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Working Paper Series

  • Consumer Demand with Several Linear Constriants:  A Global Analysis

    Michael W. Hanemann

    Goldman School of Public Policy Working Paper (October 2004)

    Economists sometimes find themselves in the position of having to extend the
    neoclassical model of consumer demand to settings where, in addition to the conventional budget
    constraint, there are one or more additional linear constraints that restrict the consumer’s utility
    maximization problem. Examples include point rationing [Tobin-Houthakker (1950-51), Tobin
    (1952)]; models of time allocation where the time constraint cannot be collapsed into the budget
    constraint [de Serpa (1971); de Donnea (1972); McConnell (1975); Lyon (1978) Larson and
    Shaikh (2001)]; and multi-period portfolio allocation problems [Diamond and Yaari (1972)].
    Without exception, the existing literature has focused on differential properties of the resulting
    demand functions-i.e. issues such as the effect of rationing on demand elasticities, the Le
    Chatelier—Samuelson Theorem, the generalization of the Hick-Slutsky decomposition, and other
    comparative static results [see Kusumoto (1976), Chichilnisky and Kalman (1978), Hatta (1980),
    Wan (1981) and the references cited above]. By employing some “tricks with utility functions”
    in the spirit of Gorman (1976), I am able to obtain a global characterization of these demand
    functions. Specifically, I develop an algorithm for deriving the demand functions that apply
    when there are M linear constraints from those that apply when these is only a single constraint.
    The algorithm permits one to derive all of the existing comparative static results in a simple and
    compact manner. It also has some value for empirical demand analysis, because it shows how to compute the demand functions associated with maximization problems involving multiple linear constraint based on direct or indirect utility functions associated with known conventional demand functions.

    The paper is organized as follows. Section 2 presents some preliminary results which are
    needed for the main analysis, but are also of interest as “tricks” in their own right. Section 3
    considers the utility maximization problem with two linear constraints, summarizes the existing
    comparative static results, develops the new Global Representation Theorem, and shows how
    this can be used to derive and sharpen the existing comparative static results. Section 4 considers
    a utility maximization problem with three linear constraints and develops the analogous Global
    Representation Theorem for the solution to this problem in terms of known demand functions
    associated with a conventional single-constraint problem; the results developed here provide the
    basis for extension to problems involving more than three linear constraints. Section 5 offers
    some concluding observations.

  • The Impact of Global Warming on U.S. Agriculture: An Econometric Analysis of Optimal Growing Conditi

    Michael W. Hanemann

    Goldman School of Public Policy Working Paper (October 2004)

  • The Temporal Resolution of Uncertainty and the Irreversibility Effect

    Michael W. Hanemann, Urvashi Narain, Anthony Fisher

    Goldman School of Public Policy Working Paper (October 2004)

    We define the irreversibility effect and demonstrate its importance in problems involving investment
    decisions under uncertainty. We establish several analytical and numerical results that suggest both
    that the effect holds more widely than generally recognized, and that an existing result (Epstein’s
    Theorem) giving a sufficient condition for determining whether the effect holds can be applied more
    widely than previously indicated, in particular to problems involving intertemporally nonseparable
    benefit functions. We further show that a low elasticity of intertemporal substitution will however
    result in failure of the effect, but that the effect will hold if the value of information increases in
    the degree of flexibility.

  • Toward a Territorial Approach to Rural Development: International Experiences and Implications for M

    Alain de Janvry, Elisabeth Sadoulet

    Goldman School of Public Policy Working Paper (July 2004)

    The persistence of rural poverty, concentration in rural areas of the most extreme forms of
    poverty, and rising inequality in the distribution of rural incomes remain vexing aspects of rural
    development in Latin America, in spite of expensive programs intended at reducing poverty and inequality.
    Mexico is no exception to this observation. This widespread failure calls upon exploring alternative
    approaches to rural development that may have greater chances of success. Taking an approach that
    distinguishes between marginal and favorable areas, and that seeks to integrate rural and urban activities in
    a territorial dimension centered around regional economic projects and the economic incorporation of the
    poor is one such option that deserves further consideration. It has been introduced in Mexico through the
    Microregions Strategy. While it is too early to evaluate this program, we derive lessons from international
    experiences that provide guidelines to assess the Mexican strategy.

    We do this by first characterizing the recent evolution of rural poverty and inequality in Latin
    America. We then proceed to explore a set of qualitative changes in rural poverty that need to be taken into
    account in a new approach. This is complemented by analyzing a set of new opportunities for rural poverty
    reduction that should also be factored into a new approach. On the basis of international experiences with
    territorial development, we derive a set of principles for success of the approach. We use these principles
    to discuss the methodology followed in Mexico for the Microregions Strategy.

