nep-mic New Economics Papers
on Microeconomics
Issue of 2004‒12‒20
ten papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. A Polarization of Polarization? The Distribution of Inequality 1970-1996 By Claudia Biancotti
  2. Markets, Torts and Social Inefficiency By Andrew F. Daughety; Jennifer F. Reinganum
  3. The Normative Approach to the Measurement of Multidimensional Inequality By John A. Weymark
  4. Selection into and across Credit Contracts: Theory and Field Research By Christian Ahlin; Robert Townsend
  5. Bargaining Sets of Voting Games By Bezalel Peleg; Peter Sudholter
  6. Unfair Contests By Feess,Eberhard; Muehlheusser,Gerd; Walzl,Markus
  7. Value of Expertise For Forecasting Decisions in Conflicts By Kesten C. Green; J. Scott Armstrong
  8. The interaction between face-to-face and electronic delivery: the case of the Italian banking industry By Emilia Bonaccorsi di Patti; Giorgio Gobbi; Paolo Emilio Mistrulli
  9. A Joint Estimation of Price-Cost Margins and Sunk Capital - Theory and Evidence from the European Electricity Industry By Roeger, Werner; Warzynski, Frédéric
  10. The Economic Theory of Illegal Goods: The Case of Drugs By Gary S. Becker; Kevin M. Murphy; Michael Grossman

  1. By: Claudia Biancotti (Bank of Italy, Economic Research Department)
    Abstract: This paper presents a panel of internationally comparable Gini coefficients, based on the United Nations University/World Institute for Development Economics Research (UNU/WIDER) World Income Inequality Database (WIID) version 1.0. The 221 data points that match minimum requirements of spatial and temporal homogeneity cover 67 developed and developing countries and span a twenty-six year period, from 1970 to 1996. Density functions for the Gini coefficients are estimated for selected points in time in order to evaluate how the distribution of inequality has evolved in the recent past: the aim is to offer a concise description of the evolution of polarization of societies in the world. The distribution of inequality appears to be slightly bimodal at the start of the period: alongside a sizable concentration of countries with average levels of distributional asymmetry, there is a smaller one of very unequal nations, mainly located in Latin America. In the following two decades polarization levels are more homogeneous, suggesting a convergence of class structure across states. In recent times, there has been a resurgence of bimodality; the rise in the number of highly polarized, strongly conflictual societies has been driven by transition frictions in the ex-USSR area.
    Keywords: Inequality
    JEL: D31
    Date: 2004–03
  2. By: Andrew F. Daughety (Department of Economics and Law School, Vanderbilt University); Jennifer F. Reinganum (Department of Economics and Law School, Vanderbilt University)
    Abstract: In this paper we examine the nexus between product markets and the legal system. We examine a model wherein oligopolists produce differentiated products that also have a safety attribute. Consumption of these products may lead to harm (to consumers and/or third parties), lawsuits, and compensation, either via settlement or trial. Firm-level costs reflect both R&D and production activities, as well as liability-related costs. Compensation is incomplete, both because of inefficiencies in the bargaining process and (possibly) because of statutorily-established limits on awards. We compare the market equilibrium safety effort and output levels to what a planner would choose. We consider two planners, one of whom is able to set safety standards, but takes the market equilibrium output as given, and one of whom can control both safety effort and output. We argue that the former type of planner is the better representative of what the tort system might do if faced with deciding upon a safety effort standard. We examine two measures of competitiveness: the number of firms, and the degree of substitutability of the products. Holding substitutability constant, an increase in the number of firms always reduces equilibrium safety effort. On the other hand, holding the number of firms constant, increasing substitutability first decreases, but ultimately increases, the equilibrium safety effort. Non-cooperative firms under-provide safety effort (relative to the restricted social planner¼s preferred level) when the products are relatively poor substitutes. However, when the products are sufficiently good substitutes, the non-cooperative firms over-provide safety effort. Moreover, the more firms there are in the industry, the less substitutable their products need to be in order for the equilibrium to result in over-provision of safety effort. Under-provision of safety becomes more typical as the rate of third-party exposure increases or as the amount of third-party uncompensated losses increases. Finally, we use the settlement subgame to examine the effects of alternative tort reform policies on the equilibrium provision of safety and welfare. In the presence of third-party victims, welfare can be increased even though changes in such policies may increase expected trial costs.
    Keywords: Liability, oligopoly, safety, social optimality, torts
    JEL: D4 K0 L1
    Date: 2003–04
  3. By: John A. Weymark (Department of Economics, Vanderbilt University)
    Abstract: This article provides an introduction to the normative approach to multidimensional inequality measurement. Multivariate generalizations of the procedures used to construct univariate inequality indices from social evaluation orderings are described. Axiomatizations of multivariate Atkinson, Kolm-Pollak, and generalized Gini indices are discussed. Maasoumi's Econometrica (1986) two-stage procedure for constructing a multivariate inequality index is critically examined. A dominance criterion proposed by Tsui Social Choice and Welfare (1999) that takes account of the dependence between the individual distributions of the attributes is also considered.
