nep-mic New Economics Papers
on Microeconomics
Issue of 2011‒03‒19
eighteen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Equity judgments and context dependence: Knowledge, efficiency and incentives By Schilizzi, Steven
  2. Entry and exit in a vertically differentiated industry By Silviano Esteve-Pérez
  3. Threshold cointegration and nonlinear adjustment between CO2 and income: the environmental Kuznets curve in Spain, 1857-2007 By Vicente Esteve; Cecilio Tamarit
  4. Local Financial Development and Firm Performance: Evidence from Morocco By Marcel Fafchamps; Matthias Schündeln
  5. Sensitivity Analysis of Composite Indicators through Mixed Model Anova By Cristina Davino, Rosaria Romano
  6. Access to Abortion, Investments in Neonatal Health, and Sex-Selection: Evidence from Nepal By Christine Valente
  7. How Much Do Fruits and Vegetables Cost? By Steward, Hayden; Hyman, Jeffrey; Buzby, Jean C.; Frazao, Elizabeth; Carlson, Andrea
  8. Green Certificates and Market Power on the Nordic Power Market By Amundsen, Eirik Schrøder; Bergman, Lars
  9. Creative Destruction and Productive Preemption By Norbäck, Pehr-Johan; Persson, Lars; Svensson, Roger
  10. Weight Restrictions in DEA:Misplaced Emphasis? By R. Førsund, Finn
  11. Myopic governments and welfare-enhancing debt limits By Malte Rieth
  12. Time Compression By Aadland, David; Shaffer, Sherrill
  13. Endogenous Growth, Monetary Shocks and Nominal Rigidities By Barbara Annicchiarico; Alessandra Pelloni; Lorenza Rossi
  14. Remittances and Income Smoothing By Catalina Amuedo-Dorantes; Susan Pozo
  15. Wars and Child Health: Evidence from the Eritrean-Ethiopian Conflict By Richard Akresh; Leonardo Lucchetti; Harsha Thirumurthy
  16. Back to the Future: A Simple Solution to Schelling Segregation By Sylvain Barde
  17. The Political Value of Land: Democratization and Land Prices in Chile By Baland, Jean-Marie; Robinson, James A
  18. Inf-convolution of g_\Gamma-solution and its applications By Helin Wu; Yuanyuan Sui

  1. By: Schilizzi, Steven
    Abstract: Distributional equity concerns are often at least as important as economic efficiency and ecological sustainability in environmental and natural resource management policies. Until recently, however, economists have shied away from tackling equity issues, primarily because equity appeared as a slippery concept, varying across people and circumstances. This study takes this context-dependence of equity judgments as a starting point and shows that such dependence, far from being random, is systematic. A series of controlled laboratory treatments with University students were designed to investigate the role on distributional equity judgments of such context factors as knowledge of oneâs position in society, how the existence of equity-efficiency tradeoffs can affect equity judgments, and the importance of material incentives compared with hypothetical situations, where âin principleâ judgments are called for. Key results include the relative discriminating power of context factors, the hierarchy of context-dependence, the dissymmetry between support and opposition to equity principles, and the impact of different wealth endowments on equity judgments. A number of common beliefs are found not to be substantiated by our experimental findings.
    Keywords: Equity, fairness, resource allocation, environmental policy, experimental economics, welfare economics, public choice, Institutional and Behavioral Economics, Public Economics, C92, D03, D63, H23, Q56, Q58,
    Date: 2011–02–23
  2. By: Silviano Esteve-Pérez (University of Valencia)
    Abstract: This paper presents a duopoly model of firm rivalry in a vertically differentiated industry when market dynamics is explicitly accounted for. It shows how the interplay between demand (degree of product differentiation, demand elasticity) and cost (fixed and quality costs) factors determine firms' relative strength when quality is irreversible. The main strategic choices are product quality, price and the timing of entry and exit. Further, firms incur sunk quality costs at time of entry and operating fixed costs of maintaining quality. Although the low quality firm may outlast its rival in the declining phase, both firms wish to be the "quality leader".
    Keywords: Entry; Exit; Vertical product differentiation
    JEL: L13 L11
    Date: 2011–03
  3. By: Vicente Esteve (Universidad de Valencia and Universidad de La Laguna, Spain); Cecilio Tamarit (Universidad de Valencia, Spain)
    Abstract: In this paper we model the long-run relationship between per capita CO2 and per capita income for the Spanish economy over the period 1857-2007. According to the Environmental Kuznets Curve (ECK) the relationship between the two variables has an inverted-U shape. However, previous studies for the Spanish economy only considered the existence of linear relationships. Such an approach may lack flexibility to detect the true shape of the relationship. Our empirical methodology accounts for a possible non-linear relationship through the use of threshold cointegration techniques. Our results confirm the non-linearity of the link between the two above-mentioned variables pointing to the existence of an Environmental Kuznets Curve for the Spanish case.
