Economics

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Shiv Nadar University

Aquatic ecosystems around the globe are under threat from pollution, invasive species, over-exploitation, and other stressors. Given synergistic effects, policy measures to address particular stressors should be developed in tandem with policy measures to address others. We present a bio-economic model that addresses the optimal management of an aquatic ecosystem subject to multiple stressors. Specifically, we consider optimal management of a native fishery in a lake ecosystem subject to risks from pollution and an invasive species. Optimal plans exist for various cases defined by whether, one, both, or neither of the stressor events has occurred. Optimal fishery stocks vary between these cases, and depend on the order in which the stressor event occur if realized. The optimal native stock is the highest in the absence of either stressor. However, the combined influence of the multiple risks can rapidly reduce the probability of maintaining an un-invaded and un-polluted state for long. The synergistic effects of the risks interconnect optimal policies in interesting ways. We find that optimal pollution abatement in absence of both these stressors may turn out to be lower than when either or both stressors are present. The effectiveness of native fish stock in mitigating the risk of alien fish invasion can have a bearing on whether optimal native fish stock and abatement effort are used as substitutes or as complements. Pollution abatement levels that are chosen without consideration of alien invasion risk can lead indirectly to increased societal costs for invasion risk mitigation. © 2017 World Scientific Publishing Company.

(SoHSS) School of Humanities and Social Sciences

World University root node

Water Economics and Policy

Protecting and Restoring Aquatic Ecosystems in Multiple Stressor Environments

Repeated Trade with Two $ sided Incomplete Information

A model of concessional bargaining among farmers explains the success (or lack thereof) of cooperative institutions in rural farm settings in the developing regions. Concessional bargaining in day-to-day interactions generates goodwill, which helps smoothen future dealings amongst farmers as well as with outside agents. In particular, we model the existence of goodwill amongst farmers as enhancing their ability to collectively bargain with an outside dealer that buys their farm produce. Results suggest that when dealing with each other, farmers offer higher concessions when the risk of loss or reversal in bargaining power is high; however, the level of concession is also influenced by the degree of reciprocity and parameters that affect bargaining surplus. Findings provide further insights over the success of cooperative institutions in rural farm settings where inter-farmer goodwill dynamics determines the cooperative's bargaining outcomes. Specifically, when farmers generously reciprocate each other's goodwill gestures, it leads to better outcomes through increasing their cooperative reservation price. In contrast, when the degree of reciprocity is lower, or when the risk of bargaining power switching is higher, farmers extract more surplus from other farmers, and this also lowers the cooperative's bargaining outcomes and makes the cooperative arrangement unviable in the long term. © 2017 The Authors Annals of Public and Cooperative Economics © 2017 CIRIEC

Annals of Public and Cooperative Economics

BARGAINING AMONG FARMERS, GOODWILL, AND THE SUCCESS OF COOPERATIVES

We study the stable market outcome that evolves in a spatially differentiated market when price-competing firms choose actions by imitation of the most profitable firm. We compare and contrast the stable outcomes under two imitation procedures: one, where each firm immediately imitates the most profitable firm, and the other when a firm imitates another firm only if it is more profitable while being “sufficiently similar” (in context of the market segment it operates in) or “sufficiently close”. In either case, the symmetric pure strategy Nash equilibrium is always a stable outcome. However, when imitation of the most profitable firm is immediate and market differentiation is ‘moderate’, states with prices lower than the Nash equilibrium are also stable. In contrast, when imitation of the most profitable firm is more gradual and market differentiation is below a threshold, states with prices above the Nash equilibrium are also stable. Thus, while competitive evolutionary pressure in this imitation based model does result in the Nash equilibrium always being stable, other outcomes may be stable as well. Interestingly, the states that are stable under gradual imitation give the firms a higher profit than the stable states under immediate imitation. © 2017 Elsevier B.V.

