nep-mic New Economics Papers
on Microeconomics
Issue of 2010‒07‒03
nineteen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Do social networks prevent bank runs? By Alfonso Rosa García; Hubert Janos Kiss; Ismael Rodríguez Lara
  2. Does Schooling Affect Health Behavior? Evidence from Educational Expansion in Western Germany By Steffen Reinhold
  3. From Russia with Love: The Impact of Relocated Firms on Incumbent Survival By Oliver Falck; Christina Guenther; Stephan Heblich; William R. Kerr
  4. Broadband Openness Rules Are Fully Justified by Economic Research By Nicholas Economides
  5. Innovation, Competition and Incentives for R&D By Martin Woerter; Christian Rammer; Spyros Arvanitis
  6. Business Demography Dynamics in Portugal: A Semi-Parametric Survival Analysis By Alcina Nunes; Elsa Sarmento
  7. Ad valorem versus unit taxes: Monopolistic competition, heterogeneous firms, and intra-industry reallocations By Philipp J.H. Schröder; Allan Sørensen
  8. A Salience Theory of Choice Errors By Manzini, Paola; Mariotti, Marco
  9. A Geometric Separation of the Economic Activities of the Agents: The Leading Example By P Stiefenhofer;
  10. Selective Reductions in Labor Taxation: Labor Market Adjustments and Macroeconomic Performance By Batyra, Anna; Sneessens, Henri R.
  11. Multivariate extremality measure By Henry Laniado; Rosa E. Lillo; Juan Romo
  12. Endogenous Incomplete Markets: A Production Model with Idiosyncratic Risk By P Stiefenhofer;
  13. The EU as a global ecological power : The logics of market integration By Eloi Lauren; Jacques Le Cacheux
  14. Three Essays on Frictional Labor Markets. By [no author]
  15. Microenvironment-specific Effects in the Application Credit Scoring Model By Khudnitskaya, Alesia S.
  16. The role of specific subjects in education production functions: evidence from morning classes in Chicago public high schools By Jesse Bricker; Kalena Cortes; Chris Rohlfs
  17. Does capacity utilisation help estimating the TFP cycle? By Christophe Planas; Werner Roeger; Alessandro Rossi
  18. Fairness Is an Emergent Self-Organized Property of the Free Market for Labor By Venkat Venkatasubramanian
  19. Intellectual Property Rights: Who Needs Them? By Garima Gupta; Avih Rastogi

  1. By: Alfonso Rosa García (Universidad de Murcia); Hubert Janos Kiss (Universidad Autónoma de Madrid); Ismael Rodríguez Lara (Universidad de Alicante)
    Abstract: We develop, both theoretically and experimentally, a stereotypical environment that allows for coordination breakdown, leading to a bank run. Three depositors are located at the nodes of a network and have to decide whether to keep their funds deposited or to withdraw. One of the depositors has immediate liquidity needs, whereas the other two depositors do not. Depositors act sequentially and observe others actions only if connected by the network. Theoretically, a link connecting the first two depositors to decide is sufficient to avoid a bank run. However, our experimental evidence shows that subjects¿ choice is not affected by the existence of the link per se. Instead, being observed and the particular action that is observed determine subjects¿ choice. Our results highlight the importance of initial decisions in the emergence of a bank run. In particular, Bayesian analysis reveals that subjects clearly depart from predicted behavior when observing a withdrawal.
    Keywords: bank runs, coordination failures, experimental evidence, networks
    JEL: C70 C90 D85 G21
    Date: 2009–10
  2. By: Steffen Reinhold (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: During the postwar period German states pursued policies to increase the share of young Germans obtaining a university entrance diploma (Abitur) by building more academic track schools, but the timing of educational expansion differed between states. This creates exogenous variation in the availability of higher education, which allows estimating the causal effect of education on health behaviors. Using the number of academic track schools in a state as an instrumental variable for years of schooling, we investigate the causal effect of schooling on health behavior such as smoking and related outcomes such as obesity. We find large negative effects of education on smoking. These effects can mostly be attributed to reductions in starting rates rather than increases in quitting rates. We find no causal effect of education on reduced overweight and obesity.
