nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒10‒15
twenty-one papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Decomposable principal-agent problems By Noldeke,G.; Samuelson,L.
  2. Collusion-proof implementation of optimal mechanisms By Che,Y.-K.; Kim,J.
  3. Asymmetric information about rivals' types in standard auctions : an experiment By Andreoni,J.; Che,Y.-K.; Kim,J.
  4. Nash Implementation with Lottery Mechanisms By Bochet,Olivier
  5. Attractiveness and Effectiveness of Competing Tourist Areas: A Study on Italian Provinces By Cracolici, M. Francesca; Nijkamp, Peter
  6. Beyond the Cost of Price Adjustment: Investments in Pricing Capita By Mark Zbarack; Mark Bergen; Shantanu Dutta; Daniel Levy; Mark Ritson
  7. Efficiency of Internal Capital Markets and Horizontal Mergers in Oligopoly By Sue Mialon
  8. Private v. Public Antitrust Enforcement: A Strategic Analysis By R. Preston McAfee; Hugo Mialon; Sue Mialon
  9. Private Antitrust Litigation: Procompetitive or Anticompetitive? By R. Preston McAfee; Hugo Mialon; Sue Mialon
  10. Does Large Price Discrimination Imply Great Market Power? By R. Preston McAfee; Hugo Mialon; Sue Mialon
  11. Nonlinear Taxation and Punishment By Andersson, Tommy
  12. Deregulation of electricity markets—The Norwegian experience By Torstein Bye and Einar Hope
  13. Cumulative Dominance and Heuristic Performance in Binary Multi-attribute Choice By Manel Baucells; Juan A. Carrasco; Robin Hogarth
  14. Evaluating Alternative Representations of the Choice Sets in Models of Labour Supply By Ugo Colombino; Rolf Aaberge; Tom Wennemo
  15. More on Bernanke's “Bad News Principle” By Yishay D. Maoz
  16. Housing, Household Portfolio, and Intertemporal Elasticity of By Fuad Hasanov
  17. The Rate of Interest or the Rate of Return: Estimating Intertemporal Elasticity of Substitution By Douglas Dacy; Fuad Hasanov
  18. Testing for Separation in Agricultural Household Models and Unobservable Individual Effects: A Note By Jean-Lois Arcand; Béatrice d'Hombres
  19. Water Pricing Models: a survey By Henrique Monteiro
  20. Submarkets and the Evolution of Market Structure By Peter Thompson; Steven Klepper
  21. Entry Costs and Stock Market Participation Over the Life Cycle By Sule Alan

  1. By: Noldeke,G.; Samuelson,L. (University of Wisconsin-Madison, Social Systems Research Institute)
    Date: 2004
  2. By: Che,Y.-K.; Kim,J. (University of Wisconsin-Madison, Social Systems Research Institute)
    Date: 2004
  3. By: Andreoni,J.; Che,Y.-K.; Kim,J. (University of Wisconsin-Madison, Social Systems Research Institute)
    Date: 2006
  4. By: Bochet,Olivier (METEOR)
    Abstract: Consider the problem of exact Nash Implementation of social choice correspondences. Define a lottery mechanism as a mechanism in which the planner can randomize on alternatives out of equilibrium while pure alternatives are always chosen in equilibrium. When preferences over alternatives are strict, we show that Maskin monotonicity (Maskin, 1999) is both necessary and sufficient for a social choice correspondence to be Nash implementable. We discuss how to relax the assumption of strict preferences. Next, we examine social choice correspondences with private components. Finally, we apply our method to the issue of voluntary implementation (Jackson and Palfrey, 2001).
