nep-mic New Economics Papers
on Microeconomics
Issue of 2010‒02‒05
twenty-one papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. The Timing of Endogenous Wage Setting under Bertrand Competition in a Unionized Mixed Duopoly By Choi, Kangsik
  2. Parallel Imports and Innovation in an Emerging Economy By A. Mantovani; A. Naghavi
  3. Quality Distortions in Vertical Relations By Pio Baake; Vanessa von Schlippenbach
  4. Will You Accept Without Knowing What? A Thuringian Newspaper Experiment of the Yes-No Game By Werner Güth; Oliver Kirchkamp
  5. Does the Law of One Price Hold in a High-Inflation Environment? A Tale of Two Cities in Turkey By Sule Akkoyunlu; Boriss Siliverstovs
  6. On the sustainability of collusion in Bertrand supergames with discrete pricing and nonlinear demand By Zimmerman, Paul R.
  7. A framework to enforce anti-predation rules By Hüschelrath, Kai; Weigand, Jürgen
  8. Patent thickets, licensing and innovative performance By Cockburn, Iain M.; MacGarvie, Megan J.; Müller, Elisabeth
  9. Have more strictly regulated banking systems fared better during the recent financial crisis? By Ahrend, Rudiger; Arnold, Jens; Murtin, Fabrice
  10. Forecasting with Equilibrium-correction Models during Structural Breaks By Jennifer L. Castle; Nicholas W.P. Fawcett; David F. Hendry
  11. Polish Households' Behavior in the Regular and Informal Economies By François Gardes; Christophe Starzec
  12. Knowledge diffusion and knowledge transfer: two sides of the medal By Klarl, Torben
  13. Fan welfare maximization as a club objective in a professional sports league By Paul Madden
  14. Central bank independence and conservatism under uncertainty: Substitutes or complements? By Carsten Hefeker; Blandine Zimmer
  15. Remittances and the Brain Drain Revisited: The microdata show that more educated migrants remit more By Albert Bollard; David McKenzie; Melanie Morten; Hillel Rapoport
  16. Social Business: A Step Toward Creating a New Economic and Social Order By Mohammad Yunus
  17. Disciplining Voluntary Environmental Standards at the WTO: An Indian Legal Viewpoint By Samir R Gandhi
  18. Martingale representation for Poisson processes with applications to minimal variance hedging By Guenter Last; Mathew D. Penrose
  19. Does interdisciplinarity lead to higher employment growth of academic spinoffs? By Müller, Bettina
  20. A multi-sectoral approach to the U.S. Great Depression By Pedro S. Amaral; James C. MacGee
  21. A strategic shift of automobile manufacturing firms in Turkey By Gursoy, Guner

  1. By: Choi, Kangsik
    Abstract: The paper examines the timing of endogenous wage setting under Bertrand competition in a unionized mixed duopoly. The results are that when the public firm chooses the timing of wage setting: (1) sequential wage setting is the outcome and (2) simultaneous wage setting is the outcome. The first result coincides with the choices of the private firm, its union, and the union of the public firm if imperfect substitutability is sufficiently large. This result is in contrast to the findings of prior literature. However, but the second result does not coincide between firms and their unions if imperfect substitutability is sufficiently small. However, simultaneous wage setting is more likely to improve the welfare if imperfect substitutability is sufficiently small. Furthermore, we find that the impact of sequential wage setting on the equilibrium path is lower in terms of improving welfare than the other outcome of sequential wage setting.
    Keywords: Endogenous Wage Setting; Bertrand Competition; Mixed Duopoly; Social Welfare.
    JEL: D21 J51 L13 H44
    Date: 2010–01–22
  2. By: A. Mantovani; A. Naghavi
    Abstract: This paper studies the consequences of parallel import (PI) on process innovation of firms heterogeneous in their production technology. In an international setting where foreign markets differ with respect to their intellectual property rights regime, a move by a technologically inferior firm to exploit a new unregulated market can result in imitation and PI. The impact of PI on innovation is determined by the degree of heterogeneity between firms and trade costs. Increasing trade costs shifts from the market share losses brought by PI from the more to the less productive firm. This induces the former to invest more in R&D. At this point, sales in the foreign market become a determinant of the R&D decision by the technologically inferior firm. For low levels of firm heterogeneity, PI increases output by this firm targeted for the unregulated market, hence increases its Innovation efforts. A tariff policy accompanied by opening borders to PI only increases welfare when the technological gap between the two firms are sufficiently large.
