New Economics Papers
on Computational Economics
Issue of 2012‒03‒28
twenty-one papers chosen by

  1. An agent-based "proof of principle" for Walrasian macroeconomic theory By Edoardo Gaffeo; Mauro Gallegati; Umberto Gostoli
  2. Game Over: Simulating Unsustainable Fiscal Policy By Richard W. Evans; Laurence J. Kotlikoff; Kerk L. Phillips
  3. Designing Carbon Taxation Schemes for Automobiles: A Simulation Exercise for Germany By Adamou, Adamos; Clerides, Sofronis; Zachariadis, Theodoros
  4. A Stochastic Simulation Approach to Estimating the Economic Impacts of Climate Change in Bangladesh By Thurlow, James; Yu, Winston
  5. A Numerical Approach to the Contract Theory: the Case of Adverse Selection By Hideo Hashimoto; Kojun Hamada; Nobuhiro Hosoe
  6. A Dynamic General Equilibrium Analysis of Adaptation to Climate Change in Ethiopia By Robinson, Sherman; Willenbockel, Dirk
  7. Pitfalls in Backtesting Historical Simulation VaR Models By Juan Carlos Escanciano; Pei Pei
  8. Tipping points and ambiguity in the economics of climate change By Lemoine, Derek M.; Traeger, Christian P.
  9. The Impact of Remittance on Poverty and Inequality: A Micro-Simulation Study for Nepal By Chakra P. Acharya; Roberto Leon-Gonzalez
  10. Dynamic Opportunity-Based Multipurpose Accessibility Indicators in California By Dalal, Pamela; Chen, Yali; Ravulaparthy, Srinath; Goulias, Konstadinos G.
  11. The role of grid extensions in a cost-efficient transformation of the European electricity system until 2050 By Fürsch, Michaela; Hagspiel, Simeon; Jägemann, Cosima; Nagl, Stephan; Lindenberger, Dietmar; Tröster, Eckehard
  12. Productivity change using growth accounting and frontier-based approaches – Evidence from a Monte Carlo analysis By Giraleas, Dimitris; Emrouznejad , Ali; Thanassoulis, Emmanuel
  13. Efficient Pricing of European-Style Options Under Heston's Stochastic Volatility Model By Zhylyevskyy, Oleksandr
  14. Stability and policy rules in emerging markets By Ashima Goyal; Shruti Tripathi
  15. Current Climate Variability and Future Climate Change: Estimated Growth and Poverty Impacts for Zambia By Thurlow, James; Diao, Xinshen
  16. Indirect Tax Initiatives and Global Rebalancing By Chunding Li; John Whalley
  17. A Note on Automatic Stabilizers in Austria: Evidence from ITABENA By Helmut Hofer; Tibor Hanappi; Sandra Müllbacher
  18. Decentralized Deterrence, with an Application to Labor Tax Auditing By Di Porto, Edoardo; Persico, Nicola; Sahuguet, Nicolas
  19. Smoothing shocks and balancing budgets in a currency union By James Costain; Beatriz de Blas
  20. A New Comparative Approach to Macroeconomic Modeling and Policy Analysis By Cwik, Tobias; Mueller, Gernot; Schmidt, Sebastian; Wieland, Volker; Wolters, Maik H
  21. Environmental and socio-economic consequences of forest carbon payments in Bolivia: Results of the OSIRIS-Bolivia model By Lykke Andersen; Jonah Busch; Elizabeth Curran; Juan Carlos Ledezma; Joaquín Mayorga; Mélissa Bellier

  1. By: Edoardo Gaffeo; Mauro Gallegati; Umberto Gostoli
    Abstract: Macroeconomic models are typically solved through the imposition of a top-down general equilibrium solution constraining agents' rational be- havior. This is customarily obtained by recurring, explicitly or not, to the Walrasian auctioneer (WA) artifice. In this paper we aim at contributing to the small but burgeoning literature that deals with the consequences of removing it from the start by means of agent-based techniques. We let the textbook full-employment neoclassical macroeconomic model be populated by a large number of bounded-rational, autonomous agents, who are repeatedly engaged in decentralized transactions in interrelated markets. We set up a computational laboratory to perform several exper- iments, whose designs di¤er as regards the way we treat learning on the one side, and the institutional arrangement determining who - between firms and workers - is bound to bear the risk associated to incomplete markets on the other one. We show that our fully decentralized multi- market system admits the possibility to attain the WA full-employment solution, but also that serious coordination failures emerge endogenously as learning mechanisms and institutional settings are varied.
