nep-mic New Economics Papers
on Microeconomics
Issue of 2010‒08‒06
nineteen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Endogenous Financing of Production in General Equilibrium with Incomplete Markets By Pascal Christian Stiefenhofer;
  2. Competition, product and process innovation: an empirical analysis By Carlos D. Santos
  3. Postal Markets and Electronic Substitution: Implications for Regulatory Practices and Institutions in Europe By Martin Maegli; Christian Jaag; Martin Koller; Urs Trinkner
  4. "Application of a High-Order Asymptotic Expansion Scheme to Long-Term Currency Options" By Kohta Takehara; Masashi Toda; Akihiko Takahashi
  5. Measuring Efficiency of German Bus Public Transport By Raimund Scheffler; Karl-Hans Hartwig; Robert Malina
  6. "Asset Bubbles, Endogenous Growth, and Financial Frictions" By Tomohiro Hirano; Noriyuki Yanagawa
  7. Dictator games in the lab and in nature: External validity tested and investigated in Ugandan primary schools By Abigail Barr; Andrew Zeitlin
  8. Quantity Competition, Endogenous Motives and Behavioral Heterogeneity By Chirco, Alessandra; Colombo , Caterina; Scrimitore, Marcella
  9. Evolving macroeconomic dynamics in a small open economy: an estimated Markov-switching DSGE model for the United Kingdom By Liu, Philip; Mumtaz, Haroon
  10. A Theory of Quality Competition in Newspaper Joint Operating Agreements By Charles J. Romeo; Aran Canes
  11. Social rights and economic objectives: The importance of competition at supra national level By Ojo, Marianne
  12. Why Do Cooperatives Fail? Big versus Small in Ghanaian Cocoa Producers’ Societies, 1930-36 By Chiara Cazzuffi; Alexander Moradi
  13. The Impact of Competition on Management Quality: Evidence from Public Hospitals By Nicholas Bloom; Carol Propper; Stephan Seiler; John van Reenan
  14. The Vanishing Procyclicality of Labor Productivity By Galí, Jordi; van Rens, Thijs
  15. The connexionnist nature of modern financial markets. Challenges and possible outcomes By Isabelle Huault; Hélène Rainelli-Le Montagner
  16. Do External Technology Acquisitions Matter for Innovative Efficiency and Productivity? By Tseveen Gantumur; Andreas Stephan
  17. House Prices and School Quality: The Impact of Score and Non-score Components of Contextual Value-Added By Sofia Andreou; Panos Pashardes
  18. Climate change and trade policy : from mutual destruction to mutual support By Messerlin, Patrick A.
  19. Child Soldiers in Colombia: The Recruitment of Children into Non-state Violent Armed Groups By Ingunn Bjørkhaug

  1. By: Pascal Christian Stiefenhofer;
    Abstract: This paper considers the financing of production in a two period general equilibrium model with incomplete markets. This requires a model where the efficient boundary of the production set available to a producer in period two in every state of the world is not independent of the financial activities of the firm in period one. The novelty of the paper is a definition of a class of long run profit maximization objective functions of the firm which is independent of any average utility of the owners of the firm. This generalizes the traditional objective of profit maximization of the Arrow-Debreu model to the case of incomplete markets. The paper shows that equilibrium exists for convex smooth and convex piecewise linear endogenized production sets.
    Keywords: Existence, Incomplete Markets, Prot Maximization, Production.
    JEL: D62 D52 D53
    Date: 2010–07
  2. By: Carlos D. Santos (Dpto. Fundamentos del Análisis Económico)
    Abstract: Competition has long been regarded as productivity enhancing. Understanding the mechanism by which competition affects innovation and productivity is therefore an important topic for economic policy. The main contribution of this paper is to disentangle the relationship between competition and two sides of innovation: product and process. I write down a model and discuss the conditions under which we can identify the causal mechanism. Overall I find that competition, measured by the number of competitors or market shares, has negative effects on product innovation and no effects on process innovation. The explanation is very simple. By shifting demand, competition directly changes the optimality condition for product but not for process innovation. Thus, competition has no direct effects on process innovations or, as a consequence, productivity.
