nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒10‒31
twenty-two papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. The Effects of Leniency on Maximal Cartel Pricing By Harold Houba; Evgenia Motchenkova; Quan Wen
  2. A Code of Practice for Grocery Goods Undertakings and An Ombudsman: How to Do a Lot of Harm by Trying to Do a Little Good By Gorecki, Paul K.
  3. Price regulation of pluralistic markets subject to provider collusion By Longo, R; Miraldo, M; Street, A
  4. Paying a Premium on Your Premium? Consolidation in the U.S. Health Insurance Industry By Leemore Dafny; Mark Duggan; Subramaniam Ramanarayanan
  5. Optimal Monetary Policy When Asset Markets are Incomplete By R. Anton BRAUN; NAKAJIMA Tomoyuki
  6. CEO overconfidence and dividend policy By Sanjay Deshmukh; Anand M. Goel; Keith M. Howe
  7. Corruption in a Model of Vertical Linkage between Formal and Informal Credit Sources and Credit Subsidy Policy By Chaudhuri, Sarbajit; Ghosh Dastidar, Krishnendu
  8. Capacity Utilisation, Constraints and Price Adjustments under the Microscope By Sarah M. Lein; Eva Köberl
  9. Stock market wealth effects in an estimated DSGE model for Hong Kong By Funke, Michael; Paetz , Michael; Pytlarczyk, Ernest
  10. State aid and tacit collusion By Christoph Bertsch; Claudio Calcagno; Mark Le Quement
  11. Labour Market Status and Migration Dynamics By Bijwaard, G.E.
  12. Reputation, social identity and social conflict By Smith, John
  13. Delocation and Trade Agreements in Imperfectly Competitive Markets By Kyle Bagwell; Robert W. Staiger
  14. Two lemmas that changed general equilibrium theory By Monique Florenzano
  15. Rising indebtedness and hyperbolic discounting: a welfare analysis By Makoto Nakajima
  16. Performance measures for hierarchical organizations: Frontier analysis as a decision support tool By Aude Deville; Gary D. Ferrier; Hervé Leleu
  17. Impact of Economic Crises on Innovation Activity: Firm Level Evidence from Patent Data By Martinsson, Gustav; Lööf, Hans
  18. Banking: a mechanism design approach By Fabrizio Mattesini; Cyril Monnet; Randall Wright
  19. The Existence of Equilibria in Discontinuous and Nonconvex Games By Rabia Nessah; Guoqiang Tian
  20. Estimating the Effects of Large Shareholders Using a Geographic Instrument By Bo Becker; Henrik Cronqvist; Rüdiger Fahlenbrach
  21. Why do markets freeze? By Philip Bond; Yaron Leitner
  22. Oil Prices and Bank Profitability: Evidence from Major Oil-Exporting Countries in the Middle East and North Africa By Heiko Hesse; Tigran Poghosyan

  1. By: Harold Houba (VU University Amsterdam); Evgenia Motchenkova (VU University Amsterdam); Quan Wen (Vanderbilt University)
    Abstract: We analyze maximal cartel prices in infinitely-repeated oligopoly models under leniency where fines are linked to illegal gains, as often outlined in existing antitrust regulation, and detection probabilities depend on the degree of collusion. We introduce cartel culture that describes how likely cartels persist after each conviction. Our analysis disentangles the effects of traditional antitrust regulation, leniency, and cartel strategies. Without rewards to the strictly-first reporter, leniency cannot reduce maximal cartel prices below those under traditional regulation. Moreover, in order to avoid adverse effects fine reductions should be moderate in case of multiple reporters. Our results extend the current literature and partially support existing leniency programs.
