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on Microeconomics |
| By: | Christian Ewerhart |
| Abstract: | The N-firm Cournot model with general technologies is reviewed to derive generalized and unified conditions for existence of a pure strategy Nash equilibrium. Tight conditions are formulated alternatively (i) in terms of concavity of two-sided transforms of inverse demand, or (ii) as linear constraints on the elasticities of inverse demand and its first derivative. These conditions hold, in particular, if a firm’s marginal revenue decreases in other firms’ aggregate output, or if inverse demand is logconcave. The analysis relies on lattice-theoretic methods, engaging both cardinal and ordinal notions of supermodularity. As a byproduct, a powerful test for strict quasiconcavity is obtained. |
| Keywords: | Cournot competition, existence of Nash equilibrium, concavity of demand, supermodular games, strict quasiconcavity |
| JEL: | L13 C72 C62 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:427&r=mic |
| By: | Simone Valente (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland) |
| Abstract: | An established result of the endogenous growth literature is that competitive equilibria in expanding-varieties models are suboptimal due to the rent-effect: monopolistic pricing drives the equilibrium quantity of each intermediate below the efficient level, implying that it is optimal to subsidize final producers. This paper shows that, if scale effects are eliminated by including R&D spillovers in the model, normative prescriptions change. Since the laissez-faire economy under-invests into R&D activity, the share of resources devoted to intermediates' production increases, and this reallocation effect contrasts the rent-effect. In many scenarios, including the polar case of logarithmic preferences, the reallocation effect surely dominates: the equilibrium quantity of each intermediate exceeds the optimal one, and the optimal policy consists of taxing final producers because fiscal authorities must internalize the overshooting mechanism generated by under-investment in R&D. |
| Keywords: | Endogenous Growth, Scale Effects, R&D Externalities, Optimal Policy |
| JEL: | O41 O31 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:09-116&r=mic |
| By: | Dewenter, Ralf; Haucap, Justus; Wenzel, Tobias |
| Abstract: | This paper analyses the interdependency between the market for music recordings and concert tickets, assuming that there are positive indirect network effects both from the record market to ticket sales for live performances and vice versa. Using a model with two interrelated Salop circles we show that prices in both markets are corrected down- wards when compared to the standard Salop model. Furthermore, we show that the effects of file sharing on firms' profitability and on variety are ambiguous. File sharing can increase profits through increased concert ticket demand and thereby also lead to additional market entry and additional variety. |
| Keywords: | Music Industry,Indirect Network Effects,Salop Model,File Sharing |
| JEL: | L13 L82 Z10 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuiedp:63&r=mic |
| By: | Jacob K. Goeree; Theo Offerman; Randolph Sloof |
| Abstract: | Multi-unit ascending auctions allow for equilibria in which bidders strategically reduce their demand and split the market at low prices. At the same time, they allow for preemptive bidding by incumbent bidders in a coordinated attempt to exclude entrants from the market. We consider an environment where both demand reduction and preemptive bidding are supported as equilibrium phenomena of the ascending auction. In a series of experiments, we compare its performance to that of the discriminatory auction. Strategic demand reduction is quite prevalent in the ascending auction even when entry imposes a (large) negative externality on incumbents. As a result, the ascending auction performs worse than the discriminatory auction both in terms of revenue and efficiency, while entrants chances are similar across the two formats. |
| Keywords: | Multi-license auctions, demand reduction, external effects, preemption |
| JEL: | D44 D45 C91 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:430&r=mic |
| By: | Brian T. Melzer; Donald P. Morgan |
| Abstract: | We find that banks charge more for overdraft credit when depositors have access to a potential substitute: deferred deposit ("payday") credit. We attribute this rise in prices partly to adverse selection created by banks' practice of charging a flat fee regardless of the overdraft amount--pricing that favors depositors prone to large overdrafts. When deferred deposit credit priced per dollar borrowed is available, depositors prone to small overdrafts switch to that option. That selection works against banks; large overdrafts cost more to supply and, if depositors default, banks lose more, so prices rise. Consistent with this adverse-selection hypothesis, we document that the average dollar amount per returned check at banks and other depository institutions increases when depositors have access to deferred deposit credit. Beyond documenting another case of price-increasing competition, our findings bear on theories of adverse selection in credit markets and contribute to the debate over the pros and cons of payday credit. |
| Keywords: | Overdrafts ; Bank competition ; Banks and banking - Service charges ; Bank deposits |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:391&r=mic |
| By: | Azrieli, Yaron; Teper, Roee |
| Abstract: | We consider games with incomplete information a la Harsanyi, where the payoff of a player depends on an unknown state of nature as well as on the profile of chosen actions. As opposed to the standard model, players' preferences over state--contingent utility vectors are represented by arbitrary functionals. The definitions of Nash and Bayes equilibria naturally extend to this generalized setting. We characterize equilibrium existence in terms of the preferences of the participating players. It turns out that, given continuity and monotonicity of the preferences, equilibrium exists in every game if and only if all players are averse to uncertainty (i.e., all the functionals are quasi--concave). We further show that if the functionals are either homogeneous or translation invariant then equilibrium existence is equivalent to concavity of the functionals. |