    Keywords: competition, innovation, R&D, product innovation, process innovation
    JEL: L11 L60 O30
    Date: 2010–07
  3. By: Martin Maegli; Christian Jaag; Martin Koller; Urs Trinkner
    Abstract: There is an increasing convergence between postal products and telecom applications which suggests the need for a co-evolution of regulation. But there is hardly any discussion in academia or in practice about the consequences for regulation. Relevant questions are: Which parts of current regulation will become redundant? Is there additional regulation needed due to new bottlenecks or changes in consumer behavior? In our qualitative analysis, we investigate the implications of intermodal competition and growing convergence between postal and telecommunications services on regulatory institutions and regimes. We set up a comparison between the networks and compare the scope of universal services and issues concerning market power regulation in the two different industries.
    Keywords: Convergence, Regulation, Post, Telecommunication, Universal service obligation, Access
    JEL: L41 L52
    Date: 2010–07
  4. By: Kohta Takehara (Graduate School of Economics, University of Tokyo); Masashi Toda (Graduate School of Economics, University of Tokyo); Akihiko Takahashi (Faculty of Economics, University of Tokyo)
    Abstract: Recently, not only academic researchers but also many practitioners have used the methodology so-called "an asymptotic expansion method" in their proposed techniques for a variety of financial issues. e.g. pricing or hedging complex derivatives under high-dimensional stochastic environments. This methodology is mathematically justified by Watanabe theory(Watanabe [1987], Yoshida [1992a,b]) in Malliavin calculus and essentially based on the framework initiated by Kunitomo and Takahashi [2003], Takahashi [1995,1999] in a financial context. In practical applications, it is desirable to investigate the accuracy and stability of the method especially with expansion up to high orders in situations where the underlying processes are highly volatile as seen in recent financial markets. After Takahashi [1995,1999] and Takahashi and Takehara [2007] had provided explicit formulas for the expansion up to the third order, Takahashi, Takehara and Toda [2009] develops general computation schemes and formulas for an arbitrary-order expansion under general diffusion-type stochastic environments. In this paper, we describe them in a simple setting to illustrate thier key idea, and to demonstrate their effectiveness apply them to pricing long-term currency options under a cross-currency Libor market model and a general stochastic volatility of a spot exchange rate with maturities up to twenty years.
    Date: 2010–07
  5. By: Raimund Scheffler (Institute of Transport Economics, Muenster); Karl-Hans Hartwig (Institute of Transport Economics, Muenster); Robert Malina (Institute of Transport Economics, Muenster)
    Abstract: This paper quantifies the technical efficiency of German bus companies and elaborates on the main factors influencing their performance. Efficiency is measured with a stochastic production frontier. We test for the impact on efficiency of ownership structure and participation at tendering. Furthermore, we investigate the influence on efficiency when a bus company is a part of a multi-product enterprise. The results yield insights how public bus companies might improve their performance in order to cope with the changing market environment. The mean technical efficiency of the investigated bus companies is around 87 percent. Bus companies with participation at tendering show a significantly higher mean efficiency than other companies. The ownership structure has no influence on technical efficiency.
    Keywords: Stochastic Frontier Analysis, Production Function, Public Transport, Efficiency Analysis,
    JEL: C13 C23 L92
    Date: 2010–07
  6. By: Tomohiro Hirano (Financial Research and Training Center, Financial Services Agency, The Japanese Government); Noriyuki Yanagawa (Faculty of Economics, University of Tokyo)
    Abstract: This paper analyzes the effects of bubbles in an in.nitely-lived agent model of endogenous growth with .nancial frictions and heterogeneous agents. We provide a complete characterization on the relationship between .nancial frictions and the existence of bubbles. Our model predicts that if the degree of pledgeability is sufficiently high or sufficiently low, bubbles can not exist. They can only arise at an intermediate degree. This suggests that improving the financial market condition might enhance the possibility of bubbles. We also examine whether bubbles are growth-enhancing or growth-impairing in the long run. We show that when the degree of pledgeability is relatively low, bubbles boost long-run growth. On the other hand, when it is relatively high, bubbles lower long-run growth. Moreover, we examine the effects of the burst of bubbles, and show that the effects much depend on the degree of the pldgeability, i.e., the quality of financial system.
