nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒03‒13
23 papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Competing or Colluding in a Stochastic Framework By Adriana Breccia; Hector Salgado-Banda
  2. The Canonical Type Space of Interdependent Preferences By Faruk Gul; Wolfgang Pesendorfer
  3. Performance Measurement, Expectancy and Agency Theory: An Experimental Study By Randolph Sloof; Mirjam van Praag
  4. Pairwise-Stability and Nash Equilibria in Network Formation By Antoni Calvó-Armengol; Rahmi Ilkiliç
  5. Nonlinear Pricing and the Utility Possibility Set By Andersson, Tommy
  6. Nonlinear Pricing and the Selection of Welfare Weights By Andersson, Tommy
  7. Imputing consumption in the PSID using food demand estimates from the CEX By Richard Blundell; ; Luigi Pistaferri; Ian Preston
  8. Consumption inequality and partial insurance By Richard Blundell; ; Luigi Pistaferri; Ian Preston
  9. Vertical integration and technology: theory and evidence By ; Daron Acemoglu; Philippe Aghion; Rachel Griffith; Fabrizio Zillibotti
  10. Exploring the returns to scale in food preparation (baking penny buns at home) By ; Thomas Crossley; ; Yuqian Lu
  11. Adjustment costs and the identification of Cobb Douglas production functions By Steve Bond; ; Måns Söderbom
  12. Household Nash equilibrium with voluntarily contributed public goods By Valérie Lechene; Ian Preston
  13. Labor Supply, Home Production and Welfare Comparisons By Donni, Olivier
  14. The Excess Demand for Subsidized Child Care in Germany By Wrohlich, Katharina
  15. Estimating Life-Cycle Parameters from Consumption Behavior at Retirement By John Laitner; Dan Silverman
  16. Dictators and Their Viziers: Agency Problems in Dictatorships By Georgy Egorov; Konstantin Sonin
  17. The role of R&D technology in asymmetric research joint ventures By Sami Dakhlia; Flavio M. Menezes; Akram Temimi
  18. A note on duplication of R&D and R&D subsidies By Sami Dakhlia; Flavio M. Menezes; Akram Temimi
  19. No-arbitrage condition and existence of equilibrium with dividends By Cuong Le Van; Nguyen Ba Minh
  20. The determination of the equilibrium exchange rate in a simple general equilibrium model By Cuong Le Van; Cécile Couharde; Thai Bao Luong
  21. Competitive Bargaining Equilibria By Julio Davila; Jan Eeckhout
  22. Elasticity of Substitution between Capital and Labor and its applications to growth and development By Samuel de Abreu Pessoa; Silvia Matos Pessoa; Rafael Rob
  23. About the Right Weight of the Social Welfare Function when Needs Differ. By Alain Trannoy

  1. By: Adriana Breccia; Hector Salgado-Banda
    Abstract: This paper addresses the issue of anticompetitive and collusive practices in a continuous-time real option framework. We extend the symmetrical duopoly under uncertainty model by Dixit and Pindyck (1994), by granting a patent to the first innovator that files an application. The patent-investment race model is used to focus on long-term collusive agreements signed under a cooperative bargaining structure. The contributions are as follows. First, we show that, in a stochastic framework, competition always leads to different forms of inefficiency. Second, it is proved that, when entrepreneurs can sign long-term contracts via cooperative bargaining, collusion is always beneficial ex-ante since inefficiency disappears. Third, we show that whilst collusion always delays innovation, it does not necessarily delay competition. Depending on a number of economic, as well as firm-specific factors, collusion can actually accelerate competition.