    Keywords: Cartel; Antitrust; Competition Policy; Leniency Program; Self-reporting; Repeated Game
    JEL: L41 K C72
    Date: 2009–09–25
  2. By: Gorecki, Paul K.
    Abstract: The Department of Enterprise, Trade and Employment in its August 2009 Consultation Paper, Code of Practice for Grocery Goods Undertakings, argues that a Code governing grocery supplier/retailer relations, enforced by an Ombudsman, should be introduced. The Code constrains the behaviour of the retailer with respect to certain practices that, for example, shift risk from the retailer to the supplier as well as those result in unexpected costs to suppliers. The rationale for the Code appears to be that due to the devaluation of sterling, combined with the recession, retailers are able to put increased pressure on local suppliers for lower prices, which in turn squeezes suppliers' margins. The paper argues that the Consultation Paper does not present a sound rationale for the Code, in reality the Code is a form of protectionism occasioned by the inflow of lower priced imports. Local suppliers should adapt through developing better products and becoming more efficient, rather than seeking shelter from market forces. The impact of the Code will likely be to lead to: higher consumer prices lowering consumer welfare and thus inconsistent with the declared aim of the Code; increased costs of doing business with local suppliers thus leading to an incentive for retailers to use more imports; and, perhaps, a less competitive grocery sector. It is argued that the Consultation Paper should be withdrawn and reissued, but in a manner consistent with the government's better regulation agenda which is currently ignored. To the extent that the issue of concern is excessive buyer power of retailers then that should be addressed directly: by liberalising the Retail Planning Guidelines as the Competition Authority has been arguing for sometime; and/or sponsoring entry of new retailers; and/or amending competition law, if a problem exists and can be demonstrated to exist, but retain the competition test. The answer, based on the evidence presented in the Consultation Paper, is not the Code.
    Keywords: better regulation/buyer power/COUNTERVAILING BUYER POWER/grocery code of practice/grocery ombudsman/grocery products/imports/sterling devaluation
    Date: 2009–10
  3. By: Longo, R; Miraldo, M; Street, A
    Abstract: We analyse incentives for collusive behaviour when heterogeneous providers are faced with regulated prices under two forms of yardstick competition, namely discriminatory and uniform schemes. Providers are heterogeneous in the degree to which their interests correspond to those of the regulator, with close correspondence labelled altruism. Deviation of interests may arise as a result of de-nationalisation or when private providers enter predominantly public markets. We assess how provider strategies and incentives to collude relate to provider characteristics and across different market structures. We differentiate between "pure" markets with either only self-interested providers or with only altruistic providers and "pluralistic" markets with a mix of provider type. We find that the incentive for collusion under a discriminatory scheme increases in the degree to which markets are self-interested whereas under a uniform scheme the likelihood increases in the degree of provider homogeneity. Providers' choice of cost also depends on the yardstick scheme and market structure. In general, costs are higher under the uniform scheme, reflecting its weaker incentives. In a pluralistic market under the discriminatory scheme each provider's choice of cost is decreasing in the degree of the other provider's altruism, so a self-interested provider will operate at a lower cost than an altruistic provider. Under the uniform scheme providers always choose to operate at the same cost. The prospect of defection serves to moderate the chosen level of operating cost.
    Date: 2009–03
  4. By: Leemore Dafny; Mark Duggan; Subramaniam Ramanarayanan
    Abstract: We examine whether and to what extent consolidation in the U.S. health insurance industry is leading to higher employer-sponsored insurance premiums. We make use of a proprietary, panel dataset of employer-sponsored healthplans enrolling over 10 million Americans annually between 1998 and 2006 to explore the relationship between premium growth and changes in market concentration. We exploit the differential impact of a large national merger of two insurance firms across local markets to estimate the causal effect of concentration on market-level premiums. We estimate real premiums increased by 2 percentage points (in a typical market) due to the rise in concentration during our study period. We also find evidence that consolidation facilitates the exercise of monopsonistic power vis a vis physicians, whose absolute employment and relative earnings decline in its wake.
