nep-mic New Economics Papers
on Microeconomics
Issue of 2010‒11‒20
twenty-two papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Does consistency predict accuracy of beliefs?: Economists surveyed about PSA By Berg, Nathan; Biele, Guido; Gigerenzer, Gerd
  2. Sales, Quantity Surcharge, and Consumer Inattention By Sofronis Clerides; Pascal Courty
  3. Evolution and market behavior with endogenous investment rules By Giulio Bottazzi; Pietro Dindo
  4. Do Product Market Regulations in Upstream Sectors Curb Productivity Growth? Panel Data Evidence for OECD Countries By Renaud Bourlès; Gilbert Cette; Jimmy Lopez; Jacques Mairesse; Giuseppe Nicoletti
  5. Credit Market Quality, Innovation and Trade By Terra Cristina; Vasconcelos Enrico
  6. Identity, reputation and social interaction with an application to sequential voting By Emilio Barucci; Marco Tolotti
  7. Can sickness absence be affected by information meetings? Evidence from a social experiment By Johansson, Per; Lindahl, Erica
  8. Market Integration and Competition in Environmental and Trade Policies By Kenji Fujiwara
  9. Time-varying spot and futures oil price dynamics By Guglielmo Caporale; Davide Ciferri; Alessandro Girardi
  10. Wage formation and bargaining power during the Great Depression.. By Bårdsen, Gunnar; Doornik, Jurgen A.; Klovland, Jan Tore
  11. The Price of Egalitarianism By Yongsung Chang; Sun-Bin Kim
  12. Inconsistency Pays?: Time-inconsistent subjects and EU violators earn more By Berg, Nathan; Eckel, Catherine; Johnson, Cathleen
  13. Shareholders and employees: rent transfer and rent sharing in corporate takeovers By Kuvandikov, Azimjon
  14. On the interaction between market and credit risk: a factor-augmented vector autoregressive (FAVAR) approach By Roberta Fiori; Simonetta Iannotti
  15. Commodity Price Volatility: The Impact of Commodity Index Traders By Getu, Hailu; Weersink, Alfons
  16. Individual Adaptation to Climate Change: The Role of Information and Perceived Risk By Osberghaus, Daniel; Finkel, Elyssa; Pohl, Max
  17. Cojumping: Evidence from the US Treasury Bond and Futures Markets By Mardi Dungey; Lyudmyla Hvozdyk
  18. Punishment and cooperation: the "old" theory By Ortona, Guido
  19. Incomplete markets, liquidation risk, and the term structure of interest rates By Challe, E.; Le Grand, F.; Ragot, X.
  20. Financial constraints and innovation: Why poor countries don't catchup By Yuriy Gorodnichenko; Monika Schnitzer
  21. International Capital Flows and Credit Market Imperfections: a Tale of Two Frictions By Alberto Martin; Filippo Taddei
  22. Access to Business Subsidies: What Explains Complementarities and Persistency? By Heli Koski; Mika Pajarinen

  1. By: Berg, Nathan; Biele, Guido; Gigerenzer, Gerd
    Abstract: Subjective beliefs and behavior regarding the Prostate Specific Antigen (PSA) test for prostate cancer were surveyed among attendees of the 2006 meeting of the American Economic Association. Logical inconsistency was measured in percentage deviations from a restriction imposed by Bayes’ Rule on pairs of conditional beliefs. Economists with inconsistent beliefs tended to be more accurate than average, and consistent Bayesians were substantially less accurate. Within a loss function framework, we look for and cannot find evidence that inconsistent beliefs cause economic losses. Subjective beliefs about cancer risks do not predict PSA testing decisions, but social influences do.
    Keywords: logical consistency; predictive accuracy; elicitation; non-Bayesian; ecological rationality
    Date: 2010
  2. By: Sofronis Clerides; Pascal Courty
    Abstract: Quantity surcharges occur when firms market a product in two sizes and offer a promotion on the small size: the large size then costs more per unit than the small one. When quantity surcharges occur the sales of the large size decrease only slightly despite the fact that the small size is a cheaper option - a clear arbitrage opportunity. This behavior is consistent with the notion of rationally inattentive consumers that has been developed in models of information frictions. We discuss implications for consumer decision making, demand estimation, and firm pricing.
    Keywords: quantity surcharge, sales, promotions, consumer inattention, quantity discounts, nonlinear pricing.
