If we knew what it was we were doing, it would not be called research, would it? — Albert Einstein
- Social groups and social network formation
(with Bassel Tarbush)
forthcoming in Games and Economic Behavior
We present a dynamic model of online social network formation in which a fixed number of agents interact in overlapping social groups. We derive several results on the formation of links in online social networks, including results on degree distribution, on comparative statics relating degree and group size, and on the dynamics of homophily. In particular, we derive comparative statics showing that degree is typically positively related to social group size but negatively related to the size of the overlap across multiple social groups. This is supported by evidence from a Facebook dataset. We also show that homophily over an agent’s lifespan in the network can be non-monotonic, reaching a global maximum in some period before eventually decreasing.// online appendix // // code //
- Gross substitutes and complements: a simple generalization (2014)
Economics Letters, 123(2), pp. 135-138.This paper extends the gross substitutes and complements (GSC) framework of Sun and Yang (2006) to a more general substitutes and complements structure. We show that competitive equilibrium with indivisible goods exists under significantly weaker, easily checkable, and interpretable conditions. We show that the dynamic double- track procedure developed by Sun and Yang (2008, 2009) can be extended to find the competitive equilibrium outcome. We also apply these insights to trading networks.
Selected working papers
- Trading networks with bilateral contracts (2016)
(with Tamás Fleiner, Zsuzsanna Jankó and Akihisa Tamura)
Revision requested from Econometrica
We consider general networks of bilateral contracts that include supply chains. We define a new stability concept, called trail stability, and show that any network of bilateral contracts has a trail-stable outcome whenever agents’ choice functions satisfy full substitutability. Trail stability is a natural extension of chain stability, but is a stronger solution concept in general contract networks. Trail-stable outcomes are not immune to deviations of arbitrary sets of firms. In fact, we show that outcomes satisfying an even more demanding stability property — full trail stability — always exist. For fully trail-stable outcomes, we prove results on the lattice structure, the rural hospitals theorem, strategy-proofness and comparative statics of firm entry and exit. We pin down a condition under which trail-stable and fully trail-stable outcomes coincide. We then completely describe the relationships between various other concepts. When contracts specify trades and prices, we also show that competitive equilibrium exists in networked markets even in the absence of fully transferrable utility. The competitive equilibrium outcome is (fully) trail-stable.// extended abstract at the AMMA conference //
- A simple model of cascades in networks (2016)
(with Yongwhan Lim and Asu Ozdaglar)We consider a linear threshold model of cascades in networks. An agent switches (e.g. adopts an innovation) if the proportion of his neighbors who have already switched exceeds his threshold. Agents’ thresholds are drawn randomly at the start of the cascade process. We present a result for the expected number of switches in arbitrary finite networks with any initial seeds. We define a new measure of an agent’s ability to influence a cascade in a given network, called cascade centrality, which is the expected size of the cascade when the agent is the only seed in the network. We then define contagion centrality, which is the probability that all agents switch when the node is a seed. For certain network topologies, we find analytic expressions for cascade centrality and contagion centrality and show that there may be tension between them. Yet nodes with high cascade and contagion centrality share an interesting property: they have many neighbors, but their neighbours have few neighbors. As an illustration of cascade centrality, we look at how the network structure affects optimal prices when a profit-maximizing firm tries to spread an innovation. Optimal price and seeding behavior can be fairly counterintuitive when firms price irreversible cascades. Our tractable model can be extended in various ways.// companion paper Competitive rumour spread in social networks at NetEcon //
Other publications and working papers
- Reforming the EU ETS – Where are we now?
(with Cameron Hepburn)
forthcoming in Energy Tax and Regulatory Policy in Europe: Reform Priorities (edited by Ian Parry, Karen Pittel, and Herman Vollebergh), Chapter 1, MIT Press
The European Emissions Trading Scheme (EU ETS) is the largest carbon cap-and-trade scheme in the world and, for better or worse, the flag bearer for the use of markets to price carbon dioxide. It is sometimes viewed in the popular press as having ‘failed’ with prices that are ‘too low’ to deliver significant emissions reductions and ‘too volatile’ to provide the stable incentives long-run investors in clean technologies require. While these assessments are in some ways too harsh, there is no doubt that the EU ETS is in need of real reform, and indeed reform is on the table. Reforms currently contemplated may apply to a fourth phase of the EU ETS (from 2021-2028) or earlier, potentially 2017. European institutions have a history of ETS reform — significant changes have occurred after each previous phase, which have, on the whole, improved the economic functioning of the scheme. This paper focuses on three key current shortcomings of the EU ETS — low and dynamically inefficient prices, inadequate coverage, and excessive free allocation — and critically analyses current proposed solutions. We then offer three alternative solutions that are economically superior, if politically difficult. The core proposals are to: (i) move as far as possible towards more price-based, less quantity-based, mechanisms to achieve price stability at higher levels; (ii) expand coverage to bunker fuels, road transport and household heating fuels as soon as possible; and (iii) move more rapidly away from free allocation to full auctioning, using other policies to address competitiveness concerns, such as they are.
