nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒08‒02
twenty papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Equilibrium price dispersion with heterogeneous searchers By Chen, Yongmin; Zhang, Tianle
  2. Anger and Regulation By Rafael Di Tella; Juan Dubra
  3. Learning and Profitability in a Theory of the Firm By Paul Hallwood
  4. Auctioning with Aspirations: Keep Them Low (Enough) By Nicholas Shunda
  5. Incomplete Financial Markets and Jumps in Asset Prices By Hervé Crès; Tobias Markeprand; Mich Tvede
  6. Martingalized Historical approach for Option Pricing By Christophe Chorro; Dominique Guegan; Florian Ielpo
  7. Does team competition eliminate the gender gap in entry in competitive environments ? By Marie-Pierre Dargnies
  8. Cherry-Picking in Labor Market with Imperfect Information By Feng, Shuaizhang; Zheng, Bingyong
  9. Dynamic Trading with Predictable Returns and Transaction Costs By Nicolae B. Garleanu; Lasse H. Pedersen
  10. The Effect of Power Outages and Cheap Talk on Willingness to Pay to Reduce Outages By Carlsson, Fredrik; Martinsson, Peter; Akay, Alpaslan
  11. Regulations, competition and bank risk-taking in transition countries By Agoraki, Maria-Eleni; Delis, Manthos D; Pasiouras, Fotios
  12. International Welfare and Employment Linkages Arising from Minimum Wages By Hartmut Egger; Peter Egger; James R. Markusen
  13. Casino revenue and the Illinois smoking ban By Thomas A. Garrett; Michael R. Pakko
  14. Technological Progress and Population Growth: Do we have too few children? By Koichi Futagami; Takeo Hori
  15. Social Leanring with Course Inference By Antonio Guarino; Philippe Jehiel
  16. Toxic exposure in America: estimating fetal and infant health outcomes By Nikhil Agarwal; Chanont Banternghansa; Linda T.M. Bui
  17. Why do the elderly save? the role of medical expenses By Mariacristina De Nardi; Eric French; John Bailey Jones
  18. An economic view of carbon allowances market By Marius-Cristian Frunza; Dominique Guegan
  19. Infrastructure of the Market Economy By Walter Buhr
  20. How do college students form expectations? By Basit Zafar

  1. By: Chen, Yongmin; Zhang, Tianle
    Abstract: Firms simultaneously set prices in a homogeneous-product market where uninformed consumers search for price information. Some uninformed consumers are local searchers who visit only one seller, possibly due to high search costs or bounded rationality; whereas others search sequentially with an optimal reservation price. Equilibrium prices may follow a mixture distribution, with clusters of high and low prices separated by a zero-density gap. The presence of local searchers raises prices for high-value products but can lower prices for low-value products. A reduction in search cost sometimes leads to higher equilibrium prices.
    Keywords: price dispersion; search; search cost; bounded rationality
    JEL: D83 D43
    Date: 2009–07–27
  2. By: Rafael Di Tella; Juan Dubra
    Abstract: We propose a model where voters experience an emotional cost when they observe a firm that has displayed insufficient concern for other people's welfare (altruism) in the process of making high profits. Even with few truly altruistic firms, an equilibrium may emerge where all firms pretend to be kind and refrain from charging "abusive" prices to their customers. Our main result is that, as competition decreases, the set of parameters for which such pooling equilibria exist beomes smaller and firms are more likely to anger consumers. Regulation can increase welfare, for example, through fines (even if there are no changes in prices). We illustrate these gains in a monopoly setting, where regulation affects welfare through 3 channels (i) a reduction in monopoly price leads to the production of units that cost less than their value to consumers (standard channel); (ii) regulation calms down existing consumers because a reduction in the profits of an "unkind" firm increases total welfare by reducing consumer anger (anger channel); and (iii) individuals who were out of the market when they were excessively angry in the unregulated market, decide to purchase once the firm is regulated, reducing the standard distortions described in the first channel (mixed channel).
