nep-mic New Economics Papers
on Microeconomics
Issue of 2010‒01‒23
twenty papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Exchange-Rate Misalignments in Duopoly: the Case of Airbus and Boeing By Agnes Benassy-Quere; Lionel Fontagne; Horst Raff
  2. Profit Taxation, Innovation and the Financing of Heterogeneous Firms By Christian Keuschnigg; Evelyn Ribi
  3. Innovation and economic growth By Uppenberg, Kristian
  4. Social Preferences and Competition By Klaus M. Schmidt
  5. Threshold Cointegration in BRENT crude futures market By Mamatzakis, E; Remoundos, P
  6. Has the Globalisation really generated more competition in OECD economies By Jambu, Marc-Antoine
  7. Licensing a common value innovation when signaling strength may backfire By Cuihong Fan; Byoung Heon Jun; Elmar Wolfstetter
  8. Buy-It-Now prices in eBay Auctions - The Field in the Lab By Tim Grebe; Radosveta Ivanova-Stenzel; Sabine Kröger
  9. Employee Capitalism or Corporate Socialism? Broad-Based Employee Stock Ownership By E. Han Kim; Paige Ouimet
  10. Switching Consumers and Product Liability: On the Optimality of Incomplete Strict Liability By Florian Baumann; Tim Friehe; Kristoffel Grechenig
  11. On Probation. An Experimental Analysis By Christoph Engel; Heike Hennig-Schmidt; Bernd Irlenbusch; Sebastian Kube
  12. Using Forward Markets to Improve Electricity Market Design By Lawrence M. Ausubel; Peter Cramton
  13. Welfare Rankings From Multivariate Data, A Non-Parametric Approach By Gordon Anderson; Ian Crawford; Andrew Leicester
  14. A price uncertainty principle and the existence of sequential equilibrium. By Lionel de Boisdeffre
  15. Decreasing Copyright Enforcement Costs: The Scope of a Gradual Response By Olivier Bomsel; Heritiana Ranaivoson
  16. On the relation between income inequality and happiness: Do fairness perceptions matter? By Bjørnskov, Christian; Dreher, Axel; Fischer, Justina A. V.; Schnellenbach, Jan
  17. How Do Small Businesses Finance their Growth Opportunities? – The Case of Recovery from the Lost Decade in Japan? By Daisuke Tsuruta
  18. Isolation or joining a mall? On the location choice of competing shops By Non, Marielle
  19. Financing technology transfer By Darcy, Jacques; Krämer-Eis, Helmut; Guellec, Dominique; Debande, Olivier
  20. Evaluating Health Care Externality Costs Generated by Risky Consumption Goods By Michael A. Cohen; Marina-Selini Katsaiti

  1. By: Agnes Benassy-Quere; Lionel Fontagne; Horst Raff
    Abstract: We examine the effect of exchange-rate misalignments on competition in the market for large commercial aircraft. This market is a duopoly where players compete in dollar-denominated prices while one of them, Airbus, incurs costs mostly in euros. We construct and calibrate a simulation model to investigate how companies adjust their prices to deal with the effects of a temporary misalignment, and how this affects profit margins and volumes. We also explore the effects on the long-run dynamics of competition. We conclude that, due to the duopolistic nature of the aircraft market, Airbus will pass only a small part of the exchange-rate fluctuations on to customers through higher prices. Moreover, due to features specific to the aircraft industry, such as customer switching costs and learning-by-doing, even a temporary departure of the exchange rate from its long-run equilibrium level may have permanent effects on the industry.
    Keywords: Exchange-rate pass-through; duopoly; aircraft industry
    JEL: F31 D43 L11 L62
    Date: 2009–06
  2. By: Christian Keuschnigg; Evelyn Ribi
    Abstract: Credit constraints are more frequent among growth companies with large investment opportunities. For the same reason, profit taxes may harm innovative firms more than standard ones. This paper develops a model of heterogeneous firms where an endogenous share opts for innovation and faces credit constraints in the subsequent expansion phase. We emphasize four results: (i) R&D subsidies not only encourage innovation but also relax finance constraints and help innovative firms to exploit investment opportunities to a larger extent. (ii) Taxes which are neutral in a neoclassical world, still restrict expansion investment of constrained firms by reducing free cash-flow and thereby discourage innovation. (iii) A revenue neutral increase in profit taxes to finance larger R&D subsidies redistributes towards innovative firms and boosts aggregate productivity and welfare. (iv) A revenue neutral tax cut cum base broadening policy similarly boosts innovation and welfare
    Keywords: Profit taxes, R&D subsidies, innovation, investment, credit constraints
    JEL: G32 G38 H25
    Date: 2010–01
  3. By: Uppenberg, Kristian (European Investment Bank, Economic and Financial Studies)
    Abstract: The literature on economic growth has identified knowledge expansion as a key propellant. Early research derived this conclusion from the residual that remained after the growth contributions from capital and labour had been accounted for. Later modifications expanded the concept of fixed capital to include intangible capital. The underlying drivers of innovation have, meanwhile, been explored by the endogenous growth literature. Together, these efforts have reconfirmed the role of knowledge and innovation in growth. But they also point to the importance of competition and firm entry and exit as key motivators for firms to innovate. Policies aiming to boost growth must therefore look beyond the amounts invested in R&D and also provide for wellfunctioning labour, product and financial markets.
