second-best approach”, which leaves domestic tax systems as they are and tries to do away with discontinuities under international taxation, thus avoiding arbitrary results which lead to inequity, inefficiency and tax arbitrage.

Turning and Churning: Loss of Health Insurance Among Adults in Medicaid

Turning and Churning: Loss of Health Insurance Among Adults in Medicaid

Emissions pricing, spillovers, and public investment in environmentally friendly technologies

In a second-best world of below-optimal pollution pricing, the public return to R&D may be greater than under Pigouvian pricing, due to excess benefits of increasing abatement, or it may be lower, since private actors lack the incentives to take full advantage of the new, cleaner technologies. This paper uses a simple model to demonstrate the interaction between environmental policies, R&D externalities, and the social return to innovation. The results indicate that strong public support for innovation in abatement technologies is only justified if at least a moderate emissions policy is in place and spillover effects are significant. If emissions policy can adjust to cost changes, the public role may be enhanced, since private actors will prefer to avoid ratcheting. Social gains from innovation increase only if innovation can allow emissions to be more fully priced. Technology policy is more effective with fuller emissions pricing and is better viewed as a complement to than a substitute for mitigation policy.

Second-best theory and the use of multiple policy instruments

In many cases policy makers employ multiple instruments to address a single environmental problem, but much of the economics literature on instrument choice focuses on comparing properties of single policy instruments. We argue that under a fairly broad set of circumstances the use of multiple policy instruments can be justified as optimal in a second-best world. We examine two broad categories of second-best policy making: cases with multiple market failures only some of which can be corrected at any one time; and cases with exogenous (often political) constraints that cannot be removed. The fact that the use of multiple policy instruments can be justified economically in these two cases does not imply, however, that all multiple instruments employed in actual practice are economically justified.

Externality Policy Reform: A General Equilibrium Analysis

AbstractWe characterize Pareto‐improving and equilibrium‐preserving policy reforms in a second‐best (Diamond/Mirrlees) world with a consumption externality. A counterintuitive finding is that, starting from an initial equilibrium with no direct quantity control on the externality, it is possible that all Pareto‐improving and equilibrium‐preserving directions of change require an increase in a negative externality. We provide intuition for these results by establishing a nexus between Guesnerie's approach to designing (tax) policy reforms and the standard Kuhn–Tucker technique for identifying the manifold of feasible Pareto‐optimal states, given the instruments available to the policy maker.

The two-part instrument in a second-best world

Standard Pigovian tax theory has been extended in two directions. First, many polluting activities are difficult to tax because they are not market transactions, and so recent papers have shown that the same effects can be achieved by use of a two-part instrument (2PI): a tax on output or income and a subsidy for clean alternatives to pollution. It is a generalization of a deposit–refund system (DRS). Second, a different literature concerns the second-best pollution tax in the presence of other tax distortions. Here, we combine the two extensions by looking at the second-best 2PI. When government needs revenue, is the deposit larger and the rebate smaller? We find explicit solutions for each tax and subsidy in a general equilibrium model with other tax distortions, and we compare these to the rates in a first-best model. The tax–subsidy combination is explained in terms of a tax effect, an environmental effect and a revenue effect. The model allows for flexible interpretation to show various applications of the 2PI. We also discuss important caveats.

Optimal and Open Access Harvesting of Multi-Use Species in a Second-Best World

Expansion of human populations and activities has caused increased conflicts between wildlife and humans. As a result, the distinction between resource and pest species has become blurry. We propose an economically-based classification of species based on a multi-use bioeconomic model. The classification of the steady state population of a species is shown to depend on both species' density and economic factors. We extend earlier work on multi-use(resource-pest) species by applying the theoretical model to a developing country context where property rights to wildlife are imperfectly enforced, so that second-best trade measures are often applied by the international community to promote conservation. Upon calibrating the model using data for the African elephant, we derive three further results. First, when comparing the optimal stock of a multi-use species to the open access stock, we find that the ranking in terms of abundance is ambiguous. Second, and consistent with existing literature on resource management in a second-best world, our case study supports the idea that trade bans have ambiguous effectson wildlife abundance. Third, due to a bifurcation effect characterizing the multi-use model's solution, strategic and temporary subsidizing by the North may enable them to free ride on conservation efforts of the South henceforth.

Deforestation, Property Rights, and International Trade

Deforestation primarily affects developing countries. Most developing countries share two characteristics: (1) trade liberalization reforms in the last two decades, and (2) weak property rights and limited rule of law. This paper investigates this second-best world; first, in a stylized model in which trade distortions are eliminated in an economy whose natural resources are subject to open access; second, empirically in an estimation exercise that disentangles the direct effect of trade on deforestation rates and an indirect effect through its interaction with ownership security. In accordance with the theory, the results show that only the indirect effect is significant.