The precautionary principle justifies postponing the implementation of development projects to await better information about their environmental impacts. But if implementation capacity is congestible, as is often the case in practical settings, a postponed project may have to vie for implementation priority with projects that arrive later. Limitations of implementation capacity create two risks. First, it may sometimes not make sense to go back to a postponed project, even if it is later revealed to be a good one. Second, the planner may find it worthwhile to go back to it, but at the expense of undesirable delay of subsequent projects. We consider a planner facing a sequence of projects that vary stochastically in their (1) importance and (2) improvability, but knowing that implementation capacity is congestible. The scope for congestion implies a ‘bonus’ for earlier-than-otherwise decisions, in common parlance ‘keeping the desk clear’, which works against the well-understood option value that encourages postponement. The optimal decision rule depends upon the stochastic environment whereby future projects are generated, in ways that are not obvious. The value of the bonus is increasing in the expected importance of future projects but decreasing in their expected improvability. Higher variability of the importance of projects, in the sense of mean-preserving spread, increases the size of the bonus, but variability in their improvability has a generally ambiguous impact. We characterize the adjusted decision rule and note its implications for the conduct of cost-benefit informed policy. 

Abstract

We consider a productive network formed by agents with heterogeneous privately-known productivity types. Under convex cost of link formation, bilateral links create endogenous externalities. We calculate the "rearrangement cost" imposed on the entire network by each subset of other agents an agent can link to, and the consequent social opportunity cost of such subsets. We construct a mechanism to implement the socially optimal network, which specifies transfers based on the calculated opportunity cost, and a allocation to each agent consisting of network links. Once agents form allocated links, network connections might reveal further information to an agent on types of other agents. As a robustness check we allow pairwise adjustments under full information at the stage after forming the allocated network. We show that the mechanism is strict ex post incentive compatible, implements the optimal network as a pairwise-stable network and does not have a budget deficit.

Link to paper on SSRN 

Abstract

Programs that certify the environmental (or other social) attributes of firms are common. But the proliferation of labeling schemes makes it difficult for consumers to know what each one means—what level of “greenness” does a particular label imply? We provide the first model in which consumers can expend effort to learn what labels mean. The relationship between information acquisition costs, firm pricing decisions, the market shares obtained by alternatively labeled goods and a brown “backstop” good, and total environmental impact proves complex. Consumer informedness can have perverse implications. In plausible cases a reduction in the cost of information damages environmental outcomes. Our results challenge the presumption that provision of environmental information to the public is necessarily good for welfare or the environment.

With A Heyes and others. Link to journal article; 

Abstract

In 1997 the new Labour government launched major initiatives in the area of financial regulation, setting up the Financial Services Authority as a comprehensive regulatory body, supported by the legislative framework of the Financial Services and Markets Act 2000. We evaluate the Labour government’s record on financial regulation in terms of its achievements and failures, especially in dealing with the global financial crisis that started in 2007. While we identify some clear flaws in regulatory design and enforcement, our evaluation highlights some inherent difficulties of financial regulation.

(With Arip Daripa and Stephen Wright
Link to journal article. vol 29(1): 71-94.]

Abstract

Emotions are a significant determinant of consumer behavior. A customer may get angry if he feels that he is being treated unfairly by his supplier and that anger may make him more likely to switch to an alternative provider. We model the strategic interaction between firms that choose quality levels and anger-prone customers who pick their supplier based on their expectations of suppliers’ quality. Strategic interaction can allow for multiple equilibria including some in which no firm invests in high quality. Allowing customers to voice their anger on peer-review fora can eliminate low-quality equilibria, and may even support a unique equilibrium in which all firms choose high quality.

Link to journal webpage,  vol 84 (3), 813-828

Abstract

The desire to avoid rousing community hostility may encourage firms to behave in an environmentally responsible manner. Firms may engage in corporate social responsibility (CSR) to maintain community support and/or to regain the support of a community where it has been lost. It has been conjectured that such ‘informal regulation’ could effectively replace formal intervention in some settings, and usefully complement it in others. We explore these conjectures with mixed results. Informal regulation is necessarily less efficient than a well-designed formal alternative and the pattern of green behavior induced by the threat of community hostility may increase or decrease welfare. The existence of community pressure may increase or decrease the optimal calibration of a formal intervention (in this case an environmental tax) and may complement or detract from the incentives generated by an optimally calibrated tax.

