nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒10‒17
twenty-one papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Incentives for innovation and adoption of new technology under emissions trading By Mandell, Svante
  2. Measuring the Price of Research and Development Output By Adam Copeland; Dennis Fixler
  3. Policy Reform and Aid Effectiveness in Africa By Mina Baliamoune
  4. Testing Models of Consumer Search using Data on Web Browsing and Purchasing Behavior By Babur De los Santos; Ali Hortacsu; Matthijs R. Wildenbeest
  5. Strategic Tax Competition: An Experimental Study By Sailesh Gunessee
  6. Bundling and Competition for Slots: Sequential Pricing By JEON, Doh-Shin; MENICUCCI, Dominico
  7. Waiting for the Invisible Hand: Market Power and Endogenous Information in the Modern Market for Food By Trenton Smith; Hayley Chouinard; Philip Wandschneider
  8. Marshallian Money, Welfare, and Side-Payments By Chen-Zhong Qin; Lloyd S. Shapley; Martin Shubik
  9. Health-enhancing activities and the environment:How competition for resources make the environmental policy beneficial By Xavier Pautrel
  10. Innovation and Economic Development By Fagerberg, Jan; Srholec, Martin; Verspagen, Bart
  11. Transparency, complementarity and holdout By Roy Chowdhury, Prabal; Sengupta, Kunal
  12. How to adapt to changing markets: experience and personality in a repeated investment game By Hopfensitz, Astrid; Wranik, Tanja
  13. Education and Economic Growth in Slovenia: A Dynamic General Equilibrium Approach with Endogenous Growth By Verbic, Miroslav; Majcen, Boris; Cok, Mitja
  14. Sibling and birth-order effects on time-preferences and real-life decisions By Lampi, Elina; Nordblom, Katarina
  15. Leadership in Public Good Provision: a Timing Game Perspective By Kempf, H.; Rota Graziosi, G.
  16. Who Leaves, Where to, and Why Worrry? Employee Mobility, Employee Entrepreneurship, and Effects on Source Firm Performance By Benjamin Campbell; Martin Ganco; April Franco; Rajshree Agarwal
  17. Signals from housing and lending booms. By Irina Bunda; Michele Ca’ Zorzi
  18. Darwinism in Economics and the Evolutionary Theory of Policy-Making By Christian Schubert
  19. A Method for Implementing Counterfactual Experiments in Models with Multiple Equilibria By Victor, Aguirregabiria
  20. A general equilibrium analysis of parental leave policies By Andrés Erosa; Luisa Fuster; Diego Restuccia
  21. Semiparametric Efficiency Bound for Models of Sequential Moment Restrictions Containing Unknown Functions By Chunrong Ai; Xiaohong Chen

  1. By: Mandell, Svante (vti - Swedish National Road & Transport Research Institute)
    Abstract: A common claim in both the public and academic debate is that a tradable emission permits scheme does not provide sufficient incentives for R&D investments. The present paper addresses R&D investments and penetration rates of new technology focusing on the specific characteristics of a tradable permits market. It is showed that a complex dependency between the emissions cap, the market price for emission permits, the price for technology once it is developed and the R&D investment decision add an additional layer to the ‘traditional’ market failures associated with R&D. Even though the cap and how it is calibrated in response to the introduction of new technology is shown to be of importance both for the level of R&D investment and the technology’s penetration rate, we argue that the policy maker’s ability to use the cap to counter market failures in the R&D stage is limited. This is due to a dynamic inconsistency problem where the policy maker is unable to credibly commit to a future policy that is more stringent than motivated by efficiency concerns given the then existing technology. Such a policy may not be stringent enough to cover the necessary R&D investments.
    Keywords: Tradable permits; Innovation; R&D; Policy; Dynamic inconsistency
    JEL: L51 O31 Q55 Q58
    Date: 2009–10–09
  2. By: Adam Copeland; Dennis Fixler (Bureau of Economic Analysis)
    Abstract: This paper develops a framework for constructing an R&D output price index. Based on a model of the innovator, we show that the price of innovation is equal to the expected discounted stream of profits attributable to the adoption of the innovation. Using this relationship, we construct an R&D output price index using data on NAICS 5417, Scientific R&D services.
