nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒12‒19
twenty-two papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Innovation-Specific Patent Protection By Angus C. Chu
  2. Competition and Gender Prejudice: Are Discriminatory Employers Doomed to Fail? By Andrea Weber; Christine Zulehner
  3. An Experimental Study of Auctions Versus Grandfathering to Assign Pollution Permits By Goeree, Jacob K.; Holt, Charles A.; Palmer, Karen; Shobe, William; Burtraw, Dallas
  4. Bridging University-Firm relationships and Open Innovation literature: a critical synthesis By Luís Pinheiro; Aurora A.C. Teixeira
  5. Strategic Under-utilization of Patents and Entry Deterrence: The Case of Pharmaceutical Industry By Marjit, Sugata; Kabiraj, Tarun; Dutta, Arijita
  6. The design paradox: the contribution of in-house and external design activities on product market performance By Czarnitzki , Dirk; Thorwarth, Susanne
  7. Winner's Curse Corrections Magnify Adverse Selection By Ronald M. Harstad; Robert Bordley
  8. Fit and complementarity: cognitive distance and combined competence as predictors of co-operative R&D projects' outcomes in Europe By Zibell, Laurent; Allen, Peter M.
  9. Two and a Half Theories of Trade By Neary, J. Peter
  10. A new approach to stochastic optimization: the investment-consumption model By Moawia, Alghalith
  11. The design and efficiency of loyalty rewards By Caminal, Ramon
  12. Do we really need regional innovation agencies? Some insights from the experience of an Italian region By Annamaria Fiore; Maria Jennifer Grisorio; Francesco Prota
  13. Credit Default Swap Calibration and Equity Swap Valuation under Counterparty Risk with a Tractable Structural Model By Damiano Brigo; Marco Tarenghi
  14. Labor Court Inputs, Judicial Cases Outcomes and Labor Flows: Identifying Real EPL. By Fraisse, H.; Kramarz, F.; Prost, C.
  15. Learning in an Estimated Medium-Scale DSGE Model By Sergey Slobodyan; Raf Wouters
  16. Macroeconomic Effects of Intellectual Property Rights: A Survey By Angus C. Chu
  17. General aggregation problems and social structure: A model-theoretic generalisation of the Kirman-Sondermann correspondence By Frederik Herzberg; Daniel Eckert
  18. Preferences estimation without approximation By Moawia, Alghalith
  19. The Partnered Core of a Game with Side Payments By Philip J. Reny; Eyal Winter; Myrna Wooders
  20. Fiscal Competition, Decentralization, Leviathan, and Growth By Ken Tabata
  21. Do expectations matter? The Great Moderation revisited By Canova, Fabio; Gambetti, Luca
  22. Relationship-Specificity, Spatial Clustering and Production to Order Choice By L. Casaburi; G. A. Minerva

  1. By: Angus C. Chu (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: This study develops an R&D-based growth model that features both vertical and horizontal innovation to shed some light on the current debate on whether patent protection stimulates or stifles innovation. Speci…cally, we analyze the growth and welfare effects of patent protection in the form of profit division between sequential innovators along the quality ladder. We show that patent protection has asymmetric effects on vertical innovation (i.e., quality improvement) and horizontal innovation (i.e., variety expansion). Maximizing the incentives for vertical (horizontal) innovation requires a profit-division rule that assigns the entire flow profit to the entrant (incumbent) of a quality ladder. In light of this finding, we argue that in order to properly analyze the growth and welfare implications of patent protection, it is important to firstly disentangle its different effects on vertical and horizontal innovation.
    Keywords: economic growth, innovation, intellectual property rights
    JEL: O31 O34 O40
    Date: 2009–10
  2. By: Andrea Weber; Christine Zulehner
    Abstract: According to Becker's (1957) famous theory on discrimination, entrepreneurs with a strong prejudice against female workers forgo profits by submitting to their tastes. In a competitive market their firms lack efficiency and are therefore forced to leave. We present new empirical evidence for this prediction by studying the survival of startup firms in a large longitudinal matched employer-employee data set from Austria. Our results show that firms with strong preferences for discrimination, i.e. a low share of female employees relatively to the industry average, have significantly shorter survival rates. This is especially relevant for firms starting out with female shares in the lower tail of the distribution. They exit about 18 months earlier than firms with a median share of females. We see no differences in survival between firms at the top of the female share distribution and at the median, though. We further document that highly discriminatory firms that manage to survive submit to market powers and increase their female workforce over time.
