nep-mic New Economics Papers
on Microeconomics
Issue of 2010‒11‒27
eighteen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Sales, Quantity Surcharge, and Consumer Inattention By Sofronis Clerides; Pascal Courty
  2. International capital flows and credit market imperfections: a tale of two frictions By Alberto Martin; Filippo Taddei
  3. An Unlucky Feeling: Overconfidence and Noisy Feedback By Grossman, Zachary; Owens, David
  4. Consumer needs and their satiation properties as drivers of the rebound effect - The case of energy-efficient washing machines By Julia Sophie Wörsdorfer
  5. Bias-Corrected Estimation for Spatial Autocorrelation By Zhenlin Yang
  6. A Reduced Form Model of Default Spreads with Markov-Switching Macroeconomic Factors By Georges Dionne; Geneviève Gauthier; Khemais Hammami; Mathieu Maurice; Jean-Guy Simonato
  7. Distribution Dynamics of Regional GDP per Employee in Unified Germany By Vollmer, Sebastian; Holzmann, Hajo; Ketterer, Florian; Klasen, Stephan
  8. A Search Model in a Segmented Labour Market: the Odd Role of Unions By Chiara BROCCOLINI; Marco LILLA; Stefano STAFFOLANI
  9. Does Ricardian Equivalence Hold When Expectations are not Rational? By George W. Evans; Seppo Honkapohja
  10. Natural Resource Distribution and Multiple Forms of Civil War By Massimo Morelli; Dominic Rohner
  11. Banking Efficiency in Emerging Market Economies By Matthews, Kent
  12. Estimating the GARCH Diffusion: Simulated Maximum Likelihood in Continuous Time By Tore Selland Kleppe; Jun Yu; Hans J. Skaug
  13. Firm Heterogeneity, Credit Constraints, and Endogenous Growth By Alfred Maussner
  14. Payday lending: new research and the big question By John P. Caskey
  15. Framing Social Security Reform: Behavioral Responses to Changes in the Full Retirement Age By Behaghel, Luc; Blau, David M.
  16. Threats or Promises?: A Simple Explanation of Gradual Trade Liberalization By Taiji Furusawa; Takashi Kamihigashi
  17. From Conflict to Reconstruction By Tony Addison
  18. Three variations on fair wages and the long-run Phillips curve By Andrea Vaona

  1. By: Sofronis Clerides (University of Cyprus; CEPR; RCEA); Pascal Courty (University of Victoria; CEPR)
    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
    JEL: L12 L13 D4
    Date: 2010–01
  2. 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 Liability, Asymmetric Information, International Capital Flows.
    JEL: D53 D82 E22 F34
    Date: 2010–11
  3. By: Grossman, Zachary; Owens, David
    Abstract: How does overconfidence arise and how does it persist in the face of experience and feedback? In an experimental setting, we examine how individuals’ beliefs about their own performance on a quiz react to noisy, but unbiased feedback. In a control treatment, each participant expresses her beliefs about another participant’s performance, rather than her own. On average, they express accurate posteriors about others’ scores, but they overestimate their own score, believing themselves to have received ‘unlucky’ feedback. However, this driven by overconfident priors, as opposed to biased information processing. We also find that, while feedback improves estimates about the performance on which it is based, this learning does not translate into improved estimates of related performances. This suggests that people use performance feedback to update their beliefs about their ability differently than they do to update their beliefs about their performance, which may contribute to the persistence of overconfidence.
    Keywords: overconfidence, overestimation, learning, Bayes rule, biased updating, learning transfer, experiments, quadratic scoring rule
    Date: 2010–11–11
  4. By: Julia Sophie Wörsdorfer
    Abstract: The possibility of the "rebound effect" to technological progress has triggered a debate in energy economics concerning the usefulness of the promotion of efficiency progress. Until now, a multitude of empirical evidence has been gathered so to assess the magnitude of the effect in the first place. Progress in theoretical research has been rather modest, however. In this paper, we argue for a broadening of the theoretical basis beyond neoclassical consumer theory. We more specifically suggest turning toward consumption theories that deal with consumer needs and learning processes. We postulate that the rebound effect to energy efficiency progress is a special case of behavioral reactions to technological change more in general. Our central hypothesis is that rebound effects will only occur as long as the consumer needs appealed to by the product are not yet satiated. We exemplarily illustrate how to apply these arguments for the case of energyefficient washing machines.