    JEL: E60
    Date: 2009–02
  3. By: Mina Baliamoune
    Abstract: We present a model of vertical product differentiation and exit where a domestic and a foreign firm face fixed setup costs and quality-dependent costs of production and compete in quality and price in the domestic market. Quality-dependent costs are quadratic in qualities, but independent of the quantities produced. The domestic government may impose a minimum quality standard binding for both foreign and domestic firms. In the presence of an initial cost advantage of the domestic firm, a sufficiently high minimum quality standard set by the domestic government will enable the domestic firm to induce exit of the foreign firm, i.e. to engage in predation. However, the same standard would lead to predation by the foreign firm, if the foreign firm had the initial cost advantage!
    Date: 2009–07
  4. By: Babur De los Santos (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Ali Hortacsu (University of Chicago and NBER); Matthijs R. Wildenbeest (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: Using a large data set on web browsing and purchasing behavior we test to what extent consumers are searching in accordance to various classical search models. We nd that the benchmark model of sequential search with a known distributions of prices can be rejected based on the recall patterns we observe in the data. Moreover, we show that even if consumers are initially unaware of the price distribution and have to learn the price distribution, observed search behavior for given consumers over time is more consistent with non-sequential search than sequential search with learning. Our ndings suggest non-sequential search provides a more accurate description of observed consumer search behavior. We then utilize the non-sequential search model to estimate the price elasticities and markups of online book retailers.
    Keywords: consumer search, electronic commerce, consumer behavior
    JEL: D43 D83 L13
    Date: 2009–04
  5. By: Sailesh Gunessee (Nottingham University Business School China)
    Abstract: We study the effect of a payoff advantage, symmetric payoff change and policymakers interaction on choices in tax competition games. To examine the first two effects a standard symmetric game is respectively compared to an asymmetric game where one player has a payoff advantage and to another symmetric game where both players have symmetrically higher payoffs. When payoffs are asymmetric, we find that if policymakers have a payoff disadvantage they are more likely to compete. Instead policymakers with a payoff advantage are keener to tax above equilibrium. Our results also show there is a payoff size effect where choices are brought closer to equilibrium when payoffs are symmetrically higher. These two effects are further studied when players interact repeatedly. With repeated interaction cooperation is sustained only in the symmetric games but fail to materialise in the asymmetric game. A regression analysis of our results reveals further differences between these games.
    Keywords: Tax Competition; Experimental Economics; Asymmetry.
    JEL: H21 H73 C92
    Date: 2009–10–08
  6. By: JEON, Doh-Shin; MENICUCCI, Dominico
    Abstract: In this paper we study, as in Jeon-Menicucci (2009), competition between sellers when each of them sells a portfolio of distinct products to a buyer having limited slots. This paper considers sequential pricing and complements our main paper (Jeon- Menicucci, 2009) that considers simultaneous pricing. First, Jeon-Menicucci (2009) find that under simultaneous individual pricing, equilibrium often does not exist and hence the outcome is often inefficient. By contrast, equilibrium always exists under sequential individual pricing and we characterize it in this paper. We find that each seller faces a trade-off between the number of slots he occupies and surplus extraction per product, and there is no particular reason that this leads to an efficient allocation of slots. Second, Jeon Menicucci (2009) find that when bundling is allowed, there always exists an efficient equilibrium but inefficient equilibria can also exist due to pure bundling (for physical products) or slotting contracts. Under sequential pricing, we find that all equilibria are efficient regardless of whether firms can use slotting contracts, and both for digital goods and for physical goods. Therefore, sequential pricing presents an even stronger case for laissez-faire in the matter of bundling than simultaneous pricing.