    JEL: D64 L4
    Date: 2009–07
  3. By: Paul Hallwood (University of Connecticut)
    Abstract: Teams combine tacit and separable knowledge so complicating the pricing of knowledge and mitigating against knowledge transfer between firms. The efficient markets hypothesis suggests that entities possessing insider information should be ablest at accurately pricing any given complementary set of knowledge. Thus, even though some knowledge in a given complementary set is separable from a team, the easily transferable pieces are still most likely to be used within the originating firm. The boundaries of a firm may therefore expand even when knowledge is not tacit and transaction costs in markets for ideas are otherwise low.
    Keywords: asymmetric information, evolutionary theory of the firm, governance, holdup, insider information, path dependency, rent appropriation, tacit information, transaction costs.
    JEL: D23 F23 L80
    Date: 2009–07
  4. By: Nicholas Shunda (University of Redlands)
    Abstract: In an auction with a buy price, a seller offers bidders the opportunity to forgo competing in an auction by transacting immediately at a pre-specified fixed price. If a seller has aspirations in the form of a reference price that depends upon the auction's reserve price and buy price, she does best to keep her aspirations sufficiently low by designing a no-reserve auction with a buy price low enough that some bidder types would exercise it with positive probability in equilibrium. The seller is indifferent between the auction component of her mechanism being a first- or second-price auction.
    Keywords: Auction, Aspiration, Buy price, Internet, Reference-dependence
    JEL: D44 D82 L86 C72
    Date: 2009–07
  5. By: Hervé Crès (Sciences Po, Paris); Tobias Markeprand (Department of Economics, University of Copenhagen); Mich Tvede (Department of Economics, University of Copenhagen)
    Abstract: A dynamic pure-exchange general equilibrium model with uncertainty is studied. Fundamentals are supposed to depend continuously on states of nature. It is shown that: 1. if financial markets are complete, then asset prices vary continuously with states of nature, and; 2. if financial markets are incomplete, jumps in asset prices may be unavoidable. Consequently incomplete financial markets may increase volatility in asset prices significantly.
    Keywords: general equilibrium; financial markets; jumps in asset prices
    JEL: D52 D53 G12
    Date: 2009–06
  6. By: Christophe Chorro (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Florian Ielpo (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: In a discrete time option pricing framework, we compare the empirical performance of two pricing methodologies, namely the affine stochastic discount factor and the empirical martingale correction methodologies. Using a CAC 40 options dataset, the differences are found to be small : the higher order moment correction involved in the SDF approach may not be that essential to reduce option pricing errors.
    Keywords: Generalized hyperbolic distribution, option pricing, incomplete market, CAC 40, Stochastic Discount Factor, martingale correction.
    Date: 2009–04
  7. By: Marie-Pierre Dargnies (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper studies the impact of the possibility to enter a tournament as a team on the gender gap in tournament entry. While a large and significant gender gap in entry in the individual tournament is found in line with the literature, no gender gap is found in entry in the team tournament. While women do not choose to enter the tournament significantly more often when it is team-based, men enter significantly less as part of a team than alone. Changes in overconfidence as well as in risk, ambiguity and feedback aversion, the difference in men and women's taste for the uncertainty on their teammate's ability all account for a part of the disappearance of the gender gap in tournament entry. A remaining explanation is that being part of a team changes men and women's taste for performing in a competitive environment.
    Keywords: Gender gap, tournament, teams.
    Date: 2009–02
  8. By: Feng, Shuaizhang (Princeton University); Zheng, Bingyong (Shanghai University of Finance and Economics)
    Abstract: We study a competitive labor market with imperfect information. In our basic model, the labor market consists of heterogeneous workers and ex ante identical firms who have only imperfect private information about workers' productivities. Firms compete by posting wages in order to cherry-pick more productive workers from the applicant pool. The model predicts many important empirical regularities, including non-degenerated firm size distribution, persistent wage dispersion, and employer size-wage premium. We also consider extensions of the model where firms differ in either productivity or information about worker types, both generating assortative matching with a positive but imperfect correlation of worker and firm types. The main insight of this paper is that identical workers can get different wages depending on productivities of their coworkers in a competitive market with informational frictions. Our model also sheds light on inter-industry wage differential and sorting between industry and worker characteristics.