  • Emissions pathways, climate change, and impacts on California

    Michael W. Hanemann, Katharine Hayhoea, Daniel Cayan, Christopher B. Field, Peter C. Frumhoff, Edwin P. Maurer, Norman L. Miller, Susanne C. Moser, Stephen H. Schneider, Kimberly Nicholas Cahill, Elsa E. Cleland, Larry Dale, Ray Drapek, Laurence S. Kalkstein, James Lenihan, Claire K. Lunch, Ronald P. Neilson, Scott C. Sheridan, Julia H. Verville

    Goldman School of Public Policy Working Paper (June 2004)

    The magnitude of future climate change depends substantially on
    the greenhouse gas emission pathways we choose. Here we
    explore the implications of the highest and lowest Intergovernmental Panel on Climate Change emissions pathways for climate
    change and associated impacts in California. Based on climate
    projections from two state-of-the-art climate models with low and
    medium sensitivity (Parallel Climate Model and Hadley Centre
    Climate Model, version 3, respectively), we find that annual temperature increases nearly double from the lower B1 to the higher
    A1fi emissions scenario before 2100. Three of four simulations also
    show greater increases in summer temperatures as compared with
    winter. Extreme heat and the associated impacts on a range of
    temperature-sensitive sectors are substantially greater under the
    higher emissions scenario, with some interscenario differences
    apparent before midcentury. By the end of the century under the
    B1 scenario, heatwaves and extreme heat in Los Angeles quadruple
    in frequency while heat-related mortality increases two to three
    times; alpinesubalpine forests are reduced by 50–75%; and Sierra
    snowpack is reduced 30–70%. Under A1fi, heatwaves in Los
    Angeles are six to eight times more frequent, with heat-related
    excess mortality increasing five to seven times; alpinesubalpine
    forests are reduced by 75–90%; and snowpack declines 73–90%,
    with cascading impacts on runoff and streamflow that, combined
    with projected modest declines in winter precipitation, could
    fundamentally disrupt California’s water rights system. Although
    interscenario differences in climate impacts and costs of adaptation
    emerge mainly in the second half of the century, they a

  • The Political Economy of Intellectual Property Treaties

    Suzanne Scotchmer

    Goldman School of Public Policy Working Paper (June 2004)

    Intellectual property treaties create two types of obligations: for national treatment of foreign inventors and for certain harmonized protections. I investigate both the incentive to join such treaties and the incentive to harmonize. As compared to an equilibrium in which the countries' policy makers make independent choices, harmonization will generally strengthen protections. this analysis recognizes that public sponsorship is sometimes an efficient alternative to intellectual property. However, there are noinstitutions to haronize public spending, and there are no international machanisms to repatriate the spillovers it generates. As a consequence, there may be too little public sponsorship and too much intellectual property. A country's inclination to strengthen harmonized protections will depend both on its innovativeness (positively) and on the size of its domestic market (negatively).

  • Procuring Knowledge

    Suzanne Scotchmer, Stephen M. Maurer

    Goldman School of Public Policy Working Paper (May 2004)

    There is growing public interest in alternatives to intellectual property including, but not limited to, prizes and government grants. We collect various
    historical and contemporary examples of alternative incentives, and show when they are superior to intellectual property. We also give an explanation for why federally funded R&D has moved from an intramural activity to largely a grant process. Finally, we observe that much research is supported by a hybrid system of public and private sponsorship, and explain why this makes sense in some circumstances.

  • Measuring Transactions Costs from Observed Behavior: Market Choices in Peru

    Alain de Janvry, Elisabeth Sadoulet, Renos Vakis

    Goldman School of Public Policy Working Paper (October 2003)

    Farmers incur proportional and fixed transactions costs in selling their crops on markets.
    Using data for Peruvian potato farmers, we propose a method to measure these transactions costs.
    When opportunities exist to sell a crop on alternative markets, the observed choice of market can be
    used to infer a monetary measure of transactions costs in market participation. The market choice
    model is first estimated at the reduced form level with a conditional logit, as a function of variables
    that explain transactions costs. We then use these market choice equations to control for selection in
    predicting the idiosyncratic prices that would be received on all markets and the idiosyncratic
    proportional transactions costs that would be incurred to reach all markets. The net between the two
    gives us a measure of effective farm-level prices. This allows us to estimate a semi-structural
    conditional logit of the market choice model. In this model, the choice of market is a function of
    predicted effective farm-level prices, and of market information that accounts for fixed transactions
    costs. We can use the estimated coefficients to derive the price equivalence of the fixed cost due to
    information. We find that the information on market price that farmers receive from their neighbors
    reduces fixed transactions costs by the equivalent of doubling the price received, and is equal to four
    times the average transportation cost.