Fulltext

Journal of Economic Dynamics and Control

Imitation and price competition in a differentiated market

Emerging market economy business cycles are typically characterized by high consumption and output volatility, strongly counter-cyclical current accounts, and counter-cyclical real interest rates. Evidence from the wider EME and less developed economy business cycle experience suggests however that real interest rates can also be pro-cyclical. We reconcile the pro-cyclicality of real interest rates with the above facts by embedding fiscal policy into a standard emerging market business cycle model. We show that fiscal policy makes real interest rates a-cyclical or pro-cyclical. We use the model to replicate some of the key features of the Indian business cycle. © 2016 Elsevier B.V.

Journal of Economic Asymmetries

Fiscal policy in an emerging market business cycle model

This dissertation studies the relation between political factors (political instability, political fragmentation, policy gridlock and the political color of parties) and fiscal policy outcomes (tax rates, debt levels, default episodes). The second chapter studies the empirical aspects of the aforementioned relation. The third chapter studies how policy gridlock affects tax policy and sovereign default. The last chapter studies the relation between political instability and fragmentation and sovereign debt and default. SOME EMPIRICAL EVIDENCE ON THE POLITICAL ECONOMY OF SOVEREIGN DEBT AND DEFAULT. The most well-known political economy theory of debt accumulation is the common pool problem of debt (Weingast et al., 1981; Velasco, 2000). This theory has been tested for advanced economies, mainly in parliamentary systems and there is empirical evidence that supports its conclusions. However, when data on political parties for emerging economies has been used, there is no support for the predictions of the theory (Stein et al., 1998; Elgie and McMenamin, 2008; Eslava and Nupia, 2010). This should not be surprising, because emerging markets are characterized by presidential systems, where the number of parties in the current government coalition does not play a crucial role in terms of the budget (the most common measure of political fragmentation). In this chapter presents alternative measures for political instability and fragmentation. The effective number of the political parties in power (or in the executive) is the proxy of political instability. The proxy for political fragmentation is the percentage of votes in Congress of all the parties that never were in power, or those parties that never belong to the government's coalition at any point in time. The idea of these two measures is to see if over time a country has had a stable group of political parties that alternate in power and how big the votes' share of those parties was in Congress. In a bipartisan system there would be only two parties over time that enjoy most of the votes in Congress. However, this is not the case of many emerging markets. Using a sample of 35 emerging countries between 1975 and 2012, this chapter documents that a higher degree of political instability and fragmentation is associated with lower levels of borrowing and a higher probability of default. Another result of the empirical analysis is that the political color of political parties is not a determinant of debt accumulation or default. Differently, the political color affects the tax rates observed in the data. In particular, left wing governments set higher tax rates than right wing parties. Muller, Storesletten and Zilibotti (2016) finds that the same holds for advanced economies. Also, using an event study analysis around default crises, the data reveals that emerging countries do exert a fiscal adjustment in terms of the tax rates before a default episode. POLICY GRIDLOCK AND SOVEREIGN DEFAULT Tax policy gridlock is defined as a situation in which political parties fail to reach an agreement that changes the current status quo tax rate and borrowing level. For that reason, the policies implemented the previous period are not changed. Policy inaction in terms of tax policy and its effects over debt accumulation has been studied in early political economy models (Alesina and Drazen, 1991). In terms of the more recent literature of sovereign default, Arellano and Bai (2014) and Andreasen, Sandleris and Van Der Ghote (2011) have focused on the inability to raise taxes. As it was mentioned in the abstract of the previous chapter, on average emerging countries do raise taxes before a default episode. In this chapter policymakers will raise taxes before a default event, but importantly, they will not be able to reduce borrowing levels. This is exactly what occurs in the data. Hence, a crucial aspect of policy gridlock highlighted in this chapter is the inability to reduce borrowing levels. The model shares the most relevant characteristics of the benchmark model of sovereign default (Eaton and Gersovitz, 1981; Aguiar and Gopinath, 2006; Arellano, 2008). Some differences are that the model contemplates a production economy and households value the provision of public goods. The model is also different due to its political economy dimension: (i) there are two parties that alternate stochastically in power and that represents two types of households (high and low productivity) and, (ii) the party in power offers a 'take-it-or-leave-it' policy