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

  1. Make vs Buy in a Monopoly with Demand or Cost Uncertainty By L. Lambertini
  2. Endogenous Market Structures and Corporate Finance By Federico Etro
  3. Collusion in markets with imperfect price information on both sides By Christian Schultz
  4. Banking Deregulations, Financing Constraints and Firm Entry Size By William R. Kerr; Ramana Nanda
  5. International Strategic Choice of Minimum Quality Standards and Welfare By Stefan Lutz; Mario Pezzino
  6. Ready to Leave the Ivory Tower? - Academic Scientists' Appeal to Work in the Private Sector By Michael Fritsch; Stefan Krabel
  7. Inequality-Seeking Punishment By Daniel Houser; Erte Xiao
  8. On the density distribution across space: a probabilistic approach By Ilenia Epifani; Rosella Nicolini
  9. Monetary Policy Committees: meetings and outcomes. By Jan Marc Berk; Beata K. Bierut
  10. A sociological perspective on measuring social norms by means of strategy method experiments By Heiko Rauhut; Fabian Winter
  11. Optimal Prediction Pools. By John Geweke; Gianni Amisano
  12. Luck or Skill? An Examination of the Ehrlich - Simon Bet By Katherine A. Kiel; Victor Matheson; Kevin Golembiewski
  14. Does Schooling Affect Health Behavior? Evidence from the Educational Expansion in Western Germany By Jürges, Hendrik; Reinhold, Steffen; Salm, Martin
  15. Evaluating Marginal Policy Changes and the Average Effect of Treatment for Individuals at the Margin By Carneiro, Pedro; Heckman, James J.; Vytlacil, Edward
  16. De Facto and De Jure Property Rights: Land Settlement and Land Conflict on the Australian, Brazilian and U.S. Frontiers By Lee J. Alston; Edwyna Harris; Bernardo Mueller
  17. Lottery valuation using the aspiration / relative utility function By Krzysztof Kontek
  18. Corporate Tax Competition between Firms By Simon Loretz; Padraig J. Moore
  19. The Gains from Right to Rent By Dean Baker; Hye Jin Rho

  1. By: L. Lambertini
    Date: 2009–05
  2. By: Federico Etro
    Abstract: We characterize the optimal financial structure as a strategic de- vice to optimize the value of a firm competing in a market whose struc- ture is endogenous. Contrary to traditional results based on duopolies and depending on the form of competition, we show the general opti- mality of moderate debt financing whenever positive shocks increase the marginal profitability of strategies that reduce prices, indepen- dently from whether they are strategic susbtitutes or complements. We derive the general formulas for the optimal financial structure un- der Cournot and Bertrand competition with endogenous entry and cost uncertainty and extend the results in many directions.
    Keywords: Financial structure, Debt, Modigliani-Miller theorem, Endogenous entry
    JEL: G31 G32 L11
    Date: 2009–07
  3. By: Christian Schultz (Department of Economics, University of Copenhagen)
    Abstract: The paper considers tacit collusion in markets which are not fully transparent on both sides. Consumers only detect prices with some probability before deciding which fi?rm to purchase from, and each fi?rm only detects the other fi?rm's price with some probability. Increasing transparency on the producer side facilitates collusion, while increasing transparency on the consumer side makes collusion more difficult. Conditions are given under which increases in a common factor, affecting transparency positively on both sides, are pro-competitive. With two standard information technologies, this is so, when fi?rms are easier to inform than consumers.
