Pim Heijnen

On the probability of breakdown in participation games

In this paper I analyze a participation game i.e. a public good game where contributions to the public good are binary (people either participate or not participate). Although variants of this game have been studied extensively, most previous work takes the benefit of provision of the public good to be independent of the number of players that contribute and show that the probability of breakdown, i.e. the probability that no one participates, is increasing in group size. Here this assumption is dropped. I show when the probability of breakdown is decreasing in group size and also present sufficient conditions under which the probability of breakdown is increasing in group size. Moreover I show that for large groups this probability is non-negligible in the limit and that the expected number of participants is less than one. Two economic examples, concerning R&D and debt overhang, are discussed.

Optimal environmental policy in the presence of multiple equilibria and reversible hysteresis

We study optimal environmental policy in an economy-ecology model featuring multiple stable steady-state ecological equilibria. The policy instruments consist of public abatement and a tax on the polluting production input, which we assume to be the stock of capital. The isocline for the stock of pollution features two stable branches, a low-pollution (good) and a high-pollution (bad) one. Assuming that the ecology is initially located on the bad branch of the isocline, the ecological equilibrium is reversibly hysteretic and a suitably designed environmental policy can be used to steer the environment from the bad to the good equilibrium. We study both first-best and second-best social optima. We show that, compared to capital taxation, abatement constitutes a very cheap instrument of environmental policy.

Catastrophe and Cooperation

We study international environmental agreements in the presence of a potential climate catastrophe between sovereign countries that are heterogeneous in their exposure to climate change. We do so by analyzing a stochastic game with an absorbing state. The equilibrium structure of this game is very different from the infinitely repeated games that are usually studied in the literature on environmental agreements. In particular, there is no “folk theorem” that guarantees that the social optimum can be sustained in a Nash equilibrium as long as players are sufficiently patient. However, often, it is feasible to implement an abatement scheme with the same level of aggregate abatement as in the social optimum, but the distribution of abatement among countries is sub-optimal. Moreover, the discount rate has a non-monotonic effect on the optimal environmental agreement.

Market-Clearing Effects of Corporate Financing Decisions on Stock Returns: An Equilibrium Analysis of Levered Firms when Equity Supply is Fixed

We analyze how corporate financing decisions affect stock returns in a stochastic Ramsey model. Motivated by stylized facts, we incorporate two distinct features in the model. First, the supply of equity (the number of outstanding shares) is fixed. Second, firms pursue a target leverage ratio, and balance retained earnings against new debt issuance when financing real investments accordingly. We characterize both the time-series and cross-sectional properties of equity returns implied by the model and confront these with historical data. The model contains only a few time-invariant parameters, but is able to match many dynamic properties of returns (e.g., fat tails, variation in mean and volatility, mean reversion, time-varying betas, return predictability). Our findings suggest that the leverage effect needs to play a more prominent role in pricing equity.