    JEL: F12 F13 L11
    Date: 2010–01
  3. By: Pio Baake; Vanessa von Schlippenbach
    Abstract: This paper examines how delivery tariffs and private quality standards are determined in vertical relations that are subject to asymmetric information. We consider an infinitely repeated game where an upstream firm sells a product to a downstream firm. In each period, the firms negotiate a delivery contract comprising the quality of the good as well as a non-linear tariff. Assuming asymmetric information about the actual quality of the product and focusing on incentive compatible contracts, we show that delivery contracts are more efficient the lower the firms' outside options, i.e. the higher their mutual dependency. Buyer power driven by a reduced outside option of the upstream firm enhances the efficiency of vertical relations, while buyer power due to an improved outside option of the downstream firm implies less efficient outcomes.
    Keywords: Quality Uncertainty, Private Standards, Vertical Relations, Buyer Power
    JEL: D82 L14 L15
    Date: 2010
  4. By: Werner Güth (Strategiec Interaction Group, Max Planck Institute of Economics, Jena); Oliver Kirchkamp (Friedrich-Schiller-University Jena, School of Economics and Business Administration)
    Abstract: Many economic experiments are run in the laboratory with students as participants. In this paper we use a newspaper experiment to learn more about external validity of lab research. Our workhorse is the Yes-No game. Unlike in ultimatum games responders of the Yes-No games do not know the proposal when deciding between whether to accept it or not. We use two different amounts that can be shared (100 Euro and 1000 Euro). In line with findings for the ultimatum game, offers were fairer and rejections less likely when participants are older and submit their decisisons via mail rather than the Internet. By comparing our results with other studies (using executives or students), we demonstrate, at least for this type of game, the external validity of lab research.
    JEL: C91 C93
    Date: 2010–01–25
  5. By: Sule Akkoyunlu (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Boriss Siliverstovs (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This study addresses price convergence in two cities in Turkey (Istanbul and Ankara) using the annual data over the three quarters of the 20th century (1922–1998), characterized by prevailing high inflation rates for most of the period. In contrast to the rest of the literature addressing convergence in price levels with a typical result of extremely slow convergence rates at best, we argue that convergence is much easier detected in growth rates rather than levels of prices. We suggest using the bounds testing procedure of Pesaran et al. (2001) for this purpose. We find a clear-cut evidence on the existence of a common driving force behind inflation dynamics in Istanbul and Ankara—a finding that is intuitively appealing from the point of view of economic theory.
    Keywords: Price convergence, Bounds testing procedure, Turkey
    JEL: C22 C32 C52 E31
    Date: 2010–01
  6. By: Zimmerman, Paul R.
    Abstract: In traditional industrial organization models of Bertrand supergames, the critical discount factor governing the sustainability of collusion is independent of key demand and supply parameters. Recent research has demonstrated that these counterintuitive results stem from the assumption that firms can change prices in infinitesimally small increments (i.e., continuously). This note considers the effects of demand curvature in the context of a model of collusion where, as in Gallice (2008), Bertrand competitors can deviate only by lowering prices by some small, discrete amount. Two alternative demand specifications that capture the influence of demand curvature are considered. In either case, it is shown that with discrete price changes the critical discount factor is determined by the key demand parameters, including demand curvature. However, the direct effects of increased concavity (or convexity) in market demand on the sustainability of collusion runs in opposite directions across the two models. This discrepancy is shown to arise from the way in which the respective demand curves rotate in response to a change in the demand curvature parameter. The results support the conclusion of earlier research that determining the potential for collusion in homogenous goods industries likely requires careful case-by-case investigation.