    Keywords: microeconomics ;
    Date: 2005
  5. By: Cracolici, M. Francesca (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Nijkamp, Peter
    Abstract: Tourism has become a wide-spread phenomenon in our age and a focal point of economic policy of many regions competing for the favours of tourists. Consequently, competitiveness of tourist destinations has received increasing interest in economic research with a view to the identification of the user attractiveness of a tourist area. The present paper is inspired by the conceptual competitiveness model developed by Crouch and Ritchie and presents an attempt to assess the relative attractiveness of tourist destinations on the basis of aggregate tourist strength of competing destinations. The main novelty of the present work is formed by the micro-based foundation of tourism attractiveness of competing areas (regions, cities, sites, etc.). The methodology deployed here uses individual survey questionnaires on the tourist' evaluation of the supply of tourist facilities and attributes in a given area (the 'regional tourist profile') as the basis for constructing an aggregate expression for the relative attractiveness of this area. The paper seeks then to estimate the competitive attractiveness of Southern regions in Italy and compares next findings on tourist effectiveness with results on tourist efficiency from a previous study
    Keywords: Tourism; Italy; Competition
    JEL: L83
    Date: 2005
  6. By: Mark Zbarack; Mark Bergen; Shantanu Dutta; Daniel Levy; Mark Ritson
    Abstract: The literature on costs of price adjustment has long argued that changing prices is a complex and costly process. In fact, some authors have suggested that we should think of firms' price-setting activities as "producing" prices, similar to the way firms use production processes to produce goods and services. In this paper we explore one natural extension of this view, that besides observing costs of price adjustment, we should also expect to see firm-level investments in capital expenditures into these "pricing" production processes. We coin the term "pricing capital" for these investments, and suggest that they can improve the efficiency of the "pricing production" activities by both reducing the costs of adjusting prices, and improving the effectiveness of price adjustments in future periods. Using two types of data sources, we find compelling evidence of the existence as well as the importance of pricing capital in firms. The existence of firm-level "pricing capital" has the potential of fundamentally altering the way we think about pricing and price adjustment in many areas of economics. It suggests looking toward the "pricing capital" to decipher the likely degree and causes of price rigidity and its variation across price setters, markets, and industries. Moreover, "pricing capital" introduces a new, higher-level, pricing decision made by individual firms. Decisions to invest in pricing capital compete with traditional capital investment decisions that have long been studied in economics, such as capital investments in plant, equipment, and R&D. Furthermore, since pricing capital is a choice variable, it implies that costs of price adjustment often used in models of price rigidity are endogenous. As such, pricing capital offers new insights into the micro-foundations of the costs of price adjustment. The most provocative implication of the new theory of pricing, however, is that the allocative efficiency of the price system itself may be determined endogenously by individual price setters who choose whether and how much to invest in pricing capital.
    Date: 2005–05
  7. By: Sue Mialon
    Abstract: This paper provides a theoretical ratification of efficiency of internal capital markets. The efficiency of internal capital market is examined in the context of horizontal mergers. In Cournot oligopoly, merged firms often optimally select the multidivisional structure in which competition among the merging partners remains in production while the headquarters establishes strong central control over resource allocation to the divisions. Under this structure, mergers not only combine the merging partners’ capital, but also provide the merged firm with a new opportunity to reallocate that capital in an efficient way. Horizontal mergers are profitable due to the efficiency of internal capital markets. Such horizontal mergers also enhance market competition. I discuss the conditions under which the multidivisional structure (the M-form) is optimal for the merged firm while complete fusion of all the merging partners under a single authority is also feasible.
    Date: 2005–08
  8. By: R. Preston McAfee; Hugo Mialon; Sue Mialon
    Abstract: We compare private and public enforcement of the antitrust laws in a simple strategic model of antitrust crime and lawsuit. The model highlights the tradeoff that private firms are ex ante more likely than the government to be informed about actual antitrust violations, but are also more likely to use the antitrust laws strategically, to the disadvantage of consumers. With coupled damages (according to which the plaintiff receives what the defendant pays), if the court is sufficiently accurate, adding private to public enforcement always increases social welfare, while if the court is less accurate, it increases welfare only if the government is sufficiently inefficient in litigation. Moreover, pure private enforcement is never strictly optimal. However, in general, achieving the welfare-maximizing outcome requires private enforcement with damages that are both multiplied and decoupled.
