nep-mic New Economics Papers
on Microeconomics
Issue of 2011‒04‒02
eighteen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Bank Credit and Business Networks By Khwaja, Asim Ijaz; Mian, Atif; Qamar, Abid
  2. The power of diversity over large solution spaces By Marco LiCalzi; Oktay Surucu
  3. Repeated moral hazard and contracts with memory: A laboratory experiment By Nieken, Petra; Schmitz, Patrick W
  4. Marginal Distance: Does Export Experience Reduce Firm Trade Costs? By Lawless, Martina
  5. Spatial Competition, Network Externalities, and Market Structure: An Application to Commercial Banking. By Spitzer, Matthew L; Talley, Eric
  6. The Impact of User Interface Design on Idea Integration in Electronic Brainstorming: An Attention-Based View By Javadi, Elahe; Gebauer, Judith; Mahoney, Joseph T.
  7. Career Concerns and the Busy Life of the Young CEO By Li, Xiaoyang; Low, Angie; Makhija, Anil K.
  8. The economics of multilingualism in the EU By Jan Fidrmuc
  9. To switch or not to switch - Can individual lending do better in microfinance than group lending? By Helke Waelde
  10. Segregation in primary schools - Do school districts really matter? Evidence from policy reforms By Anna Makles; Kerstin Schneider
  11. Baby Boom and Baby Bust in Gender-Gap Model: A Quantitative Analysis By Masako Kimura
  12. Informal Social Networks, organised crime and local labour market By Antonella Mennella
  13. Price discrimination and business-cycle risk By Marco Cornia; Kristopher S. Gerardi; Adam Hale Shapiro
  14. The long shadow of income on trustworthiness By Ermisch J; Gambetta D
  15. Creditless Recoveries By Abdul Abiad; Bin (Grace) Li; Giovanni Dell'Ariccia
  16. The expected real return to equity By Missaka Warusawitharana
  17. A Political Economy of the Immigrant Assimilation: Internal Dynamics By Gil S. Epstein; Ira N. Gang
  18. Competitive Targeted Advertising with Price Discrimination By Rosa Branca Esteves; Joana Resende

  1. By: Khwaja, Asim Ijaz (Harvard University); Mian, Atif (University of California, Berkeley); Qamar, Abid (State Bank of Pakistan)
    Abstract: We construct the topology of business networks across the population of firms in an emerging economy, Pakistan, and estimate the value that membership in large yet diffuse networks brings in terms of access to bank credit and improving financial viability. We link two firms if they have a common director. The resulting topology includes a "giant network" that is order of magnitudes larger than the second largest network. While it displays "small world" properties and comprises 5 percent of all firms, it accesses two-thirds of all bank credit. We estimate the value of joining this giant network by exploiting "incidental" entry and exit of firms over time. Membership increases total external financing by 16.6 percent, reduces the propensity to enter financial distress by 9.5 percent, and better insures firms against industry and location shocks. Firms that join improve financial access by borrowing more from new lenders, particularly those already lending to their (new) giant-network neighbors. Network benefits also depend critically on where a firm connects to in the network and on the firm's pre-existing strength.
    JEL: D02 D85 L14 O16
    Date: 2011–03
  2. By: Marco LiCalzi (Dept. of Management, University Ca’Foscari of Venice); Oktay Surucu (Dept. of Economics and Business, LUISS Rome)
    Abstract: We consider a team of agents with limited problem-solving ability facing a disjunctive task over a large solution space. We provide sufficient conditions for the following four statements. First, two heads are better than one: a team of two agents will solve the problem even if neither agent alone would be able to. Second, teaming up does not guarantee success: if the agents are not sufficiently creative, even a team of arbitrary size may fail to solve the problem. Third, "defendit numerus": when the agent's problem-solving ability is adversely affected by the complexity of the solution space, the solution of the problem requires only a mild increase in the size of the team. Fourth, groupthink impairs the power of diversity: if agents' abilities are positively correlated, a larger team is necessary to solve the problem.
    Keywords: Problem-solving; Bounded rationality; Theory of teams; Groupthink.
    JEL: D23 D71 C65
    Date: 2011–03
  3. By: Nieken, Petra; Schmitz, Patrick W
    Abstract: This paper reports data from a laboratory experiment on two-period moral hazard problems. The findings corroborate the contract-theoretic insight that even though the periods are technologically unrelated, due to incentive considerations principals may prefer to offer contracts with memory.