    Keywords: Environmental Kuznets curve, CO2 emissions, nonlinear relationship, threshold cointegration
    JEL: C2 Q4
    Date: 2011–03
  4. By: Marcel Fafchamps; Matthias Schündeln
    Abstract: Combining data from the Moroccan census of manufcaturing enterprises with information from a commune survey, we test whether firm expansion is affected by local financial development. Our findings are consistent with this hypothesis: local bank availability is robustly associated with faster growth for small and medium-size firms in sectors with growth opportunities, with a lower likelihood of firm exit and a higher likelihood of investment. The findings also suggests a channel for the effect of the availability of financing in firm growth in our data, namely that access to credit was used to invest in labor saving technology.
    Keywords: manufacturing, credit constraint, firm size
    JEL: O16 L25
    Date: 2011
  5. By: Cristina Davino, Rosaria Romano (University of Macerata)
    Abstract: <div style="text-align: justify;">The paper proposes a new approach for analysing the stability of Composite Indicators. Starting from the consideration that different subjective choices occur in their construction, the paper emphasizes the importance of investigating the possible alternatives in order to have a clear and objective picture of the phenomenon under investigation. Methods dealing with Composite Indicator stability are known in literature as Sensitivity Analysis. In such a framework, the paper presents a new approach based on a combination of explorative and confirmative analysis aiming to investigate the impact of the different subjective choices on the Composite Indicator variability and the related individual differences among the statistical units as well.</div>
    Keywords: sensitivity analysis,composite indicators,analysis of variance,principal component analysis
    JEL: C52 C63
    Date: 2011–02
  6. By: Christine Valente (Department of Economics, The University of Sheffield)
    Abstract: Every year, over 9 million children die under the age of five in developing countries, where the abortion regime is generally very restrictive. Evidence from the United States suggests that abortion liberalization may be a powerful policy tool in the fight against mortality in early life. In this paper, I consider the impact of providing affordable, legal abortion facilities in the high-fertility, high-mortality context of Nepal, on pregnancy outcomes, antenatal and perinatal health inputs, neonatal mortality, and sex-selection. In order to exploit geographical and time variation in coverage, I combine fertility histories with a unique data set recording geo-referenced coordinates and registration dates of newly introduced legal abortion centers. Consistent with the prediction that proximity to a legal abortion center reduces the cost of abortion, I find that the probability of a pregnancy ending in a live birth decreases by 8.1 percent, for a given mother. However, there is no evidence that improved access to abortion increases observed investments in antenatal and prenatal care or unobserved investments favorable to neonatal survival. Access to these legal, fist-trimester abortion centers does not appear to have led to more sex-selective terminations.
    JEL: I12 J13 J16
    Date: 2011–03
  7. By: Steward, Hayden; Hyman, Jeffrey; Buzby, Jean C.; Frazao, Elizabeth; Carlson, Andrea
    Abstract: Federal dietary guidance advises Americans to consume more vegetables and fruits because most Americans do not consume the recommended quantities or variety. Food prices, along with taste, convenience, income, and awareness of the link between diet and health, shape food choices. We used 2008 Nielsen Homescan data to estimate the average price at retail stores of a pound and an edible cup equivalent (or, for juices, a pint and an edible cup equivalent) of 153 commonly consumed fresh and processed fruits and vegetables. We found that average prices ranged from less than 20 cents per edible cup equivalent to more than $2 per edible cup equivalent. We also found that, in 2008, an adult on a 2,000- calorie diet could satisfy recommendations for vegetable and fruit consumption in the 2010 Dietary Guidelines for Americans (amounts and variety) at an average price of $2 to $2.50 per day, or approximately 50 cents per edible cup equivalent.
    Keywords: food prices, food budgeting, fruit and vegetable consumption, 2010 Dietary Guidelines for Americans, Consumer/Household Economics, Food Consumption/Nutrition/Food Safety,
    Date: 2011–02
  8. By: Amundsen, Eirik Schrøder (University of Bergen); Bergman, Lars (Stockholm School of Economics,)
    Abstract: The purpose of this study is to elucidate under which circumstances, how, and to what extent market power on the TGC market can be used to affect the entire electricity market. There are basically two reasons for being concerned with market power in TGC markets. One is that a small number of companies may have exclusive access to first rate sites for wind power generation. The other is that withdrawal of a small number of TGCs implies a multiple reduction of electricity consumption, with corresponding increases of end user prices. For the purpose of investigating the principles by which market power may be exercised in this setting a simple analytical model is designed and analytical results are derived. To investigate matters further a numerical model, based on the analytical model, is constructed for the Nordic countries. Among the Nordic countries only Sweden has a TGC market but there is a common Nordic electricity market with free trade of electricity. The analysis shows that Swedish companies possessing capacity for green electricity generation, indeed, have the ability to exercise market power on the common Nordic power market by withholding TGCs. However, the analysis reveals that an opening of TGC trade between the the Nordic countries to a large extent achieves the objective of eliminating the use of marketpower that would otherwise be established. Also, this may have a cushioning effect on the volatility of TGC prices.