    Date: 2010–07
  7. By: Abigail Barr; Andrew Zeitlin
    Abstract: This paper tests the external validity of a simple Dictator Game as a laboratory analogue for a naturally occurring policy-relevant decision-making context. In Uganda, where teacher absenteeism is a problem, primary school teachers’ allocations to parents in a Dictator Game are positively but weakly correlated with their time allocations to teaching and, so, negatively correlated with their absenteeism. Guided by a simple theoretical model, we find that the correlation can be improved by allowing for (a) variations in behavioural reference points across teachers and schools and (b) the positive effect if some School Management Committees on teacher attendance .
    Keywords: Public service, Education, Experiments, Africa, external validity, Methodology
    JEL: C91 D64 I29 O15 O17
    Date: 2010
  8. By: Chirco, Alessandra; Colombo , Caterina; Scrimitore, Marcella
    Abstract: The paper shows that strategic quantity competition can be characterized by behavioral heterogeneity, once competing firms are allowed in a pre-market stage to optimally choose the behavioral rule they will follow in their strategic choice of quantities. In particular, partitions of the population of identical firms in profit maximizers and relative profit maximizers turn out to be deviation-proof equilibria, both in simultaneous and sequential game structures. Our findings that in a strategic framework heterogeneous behavioral rules are consistent with individual incentives provides a game-theoretic microfoundation of heterogeneity.
    Keywords: Behavioral Heterogeneity; Endogenous Motives; Relative Performance; Multistage Games; Quantity Competition.
    JEL: L21 L13 C72
    Date: 2010–07
  9. By: Liu, Philip (International Monetary Fund); Mumtaz, Haroon (Bank of England)
    Abstract: This paper carries out a systematic investigation into the possibility of structural shifts in the UK economy using a Markov-switching dynamic stochastic general equilibrium (DSGE) model. We find strong evidence for shifts in the structural parameters of several equations of the DSGE model. In addition, our results indicate that the volatility of structural shocks has also changed over time. However, a version of the model that allows for a change in the coefficients of the Taylor rule and shock volatilities provides the best model fit. Estimates from the selected DSGE model suggest that the mid-1970s were associated with a regime characterised by a smaller reaction by the monetary authorities to inflation developments.
    Keywords: Markov switching; DSGE; Bayesian estimation
    JEL: E23 E32
    Date: 2010–07–27
  10. By: Charles J. Romeo (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Aran Canes
    Abstract: Newspaper Joint Operating Agreements (JOAs) are long term, inflexible contracts between metropolitan daily newspapers in the same market. These contracts maintain two editorial voices while combining all business operations of the two competitors in order to capture many of the scale economies that have put an end to newspaper competition in most markets. The question we address is what, if anything, drives newspapers to compete editorially once a JOA is formed? With contract terms that run in the 10s of years, one might reasonably question whether incentives exist to prod the partners to continue rigorous competition. Our study of JOA contracts indicates that the history of JOAs is filled with instances of unprogrammed renegotiations, and that how the partners fare in these negotiations appears to be driven by each party's relative success in the market since the agreement was initiated. In essence, forming a JOA does not resolve the issue of which newspaper will remain in the marketplace once the JOA terminates. Editorial competition throughout the life of the JOA resolves this issue.
    Date: 2010–07
  11. By: Ojo, Marianne
    Abstract: The need for a supra national model which embraces and provides for social rights of individual Member States is becoming more apparent amidst the ever intensifying integration process within the EU and its involvement in areas which have been undermined by an economic model. This paper considers why, despite such a need for a supra national model, the “ordo liberal European polity” is favoured. It partly does so, by way of reference to two judgements from the European Court of Justice (ECJ) – namely, Laval un Partneri Ltd , and the Viking Cases.
    Keywords: European Court of Justice (ECJ); integration; competition; regulation; ordo-liberalism; economic objectives; social rights; internal market; bank rescues
    JEL: D53 K2 G38
    Date: 2010–08
  12. By: Chiara Cazzuffi; Alexander Moradi
    Abstract: Using a complete panel of Ghanaian cocoa producers’ societies in the 1930s, we investigate whether group interaction problems threatened i) capital accumulation, ii) cocoa sales and iii) cooperative survival as membership size increased. We find evidence of group interaction problems. The net effect, however, is positive indicating gains from economies of scale as cooperatives expanded their membership.
