nep-mic New Economics Papers
on Microeconomics
Issue of 2011‒01‒30
sixteen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Competitive mixed bundling of vertically differentiated products By Illtae Ahn; Kiho Yoon
  2. From IRAP to CBIT: tax distortions and redistributive effects By Manzo, Marco; Monteduro, Maria Teresa
  3. Corporate Leniency with Private Information: The Push of Prosecution and the Pull of Pre-emption By Joseph E. Harrington, Jr.
  4. Endogenous Market Structures and Contract Theory. Delegation, principal-agent contracts, screening, franchising and tying By Etro Federico
  5. What Does Futures Market Interest Tell Us about the Macroeconomy and Asset Prices? By Harrison Hong; Motohiro Yogo
  6. Mediocracy, Third Version By Andrea Mattozzi; Antonio Merlo
  7. "Reverse Bayesianism": A Choice-Based Theory of Growing Awareness By Edi Karni; Marie-Louise Vierø
  8. Direct Democracy, Political Delegation, and Responsibility Substitution By Carlo Prato; Bruno Strulovici
  9. Ethnic Identity and Labor-Market Outcomes of Immigrants in Europe By Alberto Bisin; Eleonora Patacchini; Thierry Verdier; Yves Zenou
  10. Automatizing Price Negotiation in Commodities Markets By Laib, Fodil; Radjef, MS
  11. An empirical investigation of the nexus among money balances, commodity prices and consumer goods'prices By Grigoli, Francesco
  12. From Autonomy to Full Deference in the Relationship between the EFTA Court and the ECJ: The Case of the International Exhaustion of the Rights Conferred by a Trademark By Daniele Gallo
  13. Vocational Training and Innovation. By Gallié, Emilie-Pauline; Legros, Diego
  14. Are euro area inflation rates misaligned? By Lopez, Claude; Papell, David
  15. Posted Pricing as a Plus Factor By Przemyslaw Jeziorski and Ilya Segal
  16. Modeling hierarchical relationships in epidemiological studies: a Bayesian networks approach By Nguefack-Tsague, Georges; Zucchini , Walter

  1. By: Illtae Ahn (Department of Economics, Chung-Ang University, Seoul, Republic of Korea); Kiho Yoon (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: We examine mixed bundling in a competitive environment that incorporates vertical product differentiation. We show that, compared to the equilibrium without bundling, (i) prices, profits and social welfare are lower, whereas (ii) consumer surplus is higher in the equilibrium with mixed bundling. In addition, the population of consumers who purchase both products from the same firm is larger in the equilibrium with mixed bundling. Further, when the quality gap between brands narrows under no bundling and symmetric mixed bundling, prices and profits decrease but social welfare and consumer surplus increase. When quality differentiation is asymmetric across products, however, complicated effects occur on prices and profits due to strategic interdependence that mixed bundling creates.
    Keywords: mixed bundling, vertical differentiation, quality advantage, competitive bundling
    JEL: D43 L13
    Date: 2011
  2. By: Manzo, Marco; Monteduro, Maria Teresa
    Abstract: The paper explores the differences between IRAP (the Regional Tax on Productive Activities) and CBIT (the Comprehensive Business Income Tax), which approximately corresponds to allow the deduction of labor cost from the taxable base of IRAP. By developing a DSGE model that ncorporates business taxes, like IRAP or CBIT, we find that tax distortions due to IRAP are more contractionary than those caused by the presence of CBIT. Empirically, tax revenues and redistributive effects are more carefully analyzed. We implement a microsimulation model (MSM) based on a dataset of more than 150,000 incorporated firms. We show that small incorporated firms are particularly harmed by IRAP, especially when business run a loss instead of a profit. This is due to the fact that IRAP is a business tax on value added, which does not allow for the deduction of labor cost. For this purpose, we focus on the introduction of a reform based on the CBIT principle. Our result is that CBIT is particularly costly and more able to enhance the profitability for larger enterprises. Moreover, the tax design of CBIT is more regressive compared to the IRAP including tax allowances. Consequently, an efficiency-equity trade-off between IRAP and CBIT might be emphasized
    Keywords: business cycles; tax distortions; micro-simulations models; distributive effects; Italy.
    JEL: E62 E32 H25 H32
    Date: 2010–08
  3. By: Joseph E. Harrington, Jr.
    Abstract: A corporate leniency program provides relief from government penalties to the first member of a cartel to come forward and cooperate with the authorities. This study explores the incentives to apply for leniency when each cartel member has private information as to the likelihood that the competition authority will be able to convict them without a cooperating firm. A firm may apply for leniency because it fears being convicted or because it fears another firm will apply. Policies by the competition authority to magnify concerns about pre-emption - and thereby induce greater use of the leniency program - are explored.