    Keywords: Bargaining, Collusion, Competition, Geometric Brownian Motion,Nash Demand Game, Stackelberg Game
    JEL: C7 D8 K4 L13
    Date: 2005–01
  2. By: Faruk Gul; Wolfgang Pesendorfer
    Date: 2005–03–04
  3. By: Randolph Sloof (Faculty of Economics and Econometrics, Universiteit van Amsterdam); Mirjam van Praag (Faculty of Economics and Econometrics, Universiteit van Amsterdam)
    Abstract: Theoretical analyses of (optimal) performance measures are typically performed within the realm of the linear agency model. An important implication of this model is that, for a given compensation scheme, the agent's optimal effort choice is unrelated to the amount of noise in the performance measure. In contrast, expectancy theory as developed by psychologists predicts that effort levels are increasing in the signal-to-noise ratio. We conduct a real effort laboratory experiment to assess the relevance of this prediction in a setting where all key assumptions of the linear agency model are met. Moreover, our experimental design allows us to control expectancy exactly as in Vroom's (1964) original expectancy model. In this setting, we find that effort levels are invariant to changes in the distribution of the noise term, i.e. to expectancy. Our results thus confirm standard agency theory and reject this particular aspect of expectancy theory.
    Keywords: Expectancy theory; agency theory; performance measurement; experiments
    JEL: J33 C91 D81
  4. By: Antoni Calvó-Armengol (Universitat Autònoma de Barcelona, Université de Toulouse Sciences Sociales and CEPR); Rahmi Ilkiliç (Universitat Autònoma de Barcelona)
    Abstract: Suppose that individual payoffs depend on the network connecting them. Consider the following simultaneous move game of network formation: players announce independently the links they wish to form, and links are formed only under mutual consent. We provide necessary and sufficient conditions on the network link marginal payoffs such that the set of pairwise stable, pairwise-Nash and proper equilibrium networks coincide, where pairwise stable networks are robust to one-link deviations, while pairwise-Nash networks are robust to one-link creation but multi-link severance. Under these conditions, proper equilibria in pure strategies are fully characterized by one-link deviation checks.
    Keywords: Network formation, Pairwise-stability, Proper equilibrium
    JEL: C62 C72 D85 L14
    Date: 2005–03
  5. By: Andersson, Tommy (Department of Economics, Lund University)
    Abstract: We consider nonlinear pricing policies that are designed by a social welfare maximizer who operates under a non-negative profit requirement. In our two-type economy, we characterize the set of all feasible nonlinear pricing policies and the frontier of the utility possibility set. Our results provide a link between distortion in consumption and individual, as well as, social welfare.
    Keywords: Nonlinear Pricing; Budget-Balance; Welfare
    JEL: D42 D82
    Date: 2005–03–04
  6. By: Andersson, Tommy (Department of Economics, Lund University)
    Abstract: In this paper, we characterize Pareto efficient and budget-balanced nonlinear outlay schedules. The outlay schedules are identified by maximizing a welfare function that is represented by a weighted summation of net utilities over a set of differing consumer types. Our main finding is that if the n>=3 consumer types in the economy are assigned non-negative welfare weights and if a nonlinear outlay schedule where net utility is strictly positive for all consumer types exists, then some of the Pareto efficient and budget-balanced nonlinear outlay schedules cannot be identified by maximizing a weighted summation of net utilities.
    Keywords: Nonlinear Pricing; Budget-Balance; Welfare weights
    JEL: D42 D82
    Date: 2005–03–04
  7. By: Richard Blundell (Institute for Fiscal Studies and University College London); ; Luigi Pistaferri; Ian Preston (Institute for Fiscal Studies and University College London)
    Abstract: This paper assesses the accuracy of decomposing income risk into permanent and transitory components using income and consumption data. We develop a specific approximation to the optimal consumption growth rule and use Monte Carlo evidence to show that this approximation can provide a robust method for decomposing income risk. The availability of asset data enables the use of a more accurate approximation allowing for partial sef-insurance against permanent shocks. We show that the use of data on median asset holdings corrects much of the error in the simple approximation which assumes no self-insurance against permanent shocks.