    Keywords: Research and development; innovation; neoclassical growth model; endogenous growth
    JEL: O30 O40
    Date: 2009–12–23
  4. By: Klaus M. Schmidt (University of Munich)
    Abstract: There is a general presumption that social preferences can be ignored if markets are competitive. Market experiments (Smith 1962) and recent theoretical results (Dufwenberg et al. 2008) suggest that competition forces people to behave as if they were purely self-interested. We qualify this view. Social preferences are irrelevant if and only if two conditions are met: separability of preferences and completeness of contracts. These conditions are often plausible, but they fail to hold when uncertainty is important (financial markets) or when incomplete contracts are traded (labor markets). Social preferences can explain many of the anomalies frequently observed on these markets.
    Keywords: Social preferences, competition, separability, incomplete contracts, asset markets, labor markets.
    JEL: C9 D5 J0
    Date: 2009–12
  5. By: Mamatzakis, E; Remoundos, P
    Abstract: This paper, using a threshold vector error-correction (TVECM) model, examines whether BRENT crude spot and futures oil prices are cointegrated. By employing this methodology we are able to evaluate the degree and dynamics of transaction costs resulting from various market imperfections. TVECM model is applied on daily spot and futures oil prices covering the period 1990-2009. The hypothesis we test is to what extent BRENT crude is indeed an integrated oil market in terms of threshold effects and adjustment costs. Our findings support that market follows a gradual integration path. We find that BRENT crude spot and futures are cointegrated, though two regimes are clearly identified. This implies that a threshold exists and it is indeed significant. Adjustment costs in the error correction are present, and they are valid at the typical regime that is the dominant, and as a result should not be ignored.
    Keywords: Threshold Cointegration; BRENT crude futures; Non-normality; ML Estimation.
    JEL: C53 E27 E37
    Date: 2010–01
  6. By: Jambu, Marc-Antoine
    Abstract: Globalisation have generated a more or less competetive market according to the kind of rms. The Great moderation has structural causes such as market power, which is possible to study through the reduced form of the NKPC obtained with the Calvo and Rotemberg price setting assumptions. The Calvo model fails to predict the increase of price volatility on Business to Business (BotB) product markets where competition has denitively increased. By using a model with upstream and downstream rms, according to the Theory of rm Literature, where both are constraint by the Rotemberg price setting assumption, the model predicts the Great Moderation in OECD economies only if the hypothesis of an increase in the global markup is kept. Simulations replicate NKPC slope empirical estimations. This unusual hypothesis is supported by the increasing share of prot in value added, by the development of credit market in OECD countries and by the american increasing revenues inequalities. The model produces endogeneous incentives to a more exible labor market and the development of credit market. A global decreased competetive market gives an explanation of the barely growth of median wage, compare to the growth of global productivity during the period of the Great Moderation.
    Keywords: Great Moderation; New keynesian model; Market structure
    JEL: E32 F23 E23 F01 E20
    Date: 2010–01–07
  7. By: Cuihong Fan (Shanghai University of Finance and Economics); Byoung Heon Jun; Elmar Wolfstetter (Humboldt University at Berlin)
    Abstract: This paper reconsiders the licensing of a common value innovation to a downstream duopoly, assuming a dual licensing scheme that combines a first-price license auction with royalty contracts for losers. Prior to bidding firms observe imperfect signals of the expected cost reduction; after the auction the winning bid is made public. Bidders may signal strength to their rivals through aggressive bidding, which may however backfire and mislead the innovator to set an excessively high royalty rate. We provide sufficient conditions for existence of monotone bidding strategies and for the profitability of combining auctions and royalty contracts for losers.
