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

  1. When Are Voluntary Export Restraints Voluntary? : A Differential Game Approach By Kenji Fujiwara
  2. Competing engines of growth: innovation and standardization By Daron Acemoglu; Gino Gancia; Fabrizio Zilibotti
  3. Bargaining in Technology Markets: An empirical study of biotechnology alliances By KINUKAWA Shinya; MOTOHASHI Kazuyuki
  4. A Growth Model for the Quadruple Helix Innovation Theory By Óscar Afonso; Sara Monteiro; Maria Thompson
  5. Costs, demand, and producer price changes By Claire Loupias; Patrick Sevestre
  6. Competition under Dynamic Lot Sizing Costs with Capacity Acquisition By Hongyan Li; Joern Meissner
  7. Product Diversification and Labor Productivity Dispersion in German Manufacturing Industries By Rene Söllner
  9. Innovation: Principles and Strategies By Ramadani, Veland; Gerguri, Shqipe
  10. The Inclusiveness of Exclusion By Paulo Barelli; Suren Basov; Mauricio Bugarin; Ian King
  11. Human Capital Diversity and Product Innovation: A Micro-Level Analysis By Rene Söllner
  12. Environmental Standards under International Oligopoly By ISHIKAWA Jota; OKUBO Toshihiro
  13. Value Creation and Value Capture at Manufacturing Firms : Importance of Non-functional Value By Nobeoka, Kentaro
  14. Repo Runs By Martin, A.; Skeie, D.; Thadden, E.L. von
  15. Firm ownership and rent sharing By Natália P. Monteiro; Miguel Portela; Odd Rune Straume
  16. Why (and how) to regulate Power Exchanges in the EU market integration context? By Leonardo Meeus
  17. Threshold Pricing in a Noisy World By Timo Henckel; Gordon D. Menzies; Daniel J. Zizzo
  18. Modelling Information Flows in Financial Markets By Dorje C. Brody; Lane P. Hughston; Andrea Macrina
  19. Volatility Co-movement of ASEAN-5 Equity Markets By Oh, Swee-Ling; Lau, Evan; Puah, Chin-Hong; Abu Mansor, Shazali
  20. Revisiting the Migration-Development Nexus: A Gravity Model Approach By Emmanuel Letouzé; Mark Purser; Francisco Rodríguez; Matthew Cummins
  21. Model selection, estimation and forecasting in VAR models with short-run and long-run restrictions By George Athanasopoulos; Osmani Teixeira de Carvalho Guillén; João Victor Issler; Farshid Vahid
  22. The Role of Bond Finance in Firms' Survival During the Asian Crisis By Marina-Eliza Spaliara; Serafeim Tsoukas
  23. Valuing School Quality Via School Choice Reform By Stephen Machin; Kjell Salvanes
  24. Prospects of economic cooperation in the Bangladesh, China, India and Myanmar region: A quantitative assessment By Md. Tariqur Rahman; Muhammad Al Amin

  1. By: Kenji Fujiwara (Kwansei Gakuin University)
    Abstract: We revisit voluntariness of voluntary export restraints (VERs) in a differential game model of duopoly with sticky prices. We show that a VER set at the free trade level has no effect on equilibrium under open-loop strategies while the same policy results in a smaller profit for the exporting firm, i.e. it is involuntary under a non-linear feedback strategy. Moreover, we prove an extended proposition of Dockner and Haug (1991) on voluntariness of VERs under a linear feedback strategy.
    Date: 2010–04
  2. By: Daron Acemoglu; Gino Gancia; Fabrizio Zilibotti
    Abstract: We study a dynamic general equilibrium model where innovation takes the form of the introduction new goods, whose production requires skilled workers. Innovation is followed by a costly process of standardization, whereby these new goods are adapted to be produced using unskilled labor. Our framework highlights a number of novel results. First, standardization is both an engine of growth and a potential barrier to it. As a result, growth in an inverse U-shaped function of the standardization rate (and of competition). Second, we characterize the growth and welfare maximizing speed of standardization. We show how optimal IPR policies affecting the cost of standardization vary with the skill-endowment, the elasticity of substitution between goods and other parameters. Third, we show that the interplay between innovation and standardization may lead to multiple equilibria. Finally, we study the implications of our model for the skill-premium and we illustrate novel reasons for linking North-South trade to intellectual property rights protection.
