nep-mic New Economics Papers
on Microeconomics
Issue of 2010‒10‒09
eighteen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Equality, Equity and Incentives: An Experiment By Loukas Balafoutas; Martin G. Kocher; Louis Putterman; Matthias Sutter
  2. Group Membership, Competition, and Altruistic versus Antisocial Punishment: Evidence from Randomly Assigned Army Groups By Goette, Lorenz; Huffman, David; Meier, Stephan; Sutter, Matthias
  3. Does Contract Complexity Limit Opportunities? Vertical Organization and Flexibility By Pennings, H.P.G.
  4. Competition and Welfare Effects of VAT Exemptions By Helmut Dietl; Christian Jaag; Markus Lang; Urs Trinkner
  5. A Theory and Model for the Evolution of Software Services. By Andrikopoulos, V.
  6. Linearity in Instrumental Variables Estimation: Problems and Solutions By Mogstad, Magne; Wiswall, Matthew
  7. Adaptive Expectations, Confirmatory Bias, and Informational Efficiency By Gani Aldashev; Timoteo Carletti; Simone Righi
  8. How sensitive are equilibrium pricing models to real-world distortions? By Harbir Lamba
  9. The Surprising Wealth of Pre-industrial England By Clark, Gregory; Cummins, Joe; Smith, Brock
  10. Comparative Risk Aversion: A Formal Approach with Applications to Saving Behaviors By Antoine Bommier; Arnold Chassagnon; François Le Grand
  12. Why people reach intermediate agreements? Axiomatic and strategic justifications By José M. Jiménez Gómez
  13. Beyond Population: Everyone Counts in Development By Joel E. Cohen
  14. Catalyzers for Social Insurance: Education Subsidies vs. Real Capital Taxation By Dirk Schindler; Hongyan Yang
  15. Do Islamic Banks Have Greater Market Power? By Laurent Weill
  16. Group Reciprocity By David Hugh-Jones; Martin A. Leroch
  17. Strategic Party Formation on a Circle By Peeters Ronald; Saran Rene; Yuksel Ayse Muge
  18. Respect as an Incentive By Eriksson, Tor; Villeval, Marie Claire

  1. By: Loukas Balafoutas; Martin G. Kocher; Louis Putterman; Matthias Sutter
    Abstract: We devise a new experimental game by nesting a voluntary contributions mechanism in a broader spectrum of incentive schemes. With it, we study tensions between egalitarianism, equity concerns, self-interest, and the need for incentives. In a 2x2 design, subjects either vote on or exogenously encounter incentive settings while assigned unequal incomes that are either task-determined or random. We find subjects’ voting to be mainly self-interested but also influenced by egalitarian and equity concerns, which sometimes cut in opposite directions. Contributions, which seem mainly determined by boundedly rational responses to incentives, are influenced by egalitarian, equity and strategic considerations.
    Keywords: equality, efficiency, voluntary contribution mechanism, incentives, experiment
    JEL: C91 C92 D31 D63 H41
    Date: 2010–09
  2. By: Goette, Lorenz (University of Lausanne); Huffman, David (Swarthmore College); Meier, Stephan (Columbia University); Sutter, Matthias (University of Innsbruck)
    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 antisocial, harming cooperative and defecting out-group members alike. These findings support recent evolutionary models and have important organizational implications.
    Keywords: group membership, competition, punishment, army, experiment
    JEL: C72 C91 C93
    Date: 2010–09
  3. By: Pennings, H.P.G.
    Abstract: The vertical organization of production entails a range of make-or-buy decisions of intermediate goods that are influenced by the difficulty of writing contracts with a potential supplier. When contracting causes high transaction costs, a firm can decide to vertically integrate the production of the intermediate product. Contract complexity can be measured by decomposing the range of inputs into inputs that are traded on an exchange (low contract complexity), inputs for which reference prices exist (low to medium contract complexity) and other, often relationship-specific inputs (medium to high contract complexity). This inaugural lecture addresses the impact of contract complexity on the growth opportunities of a firm. The present value of growth opportunities are embedded in the market value of a firm, which is a multiple of the firm’ stock price. Examining the relation between the growth opportunities as part of the market value and contract complexity, we find that contract complexity has a negative impact on the growth opportunities of a firm if vertical integration is difficult. Whereas, on average, growth opportunities account for 56% of the market value of a firm, this percentage ranges between 50% and 53% for firms in sectors where contracts are complex and vertical integration is difficult. The difference represents a current market value between € 12 bn. and € 24 bn. only taking into account Dutch listed firms.