    Date: 2011–01
  4. By: Etro Federico (Department of Economics, University Of Venice Cà Foscari)
    Abstract: I study the role of unilateral strategic contracts for firms active in markets with price competition and endogenous entry. Traditional results change substantially when the market structure is endogenous rather than exogenous. They concern 1) contracts of managerial delegation to non-profit maximizers, 2) incentive principal-agent contracts in the presence of moral hazard on cost reducing activities, 3) screening contracts in case of asymmetric information on the productivity of the managers, 4) vertical contracts of franchising in case of hold-up problems and 5) tying contracts by monopolists competing also in secondary markets. Firms use always these contracts to strengthen price competition and manage to obtain positive profits in spite of free entry.
    Keywords: Strategic delegation, Incentive contracts, Screening contracts, Franchising, Tying, Endogenous market structures
    JEL: L11 L13 L22 L43
    Date: 2010
  5. By: Harrison Hong; Motohiro Yogo
    Abstract: Open interest, or the amount of contracts outstanding in futures markets, has remarkable power to forecast commodity, currency, bond, and stock prices. Changes in open interest are highly pro-cyclical and predict asset-price fluctuations better than a number of alternative variables including past prices. In commodity markets, rising open interest predicts rising commodity prices, falling bond prices, and a rising short rate. In currency markets, rising open interest predicts appreciation of foreign currencies relative to the U.S. dollar. In bond and stock markets, rising open interest predicts falling bond prices and rising stock prices, respectively. We offer a theoretical explanation of our empirical findings. Open interest is a more informative signal of future economic activity and inflation than past prices because of hedging demand and downward-sloping demand curves in futures markets.
    JEL: E31 E37 F31 G12 G13
    Date: 2011–01
  6. By: Andrea Mattozzi (Divison of Humanities and Social Sciences, California Institute of Technology); Antonio Merlo (Department of Economics, University of Pennsylvania)
    Abstract: We study the recruitment of individuals in the political sector. We propose an equilibrium model of political recruitment by two political parties competing in an election. We show that political parties may deliberately choose to recruit only mediocre politicians, in spite of the fact that they could select better individuals. Furthermore, we show that this phenomenon is more likely to occur in proportional than in majoritarian electoral systems.
    Keywords: Politicians, parties, political recruitment, electoral systems, all-pay auctions.
    JEL: D72 D44 J45
    Date: 2010–04–01
  7. By: Edi Karni (Johns Hopkins University); Marie-Louise Vierø (Queen`s University)
    Abstract: This paper invokes the axiomatic approach to explore the notion of growing awareness in the context of decision making under uncertainty. It introduces a new approach to modeling the expanding universe of a decision maker in the wake of becoming aware of new consequences, new acts, and new links between acts and consequences. The expanding universe, or state space, is accompanied by extension of the set of acts. The preference relations over the expanded sets of acts are linked by unchanging preferences over the satisfaction of basic needs. The main results are representation theorems and corresponding rules for updating beliefs over expanding state spaces that have the flavor of “reverse Bayesianism.”
    Keywords: Awareness, unawareness, reverse Bayesianism
    JEL: D8 D81 D83
    Date: 2010–12
  8. By: Carlo Prato; Bruno Strulovici
    Abstract: Can direct democracy provisions improve welfare over pure representative democracy? This paper studies how such provisions affect politicians’ incentives and selection. While direct democracy allows citizens to correct politicians’ mistakes, it also reduces the incentives of elected representatives to search for good policies. This responsibility substitution reduces citizens’ ability to screen competent politicians, when elections are the only means to address political agency problems. A lower cost of direct democracy induces a negative spiral on politicians incentives, which we characterize by a disincentive multiplier. As a consequence, introducing initiatives or lowering their cost can reduce voters’ expected utility. Moreover, when elections perform well in selecting politicians and provide incentives, this indirect welfare reducing effect is stronger.
