nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒11‒05
fifteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Household Time Allocation and Modes of Behavior: A Theory of Sorts By Daniela Del Boca; Christopher J. Flinn
  2. Unexploited Connections Between Intra- and Inter-temporal Allocation By Thomas F. Crossley; Hamish W. Low
  3. Competition and contracts in the Nordic Residential Electricity Markets By Stephen Littlechild
  4. Monopoly Power and Optimal Taxation of Capital Income By Sheikh Tareq Selim
  5. Barriers to network-specific innovation By Antoine Martin; Michael J. Orlando
  7. On Participation Games with Complete Information By Tasos Kalandrakis
  8. Monopoly Power and Optimal Taxation of Labor Income By Sheikh Tareq Selim
  9. Be Nice, unless it Pays to Fight By Jan Boone
  10. Long-term Framework for Electricity Distribution Access Charges By Tooraj Jamasb; Karsten Neuhoff; David Newbery; Michael Pollitt
  11. Oligopsonistic Cats and Dogs By Gerda Dewit; Dermot Leahy
  12. Networks of Relations By Steffen Lippert; Giancarlo Spagnolo
  13. Labor Pooling in R&D Intensive Industries By Heiko Gerlach; Thomas Rønde; Konrad O. Stahl
  14. U.S. v. Microsoft: Did Consumers Win? By David S. Evans; Albert L. Nichols; Richard Schmalensee
  15. Monetary policy under uncertainty in micro-founded macroeconometric models By Andrew T. Levin; Alexei Onatski; John C. Williams; Noah Williams

  1. By: Daniela Del Boca (University of Turin and IZA Bonn); Christopher J. Flinn (New York University and IZA Bonn)
    Abstract: We develop a simple model of household time allocation decisions under strong functional form assumptions regarding preferences and household production technology. We argue that the specification is general when allowing for unrestrictive forms of population heterogeneity in the parameters characterizing these functions. Moreover, we argue that the model is not capable of distinguishing among elements of a class of behavioral rules, including Nash bargaining and Nash equilibrium, without restricting population heterogeneity in arbitrary ways. However, preferences over mates for any given set of male and female characteristics will be a function of the behavioral rules used in married households. Using data from the PSID on market hours and time spent in household production, we estimate the marginal distribution of male and female characteristics and our two alternative behavioral assumptions, and perform some formal and informal comparisons of the Nash bargaining and Nash equilibrium rules’ ability to predict the marital sorts observed in the data. Given the simplicity of the model of household behavior and marriage market equilibrium, it is perhaps not surprising that neither model provides good predictions. Overall, the evidence is slightly more supportive of the hypothesis that households behave noncooperatively.
    Keywords: bilateral matching, household time allocation, Nash bargaining
    JEL: D13 J12 J22
    Date: 2005–10
  2. By: Thomas F. Crossley; Hamish W. Low
    Abstract: This paper shows that a power utility specification of preferences over total expenditure (ie. CRRA preferences) implies that intratemporal demands are in the PIGL/PIGLOG class. This class generates (at most) rank two demand systems and we can test the validity of power utility on cross-section data. Further, if we maintain the assumption of power utility, and within period preferences are not homothetic, then the intertemporal preference parameter is identified by the curvature of Engel curves. Under the power utility assumption, neither Euler equation estimation nor structural consumption function estimation is necessary to identify the power parameter. In our empirical work, we use demand data to estimate the power utility parameter and to test the assumption of the power utility representation. We find estimates of the power parameter larger than obtained from Euler equation estimation, but we reject the power specification of within period utility.
    Keywords: elasticity of intertemporal substitution, Euler equation estimation, demand systems
    JEL: D91 E21 D12
    Date: 2005–09
  3. By: Stephen Littlechild
    Abstract: The main Nordic residential electricity markets (Norway, Sweden and Finland) effectively opened to retail competition around 1998. They have not been subject to regulatory controls on prices or other contract terms. Between 11 and 29 per cent of residential customers have switched suppliers and between a fifth and a half of all residential customers have chosen alternative contractual terms of supply. These alternatives include fixed price contracts ranging from 3 months to five years duration, as well as spot-price related terms, instead of the standard variable tariffs. The use of these alternatives is increasing over time, and there is considerable product innovation. This paper surveys these developments and illustrates with case studies of significant suppliers in each Nordic market. The market is thus ascertaining and bringing about the outcomes that customers prefer. Without retail competition, it is not clear how regulation will replicate this aspect of the market process.
    Keywords: retail competition, electricity, regulation, Nordic countries
    JEL: L94 L L51
    Date: 2005–11
  4. By: Sheikh Tareq Selim (Cardiff University)
    Abstract: The recent general trend of cutting top marginal income tax rates in industrialized economies and the policy concern of enhancing competition in the US and the EU product markets subtly motivate the question if low income tax rates are optimal in an economy with imperfectly competitive markets. This paper examines long run optimal income tax policy in a model with private market monopoly distortion. It finds that the welfare-maximizing income tax policy is distortion-neutralizing, and the optimal policy may involve capital income tax or subsidy depending on the relative strength of two opposing effects --- the monopoly distortion effect, and the welfare effect of investment. If monopoly power is low (high), the welfare effect of investment (the monopoly distortion effect) dominates which supports a capital income tax (subsidy).