    Keywords: real options;vertical organization;outsourcing;contract theory;flexibility;firm value
    Date: 2010–09–17
  4. By: Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich); Christian Jaag (Institute of Public Finance and Fiscal Law, University of St. Gallen); Markus Lang (Institute for Strategy and Business Economics, University of Zurich); Urs Trinkner (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: Distortions under the value-added tax (VAT) arise mainly from the exemption of specific services and sectors. This paper develops an analytical model that is applicable to any sector characterized by asymmetric VAT exemptions of services and activities or differentiated VAT rates. We analyze the effects of such asymmetric VAT regimes on market shares, optimal prices, and tax receipts analytically and by simulation. The analytical model shows how asymmetric VAT exemptions distort competition by strengthening the competitive position of non-rated firms. The net effect of VAT exemptions depends on the fraction of VAT rated inputs versus the fraction of non-rated customers. We further shed light on the main competitive impact of VAT policies, while showing the consequences on overall welfare by presenting simulation results based on a calibrated quantitative model of a selected sector. The contribution of our paper is to provide guidance on how to resolve the policy trade-off between a level playing field, consumer surplus and government tax revenue.
    Keywords: Value-added tax, indirect taxation, tax regulation, tax exemption, universal service obligation, postal sector
    JEL: H21 H25 L51 L87
    Date: 2010–09
  5. By: Andrikopoulos, V. (Tilburg University)
    Abstract: Software services are subject to constant change and variation. To control service development, a service developer needs to know why a change was made, what are its implications and whether the change is complete. Typically, service clients do not perceive the upgraded service immediately. As a consequence, service-based applications may fail on the service client side due to changes carried out during a provider service upgrade. In order to manage changes in a meaningful and effective manner service clients must therefore be considered when service changes are introduced at the service provider's side. Otherwise such changes will most certainly result in severe application disruption. Eliminating spurious results and inconsistencies that may occur due to uncontrolled changes is therefore a necessary condition for the ability of services to evolve gracefully, ensure service stability, and handle variability in their behavior. Towards this goal, this work presents a model and a theoretical framework for the compatible evolution of services based on well-founded theories and techniques from a number of disparate fields.
    Date: 2010
  6. By: Mogstad, Magne (Statistics Norway); Wiswall, Matthew (New York University)
    Abstract: The linear IV estimator, in which the dependent variable is a linear function of a potentially endogenous regressor, is a major workhorse in empirical economics. When this regressor takes on multiple values, the linear specification restricts the marginal effects to be constant across all margins. This paper investigates the problems caused by the linearity restriction in IV estimation, and discusses possible remedies. We first examine the biases due to nonlinearity in the commonly used tests for non-zero treatment effects, selection bias, and instrument validity. Next, we consider three applications where theory suggests a nonlinear relationship, yet previous research has used linear IV estimators. We find that relaxing the linearity restriction in the IV estimation changes the qualitative conclusions about the relevant economic theory and the effectiveness of different policies.
    Keywords: linear model, variable treatment intensity, nonlinearity, instrumental variables
    JEL: C31 C14
    Date: 2010–09
  7. By: Gani Aldashev; Timoteo Carletti; Simone Righi
    Abstract: We study the informational efficiency of a market with a single traded asset. The price initially differs from the fundamental value, about which the agents have noisy private information (which is, on average, correct). A fraction of traders revise their price expectations in each period. The price at which the asset is traded is public information. The agents' expectations have an adaptive component and a social-interactions component with confirmatory bias. We show that, taken separately, each of the deviations from rationality worsen the information efficiency of the market. However, when the two biases are combined, the degree of informational inefficiency of the market (measured as the deviation of the long-run market price from the fundamental value of the asset) can be non-monotonic both in the weight of the adaptive component and in the degree of the confirmatory bias. For some ranges of parameters, two biases tend to mitigate each other's effect, thus increasing the informational efficiency.
    Date: 2010–09
  8. By: Harbir Lamba
    Abstract: In both finance and economics, quantitative models are usually studied as isolated mathematical objects --- most often defined by very strong simplifying assumptions concerning rationality, efficiency and the existence of disequilibrium adjustment mechanisms. This raises the important question of how sensitive such models might be to real-world effects that violate the assumptions. We show how the consequences of rational behavior caused by perverse incentives, as well as various irrational tendencies identified by behavioral economists, can be systematically and consistently introduced into an agent-based model for a financial asset. This generates a class of models which, in the special case where such effects are absent, reduces to geometric Brownian motion --- the usual equilibrium pricing model. Thus we are able to numerically perturb a widely-used equilibrium pricing model market and investigate its stability. The magnitude of such perturbations in real markets can be estimated and the simulations imply that this is far outside the stability region of the equilibrium solution, which is no longer observed. Indeed the price fluctuations generated by endogenous dynamics, are in good general agreement with the excess kurtosis and heteroskedasticity of actual asset prices. The methodology is presented within the context of a financial market. However, there are close links to concepts and theories from both micro- and macro-economics including rational expectations, Soros' theory of reflexivity, and Minsky's theory of financial instability.
