Waterloo economics series | 2018

#18-001 -- Hongxiu Li and Horatiu Rus

Water Innovation and Water Governance: Adaptive Responses to Regulatory Change and Extreme Weather Events 

Abstract

This paper investigates the effect of federal and state level regulatory changes with respect to drinking water quality, water pollution and water quantity in the United States on the level of relevant technological innovation. We construct and use a unique dataset covering major amendments and additions to regulated contaminants lists as stipulated in the legislative acts most relevant to the policy area we study, along with a list of technological patents pertaining to water quality and quantity over a period of more than 30 years. We find in general the impact of water regulation on innovation to be both statistically and economically significant.

JEL Classification

O31; Q25; Q55 

#18-002 -- Jean Guillaume Forand and Gergely Ujhelyi

Don’t Hatch the Messenger? On the Desirability of Restricting the Political Activity of Bureaucrats

Abstract

Every country places restrictions on the political rights of government workers. This includes limitations on expressing political views and taking an active part in political campaigns. Are such restrictions desirable? We present a formal welfare analysis of this question. Bureaucrats’ political activities can be a valuable form of communication between voters and the government, but they may induce policy mistakes, and are susceptible to “noise” from partisan bureaucrats’ innate desire for political expression. Signaling through bureaucrats is least effective when voters do not “trust” in this form of communication, or when politicians have strong control over bureaucrats. In these cases, banning political activities is generally optimal. 

JEL Classification

D73; H11; K16 

#18-003 -- Sara Aghakazemjourabbaf and Margaret Insley

Optimal timing of hazardous waste clean-up under an environmental bond and a strict liability rule

Abstract

Inadequate site clean-up and restoration by resource extraction firms leave a toxic legacy which must be dealt with by governments. This study compares the impacts of an environmental bond and a strict liability rule on a firm's incentives for cleaning up hazardous waste during resource extraction and upon termination. The firm's problem is modelled as a stochastic optimal control problem that results in a system of Hamilton Jacobi Bellman equations. The model is applied to a typical copper mine in Canada. The resource price is modelled as a stochastic differential equation, which is calibrated to copper futures prices using a Kalman filtering approach. A numerical solution is implemented to determine the optimal abatement and extraction rates as well as the critical levels of copper prices that would motivate a firm to clean up the accumulated waste under each policy. The paper demonstrates that an environmental bond provides stronger waste abatement incentives, implying that the waste is more likely to be cleaned up under the bond than the liability. The strict liability rule imposes sunk costs on a firm upon termination which would motivate it to remain inactive as a way to escape clean-up costs. However, the environmental bond raises funds ex ante for future clean-up costs and thus encourages site restoration.

JEL Classification

C61; D81; K32; Q52; Q58

#18-004-- Margaret Insley and Peter A. Forsyth

Climate games: Who's on first? What's on second?

Abstract

We study three different climate change games and compare with the outcome of choices by a Social Planner. In a dynamic setting, two players choose levels of carbon emissions. Rising atmospheric carbon stocks increase average global temperature which damages player utilities. Temperature is modeled as a stochastic differential equation. We contrast the results of a Stackelberg game with a game in which both players as leaders (a Leader-Leader or Trumpian game). We also examine a game, called an Interleaved game, where there is a significant time interval between player decisions. One or both players may be better off in these alternative games compared to the Stackelberg game, depending on state variables. We conclude that it is important to consider alternate game structures in examining strategic interactions in pollution games. We also demonstrate that the Stackelberg game is the limit of the Interleaved game as the time between decisions goes to zero.

JEL Classification

C61; C73; Q52; Q54

#18-005 -- Margaret Insley, Tracy Snoddon, and Peter A. Forsyth

Strategic interactions and uncertainty in decisions to curb greenhouse gas emissions

This paper examines the strategic interactions of two large regions making choices about greenhouse gas emissions in the face of rising global temperatures. Optimal decisions are modelled in a fully dynamic, closed loop Stackelberg pollution game. Global average temperature is modelled as a mean reverting stochastic process. A numerical solution of a coupled system of HJB equations is implemented. We explore the impact of temperature volatility and regional asymmetries on emissions, contrasting the outcomes from the Stackelberg game with the choices made by a social planner. When players are identical, a classic tragedy of the commons is demonstrated in which players in the game choose higher carbon emissions and have lower utility as compared to the outcome with a social planner. Over certain values of state variables, the tragedy of the commons is shown to be exacerbated by increased temperature volatility and regional asymmetries in climate damages. Asymmetries in environmental preferences can, under certain conditions, result in a green paradox whereby green sentiments in one region cause the other region to increase emissions. Interestingly, we also found that a contrary "green bandwagon" effect is possible. At high levels of the carbon stock, green preferences in one region can cause the other region to reduce emissions.