    JEL: I12 I20
    Date: 2009–08–21
  3. By: Oliver Falck (Ifo Institute for Economic Research at the University of Munich); Christina Guenther (Max Planck Institute of Economics, Evolutionary Economics Group; WHU- Otto Beisheim School of Management); Stephan Heblich (Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group); William R. Kerr (Harvard Business School, Entrepreneurial Management Unit)
    Abstract: We identify the impact of local firm concentration on incumbent performance with a quasi natural experiment. When Germany was divided after World War II, many firms in the machine tool industry fled the Soviet occupied zone to prevent expropriation. We show that the regional location decisions of these firms upon moving to western Germany were driven by non-economic factors and heuristics rather than existing industrial conditions. Relocating firms increased the likelihood of incumbent failure in destination regions, a pattern that differs sharply from new entrants. We further provide evidence that these effects are due to increased competition for local resources.
    Keywords: Agglomeration, competition, firm dynamics, labor, Germany
    JEL: R10 L10 H25 O10 J20
    Date: 2010–06
  4. By: Nicholas Economides (Stern School of Business, NYU)
    Abstract: This paper responds to arguments made in filings in the FCC’s broadband openness proceeding (GN Dkt. 09-191) and incorporates data made available since my January 14th filing in that proceeding. Newly available data confirm that there is limited competition in the broadband access marketplace. Contrary to some others’ arguments, wireless broadband access services are unlikely to act as effective economic substitutes for wireline broadband access services (whether offered by telephone companies or cable operators) and instead are likely to act as a complement. Nor will competition in the Internet backbone marketplace constrain broadband providers’ behavior in providing “last mile” broadband access services. The last mile, concentrated market structure, combined with high switching costs, provides last mile broadband network providers with the ability to engage in practices that will reduce social welfare in the absence of open broadband rules. Furthermore, the effect of open broadband rules on broadband provider revenues is likely to be small and can be either positive or negative. Unfortunately, various filings have misstated or mischaracterized the results on the economics of two-sided markets. Contrary to what some have argued, allowing broadband providers to charge third party content providers will not necessarily result in lower prices being charged to residential Internet subscribers. This is true under a robust set of assumptions. Despite some parties’ mischaracterization of the economic literature, price discrimination by broadband providers against third party applications and content providers will reduce societal welfare for numerous reasons. This reduction in societal welfare is especially acute when price discrimination is taken to the extreme of exclusive dealing between broadband providers and content providers. Antitrust and consumer protection laws are insufficient to protect societal welfare in the absence of open broadband rules.
    Keywords: Network Neutrality, Internet, Discrimination, Prioritization, Two-Sided Market, Market Power, Termination Fee, Broadband
    JEL: L1 D4 L12 L13 C63 D42 D43
    Date: 2010–04
  5. By: Martin Woerter (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Christian Rammer (Centre for European Economic Research (ZEW), Department of Industrial Economics and International Management, Mannheim); Spyros Arvanitis (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper analyses the relationship between past innovation output, competition, and future innovation input in a dynamic econometric setting. We distinguish two dimensions of competition that correspond to the concepts of product substitutability and entry barriers due to fixed costs. Based on firm-level panel data for Germany and Switzerland we obtain consistent results for both countries. Innovation output in t-1 as measured by the sales share of innovative products is positively related to the degree of product obsolescence in t, and negatively to the degree of substitutability in t in both countries. Further, we find that rapid product obsolescence provides positive incentives for higher – primarily product-oriented – R&D investments in t+1, while high substitutability exerts negative incentives for future R&D investment.
    Keywords: Innovation, R&D, Competition
    JEL: O3
    Date: 2010–06
  6. By: Alcina Nunes (ESTG, Instituto Politécnico de Bragança and GEMF/Faculdade de Economia da Universidade de Coimbra, Portugal); Elsa Sarmento (Departamento de Economia e Gestão da Universidade de Aveiro, Portugal)
    Abstract: We address the post-entry performance of new Portuguese firms by investigating the structural characteristics of the hazard and survival functions, using semi-parametric survival analysis for the total economy and its broad sectors. In order to approach the prevalence of some stylized facts and determinants of new firm survival, a new entrepreneurship database was produced, using the administrative data of Quadros de Pessoal, following the Eurostat/OECD´s internationally comparable business demography methodology. In line with the literature, we find that firms that start small and experience faster post-entry growth, face a higher probability of survival. Firm’s current size dimension matters particularly for the Services sector probability of survival. In industries characterized by high entry rates, post-entry survival is more difficult. This happens mostly in Agriculture and the Construction sectors in Portugal. We find a different result from the literature, for the effect of industry growth in survival rates. Firms operating in industries which are growing faster, seem to suffer from a higher probability of failure. The combined effect of turbulence and entry and growth variables help explaining this unexpected effect of industry growth on survival probabilities. By correcting heterogeneity, we obtain stronger magnitudes of the hazard ratios found previously.