    JEL: D4 K21 L13 L41 L82
    Date: 2009–08
  7. By: Trenton Smith; Hayley Chouinard; Philip Wandschneider (School of Economic Sciences, Washington State University)
    Abstract: In many ways, the modern market for food exemplifies the economist’s conception of perfect competition, with many buyers, many sellers, and a robust and dynamic marketplace. But over the course of the last century, the U.S. has witnessed a dramatic shift away from traditional diets and toward a diet comprised primarily of processed brand-name foods with deleterious long-term health effects. This, in turn, has generated increasingly urgent calls for policy interventions aimed at improving the quality of the American diet. In this paper, we ask whether the current state of affairs represents a market failure, and—if so—what might be done about it. We review evidence that most of the nutritional deficiencies associated with today’s processed foods were unknown to nutrition science at the time these products were introduced, promoted, and adopted by American consumers. Today more is known about the nutritional implications of various processing technologies, but a number of forces—including consumer habits, costly information, and the market power associated with both existing brands and scale economies—are working in concert to maintain the status quo. We argue that while the current brand-based industrial food system (adopted and maintained historically as a means of preventing competition from small producers) has its advantages, the time may have come to consider expanding the system of quality grading employed in commodity markets into the retail market for food.
    Keywords: credence goods, history, food policy, certification
    JEL: D23 D83 I18 Q18
    Date: 2009–02
  8. By: Chen-Zhong Qin (Dept. of Economics, University of California, Santa Barbara); Lloyd S. Shapley (Dept. of Economics, University of California, Los Angeles); Martin Shubik (Cowles Foundation, Yale University)
    Abstract: A link between a no-side-payment (NSP) market game and a side-payment (SP) market game can be established by introducing a sufficient amount of an ideal utility-money of constant marginal utility to all agents. At some point when there is "enough money" in the system, if it is "well distributed" the new game will be a SP game. This game can also be related to a pure NSP game where a set of default parameters have been introduced. These parameters play a role similar to the parameters specifying the interpersonal comparisons in the side-payment game. We study this game for the properties of the delta-core and consider both the conditions for the uniqueness of competitive equilibria and a new approach to the second welfare theorem. A discussion of the relationship between market games and strategic market games is also noted.
    Keywords: delta-core, enough money, market games
    JEL: C71 C72 D51 E4
    Date: 2009–09
  9. By: Xavier Pautrel (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: In a two-period overlapping generations model, this paper demonstrates that the relationship between environmental taxation and economic activity (output level and output growth) becomes inverted-U shaped when the detrimental impact of pollution on health and the private decision of each working-age agent to improve her health are taken into account. In particular, a tighter environmental tax is more likely to promote (rather than to harm) output-level and -growth when health is very sensitive to pollution, the weight of health in preferences is high, the polluting capacity of the production technology is high and the rate of natural purification of pollutants is low. The inverted-U shaped relationship between environmental tax and economic activity is due to a positive effect arising from the competition for resources between the final output sector and the health-enhancing activities. This offsets the conventional detrimental “drag-down effect” for low values of the environmental tax. We also demonstrate that the link between environmental tax and lifetime welfare is inverted-U shaped as well. Finally, we investigate the social optimum and the determinants of the optimal environmental tax.
    Date: 2009
  10. By: Fagerberg, Jan (Centre for Technology, Innovation and Culture, University of Oslo); Srholec, Martin (Centre for Technology, Innovation and Culture, University of Oslo); Verspagen, Bart (UNU-MERIT, and Maastricht University)
    Abstract: Is innovation important for development? And if so, how? One popular perception of innovation, that one meets in media every day, is that has to do with developing brand new, advanced solutions for sophisticated, well-off customers, through exploitation of the most recent advances in knowledge. Such innovation is normally seen as carried out by highly educated labour in R&D intensive companies, being large or small, with strong ties to leading centers of excellence in the scientific world. Hence innovation in this sense is a typical “first world” activity. There is, however, another way to look at innovation that goes significantly beyond the high-tech picture just described. In this broader perspective, innovation (the attempt to try out new or improved products, processes or ways to do things) is an aspect of most if not all economic activities. It includes not only technologically new products and processes but also improvements in areas such as logistics, distribution and marketing. The term may also be used for changes that are new to the local context, even if the contribution to the global knowledge frontier is negligible. In this broader sense, it is argued, innovation may be as relevant in the developing part of the world as elsewhere. The paper surveys the existing literature on the subject with a strong emphasis on recent evidence on the macro and, in particular, micro level.