    Keywords: rebound effect, consumer needs, washing machines Length 29 pages
    Date: 2010–11
  5. By: Zhenlin Yang (School of Economics, Singapore Management University)
    Abstract: The biasedness issue arising from the maximum likelihood estimation of the spatial autoregressive model (SAR) is further investigated under a broader set-up than that in Bao and Ullah (2007a). A major difficulty in analytically evaluating the expectations of ratios of quadratic forms is overcome by a simple bootstrap procedure. With that, the corrections on bias and variance of the spatial estimator can easily be made up to third-order, and once this is done, the estimators of other model parameters become nearly unbiased. Compared with the analytical approach, the new approach is much simpler, and can easily be extended to other models of a similar structure. Extensive Monte Carlo results show that the new approach performs excellently in general.
    Keywords: Third-order bias; Third-order variance; Bootstrap; Concentrated estimating equation; Monte Carlo; Quasi-MLE; Spatial layout.
    JEL: C10 C21
    Date: 2010–10
  6. By: Georges Dionne; Geneviève Gauthier; Khemais Hammami; Mathieu Maurice; Jean-Guy Simonato
    Abstract: An important research area of the corporate yield spread literature seeks to measure the proportion of the spread that can be explained by factors such as the possibility of default, liquidity, tax differentials and market risk. We contribute to this literature by assessing the ability of observed macroeconomic factors and the possibility of changes in regime to explain the proportion of yield spreads caused by the risk of default in the context of a reduced form model. For this purpose, we extend the Markov Switching risk-free term structure model of Bansal and Zhou (2002) to the corporate bond setting and develop recursive formulas for default probabilities, risk-free and risky zero-coupon bond yields as well as credit default swap premia. The model is calibrated with consumption, inflation, risk-free yields and default data for Aa, A and Baa bonds from the 1987-2008 period. We find that our macroeconomic factors are linked with two out of three sharp increases in the spreads during this sample period, indicating that the variations can be related to macroeconomic undiversifiable risk. The estimated default spreads can explain almost half of the 10 years to maturity industrial Baa zero-coupon yields in some regime. Much smaller proportions are found for Aa and A bonds with numbers around 10%. The proportions of default estimated with credit default swaps are higher, in many cases doubling those found with corporate yield spreads.
    Keywords: Credit spread, default spread, Markov switching, macroeconomic factors, reduced form model of default, random subjective discount factor, credit default swap, CDS
    JEL: G12 G13
    Date: 2010
  7. By: Vollmer, Sebastian; Holzmann, Hajo; Ketterer, Florian; Klasen, Stephan
    Abstract: We investigate to what extent convergence in production levels per worker has been achieved in Germany since unification. To this end, we model the distribution of GDP per employee across German districts using two-component normal mixtures. While in the first year after unification, the two component distributions were clearly separated and bimodal, corresponding to the East and West German districts, respectively, in the following years they started to merge showing only one mode. Still, using the recently developed EM-Test for homogeneity in normal mixtures, the hypothesis of just a single normal component for the whole distribution is clearly rejected for all years. A Posterior analysis shows that about half of the East German districts were assigned to the richer component in 2006, thus catching up to levels of the West. The growth rate of a mover district is about one percentage point higher than the growth rate of a non-mover district which had the same initial level of GDP per employee.