    Keywords: Growth, technology adoption, competition policy, intellectual property rights
    JEL: F43 O31 O33 O34
    Date: 2010–04
  3. By: KINUKAWA Shinya; MOTOHASHI Kazuyuki
    Abstract: We empirically examine the distribution of bargaining power between buyers and sellers on the biotechnology markets by estimating the extracted surplus in alliance agreements, which depends on each party's bargaining power. The results show that buyers have extracted more surplus than sellers. However, these also reveal that the surplus extracted by buyers has been decreasing while that of the sellers has been increasing. We construe that the prices of biotechnologies have been lower than their market value because of the strong bargaining position of buyers, but that sellers' negotiating power may been improving.
    Date: 2010–04
  4. By: Óscar Afonso (CEF.UP, OBEGEF and Faculdade de Economia, Universidade do Porto, Portugal); Sara Monteiro (Nice Sophia Antipolis University, Faculty of Law, Political Science, Economics and Management, CEMAFI, Nice, France); Maria Thompson (NIPE, Departamento de Economia, Universidade do Minho, Portugal)
    Abstract: We propose a theoretical growth model with which to frame analytically the Quadruple Helix Innovation Theory (QHIT). The aim is to emphasise the investment in innovation transmission mechanisms in terms of economic growth and productivity gains, in one-high-technology sector, by stressing the role played by the helices of the Quadruple Helix Innovation Model: Academia and Technological Infrastructures, Firms of Innovation, Government and Civil Society. In the existing literature, the relationship between the helices and respective impacts on economic growth does not appear clear. Results are fragile due to data weakness and the inexistence of a theoretical framework to specify the relationship between the helices. Hence our motivation for providing the QHIT with a theoretical growth model. Our intent is to model the importance of emerging, dynamically adaptive, and transdisciplinary knowledge and innovation ecosystems to economic growth. We find that higher economic growth rate is obtained as a result of an increase in synergies and complementarities between different productive units, or an increase in productive government expenditure.
    Keywords: Economic Growth, Quadruple Helix Innovation Model, Innovation Ecosystems
    JEL: O10 O18 O31
    Date: 2010–04
  5. By: Claire Loupias (Research Department of the Banque de France.); Patrick Sevestre (Paris School of Economics, Université de Paris I – Panthéon Sorbonne, France.)
    Abstract: We estimate an ordered probit model in order to explain the occurrence and magnitude of producer price changes in the French manufacturing sector. We use data consisting essentially of the Banque de France monthly business surveys, pooled over the years 1998-2005. Our results show that changes in the price of intermediate inputs are the main driver of producer price changes. Firms also appear to react significantly to changes in the producer price index of their industry. Variations in labor costs as well as in the production level also appear to increase the likelihood of a price change but their influence seems to be of a lesser importance. We also show that estimating an unconstrained dynamic model allows improving the estimation results as compared to those associated with a standard state-dependent model. Finally, our results point to an asymmetry in price adjustments. When they face a change in their costs, firms adjust their prices upward more often and more rapidly than they do it downward. JEL Classification: E31, C23, C25.
    Keywords: Price stickiness, frequency of price changes, price setting-behavior, survey data, ordered probit model.
    Date: 2010–04
  6. By: Hongyan Li (Aarhus School of Business, Aarhus University, Denmark); Joern Meissner (Department of Management Science, Lancaster University Management School)
    Abstract: Lot-sizing and capacity planning are important supply chain decisions, and competition and cooperation affect the performance of these decisions. In this paper, we look into the dynamic lot sizing and resource competition problem of an industry consisting of multiple firms. A capacity competition model combining the complexity of time-varying demand with cost functions and economies os scale arising from dynamic lot-sizing costs is developed. Each firm can replenish inventory at the beginning of each period in a finite planning horizon. Fixed as well as variable production costs incur for each production setup, along with inventory carrying costs. The individual production lots of each firm are limited by a constant capacity restriction, which is purchased up front for the planning horizon. The capacity can be purchased from a spot market, and the capacity acquisition cost fluctuates with the total capacity demand of all the competing firms. We solve the competition model and establish the existence of a capacity equilibrium over the firms and the associated optimal dynamic lot-sizing plan for each firm under mild conditions.