    Keywords: transparency; tacit collusion; cartel theory; competition policy; internet
    JEL: L13 L40
    Date: 2009–07
  4. By: William R. Kerr (Harvard Business School, Entrepreneurial Management Unit); Ramana Nanda (Harvard Business School, Entrepreneurial Management Unit)
    Abstract: We examine the effect of US branch banking deregulations on the entry size of new firms using micro-data from the US Census Bureau. We find that the average entry size for startups did not change following the deregulations. However, this result masks the differences in entry size among startups that failed within three years of entry and those that survived for four years or more. Long-term entrants started at a 2% larger size relative to their size in their fourth year, while churning entrants were no larger. Our results suggest that the banking deregulations had two distinct effects on the product market. On the one hand, they allowed entrants to compete more effectively against incumbents by reducing financing constraints and facilitating their entry at larger firm sizes. On the other hand, the process of lowering financing constraints democratized entry and created a lot more churning among entrants, particularly at the low end of the size distribution. Our results highlight that this large-scale entry at the extensive margin can obscure the more subtle intensive margin effects of changes in financing constraints.
    Keywords: entrepreneurship, entry size, financial constraints, banking.
    JEL: E44 G21 L26 L43 M13
    Date: 2009–08
  5. By: Stefan Lutz; Mario Pezzino
    Abstract: We study the influence of minimum quality standards in a two-region partial-equilibrium model of vertical product differentiation and trade. Three alternative standard setting arrangements are considered: Full Harmonization, National Treatment and Mutual Recognition. The analysis integrates the choice of a particular standard setting alternative by governments into the model. We provide a set of sufficient conditions for which Mutual Recognition emerges as one regulatory alternative that always improves welfare in both regions when compared to the case without regulation. We show that Mutual Recognition, being the default procedure if governments do not reach a unanimous decision, is the only possible equilibrium of the game.
    Keywords: product differentiation, oligopoly, trade, quality standards, policy coordination
    JEL: F12 F13 L13
    Date: 2009–05
  6. By: Michael Fritsch (Friedrich Schiller University, School of Economics and Business Administration); Stefan Krabel (Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group, Jena)
    Abstract: In this study we investigate the factors that shape the attitudes of scientists toward starting their own business or working in a private sector firm. The analysis is based on data collected from scientists working in the German Max Planck Society, a research institution devoted to basic science. We find that the scientists' evaluations of the attractiveness of working in a private sector firm or of starting their own business differ considerably according to their academic discipline and the perceived commercial potential of their research. The ability to take risks, prior work experience in private firms, and personal experience with industry cooperation lead to a positive attitude towards switching to private sector employment or entrepreneurship. Strong willingness to freely distribute research findings are related to a low appeal of private sector work.
    Keywords: Knowledge transfer, science, entrepreneurship, innovation, commercialization
    JEL: O31 O33 L26 L32
    Date: 2009–08–06
  7. By: Daniel Houser (Interdsciplinary Center for Economic Science, George Mason University); Erte Xiao (Department of Social and Decision Science,Carnegie Mellon University)
    Abstract: Inequality aversion is a key motive for punishment, with many prominent studies suggesting people use punishment to reduce or eliminate inequality. Punishment in laboratory games, however, is nearly always designed to promote equality (e.g., rejections in standard ultimatum games) and the marginal cost of punishment is typically non-trivially positive. As a consequence, individual preferences over punishment outcomes remain largely uninformed. We here report data from a laboratory experiment using dictator games. We find that when people are treated unfairly they systematically prefer to use punishment to create advantageous inequality. Our results shed new light on human preferences over punishment outcomes, and have important implications for the design of mechanisms to deter misconduct.
  8. By: Ilenia Epifani; Rosella Nicolini
    Abstract: This paper aims at providing a Bayesian parametric framework to tackle the accessibility problem across space in urban theory. Adopting continuous variables in a probabilistic setting we are able to associate with the distribution density to the Kendall's tau index and replicate the general issues related to the role of proximity in a more general context. In addition, by referring to the Beta and Gamma distribution, we are able to introduce a differentiation feature in each spatial unit without incurring in any a-priori definition of territorial units. We are also providing an empirical application of our theoretical setting to study the density distribution of the population across Massachusetts.
    Keywords: Agglomerations, Bayesian inference, Distance, Gibbs sampling, Kendall's tau index, Population density.
