nep-mic New Economics Papers
on Microeconomics
Issue of 2011‒02‒26
nineteen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Firm productivity, exchange rate movements, sources of finance and export orientationInventories and sales uncertainty By Mustafa Caglayan; Firat Demir
  2. Is Power Production Flexibility a Substitute for Storability? Evidence from Electricity Futures Prices By Mehtap Kilic; Ronald Huisman
  3. When power makes others speechless: The negative impact of leader power on team performance By Leigh Plunkett Tost; Francesca Gino; Richard P. Larrick
  4. A new perspective to rational expectations: maximin rational expectations equilibrium By Luciano De Castro; Marialaura Pesce; Nicholas C. Yannelis
  5. Ambiguity aversion solves the conflict between efficiency and incentive compatibility By Luciano De Castro; Nicholas C. Yannelis
  6. A Variation on Ellsberg By Kfir Eliaz; Pietro Ortoleva
  7. Nonemptiness of the alpha-core By V. Filipe Martins-da-Rocha; Nicholas C. Yannelis
  8. Spatial Asset Pricing: A First Step By Francois Ortalo-Magne; Andrea Prat
  9. A Random Matrix Approach on Credit Risk By Michael C. M\"unnix; Rudi Sch\"afer; Thomas Guhr
  10. Clean energy technology and the role of non-carbon price based policy: an evolutionary economics perspective By Eric Knight; Nicholas Howarth
  11. The American Family in Black and White: A Post-Racial Strategy for Improving Skills to Promote Equality By Heckman, James J.
  12. Punching above One's Weight: The Case against Election Campaigns By Marco A. Haan; Bart Los; Sander Onderstal; Yohanes E. Riyanto
  13. Naïve Beliefs and the Multiplicity of Social Norms By Patel, Amrish; Cartwright, Edward
  14. Firm Entry, Inflation and the Monetary Transmission Mechanism By Vivien LEWIS; Céline POILLY
  15. Two-way interplays between capital buffers, credit and output: evidence from French banks By Coffinet, J.; Coudert, V.; Pop, A.; Pouvelle, C.
  16. Dynamic Correlation or Tail Dependence Hedging for Portfolio Selection By Redouane Elkamhia; Denitsa Stefanova
  17. A Model of Voluntary Childlessness By Paula E. GOBBI
  18. The Effects of Housing Prices and Monetary Policy in a Currency Union By Pau Rabanal; Oriol Aspachs-Bracons
  19. Output-based allocation and investment in clean technologies By Knut Einar Rosendahl and Halvor Briseid Storrøsten

  1. By: Mustafa Caglayan (Department of Economics, The University of Sheffield); Firat Demir
    Abstract: We investigate the level and volatility effects of exchange rates on the productivity growth of manufacturing firms with heterogenous access to debt, and domestic and foreign equity markets in Turkey. We find that while exchange rate volatility affects productivity growth negatively, having access to foreign or domestic equity, or debt markets does not alleviate these effects. Furthermore, foreign owned or publicly traded companies do not appear to perform significantly better than the rest. We detect, however, that firm productivity is positively related to having access to external credit. Additionally, we find that while export (inward) oriented firms are affected less (more) by exchange rate appreciations, they are more (less) sensitive to exchange rate volatility.
    Keywords: Productivity growth, Exchange rate volatility, Source of finance, Capital structure, Export orientation
    JEL: F23 F31 F43 G31 G32 L6
    Date: 2011–02
  2. By: Mehtap Kilic (Erasmus University Rotterdam); Ronald Huisman (Erasmus University Rotterdam)
    Abstract: Electricity is not storable. As a consequence, electricity demand and supply need to be in balance at any moment in time as a shortage in production volume cannot be compensated with supply from inventories. However, if the installed power supply capacity is very flexible, variation in demand can be counterbalanced with flexible adjustment of production volumes. Therefore, supply flexibility can replace the role of inventory. In this paper, we question whether power production flexibility is a substitute for storability. To do so, we examine power futures prices from countries that differ in their power supply and test whether power futures prices contain information about expected future spot prices and risk premiums and examine whether futures prices from a market in which power supply is more flexible would lead to futures prices that are more in line with the theory of storage. We find the opposite; futures prices from markets with flexible power supply behave according to the expectations theory. The implicit view from futures prices is that flexibility is not a substitute for storability.
