Vol. 16, No. 1

Philippe Michel, Oliver Paddison and Pierre Pestieau:
Old Age Consumption and Pension Policy in a Two-Tier Developing Economy (pp. 3–14)


In a number of developing countries, an important part of the economy is informal both in terms of production and of social protection. In this paper we consider introducing a universal pension system in the formal sector. It is shown to have two main effects: first, it makes the formal sector more attractive to migration and second, it affects capital accumulation in a way that depends on the type of social security introduced, PAYG or funded, and its induced effect on private saving.

(JEL: H55, J61)

Joanna Poyago-Theotoky:
Optimal Environmental Taxation, R&D Subsidization and the Role of Market Conduct (pp. 15–26)


The paper examines the optimal environmental policy in a differentiated goods duopoly with either price- or quantity-setting firms, where firms invest in environmental R&D that reduces emissions. It is shown that in quantity (Cournot) competition, the emission tax is always lower than marginal damages. With price (Bertrand) competition, the emission tax is generally lower than marginal damages. However, for the case of very undifferentiated products, the emission tax is equal to marginal damages, that is, it approaches the first-best tax. Moreover, the Cournot emission tax is always lower than the Bertand emission tax. Concerning the R&D subsidy, the comparison crucially depends on the degree of product differentiation and the initial emissions coefficient.

(JEL: Q28, O38, H29, L13)

Klaus Kultti and Toni Riipinen:
Multilateral and Bilateral Meetings with Production Heterogeneity (pp. 27–37)


We study different trading processes in the context of a search-based model of endogenous money. We incorporate heterogeneity into the model by allowing multiple meetings of agents and divisible production. We then determine the equilibrium using three different trading mechanisms: auctions, pairwise bargaining and price posting. The welfare under these mechanisms is compared using specific functional forms for utility and cost functions. The analysis is done numerically with the bench mark of a social welfare maximising planner.

(JEL: D44, D52, D83)

Juha-Pekka Niinimäki:
Fairly Priced Deposit Insurance under Adverse Selection (pp. 38–48)


Fair pricing of deposit insurance represents one of the most difficult problems of bank regulation. This paper introduces an incentive compatible mechanism such that fair (risk-based) deposit insurance premiums can be achieved under adverse selection. The deposit insurer screens banks by offering full insurance coverage for high-risk banks and partial coverage for low-risk banks. If deposit interest rates can be regulated, low-risk banks also obtain full coverage. The optimal solution may require dividing deposits into junior and senior deposits. More generally, our analysis connects deposit insurance with standard insurance theory.

(JEL: G21, G22, G28)

Finnish Economic Papers 1/2003