nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒08‒16
twenty papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Strategic Vertical Separation By Sloev, Igor
  2. Market Shares, Consumer Ignorance and the Reciprocal Termination Charges By Yu-Shan Lo; ;
  3. Innovation through Discrimination!? A Formal Analysis of the Net Neutrality Debate By Krämer, Jan; Wiewiorra, Lukas
  4. When Do Large Buyers Pay Less? Experimental Evidence By Ruffle, Bradley J.
  5. Employment and Wage Adjustments at Firms under Distress in Japan: An analysis based upon a survey By ARIGA Kenn; KAMBAYASHI Ryo
  6. Beyond Testing: Empirical Models of Insurance Markets By Liran Einav; Amy Finkelstein; Jonathan Levin
  7. Input Constraints and the Efficiency of Entry: Lessons from Cardiac Surgery By David M. Cutler; Robert S. Huckman; Jonathan T. Kolstad
  8. Nonparametric Identification of Multinomial Choice Demand Models with Heterogeneous Consumers By Steven T. Berry; Philip A. Haile
  9. A selection of maximal elements under non-transitive indifferences By Alcantud, José Carlos R.; Bosi, Gianni; Zuanon, Magalì E.
  10. Liquidity and Asset Prices: A Unified Framework By Dimitri Vayanos; Jiang Wang
  11. Multiple Reserve Requirements, Exchange Rates, Sudden Stops and Equilibrium Dynamics in a Small Open Economy By Hernandez-Verme, Paula; Wang, Wen-Yao
  12. Neural networks as a learning paradigm for general normal form games By Spiliopoulos, Leonidas
  13. Lobbying of Firms by Voters By Matthias Dahm; Robert Dur; Amihai Glazer
  14. Are Patent Laws Harmful to Developing Countries? Evidence from China By Belton M. Fleisher; Mi Zhou
  15. The Simple Economics of Salience and Taxation By Raj Chetty
  16. Learning, Knowledge Diffusion and the Gains from Globalization By Kunal Dasgupta
  17. Who Pays a Price on Carbon? By Corbett A. Grainger; Charles D. Kolstad
  18. Optimal Policies and the Informal Sector By Katherine Cuff; Nicolas Marceau; Steeve Mongrain; Joanne Roberts
  19. Consumption and Labor Supply with Partial Insurance: An Analytical Framework By Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
  20. Judicature By Wolfgang Heinz

  1. By: Sloev, Igor
    Abstract: The paper explores incentives for strategic vertical separation of firms in a framework of a simple duopoly model. Each firm chooses either to be a retailer of its own good (vertical integration) or to sell its good through an independent exclusive retailer (vertical separation). In the latter case a two-part tariff is applied. Retailers compete in quantities, goods are perfect substitutes and firms' cost functions are quadratic. I show that the equilibrium outcome crucially depends on the degree of (dis)economies of scale and asymmetry of costs. Two asymmetric equilibria arise, in which one firm separates while another integrates, under conditions that both firms' cost functions exhibit a sufficiently high diseconomies of scale, or extreme asymmetry of costs. Under a moderate asymmetry of costs a unique equilibrium exists in which the firm with the lower degree of diseconomies of scale separates, while its rival integrates. With the degree of diseconomies of scale low for both firms in the unique equilibrium both firms separate.
    Keywords: Vertical oligopoly; Vertical Separation; Vertical Integration; Delegation
    JEL: L42 L22
    Date: 2009–08–10
  2. By: Yu-Shan Lo; ;
    Abstract: The aim of this paper is to study different regulatory effects on termination charges and social welfare. We employ a framework with a fixed network and two mobile networks competing in a market to study the following regulatory regimes: collusive and social welfaremaximising reciprocity, uniform termination charge, asymmetric regulation, and direct calling price. We incorporate the idea of partial consumer ignorance when calling to a mobile user and allow the network operator to discriminate between on-net and off-net calls by setting differential calling prices. Compared to the uniform termination charge and asymmetric regulation, it is shown in this paper that the regulator can improve social welfare, without too much intervention, by imposing reciprocity on termination charges. We also find that with stronger consumer ignorance the regulator is more capable of improving social welfare. Further we show that, depending upon the extent of consumer ignorance, direct regulation of calling prices may be a welfare-improving alternative over regulation of termination charges.
