nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒04‒13
eight papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. What does it take for an R&D tax incentive policy to be effective? By Mohnen, Pierre; Lokshin, Boris
  2. Habit Formation, Demand and Growth through Product Innovation By Garcia-Torres, M. Abraham
  3. Incomplete Regulation, Asymmetric Information and Collusion-Proofness By Marco Meireles; Paula Sarmento
  4. General Network Effects and Welfare By Pollock, R.
  5. Testing the Effectiveness of Regulation and Competition on Cable Television Rates By Mary T. Kelly; John S. Ying
  6. An Experiment on Learning in a Multiple Games Environment By Grimm, Veronika; Mengel, Friederike
  7. The Diffusion of Informal Knowledge and Innovation Performance: A sectoral approach By Garcia-Torres, M. Abraham; Hollanders, Hugo
  8. Advertising and Business Cycle Fluctuations By Benedetto Molinari; Francesco Turino

  1. By: Mohnen, Pierre (UNU-MERIT); Lokshin, Boris (UNU-MERIT)
    Abstract: While in 1996, 12 OECD countries offered R&D tax incentives, in 2008 this number increased to 21. Most countries have opted for level-based instead of incremental R&D tax incentives. This paper takes a critical look at how the effectiveness of R&D tax incentives has been assessed in recent evaluations. Whether based on structural models estimating a price elasticity of R&D or on treatment evaluation methods, most studies estimate the cost effectiveness ratio or additionality. If the cost effectiveness ratio is greater than 1, or firms to more R&D than before, the policy is considered to be effective. A more proper net welfare evaluation of this policy should also include administration, compliance and transfer costs, the marginal burden of taxation, as well R&D externalities and the indirect effects on innovation and productivity. The net welfare gain is shown to be sensitive to a certain number of parameters that are not always estimated with great precision. In particular, the transfer cost or deadweight loss associated with level-based tax incentives is shown to depend on the size of the firm, or more precisely its ex-ante R&D level. We report on the success of a past policy changes in the Netherlands and simulate the effect of various parameter changes in the existing Dutch R&D tax incentive scheme. We show that introducing marginal changes in the schemes’s parameters has little impact of increased R&D spending. The policy is more effective for small firms than for large firms. We end with a discussion of the pros and cons of level-based versus incremental R&D tax incentives.
    Keywords: R&D tax credits, R&D, tax credits, policy evaluation, cost-benefit analysis
    JEL: O32 O38 H25 H50
    Date: 2009
  2. By: Garcia-Torres, M. Abraham (UNU-MERIT)
    Abstract: Growth theory has mainly focused on process innovation, either through an increase in quality of the product or a reduction on the cost. The main contributions in growth theory that includes product innovation has been done in the Dixit and Stiglitz framework. This framework works with oversimplifying restrictions on the demand side: Preferences of consumers are assumed to be constant and equal for all goods. This paper introduces vertical and horizontal differentiation in final goods. Goods are different in their habit formation parameters. Innovation is not the normal reduction in costs but an increase in the capacity to satisfy consumers’ needs. Growth in this model is defined as the growth of the final value added.
    Keywords: growth, product innovation, technical change, consumption
    JEL: O47 E21 D11 O31 M37
    Date: 2009
  3. By: Marco Meireles (Faculdade de Economia, Universidade do Porto); Paula Sarmento (CEF.UP, Faculdade de Economia, Universidade do Porto)
    Abstract: In an incomplete regulation framework the Regulator cannot replicate all the possible outcomes by himself since he has no influence on some firms present in the market. When facing asymmetric information regarding the regulated firm’s costs, it may be better for the Regulator to allow the other competitors to extract a truthful report from her through side-payments in a collusion and therefore the “Collusion-Proofness Principle” may not hold. In fact, by introducing an exogenous number of unregulated competitors, Social Welfare differences seem to favour a Collusion-Allowing equilibrium. However, such result will strongly depend on the relative importance given by the Regulator to the Consumer Surplus.
    Keywords: Incomplete Regulation, Asymmetric Information, Collusion, Market Competition
    JEL: L41 L51 D82
    Date: 2009–04
  4. By: Pollock, R.
    Abstract: (In)direct network effects arise frequently in economic models but, for reasons of analytical tractability, are often assumed to be linear. Here, we examine the general non-linear case with two platforms. We establish the conditions characterising equilibria and show that welfare changes can be related in a simple, intuitive way to the degree of diminishing returns of the network effects function.