    Keywords: Agent-based computational economics; Decentralized exchange process; Microfoundations of macroeconomics
    JEL: B40 D51 E17
    Date: 2012
  2. By: Richard W. Evans; Laurence J. Kotlikoff; Kerk L. Phillips
    Abstract: Fiscal sustainability is one of the most pressing policy issues of our time. Yet it remains difficult to quantify. Official debt is plagued with a number of measurement difficulties since its measurement reflects the choice of words, not policies. And forming the fiscal gap–the imbalance in the government's intertemporal budget–requires strong discount rate assumptions. An alternative approach, taken here, is specifying a stochastic general equilibrium model and determining via simulation how long it takes for the economy to reach game over–the point where current policy can no longer be maintained. Our simulations, based on an OLG model calibrated to the U.S. economy, produce an average duration to game over of roughly one century, with a 35 percent chance of reaching the fiscal limit in roughly 30 years. The prospect of man-made economic collapse produces large equity premia, like those observed in the data. Our simulations show that both the fiscal gap and the equity premium rise as the economy gets closer to hitting its fiscal limit, suggesting that the fiscal gap and the equity premium may be good indicators of unsustainable policy.
    JEL: C63 C68 E62 H55
    Date: 2012–03
  3. By: Adamou, Adamos; Clerides, Sofronis; Zachariadis, Theodoros
    Abstract: Vehicle taxation based on CO2 emissions is increasingly being adopted worldwide in order to shift consumer purchases to low-carbon cars, yet little is known about the effectiveness and overall economic impact of these schemes. We focus on feebate schemes, which impose a fee on high-carbon vehicles and give a rebate to purchasers of low-carbon automobiles. We estimate a discrete choice model of demand for automobiles in Germany and simulate the impact of alternative feebate schemes on emissions, consumer welfare, public revenues and firm profits. The analysis shows that a well-designed scheme can lead to emission reductions without reducing overall welfare.
    Keywords: carbon taxation; CO2 emissions; feebates; German automobile market
    JEL: L92 Q52 Q58
    Date: 2012–01
  4. By: Thurlow, James; Yu, Winston
    Abstract: Climate change assessments often inadequately address uncertainty when estimating damages. Using a dynamic economy-wide model of Bangladesh, we estimate and decompose damages from historical climate variability and future anthropogenic climate change. Our stochastic simulation approach avoids biases caused by non-linear damage functions and fixed occurrences of extreme events in historical data. Using ten climate projections, we find that future anthropogenic climate change damages until 2050 are, on average, one-fifth of those from historical climate variability. Climate change also alters the temporal distribution of damages and slows Bangladeshâ..s long- run shift (adaptation) into dry (winter) season rice production.
    Keywords: climate change, uncertainty, stochastic simulation, CGE model, agriculture, Bangladesh
    Date: 2011
  5. By: Hideo Hashimoto (Osaka University); Kojun Hamada (Niigata University); Nobuhiro Hosoe (National Graduate Institute for Policy Studies)
    Abstract: By building and solving numerical models of the parts supply problems (an example of the adverse selection problems), and analyzing various issues of the contract theory, we demonstrate the benefits of the numerical approach. First, this approach facilitates the understanding of the contract theory by beginners, who find it difficult to comprehend the theoretical and general models. Second, this approach could extend the analysis areas beyond those of the theoretical models, which are limited by the simplifying assumptions imposed in order to make their analysis possible. The expansion of the number of the supplier types is one example.
    Keywords: Numerical approach; principal-agent problem; adverse selection; numerical and computational model; Spence-Mirrlees single crossing property; monotonicity
    Date: 2012–03
  6. By: Robinson, Sherman; Willenbockel, Dirk
    Abstract: This study links a multi-sectoral regionalized dynamic computable general equilibrium model of Ethiopia with a system of country-specific hydrology, crop, road and hydropower engineering models to simulate the economic impacts of climate change towards 2050. In the absence of externally funded policy-driven adaptation investments Ethiopiaâ..s GDP in the 2040s will be up to 10 percent below the counterfactual no-climate change baseline. Suitably scaled adaptation measures could restore aggregate welfare to baseline levels at a cost that is substantially lower than the welfare losses due to climate change.
