Marcello Galeotti

Environmental options and technological innovation: an evolutionary game model

This paper analyzes the effects on economic agents’ behavior of an innovative environmental protection mechanism that the public administration of a tourist region may adopt to attract visitors while protecting the environment. On the one hand, the public administration sells to the tourists an environmental call option that gives them the possibility of being (partially or totally) reimbursed if the environmental quality in the region turns out to be unsatisfactory. On the other hand, it offers the firms that adopt an innovative, non-polluting technology an environmental put option that allows them to get a reimbursement for the additional costs imposed by the new technology if the environmental quality is sufficiently good. The aim of the paper is to study the dynamics that arise with this financial mechanism from the interaction between the economic agents and the public administration in an evolutionary game context. The evolution of visitors’ and firms’ behavior is modeled in the paper using the so-called replicator dynamics, according to which a given choice spreads across the population as long as its expected payoff is greater than the average payoff. From the model it emerges that such dynamics may lead either to a welfare-improving attractive Nash equilibrium, in which all firms adopt the environmental-friendly technology, or to a Pareto-dominated equilibrium with no technological innovation and no tourism. As shown in the paper, the attraction basin of the virtuous equilibrium will be maximum if total reimbursement is offered by the public administration to the visitors, and will be minimum if a simple entrance ticket is imposed on the tourists with no chance of reimbursement.

Accuracy of Premium Calculation Models for CAT Bonds—An Empirical Analysis

CAT bonds are of significant importance in the field of alternative risk transfer. Since the market of CAT bonds is not complete, the application of an appropriate pricing model is of high relevance. We apply different premium calculation models in order to compare them with regard to their predictive power. Without taking the financial crisis into account, a version of the Wang transformation model and the linear model are the most accurate ones. In contrast, under consideration of the financial crisis, all analyzed models are approximately equivalent. Furthermore, we find that CAT bond specific information does not improve out-of-sample results.

Poverty trap and global indeterminacy in a growth model with open-access natural resources

In this paper we use global analysis techniques to analyze an economic growth model with environmental negative externalities, giving rise to a three-dimensional dynamic system (the framework is the one introduced by Wirl (1997) [53]). The dynamics of our model admits a locally attracting stationary state , which is, in fact, a poverty trap, coexisting with another stationary state possessing saddle-point stability. Global dynamical analysis shows that, under some conditions on the parameters, if the initial values of the state variables are close enough to the coordinates of , then there exists a continuum of equilibrium trajectories approaching and one trajectory approaching . Therefore, our model exhibits global indeterminacy, since either or can be selected according to agent expectations. Moreover, we prove that conditions guaranteeing the attractivity of also imply the saddle-point stability of . However, when is not attractive, numerical simulations show the possible existence of one or two limit cycles: an attractive one surrounding and one endowed with a two-dimensional stable manifold surrounding .

Should we replace the environment?: Limits of economic growth in the presence of self‐protective choices

Purpose - To protect against the increasing environmental degradation many agents choose today to replace consumption of depleted environmental goods with that of privately produced substitute goods. The present paper aims to highlight how this “self-protective” behaviour that is increasingly frequent in modern societies may affect the welfare of the individuals. Design/methodology/approach - The paper presents a combination of narrative with argument and analysis. It first provides several examples of self-protective choices to give a heuristic view of this phenomenon and then examines their effects through a simple evolutionary model that leads the reader beyond a purely intuitive understanding of the substitution mechanism described in the first part. Findings - The paper shows that replacing environmental goods with artificial substitute goods may give rise to an “undesiderable growth” process, that is, a vicious circle between environmental degradation and private consumption which contributes to economic growth but may have negative effects on the welfare of the agents. Originality/value - The paper investigates an aspect of the link between environmental degradation and economic growth that has been mainly ignored in the literature so far. While most contributions have underlined that self-protective choices can boost economic growth, the paper goes one step forward and shows that they can actually give rise to a self-reinforcing growth process in which environmental degradation increases economic growth and viceversa, leading the economy on a welfare-reducing path.

Undesirable economic growth via agents’ self-protection against environmental degradation

Abstract Our model analyzes the effects of the interplay between environmental degradation and consumption choices on economic growth dynamics and on economic agents’ welfare. We show that if private goods can be consumed as substitutes for environmental goods, then economic growth may be fueled by environmental deterioration. In this context, undesirable economic growth may occur, characterized by an inverse correlation between aggregate capital accumulation and economic agents’ welfare.

