nep-mic New Economics Papers
on Microeconomics
Issue of 2010‒09‒18
seventeen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Chaos and Unraveling in Matching Markets By Songzi Du; Yair Livne
  2. Asset Bubbles, Endogenous Growth, and Financial Frictions By Tomohiro Hirano; Noriyuki Yanagawa
  3. Public Policy and Market Competition: How the Master Settlement Agreement Changed the Cigarette Industry By Ciliberto, Federico; Kuminoff, Nicolai
  4. Optimal Intermediation Under Aggregate Consumption Uncertainty By Ioannis Lazopoulos
  5. Exploding offers and buy-now discounts By Armstrong, Mark; Zhou, Jidong
  6. Influential Listeners: An Experiment on Persuasion Bias in Social Networks By Luca Corazzini; Filippo Pavesi; Beatrice Petrovich; Luca Stanca
  7. Finitely Repeated Prisoners' Dilemma with Small Fines: Penance Contract By Hitoshi Matsushima
  8. A class of evolutionary models for participation games with negative feedback By Pietro Dindo; Jan Tuinstra
  9. Does Intermarriage Pay off?: A Panel Data Analysis By Olga Nottmeyer
  10. The Impact of Inflation Targeting: Testing the Good Luck Hypothesis By Federico Ravenna
  11. Does Bargaining Matter in the Small Firm Matching Model? By L'Haridon, Olivier; Malherbet, Franck; Pérez-Duarte, Sébastien
  12. A new version of Edgeworth's taxation paradox By Robert A. Ritz
  13. The price stabilization effects of the EU entry price scheme for fruits and vegetables By Cioffi, Antonio; Santeramo, Fabio Gaetano; Vitale, Cosimo
  14. Iterative Regularization in Nonparametric Instrumental Regression By Johannes, Jan; Van Bellegem, Sébastien; Vanhems, Anne
  15. Group Membership, Competition, and Altruistic versus Antisocial Punishment: Evidence from Randomly Assigned Army Groups By Lorenz Goette; David Huffman; Stephan Meier; Matthias Sutter
  16. Do managers and experts agree? A comparison of alternative sources of trade facilitation data By Alberto Behar
  17. Who Loses: An examination of losses in housing net worth, non-housing assets, and total savings from 2007 to 2008 among American families By Nitz, Lawrence H.

  1. By: Songzi Du; Yair Livne
    Abstract: We study how information perturbations can destabilize two-sided matching markets. In our model, agents arrive on the market over two periods, while agents in the first period do not know the types of those arriving later. Agents already present in the market may match early or wait for the small group of new entrants. Despite the lack of discounting or risk aversion, this perturbation creates incentives to match early and leave the market before the new agents arrive. These incentives do not disappear as the market gets large. Moreover, we identify a new adverse phenomenon in this setting: as markets get large the probability of \emph{chaos} -- where no early matching scheme for existing agents is robust to pairwise deviations -- approaches 1. These results are independent of the distribution of agents' types and robust to asymmetries between the two sides of the market. Our findings thus suggest that matching markets are extremely sensitive to institutional details and uncertainty.
    Date: 2010–09
  2. By: Tomohiro Hirano (Financial Research and Training Center, Financial Services Agency,); Noriyuki Yanagawa (Faculty of Economics, University of Tokyo)
    Abstract: This paper analyzes the effects of bubbles in an infitely-lived agent model of endogenous growth with financial frictions and heterogeneous agents. We provide a complete characterization on the relationship between financial 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
  3. By: Ciliberto, Federico; Kuminoff, Nicolai
    Abstract: This paper investigates the large and unexpected increase in cigarette prices that followed the 1997 Master Settlement Agreement (MSA). We integrate key features of rational addiction theory into a discrete-choice model of the demand for a differentiated product. We find that following the MSA firms set prices on a more elastic region of their demand curves. Using these estimates, we predict prices that would be charged under a variety of industry structures and pricing rules. Under the assumptions of firms’ perfect foresight and constant marginal costs, we fail to reject the hypothesis that firms collude on a dynamic pricing strategy.