    JEL: I11 L1 L4
    Date: 2009–10
  5. By: R. Anton BRAUN; NAKAJIMA Tomoyuki
    Abstract: his paper considers the properties of an optimal monetary policy when households are subject to counter-cyclical uninsured income shocks. We develop a tractable incomplete-markets model with Calvo price setting. In our model the welfare cost of business cycles is large when the variance of income shocks is counter-cyclical. Nevertheless, the optimal monetary policy is very similar to the optimal policy that emerges in the representative agent framework and calls for nearly complete stabilization of the price-level.
    Date: 2009–10
  6. By: Sanjay Deshmukh; Anand M. Goel; Keith M. Howe
    Abstract: We develop a model of the effect of CEO overconfidence on dividend policy and empirically examine many of its predictions. Consistent with our main prediction, we find that the level of dividend payout is lower in firms managed by overconfident CEOs. We document that this reduction in dividends associated with CEO overconfidence is greater in firms with lower growth opportunities, lower cash flow, and greater information asymmetry. We also show that the magnitude of the positive market reaction to a dividend-increase announcement is lower for firms managed by overconfident CEOs. Our overall results are consistent with the predictions of our model.
    Date: 2009
  7. By: Chaudhuri, Sarbajit; Ghosh Dastidar, Krishnendu
    Abstract: The present paper develops a model of vertical linkage between the formal and informal credit markets highlighting the presence of corruption in the distribution of formal credit. The existing moneylender, the bank official and the new moneylenders move sequentially and the existing moneylender acts as a Stackelberg leader and unilaterally decides on the informal interest rate. The analysis distinguishes between two different ways of designing a credit subsidy policy. If a credit subsidy policy is undertaken through an increase in the supply of institutional credit it is likely to increase the competitiveness in the informal credit market and lower the informal sector interest rate under reasonable parametric restrictions. Any change in the formal sector interest rate has no effect. An anticorruption measure, on the contrary, may be counterproductive and raise the interest rate in the informal credit market.
    Keywords: formal/informal credit markets; interest rates
    JEL: O17 O16
    Date: 2009–05–15
  8. By: Sarah M. Lein (Swiss National Bank Zurich, Switzerland); Eva Köberl (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper analyses the interplay of capacity utilisation, capacity constraints, demand constraints and price adjustments, employing a unique firm-level data set for Swiss manufacturing firms. Theoretically, capacity constraints limit the ability of forms to expand production in the short run and lead to increases in prices. Our results show that, on the one hand, price increases are more likely during periods when firms are faced with capacity constraints. Constraints due to the shortage of labour, in particular, lead to price increases. On the other hand, we also find evidence that firms are not reluctant to reduce prices in response to demand constraints. At the macro level, the implied capacity-utilisation Phillips curve has a convex shape during periods of excess demand and a concave shape during periods of excess supply. Our results are robust to the inclusion of proxies for changes in costs and the competitive position of firms.
    Keywords: price setting, capacity utilisation, capacity constraints, demand constraints, non-linear Phillips curve, Switzerland
    JEL: E31 E32 E52
    Date: 2009–10
  9. By: Funke, Michael (BOFIT); Paetz , Michael (BOFIT); Pytlarczyk, Ernest (BOFIT)
    Abstract: This paper develops and estimates an open economy dynamic stochastic general equilibrium (DSGE) model of the Hong Kong economy. The model features short-run price rigidities generated by monopolistic competition and staggered reoptimisation. The model is enhanced with wealth effects due to stock price dynamics, which we believe to be important. For this reason we adopt a perpetual youth approach. Model parameters and unobserved components are estimated with a Bayesian maximum likelihood procedure, conditional on prior information concerning the values of parameters.
    Keywords: DSGE models; wealth effects; open economy; Hong Kong
    JEL: D91 E21 E44 F41
    Date: 2009–10–21
  10. By: Christoph Bertsch; Claudio Calcagno; Mark Le Quement
    Abstract: Both literature and policy debate on State aid or government subsidies have focused on the trade-off between the potential ine¢ ciencies caused by state intervention (inefficient allocation of resources, moral hazard) and the potential gains from intervention (whether related to the resolution of market failures or to the achievement of some dimension of social equity). The debate however has ignored another important negative e¤ect of State aid: governments, by setting up aid schemes to ailing firms, may increase the likelihood of (tacit) collusion in an industry characterised by idiosyncratic shocks. Indeed, in a repeated-game setting, a systematic bailout regime increases the expected profits of a firm from cooperation and simultaneously raises the probability that competitors will still be in business to carry out punishment against cheaters. Despite the generality of the model and of its key insight, we study this problem through an application to the banking sector, as it has recently been subject of much attention within the context of the ongoing economic crisis.
