#13-001 -- Jean Guillaume Forand
Keeping your options open (PDF)
Abstract
In standard models of experimentation, the costs of project development consist of (a) the direct cost of running trials as well as (b)the implicit opportunity cost of leaving alternative projects idle. Another natural type of experimentation cost, the cost of holding on to the option of developing a currently inactive project, has not been studied. In a multi-armed bandit model of experimentation in which inactive projects have explicit maintenance costs and can be irreversibly discarded, I fully characterise optimal experimentation policies and show that the decision-maker's incentive to actively manage its options has important implication for the order of project development. In the model, an experimenter searches for a success among a number of projects by choosing both those to develop now and those to maintain for (potential) future development. In the absence of maintenance costs, optimal experimentation policies incentives to bring the option value of less promising projects forward, and under optimal experimentation policies, 'going -with-the-loser' can be optimal: projects that are less likely to succeed are sometimes developed rst.
JEL classification
D83, D81, C61
Keywords
Experimentation; maintenance costs; multi-armed bandits
#13-002 -- Margaret Insley
On the timing of non-renewable resource extraction with regime switching prices: an optimal stochastic control approach (PDF)
Abstract
This paper develops a model of a profit maximizing firm with the option to exploit a non-renewable resource, choosing the timing and pace of development. The resource price is modelled as a regime switching process, which is calibrated to oil futures prices. A Hamilton-Jacobi-Bellman equation is specified that describes the profit maximization decision of the firm. The model is applied to a problem of optimal investment in a typical oils sands in situ operation, and solved for critical levels of oil prices that would motivate a firm to make the large scale investment needed for oil sands extraction, as well to operate, mothball or abandon the facility. The paper focuses on the impact of regime shifts on the optimal timing of investment and extraction compared with the case when the possibility of future regime shifts is ignored.
JEL classification
Q30, Q40, C61, C63
Keywords
Non-renewable natural resources; oil sands; optimal control; HJB equation
#13-003 -- Abdullah Almansour and Margaret Insley
The impact of stochastic extraction cost on the value of an exhaustible resource: An application to the Alberta oil sands (PDF)
Abstract
The optimal management of a non-renewable resource extraction project is studied when input and output prices follow correlated stochastic processes. The decision problem is specified by two Bellman equations describing the project when it is currently operating or mothballed. Solutions are determined numerically using the Least Squares Monte Carlo methodology. The analysis is applied to an oil sands project which uses natural gas during extracting and upgrading. The paper takes into account the co-movement between crude oil and natural gas prices and proposes two price models: one incorporates a long-run link between the two while the other has no such link. Incorporating a long-run relationship between oil and natural gas prices has a significant effect on the value of the project and its optimal operation and reduces the sensitivity of the project to the natural gas price process.
JEL classification
Q30, Q40, C61, C63
Keywords
Non-renewable resource extraction; oil sands; stochastic input cost; least squares Monte Carlo; Kalman filter; futures prices; real options; co-integration of natural gas and oil prices
#13-004 -- Jean Guillaume Forand and Vikram Maheshri
A Dynamic Duverger's Law (PDF)
Abstract
Electoral systems promote strategic voting and affect party systems. Duverger (1951) proposed that plurality rule leads to bi-partyism and proportional representation leads to multi-partyism. We show that in a dynamic setting, these static effects also lead to a higher option value for existing minor parties under plurality rule, so their incentive to exit the party system is mitigated by their future benefits from continued participation. The predictions of our model are consistent with multiple cross-sectional predictions on the comparative number of parties under plurality rule and proportional representation. In particular, there could be more parties under plurality rule than under proportional representation at any point in time. However, our model makes a unique time-series prediction: the number of parties under plurality rule should be less variable than under proportional representation. We provide extensive empirical evidence in support of these results.
JEL classification
C73, D72
Keywords
Duverger's Law; dynamic elections; number of parties; electoral rules
#13-005 -- John Duggan and Jean Guillaume Forand
Markovian Elections (PDF)
Abstract
We establish existence and continuity properties of equilibria in a model of dynamic elections with a discrete (countable) state space and general policies and preferences. We provide conditions under which there is a representative voter in each state, and we give characterization results in terms of equilibria of an associated "representative voting game." When the conditions for these results are not met, we provide examples that uncover new classes of dynamic political failures.
JEL classification
C62, C73, D72
Keywords
Markov perfect equilibrium; dynamic elections; median voter theorem
#13-006 -- Francisco Gonzalez and Jean-Francois Wen
A theory of top income taxation and social insurance (PDF)
Abstract
The development of the welfare state in the Western economies between 1930 and 1990 coincided with a puzzling pattern in the taxation of top incomes. Effective tax rates at the top increased sharply but then gradually decreased, even as social transfers continued rising. We propose a new theory of the development of the welfare state to explain these facts. Our main insight is that social insurance and top income taxation are substitutes for averting social conflict. We emphasize the role of the Great Depression as a source of aggregate risk, and argue that the rise of the welfare state can be understood as a process of exploiting efficiency gains in response to gradual technological improvements in the provision of social insurance. Our detailed arguments build on the policy histories of the United States, Great Britain, and Sweden.
JEL classification
D30, H20, H50, P16
Keywords
Supply of social insurance, taxation of top incomes, social conflict
#13-007 -- Lori J. Curtis and Kathleen Rybczynski
Exiting Poverty: Does Sex Matter? (PDF)
Abstract
While Murphy, Zhang & Dionne (2012) report a slight decrease in the average duration of poverty spells in Canada over the past decade, little is understood about the factors associated with poverty duration in Canada, nor which factors, if any, may affect women and men differently. Moreover, research pays scant attention to how far Canadians transition out of poverty. For example, some may exit poverty only marginally while others exit to much higher incomes. We investigate the determinants of poverty duration among women and men in Canada. A major contribution of this paper is the examination of poverty duration across different exit destinations (competing risks); exits to just above the poverty line versus exits to higher levels of income. We find that nearly ¼ of poverty spells end within 110% of the poverty line (near poverty). Many of those that exit to near poverty experience multiple spells. As expected, we find that higher education increases the probability of transitioning to higher income levels, but very little is correlated with exits to near poverty relative to not exiting. The longer the poverty spell, the lower the probability of exit, particularly to higher income levels. We find few significant gender differences in the coefficient estimates. However, several factors associated with exit to higher income levels differ from those factors that are associated with exits to near poverty.
JEL classification
I30, G11, J22
Keywords
Poverty, Duration, Women, Family, Policy, Labour