    JEL: C30 D41 D91
    Date: 2004–10
  8. By: Richard Blundell (Institute for Fiscal Studies and University College London); ; Luigi Pistaferri; Ian Preston (Institute for Fiscal Studies and University College London)
    Abstract: This paper describes the transmission of income inequality into consumption inequality and in so doing investigates the degree of insurance to income shocks. It combines panel data on income from the PSID with consumption data from repeated CEX cross-sections and distinguishes between permanent and transitory income shocks. We find some partial insurance of permanent income shocks with more insurance possibilities for the college educated and those nearing retirement. We find little evidence against full insurance for transitory income shocks except among low income households. Tax and welfare benefits are found to play an important role in insuring permanent shocks. Adding durable expenditures to the consumption measure suggests that durable replacement is an important insurance mechanism, especially for transitory income shocks.
    Date: 2004–11
  9. By: ; Daron Acemoglu; Philippe Aghion (Institute for Fiscal Studies and Harvard University); Rachel Griffith (Institute for Fiscal Studies); Fabrizio Zillibotti (Institute for Fiscal Studies)
    Abstract: This paper investigates the determinants of vertical integration using data from the UK manufacturing sector. We find that the relationship between a downstream (producer) industry and an upstream (supplier) industry us more likely to be vertically integrated when the producing industry is more technology intensive and the supplying industry is less technology intensive. Moreover, both of these effects are stronger when the supplying industry accounts for a large fraction of the producer\\\'s costs. These results are generally robust and hold with alternative measures of technology intensity, with alternative estimation straegies, and with or without contraolling for a number of firm and industry-level characteristics. They are consistent with the incomplete contract theories of the firm that emphasize both the potential costs and benefits of vertical integration in terms of investment incentives.
    Keywords: holdup, incomplete contracts, internal organisation fo the firm, investment, R&D, technology, vertical integration
    JEL: L22 L23 L24 L60
    Date: 2004–12
  10. By: ; Thomas Crossley; ; Yuqian Lu
    Abstract: We show that as household size increases, households substitute away from prepared foods and towards ingredients. They also devote more time to food preparation. These observations (1) are consistent with a simple model with home production, returns to scale in the time input to food preparation, and varieties of food that differ in the required time input; (2) support the idea that returns to scale in home production are an important source of returns to scale in consumption; and (3), mean that across household sizes, household market expenditures on food are not proportional to food consumption quantities. The latter may provide a partial explanation for a puzzle raised by Deaton and Paxson.
    Keywords: Household returns to scale, home production, food preparation
    JEL: D11 D12 D13
    Date: 2005–01
  11. By: Steve Bond (Institute for Fiscal Studies and Nuffield College, Oxford); ; Måns Söderbom
    Abstract: Cobb Douglas production function parameters are not identified from cross-section variation when inputs are perfectly flexible and chosen optimally, and input prices are common to all firms. We consider the role of adjustment costs for inputs in identifying these parameters in this context. The presence of adjustment costs for all inputs allows production function parameters to be identified, even in the absence of variation in input prices. This source of identification appears to be quite fragile when adjustment costs are deterministic, but more useful in the case of stochastic adjustment costs. We illustrate these issues using simulated production data.
    Keywords: Production functions, adjustment costs, identification
    JEL: D20 D24 C23
    Date: 2005–02
  12. By: Valérie Lechene (Institute for Fiscal Studies and Wadham College, Oxford); Ian Preston (Institute for Fiscal Studies and University College London)
    Abstract: We study noncooperative models with two agents and several voluntarily contributed public goods. We focus on interior equilibria in which neither agent is bound by non negativity constraints, establishing the conditions for existence and uniqueness of the equilibrium. While adding-up and homogeneity hold, negativity and symmetry properties are generally violated. We derive the counterpart to the Slutsky matrix, and show that it can be decomposed into the sum of a symmetric and negative semidefinite matrix and another the rank of which never exceeds the number of public goods plus one. Under separability of the public goods the deviation from symmetry is at most rank two.