    Keywords: cooperatives, firm survival, collective action problems, Ghana
    JEL: J54 N57 Q13
    Date: 2010
  13. By: Nicholas Bloom; Carol Propper; Stephan Seiler; John van Reenan
    Abstract: In this paper we examine the causal impact of competition on management quality. We analyze the hospital sector where geographic proximity is a key determinant of competition, and English public hospitals where political competition can be used to construct instrumental variables for market structure. Since almost all major English hospitals are government run, closing hospitals in areas where the governing party has a small majority is rare due to fear of electoral punishment. We find that management quality - measured using a new survey tool - is strongly correlated with financial and clinical outcomes such as survival rates from emergency heart attack admissions (AMI). More importantly, we find that higher competition (as indicated by a greater number of neighboring hospitals) is positively correlated with increased management quality, and this relationship strengthens when we instrument the number of local hospitals with local political competition. Adding another rival hospital increases the index of management quality by one third of a standard deviation and leads to a 10.7% reduction in heart-attack mortality rates.
    Keywords: management, hospitals, competition, productivity
    JEL: J45 F12 I18 J31
    Date: 2010–05
  14. By: Galí, Jordi (CREI and Universitat Pompeu Fabra); van Rens, Thijs (CREI and Universitat Pompeu Fabra)
    Abstract: We document three changes in postwar US macroeconomic dynamics: (i) the procyclicality of labor productivity has vanished, (ii) the relative volatility of employment has risen, and (iii) the relative (and absolute) volatility of the real wage has risen. We propose an explanation for all three changes that is based on a common source: a decline in labor market frictions. We develop a simple model with labor market frictions, variable effort, and endogenous wage rigidities to illustrate the mechanisms underlying our explanation. We show that the reduction in frictions may also have contributed to the observed decline in output volatility.
    Keywords: wage rigidities, labor market frictions, labor hoarding, effort choice
    JEL: E24 E32
    Date: 2010–07
  15. By: Isabelle Huault (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX); Hélène Rainelli-Le Montagner (GREGOR - IAE de Paris)
    Abstract: The recent financial crisis has triggered radical criticism against financial markets. In this paper, we propose to analyse this criticism in the perspective drawn by Boltanski and Thevenot (1991/2006) around the notion of justification. We see the main debate as opposing the critics and the defenders of what can be identified as a Market order (Boltanski and Thevenot, 1991/2006). While the former regret the consequences of deregulation in financial markets, the latter insist on the preservation of regulatory options favouring market activity as much as possible. This debate however relies on the hypothesis that financial markets in general fit the ideal-type of the Walrasian market model. While this hypothesis might make sense as regards the description of stock markets (this refers to the so called market efficiency issue), it appears unrealistic when applied to the majority of modern financial markets. At least 80% of those are OTC markets where bilateral contracts are exchanged between counterparties in the absence of any centralized structure. Our thesis is that to be useful, a critical perspective on financial markets should take full account of the nature of OTC markets, which guarantees neither the transparency of prices nor the efficiency of competition mechanisms. We propose to characterize this nature using Boltanski and Chiapello's concept (1999/2008) of the Connexionnist World. We then emphasize the difficulty of the connexionnist grammar of worth to develop principles of justice in OTC markets, which are characterized by their despatialization and the infinity of potential members. We suggest potential tracks to struggle more efficiently against the drifts of the connexionnist logic as they arise on financial markets and their spillover effects on societies. The contribution of the paper is thus to provide a more precisely targeted critique of modern financial markets.