proposal (tax rate, borrowing levels) to the other party, requiring unanimity to approve the proposal. There is no change to the status quo tax rate or the status quo borrowing policy if the proposal is rejected. In particular, the party that accepts or rejects will contrast the dynamic payoff of the proposal with the payoff of a scenario that contemplates maintaining the status quo policy. The setup in (i) and (ii) corresponds to a dynamic bargaining game with endogenous status quo, as in Bowen, Chen and Eraslan (2014) and Ma (2014). The main result of the paper is that the inability to reduce borrowing levels plays a more important role than the inability to raise taxes in terms of default episodes. In an economy without policy gridlock, a default episode can be ruled out implementing a fiscal adjustment that considers raising taxes and reducing borrowing levels in absolute terms. However, the paper documents that reductions in the absolute level of debt are not observed in the data (same sample of 35 emerging economies used in the second chapter). The introduction of gridlock generates more default episodes, because even though policymakers can raise taxes before a crisis (as it is observed in the data), are not able to convince the other party to reduce borrowing. This implies that when economic conditions deteriorate, there is an increase in the burden of debt. In a non-gridlock economy, the default probability is 3.18%, while in the economy with the possibility of gridlock, the chances of default raise up to 4.24%. Even though this is a model with heterogeneous agents, policy gridlock induces similar borrowing levels and default probabilities by party, as reported in the second chapter. Also, the model can replicate the probabilities associated with political defaults, or defaults that occur simultaneously with government changes, as well as political defaults in which there is also a change in the political color of the new incumbent. SOVEREIGN DEFAULT, POLITICAL INSTABILITY & POLITICAL FRAGMENTATION The workhorse model of sovereign default (Eaton and Gersovitz, 1981; Aguiar and Gopinath, 2006; Arellano, 2008) shows that debt levels that can be sustained in equilibrium are extremely low when the observed probabilities of default are targeted (Mendoza, 2015; Claessens and Kose, 2014; Aguiar and Amador, 2013; Tomz and Wright, 2013). While the benchmark model has been extended in different dimensions (long-term bonds, positive recovery rates, convex cost of default) that yield higher debt ratios, none of these new features has tried to address the reasons for higher borrowing. This chapter provides a motivation for this based on two political features: fragmentation and instability. The model has the following characteristics: (i) the economy receives a stochastic endowment and can borrow from abroad; (ii) policymakers take a decision to repay previous obligations or default; (iii) the costs for default are the exclusion from capital markets and an output loss; (iv) government bonds are traded in international capital markets and their price incorporates the possibility of future default; (v) a number of political parties stochastically alternate in power (political instability) and bargain over the budget (endowment and net borrowing); and, (vi) the policymaker forms a coalition of parties to get the necessary votes to approve the budget, leaving out of the coalition a number of other parties (political fragmentation). Features (v)-(vi) follow the bargaining approach developed in Battaglini and Coate (2007, 2008) and in these authors' subsequent papers. The intuition of the mechanism is as follows. Every time the policymaker wants to borrow an extra dollar from abroad, he will need to get the votes of the members of his coalition. This implies that the extra dollar will be divided between the policymaker and the other coalition parties. Also, zero resources from the extra dollar will be allocated to those excluded from the coalition, simply because their votes are not necessary. In this setup, more debt provides not only more consumption to the policymaker, but also increases his share of the total resources. This political incentive to borrow more will confront market discipline. There exists a borrowing level at which issuing more bonds becomes counterproductive, because debt has become too high and risky. International markets will recognize this and the price of bonds will start falling, providing less resources to the country and diminishing the policymaker's share. Therefore, there is a non-monotonic relationship between borrowing decisions and the proposer's share. This mechanism accounts for two opposite forces: the political channel that provides a higher share and the endogenous borrowing constraint that hampers the distributional benefits. The novel interaction between these two forces differs from previous political economy models of sovereign default (Cuadra and Sapriza, 2008, Hatchondo et al., 2009, D'Erasmo, 2011). These papers focused on the two-party case, discount factors and only allow for a fixed policymaker's share of resources. If this share does not vary with borrowing decisions, there are no distributional incentives to borrow more. Importantly, because these distributional benefits only exist under access to capital markets, policymakers will find repayment more attractive. This will allow the model to

