nep-mic New Economics Papers
on Microeconomics
Issue of 2010‒12‒18
twenty-two papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. The Escape-Infringement Effect of Blocking Patents on Innovation and Economic Growth By Chu, Angus C.; Pan, Shiyuan
  2. Market Structure, Countervailing Power and Price Discrimination: The Case of Airports By Jonathan Haskel; Alberto Iozzi; Tommaso Valletti
  3. Introducing Class Actions in Finland: an Example of Lawmaking without Economic Analysis By Välimäki, Mikko
  4. Addiction and The Role of Commitment Devices By Matteo Bassi
  5. What is the Nature and Social Norm within the Context of In-Group Favouritism? By Harris, D.; Herrmann, B.; Kontoleon, A.
  6. Competing Auctions By Glenn Ellison; Drew Fudenberg; Markus Mobius
  7. Tribute to Paul. A. Samuelson By Vipin Chandran, K.P; Sandhya, P
  8. Efficiency in Evolutionary Games: Darwin, Nash and the Secret Handshake By A. J. Robson
  9. Agglomeration, related variety and vertical integration By Giulio Cainelli; Donato Iacobucci
  10. Refinement of the Nash Equilibrium Concept By R. Myerson
  11. Rational Learning Leads to Nash Equilibrium By E. Kalai; E. Lehrer
  12. As-if behavioral economics: Neoclassical economics in disguise? By Berg, Nathan; Gigerenzer, Gerd
  13. Stochastic Replicator Dynamics By A. Cabrales
  14. Is Earnings Nonresponse Ignorable? By Bollinger, Christopher R.; Hirsch, Barry T.
  15. Labor force participation and the discouraged worker effect By John K. Dagsvik, Tom Kornstad and
  16. Vertical Integration, Innovation and Foreclosure By Marie-Laure Allain; Claire Chambolle; Patrick Rey
  17. Intergovernmental Transfers and Re-Election Concerned Politicians By Hickey, Ross
  18. Fee Versus Royalties in General Cost functions By Hiroaki Ino
  19. Social preferences during childhood and the role of gender and age - An experiment in Austria and Sweden By Martinsson, Peter; Nordblom, Katarina; Rützler, Daniela; Sutter, Matthias
  20. A New Approach to Consumer Theory By K. K. Lancaster
  21. Modelling Overnight and Daytime Returns Using a Multivariate GARCH-Copula Model By Long Kang; Simon H. Babbs
  22. Transitions to disability and rehabilitation By Leif Andreassen and Tom Kornstad

  1. By: Chu, Angus C.; Pan, Shiyuan
    Abstract: This study develops a Schumpeterian growth model to analyze the effects of different patent instruments on innovation. We first analyze patent breadth that captures the traditional positive effect of patent rights on innovation. Then, we consider a profit-division rule between entrants and incumbents. Given the division of profit, increasing the share of profit assigned to incumbents reduces entrants' incentives for innovation. This aspect of blocking patents captures the recently proposed negative effect of patent rights on innovation. Finally, blocking patents generate a non-monotonic effect on innovation when the step size of innovation is endogenous due to a novel escape-infringement effect. Calibrating the model to aggregate data, we find that a marginal increase in the blocking effect of patent protection is likely to raise economic growth.
    Keywords: economic growth; innovation; intellectual property rights
    JEL: O34 O31 O40
    Date: 2010–12
  2. By: Jonathan Haskel (Imperial College London and CEPR); Alberto Iozzi (Faculty of Economics, University of Rome "Tor Vergata"); Tommaso Valletti (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: We study bargained input prices where up and downstream firms can choose alternative vertical partners. We apply our model to bargained airport landing fees where a number of interesting policy questions have arisen. For example, what is the impact of joint ownership of airports? Does airline countervailing power stop airports raising fees? Should airports be prohibited, as an EU directive intends, from charging differential prices to airlines? Our major findings are (a) an increase in upstream concentration or in the substitutability between airports always increases the landing fee; (b) the effect of countervailing power, via an increase in downstream concentration, depends on the competition regime between airlines and whether airports can price discriminate: airline concentration reduces the landing fee when downstream competition is in quantities, but if downstream competition is in prices only where airports cannot discriminate. Furthermore, only in a specific case (Bertrand competition, uniform landing fees and undifferentiated goods) will lower fees pass through to consumers. (c) With Cournot competition, uniform landing fees are always higher than discriminatory fees, while the reverse is true with Bertrand competition. We also look at the incentives for airport expansion which raise quantities of passengers paying a given landing fee, but alters the nature of airline competition, which changes the landing fee.