    Keywords: Firm survival, profitability, female employment, discrimination, market test, matched employer-employee data
    JEL: J16 J71 L25
    Date: 2009–10
  3. By: Goeree, Jacob K.; Holt, Charles A.; Palmer, Karen; Shobe, William; Burtraw, Dallas (Resources for the Future)
    Abstract: We experimentally study auctions versus grandfathering in the initial assignment of pollution permits that can be traded in a secondary spot market. Low and high emitters compete for permits in the auction, while permits are assigned for free under grandfathering. In theory, trading in the spot market should erase inefficiencies due to initial mis-allocations. In the experiment, high emitters exercise market power in the spot market and permit holdings under grandfathering remain skewed towards high emitters. Furthermore, the opportunity costs of “free” permits are fully “passed through.” In the auction, the majority of permits are won by low emitters, reducing the need for spot-market trading. Auctions generate higher consumer surplus and slightly lower product prices in the laboratory arkets. Moreover, auctions eliminate the large “windfall profits” that are observed in the treatment with free, grandfathered permit allocations.
    Keywords: market-based regulation, emissions trading, allocation, auctions, grandfathering, climate policy, windfall profits
    JEL: C92 D43 D44 Q58
    Date: 2009–09–29
  4. By: Luís Pinheiro (Faculdade de Economia, Universidade do Porto); Aurora A.C. Teixeira (CEF.UP, Faculdade de Economia, Universidade do Porto; INESC Porto)
    Abstract: Open Innovation is understood as a flow of incoming and outgoing knowledge and technology which allows, at the level of a firm, the acceleration of the innovation process, as well as a faster establishment and access to new markets, for external use of that same innovation. This type of innovation includes technological innovation, which comes from internal and external sources, as well as different modalities of accessing the market and, therefore, commercializing the innovation. Resorting to a bibliometric analysis, using Open Innovation as the search keyword, we found that the majority of the existing studies on OI is of conceptual character. On the one hand, from the scarce existing empirical studies, the issue of the relation University – Enterprise (U-E), one of the components of the open innovation model, is analyzed in a relatively superficial way neglecting, or not referring in the most appropriated way, the mechanisms by which companies could obtain (via innovation) competitive advantage through the exploration of a more open model of innovation based on the relationships with universities. On the other hand, the existing studies on U-E relations do not highlight, at least in an explicit way, the question of the open innovation model. Such studies are still highly directed to a unidirectional profit optic, that is, are too centred on the advantages which the enterprises will be able to obtain from the relation with the universities, failing taking into account the value that potentially goes to universities from such links.
    Keywords: Open Innovation; U-E relations; Emergency; Sustainability; Benefits
    Date: 2009–11
  5. By: Marjit, Sugata; Kabiraj, Tarun; Dutta, Arijita
    Abstract: This paper seeks to explain why some pharmaceutical companies are observed to withdraw their products before patents are expired and simultaneously introduce new patented (competing) products. Given the specific nature of drug markets, the companies in fact increase the entry cost of the potential generic drug manufacturers and thereby lessen competition for new drugs. The paper determines the optimal date of withdrawing the product and studies comparative static effects of the change of parameters underlying the model.
    Keywords: Patent protection; patent expiry; pharmaceutical industries; generic drugs; entry cost.
    JEL: O3 L1
    Date: 2009–11
  6. By: Czarnitzki , Dirk; Thorwarth, Susanne
    Abstract: This paper explores the contribution of design activities on product market performance of Belgian companies. While there is mounting evidence that design can be seen as a strategic tool to successfully spur sales of new product developments at the firm level, the topic of design innovation has not been linked to the open innovation concept yet. In this paper we empirically test whether design activities conducted in-house differ in their contribution to new product sales from externally acquired design. Using a large crosssection of manufacturing and service firms, we investigate the effects on sales of products new to the market and of imitation or significantly improved products of the firm. At first glance, we find the paradox that externally acquired design is not superior to in-house design activities. This effect is robust to several modifications of the model specification. As earlier literature on new technological developments in high-tech sectors, we argue, however, that external design may not affect the sales of market novelties as the “market news” may spill-over quickly to rivals through common customers and suppliers including external designers. --
    Keywords: Design,R&D,Collaboration,Open Innovation,Product Market Performance
    JEL: O31 O32
    Date: 2009
  7. By: Ronald M. Harstad (Department of Economics, University of Missouri-Columbia); Robert Bordley
    Abstract: The adverse-selection literature has only considered the case in which competing sellers' costs of supply are independent and privately known by the individual sellers. In contrast, the auction literature has ignored adverse selection by implicitly assuming that a bid-taker is indifferent between suppliers at a given price. We show that competition in auctions with common-value elements serves to magnify the impact of adverse selection, as a bidder supplying a higher-cost product rationally makes a heightened winner's curse correction in a procurement auction. Hence lower-cost suppliers are disproportionately likely to win the auction, potentially creating a more serious quality problem for the procurer than mainstream adverse-selection models suggest.