    Keywords: Subsidies, dynamic oligopoly, government policy, banking
    JEL: D43 G21 K21 L41
    Date: 2009
  11. By: Bijwaard, G.E. (Erasmus Econometric Institute)
    Abstract: In this empirical paper we assess how labour market transitions and out- and repeat migration of immigrants are interrelated. We estimate a multi-state multiple spell competing risks model with four states: employed, unemployed receiving benefits, out-of-the-labour market (no benefits) and abroad. We discuss one-step ahead transitions from all four states and the transition probability, including all intermediate transitions, from employment. Based on the estimated parameters we simulate the labour-migration dynamics for a synthetic cohort to derive relevant economic indicators, e.g. the probability of experiencing an unemployment spell. For the analysis we use data on recent labour immigrants to The Netherlands, which implies that all migrants are (self)-employed at the time of arrival. We find that many migrants leave the country after a period of no-income. Employment characteristics and the country of origin play an important role in explaining the dynamics. The microsimulations of synthetic cohorts reveal that many migrants experience unemployment spells, but ten years after arrival only a few are unemployed. They also indicate that the Credit Crunch will not only increase the unemployment among migrants but also departure from the country. An increase in the number of migrants from the EU accession countries will lead to more dynamics. We do not expect that the recent simplification of the entry of high income migrants will have a lasting effect, as many of those migrants leave fast.
    Keywords: migration dynamics;labour market transitions;competing risks;immigrant assimilation
    Date: 2009–10–19
  12. By: Smith, John
    Abstract: We interpret the social identity literature and examine its economic implications. We model a population of agents from two exogenous and well defined social groups. Agents are randomly matched to play a reduced form bargaining game. We show that this struggle for resources drives a conflict through the rational destruction of surplus. We assume that the population contains both unbiased and biased players. Biased players aggressively discriminate against members of the other social group. The existence and specification of the biased player is motivated by the social identity literature. For unbiased players, group membership has no payoff relevant consequences. We show that the unbiased players can contribute to the conflict by aggressively discriminating and that this behavior is consistent with existing empirical evidence.
    Keywords: reputation; identity; conflict
    JEL: L14 D74 C72
    Date: 2009–10–22
  13. By: Kyle Bagwell; Robert W. Staiger
    Abstract: We consider the purpose and design of trade agreements in imperfectly competitive environments featuring firm-delocation effects. In both the segmented-market Cournot and the integrated-market monopolistic competition settings where these effects have been identified, we show that the only rationale for a trade agreement is to remedy the inefficiency attributable to the terms-of-trade externality, the same rationale that arises in perfectly competitive markets. Furthermore, and again as in the perfectly competitive benchmark case, we show that the principle of reciprocity is efficiency enhancing, as it serves to "undo" the terms-of-trade driven inefficiency that occurs when governments pursue unilateral trade policies. Our results therefore indicate that the terms-of-trade theory of trade agreements applies to a broader set of market structures than previously thought.
    JEL: F12 F13
    Date: 2009–10
  14. By: Monique Florenzano (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: This short paper published in Games and Economic Behavior (July 2009) "In Memoriam" of David Gale, emphasizes the seminal role played by two lemmas of David Gale in the development of the foundations of General Equilibrium Theory.
    Keywords: Fixed points, equilibrium, excess demand correspondence, Gale-Nikaido-Devreu lemma, simultaneous optimization approach, Michael selection theorems.