- Green Growth
(with Cameron Hepburn and Alex Pfeiffer)
forthcoming in Handbook of Economic Geography
Debates about whether limits to economic growth are necessary or desirable have now largely moved on to discussions about the type and quality of economic growth. In particular, the notion of ‘green growth’ has become widely adopted as a core objective of international institutions (such as the World Bank and IMF) and national governments. But, somewhat like the notion of ‘sustainable development’, the concept of ‘green growth’ is used very flexibly and its definition is contested. In this chapter, we define green growth as long-run increases in GDP alongside the enhancement, or at least protection, of natural capital. Using this definition, we undertake analysis that dismisses some environmental concerns, and instead leads to a focus on others, particularly cases where prices are absent. The chapter reviews the theoretical economics of green growth. We observe that implementation of policies in the real world is very far from the theoretical ‘optimum’ in narrow economic models, for straightforward political reasons. Developing practical green growth policies for the Anthropocene is likely to require a careful and different approach to technology, markets and prices, a realistic assessment of political economy constraints, and an acceptance of pragmatic solutions.
- A Third Wave in the Economics of Climate Change (2015)
(with J. Doyne Farmer, Cameron Hepburn and Penny Mealy)
Environmental and Resource Economics, 62(2), p. 1-29
Modelling the economics of climate change is daunting. Many existing methodologies from social and physical sciences need to be deployed, and new modelling techniques and ideas still need to be developed. Existing bread-and-butter micro- and macroeconomic tools, such as the expected utility framework, market equilibrium concepts and representative agent assumptions, are far from adequate. Four key issues—along with several others—remain inadequately addressed by economic models of climate change, namely: (1) uncertainty, (2) aggregation, heterogeneity and distributional implications (3) technological change, and most of all, (4) realistic damage functions for the economic impact of the physical consequences of climate change. This paper assesses the main shortcomings of two generations of climate-energy-economic models and proposes that a new wave of models need to be developed to tackle these four challenges. This paper then examines two potential candidate approaches—dynamic stochastic general equilibrium (DSGE) models and agent-based models (ABM). The successful use of agent-based models in other areas, such as in modelling the financial system, housing markets and technological progress suggests its potential applicability to better modelling the economics of climate change.// not-a-sold-out talk //
- Path dependence, innovation and the economics of climate change (2014)
(with Philippe Aghion, Cameron Hepburn, and Dimitri Zenghelis)
Centre for Climate Change Economics and Policy Grantham Research Institute on Climate Change and the Environment Policy Paper & Contributing paper to New Climate Economy
Shifting our fossil-fuelled civilisation to clean modes of production and consumption requires deep transformations in our energy and economic systems. Innovation in physical technologies and social behaviours is key to this// press release // // media mention // // sold-out talk //
transformation. But innovation has not been at the heart of economic models of
climate change. This paper reviews the state of the art on the economics of
innovation, applies recent insights to climate change. The core insight is that
technological innovation is a path-dependent process in which history and
expectations matter greatly in determining eventual outcomes This insight has six
important implications for climate policy design. First, efficient climate policy requires direct research subsidies for inducing and/or diffusing clean innovations, combined with carbon pricing (whether by taxes or trading). Second, both public and private sector involvement is required — private market forces need to be mobilised and redirected towards cleaner energy sources by governments. Third, path dependence and system inertia imply that delaying policies that redirect innovation towards clean technologies significantly increases costs in the future. Fourth, more developed countries should act as leaders in clean technology and should subsidise access to such technologies for less developed countries. At the same time, they should consider the possibility of using border carbon adjustments against any country that would take advantage of the new environmental policies by specialising in the production and export of fossil fuel intensive products. Fifth, if a transition from coal to clean energy is to be made via intermediates (for example, gas), the use of gas (without carbon capture) should be agreed to be on a time-limited basis. Further, to avoid gas lock-in, research in fully clean technologies would need to be strongly stepped up over the intervening period, along with other supportive policies. Finally, investment in coal should not be encouraged, as its continued use is only safe if we assume the cost-effectiveness of carbon capture and storage (CCS) technologies. While much greater efforts should be taken to reduce the costs of CCS, the speed that these technologies can be developed and deployed is uncertain.
