nep-mic New Economics Papers
on Microeconomics
Issue of 2010‒10‒23
twenty-two papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Forecasting with Equilibrium-correction Models during Structural Breaks.. By Castle, Jennifer L.; Fawcett, Nicholas W.; Hendry, David F.
  2. Product Diversity, Strategic Interactions and Optimal Taxation By V. LEWIS
  3. A Tale of Two Growth Engines: The Interactive Effects of Monetary Policy and Intellectual Property Rights By Angus C. Chu; Ching-Chong Lai; Chih-Hsing Liao
  4. Alliance Partner Choice in Markets with Vertical and Horizontal Externalities By Hattori, Keisuke; Lin, Ming Hsin
  5. A structural risk-neutral model for pricing and hedging power derivatives By René Aid; Luciano Campi; Nicolas Langrené
  6. The Impact of Repeated Lying on Survey Results By Thomas Chesney; Kay Penny
  7. Endogenous Credit Cycles By Chao Gu; Randall Wright
  9. Fungibility, Labels and Consumption By Johannes Abeler; Felix Marklein
  10. Information Disclosure in Innovation Contests By Thomas Rieck
  11. Innovation and Productivity - Evidence from Six Latin American Countries By Gustavo Crespi; Pluvia Zuniga
  12. Global policy at the zero lower bound in a large-scale DSGE model By Sandra Gomes; Pascal Jacquinot; Ricardo Mestre; João Sousa
  13. The effects of workforce composition, labor turnover, and the qualities of entering and exiting workers on productivity growth By Kronenberg, Kristin; Carree, Martin
  14. Exploring the Impact of Fear Appeals on the Prevention of Shoplifting. By T. DE BOCK; I. VERMEIR; M. PANDELAERE; P. VAN KENHOVE
  15. Poverty and Income Distribution in Latin America: On the Complementarities Between Trade Policy and Social Public Spending By Lopez, Ramon E.
  16. Favor Trading in Grassroots Fundraising: The Girl Scout Cookie Phenomenon By Sarah Jacobson; Ragan Petrie
  17. Stock loans in incomplete markets By Matheus R. Grasselli; Cesar G. Velez
  18. R\&D-based Growth in the Post-modern Era By Strulik, Holger; Prettner, Klaus; Prskawetz, Alexia
  19. Family Structure Transitions and Changes in Maternal Resources and Well-Being By Cynthia Osborne; Lawrence Berger; Katherine Magnuson
  20. Signaling in First-Price Auctions By Thomas Rieck
  21. The Unending Search for a New Global Monetary and Financial Architecture By Gerardo della Paolera
  22. Modelling Aggregate Personal Income Tax Revenue in Multi-Schedular and Multi-Regional Structures By John Creedy; Jose Felix Sanz-Sanz

  1. By: Castle, Jennifer L.; Fawcett, Nicholas W.; Hendry, David F.
    Abstract: When location shifts occur, cointegration-based equilibrium-correction models (EqCMs) face forecasting problems. We consider alleviating such forecast failure by updating, intercept corrections, differencing, and estimating the future progress of an 'internal' break. Updating leads to a loss of cointegration when an EqCM suffers an equilibrium-mean shift, but helps when collinearities are changed by an 'external' break with the EqCM staying constant. Both mechanistic corrections help compared to retaining a pre-break estimated model, but an estimated model of the break process could outperform. We apply the approaches to EqCMs for UK M1, compared with updating a learning function as the break evolves.
    JEL: C1 C53
    Date: 2010–10
  2. By: V. LEWIS
    Abstract: The entry of a new product increases consumer surplus through additional product di- versity but decreases firm profits. In markets where .rm entry competition and reduces markups through strategic interactions, we expect entry to be excessively high. In a simple general equilibrium model, this is true for industries with very similar goods. If goods are instead highly differentiated, entry is below optimum. In both cases, the optimal policy is a labour subsidy and a tax on entry. If labour subsidies are unavailable, subsidising entry is optimal for industries with low degrees of product differentiation.