    Keywords: Nash equilibrium, Intra-household allocation, Slutsky
    JEL: D11 C72
    Date: 2005–03
  13. By: Donni, Olivier (University of Cergy-Pontoise, THEMA and IZA Bonn)
    Abstract: We consider the collective model of labor supply with marketable domestic production. We first show that, if domestic production is mistakenly ignored, the “collective” indirect utilities that are retrieved from observed behavior will be unbiased if and only if the profit function is additive. Otherwise, in the non-additive case, the direction and the size of the bias will depend on the complementarity/substitutability of spouses’ time inputs in the production process. We then show that, even if domestic labor supplies are not observed, valid welfare comparisons are possible. This identification result generalizes that in Chiappori (1992).
    Keywords: household, collective model, labor supply, home production, welfare analysis, identification
    JEL: D13 J22
    Date: 2005–03
  14. By: Wrohlich, Katharina (DIW Berlin and IZA Bonn)
    Abstract: The extension of subsidized child care is currently on top of the political agenda in Germany. In this paper the excess demand for subsidized child care slots is estimated using a partial observability model in the style of Abowd and Farber (1982). The results show that more than 50 percent of children aged 0-3 are queuing for child care slots, whereas only 10 percent of children aged 4-6 years are queuing. For children in the younger age group who have working mothers, about 255,000 child care slots are missing. This number comes close to the government’s plan to expand subsidized child care by 230,000 slots.
    Keywords: child care, excess demand, partial observability model
    JEL: J13 C35 D12
    Date: 2005–03
  15. By: John Laitner; Dan Silverman
    Abstract: Using pseudo-panel data, we estimate the structural parameters of a life--cycle consumption model with discrete labor supply choice. A focus of our analysis is the abrupt drop in consumption upon retirement for a typical household. The literature sometimes refers to the drop, which in the U.S. Consumer Expenditure Survey we estimate to be approximately 16%, as the "retirement--consumption puzzle." Although a downward step in consumption at retirement contradicts predictions from life--cycle models with additively separable consumption and leisure, or with continuous work-hour options, a consumption jump is consistent with a setup having nonseparable preferences over consumption and leisure and requiring discrete work choices. This paper specifies a life--cycle model with these latter two elements, and it uses the empirical magnitude of the drop in consumption at retirement to provide an advantageous method of identifying structural parameters --- most importantly, the intertemporal elasticity of substitution.
    JEL: E21 D11 D12
    Date: 2005–03
  16. By: Georgy Egorov; Konstantin Sonin
    Abstract: The possibility of treason by a close associate has been a nightmare of most dictators throughout history. Better informed viziers are also better able to discriminate among potential plotters, and this makes them more risky subordinates for the dictator. To avoid this, dictators, especially which are weak and vulnerable, sacri.ce the competence of their agents, hiring mediocre but loyal subordinates. One reason why democracies generally witness more talented people in the government is the dictator.s inability to commit to the optimal (less than the capital) punishment for those who unsuccessfully plotted to remove him from power. Furthermore, any use of incentive schemes by a dictator is limited by the fact that rewards are conditional on dictator.s own willingness to keep his promises, while punishments are conditional on dictator.s own survival. We model a principalagent game between a dictator and his (probably, few) viziers both in static and dynamic perspectives. The dynamic model allows us to focus on the succession problem the insecure dictators face.
    Keywords: dictatorship, formal political theory, principal-agent theory, institutions
    JEL: D72 P16
    Date: 2005–01–01
  17. By: Sami Dakhlia (C&BA et CERMSEM); Flavio M. Menezes (EPGE/FGV); Akram Temimi (C&BA)
    Abstract: We characterize asymmetric equilibria in two-stage process innovation games and show that they are prevalent in the different models of R&D technology considered in the literature. This leads to a reassessment of the potential benefits of research cooperative agreements. Indeed, cooperation in R&D may be accompanied by high concentration in the product market. We show that while such an increase may be profitable, it may be socially inefficient.