    Date: 2010–11
  3. By: Giulio Bottazzi; Pietro Dindo
    Abstract: In a complete market for short-lived assets, we investigate long run wealth-driven selection on a general class of investment rules that depend on endogenously determined current and past prices. We find that market instability, leading to asset mis-pricing and informational efficiencies, is a common phenomenon and is due to two different mechanisms. First, conditioning investment decisions on asset prices implies that dominance of an investment rule on others, as measured by the relative entropy, can be different at different prevailing prices thus reducing the global selective capability of the market. Second, the feedback existing between past realized prices and current investment decisions can lead to a form of deterministic overshooting. By investigating the random dynamical system that describes the price and wealth dynamics, we are able to derive general conditions for the occurrence of each type of market instability and the emergence of informational inefficiencies.
    Keywords: Market Selection, Informational Efficiency, Evolutionary Finance, Price Feedbacks, Asset Pricing.
    JEL: D50 D80 G11 G12
    Date: 2010–11–10
  4. By: Renaud Bourlès; Gilbert Cette; Jimmy Lopez; Jacques Mairesse; Giuseppe Nicoletti
    Abstract: Based on an endogenous growth model, we show that intermediate goods markets imperfections can curb incentives to improve productivity downstream. We confirm such prediction by estimating a model of multifactor productivity growth in which the effects of upstream competition vary with distance to frontier on a panel of 15 OECD countries and 20 sectors over 1985-2007. Competitive pressures are proxied with sectoral product market regulation data. We find evidence that anticompetitive upstream regulations have curbed MFP growth over the past 15 years, more strongly so for observations that are close to the productivity frontier.
    JEL: C23 L16 L5 O43 O57
    Date: 2010–11
  5. By: Terra Cristina; Vasconcelos Enrico (Universite de Cergy-Pontoise, THEMA, F-95000 Cergy-Pontoise.; Graduate School of Economics, Fundação Getulio Vargas, and Secretaria de Política Econômica, Ministério da Fazenda)
    Abstract: Using a general equilibrium model with private R&D financing, this article investigates the impact of trade openness to trade on growth and on welfare for two countries equal in all aspects, except for the quality of credit markets. We show that opening to trade increases growth in the country with better credit markets (North) and decreases it in the other country (South). With respect to trade pattern, South imports high tech goods and exports traditional goods. In terms of welfare, opening to trade may lower the welfare of individuals in the short run, but in the long run all of them are better o¤ under free trade than if they were under autarky.
    Keywords: credit markets; growth; trade pattern
    JEL: F12 G11 O16
    Date: 2010
  6. By: Emilio Barucci (Department of Applied Mathematics, Politecnico di Milano); Marco Tolotti (Department of Applied Mathematics, University Ca'Foscari of Venice)
    Abstract: We analyze binary choices in a random utility model assuming that the agent's preferences are affected by conformism (with respect to the behavior of the society) and coherence (with respect to his identity). We apply the analysis to sequential voting when voters like to win.
    Keywords: identity; reputation; social interaction; random utility models; voting system.
    JEL: D71 D81 C62
    Date: 2010–11
  7. By: Johansson, Per (IFAU - Institute for Labour Market Policy Evaluation); Lindahl, Erica (IFAU - Institute for Labour Market Policy Evaluation)
    Abstract: During the last decade several empirical studies have stressed the importance of norms and social interactions for explaining sickness absence behavior. In this context public discussions about the intentions of the insurance, and of the rights and duties of the receivers, may be important for reducing the sickness absence. In this paper we study whether information meetings about the Swedish sickness insurance affect the length of sickness absence spells. The study is based on experimental data on individuals with weak labor market attachments. The displacement of when the call to the meeting was sent out was randomized. Comparing the survival functions of those called immediately with those whose calls were delayed (by about 30 days) makes it possible to study whether the length of sickness absence is affected by receiving the call earlier. The result suggests that the length is reduced by, on average, 20 percent. In the long term (12 months later) there is no effect of the information meeting. This suggests that attendance to the information meeting does not change individuals’ long-term behavior.
    Keywords: monitoring; moral hazard; public social insurance; survival analysis; instrumental variables
    JEL: C93 H51 H55 J22
    Date: 2010–10–28
  8. By: Kenji Fujiwara (Kwansei Gakuin University)
    Abstract: Recent empirics suggest the relevance of transport cost reductions for world trade growth along with eliminations in protectionist trade barriers. To address the welfare eects of trade cost reductions in a context of `trade and the environment,' we develop a two-stage game model where governments choose environmental and trade policies and rms play a Cournot-Nash game. We show that reductions in transport costs lead to lower emission taxes and higher taris. And, we nd that the degree of pollution damage plays a central role in whether market integration is welfare-improving relative to autarky.