JEL Classification

C73; Q52; Q54; Q58

#18-006 -- Dinghai Xu, Jingru Ji and Donghua Wang

Modelling the spreading process of extrems risks via a simple agent-based model: Evidence from the China stock market

This paper focuses on investigating financial returns' extreme risks, which are defined as the negative log-returns over a certain threshold. A simple agent-based model is constructed to explain the behavior of the market traders when extreme risks occur. We consider both the volatility clustering and the heavy tail characteristics when constructing the model. Empirical study uses the China securities index 300 daily level data and applies the method of simulated moments to estimate the model parameters. The stationarity and ergodicity tests provide evidence that the proposed model is good for estimation and prediction. The goodness-of-fit measures show that our proposed model fits the empirical data well. Our estimated model performs well in out-of-sample Value-at-Risk prediction, which contributes to the risk management.

JEL Classification

C15; C52; G15

#18-007 -- Andrew Clarke, Ana Ferrer, and Mikal Skuterud

A Comparative Analysis of the Labour Market Performance of University-Educated Immigrants in Australia, Canada, and the United

We examine data from Australia, Canada, and the U.S. to inform the potential for immigrant screening policies to influence the labour market performance of skilled immigrants. Our estimates point to improvements in employment rates and weekly earnings of male university‐educated immigrants in all three countries concomitant with policy reforms. Nonetheless, the gains are modest in comparison to a substantial and persistent performance advantage of U.S. skilled immigrants. Given that there is increasingly little to distinguish the skilled immigration policies of these countries, we interpret the U.S. advantage as primarily reflecting the relative positive selectivity of U.S. immigrants.

JEL Classification

J24, J15, J08

#18-008 -- John Burbidge

"Using distance functions to derive optimal progressive earnings tax and commodity tax structures"

Much of the research program in optimal taxation rests on the Atkinson-Stiglitz theorem (1976) | in the presence of optimal nonlinear earnings taxation, if leisure is weakly separable from goods, there is no role for differential commodity taxation. The nonlinear earnings tax in the theorem is one where, conditional on reported earnings, the government can choose tax paid and the marginal tax rate (mtr). The relationship between the average tax rate (atr) and mtr is unrestricted. Most governments operate progressive nonlinear tax systems in which, for each person paying taxes, mtr is not less than atr. I build on Deaton's work on distance functions and taxation to show that the AS theorem fails in the presence of optimal progressive earnings taxation. Conditional on mtr  atr, the search for optimal earnings tax structures cannot be undertaken without simultaneously studying optimal commodity taxation whether or not leisure is weakly separable from goods. The formal theory in the paper assumes two types. I also discuss a nite-type example of an optimal progressive earnings, and commodity, tax structure and present numerical examples with four types.

JEL Classification

H21

#18-009 -- Stephanie Lluis and Yazhuo (Annie) Pan

"Marital Property Laws and Women's Labour Supply"

In this paper, we study whether and if so how changes in the marital property law following the amendment of the Civil Code of Quebec to improve economic equality between spouses impacted household labour supply and individuals' marital decisions. We exploit detailed information on individuals' labour market and marital status from the Labour Force Survey to analyze short-term changes in labour supply and marital decisions before and after the reforms in Quebec relative to other provinces, which did not experience the changes in the marital property law over that time period. Investigating the labour supply and marital decisions' responses to a policy changing the distribution of resources between men and women may assist welfare agencies in the design of family reforms and more generally, help further reduce women's entry into poverty. Furthermore, analyzing whether the Quebec marital property law changed the demographic mix of couples may further inform policymaker about possible ways to improve gender equality.

JEL Classification

C21, H75, J12, J22

#18-010 -- Stephanie Lluis and Brian McCall

"Spousal Labour Supply Adjustments"

 In this paper, we study the impact of increased generosity in the unemployment insurance system on labour supply adjustments of a spouse following the job loss of his/her partner. We exploit the longitudinal household format of the Canadian Labour Force Survey following labour force transitions of each spouse over time and estimate spousal labour supply responses arising from an added worker effect, whereby spousal labour supply increases following the partner’s job loss. We study whether the additional weeks of benefits offered by the Extended Weeks (EW) pilot, an initiative of the Employment Insurance program implemented in a subset of regions, had a differential impact on spousal labour supply. We use a difference-in-difference (DiD) approach to identify (separately from the added worker effect) a crowding-out effect of EI on the spousal labour supply resulting from the greater generosity of the added benefits weeks. Our fixed-effect estimation results show a statistically significant and substantial added worker effect for married women. Our DiD results show evidence of EI crowding-out the labour supply of wives whose spouse’s job loss qualifies for EI benefits. The crowding-out effect of EI diminishes about 55% of the added worker effect.

JEL Classification

J62, J65