    JEL: M13 M20
    Date: 2010–06
  7. By: Philipp J.H. Schröder (Aarhus School of Business, Aarhus University, Denmark); Allan Sørensen (School of Economics and Management, Aarhus University, Denmark)
    Abstract: Real-world industries are composed from heterogeneous firms and substantial intra-industry reallocations take place, i.e. high productivity firms squeeze out low productivity firms. Previous tax-tool comparisons have not included these central forces of industry structure. This paper examines a general equilibrium monopolistic competition model with heterogeneous firms and intra-industry reallocations. We show that the welfare superiority of ad valorem over unit taxes under imperfect competition is not only preserved but amplified. The additional difference between the tools arises because unit taxes distort relative prices, which in turn reduces average industry productivity through reallocations (the survival and increased market share of lower productivity firms). Importantly, numerical solutions of the model reveal that the relative welfare loss from using the unit tax increases dramatically in the degree of firm heterogeneity.
    Keywords: unit tax, ad valorem tax, welfare, intra-industry reallocation, monopolistic competition, heterogenous firms
    JEL: D43 D61 H21 H22 H23 L11 L13
    Date: 2010–06–23
  8. By: Manzini, Paola (University of St. Andrews); Mariotti, Marco (University of St. Andrews)
    Abstract: We study a psychologically based foundation for choice errors. The decision maker applies a preference ranking after forming a 'consideration set' prior to choosing an alternative. Membership of the consideration set is determined both by the alternative specific salience and by the rationality of the agent (his general propensity to consider all alternatives). The model turns out to include a logit formulation as a special case. In general, it has a rich set of implications both for exogenous parameters and for a situation in which alternatives can affect their own salience (salience games). Such implications are relevant to assess the link between 'revealed' preferences and 'true' preferences: for example, less rational agents may paradoxically express their preference through choice more truthfully than more rational agents.
    Keywords: discrete choice, random utility, logit model, consideration sets, bounded rationality
    JEL: D0
    Date: 2010–06
  9. By: P Stiefenhofer;
    Abstract: The paper considers production in a simple two period general equilibrium model with incomplete markets. It shows, by application of convex sets analysis, the separation of economic activities of the agents. The paper improves on Stiefenhofer (2010) by taking a geometric approach to the study of the decentralization theorem. This theorem separates the economic activities of the agents, hence generalizes the objective function of the firm of the Arrow-Debreu model to the case of incomplete markets, where firms are profit maximizers.
    Date: 2010–06
  10. By: Batyra, Anna (Université catholique de Louvain); Sneessens, Henri R. (University of Luxembourg)
    Abstract: We use a calibrated general equilibrium model with heterogeneous labor and search to evaluate the quantitative effects of various labor tax cut scenarios. The focus is on skill heterogeneity combined with downward wage rigidities at the low end of the skill ladder. Workers can take jobs for which they are overeducated. We compare targeted and non-targeted tax cuts, both with or without over-education effects. Introducing over-education changes substantially the employment, productivity and welfare effects of a tax cut, although tax cuts targeted on the least skilled workers always have larger effects.
    Keywords: minimum wage, job creation, job destruction, job competition, search unemployment, taxation, computable general equilibrium models
    JEL: C68 E24 J64
    Date: 2010–06
  11. By: Henry Laniado; Rosa E. Lillo; Juan Romo
    Abstract: We propose a new multivariate order based on a concept that we will call extremality". Given a unit vector, the extremality allows to measure the "farness" of a point with respect to a data cloud or to a distribution in the vector direction. We establish the most relevant properties of this measure and provide the theoretical basis for its nonparametric estimation. We include two applications in Finance: a multivariate Value at Risk (VaR) with level sets constructed through extremality and a portfolio selection strategy based on the order induced by extremality.
    Keywords: Extremality, Oriented cone, Value at risk, Portfolio selection
    Date: 2010–06
  12. By: P Stiefenhofer;
    Abstract: This paper considers a two period general equilibrium production model with incomplete markets (GEI). The novelty of this model is the endogenous smooth asset structure introduced in Stiefenhofer (2010). It is shown that incomplete markets is a consequence of idiosyncratic risk.