    Keywords: Electricity futures prices; forward risk premium; theory of storage; expectations theory
    JEL: G13
    Date: 2010–07–19
  3. By: Leigh Plunkett Tost (University of Washington); Francesca Gino (Harvard Business School, Negotiation, Organizations & Markets Unit); Richard P. Larrick (Duke University)
    Abstract: We examine the impact of subjective power on leadership behavior and demonstrate that the psychological effect of power on leaders spills over to impact team effectiveness. Specifically, drawing from the approach/inhibition theory of power, power-devaluation theory, and organizational research on the antecedents of employee voice, we argue that a leader's experience of heightened power produces verbal dominance, which reduces perceptions of leader openness and team open communication. Consequently, there is a negative effect of leader power on team performance. Three studies find consistent support for this argument. The implications for theory and practice are discussed.
    Keywords: Power; Leadership; Teams; Communication; Talking; Dominance; Team Performance; Learning
    Date: 2011–02
  4. By: Luciano De Castro; Marialaura Pesce; Nicholas C. Yannelis
    Date: 2011
  5. By: Luciano De Castro; Nicholas C. Yannelis
    Date: 2011
  6. By: Kfir Eliaz; Pietro Ortoleva
    Abstract: Ellsberg's experiment involved a gamble with no ambiguity (N) and a gam- ble where the prize that could be won is objectively known, but the winning probability depends on the (ambiguous) urn's composition (P). We extend this by including a gamble where the winning probability is objectively known, but the prize depends on the urn's composition (C), and also gambles where both the probability and the prize depend on the urn's composition, and can either be correlated positively (D) or negatively (M). Among transitive subjects who prefer N to P, 40% prefer D to N, 74% prefer D to P, 97% prefer D to M, and the modal ranking (about 39%) satises D<N<P,C. We show that this behav- ior is compatible with the Max-Min Expected Utility model if every prior in the set of priors has a high enough variance, a property that we call `skeptical pessimism.'
    Keywords: Ellsberg Paradox, Uncertainty Aversion, Ambiguity Aversion, MaxMin Expected Utility.
    Date: 2011
  7. By: V. Filipe Martins-da-Rocha; Nicholas C. Yannelis
    Date: 2011
  8. By: Francois Ortalo-Magne; Andrea Prat
    Abstract: People choose where to live and how much to invest in housing. Traditionally, the first decision has been the domain of spatial economics, while the second has been analyzed in finance. Spatial asset pricing is an attempt to combine equilibrium concepts from both disciplines. In the finance context, we show how spatial decisions can be framed as an expanded portfolio problem. Within spatial economics, we identify the consequences of hedging motives for location decisions. We characterize a number of observable deviations from standard predictions in finance (e.g. the definition of the relevant market portfolio for the pricing of risk includes homeownership rates) and in spatial economics (e.g. hedging considerations and the pricing of risk affect the geographic allocation of human capital).
    Date: 2010–04
  9. By: Michael C. M\"unnix; Rudi Sch\"afer; Thomas Guhr
    Abstract: We consider a structural model for the estimation of credit risk based on Merton's original model. By using Random-Matrix theory we demonstrate analytically that the presence of correlations severely limits the effect of diversification in a credit portfolio if the correlation are not identical zero. The existence of correlations alters the tails of the loss distribution tremendously, even if their average is zero. Under the assumption of randomly fluctuating correlations, a lower bound for the estimation of the loss distribution is provided.
