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Working papers, 2001

0101
Florenz Plassmann and Nicolaus Tideman
Accurate Valuation in the Absence of Markets

0102
Neha Khanna
On the Economics of Non-Renewable Resources

0103
Neha Khanna and Martina Vidovic
Facility Participation in Voluntary Pollution Prevention Programs and the Role of Community Characteristics: Evidence From the 33/50 Program.

0104
Neha Khanna
The Income Elasticity of Air Pollution: Revisiting the Environmental Kuznets Curve Hypothesis

0105
Barry E. Jones and Travis D. Nesmith
The Economic Theory of Interest Rate Aggregation

0106
Subal Kumbhakar
Risk Preferences under Price Uncertainties and Production Risk

0107
Barry E. Jones and Travis D. Nesmith
Primal and Dual Representations of the Error in Summation Monetary Aggregates

0108
Barry E. Jones, Gabriel Asaftei, and Lian Wang
Welfare Cost of Inflation in a General Equilibrium Model with Currency and Interest Bearing Deposits

0109
Charlotte Ostergaard, Bent Sørensen, and Oved Yosha
Consumption and Aggregate Constraints: Evidence from US States and Canadian Provinces

0110
Neha Khanna
The Income Elasticity of Non-point Source Air Pollutants


Number: 0101

Authors: Florenz Plassmann and Nicolaus Tideman

Title: Accurate Valuation in the Absence of Markets

Abstract:

The law often provides that people are entitled to compensation for losses that occur through the action of others. We argue that in such cases, an appropriate measure of the loss is the reservation price of the plaintiff. If the property is sufficiently unique so that there is no market price that can be used as an approximation, then the only way to learn this subjective reservation price is to have the owner self-assess his property. We describe a mechanism that provides an incentive for the owner to self-assess his property honestly, without requiring that the property's value be objectively observable.

File: Working Paper 0101


Number: 0102

Authors: Neha Khanna

Title: On the Economics of Non-Renewable Resources

Abstract:

This paper presents an overview of the key economic results associated with the use of non-renewable resources. The basic Hotelling model of resource depletion is discussed, followed by several extensions. The fundamental result is that scarcity rent rises at the discount rate, and that at equilibrium, marginal benefits from extraction must equal the marginal economic cost. If marginal extraction cost is determined by the remaining stock of the resource, then the result is that the scarcity rent rises at the discount rate less the percentage increase in marginal cost caused by the marginal reduction in remaining reserves.

The versatility of the Hotelling model is clearly brought out in the various qualitatively distinct outcomes possible for the equilibrium production and price trajectories. Production may be monotonically increasing, decreasing, or inverted u-shaped. The equilibrium price trajectory is determined by the interaction between the marginal extraction cost and the scarcity rent. Typically, it is increasing throughout the production horizon. However, if the marginal cost is declining rapidly, it may exceed the scarcity rent in the early part of the production horizon and price will decline. Eventually, however, it must rise as scarcity rent rises sharply.

The results obtained under the Hotelling model are robust to the assumption of market structure - both monopoly and perfect competition yield qualitatively similar outcomes, though, of course, the price and quantity paths are different.

File: Working paper 0102


Number: 0103

Authors: Neha Khanna and Martina Vidovic

Title: Facility Participation in Voluntary Pollution Prevention Programs and the Role of Community Characteristics: Evidence From the 33/50 Program.

Abstract:

The advent of voluntary pollution prevention programs has raised the question of their impact on the distribution of pollution. Do these programs enhance or alleviate the current inequity in the distribution of pollution in the US? This paper examines the evidence from the 33/50 Program. The participation decision of a facility is modeled as a probit function of various community characteristics such as income, race, educational status, housing tenure, and propensity for collective action. Several firm level variables identified in the currently published literature as having a statistically significant influence on the participation decision of the firm are included as control variables. Preliminary results suggest that a facility's decision to participate in the 33/50 Program is generally not influenced by these community characteristics. However, there is some tentative evidence to suggest that the probability of participation increases with median household income of the zip code in which the facility is located, and decreases with the percentage of the zip code population below the poverty line. It is unclear whether more polluting facilities are more likely to participate in the Program.

File: Working Paper 0103


Number: 0104

Authors: Neha Khanna

Title: The Income Elasticity of Air Pollution: Revisiting the Environmental Kuznets Curve Hypothesis

Abstract:

This paper estimates the relationship between income and pollution while controlling for the influence of other relevant factors such as economic and trade structure, as well as socio-economic factors including race, education, housing, and propensity for collective action. The analysis is based on 1990 ambient concentrations of five gases and data for U.S. census tracts. The traditional inverted U-shaped curve is obtained in the case of PM10 only. For NOx the curve is U-shaped. For the remaining three gases the relationship between ambient concentrations and median household income is statistically insignificant. Furthermore, while the income elasticity of pollution is negative and monotonically declining for PM10, it is positive and rising in the case of NOx. These results call into question the global applicability of the Environmental Kuznets Curve relationship.