    Keywords: CGE analysis, global warming, growth, adaptation costs, development
    Date: 2011
  7. By: Juan Carlos Escanciano (Indiana University); Pei Pei (Indiana University and Chinese Academy of Finance and Development, Central University of Finance and Economics)
    Abstract: Historical Simulation (HS) and its variant, the Filtered Historical Simulation (FHS), are the most widely used Value-at-Risk forecast methods at commercial banks. These forecast methods are traditionally evaluated by means of the unconditional backtest. This paper formally shows that the unconditional backtest is always inconsistent for backtesting HS and FHS models, with a power function that can be even smaller than the nominal level in large samples. Our ndings have fundamental implications in the determination of market risk capital requirements, and also explain Monte Carlo and empirical ndings in previous studies. We also propose a data-driven weighted backtest with good power properties to evaluate HS and FHS forecasts. Finally, our theoretical ndings are conrmed in a Monte Carlo simulation study and an empirical application with three U.S. stocks. The empirical application shows that multiplication factors computed under the current regulatory framework are downward biased, as they inherit the inconsistency of the unconditional backtest.
    Date: 2012–02
  8. By: Lemoine, Derek M.; Traeger, Christian P.
    Abstract: We model optimal policy when the probability of a tipping point, the welfare change due to a tipping point, and knowledge about a tipping point's trigger all depend on the policy path. Analytic results demonstrate how optimal policy depends on the ability to affect both the probability of a tipping point and also welfare in a post-threshold world. Simulations with a numerical climate-economy model show that possible tipping points in the climate system increase the optimal near-term carbon tax by up to 45% in base case speciffcations. The resulting policy paths lower peak warming by up to 0.5 C compared to a model without possible tipping points. Different types of tipping points have qualitatively different effects on policy, demonstrating the importance of explicitly modeling tipping points' effects on system dynamics. Aversion to ambiguity in the threshold's distribution can amplify or dampen the effect of tipping points on optimal policy, but in our numerical model, ambiguity aversionincreases the optimal carbon tax.
    Keywords: tipping point, threshold, regime shift, ambiguity, climate, uncertainty, integrated assessment, dynamic programming, social cost of carbon, carbon tax, Agricultural and Resource Economics, Environmental Studies, Environmental Science
    Date: 2011–12–28
  9. By: Chakra P. Acharya (National Graduate Institute for Policy Studies); Roberto Leon-Gonzalez (National Graduate Institute for Policy Studies)
    Abstract: We estimate a household consumption function using two rounds of the nationally representative panel of living standard measurement survey (LSMS) of Nepal and simulate the impacts of remittance on poverty and inequality. We study how these impacts vary with the regional ‘incidence’ and maturity of the migration process and with the country-source of remittance. We find that remittance has conditional impacts on both poverty and inequality, which largely depends on the ‘incidence’ and maturity of the migration process and, more importantly, on how lower quintiles of the society participate in this process. The national-level simulations indicate that remittance decreases the head count poverty by 2.3% and 3.3% in the first round of the survey, and between 4.6% and 7.6% in the second round. It reduces even further the depth (at least 3.4% and at most 10.5%) and severity (at least 4.3% and at most 12.5%) of poverty. Although overall remittance increases inequality, this is less so in the second round of the survey. Furthermore, remittance payment from India, which is on average much lower than from other countries, decreases inequality and has the largest impact on poverty reduction. This is due to the larger participation of the poor in the Nepal-India migration process. The region-wise simulations show that remittance has larger impacts on poverty reduction in the regions that have higher levels of migration.
    Date: 2012–03
  10. By: Dalal, Pamela; Chen, Yali; Ravulaparthy, Srinath; Goulias, Konstadinos G.
    Abstract: Accessibility, defined as the ease (or difficulty) with which activity opportunities can be reached from a given location, can be measured using the cumulative amount of opportunities from an origin within a given amount of travel time. These indicators can be used in regional planning and modeling efforts that aim to integrate land use with travel demand and an attempt should be made to compute at the smallest geographical area. The primary objective of this paper is to illustrate the creation of realistic space-sensitive and time-sensitive fine spatial level accessibility indicators that attempt to track availability of opportunities. These indicators support the development of the Southern California Association of Governments activity-based travel demand forecasting model that aims at a second by-second and parcel-by-parcel modeling and simulation. They also provide the base information for mapping opportunities of access to fifteen different types of industries at different periods during a day. The indicators and their maps are defined for the entire region using largely available data to show the polycentric structure of the region and to illustrate the method as a generator of choice sets in discrete choice models.