    Keywords: product diversity, entry, strategic interactions, optimal taxation
    JEL: E22 E61 E62
    Date: 2010–07
  3. By: Angus C. Chu (Shanghai University of Finance and Economics, China); Ching-Chong Lai (Institute of Economics, Academia Sinica, Taipei, Taiwan); Chih-Hsing Liao (National Chengchi University)
    Abstract: How do intellectual property rights that determine the market power of firms influence the effects of monetary policy on economic growth and social welfare? To analyze this question, we develop a monetary R&D-based growth model with elastic labor supply. We find that monetary expansion reduces growth and welfare through a decrease in labor supply that reduces R&D; furthermore, a larger market power of firms strengthens these effects of monetary policy in the R&D model. In contrast, increasing the market power of firms dampens the effects of monetary policy in the AK model. In other words, the market power of firms has surprisingly opposite implications on the growth and welfare effects of monetary policy under the two growth engines (i.e., innovation versus capital accumulation). Finally, we simulate the transition dynamics of the R&D-based growth model to compute the complete welfare changes from reducing inflation.
    Keywords: economic growth, inflation, monetary policy, patent policy, R&D
    JEL: O30 O40 E41
    Date: 2010–10
  4. By: Hattori, Keisuke; Lin, Ming Hsin
    Abstract: This study investigates the choice between complementary and parallel alliances in a market with vertical and horizontal externalities. One composite goods firm competes with two components producers, each providing a complementary component of a differentiated com- posite good. Although the joint profits from a parallel alliance between the composite goods firm and a components producer are always larger than those from a complementary alliance between components producers, through Nash bargaining, a components producer prefers the complementary (parallel) alliance when the degree of product differentiation is sufficiently large (small). Combined with the result that a complementary alliance is socially preferable, our findings provide meaningful implications for antitrust policy.
    Keywords: Complementary alliance; Parallel alliance; Nash bargaining; Antitrust policy
    JEL: L11 L13 L41
    Date: 2010–10–08
  5. By: René Aid (FiME - Laboratoire de Finance des Marchés d'Energies - Université Paris Dauphine - Paris IX, EDF R&D - EDF); Luciano Campi (FiME - Laboratoire de Finance des Marchés d'Energies - Université Paris Dauphine - Paris IX, CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX); Nicolas Langrené (FiME - Laboratoire de Finance des Marchés d'Energies - Université Paris Dauphine - Paris IX, PMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie - Paris VI - Université Paris-Diderot - Paris VII)
    Abstract: We develop a structural risk-neutral model for energy market modifying along several directions the approach introduced in Aid et al. (2009). In particular a scarcity function is introduced to allow important deviations of the spot price from the marginal fuel price, producing price spikes. We focus on pricing and hedging electricity derivatives. The hedging instruments are forward contracts on fuels and electricity. The presence of production capacities and electricity demand makes such a market incomplete. We follow a local risk minimization approach to price and hedge energy derivatives. Despite the richness of information included in the spot model, we obtain closed-form formulae for futures prices and semi-explicit formulae for spread options and European options on electricity forward contracts. An analysis of the electricity price risk premium is provided showing the contribution of demand and capacity to the futures prices. We show that when far from delivery, electricity futures behave like a basket of futures on fuels.
    Keywords: Electricity spot and forward prices ; Fuels ; Capacity ; Electricity demand ; Scarcity function ; Local risk minimization ; Minimal martingale measure ; Power derivatives ; Spread options ; Extended incomplete Goodwin-Staton integral
    Date: 2010–10–12
  6. By: Thomas Chesney (Nottingham University Business School); Kay Penny (Edinburgh Napier University)
    Abstract: A Monte Carlo simulation study is carried out to examine the effects on study results of subjects completing a survey more than once. Three strategies subjects might use to do this - which is known as farming - are studied. Findings show that farming influences results and can cause both statistical hypothesis testing Type I (false positive) and Type II (false negative) errors in unpredictable ways. A literature review from one management sub-discipline (marketing) was undertaken to investigate how common problem farming might be. Results suggest that while the incentivised survey method which might encourage farming is popular and some approaches to data collection make it difficult to prevent farming altogether, it is unlikely to be commonplace as many research methods prevent it.
