UC Berkeley

Climate change is likely to be the most important global pollution problem that humanity has had to face so far. In this dissertation, I tackle issues directly and indirectly related to climate change, bringing my modest contribution to the body of human creativity trying to deal with climate change. First, I look at the impact of non-convex feedbacks on the optimal climate policy. Second, I try to derive the optimal biofuel policy acknowledging the potential negative impacts that biofuel production might have on food supply. Finally, I test empirically for the presence of loss aversion in food purchases, which might play a role in the consumer response to food price changes brought about by biofuel production.

Non-convexities in feedback processes are increasingly found to be important in the climate system. To evaluate their impact on the optimal greenhouse gas (GHG) abate- ment policy, I introduce non-convex feedbacks in a stochastic pollution control model. I numerically calibrate the model to represent the mitigation of greenhouse gas (GHG) emissions contributing to global climate change. This approach makes two contributions to the literature. First, it develops a framework to tackle stochastic non-convex pollu- tion management problems. Second, it applies this framework to the problem of climate change. This approach is in contrast to most of the economic literature on climate change that focuses either on linear feedbacks or environmental thresholds. I find that non-convex feedbacks lead to a decision threshold in the optimal mitigation policy, and I characterize how this threshold depends on feedback parameters and stochasticity.

There is great hope that biofuel can help reduce greenhouse gas emissions from fossil fuel. However, there are some concerns that biofuel would increase food prices. In an optimal control model, a co-author and I look at the optimal biofuel production when it competes for land with food production. In addition oil is not exhaustible and output is subject to climate change induced damages. We find that the competitive outcome does not necessarily yield an underproduction of biofuels, but when it does, second best policies like subsidies and mandates can improve welfare.

In marketing, there has been extensive empirical research to ascertain whether there is evidence of loss aversion as predicted by several reference price preference theories. Most of that literature finds that there is indeed evidence of loss aversion for many different goods. I argue that it is possible that some of that evidence seemingly supporting loss aversion arises because price endogeneity is not properly taken into account. Using scanner data I study four product categories: bread, chicken, corn and tortilla chips, and pasta. Taking prices as exogenous, I find evidence of loss aversion for bread and corn and tortilla chips. However, when instrumenting prices, the "loss aversion evidence" disappears.