With Anthony Heyes; Link to journal article

Abstract

The extent to which environmental regulatory institutions are either ‘green’ or ‘brown’ impacts not just the intensity of regulation at any moment, but also the incentives for the development of new pollution-control technologies. We set up a strategic model of R&D in which a polluter can deploy technologies developed in-house, or license technologies developed by specialist outsiders (an ‘eco-industry’). Polluters exert R&D effort and may even develop redundant technologies to improve the terms on which they procure technology from outside. We find that, while regulatory bias has an ambiguous impact on the best-available technology, strategic delegation to systematically biased regulators can improve social welfare.

With Anthony Heyes; link to journal article. [J Environmental Economics & Management, 2011, vol 61(3), 327-340 ]

Abstract

Altruism or ‘regard for others’ can encourage self‐restraint among generators of negative externalities, thereby mitigating the externality problem. We explore how introducing impure altruism into standard regulatory settings alters regulatory prescriptions. The optimal calibration of both quantitative controls and externality taxes is affected. It also leads to surprising results on the comparative performance of instruments. Under quantity‐based regulation, welfare is increasing in the propensity for altruism in the population; under price‐based regulation, the relationship is non‐monotonic. Price‐based regulation is preferred when the population is either predominantly altruistic or predominantly selfish; quantity‐based regulation is preferred for cases in between.

With Anthony Heyes; link to journal article, [Canadian Journal of Economics, 2011, vol 44(1), 227-246 ]

Abstract

Enforcement of policy is typically delegated. What sort of mission should the head of an enforcement program be given? When there is more than one firm being regulated the firms’ decision problems—otherwise completely separate—become linked in a way that depends on that mission. Under some sorts of missions firms compete to avoid the attention of the enforcer by competitive reductions in the extent of their non-compliance, in others the interaction encourages competitive expansions. We develop a general model that allows for the ordering of some typical classes of missions. We find that in plausible settings ‘target-driven’ missions (that set a hard target in terms of environmental outcome but flexible budget) achieve the same outcome at lower cost than ‘budget-driven’ ones (that fix the enforcement budget). Inspection of some fixed fraction of firms is never optimal.

with Anthony Heyes; link to journal article, Journal of Environmental Economics & Management, 2009 [ vol 58(2), 129-140 ]

Abstract

We show how vicious circles in countries' credit histories arise in a model where output persistence is coupled with asymmetric information about output shocks. In such an environment, default signals the borrower's vulnerability to adverse shocks and creates a pessimistic growth outlook. This translates into higher interest spreads and debt servicing costs relative to income, raising the cost of future repayments, thereby creating “default traps”. We build a long and broad cross-country dataset to show the existence of a history-dependent “default premium” and of significant effects of output persistence on sovereign creditworthiness, consistent with the model's predictions.

With Ana Fostel and Luis Catão
Link to Journal of Development Economics, 2009 [vol 89(2), 271-84 ]

Abstract

The recent corporate evolution of China and India has been characterized by increased internationalization of firms in the form of significant outward foreign direct investment flows and overseas mergers and acquisitions. To provide a context for the papers in this ICC special issue 18:2 (2009), we outline the quantitative and qualitative patterns of internationalization activity of Chinese and Indian firms, identify factors that motivate these firms to invest overseas, and describe the internationalization strategies they have adopted.

with Suma Athreye; link to journal article; Industrial and Corporate Change, 2009 [vol 18(2), 209-221]
Related policy brief 

Abstract

“Whistle-blowing” is an increasingly common element of regulatory enforcement programs and one that is encouraged by recent legislation in the United States and elsewhere. We examine how responsive regulators should be to whistle-blower tip-offs and how severe should penalties be for wrongdoers detected in this way. Competing psychological theories as to what motivates employees to become whistle-blowers are operationalized as alternative behavioral heuristics. Optimal policy depends upon the motives attributed to whistle-blowers—which of the theories you subscribe to—but is not in general characterized by maximal penalties nor routine pursuit of complaints, even when pursuit is costless. 

With A Heyes; Link to journal article; An economic model of whistleblower policy, Journal of Law, Economics & Organization, 2009 [vol 25(1), 157-182]

ABSTRACT This paper studies industrial concentration in Indian manufacturing sectors over the period 1970 to 1999. Given that Indian industry was highly regulated till the mid 1980s, the market structure in most manufacturing sectors was largely shaped by government policy. Deregulation after 1985 allowed greater scope for normal competitive processes, so that concentration levels should progressively be determined by industry characteristics rather than government policy. We find that, on the whole, concentration levels were indeed more significantly related to industry characteristics after deregulation. However, even after controlling for these characteristics, there is considerable heterogeneity in the patterns of concentration in individual industries. 

with Suma Athreye; link to journal article Journal of Development Studies, 2006 [ vol 42(6), 981-999 ]