    Keywords: imperfect information, cherry-picking, wage dispersion, size-wage premium, inter-industry wage differential
    JEL: D83 J31
    Date: 2009–07
  9. By: Nicolae B. Garleanu; Lasse H. Pedersen
    Abstract: This paper derives in closed form the optimal dynamic portfolio policy when trading is costly and security returns are predictable by signals with different mean-reversion speeds. The optimal updated portfolio is a linear combination of the existing portfolio, the optimal portfolio absent trading costs, and the optimal portfolio based on future expected returns and transaction costs. Predictors with slower mean reversion (alpha decay) get more weight since they lead to a favorable positioning both now and in the future. We implement the optimal policy for commodity futures and show that the resulting portfolio has superior returns net of trading costs relative to more naive benchmarks. Finally, we derive natural equilibrium implications, including that demand shocks with faster mean reversion command a higher return premium.
    JEL: G11 G12
    Date: 2009–07
  10. By: Carlsson, Fredrik (University of Gothenburg); Martinsson, Peter (University of Gothenburg); Akay, Alpaslan (IZA)
    Abstract: Using an open-ended contingent valuation survey, we analyze how (i) experience of a power outage due to one of the worst storms ever to hit Sweden and (ii) a cheap talk script affect respondents' WTP to avoid power outages. Experience significantly increases and a cheap talk script decreases the proportion of respondents with zero WTP. There is no significant effect in either case on stated WTP conditional on a positive WTP. The paper concludes with a discussion on the use of valuation studies shortly after the occurrence of an undesirable event.
    Keywords: contingent valuation, cheap talk, experience, power outages
    JEL: C25 D12 Q41
    Date: 2009–07
  11. By: Agoraki, Maria-Eleni; Delis, Manthos D; Pasiouras, Fotios
    Abstract: This study investigates whether regulations have an independent effect on bank risk-taking or whether their effect is channeled through the market power possessed by banks. Given a well-established set of theoretical priors, the regulations considered are capital requirements, restrictions on bank activities and official supervisory power. We use data from the Central and Eastern European banking sectors over the period 1998-2005. The empirical results suggest that banks with market power tend to take on lower credit risk and have a lower probability of default. Capital requirements reduce risk in general, but for banks with market power this effect significantly weakens. Higher activity restrictions in combination with more market power reduce both credit risk and the risk of default, while official supervisory power has only a direct impact on bank risk.
    Keywords: Banking sector reform; regulations; competition; risk-taking; CEE banks
    JEL: G38 G32 G21
    Date: 2009–06–01
  12. By: Hartmut Egger; Peter Egger; James R. Markusen
    Abstract: We formulate a two-country model with monopolistic competition and heterogeneous firms to reconsider labor market linkages in open economies. Labor-market imperfections arise by virtue of country-specific real minimum wages. Two principal experiments are considered. First, we show that trade liberalization under minimum wages differs significantly from trade liberalization under standard assumptions. In the former case, there is effectively a perfectly elastic supply of labor to production whereas in the conventional case it is assumed that aggregate labor supply is perfectly inelastic. Standard effects on marginal and average firm productivity are reversed in our model, yet there are significant gains from trade arising from employment expansion, an effect quite different from the source of gains from trade in the conventional approach. Second, we show that with firm heterogeneity an increase in one country's minimum wage triggers firm exit in both countries and thus harms workers at home and abroad. In an extension to our baseline model, we illustrate that offshoring production from the high-wage to the low-wage country within multinational firms lowers the scope for exporting the costs of a higher minimum wage to the trading partner.