    Date: 2005–08
  9. By: R. Preston McAfee; Hugo Mialon; Sue Mialon
    Abstract: The antitrust laws are intended to permit procompetitive actions by firms and deter anticompetitive actions. We consider firms’ incentives to use the antitrust lawsuits for strategic purposes, in particular to prevent procompetitive efficiency-improvement by rival firms. Our main result is that, ceteris paribus, smaller firms in more fragmented industries are more likely to use the antitrust laws strategically than larger firms in concentrated industries.
    Date: 2005–08
  10. By: R. Preston McAfee; Hugo Mialon; Sue Mialon
    Abstract: A simple model demonstrates that there is no theoretical connection between the extent of price discrimination and the extent of market power.
    Date: 2005–08
  11. By: Andersson, Tommy (Department of Economics, Lund University)
    Abstract: The paper analyzes nonlinear tax schedules that are identified by maximizing a welfare function represented by a weighted summation of net utilities over a set of n>=3 differing individuals. We demonstrate that some of the feasible and Pareto efficient tax schedules that satisfy self-selection can only be identified by maximizing a welfare function of the above form if (at least) one of the individuals in the economy is assigned a negative weight.
    Keywords: Nonlinear taxation; Pareto efficiency; self-selection; welfare weights
    JEL: D82 H21
    Date: 2005–09–30
  12. By: Torstein Bye and Einar Hope (Statistics Norway)
    Abstract: In this paper, we describe the approach to, and experience of, the deregulation and liberalisation of the Norwegian electricity sector from 1991. The Norwegian electricity market was subsequently integrated with the Swedish, Finnish and Danish markets to become the Nordic electricity market: the first common, integrated, intercountry electric power market in the world. We discuss the background to electricity market reform, the analytical and legal foundations for reform, and the chosen market and regulatory design. We find that the market has performed well in terms of economic efficiency and market functionality, even when exposed to severe supply shocks because of water shortages for a power system that relies heavily on hydropower. However, we also identify issues and challenges that must be addressed to improve the performance of the Nordic electricity market and its regulatory system.
    Keywords: Deregulation; Market design; Electricity markets
    JEL: D21 D41 D42 Q4
    Date: 2005–09
  13. By: Manel Baucells; Juan A. Carrasco; Robin Hogarth
    Abstract: Several studies have reported high performance of simple decision heuristics multi-attribute decision making. In this paper, we focus on situations where attributes are binary and analyze the performance of Deterministic-Elimination-By-Aspects (DEBA) and similar decision heuristics. We consider non-increasing weights and two probabilistic models for the attribute values: one where attribute values are independent Bernoulli randomvariables; the other one where they are binary random variables with inter-attribute positive correlations. Using these models, we show that good performance of DEBA is explained by the presence of cumulative as opposed to simple dominance. We therefore introduce the concepts of cumulative dominance compliance and fully cumulative dominance compliance and show that DEBA satisfies those properties. We derive a lower bound with which cumulative dominance compliant heuristics will choose a best alternative and show that, even with many attributes, this is not small. We also derive an upper bound for the expected loss of fully cumulative compliance heuristics and show that this is moderate even when the number of attributes is large. Both bounds are independent of the values of the weights.
    Keywords: Multi-attribute decision making, binary attributes, DEBA, cumulative dominance, performance bounds
    JEL: D81 M10
    Date: 2005–09
  14. By: Ugo Colombino (CHILD, Department of Economics, Turin, Italy); Rolf Aaberge (Research Department, Statistics Norway, Oslo, Norway); Tom Wennemo (Research Department, Statistics Norway, Oslo, Norway)
    Abstract: During the last two decades, the discrete-choice modelling of labour supply decisions has become increasingly popular, starting with Aaberge et al. (1995) and van Soest (1995). Within the literature adopting this approach there are however two potentially important issues that are worthwhile analyzing in their implications and that up to know have not been given the attention that they might deserve. A first issue concerns the procedure by which the discrete alternative are chosen. For example Van Soest (1995) chooses (non probabilistically) a set of fixed points identical for every individual. This is by far the most widely adopted method. By contrast, Aaberge et al. (1995) adopt a sampling procedure and also assume that the choice set may differ across the households. A second issue concerns the availability of the alternatives. Most authors assume all the values of hours-of-work within some range [0, H] are equally available. At the other extreme, some authors assume only two or three alternatives (e.g. non-participation, part-time and full-time) are available for everyone. Aaberge et al. (1995) assume instead that not all the hour opportunities are equally available to everyone; they specify a probability density function of opportunities for each individual and the discrete choice set used in the estimation is built by sampling from that individual-specific density function. In this paper we explore by simulation the implications of - the procedure used to build the choice set (fixed alternatives vs sampled alternatives) - accounting vs not accounting for a different availability of alternatives. The way the choice set is represented seems to have little impact on the fitting of observed values, but a more significant and important impact on the prediction of policy effects.