    Keywords: Patents, licensing, auctions, royalty, innovation, R&D, mechanism design.
    JEL: D21 D43 D44 D45
    Date: 2010–01
  8. By: Tim Grebe (Gesellschaft für Innovationsforschung und Beratung mbH); Radosveta Ivanova-Stenzel (Institut für Wirtschaftstheorie I, Humboldt Universität zu Berlin); Sabine Kröger (Département d'économie, Université LavalPavillon J.A.DeSève)
    Abstract: Electronic commerce has grown extraordinarily over the years, with online auctions being extremely successful forms of trade. Those auctions come in a variety of different formats, such as the Buy-It-Now auction format on eBay, that allows sellers to post prices at which buyers can purchase a good prior to the auction. Even though, buyer behavior is well studied in Buy-It-Now auctions, as to this point little is known about how sellers set Buy-It-Now prices. We investigate into this question by analyzing seller behavior in Buy-It-Now auctions. More precisely, we combine the use of a real online auction market (the eBay platform and eBay traders) with the techniques of lab experiments. We find a striking link between the information about agents provided by the eBay market institution and their behavior. Information about buyers is correlated with their deviation from true value bidding. Sellers respond strategically to this information when deciding on their Buy-It-Now prices. Thus, our results highlight potential economic consequences of information publicly available in (online) market institutions.
    Keywords: electronic markets, experience, online auctions, BIN price, buyout price, single item auction, private value, experiment
    JEL: C72 C91 D44 D82
    Date: 2010–01
  9. By: E. Han Kim; Paige Ouimet
    Abstract: How employee share ownership plans (ESOPs) affect employee compensation and shareholder value depends on the size. Small ESOPs, defined as those controlling less than 5% of outstanding shares, benefit both workers and shareholders, implying positive productivity gains. However, the effects of large ESOPs on worker compensation and shareholder value are more or less neutral, suggesting little productivity gains. These differential effects appear to be due to two non-value-creating motives specific to large ESOPS: (1) To form management-worker alliances ala Pagano and Volpin (2005), wherein management bribes workers to garner worker support in thwarting hostile takeover threats and (2) To substitute wages with ESOP shares by cash constrained firms. Worker compensation increases when firms under takeover threats adopt large ESOPs, but only if the firm operates in a non-competitive industry. The effects on firm valuation also depend on the strength of product market competition: When the competition is strong (weak), most of the productivity gains accrue to employees (shareholders). Competitive industry also implies greater job mobility within the industry, enabling workers to take a greater portion of productivity gains.
    Keywords: ESOPs, Employee Incentives, Worker Wages and Compensation, Product Market Competition
    JEL: G32 M52 J54 J33
    Date: 2009–12
  10. By: Florian Baumann (Eberhard Karls University, Department of Economics); Tim Friehe (University of Konstanz, Department of Economics); Kristoffel Grechenig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This article shows that it may be socially optimal to grant accident victims less than full compensation. In our framework, firms are liable under product liability but also invest in care to prevent consumers switching to competitors. Affecting the partition of consumers by means of care-taking is not desirable from a social standpoint. Consequently, it may be optimal to reduce liability below full compensation in order to adjust firms’ care incentives.
    Keywords: Tort law; product liability, care level, asymmetric information, switching
    JEL: K13
    Date: 2010–01
  11. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn); Heike Hennig-Schmidt (University of Bonn, Dept. of Economics); Bernd Irlenbusch (London School of Economics and Max Planck Institute for Research on Collective Goods); Sebastian Kube (University of Bonn, Dept. of Economics and Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Does probation pay a double dividend? Society saves the cost of incarceration, and convicts preserve their liberty. But does probation also reduce the risk of recidivism? In a meta-study we show that the field evidence is inconclusive. Moreover it struggles with an identification problem: those put on probation are less likely to recidivate in the first place. We therefore complement the field evidence by a lab experiment that isolates the definitional feature of probation: the first sanction is conditional on being sanctioned again during the probation period. We find that probationers contribute less to a joint project; punishment cost is higher; efficiency is lower; inequity is higher. While experimental subjects are on probation, they increase their contributions to a joint project. However, once the probation period expires, they reduce their contributions. While in the aggregate these two effects almost cancel out, critically those not punished themselves do trust the institution less if punishment does not become effective immediately.