    JEL: F12 F15 F16 F23 J30
    Date: 2009–07
  13. By: Thomas A. Garrett; Michael R. Pakko
    Abstract: Smoking was banned in all Illinois casinos in January 2008. We explore the effects that the smoking ban has had on Illinois casino revenue and attendance. Our empirical methodology extends and enhances that of previous literature in that we observe a natural experiment in comparing the performance of Illinois casinos with out-of-state casinos (no smoking ban) that share a market with Illinois casinos. Estimates suggest that revenue and admissions at Illinois casinos declined by more than 20 percent ($400 million) and 12 percent, respectively. Calculations reveal that casino tax revenue to state and local governments declined by approximately $200 million.
    Keywords: Gambling industry ; Tobacco industry ; Illinois
    Date: 2009
  14. By: Koichi Futagami (Graduate School of Economics, Osaka University); Takeo Hori (zDepartment of Economics, Hitotsubashi University)
    Abstract: Do we have too few children? We intend to address this question. In developed countries, the fertility rate has declined since WWII. This may cause a slowdown in the growth of GDP in developed countries. However, important factors for the well-being of individuals are per capita variables, like per capita growth and per capita consumption. In turn, the rate of technological progress determines the growth rates of per capita variables. If the population size is increasing, the labour inputs for R&D activity increase, and thus speed up technological progress. As individuals do not take account of this positive effect when deciding the number of their own children, the number of children may become smaller than the socially optimal number of children. However, an increase in the number of children reduces the assets any one child owns: that is, there is a capital dilution effect. This works in the opposite direction. We examine this issue using an endogenous growth model where the head of a dynastic family decides the number of children.
    Keywords: Technological Progress, Fertility, R&D
    JEL: J1 O30
    Date: 2009–07
  15. By: Antonio Guarino (University College London); Philippe Jehiel (Paris School of Economics)
    Abstract: We study social learning by boundedly rational agents. Agents take a decision in sequence, after observing their predecessors and a private signal. They are unable to understand their predecessors’ decisions in their finest details: they only understand the relation between the aggregate distribution of actions and the state of nature. We show that, in a continuous action space, compared to the rational case, agents put more weight on early signals. Despite this behavioral bias, beliefs converge to the truth. In a discrete action space, instead, convergence to the truth does not occur even if agents receive signals of unbounded precisions.
    Date: 2009–07
  16. By: Nikhil Agarwal; Chanont Banternghansa; Linda T.M. Bui
    Abstract: We examine the effect of toxic exposure on U.S. infant and fetal mortality rates between 1989 and 2002 from toxic pollution released by facilities reporting to the Toxic Release Inventory (TRI). Unlike previous studies, we control for toxic pollution from mobile sources and from non-TRI reporting facilities. We find significant adverse effects of TRI exposure on infant mortality. There is evidence that health effects vary across media: air and water having a larger impact than land pollution. And, within air, we find that releases of carcinogens are particularly problematic for infant health outcomes. We estimate that the average county-level decreases in TRI concentrations between 1988 and 2002 saved in excess of 13,800 infant lives.
    Keywords: Newborn infants - Mortality ; Public welfare
    Date: 2009
  17. By: Mariacristina De Nardi; Eric French; John Bailey Jones
    Abstract: This paper constructs a rich model of saving for retired single people. Our framework allows for bequest motives and heterogeneity in medical expenses and life expectancies. We estimate the model using AHEAD data and the method of simulated moments. The data show that out-of-pocket medical expenses rise quickly with both age and permanent income. For many elderly people the risk of living long and requiring expensive medical care is a more important driver of old age saving than the desire to leave bequests. Social insurance programs such as Medicaid rationalize the low asset holdings of the poorest. These government programs, however, also benefit the rich because they insure them against their worst nightmares about their very old age: either not being able to afford the medical care that they need, or being left destitute by huge medical bills.
    Date: 2009
  18. By: Marius-Cristian Frunza (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Sagacarbon - Sagacarbon SA); Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: The aim of this work is to bring an econometric approach upon the CO2 market. We identify the specificities of this market, and regarding the carbon as a commodity. We investigate the econometric particularities of CO2 prices behavior and their result of the calibration. We apprehend and explain the reasons of the non-Gaussian behavior of this market focusing mainly upon jump diffusion and generalized hyperbolic distributions. We test these results for the risk modeling of a structured product specific to the carbon market, the swap between two carbon instruments : The European Union Allowances and the Certiified Emission Reductions. We estimate the counterparty risk for this kind of transaction and evaluate the impact of different models upon the risk measure and the allocated capital.