    Keywords: Direct Democracy, Initiative, Referendum, Political Agency, Delegation JEL Classification Numbers: D72, D78, P16
    Date: 2010–12–09
  9. By: Alberto Bisin (New York University); Eleonora Patacchini (La Sapienza University of Rome, Einaudi Institute for Economics and Finance (EIEF) and CEPR); Thierry Verdier (Paris School of Economics (PSE) and CEPR); Yves Zenou (Stockholm University, Research Institute of Industrial Economics (IFN), CEPR, IZA and CREAM)
    Abstract: We study the relationship between ethnic identity and labor-market outcomes of non-EU immigrants in Europe. Using the European Social Survey, we find that there is a penalty to be paid for immigrants with a strong identity. Being a first generation immigrant leads to a penalty of about 17 percent while second-generation immigrants have a probability of being employed that is not statistically different from that of natives. However, when they have a strong identity, second-generation immigrants have a lower chance of finding a job than natives. Our analysis also reveals that the relationship between ethnic identity and employment prospects may depend on the type of integration and labor-market policies implemented in the country where the immigrant lives. More flexible labor markets help immigrants to access the labor market but do not protect those who have a strong ethnic identity.
    Date: 2011–01
  10. By: Laib, Fodil; Radjef, MS
    Abstract: This is an introductory work to trade automatization of the futures market, so far operated by human traders. We are not focusing on maximizing individual profits of any trader as done in many studies, but rather we try to build a stable electronic trading system allowing to obtain a fair price, based on supply and demand dynamics, in order to avoid speculative bubbles and crashes. In our setup, producers and consumers release regularly their forecasts of output and consumption respectively. Automated traders will use this information to negotiate price of the underlying commodity. We suggested a set of analytical criteria allowing to measure the efficiency of the automatic trading strategy in respect to market stability.
    Keywords: Automated Traders; Optimal Strategies; Futures Market; Commodities Trading
    JEL: D81 C63 C73
    Date: 2010–05–24
  11. By: Grigoli, Francesco
    Abstract: This paper aims to identify the nexus between the excess of liquidity in the United States and commodity prices over the 1983-2006 period. In particular, it assesses whether commodity prices react more powerfully than consumer goods'prices to changes in real money balances. Within a cointegrated vector autoregressive framework, the author investigates whether consumer prices and commodity prices react to excess liquidity, and if the different price elasticities of supply for goods and commodities allow for differences in the dynamic paths of price adjustment to a liquidity shock. The results show a positive relationship between real money and real commodity prices and provide empirical evidence for a stronger response of commodity prices with respect to consumer goods'prices. This could imply that, if the magnitude of the reaction is due the fact that consumer goods'prices are slower to react, then their long-run value can be predicted with the help of commodity prices. The findings support the view that the latter should be considered as a valid monetary indicator.
    Keywords: Markets and Market Access,Emerging Markets,Economic Theory&Research,Commodities,E-Business
    Date: 2011–01–01
  12. By: Daniele Gallo
    Abstract: Abstract: Differently from other international tribunals set up in the context of regional economic integrations, the existing relationship between the EFTA Court and the ECJ, having been institutionalized at a primary level by the EEA Agreement itself, is naturally apt to give rise to a structural, natural and original interdependence between the two phenomena of mirror jurisdiction and mirror legislation. The relevance of the ECJ case law for the EFTA case law is not limited to the references to the former court case law, which can be found in all the advisory opinions and in all the judgments given up to now by the latter. It also and above all reveals itself in the constant adoption both of the reasoning made by the ECJ and of the constitutional principles of EU law. By putting on the same level its jurisprudence and that of the ECJ, the EFTA Court attributes to both of them the same efficacy in terms of judicial precedent. This does not mean that the EFTA Court has restricted itself to passively adopt the ECJ case law. EFTA judges have had a relevant influence on the ECJ in the course of the years. In doing so the EFTA Court has built up a strong judicial dialogue with the ECJ, according to the EEA principle that the interpretation and application of EEA law and EU law must be carried out in full deference to the independence of courts. In some other cases the EFTA Court has even developed reasonings which seem to underline a detachment of the former from the criteria and principles adopted by the ECJ. In this context, the L’Oréal case represents the first and until now only case in which the EFTA Court had to decide on a question which had already been the subject of an explicit conflict with the ECJ. The issue at stake is the admissibility of the principle of international exhaustion of the rights conferred by a trademark, that consequently functions as appropriate sedes materiae for the purpose of clarifying the degree of autonomy characterizing the EFTA Court vis-à-vis the ECJ and its case law. This working paper aims at explaining why and to what extent the choice made and the reasoning developed by the EFTA Court to abandon its previous case law in favour of the ECJ case law in the L’Oréal case seems to be more inspired by political considerations than by a purely legal reasoning. The analysis will then show the reasons why L’Oréal goes beyond the issue of the international exhaustion of the rights conferred by a trade mark and concerns structural and institutional questions pertaining to the legal and economic aims of the EEA law and the EU system. It will be finally underlined in what sense the EEA Agreement must be interpreted and construed as meaning that the uniformity and consistency in the case law of the two courts have to be always and in any case prioritized, notwithstanding the different aims and the lower degree of integration of the EEA system in comparison with the EU legal that seemed to constitute, until L’Oréal, the only exception to the objective of legal homogeneity acknowledged by the EEA Agreement.