    Keywords: computational economics, industrial competition, operations research, game theory, capacity optimization, supply chain management, lot sizing, heuristics, equilibrium
    JEL: C61
    Date: 2010–04
  7. By: Rene Söllner (Friedrich Schiller University Jena, DFG-RTG "The Economics of Innovative Change")
    Abstract: Empirical research has shown tremendous productivity differences, even within narrowly defined industries. A great host of studies is explainsing this productivity disparity by factors such as idiosyncratic technology shocks, input price differences, management skills, or international trade. Although these explanations are undoubtedly important, the current paper suggests that product diversification strategies of firms can also play an important role. Using a matched producer-product panel dataset of German manufacturing industries over the period 2003-2006, we find that the average degree of product diversification across industry establishments is positively related to within-industry labor productivity dispersion.
    Keywords: Product Diversification, Productivity, Industrial Dynamics
    JEL: L11 L22 L25
    Date: 2010–04–19
  8. By: Janvier D. Nkurunziza
    Abstract: The financial sector in Burundi has had a very limited effect on the country's development. High political and economic risks have prevented banks from engaging in long-term lending, constraining long-term investment. Moreover, the industrial organisation of the financial sector is not conducive for development lending because the sector is used more as a source of rents than development finance. As a result, the financial sector has been unable to address the needs of the core drivers of growth in Burundi, namely, agriculture and industry. Therefore, increasing the financial sector's participation in Burundi's economic development will require an improvement in political and macro-economic stability, as well as an increase of financial institutions' long-term re-sources. Most particularly, development banking should play its role of fostering the development of agriculture and the rural economy. In addition, more competition in the financial sector should be encouraged with the aim of diversifying financial services and pushing the sector's boundaries beyond the traditional urban market to embrace the rural economy where most economic activities take place.
    Date: 2010–03–15
  9. By: Ramadani, Veland; Gerguri, Shqipe
    Abstract: Competition between companies differentiates a lot nowadays compared to many years before. They compete in "nicety" that are so small but so important. Companies are trying to achieve competitive advantage in order to help them obtain a better and a stable position in the marketplace. The best way for companies to achieve a competitive advantage is through innovation. This paper addresses the meaning of innovation what does innovation present, types of innovation specifically discussing the right way of usage. In order for companies to get the as more innovations as possible it is necessary for them to be familiar with the process of innovation and its principles which innovation was found on. There are several types of innovation or ways in which companies can achieve innovation in a level of whole organization. This paper discusses the ways how that can be achieved, starting from their products and services, ways of selling, supply ect. Innovation is essential for sustainable growth and economic development. Several core conditions enable innovation and encourage economic growth. In the modern economy, innovation is crucial for value creation, growth and employment and innovation processes take place at the enterprise, regional and national level. Innovation will lead to new businesses as well as to the increased competitiveness of existing enterprises. In this paper are not covered all the characteristics of innovation but it presents a very good basis for a proper usage of innovation and ways of transforming it in competitive advantage for companies. Also this paper identifies the impact that innovation has on economic growth.
    Keywords: innovation; types of innovation; principles and strategies of innovation; sources of innovation
    JEL: A22 A10
    Date: 2010–06–09
  10. By: Paulo Barelli; Suren Basov; Mauricio Bugarin; Ian King
    Abstract: We extend Armstrong’s (1996) result on exclusion in multi-dimensional screening models in two key ways, providing support for the view that this result is quite generic and applicable to many different markets. First, we relax the strong technical assumptions he imposed on preferences and consumer types. Second, we extend the result beyond the monopolistic market structure to generalized oligopoly settings with entry. We also analyse applications to several quite different settings: credit markets, automobile industry, research grants, the regulation of a monopolist with unknown demand and cost functions, and involuntary unemployment in the labor market.