    Keywords: Renewable energy; electricity; green certificates; market power; Nordic power market.
    JEL: C70 Q28 Q42 Q48
    Date: 2010–12–01
  9. By: Norbäck, Pehr-Johan; Persson, Lars; Svensson, Roger
    Abstract: We develop a theory of innovation for entry and sale into oligopoly, and show that an invention of higher quality is more likely to be sold (or licensed) to an incumbent due to strategic product market effects on the sales price. Preemptive acquisitions by incumbents are shown to stimulate the process of creative destruction by increasing the entrepreneurial effort allocated to high-quality invention projects. Using data on patents granted to small firms and individuals, we find evidence that high-quality inventions are sold under bidding competition. Asymmetric information problems are shown to be solved by verification through entry for sale.
    Keywords: Acquisitions; Entrepreneurship; Innovation; Ownership; Patent; Start-ups
    JEL: G24 L1 L2 M13 O3
    Date: 2011–03
  10. By: R. Førsund, Finn (Dept. of Economics, University of Oslo)
    Abstract: Measuring productive efficiency is an important research strand within fields of economics, management science and operations research. One definition of efficiency is the proportional scaling needed for observations of an inefficient unit to be projected onto an efficient production function and another definition is a ratio index of weighted outputs on weighted inputs. When linear programming is used to estimate efficiency the two definitions give identical results due to the fundamental duality of linear programming. Empirical applications of DEA using linear programming showed a prevalence of zero weights leading to questioning the consequence for the efficiency score estimate based on the ratio definition. Early literature on weight restrictions is exclusively based on the ratio efficiency. It was stated that variables with zero weights had no influence on the efficiency score, in spite of the alleged importance of the variables. This has been one motivation for introducing restrictions on weights. Another empirical result was that often there were too many efficient units. This problem could also be overcome by introducing weight restrictions. Weight restrictions were said to introduce values for inputs and outputs. The paper makes a critical examinations of these claims based on defining efficiency relative to a frontier production function.
    Keywords: Weight restrictions; DEA; efficiency; frontier production function; primal and dual linear programming problems
    JEL: C61 D20
    Date: 2011–02–17
  11. By: Malte Rieth (University of Dortmund, Chair of Applied Economics and Ruhr Graduate School in Economics, Vogelpothsweg 87, 44227 Dortmund, Germany.)
    Abstract: This paper studies welfare consequences of a soft borrowing constraint on sovereign debt which is modeled as a proportional fine per unit of debt exceeding some reference value. Debt is the result of myopic fiscal policy where the government is assumed to have a smaller discount factor than the private sector. Due to the absence of lump-sum taxation, debt reduces welfare. The paper shows that the imposition of a soft borrowing constraint, which resembles features of the Stability and Growth Pact and which is taken into account by the policy maker when setting its instruments, prevents excessive borrowing. The constraint can be implemented such as to (i) control the long run level of debt, (ii) prevent debt accumulation, and (iii) induce debt consolidation. In all three cases the constraint enhances welfare and in a welfare ranking these gains outweigh the short run welfare losses of increasing the costs of using debt to smooth taxes over the business cycle. JEL Classification: H3, H63, E6.
    Keywords: Myopic governments, debt bias, fiscal constraints, Stability and Growth Pact, social welfare.
    Date: 2011–03
  12. By: Aadland, David; Shaffer, Sherrill
    Abstract: Economists have generally ignored the notion that perceived time may differ from clock time. Borrowing from the behavioral psychology literature, we investigate the case of time compression whereby perceived time passes more quickly than actual time. A framework is presented to embed time compression in economic models. We then apply the principle to a standard lifecycle permanent income model with endogenous labor. Time compression provides an alternative explanation of why older individuals, even those without declining labor productivity, may choose to reduce their work effort.
    Keywords: Time Compression; Discounting; Lifecycle Permanent Income Model; Retirement
    JEL: D91
    Date: 2010–10–01
  13. By: Barbara Annicchiarico (Faculty of Economics, University of Rome "Tor Vergata"); Alessandra Pelloni (Faculty of Economics, University of Rome "Tor Vergata"); Lorenza Rossi (University of Pavia)
    Abstract: We introduce endogenous growth in an otherwise standard NK model with staggered prices and wages. Some results follow: (i) monetary volatility negatively affects long-run growth; (ii) the relation between nominal volatility and growth depends on the persistence of the nominal shocks and on the Taylor rule considered; (iii) a Taylor rule with smoothing increases the negative effect of nominal volatility on mean growth.