| Keywords: | Games with incomplete information, equilibrium existence, uncertainty aversion, convex preferences. |
| JEL: | D81 C72 |
| Date: | 2009–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17615&r=mic |
| By: | Andreas Novy; Barbara Beinstein |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwsre:sre-disc-2009_01&r=mic |
| By: | Aleksander Berentsen; Mariana Rojas Breu; Shouyong Shi |
| Abstract: | Many countries simultaneously suffer from high rates of inflation, low growth rates of per capita income and poorly developed financial sectors. In this paper, we integrate a microfounded model of money and finance into a model of endogenous growth to examine the effects of inflation and financial development. A novel feature of the model is that the market for innovation goods is decentralized. Financial intermediaries arise endogenously to provide liquid funds to the innovation sector. We calibrate the model to address two quantitative issues. One is the effects of an exogenous improvement in the productivity of the financial sector on welfare and per capita growth. The other is the effects of inflation on welfare and growth. Consistent with the data but in contrast to previous work, reducing inflation generates large gains in the growth rate of per capita income as well as in welfare. Relative to reducing inflation, improving the efficiency of the financial market increases growth and welfare by much smaller amounts. |
| Keywords: | Money, Credit, Innovation, Growth |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:441&r=mic |
| By: | Markus Müller (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland) |
| Abstract: | We examine the interaction between vote-share contracts and learning-by-doing. Candidates for a political office are allowed to offer vote-share thresholds. The elected politician has to achieve at least this threshold value in his reelection result to remain in office for a second term. We assume there are learningby- doing effects for incumbents and show that competition leads to vote-share contracts implementing the socially optimal threshold, which is above one-half. Vote-share contracts improve the average ability level of a reelected politician and increase effort in the first term of an incumbent. On the other hand, vote-share contracts reduce the probability that learning-by-doing takes place. However, the overall effect of vote-share contracts is welfare-enhancing, even under the assumption of learning-by-doing. |
| Keywords: | elections, political contracts, vote-share thresholds, learning-by-doing effects, incumbency advantage |
| JEL: | D82 H4 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:09-114&r=mic |
| By: | Bouet, Antoine; Debucquet, David Laborde |
| Abstract: | "This study offers new conclusions on the economic cost of a failed Doha Round. The first section is devoted to an analysis of how trade policies evolve in the long and medium runs. We show that even under normal economic conditions, policymakers modify tariffs to cope with the evolution of world markets. We then use the MIRAGE Computable General Equilibrium model to assess the potential outcome of the Doha Round, and then examine four protectionist scenarios. Under a scenario where applied tariffs of major economies increase up to the currently bound tariff rates, we find that world trade decreases by 7.7 percent and world welfare drops by US$353 bn. We then compare a resort to protectionism when the Doha Development Agenda (DDA) is implemented versus a resort to protectionism when the DDA is not implemented. We find that this trade agreement could prevent the potential loss of US$ 809 bn of trade, and could therefore act as an efficient multilateral insurance scheme against the adverse consequences of “beggar-thy-neighbor” trade policies." from authors' abstract |
| Keywords: | Trade negotiations, Computable general equilibrium (CGE) modeling, Bound duties, Domestic support, Globalization, Markets, Doha Development Agenda, |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fpr:ifprid:886&r=mic |
| By: | Jacob K. Goeree; Charles A. Holt; Karen Palmer; William Shobe; Dallas Burtraw |
| Abstract: | We experimentally study auctions versus grandfathering in the initial assignment of pollution permits that can be traded in a secondary spot market. Low and high emitters compete for permits in the auction, while permits are assigned for free under grandfathering. In theory, trading in the spot market should erase inefficiencies due to initial mis-allocations. In the experiment, high emitters exercise market power in the spot market and permit holdings under grandfathering remain skewed towards high emitters. Furthermore, the opportunity costs of “free” permits are fully “passed through.” In the auction, the majority of permits are won by low emitters, reducing the need for spot-market trading. Auctions generate higher consumer surplus and slightly lower product prices in the laboratory markets. Moreover, auctions eliminate the large “windfall profits” that are observed in the treatment with free, grandfathered permit allocations. |
| Keywords: | Pollution permits, auctions, grandfathering, experiments |
| JEL: | C92 D43 D44 Q58 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:429&r=mic |
| By: | Ondrej Rydval; Andreas Ortmann; Sasha Prokosheva; Ralph Hertwig |
| Abstract: | We replicate three pricing tasks of Gneezy, List and Wu (2006) for which they document the so-called uncertainty effect, namely, that people value a binary lottery over non-monetary outcomes less than other people value the lottery’s worse outcome. While the authors implemented a verbal lottery description, we use a physical lottery format which makes misinterpretation of the lottery structure highly unlikely. We also provide subjects with complete information about the goods they are to value (book gift certificates and one-year deferred payments). Contrary to Gneezy et al. (2006), we observe for all three pricing tasks that subjects’ willingness to pay for the lottery is significantly higher than other subjects’ willingness to pay for the lottery’s worse outcome. |