    Keywords: Multidimensional screening; exclusion; regulation of amonopoly; involuntary unemployment
    JEL: C73 D82
    Date: 2010
  11. By: Rene Söllner (Friedrich Schiller University Jena, DFG-RTG "The Economics of Innovative Change")
    Abstract: The paper investigates the relationship between human capital diversity measured in terms of occupational diversity and a firm's likelihood to innovate. The empirical analysis is based on a linked employer-employee panel dataset of German firms over the period 1998 to 2007. Despite notable differences between service and manufacturing rms, our results clearly indicate a positive relationship between occupational diversity and the propensity to innovate.
    Keywords: Human Capital, Diversity, Innovation
    JEL: J24 L20 O31
    Date: 2010–04–19
  12. By: ISHIKAWA Jota; OKUBO Toshihiro
    Abstract: We explore the effects of domestic environmental standards when a domestic firm and a foreign rival compete in the domestic market. We focus on a situation where the introduction of environmental standards forces the foreign product out of the domestic market because it does not meet the standards. Such prohibitive standards may induce the foreign firm to produce an environmentally friendly good through R&D or licensing obtained from the domestic firm. However, this does not guarantee that the product, which now complies with the environmental standards, will improve the environment. In the case of licensing, governments may intervene to shift the rent from the domestic firm. In certain circumstances, the shifted rent could exceed the amount paid by the foreign firm for licensing.
    Date: 2010–04
  13. By: Nobeoka, Kentaro
    Abstract: Most large Japanese manufacturers are good at creating value utilizing their engineering capabilities but poor at capturing value in terms of creating profit and added value. This paper discusses conditions to capture value, after explaining a distinction between value creation and value capture. In order to capture value, manufacturers have to (1) link manufacturing excellence with uniqueness and differentiation from competitors, and (2) create customer value, enticing customers to pay premiums for the differentiation, and to do these two things simultaneously. In the second half of this paper, we particularly focus on customer value and discuss the importance of the non-functional value. Non-functional value has become a critical factor for manufacturers to capture value by creating customer value.
    Date: 2010–04
  14. By: Martin, A.; Skeie, D.; Thadden, E.L. von (Tilburg University, Center for Economic Research)
    Abstract: This paper develops a model of financial institutions that borrow short- term and invest into long-term marketable assets. Because these financial intermediaries perform maturity transformation, they are subject to runs. We endogenize the profits of the intermediary and derive distinct liquidity and solvency conditions that determine whether a run can be prevented. We first characterize these conditions for an isolated intermediary and then generalize them to the case where the intermediary can sell assets to prevent runs. The sale of assets can eliminate runs if the intermediary is solvent but illiquid. However, because of cash-in-the-market pricing, this becomes less likely the more intermediaries are facing problems. In the limit, in case of a general market run, no intermediary can sell assets to forestall a run, and our original solvency and liquidity constraints are again relevant for the stability of financial institutions.
    Keywords: Investment banking;securities dealers;repurchase agreements;tri-party repo;runs;financial fragility.
    JEL: E44 E58 G24
    Date: 2010
  15. By: Natália P. Monteiro (Universidade do Minho - NIPE); Miguel Portela (Universidade do Minho - NIPE, Tinbergen Institute and IZA Bonn); Odd Rune Straume (Universidade do Minho - NIPE)
    Abstract: We analyse - theoretically and empirically - how private versus public ownership of firms affects the degree of rent sharing between firms and their workers. Using a particularly rich linked employer-employee dataset from Portugal, covering a large number of corporate ownership changes across a wide spectrum of economic sectors over more than 20 years, we find a positive relationship between private ownership and rent sharing. Based on our theoretical analysis, this result cannot be explained by private firms being more profit oriented than public ones. However, the result is consistent with privatisation leading to less job security, implying stronger efficiency wage effects.
    Keywords: rent sharing; private vs public ownership; panel data
    JEL: J45 D21 C23
    Date: 2010
  16. By: Leonardo Meeus
    Abstract: Power Exchanges (PXs) are key market institutions in open and market-based electricity industries. This paper aims at contributing to the ongoing debate on why and how to regulate Power Exchanges in the EU market integration context. . The paper starts by stating that two different types of PXs have to be distinguished, i.e. "Merchant" PXs and the "Cost of Service Regulated" PXs. The paper continues by comparing the typical incentives of these two types of PXs to perform the basic PX tasks in an isolated national market and in a market integration context. The paper concludes by deriving from this analytical frame the most relevant regulatory actions..