    Keywords: Bertrand supergames; cartels; collusion sustainability; discrete pricing; nonlinear demand
    JEL: L13 L41
    Date: 2010–01–25
  7. By: Hüschelrath, Kai; Weigand, Jürgen
    Abstract: The paper develops a framework to enforce anti-predation rules that explicitly takes the intervention stage into account. In particular, it is proposed to improve predation enforcement by focusing on two channels: refining the current regime, and amending it. With respect to the refinement of the current predation enforcement regime, criteria for the imposition of optimal gain- or harm-based fines are derived in order to sharpen the deterrent effect of predation enforcement. However, given the very low probability of conviction for predators a policy proposal solely based on an increase in the fines for detected and convicted predators might be too weak to significantly amplify the deterrence effect in particular and to improve predation enforcement in general. As a consequence, the introduction of a pre-screening approach is proposed, which aims at identifying industries in which entry is difficult but desirable and a predation strategy might be a suitable instrument for an incumbent to fight such occasional entry attempts. In those industries, it is advisable to reduce the high standard of proof in predation enforcement, as its basic justification - the danger to create a negative deterrence effect - is significantly reduced. --
    Keywords: Competition policy,monopolisation,predation,enforcement,sanctions,screening
    JEL: K21 L41
    Date: 2009
  8. By: Cockburn, Iain M.; MacGarvie, Megan J.; Müller, Elisabeth
    Abstract: We examine the relationship between fragmented intellectual property (IP) rights and the innovative performance of firms, taking into consideration the role played by in-licensing of IP. We find that firms facing more fragmented IP landscapes have a higher probability of in-licensing. For firms with small patent portfolios we also find a positive association between fragmentation and licensing costs as a share of sales. We observe a negative relationship between IP fragmentation and innovative performance, but only for firms that engage in in-licensing. In contrast, greater IP fragmentation is associated with higher innovative performance for firms that do not in-license. Furthermore, the effects of fragmentation on innovation also appear to depend on the size of a firm’s patent portfolio. These results suggest that the effects of fragmentation of upstream IP rights are not uniform, and instead vary according to the characteristics of the downstream firm. --
    Keywords: patent thickets,licensing,innovative performance
    JEL: O34 O31
    Date: 2009
  9. By: Ahrend, Rudiger; Arnold, Jens; Murtin, Fabrice
    Abstract: We assess whether during the recent financial crisis banking systems in countries with more stringent prudential banking regulation have proved more stable. We find indicators of regulatory strength to be relatively well correlated with the extent to which countries have escaped damage during the recent crisis, as measured either by the degree of equity value destruction in the banking sector or by the fiscal cost of financial sector rescue.
    Keywords: Prudential regulation; banking; stability; financial crisis; crisis cost; banking sector bail-out; banking share prices.
    JEL: G28 G21
    Date: 2009–12–20
  10. By: Jennifer L. Castle; Nicholas W.P. Fawcett; David F. Hendry
    Abstract: When location shifts occur, cointegration-based equilibrium-correction models (EqCMs) face forecasting problems. We consider alleviating such forecast failure by updating, intercept corrections, differencing, and estimating the future progress of an ‘internal’ break. Updating leads to a loss of cointegration when an EqCM suffers an equilibrium-mean shift, but helps when collinearities are changed by an ‘external’ break with the EqCM staying constant. Both mechanistic corrections help compared to retaining a pre-break estimated model, but an estimated model of the break process could outperform. We apply the approaches to EqCMs for UK M1, compared with updating a learning function as the break evolves.
    Keywords: Cointegration, Equilibrium-correction, Forecasting, Location shifts, Collinearity, M1
    JEL: C1 C53
    Date: 2010
  11. By: François Gardes (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Christophe Starzec (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: The paper analyzes characteristics of the informal economy in Poland in the context of transition using a specific survey carried out in the frame of the classic Labor Force Survey 1995 by the Polish National Statistical office (GUS). The participation probabilities of three types of informal activities (working, buying and hiring) are discussed. Their interdependencies are discussed the hypothesis of the network or neighborhood effects. The impact of the household's participation on informal markets on its regular consumption is estimated by imputing the informal activity probabilities to the consumption surveys and panel. Then, the specific consumption profiles of participants in the informal market can be identified. This participation does influence significantly more than half of the household's expenditure groups. Moreover, the participants of the informal economy distinguish themselves by the higher individual full prices (integrating non monetary constraints and resources).