    Keywords: Airports, airlines, landing fees, countervailing power
    JEL: D43 L13 L93 R48
    Date: 2010–12–09
  3. By: Välimäki, Mikko
    Abstract: Finnish Parliament accepted in February 2007 a new law on class actions (literally group actions), which entered into force 1 October, 2008. The legislative process was particularly slow. Finland has been preparing a law on class actions since the early 1990s and this was - depending on the criteria of counting - the fourth try. Some fifteen years ago the idea of class actions was something new in Europe. Time passes quickly however, and the new Finnish law cannot be described as radical by any meaning of the word. Many European countries have changed their existing procedural codes and enacted new laws to make class action litigation possible. This article analyses the Finnish lawmaking process from comparative and economic policy viewpoints.
    Keywords: class actions, Finland, public choice
    JEL: K13 K41 D74
    Date: 2010–12
  4. By: Matteo Bassi (Università di Salerno and CSEF)
    Abstract: This paper studies if external commitment devices are effectively capable of helping agents to reduce their consumption of addictive goods (alcohol, cigarettes, drugs, fatty foods etc.). The main assumption introduced in the model is that individuals are sophisticated hyperbolic discounters. The model shows that making easier the access to such instruments has ambiguous effects on individuals' welfare. First, hyperbolic agents purchase commitment devices less often that they wish to. Second, once the device has been purchased, consumption of addictive goods does not necessarily decrease. In particular, for mild level of addiction, commitment devices effectively reduce consumption and improve health status. However, for severe level of addiction, the consumption of the sin good increases, and the availability of commitment devices worsens the addictive problem. Finally, policy implications are derived.
    Keywords: Addiction, Commitment, Hyperbolic Discounting
    JEL: A12 D91 E21 H55
    Date: 2010–12–10
  5. By: Harris, D.; Herrmann, B.; Kontoleon, A.
    Abstract: In-group favouritism behaviour is observed everywhere around the world and previous research has shown that this behaviour is also easily triggered in a laboratory in various contexts. However, little is known about why different magnitudes of in-group favouritism are observed across societies. In this paper, we use a new allocation experiment to examine the nature of social norms within the context of in-group favouritism behaviour. In this experiment, a decision-maker has to decide only once how to allocate a fixed amount of resource between each of the three members of her own group and each of the three members of the out-group, whilst the decision- maker's own payo is not aected by her decision. Three treatments are implemented: in the first treatment, only the members of the in-group can punish the decision-maker. In the second treatment, only the members of the out-group can punish the decision-maker. Finally, in the third treatment, only an independent third-party observer can punish the decision-maker. The aim of these treatments is to test whether there is a prevailing social norm which dominates the behavioural standard within the context of in-group favouritism and whether this mechanism varies across dierent subject pools, namely Thailand and the UK.<br><br> Compared to a baseline treatment with no punishment opportunity, we observed that among the Thai subjects in-group favouritism significantly increased once the in-group members were given the opportunity to punish the decision-maker. The threat of punishment from a third-party punisher also increased in-group favouritism in Thailand. However, when only the out-group members had the opportunity to punish, no change in in-group favouritism behaviour was observed. On the contrary, within the British subject pool, when the out-group members had the opportunity to punish the decision-maker, we observed a decline in in-group favouritism as well as a marked shift towards an equitable outcome. The threats of punishments from the in-group members and the third-party, on the other hand, did not have any impact on in-group favouritism behaviour in the UK. The results suggest that within the Thai subject pool, there appears to be a prevailing `in-group bias norm' which is strongly enforced within and outside the group. Within the UK subject pool, however, it is less clear what the prevailing norm is. Whilst the threat of punishment from the out-group members who directly lose out from favouritism behaviour appeared to significantly reduce this behaviour, an uninvolved third-party was not willing to incur a cost to punish this behaviour. This interesting result indicates two possible explanations: first, in-group favouritism, in contrast to selfish or opportunistic behaviour, may not considered as a strong enough violation of a social norm; and second, the norm of egalitarianism within the context of favouritism may still be `evolving'.