    Keywords: market integration, oligopoly, pollution tax, tariff, gains/losses from trade
    JEL: F12 F18 L13 Q56
    Date: 2010–11
  9. By: Guglielmo Caporale; Davide Ciferri; Alessandro Girardi
    Abstract: We investigate the role of crude oil spot and futures prices in the process of price discovery by using a cost-of-carry model with an endogenous convenience yield and daily data over the period from January 1990 to December 2008. We provide evidence that futures markets play a more important role than spot markets in the case of contracts with shorter maturities, but the relative contribution of the two types of market turns out to be highly unstable, especially for the most deferred contracts. The implications of these results for hedging and forecasting crude oil spot prices are also discussed.
    Keywords: Cointegration, Oil market, Futures prices, Price Discovery.
    JEL: C32 C51 G13 G14
    Date: 2010–07–01
  10. By: Bårdsen, Gunnar; Doornik, Jurgen A.; Klovland, Jan Tore
    Abstract: We present an econometric analysis of wage behaviour in Norway during the interwar years. The analysis is based on a panel of manufacturing industry data using GMM estimation methods. Our empirical analysis shows that wage formation in the interwar period can be understood with the help of modern bargaining theory and well-established wage equations. We estimate a long-run wage curve that has all the standard features of being homogeneous in prices, proportional to productivity, and with a negative unemployment elasticity. We also present some new Monte Carlo evidence on the properties of the estimators used.
    JEL: E24 N24
    Date: 2010
  11. By: Yongsung Chang (University of Rochester); Sun-Bin Kim (Department of Economics, Korea University)
    Abstract: We compute the welfare cost of egalitarianism—a tax policy that equalizes wages for all. The benchmark “laissez-faire†economy has features a la Aiyagari (1994) with endogenous labor supply. A progressive income tax provides insurance against income risks but at the cost of efficiency: it undermines highly productive workers’ incentives to work. We find that in an economy with the labor-supply elasticity of 1, the welfare cost of egalitarianism, measured in consumption-equivalence units, is only 1% as the welfare gain from insurance against income risks nearly offsets the efficiency loss from distorting labor effort. However, with an elastic labor supply, the welfare cost of egalitarianism is as large as 7.5% of steady state consumption.
    Keywords: Egalitarianism; Welfare Cost; Equal-Wage Policy; Income Risks.
    JEL: E2 E6 J3
    Date: 2010–10
  12. By: Berg, Nathan; Eckel, Catherine; Johnson, Cathleen
    Abstract: Experimental choice data from 881 subjects based on 40 time-tradeoff items and 32 risky choice items reveal that most subjects are time-inconsistent and most violate the axioms of expected utility theory. These inconsistencies cannot be explained by well-known theories of behavioral inconsistency, such as hyperbolic discounting and cumulative prospect theory. Aggregating expected payoffs and the risk associated with each subjects’ 72 choice items, the statistical links between inconsistency and total payoffs are reported. Time-inconsistent subjects and those who violate expected utility theory both earn substantially higher expected payoffs, and these positive associations survive largely undiminished when included together in total payoff regressions. Consistent subjects earn lower than average payoffs because most of them are consistently impatient or consistently risk averse. Positive payoffs from inconsistency cannot, however, be fully explained by greater risk taking. Controlling for the total risk of each subject’s risk choices as well as for socio-economic differences among subjects, time inconsistent subjects earn significantly more money, in statistical and economic terms. So do expected utility violators. Positive returns to inconsistency extend outside the domain in which inconsistencies occurs, with time-inconsistent subjects earning more on risky choice items, and expected utility violators earning more on time-tradeoff items. The results seem to call into question whether axioms of internal consistency—and violations of these axioms that behavioral economists frequently focus on—are economically relevant criteria for evaluating the quality of decision making in human populations.
    Keywords: behavioral economics; hyperbolic discounting; hypobolic; normative; coherence; correspondence; consistency; irrationality; rationality
    Date: 2010
  13. By: Kuvandikov, Azimjon
    Abstract: The introduction of the ideology of maximising shareholder value and the rise of institutional investors in LMEs contributed to the development of an active MCC, which threatens managers with replacement if they do not act in the best interests of shareholders. However, some authors argue that restructuring for shareholder value through the MCC may negatively affect labour (Froud et al., 2000; Lazonick and O'Sullivan, 2000). It is suggested that such corporate governance practices may discourage employees from investing in firm-specific human capital and may pressurise managers into taking short-term profit-maximising actions instead of investing in long-term sustainable projects (Blair, 1995).