    Keywords: Telecommunications; Consumer ignorance; Termination Charges, Regulation
    JEL: L13 L50 L96
  3. By: Krämer, Jan; Wiewiorra, Lukas
    Abstract: We model the main arguments of the net neutrality debate in a two-sided market framework with network congestion sensitive content providers and Internet consumers on each side, respectively. The platform is controlled by a monopolistic Internet service provider, who may choose to sell content providers prioritized access to its customers. We explicitly consider the adverse effects of traffic prioritization to the remaining best-effort class and find that network discrimination has overall positive effects on welfare, because congestion is better allocated to those content providers with congestion inelastic advertisement revenues. In the long-run, network discrimination leads to infrastructure investments in transmission capacity and encourages innovation on the content provider side. In the short-run, however, discrimination has no effect on innovation because the ISP expropriates the content providers' increased surplus through the price for priority access. This is the downside of network discrimination: Albeit total welfare is increased, content providers will--at least in the short-run--be worse off than under network neutrality.
    Keywords: Telecommunication; Network Neutrality; Two-Sided Market; Traffic Prioritization; Innovation; Broadband Investment
    JEL: L5 L96 D4
    Date: 2009–08–05
  4. By: Ruffle, Bradley J.
    Abstract: The rise in mega-retailers has contributed to a growing literature on buyer power and large-buyer discounts. According to Rotemberg and Saloner (1986) and Snyder (1998), large buyers' ability to obtain price discounts depends on their relative (rather than absolute) size and the degree of competition between suppliers. I test experimentally comparative statics implications of this theory concerning the number of sellers and the sizes of the buyers in the market. The results track the comparative statics predictions to a surprising extent. Subtle changes in the distribution of buyer sizes or the number of suppliers can create or negate large-buyer discounts. The results highlight the previously unexplored role of the demand structure in determining buyer-size discounts. Furthermore, the experiments establish the presence of small-buyer premia, not anticipated by the theory.
    Keywords: experimental economics; large-buyer discounts; buyer power; seller competition
    JEL: C92 D43
    Date: 2009–08–06
    Abstract: We use the result from a survey of Japanese firms in manufacturing and services to investigate the choice of wage and employment adjustments when they needed to reduce substantially the total labor cost. Our regression analysis indicates that the large size reduction favors the layoffs of core employees, whereas base wage cuts are more likely if firms do not feel immediate pressures from the external labor market or strong competition in the product market. We also find some evidence that the concerns over adverse selection or demoralizing effects of wage cuts are real. Firms do try to avoid using base wage cuts if they consider these factors more important.
    Date: 2009–08
  6. By: Liran Einav; Amy Finkelstein; Jonathan Levin
    Abstract: We describe recent advances in the empirical analysis of insurance markets. This new research proposes ways to estimate individual demand for insurance and the relationship between prices and insurer costs in the presence of adverse and advantageous selection. We discuss how these models permit the measurement of welfare distortions arising from asymmetric information and the welfare consequences of potential government policy responses. We also discuss some challenges in modeling imperfect competition between insurers, and outline a series of open research questions.
    JEL: C51 D82
    Date: 2009–08
  7. By: David M. Cutler; Robert S. Huckman; Jonathan T. Kolstad
    Abstract: Prior studies suggest that, with elastically supplied inputs, free entry may lead to an inefficiently high number of firms in equilibrium. Under input scarcity, however, the welfare loss from free entry is reduced. Further, free entry may increase use of high-quality inputs, as oligopolistic firms underuse these inputs when entry is constrained. We assess these predictions by examining how the 1996 repeal of certificate-of-need (CON) legislation in Pennsylvania affected the market for cardiac surgery in the state. We show that entry led to a redistribution of surgeries to higher-quality surgeons and that this entry was approximately welfare neutral.