    Date: 2009–04
  15. By: Makoto Nakajima
    Abstract: Is the observed rapid increase in consumer debt over the last three decades good news for consumers? This paper quantitatively studies macroeconomic and welfare implications of relaxing borrowing constraints when consumers exhibit a hyperbolic discounting preference. In particular, the author constructs a calibrated general equilibrium life-cycle model with uninsured idiosyncratic earnings shocks and a quasi-hyperbolic discounting preference and examines the effect of relaxation of the borrowing constraint which generates increased indebtedness. The model can capture the two contrasting views associated with increased indebtedness: the positive view, which links increased indebtedness to financial sector development and better insurance, and the negative view, which associates increased indebtedness with consumers' over-borrowing. He finds that while there is a welfare gain as large as 0.4 percent of flow consumption from a relaxed borrowing constraint, which is consistent with the observed increase in aggregate debt between 1980 and 2000 in the model with standard exponential discounting consumers, there is a welfare loss of 0.2 percent in the model with hyperbolic discounting consumers. This result holds in spite of the observational similarity of the two models; the macroeconomic implications of a relaxed borrowing constraint are similar between the two models. Cross-sectionally, although consumers of high and low productivity gain and medium productivity consumers suffer due to a relaxed borrowing constraint in both models, the welfare gain of low-productivity consumers is substantially reduced (and becomes negative in the case of strong hyperbolic discounting) in the hyperbolic discounting model due to the welfare loss from over-borrowing. Finally, the author finds that the optimal (social welfare maximizing) borrowing limit is 15 percent of average income, which is substantially lower than both the optimal level implied by the exponential discounting model (37 percent) and the level of the U.S. economy in 2000 implied by the model (29 percent).
    Keywords: Debt ; Econometric models
    Date: 2009
  16. By: Aude Deville (LEG-FARGO, IAE, University of Bourgogne); Gary D. Ferrier (Walton College of Business, University of Arkansas); Hervé Leleu (LEM-CNRS (UMR 8179), IÉSEG School of Management)
    Abstract: We extend the standard frontier efficiency models (data envelopment analysis [DEA] and stochastic frontier analysis [SFA]) by allowing the “decision making units” (DMUs) whose performances are assessed to consist of two different levels within hierarchical organizations. Generally, the lower level unit is responsible for “operations;” while higher level units are assumed to make “strategic” decisions. Our primary contribution in this paper is thus to extend the use of frontier efficiency models to assess each level performance with relevant technical and allocative inefficiency measures. We illustrate our approach using DEA applied to data from a sample of 1,585 branches of a major French bank. A second contribution of the paper is to explicitly relate the efficiency to differences in the operating environments and the sizes of the bank branches. We believe that the simple, easy to implement method we introduce can serve as a valuable component of a “balanced score card” approach to benchmarking performance within hierarchical settings such as a banking network.
    JEL: M40 G21 C43
    Date: 2009–01
  17. By: Martinsson, Gustav (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Lööf, Hans (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: Based on data from of 2,700 Swedish manufacturing firms, observed through the period 1997-2005, this paper shows that internal finance resources, measured by cash-flow, affect the propensity to apply for a patent as well as the number of patent applications. From a business cycle perspective, cash-flow only plays a role during and after economic contractions. In periods of economic expansion there is no significant association between internal finance and patent applications. Further, the sensitivity of patent applications to cash-flow is limited to firms with low equity-ratio. Among high equity firms the pattern of patent applications are robust over the business cycle.
    Keywords: Financing constraints; Innovation; Intellectual property rights; Firm-level panel data;
    JEL: G32 O31 O34
    Date: 2009–10–09
  18. By: Fabrizio Mattesini; Cyril Monnet; Randall Wright
    Abstract: The authors study banking using the tools of mechanism design, without a priori assumptions about what banks are, who they are, or what they do. Given preferences, technologies, and certain frictions - including limited commitment and imperfect monitoring - they describe the set of incentive feasible allocations and interpret the outcomes in terms of institutions that resemble banks. The bankers in the authors' model endogenously accept deposits, and their liabilities help others in making payments. This activity is essential: if it were ruled out the set of feasible allocations would be inferior. The authors discuss how many and which agents play the role of bankers. For example, they show agents who are more connected to the market are better suited for this role since they have more to lose by reneging on obligations. The authors discuss some banking history and compare it with the predictions of their theory.