    Date: 2010–09
  9. By: Clark, Gregory; Cummins, Joe; Smith, Brock
    Abstract: Occupations listed in wills reveal that as early as 1560 effectively only 60% of the English engaged in farming. Even by 1817, well into the Industrial Revolution, the equivalent primary share, once we count in food and raw material imports, was still 52%. By implication, incomes in pre-industrial England were close to those of 1800. Urbanization rates are not a good guide to pre-industrial income levels. Many rural workers were engaged in manufacturing, services and trade. The occupation shares also imply pre-industrial England was rich enough in 1560 to rank above the bottom fifth of countries in 2007.
    Keywords: Long Run Growth England
    JEL: N3 N13 O4
    Date: 2010–07–04
  10. By: Antoine Bommier (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland); Arnold Chassagnon (Paris School of Economics and Paris-Dauphine University); François Le Grand (EMLyon Business School)
    Abstract: We consider a formal approach to comparative risk aversion and applies it to intertemporal choice models. This allows us to ask whether standard classes of utility functions, such as those inspired by Kihlstrom and Mirman [15], Selden [26], Epstein and Zin [9] and Quiggin [24] are well-ordered in terms of risk aversion. Moreover, opting for this model-free approach allows us to establish new general results on the impact of risk aversion on savings behaviors. In particular, we show that risk aversion enhances precautionary savings, clarifying the link that exists between the notions of prudence and risk aversion.
    Keywords: Risk aversion, Savings behaviors, Precautionary savings
    JEL: D11 D81 D91
    Date: 2010–09
  11. By: Salazar Soares, Vasco (Isvouga); Lima, Antonieta (Isvouga)
    Abstract: Considering the few studies about the coupled relation between oil and gold prices and the exchange market, the purpose of this article is to explore this line of investigation. So, combining different approaches on oil and gold prices, stock indexes and exchange market (among others, Dooley, Isard and Taylor (1992), Sadorsky (1999), Park and Ratti (2007), Afshar (2008), Miller and Ratti (2008), Abdelaziz, Chortareas and Cipollini (2008) studies), our model, an unrestricted VAR and a VECM model, mixed all these variables applied to the European market, in order to explain the exchange market variation, from 1999:01 to 2010:05. We innovate by considering both gold and crude prices as explaining variables, differently from the above-mentioned authors, who only consider either gold or crude prices. Our results suggested that the model explains the long-run relationship between usd/eur and the mentioned variables, being consistent with the results previously found. Differently from the authors mentioned, in our model unrestricted VAR works better than VECM, with a R2 of 45,66% faces to 34,34%.
    Keywords: Exchange rate; crude price; gold price; stock index; inflation rate
    JEL: E44 F37
    Date: 2010–09–29
  12. By: José M. Jiménez Gómez (Universidad Politécnica de Cartagena)
    Abstract: As Roemer (1986) points out, things become more interesting once we include information. In this paper, following the line started by Jiménez-Gómez and Marco-Gil (2008), we define both a lower and an upper bounds on awards in the framework of the Lorenz-Bifocal Bankruptcy Problem (Gadea et al. (2010)), which is an extended bankruptcy problem enriched with a Commonly Accepted Equity Principles set and the idea of treat everybody as evenly as possible (Dutta and Ray (1989) and Arin (2007), among others). Moreover, we contribute with the definition of the Lorenz Double Boundedness Recursive procedure, which consists on the recursive imposition of both bounds, providing a natural way of justifying the convex combination of bankruptcy rules. Specifically, we retrieve the midpoint of extreme and opposite well known ways of distributing the resource. Finally, we complete our analysis from the strategic viewpoint, obtaining similar results.
    Keywords: bankruptcy problems, lower bound, upper bound, duality, recursivity
    JEL: C71 D63 D71
    Date: 2010–09
  13. By: Joel E. Cohen
    Abstract: This essay reviews important demographic trends expected to occur between 2010 and 2050, indicates some of their implications for economic and global development, and suggests some possible policies to respond to these trends and implications. The century from 1950 to 2050 will have witnessed the highest global population growth rate ever, the largest voluntary fall in the global population growth rate ever, and the most enormous demographic shift ever between the more developed and less developed regions. In the coming half century, according to most demographers, the world’s population will grow older, larger (albeit more slowly), and more urban than in the 20th century, but with much variance within and across regions. No one knows what population and demographic characteristics of humans are sustainable, but it is clear that having a billion or people chronically hungry today results from collective human choices, not biophysical necessities. Concrete policy options to respond to demographic trends include providing universal primary and secondary education, eliminating unmet needs for contraception and reproductive health, and implementing demographically sensitive urban planning, particularly construction for greater energy efficiency and for an aging population. [WP 220]
    Keywords: demography, urbanization, ageing, population growth, universal education, contraception, reproductive health, urban planning, sustainability, hunger, fertility decline, technology,
    Date: 2010
  14. By: Dirk Schindler (Department of Economics, University of Konstanz, Germany); Hongyan Yang (Department of Economics, University of Konstanz, Germany)
    Abstract: To analyze the optimal social insurance package, we set up a two-period life-cycle model with risky human capital investment, where the government has access to labor taxation, education subsidies and capital taxation. Social insurance is provided by redistributive labor taxation. Moreover, both education subsidies and capital taxation are used as catalyzers to facilitate social insurance by mitigating distortions from labor taxation. We derive a Ramsey-rule for the optimal combination of these two instruments. Relative to capital taxation, optimal education subsidies increase in their relative effectiveness to boost labor supply and in households' underinvestment into education, but they decrease in their relative net distortions. For their absolute levels, indirect complementarity effects, i.e., influencing the effectiveness of the other instrument, do matter. Generally, a decrease in capital taxes should go along with an increase in education subsidies.