    Keywords: hierarchical spatial choice, spatial cluster analysis, multi-scale representation, Urban Studies and Planning
    Date: 2011–09–01
  11. By: Fürsch, Michaela (Energiewirtschaftliches Institut an der Universitaet zu Koeln); Hagspiel, Simeon (Energiewirtschaftliches Institut an der Universitaet zu Koeln); Jägemann, Cosima (Energiewirtschaftliches Institut an der Universitaet zu Koeln); Nagl, Stephan (Energiewirtschaftliches Institut an der Universitaet zu Koeln); Lindenberger, Dietmar (Energiewirtschaftliches Institut an der Universitaet zu Koeln); Tröster, Eckehard (Energynautics GmbH,)
    Abstract: As an attempt to fi ght global warming, many countries try to reduce CO2 emissions in the power sector by significantly increasing the proportion of renewable energies (RES-E). A highly intermeshed electricity transmission grid allows the achievement of this target cost-efficiently by enabling the usage of most favorable RES-E sites and by facilitating the integration of fluctuating RES-E infeed and regional electricity demands. <p> However, construction of new lines is often proceeding very slowly in areas with a high population density. In this paper, we try to quantify the bene ts of optimal transmission grid extensions for Europe until 2050 compared to moderate extensions when ambitious RES-E and CO2 reduction targets are achieved. We iterate a large-scale dynamic investment and dispatch optimization model for Europe with a load-flow based transmission grid model, in order to determine the optimal deployment of electricity generation technologies and transmission grid extensions from a system integrated point of view. <p> Main findings of our analysis include that large transmission grid extensions are needed to achieve the European targets cost-efficiently. When the electricity network is cost-optimally extended, 228,000 km are built until 2050, representing an increase of 76% compared to today. Further findings include substantial increases of average system costs for electricity until 2050, even if RES-E are deployed efficiently throughout Europe, the grid is extended optimally, and if signi cant cost reductions of RES-E are assumed.
    Keywords: Renewable energy; GHG reduction; transmission grid; power system optimization
    JEL: C61 C63 Q40 Q58
    Date: 2012–03–19
  12. By: Giraleas, Dimitris; Emrouznejad , Ali; Thanassoulis, Emmanuel
    Abstract: This study presents some quantitative evidence from a number of simulation experiments on the accuracy of the productivity growth estimates derived from growth accounting (GA) and frontier-based methods (namely Data envelopment Analysis-, Corrected ordinary least squares-, and Stochastic Frontier Analysis-based Malmquist indices) under various conditions. These include the presence of technical inefficiency, measurement error, misspecification of the production function (for the GA and parametric approaches) and increased input and price volatility from one period to the next. The study finds that the frontier-based methods usually outperform GA, but the overall performance varies by experiment. Parametric approaches generally perform best when there is no functional form misspecification, but their accuracy greatly diminishes otherwise. The results also show that the deterministic approaches perform adequately even under conditions of (modest) measurement error and when measurement error becomes larger, the accuracy of all approaches (including stochastic approaches) deteriorates rapidly, to the point that their estimates could be considered unreliable for policy purposes.
    Keywords: Data envelopment analysis; Productivity and competitiveness; Simulation; Stochastic Frontier Analysis; Growth accounting
    JEL: O47 C15 D24
    Date: 2011–07
  13. By: Zhylyevskyy, Oleksandr
    Abstract: Heston's stochastic volatility model is frequently employed by finance researchers and practitioners. Fast pricing of European-style options in this setting has considerable practical significance. This paper derives a computationally efficient formula for the value of a European-style put under Heston's dynamics, by utilizing a transform approach based on inverting the characteristic function of the underlying stock's log-price and by exploiting the characteristic function's symmetry. The value of a European-style call is computed using a parity relationship. The required characteristic function is obtained as a special case of a more general solution derived in prior research. Computational advantage of the option value formula is illustrated numerically. The method can help to mitigate the time cost of algorithms that require repeated evaluation of European-style options under Heston's dynamics.