    Keywords: winner's curse; adverse selection; common-value auctions; procurement; product quality
    JEL: D44 D82 L14 C62
    Date: 2009–06–15
  8. By: Zibell, Laurent; Allen, Peter M.
    Abstract: This article considers cognitive distance and combined competence as predictors of concrete outcomes in co-operative Research and Development projects. The operationalisation is based upon a dedicated survey, answered by matched pairs of projects managers in partnering organisations, addressing technical and scientific competence, R&D management competence and cultural features. Empirical validation was performed on 92 projects based in France, Germany and the United Kingdom in the industry of electronics and telecommunications equipment. Selected dimensions of the cognitive distance and of combined competence being developed appear to be better predictors of concrete project outcomes than geographic distance, differences in organisation size or in legal status. --
    Keywords: Cognitive distance,Competence,Capability,Cooperation,R&D
    JEL: M14 L24 L25 O31 O32
    Date: 2009
  9. By: Neary, J. Peter
    Abstract: This paper discusses the place of oligopoly in international trade theory, and argues that it is unsatisfactory to ignore firms altogether, as in perfectly competitive models, or to view large firms as more productive clones of small ones, as in monopolistically competitive models. Doing either fails to account for the "granularity" in the size distribution of firms and for the dominance of large firms in exporting. The paper outlines three ways of developing more convincing models of oligopoly, which allow for free entry but do not lose sight of the grains in "granularity": heterogeneous industries, natural oligopoly, and superstar firms.
    Keywords: GOLE (General Oligopolistic Equilibrium); granularity; heterogeneous firms; international trade and market structure
    JEL: F10 F12
    Date: 2009–12
  10. By: Moawia, Alghalith
    Abstract: We derive general explicit solutions to the investment-consumption model without the restrictive assumption of HARA or exponential utility function and without reliance on the existing duality or variational methods.
    Keywords: portfolio; investment; stochastic optimization
    JEL: G11
    Date: 2009–12–14
  11. By: Caminal, Ramon
    Abstract: The goal of this paper is to reexamine the optimal design and efficiency of loyalty rewards in markets for final consumption goods. While the literature has emphasized the role of loyalty rewards as endogenous switching costs (which distort the efficient allocation of consumers), in this paper I analyze the ability of alternative designs to foster consumer participation and increase total surplus. First, the efficiency of loyalty rewards depend on their specific design. A commitment to the price of repeat purchases can involve substantial efficiency gains by reducing price-cost margins. However, discount policies imply higher future prices and are likely to reduce total surplus. Second, firms may prefer to set up inefficient rewards (discounts), especially in those circumstances where a commitment to the price of repeat purchases triggers Coasian dynamics.
    Keywords: Coasian dynamics; coupons; loyalty rewards; price commitment
    JEL: D42 D43 L12 L13
    Date: 2009–12
  12. By: Annamaria Fiore (Agenzia Regionale per la Tecnologia e l’Innovazione - ARTI); Maria Jennifer Grisorio (Agenzia Regionale per la Tecnologia e l’Innovazione - ARTI); Francesco Prota (Department of Economics & Mathematics, University of Bari)
    Abstract: Increasing globalization, if properly exploited, can provide interesting opportunities for regional economies. Nevertheless, when they are not managed with a far-sighted approach, regions, and particularly those at an intermediate level of development, can lose their comparative advantages compared to regions of developing countries. Innovation is the main instrument for improving and ensuring competitiveness to enterprises and growth opportunities to local economies. The aim of this paper is to discuss the importance of public policies in reinforcing regional innovation systems, and the role of regional innovation agencies. With this in mind, we describe the policies implemented by the Regional Agency for Technology and Innovation (ARTI) of Apulia, a region in Southern Italy. We also provide the first assessment of ARTI’s activities and provide some suggestions on how to improve regional R&D policies.