    Keywords: Survey, Incentive, Online
    Date: 2010–10–13
  7. By: Chao Gu (Department of Economics, University of Missouri-Columbia); Randall Wright
    Abstract: We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are deterministic and stationary. We show this can occur when the terms of trade are determined by Walrasian pricing or by Nash bargaining. The results illustrate how it is possible to generate equilibria with credit cycles (crunches, freezes, crises) in theory, and as recently observed in actual economies.
    Keywords: sunspot credit, commitment, dynamics, cycles.
    JEL: E2
    Date: 2010–10–11
  8. By: Daniele Nosenzo (University of Nottingham); Martin Sefton (University of Nottingham)
    Abstract: In this paper we examine voluntary contributions to a public good, embedding Varian (1994)’s voluntary contribution game in extended games that allow players to choose the timing of their contributions. We show that predicted outcomes are sensitive to the structure of the extended game, and also to the extent to which players care about payoff inequalities. We then report a laboratory experiment based on these extended games. We find that behavior is similar in the two extended games: subjects avoid the detrimental move order of Varian’s model, where a person with a high value of the public good commits to a low contribution, and instead players tend to delay contributions. These results suggest that commitment opportunities may be less damaging to public good provision than previously thought.
    Keywords: Public Goods, Voluntary Contributions, Sequential Contributions, Endogenous Timing, Action Commitment, Observable Delay, Experiment
    JEL: H41 C72 C92
    Date: 2010–08
  9. By: Johannes Abeler (University of Nottingham); Felix Marklein (University of Bonn)
    Abstract: Fungibility of money is a central assumption in the theory of consumer choice: any unit of money is substitutable for another. This implies that the composition of income or wealth is irrelevant for consumption. We find in a field experiment that even in a simple, incentivized setup many subjects do not treat money as fungible. When a label is attached to a part of their budget, subjects change consumption according to the label. A controlled laboratory experiment confirms this result and further shows that subjects with lower cognitive abilities are more likely to violate fungibility. The findings lend support to behavioral models of narrow bracketing and mental accounting. One implication of our result is that in-kind benefits distort consumption more strongly than usually assumed.
    Keywords: Fungibility, In-kind Benefits, Mental Accounting, Narrow Bracketing, Field Experiment, Laboratory Experiment
    JEL: C91 C93 D01 H31 I38
    Date: 2010–07
  10. By: Thomas Rieck
    Abstract: In innovation contests, the progress of the competing firms in the innovation process is usually their private information. We analyze an innovation contest in which research firms have a stochastic technology to develop innovations at a fixed cost, but their progress is publicly announced. We make a comparison with the case of no information revelation: if the progress is disclosed, the expected profit of the firms is higher, but the expected profit of the sponsor is lower. Additionally, we show that firms may voluntarily reveal their information.
    Keywords: contest, innovation, information revelation
    JEL: O32 D82 D72
    Date: 2010–09
  11. By: Gustavo Crespi; Pluvia Zuniga
    Abstract: This study examines the determinants of technological innovation and its impact on firm labor productivity across six Latin American countries (Argentina, Chile, Colombia, Costa Rica, Panama, and Uruguay) using micro data from innovation surveys. In line with the literature, in all countries firms that invest in knowledge are more able to introduce new technological advances, and those that innovate have greater labor productivity than those that do not. Yet firm-level determinants of innovation investment are much more heterogeneous than in OECD countries. Cooperation, foreign ownership, and exporting increase the propensity to invest in innovation activities and encourage innovation investment in only half of the countries studied. Scientific and market sources of information have little or no impact on firm innovation efforts, which illustrates the weak linkages that characterize national innovation systems in those countries. The results in terms of productivity, however, highlight the importance of innovation in enabling firms to improve economic performance and catch up.