    Keywords: Regional convergence, distribution dynamics, mixture models, Germany
    JEL: O47 R11
    Date: 2010–11
  8. By: Chiara BROCCOLINI (Universita' Politecnica delle Marche, Dipartimento di Economia); Marco LILLA (Universita' Politecnica delle Marche, Dipartimento di Economia); Stefano STAFFOLANI (Universita' Politecnica delle Marche, Dipartimento di Economia)
    Abstract: Assuming random matching productivity, we present a search equilibrium model where each match ends in a vacancy, in a temporary job or in a permanent job. Centralized bargaining sets the wage rate of permanent workers whereas rms decide unilaterally the wage rate of temporary workers. In this segmented labour market: a) the wage setting function can be downward sloping; b) higher union bargaining power leads to higher wage and higher unemployment; c) average worker productivity shows a maximum with respect to union bargaining power.
    Keywords: Productivity, Search Model, Temporary contract, Unemployment, Unions
    JEL: J31 J51 J64
    Date: 2010–10
  9. By: George W. Evans (University of Oregon Economics Department and University of St. Andrews); Seppo Honkapohja (Bank of Finland, Helsinki, Finland; University of St. Andrews)
    Abstract: This paper considers the Ricardian Equivalence proposition when expectations are not rational and are instead formed using adaptive learning rules. We show that Ricardian Equivalence continues to hold provided suitable additional conditions on learning dynamics are satisfied. However, new cases of failure can also emerge under learning. In particular, for Ricardian Equivalence to obtain, agents’ expectations must not depend on government’s financial variables under deficit financing.
    Keywords: Taxation, expectations, Ramsey model, Ricardian equivalence.
    JEL: E62 D84 E21 E43
    Date: 2010–08–04
  10. By: Massimo Morelli; Dominic Rohner
    Abstract: We examine how natural resource location, rent sharing and fighting capacities of different groups matter for ethnic conflict. A new type of bargaining failure due to multiple types of potential conflicts (and hence multiple threat points) is identified. The theory predicts conflict to be more likely when the geographical distribution of natural resources is uneven and when a minority group has better chances to win a secessionist rather than a centrist conflict. For sharing rents, resource proportionality is salient in avoiding secessions and strength proportionality in avoiding centrist civil wars. We present empirical evidence that is consistent with the model.
    Keywords: Natural Resources, Conflict, Strength Proportionality, Resource Proportionality, Secession, Bargaining Failure
    JEL: C72 D74 Q34
    Date: 2010
  11. By: Matthews, Kent (Cardiff Business School)
    Abstract: This paper reviews the different ways to measure bank efficiency and highlight the results of research on bank efficiency in Asian emerging economies. In particular it will outline the extent of research thus far conducted on the efficiency of banks in Pakistan and comment on how to build and improve upon them.
    Keywords: bank efficiency; bootstrap; Pakistan
    JEL: G20 G21
    Date: 2010–11
  12. By: Tore Selland Kleppe (Department of Mathematics, University of Bergen); Jun Yu (School of Economics, Singapore Management University); Hans J. Skaug (Department of Mathematics, University of Bergen)
    Abstract: A new algorithm is developed to provide a simulated maximum likelihood estimation of the GARCH diffusion model of Nelson (1990) based on return data only. The method combines two accurate approximation procedures, namely, the polynomial expansion of Aït-Sahalia (2008) to approximate the transition probability density of return and volatility, and the Efficient Importance Sampler (EIS) of Richard and Zhang (2007) to integrate out the volatility. The first and second order terms in the polynomial expansion are used to generate a base-line importance density for an EIS algorithm. The higher order terms are included when evaluating the importance weights. Monte Carlo experiments show that the new method works well and the discretization error is well controlled by the polynomial expansion. In the empirical application, we fit the GARCH diffusion to equity data, perform diagnostics on the model fit, and test the finiteness of the importance weights.
    Keywords: Ecient importance sampling; GARCH diusion model; Simulated Maximum likelihood; Stochastic volatility
    JEL: C11 C15 G12
    Date: 2010–01
  13. By: Alfred Maussner (University of Augsburg, Department of Economics)
    Abstract: This paper introduces the reader into the apparatus behind the popularNew Keynesian Phillips (NKPC) curve. It derives several log-linear versionsof this curve and recursive formulations of the Calvo-Yun price staggeringmodel that is behind this curve. These formulations can be used for higher-orderapproximations of the NKPC or for implementations that use othernon-linear solution techniques, as, e.g., projection methods.
