WATERLOO ECONOMICS SERIES
Abstracts of Working Papers January 2002 - December
2002
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#02-01 -- Anindya Sen
"Higher Prices at the Gas Pump: International Crude
Oil Price Fluctuations or Local
Market Concentration? An Empirical Investigation."
forthcoming in Energy Economics.
Abstract
There is little consensus on whether higher retail gasoline
prices in Canada are the result of international crude oil price fluctuations
or local market power exercised by large vertically-integrated firms. I find
that although both increasing local market concentration and higher average
monthly wholesale prices are positively and significantly associated with
higher retail prices, wholesale prices are more important than local market
concentration. Similarly, crude oil prices are more important than the number
of local wholesalers in determining wholesale prices. These results suggest
that movements in gasoline prices are largely the result of input price fluctuations
rather than local market structure.
#02-02 -- Anindya Sen
"Does Protecting Smaller Firms Result in Lower Prices?
Evidence from Canadian Gasoline Markets"
(Under Review)
Abstract
Some recent policy initiatives aimed at preserving the market
share of smaller gasoline retailers have been proposed in Canada. These measures
are grounded in the belief that strengthening such firms will enhance competition
and result in lower prices, which is consistent with the implications of the
dominant firm/competitive fringe model. Using monthly data on average retail
prices and market shares across eleven Canadian cities between 1991 and 1997,
I find the opposite to be true. Specifically, increased market concentration
on the part of independent retailers is in fact, significantly correlated with
higher retail prices. This may be due to an enhanced ability to set prices as
well as higher marginal costs of production experienced by these retailers,
relative to corresponding costs incurred by larger and more efficient vertically
integrated firms.
#02-03 -- Anindya Sen
"To Encourage or Not to Encourage Seat Belt Use: Simultaneity
Bias and Offsetting Behaviour."
(with Brent Mizzen, Department of Finance, Government of Canada)
(Published in the
Canadian Public Policy)
Abstract
Estimating the efficacy of seat belt use is important as compensating
risk-taking or "offsetting behaviour" by drivers may attenuate benefits
from vehicle safety regulation. However, evidence on partial-offsetting behaviour
from previous studies may simply reflect simultaneity bias, as increasing deaths
from traffic accidents results in tougher policies aimed at encouraging seat
belt use. We find significant evidence of such measurement error. OLS estimates
from Canadian provincial data between 1980 and 1996 imply partial offsetting
behaviour as increased average seat belt use over the sample period resulted
in a 13.42% decline in vehicle occupant fatalities, in contrast to the expected
39-46% drop. However, corresponding instrumental variables (IV) estimates imply
a lack of significant risk compensation as increased seat belt use is associated
with a 37% fall in occupant deaths.
#02-04 -- Anindya Sen
"Does Increased Abortion Lead to Reduced Crime? Evaluating
the Relationship
between Crime, Abortion, and Fertility."
(under review)
Abstract
Donohue and Levitt (2001) attribute over half the current decline
in U.S. crime rates to the legalization of abortion. I contribute to the literature
by using provincial Canadian data, which permits the segregation of trends in
teenage abortions from general abortion rates. This distinction is important,
as I find that a much larger drop in violent crime (almost half) during the
nineteen-nineties, is attributable to the increase in teenage abortions due
to abortion legalization. In contrast, the fall in general abortion rates accounts
for a quarter of the decline. Hence, falling crime rates are largely attributable
to abortion legalization resulting in better timing of births, rather than lower
cohort size. Further, I find that the drop in teenage fertility rates during
the nineteen-sixties and seventies, accounts for the entire fall in violent
crime. This is probably in part, due to the increase in contraception sophistication
(the pill) witnessed during that era.
#02-05 -- Anindya Sen
"Do Stricter Penalties or Media Publicity Reduce Alcohol
Consumption By Drivers?"
