John Hassler

Optimal Taxes on Fossil Fuel in General Equilibrium

We analyze a dynamic stochastic general-equilibrium (DSGE) model with an externality—through climate change—from using fossil energy. Our central result is a simple formula for the marginal externality damage of emissions (or, equivalently, for the optimal carbon tax). This formula, which holds under quite plausible assumptions, reveals that the damage is proportional to current GDP, with the proportion depending only on three factors: (i) discounting, (ii) the expected damage elasticity (how many percent of the output flow is lost from an extra unit of carbon in the atmosphere), and (iii) the structure of carbon depreciation in the atmosphere. Thus, the stochastic values of future output, consumption, and the atmospheric CO2 concentration, as well as the paths of technology (whether endogenous or exogenous) and population, and so on, all disappear from the formula. We find that the optimal tax should be a bit higher than the median, or most well-known, estimates in the literature. We also formulate a parsimonious yet comprehensive and easily solved model allowing us to compute the optimal and market paths for the use of different sources of energy and the corresponding climate change. We find coal—rather than oil—to be the main threat to economic welfare, largely due to its abundance. We also find that the costs of inaction are particularly sensitive to the assumptions regarding the substitutability of different energy sources and technological progress.

Democratic public good provision

This Paper analyses an overlapping generation model of public good provision under repeated voting. The public good is financed through age-dependent taxation that distorts human capital investment. Taxes redistribute income both across different skill groups and across generations. We contrast the political equilibria with the Ramsey allocation, and analyse the sources of inefficiency. The political equilibria can feature both under- and over-provision of public good, as well an inefficient life-cycle profile of taxes.

Variations in risk and fluctuations in demand: A theoretical model

Abstract Can variations in risk cause nonnegligible fluctuations in the flow of investment? This issue has so far only been studied in models with a fixed level of risk. Comparative statics may be inadequate, since risk varies over time. In this paper, a simple irreversible investment model is extended by including a stochastic process for the risk level. An increase in risk increases the value of waiting as in the standard model. The agent then allows larger deviations from the target level before adjusting, as long as the high-risk period continues. The new result is that this effect is stronger the shorter the high-risk periods are expected to be. Comparative statics may thus underestimate the effects of fluctuations in risk.

Should UI Benefits Really Fall over Time

The issue of whether unemployment benefits should increase or decrease over the unemployment spell is analyzed in an analytically tractable model allowing moral hazard, adverse selection and hidden savings. Analytical results show that when the search productivity of unemployed is constant over the unemployment spell, benefits should typically increase or be constant. The only exception is when there is moral hazard and no hidden savings. In general, adverse selection problems calls for increasing benefits, moral hazard problems for constant benefits and decreasing search productivity for decreasing benefits.

Employment turnover and the public allocation of unemployment insurance

Unemployment benefits are higher and turnover between unemployment and employment is lower in Europe than in the U.S. We model the political determination of the unemployment insurance to explain these differences. We show that saving and borrowing is a good substitute for unemployment insurance when turnover is high. With high turnover, the median voter thus prefers low unemployment insurance. With low turnover, generous unemployment insurance becomes more valuable. If the median voter cannot bind future voters, the voting cycle must, however, be long in order to support a high level of insurance. Endogenizing turnover produces the possibility of multiple political equilibria.

Equilibrium Unemployment Insurance

In this paper, we incorporate a positive theory of unemployment insurance into a dynamic overlapping generations model with search-matching frictions and on-the-job learning-by-doing. The model shows that societies populated by identical rational agents, but differing in the initial distribution of human capital across agents, may choose very different unemployment insurance levels in a politico-economic equilibrium. The interaction between the political decision about the level of the unemployment insurance and the optimal search behavior of the unemployed gives rise to a self-reinforcing mechanism whichmay generate multiple steady-state equilibria. In particular, a European-type steady-state with high unemployment, low employment turnover and high insurance can co-exist with an American-type steady-state with low unemployment, high employment turnover and low unemployment insurance. A calibrated version of the model features two distinct steady-state equilibria with unemployment levels and duration rates resembling those of the U.S. and Europe, respectively.

Uncertainty and the Timing of Automobile Purchases

Earlier studies have shown that lumpy investment models well characterize individual expenditures on durables, in particular automobiles. In this class of models, a higher level of uncertainty generally implies that the household should tolerate a larger imbalance between the actual stock of the durable and the target stock before adjusting it by buying and/or selling. Then, if the level of uncertainty increases, aggregate expenditures would temporarily fall. This hypothesis is tested by estimating an aggregate lumpy investment model on automobile expenditure data, using stock market volatility to proxy uncertainty. The result is that expenditures fall significantly as stock market volatility increases. Copyright 2001 by The editors of the Scandinavian Journal of Economics.

Optimal actuarial fairness in pension systems: A note

Abstract Given a compulsory pension system, we calculate the optimal ratio of marginal contributions to benefits. This ratio is independent of the labor supply elasticity, it increases in the rate of return in the pension system and decreases in the governments discount rate.

On the Optimal Timing of Capital Taxes

For many kinds of capital, depreciation rates change systematically with the age of the capital. Consider an example that captures essential aspects of human capital, both regarding its accumulation and its depreciation: a worker obtains knowledge in period 0, then uses this knowledge in production in periods 1 and 2, and thereafter retires. Here, depreciation accelerates: it occurs at a 100% rate after period 2, and at a lower (perhaps zero) rate before that. The present paper analyzes the implications of non-constant depreciation rates for the optimal timing of taxes on capital income. The main finding is that under natural assumptions, the path of tax rates over time must be oscillatory. Oscillatory tax rates are optimal when depreciation rates accelerate with the age of the capital (as in the above example), and provided that the government can commit to the path of future tax rates but cannot apply different tax rates in a given year to different vintages of capital.

Does Increased International Influence Cause Higher Stock Market Volatility

Increased international financial integration is likely to cause greater market interdependence. This may either reduce volatility or increase it by adding a new source of noise. Based on Swedish data, the findings in this paper are that foreign influence on the stock market shows a clear, positive trend, while purely domestic factors have not become more volatile. The trendwise increase in volatility on the Swedish stock market, can, thus be attributed to increased foreign influence. Copyright 1999 by The editors of the Scandinavian Journal of Economics.