    Keywords: Research and development; research joint ventures; process innovation games
    JEL: D43 L1 O32
    Date: 2004–06
  18. By: Sami Dakhlia (C&BA et CERMSEM); Flavio M. Menezes (EPGE/FGV); Akram Temimi (C&BA)
    Abstract: We show that the presumed incompatibility of uncoordinated R&D and competition is not fudamental, but hinges on the nature of R&D spillovers. As a consequence, R&D subsidies may be more effective than previously thought.
    Keywords: Research and development; subsidies; process innovation games
    JEL: D43 L1 O32
    Date: 2004–06
  19. By: Cuong Le Van (CERMSEM); Nguyen Ba Minh (Hanoi University of Commerce)
    Abstract: In this paper, we first give an elementary proof of existence of equilibrium with dividends in an economy with possibly satiated consumers. We then introduce a non-arbitrage condition and show that it is equivalent to the existence of equilibrium with dividends.
    Keywords: Equilibrium with dividends; Walras equilibrium; satiation points; no-arbitrage condition
    JEL: C62 D51
    Date: 2004–06
  20. By: Cuong Le Van (CERMSEM); Cécile Couharde (CEPN); Thai Bao Luong (CEPN)
    Abstract: In this article, we develop an analytical general equilibrium model of the equilibrium exchange rate. This theoretical framework allows us to identify the relevant set of variables which determinate the equilibrium exchange rate and to explore how theses variables influence the trajectory of the equilibrium exchange rate.
    Keywords: Equilibrium exchange rate, purchasing power parity; Balassa-Samuelson effect; general equilibrium model
    JEL: D51 F41 F31
    Date: 2004–05
  21. By: Julio Davila (CERMSEM et University Pennsylvania); Jan Eeckhout (University Pennsylvania)
    Abstract: We propose a simple bargaining procedure, the equilibrium of which converges to the Walrasian allocation as the agents become increasingly patient. We thus establish that the competitive outcome obtains even if agents have market power and are not price-takers. Moreover, where in other bargaining protocols the final outcome depends on bargaining power or relative impatience, the outcome here is determinate and depends only on preferences and endowments. This procedure has therefore important implications for policy applications compared to standard bargaining rules.
    Keywords: Alternating-offers bargaining; Walrasian equilibrium; price-setting; quantity constraints
    JEL: C60 C71 D41 D51
    Date: 2004–04
  22. By: Samuel de Abreu Pessoa (Graduate School of Economics, Fundacao Getulio Vargas); Silvia Matos Pessoa (Department of Economics, University of Pennsylvania); Rafael Rob (Department of Economics, University of Pennslyvania)
    Abstract: This paper estimates the elasticity of substitution of an aggregate production function. The estimating equation is derived from the steady state of a neoclassical growth model. The data comes from the PWT in which different countries face different relative prices of the investment good and exhibit different investment-output ratios. Then, taking advantage of this variation we estimate the long-run elasticity of substitution. Using various estimation techniques, we find that the elasticity of substitution is 0.7, which is lower than the elasticity, 1, that is traditionally used in macro-development exercises. We show that this lower elasticity reinforces the power of the neoclassical model to explain income differences across countries as coming from differential distortions.
    Keywords: Demand for Investment, Dynamic Panel Data, Elasticity of Substitution
    JEL: D24 D33 E25
    Date: 2005–03–04
  23. By: Alain Trannoy (Ehess, Greqam-Idep)
    Abstract: When equivalence scales are used to compute the well-being of individuals, two possible weighting methods of the different household types have been proposed, the first one resorts to the family size and the second to the equivalence scale itself. The latter is criticized on the ground that it does not respect an anonymity axiom. We show that this criticism vanishes in the standard microeconomic setting.
    Keywords: social welfare, equivalence scale, weights, anonymity, indirect utility function
    JEL: D63 I3 D13
    Date: 2003–04

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