    Keywords: Social Norms, In-group Favouritism, Group Behaviour, In-group Punishment, Out-group Punishment, Third-party Punishment, Experimental Design
    JEL: D73 C92
    Date: 2010–12–13
  6. By: Glenn Ellison; Drew Fudenberg; Markus Mobius
    Date: 2010–12–09
  7. By: Vipin Chandran, K.P; Sandhya, P
    Abstract: Paul .A. Samuelson, the first American Nobel laureate in Economics and the foremost academic economist of the 20th century. As a graduate student at Harvard, Samuelson studied Economics under Joseph Schumpeter, W.W. Leontief, Goldfried Haberler and the ‘American Keynes’ Alvin Hansen. He was the first American to win to Nobel Prize in Economics; and he is considered to be one of the founders of Neo-Keynesian Economics and a seminal figure in the development of Neoclassical Economics.
    Keywords: Neoclassical economics; Welfare economics; International economics
    JEL: B31 B3 B30 B32
    Date: 2010–12–01
  8. By: A. J. Robson
    Date: 2010–12–10
  9. By: Giulio Cainelli (Dipartimento di Scienze Economiche “Marco Fanno”, Università degli Studi di Padova); Donato Iacobucci (Dipartimento di Ingegneria Informatica, Gestionale e dell’Automazione, Università Politecnica delle Marche)
    Abstract: Several recent studies investigate the relation between geographic concentration of production and vertical integration based on the hypothesis that spatial agglomeration of firms in the same industry facilitates input procurement thereby reducing the degree of vertical integration. The present paper contributes to this debate. We are interested specifically in assessing the effect of specialization compared to variety, in local production systems, in these decisions. Using a dataset of 24,663 Italian business groups for 2001, we estimate Tobit models to investigate the influence of these forces on the degree of vertical integration. Following a methodology developed by Fan et al. (2009), we construct an index of vertical integration in business groups using information on the activities of firms belonging to the same group, and information from input-output tables on the exchanges between industries. Our evidence supports the hypothesis that vertical integration choices are influenced by agglomeration forces. Moreover, we find that the higher the variety in the local system the lower the need for firms to integrate activities since they can acquire intermediate goods and services from within the local system. Finally, we show that it is not variety ‘per se’ that matters for vertical integration choices, but the presence of technologically related activities.
    Keywords: vertical integration, agglomeration, related-variety, business groups
    JEL: L2 M2
    Date: 2010–11
  10. By: R. Myerson
    Date: 2010–12–10
  11. By: E. Kalai; E. Lehrer
    Date: 2010–12–09
  12. By: Berg, Nathan; Gigerenzer, Gerd
    Abstract: For a research program that counts improved empirical realism among its primary goals, it is surprising that behavioral economics appears indistinguishable from neoclassical economics in its reliance on “as-if” arguments. “As-if” arguments are frequently put forward in behavioral economics to justify “psychological” models that add new parameters to fit decision outcome data rather than specifying more realistic or empirically supported psychological processes that genuinely explain these data. Another striking similarity is that both behavioral and neoclassical research programs refer to a common set of axiomatic norms without subjecting them to empirical investigation. Notably missing is investigation of whether people who deviate from axiomatic rationality face economically significant losses. Despite producing prolific documentation of deviations from neoclassical norms, behavioral economics has produced almost no evidence that deviations are correlated with lower earnings, lower happiness, impaired health, inaccurate beliefs, or shorter lives. We argue for an alternative non-axiomatic approach to normative analysis focused on veridical descriptions of decision process and a matching principle – between behavioral strategies and the environments in which they are used – referred to as ecological rationality. To make behavioral economics, or psychology and economics, a more rigorously empirical science will require less effort spent extending “as-if” utility theory to account for biases and deviations, and substantially more careful observation of successful decision makers in their respective domains.