    Date: 2010–08
  14. By: Roberta Fiori (Bank of Italy); Simonetta Iannotti (Bank for International Settlements)
    Abstract: The aim of the paper is to understand the interaction between market and credit risk. Using a comprehensive set of Italian data, we apply a factor model to identify the common sources of risk driving fluctuations in the real and financial sectors. The common latent factors are then inserted in a VAR framework via a Factor Augmented Vector Autoregressive (FAVAR) approach to analyse the role of risk interactions with monetary policy shocks. We find that the impact of a restrictive monetary policy shock on credit risk is amplified when considering the feedback effect deriving from macroeconomic and equity market risk. Thus, neglecting dynamic interactions among risks may lead to biased estimates of the overall risk measure. The approach provides a framework for modelling macro and financial feedback dynamics, shedding some light on the complex interdependence between the financial sector and the real economy.
    Keywords: FAVAR approach, credit risk, market risk, factor model
    JEL: C32 E44 G21
    Date: 2010–10
  15. By: Getu, Hailu; Weersink, Alfons
    Abstract: Over the years, critics have argued that futures market prices have been either too low or too high. Speculators have often been the target for the wrath of those feeling the futures price does not properly reflect market fundamentals. Recently, the criticism has been vented toward a new type of speculator that has been blamed for the dramatic changes in agricultural commodity prices experienced over the last several years. Commodity index traders (CITs) and other large institutional traders are commonly accused of exerting a destabilizing influence on commodity prices. The intensity of the debate over the role of CITs appeared to wane with the reduction in commodity prices since 2008 but the recent release of a well-publicized OECD report on the issue by Irwin and Sanders (2010) along with the doubling of wheat prices and the claim by von Braun (2010) and others that the rise was due to speculative activity has renewed the debate.
    Keywords: commodity, index futures, trading, volatility, Agribusiness, Agricultural and Food Policy, Demand and Price Analysis, Marketing,
    Date: 2010–10
  16. By: Osberghaus, Daniel; Finkel, Elyssa; Pohl, Max
    Abstract: Given that many of the predicted effects of climate change are considered imminent and unavoidable, the need to mainstream adaptation as a viable coping measure among private households is becoming a topic of increasing importance. However, little research to date has assessed the factors influencing the motivation to autonomously adapt, nor any successful measures for instigating this behavioural change. This study investigates whether providing locally-focused vs. globally-focused information about the effects of climate change influences the personal perceived risk (PPR) of individual people. Based on a socio-psychological model, Protection Motivation Theory (PMT), it is hypothesized that a higher PPR will lead to a higher motivation to adapt. While this hypothesis has been empirically confirmed by the study, it has been found that providing information on climate change effects that is more personally relevant to the individual and is concerned with his local surroundings does not significantly increase PPR. This may be due to a trade-off between spatial-temporal distance and the comparably low severity of predicted effects in the study region. Interestingly, providing any kind of information, irrespective of having a global or local focus, also did not increase PPR as compared to receiving no information. These results suggest that the sole provision of information about expected climate change impacts, even if tailored to one‟s individual context, does not significantly increase PPR and consequently the motivation to adapt. Another necessary factor might be increasing the knowledge about concrete coping options to allow people to weigh up their personal options.
    Keywords: individual adaptation; perceived risk; adaptation motivation; spatial-temporal distance; information; protection motivation theory
    JEL: D83 Q54 Q58
    Date: 2010–07–01
  17. By: Mardi Dungey (UTas; CFAP); Lyudmyla Hvozdyk (CFAP)
    Abstract: The basis between spot and future prices will be affected by jump behavior in each asset price, challenging intraday hedging strategies. Using a formal cojumping test this paper considers the cojumping behavior of spot and futures prices in high frequency US Treasury data. Cojumping occurs most frequently at shorter maturities and higher sampling frequencies. We find that the presence of an anticipated macroeconomic news announcement, and particularly non-farm payrolls, increases the probability of observing cojumps. However, a negative surprise in non-farm payrolls, also increases the probability of the cojumping tests being unable to determine whether jumps in spots and futures occur contemporaneously, or alternatively that one market follows the other. On these occasions the market does not clearly signal its short term pricing behavior.