    Date: 2010–06
  13. By: Eloi Lauren (Observatoire Français des Conjonctures Économiques); Jacques Le Cacheux (Observatoire Français des Conjonctures Économiques)
    Date: 2010–03
  14. By: [no author]
    Abstract: The labor market is central to many issues in economics, including business cycles, unemployment, inequality, education, and growth. Moreover, it is the largest single market in most economies and it is fundamental in determining individual and household well-being. Therefore, a good understanding of the many phenomena that we observe in modern societies requires knowledge of the functioning of the labor market. It is the aim of this dissertation to improve and to deepen this knowledge and it does so by investigating three important labor market phenomena. In the first chapter, I address the divergence of unemployment rates between the U.S. and Europe. In the second chapter, I investigate the life-cycle dynamics of individual job mobility. The third chapter empirically sheds some light on the causes and consequences of job separation. In particular, it addresses the following three questions: (a) What are the factors determining the separation hazard of employment relationships? (b) Which employer-employee matches are more likely to dissolve due to a layoff rather than a voluntary quit? (c) What are the effects of a voluntary quit and a layoff, respectively, on re-employment wages?
    Date: 2010
  15. By: Khudnitskaya, Alesia S.
    Abstract: Paper introduces the improved version of a credit scoring model which assesses credit worthiness of applicants for a loan. The scorecard has a two-level multilevel structure which nests applicants for a loan within microenvironments. Paper discusses several versions of the multilevel scorecards which includes random-intercept, random-coefficients and group-level variables. The primary benefit of the multilevel scorecard compared to a conventional scoring model is a higher accuracy of the model predictions.
    Keywords: Credit scoring; Hierarchical clustering; Multilevel model; Random-coefficient; Random-intercept; Monte Carlo Markov chain
    JEL: C53 D14 G21
    Date: 2009–12
  16. By: Jesse Bricker; Kalena Cortes; Chris Rohlfs
    Abstract: Absences in Chicago Public High Schools are 3-7 days per year higher in first period than at other times of the day. This study exploits this empirical regularity and the essentially random variation between students in the ordering of classes over the day to measure how the returns to classroom learning vary by course subject, and how much attendance in one class spills over into learning in other subjects. We find that having a class in first period reduces grades in that course and has little effect on long-term grades or grades in related subjects. We also find moderately-sized negative effects of having a class in first period on test scores in that subject and in related subjects, particularly for math classes.
    Date: 2010
  17. By: Christophe Planas; Werner Roeger; Alessandro Rossi
    Abstract: In the production function approach, accurate output gap assessment requires a careful evaluation of the TFP cycle. In this paper we propose a bivariate model that links TFP to capacity utilization and we show that this model improves the TFP trend-cycle decomposition upon univariate and Hodrick-Prescott filtering. In particular, we show that estimates of the TFP cycle that load information about capacity utilization are less revised than univariate and HP estimates, both with 2009 and real-time TFPdata vintages. We obtain this evidence for twelve pre-enlargement EU countries.
    JEL: C11 E23 E32
    Date: 2010–05
  18. By: Venkat Venkatasubramanian
    Abstract: The excessive compensation packages of CEOs of U.S. corporations in recent years have brought to the foreground the issue of fairness in economics. The conventional wisdom is that the free market for labor, which determines the pay packages, cares only about efficiency and not fairness. We present an alternative theory that shows that an ideal free market environment also promotes fairness, as an emergent property resulting from the self-organizing market dynamics. Even though an individual employee may care only about his or her salary and no one else's, the collective actions of all the employees, combined with the profit maximizing actions of all the companies, in a free market environment under budgetary constraints, lead towards a more fair allocation of wages, guided by Adam Smith's invisible hand of self-organization. By exploring deep connections with statistical thermodynamics, we show that entropy is the appropriate measure of fairness in a free market environment which is maximized at equilibrium to yield the lognormal distribution of salaries as the fairest inequality of pay in an organization under ideal conditions.
    Date: 2010–06
  19. By: Garima Gupta; Avih Rastogi
    Abstract: The twenty-first century will be the century of knowledge, indeed the century of the intellect. A nation’s ability to translate knowledge into wealth and social good through innovations will determine its future. Thus innovations hold the key to the creation as well as processing of knowledge. Consequently issues of generation, evaluation, protection and exploitation of intellectual property would become critically important all over the world. Their analysis of intellectual property rights (IPRs) is presented in two sections: in the first they deal with the concept of intellectual property rights and the rationale behind them. In the second section, focus is on the intellectual property rights in the Indian context.[Working Paper No. 0040]
    Keywords: knowledge, wealth, social good, innovations,generation, evaluation, protection, exploitation
    Date: 2010

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