    Keywords: Informal economy participation, Consumer behavior, Cross-section-panel estimation
    Date: 2009–09–01
  12. By: Klarl, Torben
    Abstract: Understanding the way in which knowledge is technically produced and transferred, and how its diffusion path can be characterized is of fundamental importance for the performance of an economy. Although this fact seems to be plausible ex ante, the relevant literature so far has paid less attention investigating the microeconomic link between knowledge transfer and knowledge diffusion in a comprehensive approach. The aim of this paper is to highlight the link between knowledge transfer, knowledge diffusion and network effects in a stochastic environment, because the adoption decision of new knowledge should be treated as a stochastic event. For this reason, a new knowledge diffusion model in the line of Bass (1969) has been put forward, which integrates knowledge diffusion and knowledge transfer. The advantage of the proposed model is twofold. From a theoretical point of view, not only the so-called unimodal diffusion phenomena can be modelled, but also bimodal diffusion phenomena can be obtained. From an empirical point of view, the model which incorporates heteroscedastic errors and mean reverting behaviour can be theoretically estimated directly within a standard SUR context. --
    Keywords: Knowledge diffusion,knowledge transfer,SUR
    JEL: C50 C51 C61 D89
    Date: 2009
  13. By: Paul Madden
    Date: 2010
  14. By: Carsten Hefeker; Blandine Zimmer
    Abstract: This paper revisits the trade-off between central bank independence and conservatism using a New Keynesian model with uncertainty about the central banker's output gap target. It is shown that when this uncertainty is high, the trade-off no longer holds. In this case, the optimal combination between independence and conservatism is characterised by complementarity.
    Keywords: central bank independence, conservatism, transparency of monetary policy
    JEL: E52 E58
    Date: 2010
  15. By: Albert Bollard (Stanford University); David McKenzie (World Bank, BREAD, IZA and CReAM); Melanie Morten (Yale University); Hillel Rapoport (Bar-Ilan University, EQUIPPE and CID, Harvard University)
    Abstract: Two of the most salient trends surrounding the issue of migration and development over the last two decades are the large rise in remittances, and an increased flow of skilled migration. However, recent literature based on cross-country regressions has claimed that more educated migrants remit less, leading to concerns that further increases in skilled migration will hamper remittance growth. We revisit the relationship between education and remitting behavior using microdata from surveys of immigrants in eleven major destination countries. The data show a mixed pattern between education and the likelihood of remitting, and a strong positive relationship between education and the amount remitted conditional on remitting. Combining these intensive and extensive margins gives an overall positive effect of education on the amount remitted. The microdata then allow investigation as to why the more educated remit more. We find the higher income earned by migrants, rather than characteristics of their family situations explains much of the higher remittances.
    Keywords: Remittances, Migration, Brain Drain, Education
    JEL: O15 F22 J61
    Date: 2009–10
  16. By: Mohammad Yunus
    Abstract: The concept of social business flows from a firm conviction that profit or benefit is not the only motivating factor for an entrepreneur and an entrepreneur can also be motivated by social goals and enjoy success. Social business, as advocated by the author, is essentially a non-loss, non-dividend business aimed at social objectives like education, health, environment, etc. Yet another type of social business is business that is profitable but is owned by the poor and the disadvantaged, who can gain either through receiving direct dividends or some indirect benefits.Seeing the effectiveness of social business, governments may decide to create their own social businesses or partner with citizen-run social businesses and/or incorporate the lessons from the social businesses to improve the effectiveness of their own programmes. [Second Professor Hiren Mukherjee Memorial Annual Lecture]
    Keywords: social business, microcredit, Nobel Laureate, Bangladesh,Economics, Political Science
    Date: 2010
  17. By: Samir R Gandhi
    Abstract: Whether the WTO dispute settlement mechanism offers India an effective remedy against the misuse of NGO Standards or does India needs to adopt an alternate strategy to address such concerns is evaluated. The paper argues that an amendment to the text of the TBT Agreement is perhaps the most effective way regulating the growth of NGO Standards and for removing any ambiguity in or misinterpretation by the dispute settlement mechanism. In addition, India could push for a more ambitious work agenda at the CTE within the ongoing Doha Round negotiations. [ICRIER WP No. 181].
