nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒05‒14
thirteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  2. Patents and R & D: The tournament effect By Prabal Roy Chowdhury
  3. The Role of R&D Technology in Asymmetric Research Joint Ventures By Sami Dakhlia; Flavio M. Menezes; Akram Temimi
  4. Merger Failures By Albert Banal-Estañol; Jo Seldeslachts
  5. Price-setting behaviour in Belgium: what can be learned from an ad hoc survey ? By Luc Aucremanne; Martine Druant
  6. Fixed wages and bonuses in agency contracts: the case of a continuous state space By Maria Racionero; John Quiggin
  7. Games without Rules By Flavio Menezes; John Quiggin
  8. Rational Participation Revolutionizes Auction Theory By Ronald M. Harstad
  9. Stationary Temporary Equilibrium in a General Model of Optimal Accumulation and Trade By Manjira Datta
  10. Externalities, Market Power, and Resource Extraction By Manjira Datta; Leonard Mirman
  11. Intertemporal Cournot and Walras Equilibrium: An Illustration By Manjira Datta; Tito Cordella
  12. Two-Sided Search and Perfect Segregation with Fixed Search Costs By Hector Chade
  13. Risk Aversion, Moral Hazard, and the Principal's Loss By Hector Chade; Virginia Vera de Serio

  1. By: Alexander Cotte
    Abstract: During the last years a new economic theory to address business problems has been strengthening. The analysis of the several different theoretical approaches of the firm indicate that transaction complexity inside the company and the indetermination inherent to unbalance in repeated interaction between the firms cast doubt both about traditional models and their outcomes. The work specially emphasizes the fact that the companies are institutions, with a category tantamount to that of the market. In this regard, the paper looks into the new theory of the firm and the relation existing between the several different approaches. Along the theoretical dimension the newest breakthroughs in this field are analyzed and the link between game theory, information economy, contract theory, modeling and the different manner to perform empirical application is explained.
    Keywords: Theory of the Firm,
    JEL: L2
    Date: 2004–08–14
  2. By: Prabal Roy Chowdhury (Indian Statistical Institute, New Delhi)
    Abstract: We identify a new route through which patent protection may affect R&D incentives, the tournament effect. It may decrease R\&D incentives, in which case patent protection may either adversely affect the level of R&D, or may discourage licensing. In either case welfare may fall.
    Keywords: Patents, R&D incentive, Tournament effect, Licensing
    JEL: O31 O34 O38
    Date: 2005–04
  3. By: Sami Dakhlia (University of Alabama); Flavio M. Menezes (Australian National University & EPGE/FGV); Akram Temimi (University of Alabama)
    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. 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: 2005–05–12
  4. By: Albert Banal-Estañol; Jo Seldeslachts
    Abstract: This paper proposes an explanation as to why some mergers fail, based on the interaction between the pre-merger gathering of information and the postmerger integration processes. Rational managers acting in the interest of shareholders may still lead their firms into unsuccessfully integrated companies. Firms may agree to merge and may abstain from putting forth integration efforts, counting on the partners to adapt. We explain why mergers among partners with closer corporate cultures can have a lower success rate and why failures should be more frequent during economic booms, consistent with the empirical evidence. Our setup is a global game (integration process) in which players decide whether to participate (merger decision). We show that private signals need to be noisy enough in order to ensure equilibrium uniqueness. <br> <br> <i>ZUSAMMENFASSUNG - (Gescheiterte Fusionen) <br> In dieser Arbeit wird eine Erklärung vorgestellt für das Scheitern von Fusionen. Sie beruht auf einem Modell, das das Verhalten der fusionierenden Firmen vor der Fusion, wenn Erkundungen über den Partner eingeholt werden, und nach der Fusion, wenn sich die Unternehmensteile integrieren müssen, in den Mittelpunkt stellt. Manager können nach diesem Modell durch rationales Verhalten die fusionierte Firma in Verluste und schlechte Aktienwerte führen, obwohl sie eigentlich das Interesse der Aktionäre im Blick haben. Die Firmen stimmen einer Fusion zu, halten sich aber beim Voranbringen der Integrationsbemühungen zurück, da sie darauf zählen, dass sich die Partner anpassen. Wir erklären, warum Fusionen zwischen Partnern mit ähnlichen Unternehmenskulturen eine geringere Erfolgsrate haben können und warum Misserfolge häufiger während eines wirtschaftlichen Booms auftreten. Dies ist konsistent mit empirischen Ergebnissen. Unser Ausgangspunkt ist ein globales Spiel, in dem der Integrationsprozess dargestellt wird und die Spieler entscheiden, ob sie sich am Spiel beteiligen, d.h. der Fusion zustimmen. Wir zeigen, dass ein eindeutiges Gleichgewicht nur garantiert werden kann, wenn die privaten Informationen der fusionierenden Firmen, die dem Fusionspartner nicht bekannt sind, genügend unpräzise sind.</i>
    Keywords: mergers, synergies, information, uncertainty, organizational culture.