    Keywords: Monopoly Power, Optimal Taxation, Ramsey Policy
    JEL: D42 H21 H30
    Date: 2005–11–01
  5. By: Antoine Martin; Michael J. Orlando
    Abstract: We examine incentives for network-specific investment and the implications for network governance. We model an environment in which participants that make payments over a network can invest in a technology that reduces the marginal cost of using the network. A network effect results in multiple equilibria; either all agents invest and network usage is high or no agents invest and network usage is low. When commitment is feasible, the high-use equilibrium can be implemented; however, when commitment is infeasible, fixed costs associated with use of the network-specific technology result in a holdup problem that implements the low-investment equilibrium. Thus, governance structures necessary to achieve commitment will be preferred to those necessary merely to achieve coordination. For example, mutual ownership by network users may emerge where users face risk of ex post renegotiation. Such a governance structure will also be sufficient to avoid the network effect.
    Keywords: Investments ; Equilibrium (Economics) ; Payment systems
    Date: 2005
  6. By: Andrés Carvajal; Alvaro Riascos
    Abstract: We show that even under incomplete markets, the equilibrium manifold identifies aggregate demand and individual demands everywhere in their domains. Moreover, under partial observation of the equilibrium manifold, we we construct maximal domains of identification. For this, we assume conditions of smoothness, interiority and regularity, but avoid implausible observational requirements. It is crucial that there be date-zero consumption. As a by-product, we develop some duality theory under incomplete markets.
    Keywords: Identification
    JEL: D50
    Date: 2005–08–16
  7. By: Tasos Kalandrakis (W. Allen Wallis Institute of Political Economy, 107 Harkness Hall, University of Rochester, Rochester, NY 14627-0158)
    Abstract: We analyze a class of two-candidate voter participation games under complete information that encompasses as special cases certain public good provision games. We characterize the Nash equilibria of these games as stationary points of a non-linear programming problem, the objective function of which is a Morse function (one that does not admit degenerate critical points) for almost all costs of participation. We use this fact to establish that, outside a closed set of measure zero of participation costs, all equilibria of these games are regular (an alternative to the result of De Sinopoli and Iannantuoni, 2005). One consequence of regularity is that the equilibria of these games are robust to the introduction of (mild) incomplete information. Finally, we establish the existence of monotone Nash equilibria, such that players with higher participation cost abstain with (weakly) higher probability.
    Keywords: Turnout, Public Goods, Regular Equilibrium, Monotone Equilibrium.
    JEL: C72 D72
    Date: 2005–10
  8. By: Sheikh Tareq Selim (Cardiff University)
    Abstract: This paper studies the Ramsey problem of optimal labor income taxation in a simple model economy which deviates from a first best representative agent economy in three important aspects, namely, flat rate second best tax, monopoly power in intermediate product market, and monopolistic wage setting. There are three key findings: (1) In order to correct for monopoly distortion the Ramsey tax prescription is to set the labor income tax rate lower than its competitive market analogue; (2) Government’s optimal tax policy is independent of its fiscal treatment of distributed pure profits; and (3) For higher levels of monopoly distortions Ramsey policy is more desirable than the first best policy. The key analytical results are verified by a calibration which fits the model to the stylized facts of the US economy.
    Keywords: Optimal taxation, Monopoly power, Ramsey policy
    JEL: H21 H30
    Date: 2005–11–01
  9. By: Jan Boone
    Abstract: This paper considers industries where a firm or group of firms acts as price leader. It shows that entry in such industries can lead to higher prices through a crowding effect. Further, efficiency gains can lead to higher prices by making it too costly to fight. Mergers that bring the merged firms' efficiency close to that of the price leader(s) lead to higher prices if the merged firm does not belong to the group of price leaders. This is a formalization of joint dominance or coordinated effects. Finally, the model is extended to endogenize the identity of the price leader. This is done by allowing firms to make price announcements.
    Keywords: price leadership, mergers, joint dominance, coordinated effects, endogenous price leadership
    JEL: D43 L11 L41
    Date: 2005–03
  10. By: Tooraj Jamasb; Karsten Neuhoff; David Newbery; Michael Pollitt
    Abstract: In order to achieve overall economic efficiency, incentive regulation of electricity distribution utilities must address two important and inter-related issues. First, the utilities’ allowed revenues need to be set at correct levels. Second, the access charging mechanism by which the utilities recover the allowed revenues must give the correct economic signals to generation and load connected to the network. This paper is concerned with the latter aspect of regulation. The paper discusses the main economic principles that should form the basis on which a distribution access charging model is developed. The charging model should have a number of attributes: be calibrated to each existing network; contain an asset register; be able to determine assets needed to meet new demand; find least-cost system expansion; compute network losses and handle ancillary services; estimate incremental operating and maintenance costs; be available to users; and be simple enough for external users to understand.
