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Essays on Applied Microeconomic Theory Essays on Applied Microeconomic Theory David Andrés-Cerezo Thesis submitted for assessment with a view to obtaining the degree of Doctor of Economics of the European University Institute Florence, 22 June 2021 European University Institute Department of Economics Essays on Applied Microeconomic Theory David Andrés-Cerezo Thesis submitted for assessment with a view to obtaining the degree of Doctor of Economics of the European University Institute Examining Board Prof. David Levine, EUI, Supervisor Prof. Philipp Kircher, Cornell University, Co-Supervisor Prof. Gerard Llobet, Centro de Estudios Monetarios y Financieros (CEMFI) Prof. Guido Tabellini, Bocconi University © David Andrés-Cerezo, 2021 No part of this thesis may be copied, reproduced or transmitted without prior permission of the author Researcher declaration to accompany the submission of written work Department Economics - Doctoral Programme I David J. Andrés-Cerezo certify that I am the author of the work "Essays on Applied Microeconomic Theory" I have presented for examination for the Ph.D. at the European University Institute. I also certify that this is solely my own original work, other than where I have clearly indicated, in this declaration and in the thesis, that it is the work of others. I warrant that I have obtained all the permissions required for using any material from other copyrighted publications. I certify that this work complies with the Code of Ethics in Academic Research issued by the European University Institute (IUE 332/2/10 (CA 297). The copyright of this work rests with its author. Quotation from it is permitted, provided that full acknowledgment is made. This work may not be reproduced without my prior written consent. This authorisation does not, to the best of my knowledge, infringe the rights of any third party. I declare that this work consists of 67626 words. Statement of inclusion of previous work: I confirm that chapter 1 was jointly co-authored with Ms Milena Almagro and I contributed 50% of the work. I confirm that chapter 2 was jointly co-authored with Ms Natalia Fabra and I contributed 50%of the work. I confirm that chapter 1 draws upon an earlier article I published in Theoretical Economics, 15 (2), 763-810 (2020). Signature and date: 14/02/2021 Abstract This thesis is a collection of three independent essays in applied microeconomic theory. The first chapter, co-authored with Milena Almagro, explores the conditions under which a state promotes a shared national identity on its territory. A forward-looking government that internalizes identity dynamics shapes them by implementing nation-building policies. Assimilation attempts are con- strained by political unrest, electoral competition, and the intergenerational transmission of identities. We find the long-run evolution of identities to be highly sensitive to initial conditions and to temporary shocks that affect the relative political power of the ethnic groups. Interestingly, when the conditions to promote the national identity are not present, the central government avoids long-run conflict by allowing regional identities to thrive. The results point to different nation-building behavior between autocracies and democracies, with the latter being more likely to preserve regional identities. The second chapter, co-authored with Natalia Fabra, analyzes how firms’ in- centives to operate and invest in energy storage depend on the market struc- ture. For this purpose, we characterize equilibrium market outcomes allowing for market power in storage and/or production, as well as for vertical integra- tion between storage and production. Market power reduces efficiency through two channels: it induces an inefficient use of the storage facilities, and it dis- torts investment incentives. We illustrate our theoretical results by simulating the Spanish wholesale electricity market. The results are key to understanding how to regulate energy storage, an issue which is critical for the deployment of renewables. The third chapter explores the difficulties that endogenous preferences pose for normative work, using environmental policy design as a motivating example. I first assess how the major positions in welfare economics can be adapted to contexts in which policies shape preference formation. The implications for policy design of using different welfare criteria are then illustrated with a simple 1 Essays on Applied Microeconomic Theory model of carbon pricing. An empirically implementable method is proposed to micro-found the relative weights that a standard welfarist approach could give to pre-policy and post-policy preferences. 