    Keywords: Microeconometric Models, Discrete Choice, Choice Set, Labour Supply, Tax Reforms.
    JEL: C1 C2 C3 C4 C5 C8
    Date: 2005–10–13
  15. By: Yishay D. Maoz (University of Haifa)
    Abstract: The role that Bernanke’s Bad News Principle plays in the modern theory of investment under uncertainty is analyzed. The analysis shows that the actual investment dilemma is that by delaying investment firms trade off a higher present value of earnings for a lower present value of the investment cost, in contrast to previous interpretations of this dilemma. The economic interpretation of the Smooth Pasting Condition is clarified too: it represents the trade-off mentioned above. I also show that investment triggers may stay intact despite changes in the profit process, if the changes are restricted to the range of sufficiently high profits.
    Keywords: Investment, Uncertainty, Option Value, Competition
    JEL: D41 D81
    Date: 2005–10–09
  16. By: Fuad Hasanov (Oakland University)
    Abstract: This paper investigates whether the inclusion of housing in a household portfolio is important to the household’s intertemporal decision making. Households hold portfolios of assets rather than a Treasury bill and/or a stock index and make their spending decisions based on expected total returns of an array of assets. The total returns account for capital gains, taxes, and inflation. In addition to financial assets such as stocks and bonds, we incorporate a real asset, residential housing, into a household portfolio. In particular, we estimate the intertemporal elasticity of substitution (IES), that is, how a change in asset or portfolio return affects household’s consumption growth, using a sample of households from the Consumer Expenditure Survey. Since changes in housing return can affect consumption of households over time, we investigate whether the inclusion of housing in the household portfolio provides different IES estimates. Moreover, utilizing a household-level data set, we estimate IES parameters for different groups of assetholders. Our results indicate that the housing return positively affects consumption growth, and housing is an important asset to account for in the household portfolio.
    Keywords: intertemporal elasticity of substitution, intertemporal choice, consumption, housing, household portfolio
    JEL: D91 E21 C13
    Date: 2005–10–11
  17. By: Douglas Dacy (University of Texas at Austin); Fuad Hasanov (Oakland University)
    Abstract: This paper investigates whether the rate of interest such as the Treasury bill rate or the rate of return such as the return on a household portfolio is more relevant to the household’s intertemporal decision making. In a current era, households are diversifiers (to use Tobin’s 1958 term) and hold portfolios of assets rather than a simple loan. A portfolio of assets earns a composite return accounting for capital gains, taxes, and inflation, and rational agents make spending decisions based on expected total returns on a portfolio rather than on the return on a single asset. The total composite measure we use includes financial assets such as stocks and bonds and a real asset, residential housing. In particular, we estimate the intertemporal elasticity of substitution, namely, how a change in the asset or portfolio return affects household’s consumption growth. The estimates obtained using real after-tax composite return are about 0.15-0.3 and are more robust to linear and nonlinear estimations, different consumption measures, and various time periods than those obtained by using individual asset returns such as the Treasury bill rate.