    JEL: C40 R14
    Date: 2009–07–22
  9. By: Jan Marc Berk (De Nederlandsche Bank, Statistics & Information Division, PO Box 98, 1000AB Amsterdam, the Netherlands.); Beata K. Bierut (De Nederlandsche Bank, Economics & Research Division, PO Box 98, 1000AB Amsterdam, the Netherlands)
    Abstract: Monetary Policy Committees differ in the way the interest rate proposal is prepared and presented in the policy meeting. In this paper we show analytically how different arrangements could affect the voting behaviour of individual MPC members and therefore policy outcomes. We then apply our results to the Bank of England and the Federal Reserve. A general finding is that when MPC members are not too diverse in terms of expertise and experience, policy discussions should not be based on pre-repared policy options. Instead, interest rate proposals should arise endogenously as a majority of views expressed by the members, as is the case at the Bank of England and appears to be the case in the FOMC under Chairman Bernanke. JEL Classification: E58, D71, D78.
    Keywords: monetary policy committee, voting, Bank of England, Federal Open Market Committee.
    Date: 2009–07
  10. By: Heiko Rauhut (ETH Zurich, Swiss Federal Institute of Technology); Fabian Winter (Max Planck Institute of Economics)
    Abstract: The measurement of social norms plays a pivotal role in many social sciences. While economists predominantly conduct experiments, sociologists rather employ (factorial) surveys. Both methods, however, suffer from distinct weaknesses. Experiments, on the one hand, often fall short in the measurement of more complex elements, such as the conditionality or the level of consensus of social norms. Surveys, on the other, lack the ability to measure actual behavior. This paper argues that the so-called "strategy method" compensates for these weaknesses by combining the observational characteristic of experiments with the conditionality of factorial surveys. We can demonstrate the applicability of the strategy method for the measure- ment of conditional bargaining norms in the case of ultimatum games. To substantiate our claim, we conduct a methodological experiment in which we compare results for the strategy ultimatum game with those from a "conventional" ultimatum game. The strategy method yields higher levels of normative compliance in terms of rejecting "unfair" offers. We conclude that the strategy method rather measures normative expectations whereas the "conventional" ultimatum game the willingness to sacrifice own profits to adhere to these expectations. Our results are consistent with previous comparative research between factorial surveys and observational data.
    Keywords: Social norms, measurement, ultimatum game, strategy method, factorial surveys
    JEL: Z13 D63 C91
    Date: 2009–08–06
  11. By: John Geweke (Departments of Statistics and Economics, University of Iowa, Iowa City, IA, USA.); Gianni Amisano (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: A prediction model is any statement of a probability distribution for an outcome not yet observed. This study considers the properties of weighted linear combinations of n prediction models, or linear pools, evaluated using the conventional log predictive scoring rule. The log score is a concave function of the weights and, in general, an optimal linear combination will include several models with positive weights despite the fact that exactly one model has limiting posterior probability one. The paper derives several interesting formal results: for example, a prediction model with positive weight in a pool may have zero weight if some other models are deleted from that pool. The results are illustrated using S&P 500 returns with prediction models from the ARCH, stochastic volatility and Markov mixture families. In this example models that are clearly inferior by the usual scoring criteria have positive weights in optimal linear pools, and these pools substantially outperform their best components. JEL Classification: C11, C53.
    Keywords: forecasting, GARCH, log scoring, Markov mixture, model combination, S&P 500 returns, stochastic volatility.