    JEL: I10 I11 I18 L1 L15 L23 L5 L8
    Date: 2009–08
  8. By: Steven T. Berry (Cowles Foundation, Yale University); Philip A. Haile (Cowles Foundation, Yale University)
    Abstract: We consider identification of nonparametric random utility models of multinomial choice using "micro data," i.e., observation of the characteristics and choices of individual consumers. Our model of preferences nests random coefficients discrete choice models widely used in practice with parametric functional form and distributional assumptions. However, the model is nonparametric and distribution free. It allows choice-specific unobservables, endogenous choice characteristics, unknown heteroskedasticity, and high-dimensional correlated taste shocks. Under standard "large support" and instrumental variables assumptions, we show identifiability of the random utility model. We demonstrate robustness of these results to relaxation of the large support condition and show that when it is replaced with a weaker "common choice probability" condition, the demand structure is still identified. We show that key maintained hypotheses are testable.
    Keywords: Nonparametric identification, Discrete choice demand, Differentiated products
    JEL: C35
    Date: 2009–09
  9. By: Alcantud, José Carlos R.; Bosi, Gianni; Zuanon, Magalì E.
    Abstract: In this work we are concerned with maximality issues under intransitivity of the indifference. Our approach relies on the analysis of "undominated maximals" (cf., Peris and Subiza, J Math Psychology 2002). Provided that an agent's binary relation is acyclic, this is a selection of its maximal elements that can always be done when the set of alternatives is finite. In the case of semiorders, proceeding in this way is the same as using Luce's selected maximals. We put forward a sufficient condition for the existence of undominated maximals for interval orders without any cardinality restriction. Its application to certain type of continuous semiorders is very intuitive and accommodates the well-known "sugar example" by Luce.
    Keywords: Maximal element; Selection of maximals; Acyclicity; Interval order; Semiorder
    JEL: D11
    Date: 2009–08–04
  10. By: Dimitri Vayanos; Jiang Wang
    Abstract: We examine how liquidity and asset prices are affected by the following market imperfections: asymmetric information, participation costs, transaction costs, leverage constraints, non-competitive behavior and search. Our model has three periods: agents are identical in the first, become heterogeneous and trade in the second, and consume asset payoffs in the third. We examine how imperfections in the second period affect different measures of illiquidity, as well as asset prices in the first period. Besides nesting multiple imperfections in a single model, we derive new results on the effects of each imperfection. Our results imply, in particular, that imperfections do not always raise expected returns, and can influence common measures of illiquidity in opposite directions.
    JEL: D8 G1
    Date: 2009–08
  11. By: Hernandez-Verme, Paula; Wang, Wen-Yao
    Abstract: We model a typical Asian-crisis-economy using dynamic general equilibrium tech-niques. Exchange rates obtain from nontrivial fiat-currencies demands. Sudden stops/bank-panics are possible, and key for evaluating the merits of alternative ex-change rate regimes. Strategic complementarities contribute to the severe indetermi-nacy of the continuum of equilibria. The scope for existence and indeterminacy of equilibria and dynamic properties are associated with the underlying policy regime. Binding multiple reserve requirements promote stability under floating but increase the scope for panic equilibria under both regimes. Backing the money supply acts as a stabilizer only in fixed regimes, but reduces financial fragility under both regimes.
    Keywords: Sudden stops; Bank runs; Exchange rate regimes; Multiple reserve requirements; Dynamic Stochastic General Equilibrium; Open Economy Macroeconomics; International Financial crises.