    Keywords: Network Effects; Indirect Network Effects; Platforms; Welfare
    JEL: L13
    Date: 2009–04–07
  5. By: Mary T. Kelly (Department of Economics and Statistics, Villanova School of Business, Villanova University); John S. Ying (Department of Economics,University of Delaware)
    Abstract: Regulation of the cable television industry was marked by remarkable periods of deregulation, re-regulation, and re-deregulation during the 1980s and 1990s. Using FCC firm-level survey data spanning 1993 to 2001, we model and econometrically estimate the effect of regulation and competition on cable rates. Our calculations indicate that while regulation lowered rates for small system operators, it raised them for medium and large systems. Meanwhile, competition consistently decreased rates from 5.6 to 8.8 percent, with even larger declines during periods of regulation. Our results suggest that competition is more effective than regulation in containing cable prices.
    Keywords: cable rates, regulation, competition
    JEL: L51 L96
    Date: 2009–04
  6. By: Grimm, Veronika; Mengel, Friederike (METEOR)
    Abstract: We study experimentally how players learn to make decisions if they face many different (normal-form) games. Games are generated randomly from a uniform distribution in each of 100 rounds. We find that agents do extrapolate between games but learn to play strategically equivalent games in the same way. If either there are few games or if explicit information about the opponent''s behavior is provided (or both) convergence to the unique Nash equilibrium generally occurs. Otherwise this is not the case and play converges to a distribution of actions which is Non-Nash. Action choices, though, that cannot be explained by theoretical models of either belief-bundling or action bundling are never observed. Estimating different learning models we find that Nash choices are best explained by finer categorizations than Non-Nash choices. Furthermore participants scoring better in the "Cognitive Reflection Test" choose Nash actions more often than other participants.
    Keywords: microeconomics ;
    Date: 2009
  7. By: Garcia-Torres, M. Abraham (UNU-MERIT); Hollanders, Hugo (UNU-MERIT)
    Abstract: This paper tries to quantify the effect of diffusion of informal knowledge on the innovative performance of European firms using data derived from the 3rd Community Innovation Survey. When firms are asked whether or not they have introduced new products or processes, they were also asked to which degree such innovations were developed in-house. These degrees were captured by the CIS variables InPdtW and InPcsW. These variables ranged from 1 (Mainly done by the firm) to 3 (Mainly done by other enterprises). The focus of this paper is to investigate the impact of diffusion of informal knowledge. We combine the previous variables with another variable which reflects firms that were not doing any formal collaboration with other institutions. If an innovative firm has no formal collaboration arrangements and the innovation has not been done mainly by the firm, then diffusion of informal knowledge is considered to be the main driver of the innovation. The idea is that informal channels are accessible to all firms. This paper tries to quantify the impact of such flows of knowledge on firms’ innovation performance. To do this, a two step procedure is followed: -In a first step, a latent variable for diffusion of informal knowledge is defined and estimated based on firms’ characteristics. -In a second step, the latent diffusion variable is introduced as a regressor in a probit/tobit model.
    Keywords: Knowledge flows, innovation, dynamic equations, sectoral innovation, CIS
    JEL: C34 O32 O31
    Date: 2009
  8. By: Benedetto Molinari (Universidad Pablo de Olavide); Francesco Turino (Universidad de Alicante)
    Abstract: This paper provides new empirical evidence for quarterly U.S. aggregate advertisingexpenditures, showing that advertising has a well defined pattern over the BusinessCycle. To understand this pattern we develop a general equilibrium model wheretargeted advertising increases the marginal utility of the advertised good. Advertisingintensity is endogenously determined by profit maximizing firms. We embed thisassumption into an otherwise standard model of the business cycle withmonopolistic competition. We find that advertising affects the aggregate dynamics ina relevant way, and it exacerbates the welfare costs of fluctuations for the consumer.Finally, we provide estimates of our setup using Bayesian techniques.
    Keywords: Advertising, DSGE model, Business Cycle fluctuations, Bayesian
    JEL: D11 E32 J22 M37
    Date: 2009–03

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