Abstract: A striking feature of sovereign lending is that many countries with moderate debtto-income ratios systematically face higher spreads and more stringent borrowing constraints than other countries with far higher debt ratios. Earlier research has rationalized the phenomenon in terms of sovereign reputation and countries' distinct credit histories. This paper provides theoretical and empirical evidence to show that differences in underlying macroeconomic volatility are key. While volatility increases the need for international borrowing to help smooth domestic consumption, the ability to borrow is constrained by the higher default risk that volatility engenders. [JEL C23, F34] 

with Luis Catão
Link to journal article, IMF Staff Papers, 2006 [ vol 53(2), 195-218 ]

Abstract

We analyse the equilibrium consequences of performance‐based contracts for fund managers. Managerial remuneration is tied to a fund’s absolute and relative performance. Investors choose whether or not to delegate their investment to better‐informed fund managers; if they delegate they choose the optimal contract subject to the fund manager’s participation constraint. We find that the impact of relative performance evaluation on the equilibrium equity premium and on portfolio herding critically depends on whether the participation constraint is binding. Simple numerical examples suggest that the increased importance of delegation and relative performance evaluation may lower the equity premium.

With Allan Tmmermann,
Link to journal article. The Economic Journal, 2005
[ vol.115, 1077-1102]

Abstract

We examine the nature of debt contracts when repayment of debt cannot be fully enforced. We study outcomes an infinite-horizon economy in which some individuals have access to a productive, intertemporal technology. Individuals without access to the technology must lend their savings to the rest. Borrowers can default on their debt at any time: lenders can capture a fraction of their investment incomes. Borrowers who default stand to lose the right to borrow in the future. These constitute the penalties of capture and exclusion.

We evaluate debt and repayment paths that can be sustained in this these penalties. The set of allocations that can be supported by default-free debt is fully characterized; this set is non-empty, convex, and contains a subset that is fully efficient.

With J Dutta
Link to journal article Journal of Mathematical Economics, 2002 [ vol 38, 249-270 ]

Abstract

It is often claimed that e‐commerce has created a more competitive environment by encouraging the entry of new online firms and by enabling buyers to search easily for the lowest prices. The limited evidence that exists paints a mixed picture. Many online markets are advertising‐ and technology‐intensive, creating a tendency towards growing concentration. Price search is imperfect and firms can dampen price competition by increasing product heterogeneity and switching costs. In many sectors, online firms may come to acquire some market power. We look at the forms of pricing that are likely to emerge in such markets, including the greater use of price discrimination and auction‐like trading arrangements.

With Arup Daripa
Link to journal article Oxford Review of Economic Policy, 2001 [ vol 17(2),  202-216]

Abstract

In situations where a seller has surplus stock and another seller is stocked out, it may be desirable to transfer surplus stock from the former to the latter. We examine how the possibility of such transshipments between two independent locations affects the optimal inventory orders at each location. If each location aims to maximize its own profits—we call this local decision making—their inventory choices will not, in general, maximize joint profits. We find transshipment prices which induce the locations to choose inventory levels consistent with joint-profit maximization.

• (with Rudi &  Pyke), link to Management Science, 2001 [ 47 (12), 1668-1680 ]

Abstract

Private foreign capital, whose presence in Indian industry was long regarded with concern and suspicion, is now presented as a panacea for India's poor industrial and export performance. This paper examines available evidence to compare the behaviour and performance of domestic and foreign‐controlled firms in India over the last five decades. It discusses the contribution of foreign capital to aggregate investment, balance of payments and economic growth. We assess the effects of government policy towards foreign investment, review recent changes, and outline implications for the future

with Suma Athreye
Link to the journal article, The World Economy, 2001 [vol 24(3), 399-424 | data appendix]

Abstract

Fully funded pension systems are advocated for their higher rate of return, but this return is typically risky. Using a simple mean-variance model, we find that mixed funded–unfunded systems are desirable in this setting because they enable risk diversification.

(with Dutta & Orszag)
Economics Letters, 2000,  [vol 69(2), 201-06 | via ScDirect |link]

Abstract

We examine the characteristics of optimal monetary policies in a general equilibrium model with incomplete markets. Markets are incomplete because of uninsured preference uncertainty, and because productive capital is traded infrequently. Rational individuals are willing to hold a liquid asset-"money"-at a premium. Monetary policy interacts with existing financial institutions to determine this premium, as well as the level of precautionary holdings. We show that inflation is expansionary, and that the optimal inflation rate is positive if there is no operative banking system (the Tobin effect). Otherwise, efficiency requires that money be undominated in its rate of return (the Friedman Rule).

With Jayasri Dutta
Review of Economic Studies, 1998 [vol. 65, 551-572 | via JSTOR]