    Keywords: US Treasury markets, high frequency data, cojump test
    JEL: C1 C32 G14
    Date: 2010–07–20
  18. By: Ortona, Guido
    Abstract: The so-called problem of the spontaneous cooperation has been substantially resolved through a mix of biology and economics. All the elements of the solution had been discovered by 1980s, yet they went somehow unnoticed. This "old" solution is the subject of this review. Its most relevant feature was the discovery that the adoption of punishment as an equilibrium-enforcing device makes a cooperative solution in a repeated prisoner's dilemma possible. This opened the way to a biological (or anthropological) explanation otherwise logically inconsistent.
    Keywords: norms, cooperation, punishment
    JEL: A12
    Date: 2010–11
  19. By: Challe, E.; Le Grand, F.; Ragot, X.
    Abstract: We analyze the term structure of real interest rates in a general equilibrium model with incomplete markets and borrowing constraints. Agents are subject to both aggregate and idiosyncratic income shocks, which latter may force them into early portfolio liquidation in a bad aggregate state. We derive a closed-form equilibrium with limited agent heterogeneity (despite market incompleteness), which allows us to produce analytical expressions for bond prices and returns at any maturity. The attractiveness of bonds as liquidity makes aggregate bond demand downward-sloping, so that greater bond supply raises both the level and the slope of the yield curve. Moreover, time-variations in liquidation risk are shown to help explain the rejection of the Expectations Hypothesis.
    Keywords: Incomplete markets; yield curve; borrowing constraints.
    JEL: E21 E43 G12
    Date: 2010
  20. By: Yuriy Gorodnichenko (University of California); Monika Schnitzer (University of Munich)
    Abstract: We examine micro-level channels of how financial development can affect macroeconomic outcomes like the level of income and export intensity. We investigate theoretically and empirically how financial constraints affect a firm's innovation and export activities, using unique firm survey data which provides direct measures for innovations and firm-specific financial constraints. We find that financial constraints restraint heability of domestically owned firms to innovate and export and hence to catch up to the technological frontiers. This negative effect is amplified as financial constraints force export and innovation activities to become substitutes although they are generally natural complements.
    Keywords: innovation, productivity, financial constraint, export, technology frontier, BEEPS
    JEL: O3 O16 F1 G3
    Date: 2010–11
  21. By: Alberto Martin; Filippo Taddei
    Abstract: The financial crisis of 2007-08 has underscored the importance of adverse selection in financial markets. This friction has been mostly neglected by macroeconomic models of financial frictions, however, which have focused almost exclusively on the effects of limited pledgeability. In this paper, we fill this gap by developing a standard growth model with adverse selection. Our main results are that, by fostering unproductive investment, adverse selection: (i) leads to an increase in the economy's equilibrium interest rate, and (ii) it generates a negative wedge between the marginal return to investment and the equilibrium interest rate. Under financial integration, we show how this translates into excessive capital inflows and endogenous cycles. We also explore how these results change when limited pledgeability is added to the model. We conclude that both frictions complement one another and argue that limited pledgeability exacerbates the effects of adverse selection.
    Keywords: Limited Pledgeability; Asymmetric Information; International Capital Flows; Credit Market Imperfections
    JEL: D53 D82 E22 F34
    Date: 2010
  22. By: Heli Koski; Mika Pajarinen
    Abstract: Our empirical analysis using an extensive database on the allocation of busi-ness subsidies in Finland during the years 2004–2008 finds that large firms are less likely to exit support system and more likely to continue receiving both support from one organization only and simultaneous support from multiple organizations. Large firms’ propensity to transit between subsidies of different organizations is also higher than that of the smaller ones. Our study detects another interesting characteristic of the Finnish business subsidy system : the existence of agency-specific loyal customers. Firm size relates positively to the probability of a firm becoming the agency-specific customer of any public support provider, while the effect of other firm-level factors on this probability varies among the agencies. In addition to this, various parts of our analysis suggest that there is also a group of firms – comprising more likely larger firms – that tends to obtain support simultaneously from at least from two different organizations over several years. This finding is, as is the existence of agency-specific loyal customers, contrary to the basic principles of business subsidy system originally designed for providing temporary aid for companies.
    Keywords: public subsidies, complementarities, transitions, persistency
    JEL: L53 O25
    Date: 2010–11–11

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