    Keywords: probation, recidivism, public goods, punishment, experimental economics
    JEL: C91 H41 K14 K42
    Date: 2009–11
  12. By: Lawrence M. Ausubel (Economics Department, University of Maryland); Peter Cramton (Economics Department, University of Maryland)
    Abstract: Forward markets, both medium term and long term, complement the spot market for wholesale electricity. The forward markets reduce risk, mitigate market power, and coordinate new investment. In the medium term, a forward energy market lets suppliers and demanders lock in energy prices and quantities for one to three years. In the long term, a forward reliability market assures adequate resources are available when they are needed most. The forward markets reduce risk for both sides of the market, since they reduce the quantity of energy that trades at the more volatile spot price. Spot market power is mitigated by putting suppliers and demanders in a more balanced position at the time of the spot market. The markets also reduce transaction costs and improve liquidity and transparency. Recent innovations to the Colombia market illustrate the basic elements of the forward markets and their beneficial role.
    Keywords: Auctions, electricity auctions, market design, forward markets
    JEL: D44 C78 L96
    Date: 2009
  13. By: Gordon Anderson; Ian Crawford; Andrew Leicester
    Abstract: Economic and Social Welfare is inherently multidimensional. However choosing a measure which combines several indicators is difficult and may have unintended and undesireable effects on the incentives for policymakers. We develope a nonparametric empirical method for deriving welfare rankings based on data envelopment which avoids the need to specify a weighting scheme. The results are valid for all possible social welfare functions which share certain cannonical properties. We apply this method to data on human development.
    Keywords: Welfare Rankings, Data Envelopment, Human development
    JEL: I3
    Date: 2010–01–14
  14. By: Lionel de Boisdeffre (Centre d'Economie de la Sorbonne)
    Abstract: We consider a pure exchange financial economy, where agents observe private information signals, form private anticipations and face an "exogenous uncertainty" on the future state, and an "endogenous uncertainty", on the future prices. At a sequential equilibrium, all agents expect the "true" price as a possible outcome, and elect optimal strategies, which clear on all markets at every time period. This concept differs from both traditional ones of temporary equilibrium and sequential equilibrium with perfect price foresight. We display on an example a continuum of sequential equilibria, varying with agents' anticipations. We show, when anticipations are private or prone to change, that "correct" price forecasts need always embed a set of "minimum uncertainty", which only depends on the fundamentals of the economy and current period prices. When anticipations are so correct, we prove the existence of a sequential equilibrium is still characterized by the no-arbitrage condition.
    Keywords: Sequential equilibrium, temporary equilibrium, perfect foresight, expectations, incomplete markets, asymmetric information, arbitrage, existence proof.
    JEL: D52
    Date: 2009–12
  15. By: Olivier Bomsel (CERNA - Centre d'économie industrielle - Mines ParisTech); Heritiana Ranaivoson (CERNA - Centre d'économie industrielle - Mines ParisTech)
    Abstract: The digitization of copyrighted goods and the dematerialization of their distribution over the Internet have weakened copyright, a key institution of the creative industries. One factor affecting the value of copyright stems from the broadband roll-out, wherein copyright enforcement costs have become higher than the estimated benefits of copyright. This paper analyzes the causes of this situation and suggests how a graduated response to infringers may durably decrease copyright enforcement costs. Beginning with a review of the economic literature on copyright focusing on its industrial aspects, the study then analyzes how the consumers' impunity provides incentives to “free ride” on copyright all along the vertical distribution chain. This rapidly increases copyright enforcement costs. Next, the paper describes both the graduated response mechanism and the voluntary agreement which initiated this system in France. In conclusion, this study argues that increasing the cost of free-riding for the final consumer should lead to a decrease of copyright enforcement costs and, therefore, higher returns in the creative industries.
    Keywords: Copyright, Creative industries, Regulation enforcement costs, Digitization, Graduated response.
    Date: 2009–12
  16. By: Bjørnskov, Christian; Dreher, Axel; Fischer, Justina A. V.; Schnellenbach, Jan
    Abstract: In this paper, we revisit the association between happiness and inequality. We argue that the perceived fairness of the income generation process affects this association. Building on a two-period model of individual life-time utility maximization, we predict that persons with higher perceived fairness will experience higher levels of life-time utility and are less in favor of income redistribution. In societies with a high level of actual social mobility, income inequality is perceived more positively with increased expected fairness. The opposite is expected for countries with low actual social mobility, due to an increasing relevance of a disappointment effect resulting from unsuccessful individual investments. Using the World Values Survey data and a broad set of fairness measures, we find strong support for the negative (positive) association between fairness perceptions and the demand for more equal incomes (subjective well-being). We also find strong empirical support for the disappointment effect in low social mobility countries. In contrast, the results for high-mobility countries turn out to be ambiguous.