2 Acknowledgments This thesis is the written legacy of a long journey, in which the good and happy moments have far outweighed the more difficult and stressful ones. Several things have been changing along the way: the places I've been living in, the extraordinary people who have accompanied me, even the research fields of the chapters that compose this thesis. But one thing has remained constant, always being there, and this has been my partner Ana. You are the main reason why I started the PhD, and only with your unconditional support I've been able to finish it. Thanks for your patience and for your unlimited energy and joy. Nobody makes me happier. I only hope that you continue to be what remains constant in my life. I am extremely grateful to my advisors. This thesis could not have been possi- ble without your dedication and immense support. First and foremost, thanks to David Levine for his professionalism and for always providing excellent guid- ance on any possible topic. Your supervision style, never pressing and always supporting, has been fundamental for helping me finding my way of doing re- search. It has been a true privilege to be in regular contact with such a great thinker and human being. A profound gratitude goes to Philipp Kircher, for his solid and constructive feedback, and for always taking the time to think about how to improve my work. This thesis is highly indebted to your sharp intellect and your kindness. I am also indebted to Andrea Galeotti, who pro- vided valuable guidance at the early stages of this thesis, and to Gerard Llobet and Guido Tabellini for accepting to be part of my thesis committee. This thesis would not exist without my amazing co-authors, from whom I al- ways learn what it takes to be an outstanding researcher. I am highly indebted to Natalia, my wonderful unofficial supervisor, who welcomed me to Carlos III without knowing me but still relied on me from the very first day. You opened me the doors of environmental & energy economics, and your academic and personal support has been (and still is) fundamental. Thank you very much for all the opportunities you are giving me. To the versatile Milena, thanks 3 Essays on Applied Microeconomic Theory for your help during these years and for all the good moments in Madrid and New York, there are many more to come. On top of being the best possible role models to look up to, you are also very good friends. During these years I have always felt very lucky for being part of the EUI's Economics Department. Thanks to all my professors and colleagues for cre- ating a stimulating and friendly environment, and to all members of staff at Villa la Fonte for their professionalism and kindness. I am also very grateful to all the friends I made during these years in Florence, with special mention to Carlos, Gonzalo, Iacopo, Daniele, Mustafa and, of course, to my anai David, who has played every possible role: classmate, flatmate and, mostly, friend. A substantial part of this thesis was written in Madrid. I would like to thank Alvaro´ and Agustina for several interesting conversations (we still have a paper pending) and to Michele and Clara for being genuine friends outside the walls of the department. I cannot forget about the link between the two departments, another constant of the PhD, the unique Juanjo Dolado, Juan in a million, which apart from being a great mentor is also a great friend. I also want to thank Toni, for making me his heir of San Marco's flat and for sharing research ideas, job market tips and good moments in Madrid. Los a~nosde la tesis han sido mas amables gracias a mis amigos, los hermanos que no tengo, que hicieron el camino menos duro y m´asdivertido. Sin necesidad de doctorados, conoc´eisla verdad profunda: econom´ıano se estudia, econom´ıa se sabe. Especial menci´onal aut´entico V que, sin pretenderlo y tal vez a su pesar, se ha convertido en un experto del mundo acad´emico. Por ´ultimo,lo fundamental, las ra´ıces. Esta tesis va a dedicada a toda mi familia, mis t´ıasy t´ıos,que siempre me han dado su cari~noy, con su ejemplo, me han transmitido los valores y principios que trato de seguir en mi vida. Sois una familia excepcional. Los mejores momentos siempre han sido a vuestro lado, que lo sigan siendo mucho tiempo. Estos agradecimientos solo pueden terminar con las dos personas que lo hicieron posible con su esfuerzo y amor desde mi primer d´ıade vida: mi madre y mi padre. Vosotros hicisteis todos los sacrificios necesarios para que yo nunca tuviera que hacer ninguno. Nunca un hijo fue tan querido, es un privilegio teneros como padres. Muchas gracias por estar siempre ah´ı,yo siempre estar´e para vosotros. Esta tesis es vuestra. 4 Contents 1 The Construction of National Identities 7 1.1 Introduction . .7 1.2 Related literature . 11 1.3 Model . 13 1.4 Solution to the dynamic problem and main results . 18 1.5 Non-interior steady state: A general result . 22 1.6 Nation-building under electoral competition . 26 1.7 Interpretation of the results: Case studies .
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