Evolutionary Selection of Correlation Mechanisms for Coordination Games

One of the main problems with the notion of correlated equilibrium is the lack of an explicit rationale for the correlation mechanism that is adopted. This paper investigates the conditions under which a specific correlation mechanism may be selected through a social learning process in a population of boundedly rational players that are randomly matched to play a coordination game. The selection process among correlation mechanisms is defined by replicator equations and the qualitative features of the dynamics are analyzed for the general case with n correlation devices. It is found that the dynamics generically select one specific mechanism among the alternative ones, thus bringing about a social standard of choice, i.e. a conventional way of correlating players‘ actions in anonymous interactions. This result then provides a strong evolutionary rationale for correlated equilibrium as a solution concept for coordination games.

The cultural implications of growth: Modeling nonlinear interaction of trait selection and population dynamics

In this paper, we study a nonlinear model of the interaction between trait selection and population dynamics, building on previous work of Ghirlanda et al. [Theor. Popul. Biol. 77, 181-188 (2010)] and Antoci et al. [Commun. Nonlinear Sci. Numer. Simul. 58, 92-106 (2018)]. We establish some basic properties of the model dynamics and present some simulations of the fine-grained structure of alternative dynamic regimes for chosen combinations of parameters. The role of the parameters that govern the reinforcement/corruption of maladaptive vs. adaptive traits is of special importance in determining the models dynamic evolution. The main implication of this result is the need to pay special attention to the structural forces that may favor the emergence and consolidation of maladaptive traits in contemporary socio-economies, as it is the case, for example, for the stimulation of dysfunctional consumption habits and lifestyles in the pursuit of short-term profits.

Totally Bounded Cubic Systems in ℝ2

This work describes the behavior of trajectories of a planar cubic system such that a) all the trajectories are bounded, b) there exist just two singular points S, O, c) the system is reversible about the line SO. The exposition is divided into: i) there is no heterocline. In particular O is a Poincare center (Sec. 2.13), a degenerate center (Sec. 2.14), a right pseudo-center (Sec. 2.15), a left pseudo-center (Sec. 2.16); ii) there exists just one pair of heteroclines. In particular O is a Poincare saddle (Sec. 2.17), a degenerate saddle (Sec. 2.18), a tangential limit point with indexO = 1 (Sec. 2.19); iii) there exists a pair of bands of heteroclines (Sec. 2.23). Maintaining the total boundedness, i.e., the boundedness of all the trajectories, the following topics α) O is the unique singular point (Sec. 1.5), β) invariancy of an ellipse (Sec. 2.20), γ) existence of limit cycles (Sec. 3.1) are also considered.

Multiple patterns in the dynamics of a stock market model

We study a non-linear model of the interactions between stock market prices and the level of assets owned by investment funds. The model dynamics is described, in continuous time, by a smooth vector field in the plane, which presents, under suitable hypotheses, a unique equilibrium point.Our analisis of the system flow is qualitative and focuses on detecting endogenous fluctuations of the state variables, i.e. on checking existence and number of limit cycles.We prove that several, and quite different, dynamical patterns can occur, even in cases where the system isoclines assume that “most simple” geometrical forms.It is shown, in particular, that the equilibrium point can undergo either a sub-critical or a super-critical Hopf-bifurcation whenever two economically meaningful exogenous parameters are made to cross a given set of critical values. Hence, in the subcritical case, as a trapping region exists, at least two limit cycles appear.Next, we give analytical examples of model-consistent vector fields which present a multiplicity of fluctuating trends, and prove the apparently surprising result that the number of limit cycles can be as large as one wants, provided a specific isocline assumes a “cubic” shape.

Financial Instruments for Mitigation of Flood Risks: The Case of Florence: Financial Instruments for Mitigation of Flood Risks

This article analyzes the mechanisms and effects of innovative financial instruments that a central public administration (CPA) may adopt to minimize the flood risk in particularly exposed regions. The pattern we suggest assumes that in risky areas the CPA can issue two financial instruments, called project options and CAT-bonds, producing a dynamic interaction among three types of agents: the CPA itself, the local public administrations, and private investors. We explore the possible scenarios of such interaction and the conditions under which the CPAs goal of maximal risk reduction is attained. This pattern is proposed for flood risk mitigation in the city of Florence, where the model dynamics are tested assuming parameters obtained from engineering studies.