    Keywords: Happiness; life satisfaction; subjective well-being ; inequality; income distribution; redistribution; political ideology; justice; fairness
    JEL: I31 H40 D31 J62 Z13
    Date: 2010–01–15
  17. By: Daisuke Tsuruta (National Graduate Institute for Policy Studies)
    Abstract: We investigate the financial resources used by small businesses in Japan during the period of recovery from a severe recession. Unlike large listed firms, small businesses cannot easily issue commercial debt or equity. Therefore, small businesses largely depend on trade credit and bank loans. Many previous studies argue that bank loans are cheaper than trade credit; so many firms (particularly unconstrained firms) use bank loans, especially in financially developed economies. However, the Japanese evidence does not support this view. First, small businesses with higher credit demand increase trade credit more during the period of the recovery from a severe recession. Second, creditworthy firms (for example, firms with more collateral assets) also increase trade credit to finance their growth opportunities. Third, firms in unstable industries increase trade credit more. This suggests that suppliers are able to offer credit, unlike banks, as they have a relative advantage in day-by-day monitoring.
    Date: 2010–01
  18. By: Non, Marielle
    Abstract: I study the location choice of competing shops. A shop can either be isolated or join a mall. A fraction of consumers is uninformed about prices and incurs costs to travel between market places and to enter a shop. The equilibrium mall size is computed for several parameter values, showing that mall and isolated shops can coexist. Several effects play a role. Mall shops attract more consumers, but isolated shops set a higher maximum price. Moreover, numerical evaluations show that an increase in mall size decreases the average price level and increases the participation level of uninformed consumers.
    Keywords: location choice; travel costs; pricing; consumer search
    JEL: L11 L13 D83
    Date: 2010–01–15
  19. By: Darcy, Jacques (European Investment Fund); Krämer-Eis, Helmut (European Investment Fund); Guellec, Dominique (Organisation for Economic Co-operation and Development); Debande, Olivier (European Investment Bank)
    Abstract: Global policy discussions increasingly focus on innovation and the knowledge economy as a driver of long-term growth. In parallel new forms of innovation processes are emerging, notably open innovation and innovation networks stressing the importance of connections between various stakeholders. Links between universities and the business sector are of particular importance as many inventions come out of universities but have to be further developed to become economically relevant innovations. New financing instruments and attracting private investors to technology transfer (TT) are necessary but difficult as the patterns of risk and information in this “in-between area” is complex: Technology is not basic anymore and it requires large amounts of capital to be scaled up – with uncertain market prospects. This paper addresses new financial instruments for TT, building on European Investment Fund’s experience in this field.
    Keywords: Technology Transfer; Financing; Innovation; Commercialisation; Funding gap; Patents; Licensing; Intellectual Property
    JEL: O30 O31 O32 O34
    Date: 2009–12–23
  20. By: Michael A. Cohen (University of Connecticut); Marina-Selini Katsaiti (University of Connecticut and University of Athens)
    Abstract: We present an overlapping-generations (OLG) macroeconomic model that applies a behavioral interpretation of preferences for goods that generate health risks. In this paper proneness to poor health is viewed as a cognitive miscalculation by economic agents between their expected health state over various consumption bundles and the actual health care they require for their health outcome. To model this the paper borrows insight from prospect theory and applies the reference-dependent preference framework to the specication of out utility model. In our model of the economy individual preferences are decomposed into intrinsic consumption utility and gain-loss utility associated with the miscalculation. Agents in the economy are stratied in their health states as well as their expected health care consumption according to some probability measure over the population. Heterogeneity introduced in this way generates consumers of varied proneness to risk associated with consumption of unhealthy goods because individuals have various marginal valuations of their miscalculation. In such a population, when all agents pay the same insurance premium, health-conscious agents shoulder the health care costs of their less health-conscious counterparts and the less health-conscious are engaged in less healthy consumption than they would if they paid actuarially fair premia. We demonstrate these eects in simulations by comparing the risk pooling equilibria to the actuarially fair pricing equilibria. This paper introduces the mathematical programming equilibrium constraint (MPEC) computational approach to compute model equilibria; we believe this approach is new to heterogeneous agent OLG model simulation.
    Keywords: Risky Consumption, Health care Cost, Insurance Premia Pricing, Two Sector Model, Obesity.
    JEL: I19 E21 O41
    Date: 2009–12

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