    Keywords: European Court of Justice
    Date: 2010–10–15
  13. By: Gallié, Emilie-Pauline; Legros, Diego
    Abstract: Human capital is considered as one of the main inputs in economic growth. Human capital can generate endogenous growth thanks to a continuous process of knowledge and externalities accumulation (Aghion and Howitt, 1998). In that context, this paper explores the relationship between innovation and vocational training. Our methodological approach allows to contribute to the literature in three manners. First, we propose different indicators of vocational training. Second, we build a count data panel with a long time data series. This deals with the issue of non-random selection and potentially with measurement error from short panels. Finally, we explicitly allow for endogeneity and fixed effects using GMM techniques. Estimations are made on a panel data set relative to French industrial firms over the period 1986-1992. Our results indicate that whatever the indicators, vocational training has a positive impact on the technological innovation.
    Keywords: count panel data; linear feedback model; patents; R&D; training;
    JEL: C23 C25 J24 L60 O31
    Date: 2011
  14. By: Lopez, Claude; Papell, David
    Abstract: We study the behavior of inflation rates among Euro countries. More specifically, we are interested in testing whether and when group convergence dictated by the Maastricht treaty occurs, and we assess the impact of events such as the advent of the Euro and the 2008 financial crisis. Due to the small size of the estimation sample, we propose a new procedure that increases the power of panel unit root tests when used to study group-wise convergence. Applying this new procedure to Euro Area inflation, we find strong and lasting evidence of convergence among the inflation rates soon after the implementation of the Maastricht treaty and a dramatic decrease in the persistence of the differential after the occurrence of the single currency. Furthermore, while we find divergence among some of the Euro countries prior to the 2008 financial crisis, the convergence is strengthened after the crisis for all countries except Greece.
    Keywords: groupwise convergence; inflation; euro; 2008 crisis
    JEL: C32 E31
    Date: 2010
  15. By: Przemyslaw Jeziorski and Ilya Segal
    Abstract: We study users' response to sponsored-search advertising using data from Microsoft's Live AdCenter distributed in the "Beyond Search" initiative. We estimate a structural model of utility maximizing users, which quantifies "user experience" based on their "revealed preferences," and predicts user responses to counterfactual ad placements. In the model, each user chooses clicks sequentially to maximize his expected utility under incomplete information about the relevance of ads. We estimate the substitutability of ads in users' utility function, the fixed effects of different ads and positions, user uncertainty about ads' relevance, and user heterogeneity. We find substantial substitutability of ads, which generates large negative externalities: 40% more clicks would occur in a hypothetical world in which each ad faces no competition. As for counterfactual ad placements, our simulations indicate that CTR-optimal matching increases CTR by 10.1% while user-optimal matching increases user welfare by 13.3%. Moreover, targeting ad placement to specific users could raise user welfare by 59%. Here, we find a significant suboptimality (up to 16% of total welfare) in case the search engine tries to implement a sophisticated matching policy using a misspecified model that does not account for externalities. Finally, user welfare could be raised by 14% if they had full information about the relevance of ads to them.
    Date: 2010–08
  16. By: Nguefack-Tsague, Georges; Zucchini , Walter
    Abstract: Hierarchical relationships between risk factors are seldom taken into account in epidemiological studies though some authors stressed the importance of doing so, and proposed a conceptual framework in which each level of the hierarchy is modeled separately. The objective of this paper was to implement a simple version of their framework, and to propose an alternative procedure based on a Bayesian Network (BN). These approaches were illustrated in modeling the risk of diarrhea infection for 2740 children aged 0 to 59 months in Cameroon. The authors implemented a (naïve) logistic regression, a step-level logistic regression and also a BN. While the first approach is inadequate, the two others approaches both account for the hierarchical structure but to different estimates and interpretations. BN implementation showed that a child in a family in the poorest group has respectively 89%, 40% and 18% probabilities of having poor sanitation, being malnourished and having diarrhea. An advantage of the latter approach is that it enables one to determine the probability that a risk factor (and/or the outcome) is in a given state, given the states of the others. Although the BN considered here is very simple, the method can deal with more complicated models.
    Keywords: Bayesian networks; hierarchical model; diarrhea infection; disease determinants; logistic regression
    JEL: I12 C45 C11
    Date: 2011–01–19

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