State University of New York at Stony Brook

Essays on the Political Economy of Sovereign Debt and Default

We consider locally incentive compatible mechanisms with deterministic allocation rules and transfers with quasilinear utility. We identify a rich class of type spaces, which includes the single peaked type space, where local incentive compatibility does not imply incentive compatibility. Our main result shows that in such type spaces, a mechanism is locally incentive compatible and payment-only incentive compatible if and only if it is incentive compatible. Payment-only incentive compatibility requires that a mechanism that generates the same allocation at two types must have the same payment at those two types. Our result works on a class of ordinal type spaces, which are generated by considering a set of ordinal preferences over alternatives and then considering all non-negative type vectors representing such preferences. © 2016 Elsevier Inc.

Games and Economic Behavior

Local incentive compatibility with transfers

I develop a bio-economic model to analyse how human-tiger conflicts (HTCs) impact on forest dependent community members’ decisions to invest in human capital via education. I further explore the linkages between human capital outcomes and future sustainability of the forests as well as of the tiger populations. Results suggest that the risk of human mortality arising from HTCs could play a crucial role in determining human capital investment decisions. Specifically, lower HTC risk delays efforts to increase human capital via education. Furthermore, when the chances of finding employment are not very high, or when expected income in the skilled sector is not very high, communities delay human capital accumulation and prolong reliance on forest-based livelihoods, thereby increasing HTC risks. Low-growth forests can also promote early human capital investments. Finally, the manner in which HTC risks are affected by community actions can also influence their livelihood-based decisions. © 2016, Springer Science+Business Media New York.

Human Ecology

Exploring Inter-Relationships among Human-Tiger Conflicts, Human Capital Outcomes for Forest Dependent Communities and the Sustainability of Tiger Habitats

Repeated droughts in agriculture have promoted intensive reliance upon groundwater resources, thereby exacerbating the already stressed groundwater reservoir situations all across the globe. This has also resulted in increased inequality among farmers by allowing those with better physical assets, such as borewells, to extract water at the cost of less affluent farmers. As a response, bore pool sharing collective arrangements were introduced in some parts of India, with the intention of slowing down the rate of groundwater depletion and helping improve the livelihoods of the worst affected farmers. Such arrangements work through promoting collective management of groundwater resources by providing critical and timely irrigation to rain-fed crops and through dis-incentivizing the cultivation of high water consuming crops. We investigate the impact of bore pool sharing programs on crop incomes and cropping patterns of the participating households in South India. A Probit–2SLS model and Propensity score matching method are used to evaluate the impact of such programs while controlling for self-selection biases. Results indicate that farmers’ participation in bore pool sharing collectives is positively associated with their crop incomes. However, contrary to expectation, the share of high water-intensive crops also increases with participation. In addition, share of water-intensive crops is higher for a collective group with a higher ratio of bore wells to number of participating households. Finally, farmers within the pool with multiple past failed bore well sinking attempts tend to extract more water, thereby threatening the sustainability of the groundwater as well as the livelihoods of the farming community. © 2016 Elsevier Ltd

World Development

Achieving Sustainability and Development through Collective Action? An Empirical Analysis of the Impact of the Bore Pool Sharing Program on Farm Incomes and Crop Choices

In this paper we consider the exogenous indifference classes model of Barberá and Ehlers (2011) and Sato (2009) and analyze further the relationship between the structure of indifference classes across agents and dictatorship results. The key to our approach is the pairwise partition graph. We provide necessary conditions on these graphs for strategy-proofness and unanimity (or efficiency) to imply dictatorship. These conditions are not sufficient; we also provide separate stronger conditions that are sufficient. A full characterization is obtained in the case of two agents for domains where strategy-proofness and efficiency imply dictatorship. © 2015, Springer-Verlag Berlin Heidelberg.