    Keywords: characteristic function inversion; Heston's model; European-style option
    JEL: G13
    Date: 2012–02–23
  14. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Shruti Tripathi (Indira Gandhi Institute of Development Research)
    Abstract: Stability results for an open economy DSGE adapted to an emerging market (SOEME) with a dualistic structure have the same structure as in the original model, but those derived for the simulated version turn out to impose no restriction on the coefficient of inflation, but rather a threshold on the coefficient of the output gap. Other rigidities, lags and some degree of backward looking behavior in the simulated SOEME model arising from its calibration to an emerging market, may be helping provide a nominal anchor. Estimation of a Taylor rule for India, simulations in the SOEME model itself and a variant with government debt, confirm the analytical result. Implications are, first, optimization can be as effective as following a monetary policy rule. Second, knowledge of the specific rigidities in an economy can give useful inputs for the design of policy-their effect on stability should be more carefully researched.
    Keywords: DSGE, emerging economy, rigidities, stability, optimization, Taylor rule
    JEL: E26 E52
    Date: 2012–01
  15. By: Thurlow, James; Diao, Xinshen
    Abstract: Economy-wide and hydrological-crop models are combined to estimate and compare the economic impacts of current climate variability and future anthropogenic climate change in Zambia. Accounting for uncertainty, simulation results indicate that, on average, current variability reduces gross domestic product by four percent over a ten-year period and pulls over two percent of the population below the poverty line. Socio-economic impacts are much larger during major drought years, thus underscoring the importance of extreme weather events in determining climate damages. Three climate change scenarios are simulated based on projections for 2025. Results indicate that, in the worst case scenario, damages caused by climate change are half the size of those from current variability. We conclude that current climate variability, rather than climate change, will remain the more binding constraint on economic development in Zambia, at least over the next few decades.
    Keywords: climate change, weather variability, economic growth, poverty, Zambia
    Date: 2011
  16. By: Chunding Li; John Whalley
    Abstract: This paper discusses how joint cross country indirect tax initiatives can be used to achieve global rebalancing. This is potentially an important development for G20 discussions which thus far have centered on exchange rates as the instruments to achieve rebalancing. We suggest that if China and Germany (as major surplus countries) switch their present VAT systems from a destination principle to an origin principle, and the US (as the major deficit country) adopts a VAT on a destination principle VAT, jointly these actions can significantly reduce the three countries’ joint imbalances and so contribute to global rebalancing. We use a numerical general equilibrium model with a monetary structure incorporating inside money to capture endogeneity of trade imbalances, and to also investigate the potential impacts of such initiatives. These confirm that VAT structures are not only good for global rebalancing but also the changes we consider are beneficial for welfare and revenue collection. Our research is aimed to inject new ideas to the present global rebalancing debate.
    JEL: F10 F32 F47 H20
    Date: 2012–03
  17. By: Helmut Hofer; Tibor Hanappi (Institut für Höhere Studien (IHS) / Department of Economics & Finance); Sandra Müllbacher (Institut für Höhere Studien (IHS) / Department of Economics & Finance)
    Abstract: In the Great Recession market income of the households in Austria has been reduced and unemployment increased. In this paper we examine the impact of automatic stabilizers on cushioning such income losses. We use ITABENA, an Austrian tax-benefit model, to analyze how shocks on market income and employment are mitigated by taxes and transfers. In the case of a proportional income shock 46 percent of the shock will be absorbed by automatic stabilizers in Austria. For the unemployment shocks automatic stabilizers absorb 68 percent. Automatic stabilizers increase the redistributive effects of the Austrian tax benefit system. We find that recent changes in the income tax code have almost no impact on the size of automatic stabilizers in Austria.
    Keywords: automatic stabilization, microsimulation, tax reforms
    JEL: E32 E63 H2 H31
    Date: 2012–03
  18. By: Di Porto, Edoardo; Persico, Nicola; Sahuguet, Nicolas
    Abstract: Deterrence of illegal activities is frequently carried out by many atomistic auditors (tax auditors, law enforcement agents, etc.). Not much is known either normatively about the best way to incentivize atomistic auditors, nor positively about what these incentives actually look like in real world organizations. This paper focuses almost exclusively on the positive question. It proposes a game-theoretic model of decentralized deterrence and an empirical test, based on the equilibrium of the model, to identify the incentives of individual auditors. In the special (but important) case of tax enforcement, the paper fully characterizes the equilibrium of a strategic auditing game and provides a method to calibrate its parameters based on audit data. Applying the model and method to Italian auditing data provides ‘proof of concept’: the methods are practical and tractable. We are able to provide an estimate of tax evasion based on (non-random) audit data alone. Counterfactual simulation of the model quantifies the costs and benefits of alternative auditing policies. We compare decentralized enforcement with a counterfactual commitment policy, and compute the loss from the former. Thus we are able to quantify the costs of decentralizing enforcement.