    Keywords: intertemporal elasticity of substitution, intertemporal choice, consumption, housing, portfolio return
    JEL: D91 E21 C13
    Date: 2005–10–11
  18. By: Jean-Lois Arcand; Béatrice d'Hombres
    Abstract: When market structure is complete, factor demands by households will be independent of their characteristics, and households will take their production decisions as if they were profit-maximizing firms. This observation constitutes the basis for one of the most popular empirical tests for complete markets, commonly known as the 'separation' hypothesis. In this paper, we show that all existing tests for separation using panel data are potentially biased towards rejecting the null-hypothesis of complete markets, because of the failure to adequately control for unobservable individual effects. Since the variable on which the test for separation is based cannot be identified in most panel datasets following the usual covariance transformations, and is likely to be correlated with the individual effect, neither the within nor the variance-components procedures are able to solve the problem. We show that the Hausman-Taylor (1981) estimator, in which the impact of covariates that are invariant along one dimension of a panel can be identified through the use of covariance transformations of other included variables that are orthogonal to the individual effects as instruments, provides a simple solution. We furnish an empirical illustration in which separation —and thus the null of complete markets— is strongly rejected using the standard approach, but is not rejected once correlated unobservable individual effects are controlled for using the Hausman-Taylor instrument set.
    Keywords: Panel data, individual effects, household models, testing for incomplete markets, development microeconomics, Tunisia
    JEL: D1 D2 D3 D4
    Date: 2005–10–11
  19. By: Henrique Monteiro (Department of Economics & Dinâmia – ISCTE)
    Abstract: This paper surveys water pricing models, highlighting some important results. Efficiency rquires marginal cost pricing. Intra-annual price changes or customer differentiation to reflect differences in marginal costs can enhance efficiency. A marginal cost pricing mechanism may signal the value that consumers attribute to further capacity expansions as the water supply system approaches its capacity limit and marginal cost rises. However, pure marginal cost pricing may not be feasible while respecting a revenue requirement because marginal costs may be higher or lower than average costs. The most common ways of combining efficiency and revenue requirements are through the use of two-part tariffs, adjusting the fixed charge to meet the revenue requirement, or through second-best pricing like Ramsey pricing. It is not evident whether the best scheme is a two-part tariff or some other pricing mechanism. The role of block rate pricing, increasingly more frequent in actual pricing practices, is yet to be fully investigated.
    Keywords: water pricing models; capacity constraints; scarcity; revenue requirements; second-best pricing; block rate pricing
    JEL: L95 Q25
    Date: 2005–10–13
  20. By: Peter Thompson (Department of Economics, Florida International University); Steven Klepper (Department of Social and Decision Sciences, Carnegie Mellon University)
    Abstract: We construct a model of industry evolution in which the central force for change is the creation and destruction of submarkets. Firms expand when they are able to exploit new opportunities that arrive in the form of submarkets; they contract and ultimately exit when the submarkets in which they operate are destroyed. This simple framework can transparently explain a wide range of well-known regularities about industry dynamics, most notably the subtle relationships between size, age, growth, and survival. Data on the laser industry, where submarkets are prominent, further illustrate the ability of the model to explain distinctive patterns in the evolution of industries and firms.
    Keywords: Spinoffs, firm growth, survival, firm age, market structure, industry evolution, technological change
    JEL: L1 O33
    Date: 2003–12
  21. By: Sule Alan (Department of Economics, York University)
    Abstract: Several explanations for the observed limited stock market participation have been offered in the literature. One of the most promising one is the presence of market frictions mostly in the form of fixed entry and/or transaction costs. Empirical studies strongly point to a significant structural (state) dependence in the the stock market entry decision, which is consistent with costs of these types. However, the magnitude of these costs are not yet known. This paper focuses on fixed stock market entry costs. I set up a structural estimation procedure which involves solving and simulating a life cycle intertemporal portfolio choice model augmented with a fixed stock market entry cost. Important features of household portfolio data (from the PSID) are matched to their simulated counterparts. Utilizing a Simulated Minimum Distance estimator, I estimate the coefficient of relative risk aversion, the discount factor and the stock market entry cost. Given the equity premium and the calibrated income process, I estimate a one-time entry cost of approximately 2 percent of (annual) permanent income. My estimated model matches the zero median holding as well as the hump-shaped age-participation profile observed in the data.
    Keywords: Entry costs, Stock market, Structural estimation
    JEL: G11 D91
    Date: 2005–01

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