    Keywords: Banks and banking
    Date: 2009
  19. By: Rabia Nessah (IÉSEG School of Management, LEM-CNRS (UMR 8179)); Guoqiang Tian (Texas A&M University, USA)
    Abstract: This paper investigates the existence of pure strategy, dominant-strategy, and mixed strategy Nash equilibria in discontinuous and nonconvex games. We introduce a new notion of very weak continuity, called weak transfer continuity, which holds in a large class of discontinuous economic games and is easy to check. We show that it, together with the compactness of strategy space and the quasiconcavity of payoff functions, permits the existence of pure strategy Nash equilibria. Our equilibrium existence result neither implies nor is implied by the existing results in the literature such as those in Baye et al. [1993] and Reny [1999]. We provide sufficient conditions for weak transfer continuity by introducing notions of weak transfer upper continuity and weak transfer lower continuity. These conditions are satisfied in many economic games and are often quite simple to check. We also introduce the notion of weak dominant transfer upper continuity, and use it to study the existence of dominant strategy equilibria. We then generalize these results and those in Baye et al. [1993] and Reny [1999] without assuming any form of quasi-concavity of payoff functions or convexity of strategy spaces.
    Keywords: Nash equilibrium, dominant strategy equilibrium, discontinuity, nonquasiconcavity, nonconvexity and mixed strategy
    Date: 2009–04
  20. By: Bo Becker (Harvard Business School, Finance Unit); Henrik Cronqvist (Claremont McKenna College, Robert Day School of Economics and Finance); Rüdiger Fahlenbrach (Ohio State University, Fisher College of Business and Ecole polytechnique Fédérale de Lausanne)
    Abstract: Large shareholders may play an important role for firm performance and policies, but identifying this empirically presents a challenge due to the endogeneity of ownership structures. We develop and test an empirical framework which allows us to separate selection from treatment effects of large shareholders. Individual blockholders tend to hold blocks in public firms located close to where they reside. Using this empirical observation, we develop an instrument - the density of wealthy individuals near a firm's headquarters - for the presence of a large, non-managerial individual shareholder in a firm. These shareholders have a large impact on firms, controlling for selection effects.
    Date: 2009–09
  21. By: Philip Bond; Yaron Leitner
    Abstract: Consider the sale of mortgages by a loan originator to a buyer. As widely noted, such a transaction is subject to a severe adverse selection problem: the originator has a natural information advantage and will attempt to sell only the worst mortgages. However, a second important feature of this transaction has received much less attention: both the seller and the buyer may have existing inventories of mortgages similar to those being sold. The authors analyze how the presence of such inventories affects trade. They use their model to discuss implications for regulatory intervention in illiquid markets.
    Keywords: Mortgage loans
    Date: 2009
  22. By: Heiko Hesse; Tigran Poghosyan
    Abstract: This paper analyzes the relationship between oil price shocks and bank profitability. Using data on 145 banks in 11 oil-exporting MENA countries for 1994-2008, we test hypotheses of direct and indirect effects of oil price shocks on bank profitability. Our results indicate that oil price shocks have indirect effect on bank profitability, channeled through country-specific macroeconomic and institutional variables, while the direct effect is insignificant. Investment banks appear to be the most affected ones compared to Islamic and commercial banks. Our findings highlight systemic implications of oil price shocks on bank performance and underscore their importance for macroprudential regulation purposes in MENA countries.
    Keywords: Banks , Commodity price fluctuations , External shocks , Middle East , North Africa , Oil exporting countries , Oil exports , Oil prices , Oil sector , Profit margins , Profits ,
    Date: 2009–10–09

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