    Keywords: Human Capital Investment, Education Subsidies, Capital Taxation, Risk, Social Insurance
    JEL: H21 I2 J2 D80
    Date: 2010–09–30
  15. By: Laurent Weill (University of Strasbourg and EM Strasbourg Business School)
    Abstract: The aim of this paper is to investigate whether Islamic banks have greater market power than conventional banks. Indeed Islamic banks may benefit from a captive clientele, owing to religious principles, which would be charged greater prices. To measure market power, we compute Lerner indices on a sample of banks from 17 countries in which Islamic and conventional banks coexist over the period 2000–2007. Comparison of Lerner indices shows no significant difference between Islamic banks and conventional banks. When including control variables, regression of Lerner indices even suggests that Islamic banks have a lower market power than conventional banks. A robustness check with the Rosse-Panzar model confirms that Islamic banks are not less competitive than conventional banks. The lower market power of Islamic banks can be explained by their different norms and their different incentives.
    Date: 2010–09
  16. By: David Hugh-Jones (Max Planck Institute of Economics, Jena); Martin A. Leroch (University of Hamburg)
    Abstract: People exhibit group reciprocity when they retaliate, not against the person who harmed them, but against somebody else in that person's group. Group reciprocity may be a key motivation behind intergroup conflict. We investigated group reciprocity in a laboratory experiment. After a group identity manipulation, subjects played a Prisoner's Dilemma with others from different groups. Subjects then allocated money between themselves and others, learning the group of the others. Subjects who knew that their partner in the Prisoner's Dilemma had defected became relatively less generous to people from the partner's group, compared to a third group. We use our experiment to develop hypotheses about group reciprocity and its correlates.
    Keywords: reciprocity, groups, conflict
    JEL: D74 C92
    Date: 2010–09–27
  17. By: Peeters Ronald; Saran Rene; Yuksel Ayse Muge (METEOR)
    Abstract: We study a spatial model of party formation in which the set of agendas is the unit circle. We characterize the sets of pure-strategy Nash equilibria under the plurality and proportional rules. In both rules, multiple configurations of parties are possible in Nash equilibrium. We refine our predictions using a new notion called “defection-proof” Nash equilibrium. Under the plurality rule, only those Nash equilibria in which either two or three parties exist are defection-proof, whereas multiple parties exist in any defectionproof Nash equilibrium under the proportional rule. These results are mostly consistent with the predictions of Duverger (1954).Keywords: Party Formation; Spatial Model; Plurality Rule; Proportional Rule; Nash Equilibrium; Defection-Proof Nash Equilibrium.
    Keywords: microeconomics ;
    Date: 2010
  18. By: Eriksson, Tor (Aarhus School of Business); Villeval, Marie Claire (CNRS, GATE)
    Abstract: Assuming that people care not only about what others do but also on what others think, we study respect as a non-monetary source of motivation in a context where the length of the employment relationship is endogeneous. In our three-stage gift-exchange experiment, the employer can express respect by giving the employee costly symbolic rewards after observing his level of effort. This experiment sheds light on the extent to which symbolic rewards are used, how they affect employees’ further effort, the duration of relationships, and the profits of employers. Furthermore, we study whether employers’ decisions to give symbolic rewards are driven by strategic considerations, by manipulating the bargaining power of employers and employees. We find that employers make use of symbolic rewards and chiefly to express their satisfaction with the employee. Indeed, symbolic rewards are more frequently used when there is excess supply of labor in the market while they are used in almost the same proportion when the market is balanced and when there is excess demand of labor. They are associated with higher profits and increased probability of continuing employment relationships. Overall, however, the opportunity of expressing respect does not improve efficiency compared with an environment in which it does not exist, possibly due to a crowding-out of extrinsic incentives by the availability of non-monetary incentives.
    Keywords: respect, symbolic rewards, incentives, labor market, experiment
    JEL: C91 J32 J64 M52
    Date: 2010–09

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