    JEL: D74 D82 L20 M14
    Date: 2005–04
  5. By: Luc Aucremanne (National Bank of Belgium, Research Department); Martine Druant (National Bank of Belgium, Research Department)
    Abstract: This paper reports the results of an ad hoc survey on price-setting behaviour conducted in February 2004 among 2,000 Belgian firms. The reported results clearly deviate from a situation of perfect competition and show that firms have some market power. Pricing-to-market is applied by a majority of industrial firms. Prices are rather sticky. The average duration between two consecutive price reviews is 10 months, whereas it amounts to 13 months between two consecutive price changes. Most firms adopt time-dependent price-reviewing under normal circumstances. However, when specific events occur, the majority will adopt a state-dependent behaviour. Evidence is found in favour of both nominal (mainly implicit and explicit contracts) and real rigidities (including flat marginal costs and counter-cyclical movements in desired mark-ups). The survey results point to a non-negligible degree of non-optimal price-setting.
    Keywords: price-setting behaviour, price rigidity, nominal rigidity, real rigidity, survey, time-dependent pricing, state-dependent pricing, pricing-to-market
    JEL: D40 E31 L11
    Date: 2005–03
  6. By: Maria Racionero (Australian National University); John Quiggin (Department of Economics, University of Queensland)
    Abstract: In this paper, we extend the state-contingent production approach to principal-agent problems to the case where the state space is an atomless continuum. The approach is modelled on the treatment of optimal tax problems. The central observation is that, under reasonable conditions, the optimal contract may involve a fixed wage with a bonus for above-normal performance. This is analogous to the phenomenon of `bunching' at the bottom in the optimal tax literature.
    Keywords: state-contingent production, moral hazard
    JEL: D21 D82
    Date: 2004–06
  7. By: Flavio Menezes (Australian National University); John Quiggin (Department of Economics, University of Queensland)
    Abstract: We introduce the notion of an outcome space, in which strategic interactions are embedded. This allows us to investigate the idea that one strategic interaction might be an expanded version of another interaction. We then characterize the Nash equilibria arising in such extensions and demonstrate a folk-type theorem stating that any individually rational element of the outcome space is a Nash equilibrium.
    Keywords: game theory
    JEL: C71
    Date: 2004–07
  8. By: Ronald M. Harstad (Department of Economics, University of Missouri-Columbia)
    Abstract: Potential bidders respond to a seller's choice of auction mechanism for a common-value or affiliated-values asset by endogenous decisions whether to incur a participation cost (and observe a private signal), or forego competing. Privately informed participants decide whether to incur a bid-preparation cost and pay an entry fee, or cease competing. Auction rules and information flows are quite general; participation decisions may be simultaneous or sequential. The resulting revenue identity for any auction mechanism implies that optimal auctions are allocatively efficient; a nontrivial reserve price is revenue-inferior for any common-value auction. Characterization of optimal auctions is otherwise contentless, in that any auction that sells without reserve is within the setting of one continuous parameter of an optimal auction; seller's surplus-extracting tools are now substitutes, not complements. Revenue comparisons from the exogenous-bidders literature are upheld in a half-space of parameters, overturned in a half-space. Many econometric studies of auction markets are seen to be flawed in their identifcation of the number of bidders.