    Keywords: audits; deterrence; tax evasion
    JEL: H26 H83 K42
    Date: 2012–03
  19. By: James Costain (Banco de España); Beatriz de Blas (Universidad autónoma de Madrid)
    Abstract: We study simple fiscal rules for stabilizing the government debt level in response to asymmetric demand shocks in a country that belongs to a currency union. We compare debt stabilization through tax rate adjustments with debt stabilization through expenditure changes. While rapid and flexible adjustment of public expenditure might seem institutionally or informationally infeasible, we discuss one concrete way in which this might be implemented: setting salaries of public employees, and social transfers, in an alternative unit of account, and delegating the valuation of this numeraire to an independent fi scal authority. Using a sticky-price DSGE matching model of a small open economy in a currency union, we compare the business cycle implications of several different fiscal rules that all achieve the same reduction in the standard deviation of the public debt. In our simulations, compared with rules that adjust tax rates, a rule that stabilizes the budget by adjusting public salaries and transfers reduces fluctuations in consumption, employment, and private and public after-tax real wages, thus bringing the market economy closer to the social planner’s solution.
    Keywords: Fiscal authority, public wages, sovereign debt, monetary union
    JEL: E24 E32 E62 F41
    Date: 2012–01
  20. By: Cwik, Tobias; Mueller, Gernot; Schmidt, Sebastian; Wieland, Volker; Wolters, Maik H
    Abstract: In the aftermath of the global financial crisis, the state of macroeconomic modeling and the use of macroeconomic models in policy analysis has come under heavy criticism. Macroeconomists in academia and policy institutions have been blamed for relying too much on a particular class of macroeconomic models. This paper proposes a comparative approach to macroeconomic policy analysis that is open to competing modeling paradigms. Macroeconomic model comparison projects have helped produce some very influential insights such as the Taylor rule. However, they have been infrequent and costly, because they require the input of many teams of researchers and multiple meetings to obtain a limited set of comparative findings. This paper provides a new approach that enables individual researchers to conduct model comparisons easily, frequently, at low cost and on a large scale. Using this approach a model archive is built that includes many well-known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies. A computational platform is created that allows straightforward comparisons of models' implications. Its application is illustrated by comparing different monetary and fiscal policies across selected models. Researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model development.
    Keywords: fiscal policy; Macroeconomic models; model comparison; model uncertainty; monetary policy; policy rules; robustness
    JEL: E52 E58 E62 F41
    Date: 2012–02
  21. By: Lykke Andersen (Institute for Advanced Development Studies); Jonah Busch (Conservation International – Arlington, Virginia); Elizabeth Curran (CEEMA-INESAD, San Francisco, California); Juan Carlos Ledezma (Conservation International – Bolivia); Joaquín Mayorga (CEEMA-INESAD, San Francisco, California); Mélissa Bellier (University of Montesquieu Bordeaux IV, France)
    Abstract: Bolivia has significant potential to abate climate change by reducing deforestation. This opportunity presents economic and environmental tradeoffs. While these tradeoffs have been hotly debated, they have as yet been the subject of little quantitative analysis. We introduce the OSIRIS-Bolivia model to provide a quantitative basis for decision-making. OSIRIS-Bolivia is an Excel-based tool for analyzing the potential effects of incentive payments to reduce emissions from deforestation (REDD) in Bolivia. It is based on a spatial econometric model of deforestation in Bolivia during the period 2001-2005, and uses information on forest cover, deforestation rates, geographical conditions, and drivers of deforestation, including agricultural opportunity costs, for more than 120,000 pixels covering the whole country. OSIRIS-Bolivia is based on a partial equilibrium model in which reductions in deforestation in one region reduce the supply of agricultural products to the domestic market, which in turn causes an increase in the price of agricultural products, making conversion of land to agriculture more attractive and thus stimulating an increase in deforestation in other regions (leakage). The model can help answer questions such as: Where in Bolivia are carbon incentive payments most likely to result in reduced deforestation? Who are most likely to benefit from REDD? How much money will it take to reduce deforestation by a given amount? To what extent might transaction costs or preferences for agricultural income undermine the goals of the REDD program?
    Keywords: Deforestation, REDD, environmental impacts, socio-economic impacts
    JEL: Q21 Q56
    Date: 2011–12

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