    Keywords: innovation and development, innovation capabilities, technology transfer
    JEL: O14 O19 O31 O33 O40
    Date: 2009
  11. By: Roy Chowdhury, Prabal; Sengupta, Kunal
    Abstract: This paper characterizes the conditions under which holdout (i.e. bargaining inefficiency) may, or may not be significant in a two-sided, one-buyer-many-seller model with complementarity. We address this problem in a very general setup with a bargaining protocol that is symmetric and allows for both publicly observable, as well as secret offers, and a technology that allows for variable degrees of complementarity. The central insight is that the transparency of the bargaining protocol, formalized by whether offers are publicly observable or secret, as well as the extent of complementarity, play a critical role in generating efficiency. Even with perfect complementarity, holdout seems to be largely resolved whenever the bargaining protocol is public (but not if it is secret). Further, irrespective of the bargaining protocol, holdout is resolved if the marginal contribution of the last seller is not too large.
    Keywords: Multi-person bargaining; holdout; complementarity; efficiency; secret offers; public offers; Coase theorem; transparency.
    JEL: D23 L14 D62 C78
    Date: 2009–09
  12. By: Hopfensitz, Astrid; Wranik, Tanja
    Abstract: Investment behavior is traditionally investigated with the assumption that risky investment is on average advantageous. However, this may not always be the case. In this paper, we experimentally studied investment choices made by students and financial professionals under favorable and unfavorable market conditions in a multi-round investment game. In particular, the probability of winning was set so that investment in one condition was advantageous, and in one condition was disadvantageous. To investigate who is more likely to adapt their investment behaviors to the changing market conditions, we also measured personality and self-efficacy. We expected that investment behavior in changing markets could be predicted by a combination of experience (students, professionals), personality (anxiety, optimism, impulsivity, and Openness to Experience), and self-efficacy (belief in one’s ability to make good decisions in an investment task). Results indicate that professionals do not significantly differ from students in their decisions. Personality and self-efficacy both predicted investment behavior. In particular, we found that optimism and anxiety were a liability in unfavorable markets, leading to unreasonable levels of risk. Impulsivity was a liability in both favorable and unfavorable markets, leading to high risk on unfavorable markets, and low risk in favorable markets. Openness to experience was an asset in unfavorable markets, leading to adjusted risk taking. Finally, self-efficacy was generally related to higher levels of risk.
    Keywords: risk taking; field experiment; personality; unfavorable conditions; professionals
    JEL: D53 D81 G11 C93 C91 D14
    Date: 2009–09–30
  13. By: Verbic, Miroslav; Majcen, Boris; Cok, Mitja
    Abstract: In the article we model education and human capital as major endogenous growth elements in a small open economy general equilibrium framework and consider several policy scenarios for Slovenia. Decrease of the PIT rate and increase of government spending on education turned out to be the most effective policy measures. It is important, though, to understand its transitory dynamic. Namely, as education expenditure is increased, certain amount of labour is temporarily withdrawn from its productive use and put into the educational system. Higher skill upgrade of labour requires longer and higher short-term labour force decrease, but also provides us with higher long-term growth. The households that would gain more utility from such policy scenarios are those with more skilled labour and thus higher income level.