    Keywords: optimal auctions, endegenous bidder participation, affiliated-values, common-value auctions, surplus-extracting devices
    JEL: D44 D82 C72
    Date: 2005–05–10
  9. By: Manjira Datta (W. P. Carey School of Business Department of Economics)
    Abstract: This paper analyzes the movement of market-clearing prices in an intertemporal general equilibrium framework and, in particular, proves the existence of a stationary temporary equilibrium. A model of a competitive economy is developed which consists of several 'small' countries engaged in consumption, production and trade. Following Hicks, one way to look at the evolution of an economic system is to view it as a succession of temporary competitive equilibria. The aspect of stationarity is interesting because if the sequence of temporary equilibria converges to a steady-state, it must converge to a stationary temporary equilibrium. A linear-logarithmic economy exhibits convergence.
    JEL: D51 D52 D90 F10
  10. By: Manjira Datta (W. P. Carey School of Business Department of Economics); Leonard Mirman (University of Virginia)
    Abstract: This paper analyzes the effect of market power in a model with dynamic and biological externalities. When several countries harvest fish in international waters the evolution of fish population is affected by their joint action, thus, generating a biological and a dynamic externality. If there is trade in fish, the market-clearing prices depend on the harvesting and consumption decision made in every country. Therefore, market-clearing prices generate another type of interdependence. The planners' make their policy decision by taking account of various externalities.We find a subgame perfect Cournot-Nash equilibrium and the conditions under which it may be efficient. We also study the role of different externalities in generating inefficiency.
    JEL: C73 D51 D90 F12
  11. By: Manjira Datta (W. P. Carey School of Business Department of Economics); Tito Cordella (International Monetary Fund)
    Abstract: In an intertemporal general equilibrium framework, we compare a Cournot equilibrium to the Walras equilibrium. The Cournot agents trade and invest less than the Walras agents. This generates an ineffciency which does not vanish as the number of Cournot agents tends to infinity. A larger number of strategic Cournot agents implies that the amount of trade (relative to their aggregate consumption) increases (i.e., moving towards the Walrasian amount), but their investment (relative to the stock) decreases (i.e., moving away from the Walrasian amount).
    JEL: C72 C73 D43 D90
  12. By: Hector Chade (W. P. Carey School of Business Department of Economics)
    Abstract: This paper studies a two-sided search model with the following characteristics: there is a continuum of agents with different types in each population, match utility is nontransferable, and there is a fixed search cost that agents incur in each period. When utility functions are additively separable in types and strictly increasing in the partner's type, there exists a unique matching equilibrium that exhibits perfect segregation as in Smith (1997) and Burdett and Coles (1997); i.e., agents form clusters and mate only within them. The role of additive separability and xed search costs is discussed and contrasted with the discounted case, and an intuitive explanation for the different results obtained in the literature is provided. Also, a simple sufficient condition on the match utility function and the density of types allow us to characterize the duration of the search for each type of agent.
    JEL: D81 D83
  13. By: Hector Chade (W. P. Carey School of Business Department of Economics); Virginia Vera de Serio (Facultad de Ciencias Economicas, Universidad Nacional)
    Abstract: In their seminal paper on the principal-agent model with moral hazard, Grossman and Hart (1983) show that the loss to the principal from being unable to observe the agent’s action is increasing in the agent’s degree of absolute risk aversion. Their proof is restricted to the case where the number of observable outcomes is equal to two, and uses an argument which is specific to that case. In this note, we provide a different proof that generalizes their result to any (finite) number of outcomes.
    JEL: D82

This nep-mic issue is ©2005 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.