    Keywords: Multidimensional inequality, inequality indices, multivariate inequality measurement, multivariate majorization
    JEL: D63
    Date: 2003–07
  4. By: Christian Ahlin (Department of Economics, Vanderbilt University); Robert Townsend
    Abstract: Various theories make predictions about the relative advantages of individual loans versus joint liability loans. If we imagine that lenders facing moral hazard make relative performance comparisons in determining stringency in repayment, then individual loans should vary positively with covariance of output across funded projects. Relatively new work also highlights inequality and heterogeneity in preferences, establishing that wealth of the agents relative to the bank, and wealth dispersion among potential joint liability partners, are important factors determining the likelihood of the joint liability regime. An alternative imperfect information model also addresses the question of which agents will accept a group contract and borrow and which will pursue outside options. We attempt to test these various models using relatively rich data gathered in field research in Thailand, measuring not only the presence of joint liability versus individual loans, but also measuring various of the key variables suggested by these theories. As predicted by one of the theories, the prevalence of joint liability contracts relative to individual contracts exhibits a U-shaped relationship with the wealth of the borrowing pair and increases with the wealth dispersion. (We control for wealth that can be used as collateral.) Contrary to one theory, we find no evidence joint liability borrowing becomes less likely as covariance of output increases. We do find, consistent with our modified version of the model with adverse selection, that higher correlation makes joint liability borrowing more likely relative to all outside options. We also find direct evidence consistent with adverse selection in the credit market, in that the likelihood of joint-liability borrowing increases the lower is the probability of project success. We are able to distinguish this result from an alternative moral hazard explanation. Strikingly, most of the results disappear if we do not condition the sample according to the dictates of the models.
    Keywords: Credit markets, group participation, empirical contract theory, micro-credit
    JEL: D20 D83 G21 O16
    Date: 2003–10
  5. By: Bezalel Peleg; Peter Sudholter
    Abstract: Let A be a finite set of m <FONT FACE="Symbol">&#179;</FONT> 3 alternatives, let N be a finite set of n <FONT FACE="Symbol">&#179;</FONT> 3 players and let R<SUP>n</SUP> be a profile of linear preference orderings on A of the players. Throughout most of the paper the considered voting system is the majority rule. Let u<SUP>N</SUP> be a profile of utility functions for R<SUP>N</SUP>. Using <FONT FACE="Symbol">a</FONT>-effectiveness we define the NTU game V<SUB>u<SUP>N</SUP></SUB> and investigate its Aumann-Davis-Maschler and Mas-Colell bargaining sets. The first bargaining set is nonempty for m = 3 and it may be empty for m <FONT FACE="Symbol">&#179;</FONT> 4. Moreover, in a simple probabilistic model, for fixed m, the probability that the Aumann-Davis-Maschler bargaining set is nonempty tends to one if n tends to infinity. The Mas-Colell bargaining set is nonempty for m <FONT FACE="Symbol">&#163;</FONT> 5 and it may be empty for m <FONT FACE="Symbol">&#179;</FONT> 6. Moreover, we prove the following startling result: The Mas-Colell bargaining set of any simple majority voting game derived from the k-th replication of R<SUP>N</SUP> is nonempty, provided that k <FONT FACE="Symbol">&#179;</FONT> n + 2. We also compute the NTU games which are derived from choice by plurality voting and approval voting, and we analyze some interesting examples.
    Keywords: NTU game; bargaining set; majority rule; plurality voting; approval voting
    JEL: D71
    Date: 2004–12
  6. By: Feess,Eberhard; Muehlheusser,Gerd; Walzl,Markus (METEOR)
    Abstract: Real-world contests are often "unfair" in the sense that outperforming all rivals may not be enough to be the winner, because some contestants are favored by the allocation rule, while others are handicapped. Examples of such contests can be inter alia found in the area of litigation and procurement.This paper analyzes discriminatory contests (which are strategically equivalent to all-pay auctions) with a handicap for one of the participants. We first characterize the equilibriumstrategies, provide closed form solutions, and illustrate the additional strategic issues arising through this asymmetry. We then analyze the issue of the optimal degree of unfairness. From a social point of view, the following trade-off arises: The disadvantage of unfair contests is that the prize may be awarded to an inferior contestant. On the other hand, under the assumption that the effort exerted by contestants to increase their chancesof winning the prize is wasteful from a social point of view, one advantage of an unfair contest is that it leads to lower effort incentives. We characterize situations in which it is optimal for an authority to either stipulate a fair contest, an interior degree of unfairness or even an infinitely unfair contest where the prize is directly awarded to one of the ontestants.