    Keywords: Growth, volatility, business cycle, monetary policy
    JEL: E32 E52 O42
    Date: 2011–03–08
  14. By: Catalina Amuedo-Dorantes (San Diego State University); Susan Pozo (Western Michigan University)
    Abstract: Due to inadequate savings and binding borrowing constraints, income volatility can make households in developing countries particularly susceptible to economic hardship. We examine the role of remittances in either alleviating or increasing household income volatility using Mexican household level data over the 2000 through 2008 period. We correct for reverse causality and endogeneity and find that while income smoothing does not appear to be the main motive for sending remittances in a non-negligible share of households, remittances do indeed smooth household income on average. Other variables surrounding income volatility are also considered and evaluated.
    Keywords: remittances, income smoothing.
    JEL: F22 O
    Date: 2011–03
  15. By: Richard Akresh (University of Illinois at Urbana-Champaign); Leonardo Lucchetti (University of Illinois at Urbana-Champaign); Harsha Thirumurthy (University of North Carolina at Chapel Hill)
    Abstract: This is the first paper using household survey data from two countries involved in an international war (Eritrea and Ethiopia) to measure the conflict’s impact on children’s health in both nations. The identification strategy uses event data to exploit exogenous variation in the conflict’s geographic extent and timing and the exposure of different children’s birth cohorts to the fighting. The paper uniquely incorporates GPS information on the distance between survey villages and conflict sites to more accurately measure a child’s war exposure. War-exposed children in both countries have lower height-for-age Z-scores, with the children in the warinstigating and losing country (Eritrea) suffering more than the winning nation (Ethiopia). Negative impacts on boys and girls of being born during the conflict are comparable to impacts for children alive at the time of the war. Effects are robust to including region-specific time trends, alternative conflict exposure measures, and an instrumental variables strategy.
    Date: 2010–12
  16. By: Sylvain Barde
    Abstract: The maximum entropy methodology is applied to the Schelling model of urban segregation in order to obtain a reliable prediction of the stable configuration of the system without resorting to numerical simulations. We show that this approach also provides an implicit equation describing the distribution of agents over a city which allows for directly assessing the effect of model parameters on the solution. Finally, we discuss the information theoretic motivation for applying this methodology to the Schelling model, and show that it effectively rests on the presence of a potential function, suggesting a broader applicability of the methodology.
    Keywords: Information theoretic measure; potential function; Schelling segregation model
    JEL: C11 C63 D80 J15
    Date: 2011–02
  17. By: Baland, Jean-Marie; Robinson, James A
    Abstract: Though models of political economy suggest that changes in political institutions, such as democratization, should have large effects on policies and economic outcomes, the empirical literature finds ambiguous results. It is important, however, to ‘unbundle’ democratic reforms into more specific changes, for instance the introduction of secrecy of balloting, and be more specific about the mechanisms linking these to economic outcomes. To this end we develop a simple model of the economic consequences of the absence of a secret ballot. While providing workers with employment, landlords can also impose some degree of political control. When voting is not secret, landlords can dictate who their workers should vote for. As votes are used by the landlords to accumulate political rents, vote control increases the demand for labor and for land. The introduction of secret ballot should lead to a fall in the price of land in those areas where patron-client relationships and vote control were the strongest. We test the predictions of the model by examining in detail the evolution of land prices in Chile around May 31st. 1958, for which we collected original data. A characteristic of rural Chile at this time was the inquilinaje system, by which a worker, the inquilino, entered into a long term, often hereditary, employment relationship with a landlord, and lived on his landlord’s estate. We show that the introduction of the secret ballot in 1958 had implications for land prices which are perfectly consistent with the predictions of our model. Political rents represented 25% of the value of the land in Chile prior to 1958.
    Keywords: elections; land prices; political institutions
    JEL: D72 O54 Q15
    Date: 2011–03
  18. By: Helin Wu; Yuanyuan Sui
    Abstract: A risk-neutral method is always used to price and hedge contingent claims in complete market, but another method based on utility maximization or risk minimization is wildly used in more general case. One can find all kinds of special risk measure in literature. In this paper, instead of using market modified risk measure, we use a kind of risk measure induced by g_\Gamma-solution or the minimal solution of a Constrained Backward Stochastic Differential Equation (CBSDE) directly when constraints on wealth and portfolio process comes to our consideration. Such g_\Gamma-solution and the risk measure generated by it is well defined on appropriate space under suitable conditions. We adopt the inf-convolution of convex risk measures to solve some optimization problem. A dynamic version risk measures defined through g_\Gamma-solution and some similar results about optimal problem can be got in our new framework and by our new approach.
    Date: 2011–03

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