    Keywords: Regulation, Exchanges, Grid access, Power Markets.
    Date: 2010–01–29
  17. By: Timo Henckel; Gordon D. Menzies; Daniel J. Zizzo
    Abstract: We propose that the formation of beliefs be treated as statistical hypothesis tests, and label such beliefs inferential expectations. If a belief is overturned through the build-up of evidence, we assume agents switch to the rational expectation. We build a state dependent Phillips curve, and show that adjustments to equilibria may be contaminated by noise adverse selection, where agents in possession of extreme information are the first to adjust to changed economic circumstances. This approach is able to replicate recent micro-level evidence on firms’ pricing behavior and sheds light onto the dynamics of disaggregated prices
    JEL: E30 E50
    Date: 2010–01
  18. By: Dorje C. Brody; Lane P. Hughston; Andrea Macrina
    Abstract: This paper presents an overview of information-based asset pricing. In this approach, an asset is defined by its cash-flow structure. The market is assumed to have access to "partial" information about future cash flows. Each cash flow is determined by a collection of independent market factors called X-factors. The market filtration is generated by a set of information processes, each of which carries information about one of the X-factors, and eventually reveals the X-factor. Each information process has two terms, one of which contains a "signal" about the associated X-factor, and the other of which represents "market noise". The price of an asset is given by the expectation of the discounted cash flows in the risk-neutral measure, conditional on the information provided by the market. When the market noise is modelled by a Brownian bridge one is able to construct explicit formulae for asset prices, as well as semi-analytic expressions for the prices and greeks of options and derivatives. In particular, option price data can be used to determine the information flow-rate parameters implicit in the definitions of the information processes. One consequence of the modelling framework is a specific scheme of stochastic volatility and correlation processes. Instead of imposing a volatility and correlation model upon the dynamics of a set of assets, one is able to deduce the dynamics of the volatilities and correlations of the asset price movements from more primitive assumptions involving the associated cash flows. The paper concludes with an examination of situations involving asymmetric information. We present a simple model for informed traders and show how this can be used as a basis for so-called statistical arbitrage. Finally, we consider the problem of price formation in a heterogeneous market with multiple agents.
    Date: 2010–04
  19. By: Oh, Swee-Ling; Lau, Evan; Puah, Chin-Hong; Abu Mansor, Shazali
    Abstract: Purpose – Economic cross-linkages and the increased co-movement of asset prices across international markets are important outcomes as the result of globalization. Hereby, the nature of international stock markets and the extent to which the 1997-1998 East Asian turmoil had affected the market relationship of five countries of Association of Southeast Asian Nations (ASEAN-5) remain as probing questions. Design/methodology/approach – We resort to the standard time series econometrics analysis. These include the unit root, cointegration and the Granger causality tests. Hereby, further empirical analyzes is conducted upon two sub-periods of interest: (1) pre-crisis period from 1987:1 to 1997:7 and (2) post-crisis period from 1997:8 to 2007:12. This is to allow for possible transitional motion leading to and departing from the crisis. Findings – Using an array of econometrics analysis upon the stock price volatility series, we found partial market integration for the pre-crisis; whereas in the post-crisis, complete integration prevails. Hence, the financial meltdown in 1997 is said to be a contagion led crisis as markets integrate well off after the crisis than prior to it. Nonetheless, long run portfolio asset diversification benefits across the ASEAN-5 basin are reduced as markets are integrated in both the pre- and post-crisis. Originality/value – The paper is of value by showing to uncover the issue of interdependence of stock market integration focusing on the ASEAN-5 economies. The formation of the ASEAN Investment Area (AIA- 1998) parallel with the establishment of a developed ASEAN Index-Financial Times Stock Exchange (FTSE) regional index is viable to foster deeper regional market convergence.