    Keywords: Cigarettes; Master Settlement Agreement; Demand; Collusion; Rational Addiction.
    JEL: L13 L41 H32
    Date: 2010–07–17
  4. By: Ioannis Lazopoulos (University of Surrey)
    Abstract: The paper develops a banking framework where a welfare comparison is made between non-tradable demand deposit and equity contracts. Contrary to the existing literature that relies heavily on smooth preferences assumption to justify the liquidity insurance superiority of the ‘run-prone’ debt contracts over the ‘run-free’ equity contracts, the paper shows that when aggregate consumption uncertainty is introduced, the welfare dominance of deposit contracts emerges for a simpler preference structure as deposit contracts offer more risk-sharing opportunities. The model illustrates that such uncertainty creates a high dispersion between the allocations that can be attained by trading in the secondary market, and therefore the equity contract provides ex ante less risk-sharing to risk-averse consumers than a tailored-made debt contract.
    Keywords: financial intermediation, aggregate uncertainty, deposit contracts, equity contracts.
    JEL: G21 D81 D82
    Date: 2010–09
  5. By: Armstrong, Mark; Zhou, Jidong
    Abstract: A common sales tactic is for a seller to encourage a potential customer to make her purchase decision quickly. We consider a market with sequential consumer search in which firms often encourage first-time visitors to buy immediately, either by making an "exploding offer" (which permits no return once the consumer leaves) or by offering a "buy-now discount" (which makes the price paid for immediate purchase lower than the regular price). Prices often increase when these policies are used. If firms cannot commit to their sales policy, the outcome depends on whether consumer incur an intrinsic cost of returning to a firm: if there is no such return cost, it is often an equilibrium for firms to offer a uniform price to both first-time and returning visitors; if the return cost is positive, however, firms are forced to make exploding offers.
    Keywords: Consumer search; oligopoly; price discrimination; high-pressure selling; exploding offers; costly recall
    JEL: D18 D83 D43
    Date: 2010–09
  6. By: Luca Corazzini; Filippo Pavesi; Beatrice Petrovich; Luca Stanca
    Abstract: This paper presents an experimental investigation of persuasion bias, a form of bounded rationality whereby agents communicating through a social network are unable to account for possible repetitions in the information they receive. The results indicate that network structure plays a significant role in determining social influence. How- ever, the most influential agents are not those with more outgoing links, as predicted by the persuasion bias hypothesis, but those with more incoming links. We show that a boundedly rational updating rule that takes into account not only agents' outdegree, but also their inde- gree, provides a better explanation of the experimental data. In this framework, consensus beliefs tend to be swayed towards the opinions of influential listeners. We then present an effort-weighted updating model as a more general characterization of information aggregation in social networks.
    Date: 2010–08
  7. By: Hitoshi Matsushima (Faculty of Economics, University of Tokyo)
    Abstract: We investigate the finitely repeated prisoners' dilemma with explicit contractual devices. We show that full collusion can be achieved by incentivizing the players' final period of play with small fines. Our incentivizing modality is the penance contract, by which a player is penalized if (and only if) he deviates from the penance strategy in the final period. We show that using this contractual agreement brings the penance strategy profile into unique subgame perfect equilibrium and achieves full collusion without being overturned by renegotiation.
    Date: 2010–03
  8. By: Pietro Dindo; Jan Tuinstra
    Abstract: We introduce a framework to analyze the interaction of boundedly rational heterogeneous agents repeatedly playing a participation game with negative feedback. We assume that agents use different behavioral rules prescribing how to play the game conditionally on the outcome of previous rounds. We update the fraction of the population using each rule by means of a general class of evolutionary dynamics based on imitation, which contains both replicator and logit dynamics. Our model is analyzed by a combination of formal analysis and numerical simulations and is able to replicate results from the experimental and computational literature on these types of games. In particular, irrespective of the specific evolutionary dynamics and of the exact behavioral rules used, the dynamics of the aggregate participation rate is consistent with the symmetric mixed strategy Nash equilibrium, whereas individual behavior clearly departs from it. Moreover, as the number of players or speed of adjustment increase the evolutionary dynamics typically becomes unstable and leads to endogenous fluctuations around the steady state. These fluctuations are robust with respect to behavioral rules that try to exploit them.