    JEL: G14 E43 F34 E31 O53 E44 G33 F33 O11 F32 E58 E42 O16 E52 E65 F41 F31 G21
    Date: 2009–03–05
  12. By: Spiliopoulos, Leonidas
    Abstract: This paper addresses how neural networks learn to play one-shot normal form games through experience in an environment of randomly generated game payoffs and randomly selected opponents. This agent based computational approach allows the modeling of learning all strategic types of normal form games, irregardless of the number of pure and mixed strategy Nash equilibria that they exhibit. This is a more realistic model of learning than the oft used models in the game theory learning literature which are usually restricted either to repeated games against the same opponent (or games with different payoffs but belonging to the same strategic class). The neural network agents were found to approximate human behavior in experimental one-shot games very well as the Spearman correlation coefficients between their behavior and that of human subjects ranged from 0.49 to 0.8857 across numerous experimental studies. Also, they exhibited the endogenous emergence of heuristics that have been found effective in describing human behavior in one-shot games. The notion of bounded rationality is explored by varying the topologies of the neural networks, which indirectly affects their ability to act as universal approximators of any function. The neural networks' behavior was assessed across various dimensions such as convergence to Nash equilibria, equilibrium selection and adherence to principles of iterated dominance.
    Keywords: Behavioral game theory; Learning; Global games; Neural networks; Agent-based computational economics; Simulations; Complex adaptive systems; Artificial intelligence
    JEL: C45 C70 C73
    Date: 2009–08–12
  13. By: Matthias Dahm (Universitat Rovira i Virgili); Robert Dur (Erasmus University Rotterdam, CESifo, IZA); Amihai Glazer (University of California, Irvine)
    Abstract: A firm may induce voters or elected politicians to support a policy it favors by suggesting that it is more likely to invest in a district whose voters or representatives support the policy. In equilibrium, no one vote may be decisive, and the policy may gain strong support though the majority of districts suffer from adoption of the program. When votes reveal information about the district, the firm's implicit promise or threat can be credible.
    Keywords: Lobbying; voting; special interests; influence
    JEL: C72 D72 D78
    Date: 2009–07–31
  14. By: Belton M. Fleisher (Department of Economics, Ohio State University); Mi Zhou (College of Economics and Trade, Hunan University)
    Abstract: Has upgrading and enforcing its patent laws slowed China’s economic growth? The answer we draw from detailed analysis of provincial aggregate data covering roughly the period 1990 through 2007 is strongly negative, but understanding the channels through which stricter protection of intellectual property rights has contributed to more rapid productivity growth is elusive. Our best estimate of the direct impact of the 1992 and 2001 patent laws on TFP growth amounts to not quite 15 percent of the average TFP growth rate over the period, but a much larger share of TFP growth is associated with enactment of the laws in a simple interpretation of our empirical investigation. We estimate that virtually none of the laws’ impact on TFP growth can be directly associated with increased quantity of FDI or R&D, although both series are strongly positively correlated with promulgation of the patent laws. We infer that amount of technology transfer through a FDI and the focus of R&D activity, decline of state ownership and increased marketization, growth of the human capital stock, and movement of the labor force from agriculture to manufacturing and service industries are all processes that were encouraged and whose effect has been magnified by stronger IPR protection. Moreover, adopting and enforcing the patent laws probably cannot be treated as an independent event with causation running in only one direction to China’s economic development..
    Keywords: Patent law, Intellectual Property Rights, TRIPS, TFP Growth
    JEL: O31 O33 O34
    Date: 2009–09
  15. By: Raj Chetty
    Abstract: This paper derives empirically implementable formulas for the incidence and efficiency costs of taxation that account for tax salience effects as well as other optimization errors. Contrary to conventional wisdom, the formulas imply that the economic incidence of a tax depends on its statutory incidence and that a tax can create deadweight loss even if it induces no change in demand. The results are derived using simple supply and demand diagrams and familiar notions of consumer and producer surplus. The approach to welfare analysis proposed here yields robust formulas because it does not require specification of a positive theory for why agents fail to optimize with respect to tax policies.
    JEL: H0 H2
    Date: 2009–08
  16. By: Kunal Dasgupta
    Abstract: We develop a dynamic, general equilibrium model to understand how multinationals affect host countries through knowledge diffusion. Workers learn from their managers and knowledge diffusion takes place through worker mobility. We identify two forces that determine wages : the labour demand effect and the learning effect. The former tends to raise wages while the latter tends to reduce it. We show that in a model without learning, an integrated steady-state equilibrium in which incumbent host country managers operate alongside multinationals, can never be a Pareto improvement for the host country. In contrast, we present a novel mechanism through which a Pareto improvement occurs in the presence of learning dynamics. We study how integration affects the life time earnings of agents and the degree of inequality in the host country, as well as, analyze the pattern of multinational activity. In the quantitative section of the paper, we calibrate our model to fit key moments from the U.S. wage distribution and quantify gains from integration. Our estimates suggest that learning produces welfare gains that range from 2% for middle-income countries to 43% for the low-income countries.