    Keywords: Laboratory experiment; Repeated moral hazard; Sequential hidden actions
    JEL: D82 J33
    Date: 2011–02
  4. By: Lawless, Martina (Central Bank of Ireland)
    Abstract: Are the costs of exporting to a market reduced if a firm has experience of exporting to a neighbouring market? If so, does this effect operate through reducing en- try barriers or by increasing sales once the firm is operating in the market? This paper examines linkages between current export destinations and entry, sales and exit for new markets. We find that measures of exporting experience in geographically nearby markets increase the probability of entry into a market and reduce the probability of exit. However, these same measures have negative effects on the firm’s export sales in the market. This negative effect on sales is particularly strong for recently entered firms. We interpret this result in the context of the Melitz heterogeneous-firm model of trade by showing that lower fixed costs reduce the entry threshold, but this lower threshold has the effect of allowing lower-sales marginal firms to be present in the market.
    Keywords: Distance; Export performance; Heterogeneous firms
    JEL: F10
    Date: 2011–03
  5. By: Spitzer, Matthew L; Talley, Eric
    Keywords: Law
    Date: 2011–03–24
  6. By: Javadi, Elahe (University of IL); Gebauer, Judith (University of NC, Wilmington); Mahoney, Joseph T. (University of IL)
    Abstract: This paper introduces an attention-based view of idea integration that underscores the importance of IS user interface design. The assumption is that presenting ideas via user interface plays a key role in enabling and motivating idea integration in electronic brainstorming (EBS), and thus advances productivity. Building upon Cognitive Network Model of Creativity and ability-motivation framework, our attention-based theory focuses on two major attributes of user interface: visibility and prioritization. While visibility enables idea integration via directing attention to a limited set of ideas, prioritization enhances the motivation for idea integration by providing individuals with a relevant and legitimate proxy for value of the shared ideas. The theory developed in this paper is distinct from previous research on EBS in at least two ways: (1) this theory exclusively focuses on idea integration as the desired outcome and studies it in the context of IS user interface; and (2) rather than debating whether or not EBS universally outperforms verbal brainstorming, the proposed theory revisits the links between user interface and idea integration as an attention-intensive process that contributes to EBS productivity. Idea integration by individuals within a group is an essential process for organizational creativity and thus for establishing knowledge-based capabilities. Lack of such integration significantly reduces the value of idea sharing, which has been a predominant focus of the EBS literature in the past. The current theory posits that the ability of electronic brain-storming to outperform nominal or verbal brainstorming depends on its ability to leverage information system (IS) artifact capabilities for enhancing idea integration to create a key pattern of productivity. The developed theory provides a foundation for new approaches to EBS research and design, which use visibility and prioritization, and also identify new user interface features for fostering idea integration. By emphasizing idea integration, designers and managers are provided with practical, cognition-based criteria for choosing interface features, which can improve EBS productivity. This theory also has implications for both the practice and research of knowledge management, especially for the attention-based view of the organization.
    Date: 2011
  7. By: Li, Xiaoyang (University of MI); Low, Angie (Nanyang Technological University); Makhija, Anil K. (OH State University)
    Abstract: Using U.S. plant-level data for firms across a broad spectrum of industries, we compare how career concerns affect the real investment decisions of younger and older CEOs. In contrast to prior research which has examined some specialized labor markets, we find that younger CEOs undertake more active, bolder investment activities, consistent with an attempt on their part to signal confidence and superior abilities. They are more likely to enter new lines of business, as well as exit other existing businesses. They prefer growth through acquisitions, while older CEOs prefer to build new plants. This busier investment style of the younger CEOs appears to be relatively successful since younger CEOs are associated with higher plant-level efficiency compared to older CEOs.
    JEL: G34
    Date: 2011–02
  8. By: Jan Fidrmuc
    Date: 2011–03
  9. By: Helke Waelde (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany)
    Abstract: These days it has been witnessed, that banks other individual loans instead of group loans and develop products based on individual liability in developing coun- tries. In order to study this surprising turn, we expand the conventional approach on decision making of individuals. A social prestige function is introduced that re- ‡ects the non-monetary impacts of group membership on the individual and on her decisions. If a borrower possesses more than a critical level of wealth, it is optimal for her to switch to individual borrowing. From a welfare perspective, a mixture of individual and group loans is desirable. However, the average borrower switches from group to individual lending too soon.
    JEL: E43 E52 E58 D44
    Date: 2011–03–07
  10. By: Anna Makles (Department of Economics University of Wuppertal); Kerstin Schneider (Department of Economics University of Wuppertal)
    Abstract: This paper analyzes the effect of the abolition of school districts in North-Rhine Westphalia on ethnic segregation in primary schools, using data from the school statistics from 2006/07 to 2008/09. The effect of the new policy is not easily identified, because several additional changes to the school law and nationality law have also affected segregation. We propose using a measure of systematic segregation and a Wald test in order to test for differences in systematic segregation and to estimate a random effects model to explain differences in systematic segregation across municipalities. The ethnic groups analyzed are Turkish and non-Turkish students, non-German and German students, and Muslim and non-Muslim students. It is shown that abolishing school districts has not increased systematic segregation in primary schools. However, segregation has been affected by policy changes other than the abolition of school districts.