| Keywords: | Decision under risk, framing, experiments, task ambiguity. |
| JEL: | C81 C91 C93 D83 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp385&r=mic |
| By: | Gita Gopinath; Pierre-Olivier Gourinchas; Chang-Tai Hsieh; Nicholas Li |
| Abstract: | To what extent do national borders and national currencies impose costs that segment markets across countries? To answer this question the authors use a dataset with product-level retail prices and wholesale costs for a large grocery chain with stores in the United States and Canada. They develop a model of pricing by location and employ a regression discontinuity approach to estimate and interpret the border effect. They report three main facts: One, the median absolute retail price and wholesale cost discontinuities between adjacent stores on either side of the U.S.-Canadian border are as high as 21 percent. In contrast, within-country border discontinuity is close to 0 percent. Two, the variation in the retail price gap at the border is almost entirely driven by variation in wholesale costs, not by variation in markups. Three, the border gaps in prices and costs co-move almost one-to-one with changes in the U.S.-Canadian nominal exchange rate. They show these facts suggest that the price gaps they estimate provide only a lower bound on border costs. |
| Keywords: | Prices ; Price indexes ; Wholesale price indexes ; Retail trade |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:09-10&r=mic |
| By: | Fabio Caccioli; Matteo Marsili; Pierpaolo Vivo |
| Abstract: | We contrast Arbitrage Pricing Theory (APT), the theoretical basis for the development of financial instruments, with a dynamical picture of an interacting market, in a simple setting. The proliferation of financial instruments apparently provides more means for risk diversification, making the market more efficient and complete. In the simple market of interacting traders discussed here, the proliferation of financial instruments erodes systemic stability and it drives the market to a critical state characterized by large susceptibility, strong fluctuations and enhanced correlations among risks. This suggests that the hypothesis of APT may not be compatible with a stable market dynamics. In this perspective, market stability acquires the properties of a common good, which suggests that appropriate measures should be introduced in derivative markets, to preserve stability. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:0910.0064&r=mic |
| By: | Sturgeon, Timothy J.; Van Biesebroeck, Johannes |
| Abstract: | In this paper the authors apply global value chain (GVC) analysis to recent trends in the global automotive industry, with special attention paid to government interventions triggered by the recent economic crisis. The authors first highlight some of the defining characteristics of GVCs in this important industry, especially the unusually strong regional structure of production and sales. National political institutions create pressure for local content, which drives production close to end markets, where it tends to be organized nationally or regionally. They then examine policy reactions to the recent economic crisis, and provide some discussion of the government interventions in the industry. The authors end with a number of policy conclusions that highlight the likely impact of the interventions on the evolution GVCs and the growth of the industry in developing countries. |
| Keywords: | Markets and Market Access,Economic Theory&Research,Labor Policies,Water and Industry,Debt Markets |
| Date: | 2009–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5060&r=mic |
| By: | Amy King; Andrew Leigh |
| Abstract: | Are beautiful politicians more likely to be elected? To test this, we use evidence from Australia, a country in which voting is compulsory, and in which voters are given ‘How to Vote’ cards depicting photos of the major party candidates as they arrive to vote. Using raters chosen to be representative of the electorate, we assess the beauty of political candidates from major political parties, and then estimate the effect of beauty on voteshare for candidates in the 2004 federal election. Beautiful candidates are indeed more likely to be elected, with a one standard deviation increase in beauty associated with a 1½ – 2 percentage point increase in voteshare. Our results are robust to several specification checks: adding party fixed effects, dropping well-known politicians, using non-Australian beauty raters, omitting candidates of non-Anglo Saxon appearance, controlling for age, and analyzing the ‘beauty gap’ between candidates running in the same electorate. The marginal effect of beauty is larger for male candidates than for female candidates, and appears to be approximately linear. Consistent with the theory that returns to beauty reflect discrimination, we find suggestive evidence that beauty matters more in electorates with a higher share of apathetic voters. |
| Keywords: | economics of beauty, elections, voter rationality, information shortcuts, thin slices |
| JEL: | D72 J45 J71 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:auu:dpaper:616&r=mic |
| By: | Knabe, Andreas; Rätzel, Steffen |
| Abstract: | We reexamine the claim that the effect of income on subjective well-being suffers from a systematic downward bias if one ignores that higher income is typically associated with more work effort. We analyze this claim using German panel data, controlling for individual unobserved heterogeneity, and specifying the impact of working hours in a non-monotonic form. Our results suggest that the impact of working hours on happiness is rather small and exhibits an inverse U-shape. We do not find evidence that leaving working hours out of the analysis leads to an underestimation of the income effect. |
| Keywords: | Happiness,life satisfaction,income,disutility of labor |
| JEL: | D60 I31 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:200912&r=mic |