    Keywords: ASEAN-5; Portfolio Diversification; Volatility co-movement
    JEL: C32 G15 C22
    Date: 2010–04–03
  20. By: Emmanuel Letouzé (Human Development Report Office (HDRO), United Nations Development Programme); Mark Purser (Human Development Report Office (HDRO), United Nations Development Programme); Francisco Rodríguez (Human Development Report Office (HDRO), United Nations Development Programme); Matthew Cummins (Human Development Report Office (HDRO), United Nations Development Programme)
    Abstract: This paper presents empirical estimates of a gravity model of bilateral migration that properly accounts for non-linearities and tackles causality issues through an instrumental variables approach. In contrast to the existing literature, which is limited to OECD data, we have estimated our model using a matrix of bilateral migration stocks for 127 countries. We find that the inverted-U relationship between income at origin and migration found by other authors survives the more demanding bilateral specification but does not survive both instrumentation and introduction of controls for the geographical and cultural proximity between country pairs. We also evaluate the effect of migration on origin and destination country income using the geographically determined component of migration as a source of exogenous variation and fail to find a significant effect of migration on origin or destination income.
    Keywords: human development, human mobility, migration, poverty
    JEL: F16 F22 O15 O19 O57
    Date: 2009–10
  21. By: George Athanasopoulos; Osmani Teixeira de Carvalho Guillén; João Victor Issler; Farshid Vahid
    Abstract: We study the joint determination of the lag length, the dimension of the cointegrating space and the rank of the matrix of short-run parameters of a vector autoregressive (VAR) model using model selection criteria. We consider model selection criteria which have data-dependent penalties as well as the traditional ones. We suggest a new two-step model selection procedure which is a hybrid of traditional criteria and criteria with data-dependant penalties and we prove its consistency. Our Monte Carlo simulations measure the improvements in forecasting accuracy that can arise from the joint determination of lag-length and rank using our proposed procedure, relative to an unrestricted VAR or a cointegrated VAR estimated by the commonly used procedure of selecting the lag-length only and then testing for cointegration. Two empirical applications forecasting Brazilian inflation and U.S. macroeconomic aggregates growth rates respectively show the usefulness of the model-selection strategy proposed here. The gains in different measures of forecasting accuracy are substantial, especially for short horizons.
    Date: 2010–04
  22. By: Marina-Eliza Spaliara (Loughborough University); Serafeim Tsoukas (University of Nottingham, Hong Kong Institute for Monetary Research)
    Abstract: In this paper we assess the effects of bond financing on firms' survival during the 1997-98 Asian crisis. Using a novel database covering the period 1995 to 2007 for five Asian economies most affected by the crisis - Indonesia, Korea, Malaysia, Singapore and Thailand - we find strong evidence that the Asian crisis affected both directly and indirectly (through interactions with financial indicators) the probability of survival. More importantly, we show that bond issuers, irrespective of the currency denomination, are more likely to survive compared to non-issuers. Nevertheless, only firms issuing bonds in local currency are shielded from the adverse effects of the crisis.
    Keywords: Bond Financing, Financial Crisis, Firm Survival, East Asia
    JEL: F32 F34 G15 L20
    Date: 2010–02
  23. By: Stephen Machin; Kjell Salvanes
    Abstract: Among policymakers, educators and economists there remains a strong, sometimes heated, debate on the extent to which good schools matter. This is seen, for instance, in the strong trend towards establishing accountability systems in education in many countries across the world. In this paper, in line with some recent studies, we value school quality using house prices. We, however, adopt a rather different approach to other work, using a policy experiment regarding pupils' choice to attend high schools to identify the relationship between house prices and school performance. We exploit a change in school choice policy that took place in Oslo county in 1997, where the school authorities opened up the possibility for every pupil to apply to any of the high schools in the county without having to live in the school's catchment area (the rule that applied before 1997). Our estimates show evidence that parents substantially value better performing schools since the sensitivity of housing valuations to school performance falls significantly by over 50% following the school choice reform.
    Keywords: School choice, school performance, house prices,
    Date: 2010–03
  24. By: Md. Tariqur Rahman; Muhammad Al Amin (Centre for Policy Dialogue, Dhaka, Bangladesh)
    Abstract: This paper quantifies the economic impact of Bangladesh, China, India and Myanmar (BCIM) economic cooperation and compares it with the alternative option of expanding South Asian Free Trade Area (SAFTA) with China and Myanmar. The paper examines the macro-economic performance of the individual countries and the current level of trade among the BCIM member countries at the regional level.
    Keywords: BCIM, SAFTA, Economic Impact
    JEL: F1
    Date: 2009–07

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