    Keywords: education; endogenous growth; general equilibrium modelling; Slovenia
    JEL: C68 E24 D58 H52
    Date: 2009
  14. By: Lampi, Elina (Department of Economics, School of Business, Economics and Law, Göteborg University); Nordblom, Katarina (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Survey data is used to investigate whether siblings and birth order can explain differences in stated time preferences and in some real-life decisions of intertemporal nature, namely whether one obtains a university education, whether one moves in with a partner at an early age, and when one has children. We also study earnings. Middleborns are found to be the least patient in terms of stated time preferences. First-borns, on the other hand, are more patient in real-life decisions than later-borns: they are more likely to obtain a university education and have higher earnings. Interestingly, those who have siblings but did not grow up with them are the least patient in family related real-life decisions. We also find that the more siblings one grew up with, the more impatient one is in the studied real-life decisions. Moreover, stated time preferences are correlated with the studied real-life decisions: people with high discount rates make more impatient choices and have lower earnings than others.<p>
    Keywords: time preferences; education; earnings; birth order; siblings
    JEL: D99 I20 J10
    Date: 2009–10–05
  15. By: Kempf, H.; Rota Graziosi, G.
    Abstract: We address in this paper the issue of leadership when two governments provide public goods to their constituencies with cross border externalities as both public goods are valued by consumers in both countries. We study a timing game between two different countries: before providing public goods, the two policymakers non-cooperatively decide their preferred sequence of moves. We establish conditions under which a first- or second-mover advantage emerges for each country, highlighting the role of spillovers and the complementarity or substitutability of public goods. As a result we are able to prove that there is no leader when, for both countries, public goods are substitutable. When public goods are complements for both countries, each of them may emerge as the leader in the game. Hence a coordination issue arises. We use the notion of risk-dominance to select the leading government. Lastly, in the mixed case, the government for whom public goods are substitutable becomes the leader.
    Keywords: Endogenous timing ; First/second-mover advantage ; Public good ; Stackelberg equilibria ; Risk dominance.
    JEL: E31 E42 E58 E62
    Date: 2009
  16. By: Benjamin Campbell; Martin Ganco; April Franco; Rajshree Agarwal
    Abstract: We theorize that differences in human assets’ ability to generate value are linked to exit decisions and their effects on firm performance. Using linked employee-employer data from the U.S. Census Bureau on legal services, we find that employees with higher earnings are less likely to leave relative to employees with lower earnings, but if they do leave, they are more likely to move to a spin-out instead of an incumbent firm. Employee entrepreneurship has a larger adverse impact on source firm performance than moves to established firms, even controlling for observable employee quality. Findings suggest that the transfer of human capital, complementary assets, and opportunities all affect mobility decisions and their impact on source firms.
    Date: 2009–09
  17. By: Irina Bunda (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Michele Ca’ Zorzi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The contribution of this paper is to revisit the Early Warning System (EWS) literature by analysing selected episodes of financial market crisis, i.e. those preceded by a spell of credit and real estate expansions. The aim is to disentangle instances when this constitutes a natural phenomenon associated with a process of financial development and innovation from those where it constitutes a worrisome signal. We identify economic variables that have leading indicator properties, thus helping to distinguish between “benign” episodes from those likely ending with downward pressures on the exchange rate or even a fully-fledged banking crisis. We find that a large current account deficit, a fall in price competitiveness, strong real growth and high public debt-to-GDP ratio increase the probability that a lending or housing boom would be accompanied by financial market tensions shortly after the peak. JEL Classification: E32, F31, F37.
    Keywords: Early warning system, financial crises, house prices, credit booms.
    Date: 2009–09
  18. By: Christian Schubert
    Abstract: According to the advocates of a "Generalized Darwinism" (GD), the three core Darwinian principles of variation, selection and retention (or inheritance) can be used as a general framework for the development of theories explaining evolutionary processes in the socio­economic domain. Even though these are originally biological terms, GD argues that they can be re-defined in such a way as to abstract from biological particulars. We argue that this approach does not only risk to misguide positive theory development, but that it may also impede the construction of a coherent evolutionary approach to "policy implications". This is shown with respect to the positive, instrumental and normative theories such an approach is supposed to be based upon.