    Keywords: Electricity, network regulation, access charges, distributed generation
    JEL: L43 L51 L94
    Date: 2005–11
  11. By: Gerda Dewit (National University of Ireland Maynooth); Dermot Leahy (University College Dublin)
    Abstract: We study the strategic investment behaviour of oligopsonistic rivals in the labour market. Under wage competition, firms play "puppy dog" with productivityaugmenting investment and "fat cat" with supply-enhancing investment. Under employment competition, investing strategically always involves playing "top dog".
    Keywords: Oligopsony,Strategic behaviour,Productivity-augmenting investment
    JEL: L13 J42
    Date: 2005–09
  12. By: Steffen Lippert (Université Toulouse 1 and Universität Mannheim); Giancarlo Spagnolo (Department of Economics, Stockholm School of Economics, C.E.P.R. ans Consip Spa.)
    Abstract: We model networks of relational (or implicit) contracts, exploring how sanctioning power and equilibrium conditions change under different network configurations and information transmission technologies. In our model, relations are the links, and the value of the network lies in its ability to enforce cooperative agreements that could not be sustained if agents had no access to other network members' sanctioning power and information. We identify conditions for network stability and in-network information transmission as well as conditions under which stable subnetworks inhibit more valuable larger networks.
    Keywords: Networks, Relational Contracts, Indirect Multimarket Contact, Social Capital.
    JEL: L13 L29 D23 D43 O17
    Date: 2004–11
  13. By: Heiko Gerlach (University of Auckland,; Thomas Rønde (University of Copenhagen, CEBR, and CEPR,; Konrad O. Stahl (University of Mannheim, CEPR, CESifo, and ZEW,
    Abstract: We investigate firms’ incentives to locate in the same region to gain access to a large pool of skilled labor. Firms engage in risky R&D activities and thus create stochastic product and implied labor demand. Agglomeration in a cluster is more likely in situations where the innovation step is large and the probability for a firm to be the only innovator is high. When firms cluster, they tend to invest more and take more risk in R&D compared to spatially dispersed firms. Agglomeration is welfare maximizing, because expected labor productivity is higher and firms choose a more effcient, technically diversified portfolio of R&D projects at the industry level.
    JEL: L13 O32 R12
    Date: 2005–09
  14. By: David S. Evans; Albert L. Nichols; Richard Schmalensee
    Abstract: U.S. v. Microsoft and the related state suit filed in 1998 appear finally to have concluded. In a unanimous en banc decision issued in late June 2004, the D.C. Circuit Court of Appeals rejected challenges to the remedies approved by the District Court in November 2002. The wave of follow-on private antitrust suits filed against Microsoft also appears to be subsiding. In this paper we review the remedies imposed in the United States, in terms of both their relationship to the violations found and their impact on consumer welfare. We conclude that the remedies addressed the violations ultimately found by the Court of Appeals (which were a subset of those found by the original district court and an even smaller subset of the violations alleged, both in court and in public discourse) and went beyond them in important ways. Thus, for those who believe that the courts were right in finding that some of Microsoft's actions harmed competition, the constraints placed on its behavior and the active, ongoing oversight by the Court and the plaintiffs provide useful protection against a recurrence of such harm. For those who believe that Microsoft should not have been found liable because of insufficient evidence of harm to consumers, the remedies may be unnecessary, but they avoided the serious potential damage to consumer welfare that was likely to accompany the main alternative proposals. The remedies actually imposed appear to have struck a reasonable balance between protecting consumers against the types of actions found illegal and harming consumers by unnecessarily restricting Microsoft's ability to compete.
    JEL: K21 L1 L4 L6
    Date: 2005–10
  15. By: Andrew T. Levin; Alexei Onatski; John C. Williams; Noah Williams
    Abstract: We use a micro-founded macroeconometric modeling framework to investigate the design of monetary policy when the central bank faces uncertainty about the true structure of the economy. We apply Bayesian methods to estimate the parameters of the baseline specification using postwar U.S. data and then determine the policy under commitment that maximizes household welfare. We find that the performance of the optimal policy is closely matched by a simple operational rule that focuses solely on stabilizing nominal wage inflation. Furthermore, this simple wage stabilization rule is remarkably robust to uncertainty about the model parameters and to various assumptions regarding the nature and incidence of the innovations. However, the characteristics of optimal policy are very sensitive to the specification of the wage contracting mechanism, thereby highlighting the importance of additional research regarding the structure of labor markets and wage determination.
    Keywords: Monetary policy ; Macroeconomics ; Microeconomics
    Date: 2005

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