    Keywords: ENVIRONMENTAL standards, non-profit, amendment, industry, manufacturers, privatization, NGO, green consumerism, negotiations, NGO, India, protection, Doha round, negotiations, WTO, Indian, voluntary, trade report, technological innovations, standardization, social issues, global commerce,
    Date: 2010
  18. By: Guenter Last; Mathew D. Penrose
    Abstract: We consider a Poisson process $\eta$ on a measurable space $(\BY,\mathcal{Y})$ equipped with a partial ordering, assumed to be strict almost everwhwere with respect to the intensity measure $\lambda$ of $\eta$. We give a Clark-Ocone type formula providing an explicit representation of square integrable martingales (defined with respect to the natural filtration associated with $\eta$), which was previously known only in the special case, when $\lambda$ is the product of Lebesgue measure on $\R_+$ and a $\sigma$-finite measure on another space $\BX$. Our proof is new and based on only a few basic properties of Poisson processes and stochastic integrals. We also consider the more general case of an independent random measure in the sense of It\^o of pure jump type and show that the Clark-Ocone type representation leads to an explicit version of the Kunita-Watanabe decomposition of square integrable martingales. We also find the explicit minimal variance hedge in a quite general financial market driven by an independent random measure.
    Date: 2010–01
  19. By: Müller, Bettina
    Abstract: Does heterogeneity in the educational backgrounds of the founders matter for firm success? Are team foundations more successful than single entrepreneurs? These questions are analysed using data on academic spinoffs in Germany. Firm success is measured by employment growth. I find that team foundations have higher employment growth than single entrepreneurs. Team foundations of engineers perform better when they have a business scientist in the team. However, different subjects per se and heterogeneity in the academic origins of the founders do not play a significant role for the employment growth of academic spinoffs. --
    Keywords: human capital,entrepreneurship,academic spinoffs,employment growth
    JEL: C12 L25 M13
    Date: 2009
  20. By: Pedro S. Amaral; James C. MacGee
    Abstract: We document sectoral differences in changes in output, hours worked, prices, and nominal wages in the United States during the Great Depression. We explore whether contractionary monetary shocks combined with different degrees of nominal wage frictions across sectors are consistent with both sectoral as well as aggregate facts. To do so, we construct a two-sector model where goods from each sector are used as intermediates to produce the sectoral goods that in turn produce final output. One sector is assumed to have flexible nominal wages, while nominal wages in the other sector are set using Taylor contracts. We calibrate the model to the U.S. economy in 1929, and then feed in monetary shocks estimated from the data. We find that while the model can qualitatively replicate the key sectoral facts, it can account for less than a third of the decline in aggregate output. This decline in output is roughly half as large as the one implied by a one-sector model. Alternatively, if wages are set using Calvo-type contracts, the decline in output is even smaller.
    Keywords: Depressions ; Wages ; Prices
    Date: 2009
  21. By: Gursoy, Guner
    Abstract: This paper examines major business environmental changes influencing a strategic shift of automobile manufacturing firms in Turkey. Within a conceptual model consisting of environmental forces, strategic shift, and mediating variables, including firm size, ownership pattern, and market entry mode, it empirically investigates how such market changes influenced the business strategies of automotive firms in Turkey. The findings indicate that the multinational automotive firms in Turkey have shifted their strategic focus from relying solely on the domestic market to balancing domestic and export markets because of environmental forces. The paper concludes with discussions and suggestions for further research on the subject.
    Keywords: market environment; strategic shift; FDI; foreign direct investment; export performance; multinational corporations.
    JEL: G32 G3
    Date: 2009

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