    Keywords: Carbon, Normal Inverse Gaussian, CER, EUA, swap.
    Date: 2009–05
  19. By: Walter Buhr
    Abstract: Infrastructure is the economic growth framework of the market economy. The missing comprehensive approach to infrastructure corresponds to the practiced neglect of the long-term policy objective of economic growth in the economic order of the German social market economy since its creation after World War II. Starting from Jochimsen's distinction of material, institutional and personal infrastructure, infrastructure policy as an indirect approach to economic growth policy is suggested. The main reason for this approach is our lack of knowledge about the process and results of future economic growth. With respect to the three categories of infrastructure selected aspects are discussed. Concerning material infrastructure now a definition is presented that can be integrated into a general definition of infrastructure. Regarding institutional infrastructure, after the presentation of relevant terms (rule, order, institution, organization) the analysis of important implications of institutional economics and its integration into constitutional economics follows. As to personal infrastructure, a quantitative component (population) and a qualitative component (human capital) are consistently distinguished and their determinants systematically elaborated. The determinants of human capital are education and learning from experience, research and development as the production of new knowledge or technological progress (inventions, innovations and diffusion of innovations). All of these considerations can be brought together in a general definition of the infrastructure of a market economy so far missing. Basically, this definition refers to a number of specifically characterized individual economic agents interacting under secure living conditions according to certain rules in the presence and the future. The analysis of infrastructure in a growing economy essentially leads to the result that personal infrastructure, especially human capital, is most important for structuring future economic growth. In the growth process, material and institutional infrastructure depend on personal infrastructure which in turn is influenced by material infrastructure (producing existence goods and services) and institutional infrastructure (e.g., population and education policy). Thus we discover infrastructure of the market economy to constitute a system in the sense of systems theory. Personal infrastructure of today may determine economic growth in the medium, long, and very long term, whereas institutional and material infrastructure indicate, as a rule, to have shorter reference periods. Due to its character, material infrastructure must be controlled and permanently maintained within the medium term. What is needed is a comprehensive and balanced time-oriented infrastructure policy approach, observing the natural environment, to settle the growth problems of the market economy. This approach would result in a revision of the present economic order of the social market economy.
    Keywords: infrastructure, market economy, economic growth, existence goods, economic order, institution, population, human capital, infrastructure policy
    JEL: D78 J11 J24 O10 P11
    Date: 2009
  20. By: Basit Zafar
    Abstract: Because students rely on their subjective expectations when choosing a college major, understanding this process of expectations formation is crucial for education policy recommendations. This paper focuses on how college students form expectations about various major-specific outcomes. I collect a unique panel data set of Northwestern University undergraduates that contains their subjective expectations about major-specific outcomes. Although students tend to be overconfident about their future academic performance, I find that they revise their expectations about various major-specific outcomes in systematic ways. For example, students who receive extremely positive information about their ability revise upward their prediction for short-term grade-point average (GPA). Similarly, those who receive very negative information revise downward their beliefs about GPA. Furthermore, students seem to update their probabilistic beliefs in a manner consistent with Bayesian analysis: Prior beliefs about outcomesto be realized in college tend to be fairly precise, while new information influences prior beliefs about outcomes in the workplace. Moreover, students who are more uncertain about major-specific outcomes in the initial survey make greater absolute revisions in their beliefs in the follow-up survey. Finally, I present evidence that learning plays a role in the decision to switch majors. Negative revisions to beliefs about graduating in four years, enjoying coursework, and earning an expected salary are associated with dropping a major.
    Keywords: Education ; Forecasting ; Human behavior ; Prediction (Psychology)
    Date: 2009

This nep-mic issue is ©2009 by Vaishnavi Srivathsan. 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.
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