    Keywords: inflation, New Keynesian Phillips curve, projection methods
    JEL: E31 E37 E43 E47
    Date: 2010–11
  14. By: John P. Caskey
    Abstract: Payday lending is controversial. In the states that allow it, payday lenders make cash loans that are typically for $500 or less that the borrower must repay or renew on his or her next payday. The finance charge for the loan is usually 15 to 20 percent of the amount advanced, so for a typical two-week loan the annual percentage interest rate is about 400 percent. In this article, the author briefly describes the payday lending business and explains why it presents challenging public policy issues. The heart of this article, however, surveys recent research that attempts to answer what the author calls the "big question," one that is fundamental to the public policy dispute: Do payday lenders, on net, exacerbate or relieve customers' financial difficulties?
    Keywords: Payday loans ; Public policy
    Date: 2010
  15. By: Behaghel, Luc (CREST-INSEE); Blau, David M. (Ohio State University)
    Abstract: We use a US Social Security reform as a quasi-experiment to provide evidence on framing effects in retirement behavior. The reform increased the full retirement age (FRA) from 65 to 66 in two month increments per year of birth for cohorts born from 1938 to 1943. We find strong evidence that the spike in the benefit claiming hazard at 65 moved in lockstep along with the FRA. Results on self-reported retirement and exit from employment are less clear-cut, but go in the same direction. The responsiveness to the new FRA is stronger for people with higher cognitive skills. We interpret the findings as evidence of reference dependence with loss aversion. We develop a simple labor supply model with reference dependence that can explain the results. The model has potentially important implications for framing of future Social Security reforms.
    Keywords: retirement, social security, loss aversion
    JEL: J26
    Date: 2010–11
  16. By: Taiji Furusawa (Graduate School of Economics, Hitotsubashi University); Takashi Kamihigashi (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: We analyze a infinitely repeated tariff-setting game by two large countries with alternating moves. We focus on the subgame perfect equilibria in which each country chooses its tariff according to a stationary function of the other country's tariff. We show that there are many equilibria with two steady states, one with higher tariffs (but still lower than the static Nash tariffs), the other with lower tariffs. We also show that there is a special class of equilibria in which there exists a unique, globally stable steady state. In both types of equilibria, one country unilaterally reduces its tariff from the static Nash equilibrium, the other country reciprocates in response to the first country's implicit "promise" to lower its tariff even further, and this process continues forever, converging to a steady state with tariffs lower than the static Nash tariffs. Therefore it is promises, rather than threats, that induce the countries to gradually reduce their tariffs.
    JEL: C73 F13
    Date: 2010–11
  17. By: Tony Addison
    Abstract: Governments frequently compartmentalize issues of reform and reconstruction into separate strategies and separate ministries (the fate of poverty reduction as well). Donors do likewise, for each has its own responsibilities; the IMF focuses on reform, the UN concentrates on conflict resolution and reconstruction, and the World Bank- whose operations span both the agendas- has yet to integrate reform and conflict issues. However, reform and reconstruction can be kept separate if conflict is to be halted and poverty reduced. [Discussion Paper No. 2001/16]
    Keywords: Sub-Saharan Africa, conflict, economic reform
    Date: 2010
  18. By: Andrea Vaona (Department of Economics (University of Verona))
    Abstract: The present paper explores the connection between money growth and unemployment in the long run in different models with fair wages. Under customary assumptions regarding the sign of the parameters of the effort function, more money growth (equal to inflation) lowers the unemployment rate, though to a declining extent. This is because firms respond to inflation - that spurs effort by decreasing the reference wage - by increasing employment, so to maintain the effort level constant, as implied by the Solow condition. Under wage staggering this effect is stronger because wage dispersion magnifies the impact of inflation on effort. Therefore, we provide a new theoretical foundation for recent empirical contributions finding a negative long-run relationship between unemployment and inflation.
    Keywords: efficiency wages, money growth, long-run Phillips curve, trend inflation, wage staggering
    JEL: E3 E20 E40 E50
    Date: 2010–11

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