    Keywords: Multinationals, knowledge di¤usion, learning, welfare gains, worker mobility
    JEL: F23
    Date: 2009–07–30
  17. By: Corbett A. Grainger; Charles D. Kolstad
    Abstract: We use the 2003 Consumer Expenditure Survey and emissions estimates from an input-output model to estimate the incidence of a price on carbon induced by a cap-and-trade program or carbon tax in the US context. We present results on how much difference income deciles pay for a carbon tax as well as which industries see the largest increase in costs due to a carbon tax. We illustrate the main determinant of the regressivity: consumption patterns for energy-intensive goods. We find that a policy targeting CO2 from energy consumption is more regressive than a price on all emissions. Furthermore, on a per-capita basis a carbon price is much more regressive than calculations at the household level. We discuss policy options to offset the adverse distributional effects of a carbon emissions policy.
    JEL: H22 Q43 Q5 Q52 Q53 Q54 Q58
    Date: 2009–08
  18. By: Katherine Cuff; Nicolas Marceau; Steeve Mongrain; Joanne Roberts
    Abstract: This paper characterizes optimal policies in the presence of tax evasion and undocumented workers. Equilibrium can be characterized as segmented or non-segmented, depending on whether domestic workers work exclusively in the formal sector (seg- mented) or also in the informal sector (non-segmented). Surprisingly, in equilibrium, wages are always equalized between domestic and undocumented workers, even if they do not work in the same sectors of the economy. This is driven by the interaction of ¯rm level decisions with optimal government policy. We also ¯nd that enforcement may not always be decreasing in its cost, and that governments will optimally enforce segmentation if enforcement costs are not too high.
    JEL: H32 H26 K42
    Date: 2009–01–10
  19. By: Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
    Abstract: This paper studies consumption and labor supply in a model where agents have partial insurance and face risk and initial heterogeneity in wages and preferences. Equilibrium allocations and variances and covariances of wages, hours and consumption are solved for analytically. We prove that all parameters of the structural model are identified given panel data on wages and hours, and cross-sectional data on consumption. The model is estimated on US data. Second moments involving hours and consumption show that the rise in wage dispersion in the 1970s was effectively insured by households, while the rise in the 1980s was not.
    JEL: E21 J22 J31
    Date: 2009–08
  20. By: Wolfgang Heinz
    Abstract: The central issues that should be answered by the criminal statistic system pertain to the extent, structure and development of crime rates, the decisions of authorities for prosecution and sanctioning, the amount and type of imposed criminal sanctions, the enforcement of sanctions and the amount of reconviction after sanctioning. In this respect the German criminal statistic system has many deficits. Therefore it is necessary to supplement the existing statistics through periodical crime and victimisation surveys, to supplement the prison statistics and to implement statistics regarding suspected persons in the preliminary proceedings of public prosecutors, the enforcement of criminal sanctions as well as periodic reconviction statistic. But a comprehensive optimisation of the criminal statistics system requires the establishment of a statistical data base in which all data of the police crime statistics and all criminological relevant judicial decisions are recorded with pseudonymised individual data and subsequently linked with each other. This statistical data base will solve the problems of the current German crime statistics and will offer a basis for the implementation of new regular federal statistics, in particular with regard to the execution of a sentence and recidivism as well as the implementation of case-flow statistics and cohort studies.
    Keywords: case-flow statistics, cohort studies, conviction statistics, crime, sanctions, criminal, police crime statistics, prison statistics, probation service statistics, recidivism, reconviction statistic, statistics of criminal courts, statistics of the public prosecution offices, victimisation survey
    Date: 2009

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