    Date: 2011–02
  10. By: Eric Knight (Department of Geography and the Environment, University of Oxford, Oxford, UK); Nicholas Howarth (Department of Geography and the Environment, University of Oxford, Oxford, UK)
    Abstract: Much academic attention has been paid to the role of carbon pricing in developing a market-led response to low carbon energy innovation. Taking an evolutionary economics perspective this paper makes the case as to why price mechanisms alone are insufficient to support new energy technologies coming to market. In doing so, we set out the unique investment barriers in the clean energy space. For guidance on possible approaches to non-carbon price based policies that seek to tackle these barriers we turn to case studies from Asia, a region which has experienced a strong uptake in climate policy in recent years.
    JEL: Q48 Q42 Q55
    Date: 2011–02
  11. By: Heckman, James J. (University of Chicago)
    Abstract: In contemporary America, racial gaps in achievement are primarily due to gaps in skills. Skill gaps emerge early before children enter school. Families are major producers of those skills. Inequality in performance in school is strongly linked to inequality in family environments. Schools do little to reduce or enlarge the gaps in skills that are present when children enter school. Parenting matters, and the true measure of child advantage and disadvantage is the quality of parenting received. A growing fraction of American children across all race and ethnic groups is being raised in dysfunctional families. Investment in the early lives of children in disadvantaged families will help close achievement gaps. America currently relies too much on schools and adolescent remediation strategies to solve problems that start in the preschool years. Policy should prevent rather than remediate. Voluntary, culturally sensitive support for parenting is a politically and economically palatable strategy that addresses problems common to all racial and ethnic groups.
    Keywords: skill gap, racial inequality, early childhood intervention
    JEL: J15 J24
    Date: 2011–02
  12. By: Marco A. Haan (University of Groningen); Bart Los (University of Groningen); Sander Onderstal (University of Amsterdam); Yohanes E. Riyanto (Nanyang Technological University Singapore)
    Abstract: Politicians differ in their ability to implement some policy. In an election, candidates make commitments regarding the plans they will try to implement if elected. These serve as a signal of true ability. In equilibrium, candidates make overambitious promises. The candidate with the highest ability wins. Yet, the electorate may be better off having a random candidate implement her best plan, rather than seeing the winner implementing an overambitious plan. This is more likely if the ability distribution is skewed toward high values, the number of candidates is high, with private benefits from being elected, or if parties select candidates.
    Keywords: election promises; signalling
    JEL: D72
    Date: 2010–06–10
  13. By: Patel, Amrish (Department of Economics, School of Business, Economics and Law, Göteborg University); Cartwright, Edward (Department of Economics, University of Kent)
    Abstract: In a signalling model of conformity, we demonstrate that naïve observers, those that take actions at face value, constrain the set of actions that can possibly be social norms. With rational observers many actions can be norms, but with naïve observers only actions close to that preferred by the ideal type can be norms. We suggest, therefore, that the naïvety or inexperience of observers is an important determinant of norms and how they evolve.<p>
    Keywords: Signalling; Conformity; Social Norms; Naïve Beliefs
    JEL: D82 D83 Z13
    Date: 2011–02–18
  14. By: Vivien LEWIS (Ghent University and Goethe University Frankfurt, IMFS); Céline POILLY (UNIVERSITE CATHOLIQUE DE LOUVAIN, IMMAQ, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper estimates a business cycle model with endogenous firm entry by matching impulse responses to a monetary policy shock in US data. Our VAR includes net business formation, profits and markups. We evaluate two channels through which entry may influence the monetary transmission process. Through the competition effect, the arrival of new entrants makes the demand for existing goods more elastic, and thus lowers desired markups and prices. Through the variety effect, increased firm and product entry raises consumption utility and thereby lowers the cost of living. This implies higher markups and, through the New Keynesian Phillips Curve, lower inflation. While the proposed model does a good job at matching the observed dynamics, it generates insufficient volatility of markups and profits. Estimates of standard parameters are largely unaffected by the introduction of firm entry. Our results lend support to the variety effect; however, we find no evidence for the competition effect.