    Keywords: Evolution, Selection, Darwinism, Ontology, Continuity Hypothesis, Evolutionary Theory of Policy-Making Length 30 pages
    JEL: A1 B4 B52 D6
    Date: 2009–09
  19. By: Victor, Aguirregabiria
    Abstract: This paper proposes a method for implementing counterfactual experiments in estimated models that have multiple equilibria. The method assumes that the researcher does not know the equilibrium selection mechanism and wants to impose minimum restrictions on it. Our key assumption is that the equilibrium selection function does not jump discontinuously between equilibria as we change marginally the structural parameters of the model. Under this assumption, we show that, although the equilibrium selection function is unknown, the researcher can obtain an approximation of this function in a neighborhood of the estimated values of the structural parameters. Under the additional assumption that the counterfactual equilibrium is stable, this approximation can be combined with iterations in the equilibrium mapping to obtain the exact counterfactual equilibrium. We illustrate the differences between our approach and other methods, such as the selection of a counterfactual equilibrium that is closer to the equilibrium in the data, and equilibrium mapping iterations using the equilibrium in the data as the initial value. We show that, in general, these alternative methods are not consistent with the assumption that the equilibrium selection mechanism is continuous with respect to the structural parameters.
    Keywords: Structural models with multiple equilibria; Counterfactual experiments; Equilibrium selection.
    JEL: C10 C60
    Date: 2009–10–10
  20. By: Andrés Erosa (IMDEA Ciencias Sociales); Luisa Fuster (IMDEA Ciencias Sociales); Diego Restuccia (University of Toronto)
    Abstract: Despite mandatory parental-leave policies being a prevalent feature of labor markets in developed countries, the aggregate effects of leave policies are not well understood. In order to assess the quantitative impact of mandated leave policies in the economy, we develop ageneral-equilibrium model of fertility and labor-market decisions that builds on the labormarket framework of Mortensen and Pissarides (1994). We find that females gain substantially with generous policies, but this benefit occurs at the expense of a reduction in the welfare of males. Mandated leave policies have important effects on fertility, leave taking decisions, and employment rate of mothers with infants. These effects are driven by how policy affects bargaining in job matches: Young females anticipate that there are some states in the future in which their threat point in bargaining will be higher. Because the realization of these states depend on the decisions of females to give birth and take a leave, the change in the threat point induced by the policy subsidizes fertility and leave taking. Unpaid parental leaves have a small impact on the time that mothers spend with their children but paid parental leaves can be an effective tool to encourage mothers to spend time with theirchildren after giving birth.
    Keywords: human capital; labor-market equilibrium; parental-leave policies; fertility; temporary separations
    JEL: E24 E60 J2 J3
    Date: 2009–09–30
  21. By: Chunrong Ai (Dept. of Economics, University of Florida); Xiaohong Chen (Cowles Foundation, Yale University)
    Abstract: This paper computes the semiparametric efficiency bound for finite dimensional parameters identified by models of sequential moment restrictions containing unknown functions. Our results extend those of Chamberlain (1992b) and Ai and Chen (2003) for semiparametric conditional moment restriction models with identical information sets to the case of nested information sets, and those of Chamberlain (1992a) and Brown and Newey (1998) for models of sequential moment restrictions without unknown functions to cases with unknown functions of possibly endogenous variables. Our bound results are applicable to semiparametric panel data models and semiparametric two stage plug-in problems. As an example, we compute the efficiency bound for a weighted average derivative of a nonparametric instrumental variables (IV) regression, and find that the simple plug-in estimator is not efficient. Finally, we present an optimally weighted, orthogonalized, sieve minimum distance estimator that achieves the semiparametric efficiency bound.
    Keywords: Sequential moment models, Semiparametric efficiency bounds, Optimally weighted orthogonalized sieve minimum distance, Nonparametric IV regression, Weighted average derivatives, Partially linear quantile IV
    JEL: C14 C22
    Date: 2009–10

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