Vladimir Petkov

International Environmental Agreements: Design of Optimal Transfers Under Heterogeneity

International environmental agreements (IEAs) can coordinate abatement of transboundary pollutants. This paper investigates how heterogeneous countries facing a stock pollutant might structure such an agreement. In particular, we examine how an IEA might be implemented with a set of monetary transfers. The focus is on transfers that are time invariant, linear in emissions, and consistent with budget balance. There is a range of such schemes that would induce efficient emissions. We provide a simple and intuitive characterization of these penalties and describe how specific proposals might be chosen in order to facilitate compliance and implementation. Our proposals are illustrated with a simple example. We show that heterogeneity reduces the scope for penalty schemes to jointly satisfy desirable properties.

Corrective Taxes and Cigarette Characteristics

If cigarette design was exogenous, inefficiencies arising from smoking could be addressed either with a tax per packet or with an ad valorem tax. However, it is well known that the consequences of these two instruments differ when product characteristics are endogenous. We consider three such characteristics: nicotine, tar, and flavor. Implementation of the first-best social optimum typically requires the capacity to tax or regulate harmful ingredients. Without such a capacity, the next-best policy often combines a per-unit tax on cigarettes with an ad valorem subsidy. Copyright

Cigarette Taxes with Endogenous Addictiveness

Abstract We examine how a tax on cigarettes would be affected by endogeneity of their addictiveness. In our model, the rationale for government intervention is based on internalities and externalities. While a corrective tax could be imposed to address these two distortions, it may result in excessive nicotine consumption per cigarette. This suggests that tax rates should be moderated. We consider two types of behavior that affect the addictiveness of cigarettes. First, producers can manipulate the nicotine content of tobacco products. Second, consumers are able to adjust the intensity of their smoking. We show that there may still be a case for a corrective tax. However, tax policies and attainable welfare depend on whether the nicotine dose from each cigarette is influenced by producers or consumers.

Capacity Accumulation Games with Technology Constraints

This chapter examines the conduct and performance of large mutually dependent firms. Its objective is to study contractual relationships in a dynamic bilateral monopoly, where producers’ investment choices must obey a technology constraint. This is in contrast to previous studies of accumulation games, in which technological interdependence was not explicitly allowed for. The analysis focuses on investment incentives and payoff allocation under two regimes: (1) contracting based on input quantities, and (2) contracting based on final revenues. The technologically feasible equilibrium strategies and the terms of trade that support them are characterized with intuitive necessary conditions which reflect the players’ intertemporal trade-offs. To assess the factors that influence efficiency and market power, the chapter presents a linear-quadratic example. Our simulations indicate that contracts based on input quantities generate higher joint payoffs and tend to benefit the input producer.

DELEGATED MANAGEMENT IN DYNAMIC DUOPOLIES

This paper studies the commitment value of delegation in a model of dynamic competition. We argue that separating ownership and control delivers an instantaneous first-mover advantage. Thus, delegation would enable an oligopolistic firm to increase its equilibrium profit relative to direct management. We focus on remuneration strategies that provide managers with intertemporal production incentives: future wages depend on current effort. Their composition and functional form are endogenously determined by the requirement for Markov perfection. For the case of linear-quadratic payoffs, we obtain a closed-form solution for the equilibrium wage strategies which is independent of industry structure.

Contracting for Dynamic Efficiency

This paper explores implementation of efficiency in an alternating-move game. Incentives are provided with contracts that specify a scheme of monetary obligations. The analysis focuses on time-invariant payment schedules that satisfy budget balance. We derive contracting forms that generate efficient investments in Markov-perfect equilibria. Some notable solutions are highlighted: repeated transfer of ownership, partnership and Markovian expectation damages.

Delegation and Commitment in Durable Goods Monopolies

This paper studies a simultaneous-move infinite-horizon delegation game in which the principal of a durable goods monopoly entrusts pricing decisions to a manager who enjoys consuming her monetary rewards but dislikes production effort. The delegation contract allows for continual interference with managerial incentives: in each period the principal rewards the manager according to her performance. We show that when the cost of delegation is low relative to profits, the principal can attain the precommitment price plan in a perfect rational expectations equilibrium. The paper analyzes the robustness of this result under alternative specifications of timing and objectives. We also provide a numerical characterization of the equilibrium strategies for the case of linear-quadratic payoffs.

Strategic Delegation in a Durable Goods Monopoly

This paper studies a simultaneous-move infinite-horizon delegation game in which the principal of a durable goods monopoly entrusts pricing decisions to a manager who enjoys monetary rewards but dislikes production effort. We show that cheap delegation enables the principal to attain the precommitment price plan in a time consistent Markov-perfect equilibrium. The paper analyzes the robustness of this result under alternative specifications of timing and objectives. We also provide a numerical characterization of the Markov-perfect equilibrium pricing and remuneration strategies for the case of linear-quadratic payoffs.