    Date: 2009–03
  12. By: Katherine A. Kiel (Department of Economics, College of the Holy Cross); Victor Matheson (Department of Economics, College of the Holy Cross); Kevin Golembiewski (Department of Economics, College of the Holy Cross)
    Abstract: In 1980, Paul Ehrlich and Julian Simon placed a famous bet on whether the prices of a bundle of natural resources would rise or fall over the ensuing decade. Simon won the bet as the real price of the bundle fell significantly, and the result of this bet has been taken as proof that technological progress is likely overcome any Neo-Malthusian concerns about natural resource scarcity. Contrary to the popular perception, however, an examination of the price history of the identical bundle of goods from 1900-2007 shows that Ehrlich and not Simon would have won a majority of the bets over the past century and would have done so by a wide margin.
    Keywords: Natural resources, scarcity, Neo-Malthusian
    JEL: Q30 Q31
    Date: 2009–07
  13. By: Almenberg, Johan; Dreber, Anna
    Abstract: We designed an experiment that examines how knowledge about the price of a good, and the time at which the information is received, affects how the good is experienced. The good in question was wine, and the price was either high or low. Our results suggest that hosts offering wine to guests can safely reveal the price: much is gained if the wine is expensive, and little is lost if it is cheap. Disclosing the high price before tasting the wine produces considerably higher ratings, although only from women. Disclosing the low price, by contrast, does not result in lower ratings. Our finding indicates that price not only serves to clear markets, it also serves as a marketing tool; it influences expectations that in turn shape a consumerâs experience. In addition, our results suggest that men and women respond differently to attribute information.
    Keywords: Price-Quality Heuristic, Attribute Information, Role of Expectations, Marketing, Blind Tasting, Wine, Consumer/Household Economics, Demand and Price Analysis, C91, D03, D83, M31,
    Date: 2009–04
  14. By: Jürges, Hendrik (University of Mannheim); Reinhold, Steffen (MEA, University of Mannheim); Salm, Martin (Tilburg University)
    Abstract: During the postwar period German states pursued policies to increase the share of young Germans obtaining a university entrance diploma (Abitur) by building more academic track schools, but the timing of educational expansion differed between states. This creates exogenous variation in the availability of higher education, which allows estimating the causal effect of education on health behaviors. Using the number of academic track schools in a state as an instrumental variable for years of schooling, we investigate the causal effect of schooling on health behavior such as smoking and related outcomes such as obesity. We find large negative effects of education on smoking. These effects can mostly be attributed to reductions in starting rates rather than increases in quitting rates. We find no causal effect of education on reduced overweight and obesity.
    Keywords: education, smoking, obesity
    JEL: I12 I20
    Date: 2009–07
  15. By: Carneiro, Pedro (University College London); Heckman, James J. (University of Chicago); Vytlacil, Edward (Yale University)
    Abstract: This paper develops methods for evaluating marginal policy changes. We characterize how the effects of marginal policy changes depend on the direction of the policy change, and show that marginal policy effects are fundamentally easier to identify and to estimate than conventional treatment parameters. We develop the connection between marginal policy effects and the average effect of treatment for persons on the margin of indifference between participation in treatment and nonparticipation, and use this connection to analyze both parameters. We apply our analysis to estimate the effect of marginal changes in tuition on the return to going to college.
    Keywords: marginal treatment effect, effects of marginal policy changes, marginal policy relevant treatment effect, average marginal treatment effect
    JEL: C14
    Date: 2009–07
  16. By: Lee J. Alston; Edwyna Harris; Bernardo Mueller
    Abstract: We present a general model of the interaction between settlement and the emergence of de facto property rights on frontiers prior to governments establishing and enforcing de jure property rights. Settlers have an incentive to establish de facto property rights to avoid the dissipation associated with open access conditions. The potential rent associated with more exclusivity drives the “demand’ for commons arrangements. As the potential rental stream from land increases due to enhanced scarcity there is a greater demand for more exclusivity beyond what can be sustained with commons arrangements. In some instances claimants will petition the government for de jure property rights to their claims – formal titles. In other instances it may be cheaper to acquire titles through fraudulent means. To the extent that governments supply property rights to those with first possession, land conflict will generally be minimal, though there may be political protests. But, governments face differing political constituencies and may not allocate de jure rights to the current claimants. Moreover, governments may assign de jure rights but not be willing to enforce the rights. This may generate potential or actual conflict over land depending on the violence potentials held by the de facto and de jure land claimants. We examine land settlement and land conflict on the frontiers of Australia, the U.S. and Brazil. We are particularly interested in examining the emergence, sustainability, and collapse of commons arrangements in specific historical contexts. Our analysis indicates that the emergence of demand driven de facto property rights arrangements was relatively peaceful in Australia and the U.S. where claimants had reasons to organize collectively. The settlement process in Brazil was more prone to conflict because agriculture required fewer collective activities and as a result claimants resorted to periodic violent self-enforcement. In all three cases the movement from de facto to de jure property rights led to potential or actual conflict because of insufficient government enforcement.