    Keywords: Participation games, Heterogeneous behavioral rules, Revision protocol, Replicator Dynamics Logit Dynamics, Nonlinear dynamics
    JEL: C72 C73
    Date: 2010–09–02
  9. By: Olga Nottmeyer
    Abstract: Taking advantage of the panel structure of the data, the impact of intermarriage on labor market productivity as measured by earnings is examined. Contrarily to previous studies which rely on instrumental variable techniques, selection issues are addressed within a fixed effects framework. The model accounts for short and long term effects as well as general differences between those who intermarry and those who do not. Once unobserved heterogeneity is incorporated, advantageous effects from intermarriage vanish and do not differ from premiums from marriage between immigrants. However, immigrants who eventually intermarry receive greater returns to experience indicating better labor market integration.
    Keywords: intermarriage, integration, labor market, migration
    JEL: J1 J12
    Date: 2010
  10. By: Federico Ravenna
    Abstract: Over the last twenty years the level and volatility of inflation decreased across industrial countries. The inflation stabilization can be explained by a shift in monetary policy or by a lucky period of low volatility in business cycle shocks. To test the “luck hypothesis” we examine the inflation experience of Canada, one of the earliest and most successful adopters of an inflation targeting monetary policy. We Kalman-filter the historical structural shocks consistent with an estimated DSGE model. The estimated shocks are used to build counterfactual histories. Ex-ante the model predicts inflation volatility to more than halve under inflation targeting. But conditional on the shocks, we show that the luck hypothesis can explain with a high probability Canada’s low inflation volatility since the early 1990s. Any inflation stabilization induced by the shift in policy is accounted for the most part by the impact on expectations. Counterfactuals built neglecting expectations would prove the inflation targeting policy irrelevant.
    Keywords: Business cycle shocks, Kalman filter, Credibility, Inflation targeting
    JEL: E42 E52 E58
    Date: 2010
  11. By: L'Haridon, Olivier (HEC Paris); Malherbet, Franck (University of Rouen); Pérez-Duarte, Sébastien (European Central Bank)
    Abstract: In this article, we use a stylized model of the labor market to investigate the effects of three alternative and well-known bargaining solutions. We apply the Nash, the Egalitarian and the Kalai-Smorodinsky bargaining solutions in the small firm’s matching model of unemployment. To the best of our knowledge, this is the first attempt that has been made to implement and systematically compare these solutions in search-matching economies. Our results are twofold. First from the theoretical/methodological viewpoint, we extend a somewhat flexible search-matching economy to alternative bargaining solutions. In particular, we prove that the Egalitarian and the Kalai-Smorodinsky solutions are easily implementable and mathematically tractable within search-matching economies. Second, our results show that even though the traditional results of bargaining theory apply in this context, they are generally qualitatively different and quantitatively weaker than expected. This is of particular relevance in comparison with the results established in the earlier literature.
    Keywords: search and matching models, bargaining theory, Nash, Egalitarian, Kalai-Smorodinsky
    JEL: C71 C78 J20 J60
    Date: 2010–09
  12. By: Robert A. Ritz
    Abstract: Edgworth’s taxation paradox states that an excise tax can decrease the market price of a good. This paper presents a new version of the paradox in which a tax reduces price because it attracts entry of additional firms into the market. The paper also presents two new applications: (i) an emissions tax that leads to an increase in industry emissions (due to entry), and (ii) an interest rate cut by the central bank that reduces lending by commercial banks (due to exit). Basic principles of environmental regulation and monetary policy therefore fail under the conditions of the paradox.