    Keywords: bounded rationality; ecological rationality; as-if; fit; prediction; decision; process
    JEL: B1 B4
    Date: 2010
  13. By: A. Cabrales
    Date: 2010–12–08
  14. By: Bollinger, Christopher R. (University of Kentucky); Hirsch, Barry T. (Georgia State University)
    Abstract: Earnings nonresponse in the Current Population Survey is roughly 30% in the monthly surveys and 20% in the annual March survey. Even if nonresponse is random, severe bias attaches to wage equation coefficient estimates on attributes not matched in the earnings imputation hot deck. If nonresponse is ignorable, unbiased estimates can be achieved by omitting imputed earners, yet little is known about whether or not CPS nonresponse is ignorable. Using sample frame measures to identify selection, we find clear-cut evidence among men but limited evidence among women for negative selection into response. Wage equation slope coefficients are affected little by selection but because of intercept shifts, wages for men and to a lesser extent women are understated, as are gender wage gaps. Selection is less severe among household heads/co-heads than among other household members.
    Keywords: response bias, imputation, earnings nonresponse, gender gap, CPS
    JEL: J31 C81
    Date: 2010–11
  15. By: John K. Dagsvik, Tom Kornstad and (Statistics Norway)
    Abstract: This paper analyzes labor force participation with particular reference to the discouraged worker effect. Discouraged workers are those who do not search for work because they view their chances of finding a suitable job as too low. The theoretical point of departure is a search model where the worker evaluates the expected utility of searching for work and decides to participate in the labor market if the expected utility of the search exceeds the utility of not working. From this framework we derive an empirical model for the probability that the worker will be unemployed or employed as a function of the probability of getting an acceptable job, given that the worker searches for work. The model is estimated on a sample of married and cohabitating women in Norway covering the period from 1988 to 2008. The results show that the discouraged worker effect is substantial. On average, about one third of those who are out of the labor force are discouraged according to our analysis.
    Keywords: Discouraged workers; Labor force participation; Random utility modeling
    JEL: J21 J22 J64
    Date: 2010–12
  16. By: Marie-Laure Allain (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Claire Chambolle (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, ALISS - Alimentation et sciences sociales - INRA : UR1303); Patrick Rey (Toulouse School of Economics - Toulouse School of Economics)
    Abstract: This paper studies the potential effects of vertical integration on downstream firms' incentives to innovate. Interacting efficiently with a supplier may require information exchanges, which raises the concern that sensitive information may be disclosed to rivals. This may be particularly harmful in case of innovative activities, as it increases the risk of imitation. We show that vertical integration exacerbates this threat of imitation, which de facto degrades the integrated supplier's ability to interact with unintegrated competitors. Vertical integration may thus lead to input foreclosure, thereby raising rivals' cost and limiting both upstream competition and downstream innovation. A similar concern of customer foreclosure arises in the case of downstream bottlenecks.
    Keywords: Vertical Integration, Foreclosure, Innovation, Imitation, Firewall.