    Keywords: property rights, Australia, Brazil, United States
    JEL: D72 Q15 N40 N50 K11
    Date: 2009–05
  17. By: Krzysztof Kontek (Artal Investments)
    Abstract: The paper presents a method for lottery valuation using the relative utility function. This function was presented by Kontek (2009) as “the aspiration function” and resembles the utility curve proposed by Markowitz (1952A). The paper discusses lotteries with discrete and continuous outcome distributions as well as lotteries with positive, negative and mixed outcomes providing analytical formulas for certainty equivalents in each case. The solution is similar to the Expected Utility Theory approach and does not use the probability weighting function – one of the key elements of Prospect Theory. Solutions to several classical behavioral problems, including the Allais paradox, are presented, demonstrating that the method can be used for valuing lotteries even in more complex cases of outcomes described by a combination of Beta distributions. The paper provides strong arguments against Prospect Theory as a model for describing human behavior and lays the foundations for Relative Utility Theory – a new theory of decision making under conditions of risk.
    Keywords: Lottery Valuation, Expected Utility Theory, Markowitz Hypothesis, Prospect / Cumulative Prospect Theory, Aspiration / Relative Utility Function
    Date: 2009–07–25
  18. By: Simon Loretz (Oxford University Centre for Business Taxation); Padraig J. Moore (Deutsche Bank London)
    Abstract: Firms' tax planning decisions, similar to their other operational decisions, are made in a competitive environment. Various stakeholders observe the tax payments and evaluate these against the relevant peer group, which creates interdependencies in the tax planning activities of firms. Introducing the concept of reputational loss we show the positive interdependence in a theoretical model and test it in a spatial econometric model. Empirical evidence suggests that benchmarking takes place both within countries and within industries, however for the latter it is important to include firms in large non-EU OECD countries. Further, the analysis shows that spatial interdependence is stronger for the largest firms and if they have an average effective tax rate above the statutory tax rate.
    Keywords: Corporate Taxation; Benchmarking; Tax Competition; Spatial Econometrics
    JEL: H25 M40
    Date: 2009
  19. By: Dean Baker; Hye Jin Rho
    Abstract: This paper calculates savings from renting compared with owning a house purchased at the peak housing bubble years of 2006 or 2007 in 16 major metropolitan areas. (The appendix includes calculations for 100 cities, including these 16.) The analysis calculates the savings both before- and after-tax, allowing readers to see the impact on ownership costs of the mortgage interest and property tax deductions. Many of the homeowners currently facing foreclosure would likely be able to afford the market rent on their home. If Congress were to temporarily alter the foreclosure laws to allow foreclosed homeowners to remain in their homes as renters, it is likely that many would chose to take advantage of this opportunity. This path would offer savings for former homeowners, as well as help stabilize families and communities that are blighted by foreclosures. In addition, Right to Rent offers the advantage that it could immediately benefit all homeowners facing foreclosure without any bureaucracy and would require no taxpayer dollars.
    Keywords: right to rent, foreclosures, housing
    JEL: G G2 G21 G28 R R2 R21
    Date: 2009–07

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