    Keywords: microeconomics ;
    Date: 2004
  7. By: Kesten C. Green; J. Scott Armstrong
    Abstract: In important conflicts, people typically rely on experts' judgments to predict the decisions that adversaries will make. We compared the accuracy of 106 expert and 169 novice forecasts for eight real conflicts. The forecasts of experts using unaided judgment were little better than those of novices, and neither were much better than simply guessing. The forecasts of experts with more experience were no more accurate than those with less. Speculating that consideration of the relative frequency of decisions might improve accuracy, we obtained 89 forecasts from novices instructed to assume there were 100 similar situations and to ascribe frequencies to decisions. Their forecasts were no more accurate than 96 forecasts from novices asked to pick the most likely decision. We conclude that expert judgment should not be used for predicting decisions that people will make in conflicts. Their use might lead decision makers to overlook other, more useful, approaches.
    Keywords: Bad faith, Framing, Hindsight bias, Methods, Politics.
    JEL: D74 D78 D81 D83 D84
    Date: 2004–12
  8. By: Emilia Bonaccorsi di Patti (Bank of Italy, Economic Research Department); Giorgio Gobbi (Bank of Italy, Economic Research Department); Paolo Emilio Mistrulli (Bank of Italy, Economic Research Department)
    Abstract: We empirically investigate the relevance of demand-side complementarity between electronic and traditional provision of banking services. Since no systematic data on prices for the two types of services is available, it is not possible to estimate cross-elasticities of demand. We resort to two indirect tests. The first test is based on estimating the relationship between branches and the diffusion of e-banking services in local markets, controlling for individual bank and market characteristics employing new data for Italian banks referring to 1998-2001. We find that banks expanded relatively more in the e-business in those local markets where they had relatively fewer branches, with the exclusion of markets where the banks were chartered. The second test is based on measuring the impact of the joint provision of banking services - electronically and at traditional branches - on banks’ revenues per customer. We estimate a non-standard revenue function that relates revenues from asset management, brokerage and payment services to the share of customers employing e-banking, given the total number of bank customers. Our results show that a high share of e-customers is associated with a reduction in revenues per customer. This evidence suggests that banks did not extract substantial consumer surplus from the joint provision of electronic services and traditional services at the branch. We interpret the results of both our test as not consistent with the hypothesis of complementarity between stores and e-commerce in the banking industry.
    Keywords: commercial banks, e-banking, electronic transactions, store proximity
    JEL: D12 G21 O32
    Date: 2004–07
  9. By: Roeger, Werner (European Commission); Warzynski, Frédéric (Department of Economics, Aarhus School of Business)
    Abstract: In this paper, we propose a new methodology to jointly estimate market power and the importance of sunk capital extending the work of Hall (1988) and Roeger (1995). We then apply this new technique to the European electricity industry using firm level data for the period 1994-1999, and analyze the impact of the 1996 European directive to liberalize electricity markets. We find that the average price cost margin has declined from 0.29 in 1994 to 0.22 in 1999. Moreover, the magnitude of the decline is linked to firm size: the largest firms have experienced a larger percentage fall. The variable cost parameter has increased from 0.36 in 1994 to 0.56 in 1999. The main reason of the change is the switch of the relationship between real labor productivity and the share of variable capital. Our results therefore document a more competitive electricity market and a more flexible and more efficient use of capital.
    Keywords: market power; fixed capital; liberalization; electricity market
    JEL: D24 D40 L94
    Date: 2004–12–10
  10. By: Gary S. Becker; Kevin M. Murphy; Michael Grossman
    Abstract: This paper concentrates on both the positive and normative effects of punishments that enforce laws to make production and consumption of particular goods illegal, with illegal drugs as the main example. Optimal public expenditures on apprehension and conviction of illegal suppliers obviously depend on the extent of the difference between the social and private value of consumption of illegal goods, but they also depend crucially on the elasticity of demand for these goods. In particular, when demand is inelastic, it does not pay to enforce any prohibition unless the social value is negative and not merely less than the private value. We also compare outputs and prices when a good is legal and taxed with outputs and prices when the good is illegal. We show that a monetary tax on a legal good could cause a greater reduction in output and increase in price than would optimal enforcement, even recognizing that producers may want to go underground to try to avoid a monetary tax. This means that fighting a war on drugs by legalizing drug use and taxing consumption may be more effective than continuing to prohibit the legal use of drugs.
    JEL: D00 D11 D60 I11 I18
    Date: 2004–12

This nep-mic issue is ©2004 by Joao Carlos Correia Leitao. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.