    Keywords: entry, inflation, monetary transmission, monetary policy, extensive margin
    JEL: E32 E52
    Date: 2011–02–08
  15. By: Coffinet, J.; Coudert, V.; Pop, A.; Pouvelle, C.
    Abstract: We assess the extent to which capital buffers (the capital banks hold in excess of the regulatory minimum) exacerbate rather than reduce the cyclical behavior of credit. We empirically study the relationships between output gap, capital buffers and loan growth with firm-level data for French banks over the period 1993—2009. Our findings reveal that bank capital buffers intensify the cyclical credit fluctuations arising from the output gap developments, all the more as better quality capital is considered. Moreover, by performing Granger causality tests at the bank level, we find evidence of a two-way causality between capital buffers and loan growth, pointing to mutually reinforcing mechanisms. Overall, those empirical results lend support to a countercyclical financial regulation that focuses on highest-quality capital and aims at smoothing loan growth.
    Keywords: Bank Capital Regulation, Procyclicality, Capital Buffers, Business Cycle Fluctuations, Basel III.
    JEL: G28 G21
    Date: 2011
  16. By: Redouane Elkamhia (University of Iowa, Henry B. Tippie College of Business); Denitsa Stefanova (VU University Amsterdam, and Duisenberg School of Finance)
    Abstract: We solve for the optimal portfolio allocation in a setting where both conditional correlation and the
    Keywords: correlation hedging; dynamic portfolio allocation; Monte Carlo simulation; tail dependence
    JEL: C15 C16 C51 G11
    Date: 2011–02–11
  17. By: Paula E. GOBBI (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: Demographers and sociologists have studied and asked for a theory of childlessness for more than two decades, however, this specific choice of zero fertility has not interested economists. Nowadays, facts show us that permanent childlessness can concern up to 30% of all women of a cohort. This paper gives an endogenous fertility model that looks in detail to the mechanisms leading to fluctuations in childlessness. Two mechanisms are considered. The first mechanism goes through the inter-generational evolution of preferences, that can be either exogenous or endogenous. I show that under some values of the parameters, oscillatory dynamics of childlessness may arise. The second mechanism goes through the female labor market; a more gender parity labor environment and an increase in the fixed cost of becoming parents could be an explanation for the dynamics of fertility and childlessness that we have observed in the United States since the early nineteenth century.
    Date: 2011–01–31
  18. By: Pau Rabanal; Oriol Aspachs-Bracons
    Abstract: The recent boom-and-bust cycle in housing prices has refreshed the debate on the drivers of housing cycles as well as the appropriate policy response. We analyze the case of Spain, where housing prices have soared since it joined the EMU. We present evidence based on a VAR model, and we calibrate a New Keynesian model of a currency area with durable goods to explain it. We find that labor market rigidities provide stronger amplification effects to all type of shocks than financial frictions do. Finally, we show that when the central bank reacts to house prices, the non-durable sector suffers an important contraction. As a result, the boom-and-bust cycle would not have been avoided if Spain had remained outside the EMU during the 1996-2007 period.
    Keywords: Demand , Economic models , European Economic and Monetary Union , External shocks , Housing , Housing prices , Interest rates , Labor markets , Monetary policy , Spain ,
    Date: 2011–01–07
  19. By: Knut Einar Rosendahl and Halvor Briseid Storrøsten (Statistics Norway)
    Abstract: Allocation of emission allowances may affect firms' incentives to invest in clean technologies. In this paper we show that so-called output-based allocation tends to stimulate such investments as long as individual firms do not assume the regulator to tighten the allocation rule as a consequence of their investments. The explanation is that output-based allocation creates an implicit subsidy to the firms' output, which increases production, leads to a higher price of allowances, and thus increases the incentives to invest in clean technologies. On the other hand, if the firms expect the regulator to tighten the allocation rule after observing their clean technology investment, the firms' incentives to invest are moderated. If strong, this last effect may outweigh the enhanced investment incentives induced by increased output and higher allowance price.
    Keywords: Emissions trading; allocation of quotas; abatement technology.
    JEL: H21 Q58
    Date: 2011–02

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