    Keywords: public policy, innovation, regional innovation system, regional competitiveness
    JEL: O18 O38 R58
    Date: 2009–11
  13. By: Damiano Brigo; Marco Tarenghi
    Abstract: In this paper we develop a tractable structural model with analytical default probabilities depending on some dynamics parameters, and we show how to calibrate the model using a chosen number of Credit Default Swap (CDS) market quotes. We essentially show how to use structural models with a calibration capability that is typical of the much more tractable credit-spread based intensity models. We apply the structural model to a concrete calibration case and observe what happens to the calibrated dynamics when the CDS-implied credit quality deteriorates as the firm approaches default. Finally we provide a typical example of a case where the calibrated structural model can be used for credit pricing in a much more convenient way than a calibrated reduced form model: The pricing of counterparty risk in an equity swap.
    Date: 2009–12
  14. By: Fraisse, H.; Kramarz, F.; Prost, C.
    Abstract: Using a data set of individual labor disputes brought to court over the years 1990 to 2003 in France, we examine the impact of the enforcement of Employment Protection Legislation on labor market outcomes. First, we present a simple theoretical model showing that judicial case outcomes cannot be directly interpreted in terms of EPL. A large fraction of cases that go to trials may well be a sign of low firing costs when firms face low litigation costs and are therefore willing to go to court or a sign of high firing costs when workers face low litigation costs and are therefore willing to sue the firm. Second, we exploit our model as well as the French institutional setting to generate instruments for these endogenous outcomes. Using these instruments, we show that labor courts decisions have a causal effect on labor flows. More dropped cases and more trials cause more job destructions: more trials indeed are a sign of lower separation costs. More settlements, higher filing rates, a larger fraction of workers represented at trial, large lawyer density dampen job destruction. A larger judge density causes less job creation, in particular on the extensive margin.
    Keywords: Employment protection legislation, Labor flows, Labor judges, Unfair dismissal, France
    JEL: J32 J53 J63 K31
    Date: 2009
  15. By: Sergey Slobodyan; Raf Wouters
    Abstract: In this paper we evaluate the empirical relevance of learning by private agents in an estimated medium–scale DSGE model. We replace the standard rational expectation assumption in the Smets and Wouters (2007) model by a constant gain learning mechanism. If agents know the correct structure of the model and only learn about the parameters, both expectation mechanisms result in a similar fit, and only the transition dynamics that are generated by specific initial beliefs are responsible for the differences between the two approaches. If, in addition, agents use only a reduced information set in forming the perceived law of motion, the implied model dynamics change and for some initial beliefs the marginal likelihood of the model is further improved. The learning models with the highest posterior probabilities add some additional persistence to the DSGE model that reduce the gap between the IRFs of the DSGE model and the more data-driven DSGE-VAR model. However, the additional dynamics that are introduced by the learning process do not systematically alter the estimated structural parameters related to the nominal and real frictions in the DSGE model.
    Keywords: Constant gain adaptive learning, medium–scale DSGE model, DSGE–VAR.
    JEL: C11 D84 E30 E52
    Date: 2009–11
  16. By: Angus C. Chu (Institute of Economics, Academia Sinica, Taipei,Taiwan)
    Abstract: This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection as well as empirical evidence on the effects of patent rights. Then, the second part considers the international aspects of IPR protection. In summary, this paper draws the following conclusions from the literature. Firstly, different patent policy instruments have different effects on R&D and growth. Secondly, there is empirical evidence supporting a positive relationship between IPR protection and innovation, but the evidence is stronger for developed countries than for developing countries. Thirdly, the optimal level of IPR protection should tradeoff the social benefits of enhanced innovation against the social costs of multiple distortions and income inequality. Finally, in an open economy, achieving the globally optimal level of protection requires an international coordination (rather than the harmonization) of IPR protection.