    Keywords: Innovation, Productivity, Developing countries, Latin America, Innovation surveys
    JEL: O12 O14 O31 O33 O40
    Date: 2010–10
  12. By: Sandra Gomes (Bank of Portugal, R. Francisco Ribeiro, 2, 1150-165 Lisboa, Portugal.); Pascal Jacquinot (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ricardo Mestre (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); João Sousa (Bank of Portugal, R. Francisco Ribeiro, 2, 1150-165 Lisboa, Portugal.)
    Abstract: The purpose of this paper is to analyse whether fiscal policies can alleviate the effects of the zero lower bound (ZLB) on interest rates and if they should be coordinated internationally. The analysis is carried out using EAGLE, a DSGE model of the global economy. We consider that the fiscal shocks are temporary and that fiscal policy retains full credibility at all times. In this setup we find significant non-linearities in a ZLB situation that amplify the effects of fiscal shocks compared to the non-ZLB case. International coordination is helpful but does not play a major role in the results. JEL Classification: E40, E62, E63, F42.
    Keywords: Zero Lower Bound, Fiscal Multipliers, Monetary Policy, DSGE models.
    Date: 2010–10
  13. By: Kronenberg, Kristin; Carree, Martin
    Abstract: This study identifies and analyzes the effects of firms’ workforce composition, labor turnover, and the qualities of entering and exiting employees on consequent changes in their productivity. Using register data provided by Statistics Netherlands, we examine the productivity dynamics of Dutch manufacturing firms between the years 2002 and 2005. The regression results illustrate that changes in firm productivity are not only determined by the composition of the firm’s current workforce and the degree of labor turnover, but also by the characteristics of the workers who enter and exit the firm. Firms benefit from the inflow of employees previously employed with other firms in the same industry, and with highly productive firms, whereas the inflow of workers from non-employment has a negative effect on their new employers’ productivity growth. Furthermore, the outflow of workers into non-employment, and to highly productive firms positively affects their old employers’ productivity growth, while the exit of workers who leave for firms in the same industry, and of those who simultaneously relocate (across long distances) has a negative effect.
    Keywords: workforce composition; labor turnover; job mobility; employee mobility; productivity growth
    JEL: J62 J63 J61 J24
    Date: 2010
    Abstract: The present study investigates the effectiveness of fear appeals in preventing shoplifting among adolescents. We study the effects of type of punishment (social disapproval versus fines), probability of getting caught when shoplifting and severity of the punishment. Results show that social punishment messages should stress severe levels of social disapproval when the chance of getting caught is low. When social disapproval messages imply a high probability of apprehension, the severity of social rejection makes no difference for the shoplifting intentions. Finally, messages focusing on fines should depict large instead of small fines, irrespective of the communicated probability of getting caught
    Keywords: demography prediction, demographic targeting, web advertising, Random Forests, web user profiling, clickstream analysis
    Date: 2010–09
  15. By: Lopez, Ramon E.
    Keywords: International Development, International Relations/Trade, Public Economics,
    Date: 2010–09
  16. By: Sarah Jacobson (Williams College); Ragan Petrie (George Mason University)
    Abstract: Grassroots fundraising leverages favor trading within social networks to support the provision of a public good. We use a laboratory experiment to study the elements and dynamics of this type of fundraising institution. Peer-to-peer reciprocity is an important component of grassroots fundraising, and the ability to practice this targeted reciprocity in our experiment increases contributions to the public good by 14%. Subjects discriminate by rewarding group members who have been generous and withholding rewards from ungenerous group members. At least some of this reciprocal behavior is rooted in other-regarding preferences. When someone is rendered unable to benefit from favor trading, he gives much less to the public good than he does in other settings. People thus excluded from the "circle of reciprocity" thus provide a clean and strict test of indirect reciprocity, since they cannot benefit from a norm of cooperation. We do not observe indirect reciprocity.