- Resilient and inclusive prosperity within planetary boundaries (2014)
(with Eric Beinhocker, Cameron Hepburn, and J. Doyne Farmer)
China & World Economy, 22(5), p. 1-16
The current model of economic growth generated unprecedented increases in human wealth and prosperity during the 19th and 20th centuries. The main mechanisms have been the rapid pace of technological and social innovation, human capital accumulation, and the conversion of resources and natural capital into more valuable forms of produced capital. However, there is evidence emerging that this model may be approaching environmental limits and planetary boundaries, and that the conversion of natural capital needs to slow down rapidly and then be reversed. Some commentators have asserted that in order for this to occur, we will need to stop growing altogether and, instead, seek prosperity without growth. Others argue that environmental concerns are low-priority luxuries to be contemplated once global growth has properly returned to levels observed prior to the 2008 financial crisis. A third group argues that there is no trade-off, and, instead, promotes green growth: the (politically appealing) idea is that we can simultaneously grow and address our environmental problems. This paper provides a critical perspective on this debate and suggests that a substantial research agenda is required to come to grips with these challenges. One place to start is with the relevant metrics: measures of per-capita wealth, and, eventually, quantitative measures of prosperity, alongside a dashboard of other sustainability indicators. A public and political focus on wealth (a stock), and its annual changes, could realistically complement the current focus on market-based gross output as measured by GDP (a flow). This could have important policy implications, but deeper changes to governance and business models will be required.
- Political economy of climate change policy (2013),
(with Franklin Steves)
Smith School for Enterprise and the Environment Working Paper 13-02,In order to reduce greenhouse gas (GHG) emissions, countries need to have the institutional capacity to implement effective climate change policies. This paper makes two contributions. First, we introduce a new index, CLIMI, which represents the first systematic attempt to measure the current institutional capacity of countries to address climate change. CLIMI covers all the relevant institutions and sector-specific policies in 95 countries, representing 90% of the world’s GHG emissions. Second, we use CLIMI to examine key political and economic factors that affect a country’s institutional capacity to deal with climate change. We show that countries with higher public knowledge of climate change have more effective climate policies regardless of the presence of democratic institutions. In addition, we show that countries with a high concentration of carbon-intensive industry are likely to have a lower institutional capacity.// passing media mention //
- Part I: Externalities and economic policies in road transport (2010)
(with Georgina Santos, Hannah Behrendt, Laura Maconi and Tara Shirvani)
Research in Transportation Economics, Vol. 28, No. 1, pp. 2-45Road transport imposes negative externalities on society. These externalities include environmental and road damage, accidents, congestion, and oil dependence. The cost of these externalities to society is in general not reflected in the current market prices in the road transport sector. An efficient mobility model for the future must take into account the true costs of transport and its regulatory framework will need to create incentives for people to make sustainable transport choices. This paper discusses the use of economic instruments to correct road transport externalities, but gives relatively more weight to the problem of carbon emissions from road transport, as this is particularly challenging, given its global and long-term nature.
- Part II: Policy instruments for sustainable road transport (2010)
(with Georgina Santos and Hannah Behrendt)
Research in Transportation Economics, Vol. 28, No. 1, pp. 46-91Without questioning the fact that to achieve efficiency emitters should pay for the true costs of their actions (a core principle of economic policies such as pollution taxes), we find sufficient evidence in the literature to demonstrate that many other policy instruments can be used in combination with taxes and permits to ensure that the transport needs of the present generation can be met without compromising the ability of future generations to meet any needs of their own. The policies and policy aspects considered in this paper broadly fall into three categories: physical policies, soft policies, and knowledge policies. All three aim to bring about changes in consumers’ and firms’ behaviour, but in different ways. The first category includes policies with a physical infrastructure element: public transport, land use, walking and cycling, road construction, and freight transport. We also consider the particular challenges for mobility in developing countries, and how these may be addressed. Soft policies, on the other hand, are non-tangible aiming to bring about behavioural change by informing actors about the consequences of their transport choices, and potentially persuading them to change their behaviour. These measures include car sharing and car pooling, teleworking and teleshopping, eco-driving, as well as general information and advertising campaigns. Finally, knowledge policies emphasise the important role of investment in research and development for a sustainable model of mobility for the future.
Research in Progress (summary)
Ever tried. Ever failed. No matter.
Try again. Fail again. Fail better. — Samuel Beckett
Research Papers in Progress
- Auctions for complements: an experimental investigation (with Daniel Marszalec and Alex Levkun) We experimentally test two core-selecting auctions, the first-price auction and the Vickrey auction in a simple setting with two items, two local bidders and one global bidders under a variety of information treatments.
- Competitive equilibrium and graphical demands
- Natural capital market design (with Scott Duke Kominers)
- Permitting by-catch (with Scott Duke Kominers and Joseph Shayani)
- Matching in supply chains with complementary inputs (with Samson Alva)
- Global carbon leakage: A networks approach (with Bassel Tarbush and Maia King)
- Economic complexity of green knowhow (with Penny Mealy)
Edited Book and Journal Special Issue in Progress
- Oxford Review of Economic Policy Special Issue on Market Design and Economic Policy (with Vincent Crawford and Scott Duke Kominers)
- Fair by Design: Economic Design Approaches to Inequality (with Scott Duke Kominers), Oxford University Press (based on HCEO Market Design Perspectives on Inequality conference)