    Keywords: economic growth, income inequality, patent policy, international coordination
    JEL: O34 O40 F13 D31
    Date: 2009–06
  17. By: Frederik Herzberg (Institute of Mathematical Economics, Bielefeld University); Daniel Eckert (Institute of Public Economics, Graz University)
    Abstract: This article proves a very general version of the Kirman-Sondermann [Journal of Economic Theory, 5(2):267-277, 1972] correspondence by extending the methodology of Lauwers and Van Liedekerke [Journal of Mathematical Economics, 24(3):217-237, 1995]. The paper first proposes a unified framework for the analysis of the relation between various aggregation problems and the social structure they induce, based on first-order predicate logic and model theory. Thereafter, aggregators satisfying Arrow-type rationality axioms are shown to be restricted reduced product constructions with respect to the filter of decisive coalitions; an oligarchic impossibility result follows. Under stronger assumptions, aggregators are restricted ultraproduct constructions, whence a generalised Kirman-Sondermann correspondence as well as a dictatorial impossibility result follow.
    Keywords: Arrow-type preference aggregation, judgment aggregation, systematicity, model theory, first-order predicate logic, filter, ultrafilter, reduced product, ultraproduct
    JEL: D71
    Date: 2009–11
  18. By: Moawia, Alghalith
    Abstract: We devise an estimation methodology which allows preferences estimation and comparative statics analysis without a reliance on Taylor’s approximations and the indirect utility function.
    Keywords: utility; risk; uncertainty; portfolio; production; estimation
    JEL: C13 D80
    Date: 2009–12–14
  19. By: Philip J. Reny (Department of Economics, University of Chicago); Eyal Winter (Center for the Study of Rationality, Hebrew University); Myrna Wooders (Department of Economics, Vanderbilt University)
    Abstract: An outcome of a game is partnered if there are no asymmetric dependencies between any two players. For a cooperative game, a payoff is in the partnered core of the game if it is partnered, feasible and cannot be improved upon by any coalition of players. We show that the relative interior of the core of a game with side payments is contained in the partnered core. For quasi-strictly convex games the partnered core coincides with the relative interior of the core. When there are no more than three partnerships, the sums of the payoffs to partnerships are constant across all core payoffs. When there are no more than three players, the partnered core satisfies additional properties.
    Keywords: Partnership, core, cooperative game, convex game, separating collections of sets, minimal partnership, coalition structure games, partitioning games, kernel
    JEL: C71
    Date: 2009–10
  20. By: Ken Tabata (Kwansei Gakuin University)
    Abstract: This paper studies the implications of different fiscal regimes (i.e. centralized vs decentralized) for economic growth and welfare by incorporating Wilson (2005)-type fiscal competition model into a Barro (1990)-type endogenous growth model. We show that fiscal decentralization is more desirable than fiscal centralization for economic growth, when the degree of selfishness of central government bureaucrats is high, and the relative political power of the young to the old is low. We also show that the growth-maximizing fiscal regime is also welfare-maximizing.
    Keywords: Fiscal competition, Decentralization, Leviathan, Overlapping generations
    JEL: H71 H72 E62
    Date: 2009–11
  21. By: Canova, Fabio; Gambetti, Luca
    Abstract: We examine the role of expectations in the Great Moderation episode. We derive theoretical restrictions in a New-Keynesian model and test them using measures of expectations obtained from survey data, the Greenbook and bond markets. Expectations explain the dynamics of inflation and interest rates but their importance is roughly unchanged over time. Systems with and without expectations display similar reduced form characteristics. Results are robust to changes in the structure of the empirical model.
    Keywords: Expectations; Indeterminacy; Term structure; VARs
    JEL: C11 E12 E32 E62
    Date: 2009–12
  22. By: L. Casaburi; G. A. Minerva
    Abstract: We study the determinants of the firm-level choice to produce following an order placed by a downstream firm (production to order) or to produce in advance. We rationalize this choice through a simple theoretical model and apply it to a firm-level empirical analysis. Relying on a large dataset of Italian manufacturing firms, we show that two main variables affect this choice: the extent of spatial clustering of the industry, and the degree of product complexity and relationship-specificity of the goods that are traded. The sign of the impact of clustering on the choice of producing to order crucially depends on product complexity. If product complexity is high, production to order prevails when firms are clustered together. On the contrary, clustering is associated to production in advance for sectors where goods are standardized.
    JEL: D23 F10 L14 R30 R34
    Date: 2009–11

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