(under review)
Abstract
A decline in drinking and driving could be due to stricter penalties
as well as enhanced media publicity, which increases public knowledge of drinking
and driving laws. However, most research fails to control for the effects of
increased media coverage. Employing a unique data set consisting of the blood
alcohol content (BAC) levels of fatally injured drivers in Canada from 1982
to 1992, I find that both stricter penalties and an increase in the number of
newspaper articles related to drinking and driving are significantly correlated
with reduced alcohol consumption. Further, omitting proxies for media coverage
results in biased coefficient estimates of the efficacy of stricter penalties.
These results suggest that the enactment of sterner punishment must be supplemented
with public education programs.
#02-06 -- Anindya Sen
"Health Care is not a Luxury: Evidence from OECD data"
(under review)
Abstract
Most research using cross-country data find income elasticities
with respect to health expenditure equal to or exceeding unity. These results
might be confounded due to omitted variables bias as well the presence of unobserved
country and year specific determinants of per capita health expenditures. Empirical
results from fifteen OECD countries between 1990 and 1998 support these hypotheses.
Specifically, OLS coefficient estimates drop by roughly more than 50% with the
use of two way fixed effects models and the inclusion of various demand and
supply based determinants of per capita health expenditrues.
#02-07 -- John Burbidge
Abstract
Governments around the world operate personal income
tax systems but most governments go to considerable lengths to mitigate the
distortions caused by the interest tax component of the income tax. A popular
antidote is the tax deferred savings plan, TDSP, (e.g., RRSP in Canada or 401(k)
in the U.S.; see Poterba (1994a)). It is thought that by deferring income taxes
on saving, and the interest income on savings, such plans will move the income
tax system closer to the more efficient consumption tax. I argue that whether
or not TDSPs in fact move income tax systems away from or closer to a consumption
tax depends on whether or not interest on debts incurred to make TDSP contributions
is deductible for income tax purposes. If people optimize as assumed in simple
life-cycle models then it may be that governments can convert a nonlinear income
tax system to a proportional consumption tax system by permitting unlimited
TDSPs and disallowing the deductibility of debt interest.
#02-08 -- Margaret Insley
"On the option to invest
in pollution control under a regime of tradable emissions allowances"
Forthcoming in the Canadian Journal of Economics
Abstract
This paper analyses the optimal decision of a firm
faced with the option of retrofitting its plant to reduce pollution and thereby
eliminate the need to purchase emissions allowances. The decision is treated
as a real option with the price of pollution permits assumed to follow a known
stochastic process. The model is formulated as a set of one-dimensional partial
differential equations. At discrete points in time, the firm owner is assumed
to make optimal decisions about the retrofitting. In addition, if mothballing
is allowed, the owner can halt the installation, with the option of resuming
at later date. Optimality conditions are imposed at each decision date, which
link the set of one-dimensional partial differential equations. The model is
used to calculate critical permit prices at which the firm should choose to
retrofit. (JEL Q25,D81,G31).
#02-09 -- Margaret Insley
"Real
options in harvesting decision on publicly owned forest lands"
(with K. Rollins, University of Nevada)
(under review)
Abstract
This paper extends the literature on optimal tree harvesting assuming stochastic prices. With volatile prices, the value of a stand of trees is increased when harvesting dates are flexible, depending on wood volume and product prices of the day. Flexibility adds value because a forest owner can delay harvesting when prices are depressed, or can harvest earlier than planned if there is a uptick in prices. The stand owner thus has a natural hedge against price volatility. Regulatory policy in some jurisdictions has reduced the flexibility of firms harvesting on public lands by imposing allowable cut restrictions. This paper develops a two factor real options model of the harvesting decision over infinite rotations with mean reverting stochastic prices. The model is used to examine a proposed investment in intensive forest management in Ontario's boreal forests. The value of a representative stand in the Romeo Malette forest is estimated assuming complete harvesting flexibility. This value is then compared to the value when regulations dictate a window of time during which harvesting must occur.
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