    Keywords: public goods, reciprocity, experiment, peer-to-peer fundraising
    JEL: C91 H41 D01
    Date: 2010–10
  17. By: Matheus R. Grasselli; Cesar G. Velez
    Abstract: A stock loan is a contract whereby a stockholder uses shares as collateral to borrow money from a bank or financial institution. In Xia and Zhou (2007), this contract is modeled as a perpetual American option with a time varying strike and analyzed in detail within a risk--neutral framework. In this paper, we extend the valuation of such loans to an incomplete market setting, which takes into account the natural trading restrictions faced by the client. When the maturity of the loan is infinite, we use a time--homogeneous utility maximization problem to obtain an exact formula for the value of the loan fee to be charged by the bank. For loans of finite maturity, we characterize the fee using variational inequality techniques. In both cases we show analytically how the fee varies with the model parameters and illustrate the results numerically.
    Date: 2010–10
  18. By: Strulik, Holger; Prettner, Klaus; Prskawetz, Alexia
    Abstract: Conventional R\&D-based growth theory suggests that productivity growth is positively correlated with population size or population growth, an implication which is hard to see in the data. Here we integrate microfounded fertility and schooling into an otherwise standard R\&D-based growth model. We then show how a Beckerian child quality-quantity trade-off explains why higher growth of productivity and income per capita are associated with lower population growth. The medium-run prospects for future economic growth - when fertility is going to be below replacement level in virtually all fully developed countries - are thus much better than predicted by conventional R\&D-based growth theory.
    Keywords: endogenous growth, R\&D, declining population, fertility, schooling, human capital, post-modern society, post-transitional fertility
    JEL: J13 J24 O10 O30 O40
    Date: 2010–10
  19. By: Cynthia Osborne (University of Texas); Lawrence Berger (University of Wisconsin); Katherine Magnuson (University of Wisconsin)
    Abstract: This paper uses data from the Fragile Families and Child Wellbeing study to examine whether family instability is associated with changes in perceived social support, material hardship, maternal depression, and parenting stress among mothers of young children. In addition to accounting for the number of transitions a mother experiences over the first five years of her child’s life, we pay close attention to the type and timing of these transitions. We find that mothers who transition to cohabitation or marriage with their child’s biological father experience declines in material hardship and that those who transition to cohabitation or marriage with another man exhibit modest declines in both material hardship and depression. Mothers who exit cohabiting or marital relationships encounter decreases in perceived social support and increases in material hardship, depression, and parenting stress. Overall, our results suggest that both the type and, to a much lesser degree, the timing of family structure transitions may influence maternal well-being.
    Keywords: material hardship, motherhood, depression, social support, stress, family structure, Father involvement, fragile families, longitudinal data, well-being
    JEL: I00 I32 J12 J13 J16
    Date: 2010–09
  20. By: Thomas Rieck
    Abstract: It is commonly assumed in private value auctions that bidders have no information about the realization of the other bidders' valuations. Nevertheless, an informative public signal about the realization may be released by a bidder while he learns his own valuation. Using a simple discrete asymmetric first-price auction setting, we show that a bidder may indeed benefit from the presence of an informative signal about his own valuation. We characterize the optimal signal and show that a signal is not beneficial if it is too precise. The latter result carries over to a general continuous asymmetric first-price auction model. Finally, we use a specific signaling structure with uniform distributions to show that signaling need not be beneficial for any precision of the signal.
    Keywords: asymmetric auction, first-price auction, signaling
    JEL: D44 D82
    Date: 2010–09
  21. By: Gerardo della Paolera (Global Development Network (GDN))
    Abstract: This paper analyzes some key features of the global monetary and financial crisis and the limitations faced by Central Banks. It also includes a brief description for the collectively previous efforts to anchor a Global Monetary and Financial regime. The main difficulties to “globalize” banking and financial reforms are illustrated in this paper. It is concluded with some open questions concerning the threats and opportunities that this crisis presents for emerging, developing and poorer countries.
    Date: 2010–10
  22. By: John Creedy; Jose Felix Sanz-Sanz
    Abstract: This paper derives analytical expressions for aggregate personal income tax revenue obtained from a multi-schedular and multi-regional personal income tax system, with revenue divided among central and regional governments. Aggregate income tax revenue is expressed as a function of characteristics of the distribution of taxable income, making it possible to identify the sources of revenue differences among regions. The approach is applied to the tax structure in Spain, and the effects of income distribution differences among the Spanish regions is examined.
    Date: 2010

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