    Keywords: connexionism, social studies of finance, critical theory
    Date: 2010–07–01
  16. By: Tseveen Gantumur; Andreas Stephan
    Abstract: To quickly adapt to technological change and developments, and thus remain competitive, firms increasingly resort to the use of external technology. This paper investigates whether and to what extent the acquisition of external disembodied technology affects the efficiency and productivity in innovation of technology acquiring firms. Using the stochastic frontier analysis combined with a difference-in-difference matching approach and firm-level panel from the German Innovation Survey for the period 1992-2004, we find that manufacturing firms that acquire disembodied technology experience more growth in innovative productivity than non-acquiring firms do. Thus, this study provides evidence on complementarity between internal and external R&D in innovation production, which is attributed by increasing returns to R&D scale and increasing technical efficiency. Moreover, we find that firm size significantly contributes to innovative efficiency and productivity of external technology acquirers.
    Keywords: Technology acquisition, innovative efficiency, innovative productivity, SFA, Difference-in-difference matching
    JEL: O30 L24 L25 L60
    Date: 2010
  17. By: Sofia Andreou; Panos Pashardes
    Abstract: This paper investigates how the newly introduced Contextual Value Added (CVA) indicator of school quality affects house prices in the catchment area of primary and secondary schools in England. The empirical analysis, based on the data drawn from three independent and previously unexplored UK data sources, shows that the score component of CVA has a strong positive effect on house prices at both primary and secondary levels of education; while the non-score component of this school quality indicator has a significant (negative) effect only in the analysis of secondary school data. Nevertheless, the effect of CVA and its score and non-score components on house prices also varies with the level of spatial aggregation at which empirical investigation is pursued, assuming a more positive role between rather than within Local Authorities (Las). This reflects the emphasis placed by CVA on public good aspects of school quality and suggests that LA policies aimed at raising the average non-score quality characteristics of school conform to household preferences.
    Keywords: School quality, hedonic regression, house prices
    Date: 2010–07
  18. By: Messerlin, Patrick A.
    Abstract: Contrary to what is still often believed, the climate and trade communities have a lot in common: a common problem (a global"public good"), common foes (vested interests using protection for slowing down climate change policies), and common friends (firms delivering goods, services, and equipment that are both cleaner and cheaper). They have thus many reasons to buttress each other. The climate community would enormously benefit from adopting the principle of"national treatment,"which would legitimize and discipline the use of carbon border tax adjustment and the principle of"most-favored nation,"which would ban carbon tariffs. The main effect of this would be to fuel a dual world economy of clean countries trading between themselves and dirty countries trading between themselves at a great cost for climate change. And the trade community would enormously benefit from a climate community capable of designing instruments that would support the adjustment efforts to be made by carbon-intensive firms much better than instruments such as antidumping or safeguards, which have proved to be ineffective and perverse. That said, implementing these principles will be difficult. The paper focuses on two key problems. First, the way carbon border taxes are defined has a huge impact on the joint outcome from climate change, trade, and development perspectives. Second, the multilateral climate change regime could easily become too complex to be manageable. Focusing on carbon-intensive sectors and building"clusters"of production processes considered as having"like carbon-intensity"are the two main ways for keeping the regime manageable. Developing them in a multilateral framework would make them more transparent and unbiased.
    Keywords: Climate Change Mitigation and Green House Gases,Climate Change Economics,Emerging Markets,Carbon Policy and Trading,Debt Markets
    Date: 2010–07–01
  19. By: Ingunn Bjørkhaug (Fafo Institute for Applied International Studies)
    Abstract: Based on in-depth interviews with former child soldiers in Colombia, this article presents the findings from fieldwork conducted among demobilized child soldiers in Colombia. The findings add to the state of knowledge by going in-depth into the circumstances surrounding the processes and mechanisms of recruitment of children and adolescents into armed groups. The former child soldiers had generally joined the armed groups voluntarily. However; one of the challenges with a strong division between ‘voluntary’ and ‘coerced’ recruitment, is that it indicates a sharp dichotomy between two very different situations. This article argues that most cases of recruitment takes place in the grey zone between voluntary and coerced recruitment. However, the demobilization policies work under the assumption that even when the children classify themselves as voluntarily recruited it is considered force due to children’s inability to make a free or conscious choice. This indicates that demobilization programs are based on an assumption that is incorrect. The former child soldiers, both girls and boys, were affected by their involvement in the conflict. They did not, however, constitute a homogeneous group of passive victims, but rather a group of vital agents each one with their choices shaped by their particular experiences and circumstances.
    Date: 2010

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