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Recent Submissions

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    On the economics of ramping rate restrictions at hydro power plants: Balancing profitability and environmental costs
    (University of Waterloo, 2010-12-15) Niu, Shilei; Insley, Margaret
    This paper examines the impact of ramping rate restrictions imposed on hydro operations to protect aquatic ecosystems. A dynamic optimization model of the profit maximizing decisions of a hydro operator is solved for various restrictions on water flow, using data for a representative hydro operation in Ontario. Profits are negatively affected, but for a range of restrictions the impact is not large. Ramping restrictions cause a redistribution of hydro production over a given day, which can result in an increase in total hydro power produced. This affects the need for power from other sources with consequent environmental impacts.
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    Regime switching in stochastic models of commidity prices: An application to an optimal tree harvesting problem
    (University of Waterloo, 2010-07) Chen, Shan; Insley, Margaret
    This paper investigates whether a regime switching model of stochastic lumber prices is better for the analysis of optimal harvesting problems in forestry than a more traditional single regime model. Prices of lumber derivatives are used to calibrate a regime switching model, with each of two regimes characterized by a different mean reverting process. A single regime, mean reverting process is also calibrated. The value of a representative stand of trees and optimal harvesting prices are determined by specifying a Hamilton-Jacobi-Bellman Variational Inequality, which is solved for both pricing models using a fully implicit finite difference approach. The regime switching model is found to more closely match the behavior of futures prices than the single regime model. In addition, analysis of a tree harvesting problem indicates significant differences in terms of land value and optimal harvest thresholds between the regime switching and single regime models.
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    The other ex-ante moral hazard in health
    (University of Waterloo, 2010-12-17) Bhattacharya, Jay; Packalen, Mikko
    It is well known that pooled insurance coverage can induce a form of ex-ante moral hazard: people make inefficiently low investments in self-protective activities. This paper identifies another ex-ante moral hazard that runs in the opposite direction: it cases people to choose inefficiently high level of self-protection. This other ex-ante moral hazard arises through the impact that self-protective activities have on the reward for innovation. Lower levels of self-protection and the associated chronic conditions and behavioral patterns such as obesity, smoking, and malnutrition increase the incidence of many diseases for an individual. This increases the individual's consumption of treatments to those diseases, which increases the reward for innovation that an innovator receives. By the induced innovation hypothesis, which has broad empirical support, the increase in the reward for innovation in turn increases the rate of innovation, which benefits all consumers. As individuals do not take these positive externalities on the innovator and other consumers into account when deciding the level of self-protective activities, they each invest an inefficiently high level in self-protective activities. In the quantitative part of our analysis we show that for obesity the magnitude of this positive innovation externality roughly coincides with the magnitude of the negative Medicare-induced health insurance externality of obesity. The other ex-ante moral hazard that we identify can thus be as important as the ex-ante moral hazard that has been a central concept in health economics for decades. The quantitative finding also implies that the current Medicare-induced subsidy for obesity is approximately optimal. Thus the presence of this obesity subsidy is not a sufficient rationale for "soda taxes", "fat taxes" or other penalties on obesity.
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    Opportunities and benefits as determinants of the direction of scientific research
    (University of Waterloo, 2010-09-03) Bhattacharya, Jay; Packalen, Mikko
    Scientific research and private-sector technological innovation are different in terms of objectives, constraints, and organizational forms. For example, the for-profit objective that drives private-sector innovation is absent from much of scientific research, and individual researchers have many times more control in scientific research than in private-sector innovation. These differences and the lack of any obvious objective that would drive the direction of scientific research raise the possibility that the direction of scientific research is exogenous in the sense that it may not be influenced by factors such as the quality of research opportunities and the expected benefit from research that not only drive private-sector innovation but also in part determine the socially optimal allocation of research. Alternatively, some - yet largely unexplored - mechanisms drive also the direction of scientific research to respond to these factors. In this paper we test these two competing hypotheses of scientific research. In particular, we examine whether the composition of medical research responds to changes in disease prevalence and research opportunities. The extent of inventive activity is measured from the MEDLINE database on 16 million biomedical publications. We match these data with data on disease prevalence. We develop and apply a method for estimating the quality of research opportunities from structural productivity parameters. Our results show that the direction of medical research responds to changes in disease prevalence and research opportunities.
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    Identification and estimation of social interactions through variation in equilibrium influence
    (University of Waterloo, 2010-12-05) Packalen, Mikko
    This paper presents a new method for estimating social interaction effects. The proposed approach is based on using network interaction structure induced variation in equilibrium influence to construct conditionally balanced interaction structures. As equilibrium influence is determined by the known interaction structure and the unknown endogenous social interaction parameter, interaction structures are constructed for different imputed values of the unknown parameter. Each constructed interaction structure is conditionally balanced in the sense that when it is combined with observations on the outcome variable to construct a new variable, the constructed variable is a valid instrumental variable for the endogenous social interaction regressor if the true and imputed parameter values are the same. Comparison of each imputed value with the associated instrumental variable estimate thus yields a confidence set estimate for the endogenous social interaction parameter as well as for other model parameters. We provide conditions for point identification and partial identification. The contrast between the proposed and existing approaches is stark. In the existing approach instruments are constructed from observations on exogenous variables, whereas in the proposed approach instruments are constructed from observations on the outcome variable. Both approaches have advantages, and the two approaches complement one another. Both approaches have advantages, and the two approaches complement one another. We demonstrate the feasibility of the proposed approach with analyses of the determinants of subjective college completion and income expectations among adolescents in the Add Health data and with Monte Carlo simulation of Erdos-Renyi and small-world networks.