    Keywords: Bank lending, Cost pass-through, Edgeworth's paradox, Environmental regulation, Market structure, Taxation
    JEL: D43 G21 H22 Q50
    Date: 2010
  13. By: Cioffi, Antonio; Santeramo, Fabio Gaetano; Vitale, Cosimo
    Abstract: The paper assesses the stabilization effects of the EU import regime for fresh fruit and vegetables based on the entry price system. The analysis is carried out on the EU prices of tomatoes and lemons and those of imports from some of the main competing countries on the EU domestic markets: Morocco, Argentina and Turkey. It is based on the estimation of a threshold vector autoregressive econometric model that is shown capable of taking the workings of the import regime into account. The model shows that prices behave differently when import prices are above/below the trigger entry price. This paper allowed to highlight the cases for which the isolation effect of EPS seems reached and the resulting stabilization effects.
    Keywords: Fruit and vegetables; Entry price system; stabilisation effects; TVAR
    JEL: F13 Q17 Q18
    Date: 2010–07
  14. By: Johannes, Jan; Van Bellegem, Sébastien; Vanhems, Anne
    Abstract: We consider the nonparametric regression model with an additive error that is correlated with the explanatory variables. We suppose the existence of instrumental variables that are considered in this model for the identification and the estimation of the regression function. The nonparametric estimation by instrumental variables is an illposed linear inverse problem with an unknown but estimable operator. We provide a new estimator of the regression function using an iterative regularization method (the Landweber-Fridman method). The optimal number of iterations and the convergence of the mean square error of the resulting estimator are derived under both mild and severe degrees of ill-posedness. A Monte-Carlo exercise shows the impact of some parameters on the estimator and concludes on the reasonable finite sample performance of the new estimator.
    Keywords: Nonparametric estimation; Instrumental variable; Ill-posed inverse problem
    JEL: C14 C30
    Date: 2010–07
  15. By: Lorenz Goette; David Huffman; Stephan Meier; Matthias Sutter
    Abstract: We investigate how group boundaries, and the economic environment surrounding groups, affect altruistic cooperation and punishment behavior. Our study uses experiments conducted with 525 officers in the Swiss Army, and exploits random assignment to platoons. We find that, without competition between groups, individuals are more prone to cooperate altruistically in a prisoner's dilemma game with in-group as opposed to out-group members. They also use a costly punishment option to selectively harm those who defect, encouraging a norm of cooperation towards the group. Adding competition between groups causes even stronger in-group cooperation, but also a qualitative change in punishment: punishment becomes anti-social, harming cooperative and defecting out-group members alike. These findings support recent evolutionary models and have important organizational implications.
    Keywords: Cooperation, Punishment, Army, Experiment
    JEL: C72 C91
    Date: 2010–09
  16. By: Alberto Behar
    Abstract: This paper constructs country-level aggregates of trade facilitation measures from firm-level responses in the Enterprise Surveys and compares them with the Doing Business indicators, the Logistics Performance Index and the Enabling Trade Index. Correlations between the data sources are low even for very specific and similar questions. We also use the Enterprise Surveys to distinguish between within-country inter-firm variation and between-country variation, finding that the latter accounts for only a quarter of the total. For the purposes of identifying where reform is needed and estimating the relationship between trade facilitation and exports, these findings raise the issue of which form of variation is more informative and which data source is more reliable.
    Keywords: Trade facilitation, Enterprise Surveys, Logistics Performance Index, Doing Business, Enabling Trade Index, Gravity models, Firm heterogeneity
    JEL: F1 N70 O24
    Date: 2010
  17. By: Nitz, Lawrence H.
    Abstract: This study models the loss in non-housing assets, increase in non-housing liabilities, and net change in housing value across people by education, ethnic, and occupational categories in the 2007-2008 collapse of Wall Street financial markets. Hypotheses of plausible loci of loss include the usual social categories. Findings do not confirm all of the common presuppositions—managerial class workers have among the largest losses, retirees somewhat limited losses, and losses by educational group decline with advancing education, with the possible exception of Ph.D. holders. The group which had the most severe losses in all asset categories was the armed forces. The magnitude of the suggested effects would indicate that additional policy attention should be targeted on military family outcomes under economic stress.
    Keywords: housing net worth; non-household liabilities; non-household assets; occupational group; education level;
    JEL: I31 J15 I32
    Date: 2010–09–10

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