The riskiness of random processes is compared by (a) employing a decision-theoretic equivalence between processes and lotteries on pathspaces to identify the riskiness of the former with that of the latter, and (b) using the theory of comparative riskiness of lotteries over vector spaces to compare the riskiness of lotteries on a given path-space. We derive the equivalence used in step (a) and contribute a new criterion to the theory applied in step (b). The new criterion, involving a generalized form of second order stochastic dominance, is shown to be valid by establishing its equivalence to the standard decision-theoretic criterion. We demonstrate its tractability via diverse economic applications featuring risk embodied in random processes.
We study a remedy for the problem caused by international transfrontier pollution. Our results are derived from the analysis of a noncooperative game model of the determination of emissions in a quantity-rationing setting. We model the emission capping negotiations using the best response dynamic process and provide natural conditions under which the process has a unique and globally asymptotically stable stationary point. We then analyze the link between type profiles and the stationary points of the negotiation process to derive various comparative statics results and the type-contingent ordering of emission allocations. These results are used to study the investment strategies that nations can use prior to the negotiations in order to manipulate the equilibrium emission caps. Copyright � 2010 Wiley Periodicals, Inc..
We study an incompletely informed regulator's problem of inducing a firm producing durable pollution to manage its pollution optimally. We show the existence of an optimal regulatory contract. Our principal qualitative result is that the optimal contract in this setting induces an inefficiently large amount of emission, relative to the outcome under Pigovian regulation or full information. Our sparse, yet flexible, model of the firm can be applied directly in concrete settings as it is stated in terms of statistical parameters. Moreover, it generates useful information about the firm that has to be assumed in an abstract regulatory model. r
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