File:Working paper 0104


Number: 0105

Authors: Barry E, Jones, Travis D. Nesmith

Title: The Economic Theory of Interest Rate Aggregation

Abstract:

The empirical relationship between monetary aggregates, real output, and interest rates has featured prominently in studies of aggregate money demand, the monetary transmission mechanism, identification of monetary policy rules, and the business cycle. Such studies typically incorporate a single interest rate, but there is no consensus as to which is the relevant one. In this paper, we prove that if the conditions under which a monetary aggregate exists are imposed, then a derived interest rate aggregate can be defined. If the subutility function is homothetic, the interest rate aggregate can be tracked using index number methods. Including the interest rate aggregate in a model that contains a monetary aggregate is superior to choosing an individual interest rate in an ad hoc fashion because of internal consistency. We investigate the empirical relevance of our results by comparing the dual interest rate on money to individual interest rates using frequency domain techniques and by investigating money-income causality. We also generalize our results to allow for risk.

File: Working Paper 0105, Appendix 1, Appendix 2


Number: 0106

Authors: Subal Kumbhakar

Title: Risk Preferences under Price Uncertainties and Production Risk

Abstract:

This paper deals with estimation of risk preferences of producers when they face uncertainties in output and input prices, in addition to uncertainty in production (usually labeled as production risk). All these uncertainty components are modeled in the context of production theory where the producers maximize expected utility of anticipated profit. Risk preference functions associated with these uncertainties are derived without assuming a specific form of the utility function. Moreover, no distributional assumptions are made on the distributions of the random variables representing price and production uncertainties. A multi-stage estimation procedure is developed to estimate the parameters of the production function and risk preference functions associated with output price uncertainty, input price uncertainty and production risk. Production risk is specified in such a way that one can identify inputs with increasing, decreasing and constant production risks. Similarly, risk aversion behavior is specified in such a way that one can test for different types of risk aversion behavior.

File: Working paper 0106


Number: 0107

Authors: Barry E, Jones, Travis D. Nesmith

Title: Primal and Dual Representations of the Error in Summation Monetary Aggregates

Abstract:

We provide primal and dual representations for the tracking error in the official monetary aggregates published by the Federal Reserve System from the standpoint of monetary aggregation theory. We show that the tracking error will be zero if either all asset stocks or their prices change proportionally. This result implies that the squared tracking error is a function of the degree of non-proportionality in the changes in either asset stocks or their prices. We present two measures of the degree of non-proportionality that were originally developed by Theil (1967) and Allen and Diewert (1981). We first illustrate the interaction between the tracking error and these measures using simulated data. We next examine the available time series, which indicate that the degree of non-proportionality in monetary data changes over time and may increase systematically under certain monetary policy regimes. In particular, we show that the degree of non-proportionality for both asset stocks and their prices was very high during 1978-1982, when the Federal Reserve was targeting nominal monetary aggregates, contributing to a large error in the measurement of the underlying policy instrument.

File: Working Paper 0107


Number: 0108

Authors: Barry E, Jones, Gabriel Asaftei, and Lian Wan

Title: Welfare Cost of Inflation in a General Equilibrium Model with Currency and Interest Bearing Deposits

Abstract:

The user cost of non-interest bearing currency is the nominal interest rate. Increases in inflation lead to decreased real currency held in steady state, which imposes a welfare cost. Lucas (2000) estimates this welfare cost in a model with a single non-interest bearing monetary asset. Lucas suggests applying monetary aggregation/index number theory to generalize the model to contain interest-bearing deposits. We solve a general equilibrium model with three agents: a household, a goods producing firm, and a financial firm. We assume that currency and deposits provide utility to the household and form a weakly separable group in the utility function. We use monetary aggregation and index number methods to calibrate the model and estimate the welfare cost of inflation. We compare these estimates to welfare cost estimates from a model in which all money is non-interest bearing currency. We find that the welfare cost of inflation is substantially lower in the models with interest-bearing deposits than in models with only non-interest bearing currency. We also find that the welfare cost of inflation is positively related to the own price elasticity of aggregate money demand.

File: Working paper 0108, Graphs


Number: 0109

Authors: Charlotte Ostergaard, Bent Sørensen, and Oved Yosha

Title: Consumption and Aggregate Constraints: Evidence from US States and Canadian Provinces

Abstract:

State-level consumption exhibits excess sensitivity to lagged income to the same extent as US aggregate data, but state-specific (idiosyncratic) consumption exhibits substantially less sensitivity to lagged state-specific income---a result that also holds for Canadian provinces. We propose the following interpretation: borrowing and lending in response to changes in consumer demand is easier for individual US states than for the US as a whole and, therefore, the measured deviation from the benchmark PIH model is smaller. However, lagged state-specific variables help predict state-specific consumption suggesting that the PIH model still requires qualification.

File: Working Paper 0109


Number: 0110

Authors: Neha Khanna

Title: The Income Elasticity of Non-point Source Air Pollutants

Abstract:

This paper examines the income-pollution relationship for three non-point source pollutants in 1990. Ambient concentrations reported at monitors throughout the U.S. are regressed on median household income and other socio-economic variables for the census tracts in which the monitors were located. Contrary to earlier studies, a u-shaped relationship is obtained.

File: Working Paper 0110


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Last Updated: 6/16/09