    Date: 2010–12–08
  17. By: Hickey, Ross
    Abstract: This paper studies intergovernmental transfers. Many intergovernmental transfers are said to serve political purposes. We augment a standard model of political career concerns to allow for multilevel governance. When elections are simultaneous, there is no equilibrium with non-zero transfers as the opportunity cost of a transfer is too high. However when elections are staggered, an equilibrium exists with positive transfers. These transfers are motivated by two factors; sabotaging challengers and rent smoothing. These transfers are non-partisan and an artifact of the electoral dynamics as prescribed by an electoral calendar and politicians' career concerns. This model produces an additional insight in understanding intergovernmental grants. These results are discussed with reference to the growing literature on the partisan basis of intergovernmental transfers.
    Keywords: Career Concerns; Public Economics; Intergovernmental Transfers
    JEL: H10 H77
    Date: 2010–08
  18. By: Hiroaki Ino (School of Economics, Kwansei Gakuin University)
    Abstract: Which is better off for the patentee to license its technology by fixed fee or unit royalties? Kamien and Tauman [8] showed that the fixed fee scheme brings greater private value of the patent in the linear model. We extend their analysis into a general model. Then, the simple fact that the model allows a increasing marginal cost supports the unit royalties scheme. More concretely, the unit royalties scheme is superior to the fixed fee scheme when the number of firms is large.
    Keywords: licensing, Cournot competition, convex cost, limit theorem
    JEL: D45 L13
    Date: 2010–11
  19. By: Martinsson, Peter (Department of Economics, School of Business, Economics and Law, Göteborg University); Nordblom, Katarina (Department of Economics, School of Business, Economics and Law, Göteborg University); Rützler, Daniela (Department of Public Economics, University of Innsbruck, Austria); Sutter, Matthias (Department of Public Economics, University of Innsbruck, Austria)
    Abstract: We examine social preferences of Swedish and Austrian children and adolescents using the experimental design of Charness and Rabin (2002). We find that difference aversion decreases while social-welfare preferences increase with age.<p>
    Keywords: social preferences; children; adolescents; distributional experiment; Austria; Sweden.
    JEL: C91 D63 D64
    Date: 2010–12–10
  20. By: K. K. Lancaster
    Date: 2010–12–09
  21. By: Long Kang (The Options Clearing Corporation); Simon H. Babbs (The Options Clearing Corporation)
    Abstract: We introduce a multivariate GARCH-Copula model to describe joint dynamics of overnight and daytime returns for multiple assets. The conditional mean and variance of individual overnight and daytime returns depend on their previous realizations through a variant of GARCH specification, and two Student’s t copulas describe joint distributions of both returns respectively. We employ both constant and time-varying correlation matrices for the t copulas and with the time-varying case the dependence structure of both returns depends on their previous dependence structures through a DCC specification. We estimate the model by a two-step procedure, where marginal distributions are estimated in the first step and copulas in the second. We apply our model to overnight and daytime returns of SPDR ETFs of nine major sectors and briefly illustrate its use in risk management and asset allocation. Our empirical results show higher mean, lower variance, fatter tails and lower correlations for overnight returns than daytime returns. Daytime returns are significantly negatively correlated with previous overnight returns. Moreover, daytime returns depend on previous overnight returns in both conditional variance and correlation matrix (through a DCC specification). Most of our empirical findings are consistent with the asymmetric information argument in the market microstructure literature. With respect to econometric modelling, our results show a DCC specification for correlation matrices of t copulas significantly improves the fit of data and enables the model to account for time-varying dependence structure.
    Date: 2010–06
  22. By: Leif Andreassen and Tom Kornstad (Statistics Norway)
    Abstract: The discrete choice model of McFadden (1973) is used to quantify the desire for going into rehabilitation or disability among fully employed married women in Norway. Predictions using the model indicate that as much as 60 percent of full-time employed married women going into disability or rehabilitation are not doing so entirely voluntarily. Using a set of identifying assumptions we decompose transitions into different components. Important findings are that decreasing unemployment has also played a significant role in increasing the number on disability and rehabilitation, while changes in disability benefits have not played a large role.
    Keywords: social security; disability; rehabilitation; discrete choice
    JEL: C35 H55 I12 I18
    Date: 2010–12

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