    Keywords: School choice, policy reform, systematic segregation, dissimilarity index, school districts
    JEL: H75 I21 I28 J15
    Date: 2011–03
  11. By: Masako Kimura (Nagoya City University)
    Abstract: This paper explores what factor is important to replicate U.S. fertility transition in the last two centuries. We solve a multiperiod version of the model of Kimura and Yasui (J Econ Growth 15(4):323-351, 2010) numerically, conducting several experiments based on it. We find that the main trend of fertility transition in the last two centuries is attributed to changes in gender division of labor associated with capital accumulation and technological progress, the plunge during 1920-1940 to negative shocks on male labor supply by the World War II, and the upswing during 1940-1965 to an atypical burst of technological progress in household sector.
    Date: 2011–03
  12. By: Antonella Mennella
    Abstract: This paper’s purpose is to show a new informal social networks interpretation, according to which social networks change their nature if they are located in social contexts where organised crime is relevant. Here the perusal of a social network is just a necessary condition to enter the labour market rather than a deliberate choice. Moreover this labour market is the ground where favouritisms and social and electoral consensus policies take place.
    Keywords: social networks, organised crime, labour market
    JEL: D85 J64 K00
    Date: 2011–03
  13. By: Marco Cornia; Kristopher S. Gerardi; Adam Hale Shapiro
    Abstract: A parsimonious theoretical model of second degree price discrimination suggests that the business cycle will affect the degree to which firms are able to price-discriminate between different consumer types. We analyze price dispersion in the airline industry to assess how price discrimination can expose airlines to aggregate-demand fluctuations. Performing a panel analysis on seventeen years of data covering two business cycles, we find that price dispersion is highly procyclical. Estimates show that a rise in the output gap of 1 percentage point is associated with a 1.9 percent increase in the interquartile range of the price distribution in a market. These results suggest that markups move procyclically in the airline industry, such that during booms in the cycle, firms can significantly raise the markup charged to those with a high willingness to pay. The analysis suggests that this impact on firms' ability to price-discriminate results in additional profit risk, over and above the risk that comes from variations in cost.
    Date: 2011
  14. By: Ermisch J (Institute for Social and Economic Research); Gambetta D (Nuffield College, Oxfod)
    Abstract: We employ a behavioural measure of trustworthiness obtained from an experiment carried out with a sample of the general British population whose individuals were extensively interviewed on earlier occasions. Our basic finding is that given past income, higher current income increases trustworthiness and, given current income, higher past income reduces trustworthiness. Past income determines the level of financial aspirations and whether or not these are fulfilled by the level of current income affects trustworthiness. We also suspect that past income may also capture heterogeneity in relevant subjects‘ dispositions, with more opportunistic subjects being less trustworthy and having higher average incomes.
    Date: 2011–03–22
  15. By: Abdul Abiad; Bin (Grace) Li; Giovanni Dell'Ariccia
    Abstract: Recoveries that occur in the absence of credit growth are often dubbed miracles and named after mythical creatures. Yet these are not rare animals, and are not always miracles. About one out of five recoveries is "creditless", and average growth during these episodes is about a third lower than during "normal" recoveries. Aggregate and sectoral data suggest that impaired financial intermediation is the culprit. Creditless recoveries are more common after banking crises and credit booms. Furthermore, sectors more dependent on external finance grow relatively less and more financially dependent activities (such as investment) are curtailed more during creditless recoveries.
    Keywords: Bank credit , Banking crisis , Business cycles , Credit expansion , Cross country analysis , Developed countries , Economic growth , Economic recovery , Emerging markets , Financial crisis , Industrial investment , Private sector ,
    Date: 2011–03–15
  16. By: Missaka Warusawitharana
    Abstract: The expected return to equity--typically measured as a historical average--is a key variable in the decision making of investors. A recent literature based on analysts forecasts and practitioner surveys finds estimates of expected returns that are sometimes much lower than historical averages. This study presents a novel method that estimates the expected return to equity using only observable data. The method builds on a present value relationship that links dividends, earnings, and investment to market values via expected returns. Given a model that captures this relationship, one can infer the expected return. Using this method, the estimated expected real return to equity ranges from 4 to 5.5 percent. Furthermore, the analysis indicates that expected returns have declined by about 2 percentage points over the past forty years. These results indicate that future returns to equity may be lower than past realized returns.
    Keywords: Stock - Prices ; Forecasting ; Investments ; Securities
    Date: 2011
  17. By: Gil S. Epstein (Department of Economics, Bar Ilan University); Ira N. Gang (Rutgers University)
    Abstract: Within immigrant society different groups wish to help the migrants in different ways – immigrant societies are multi-layered and multi-dimensional. We examine the situation where there exists a foundation that has resources and that wishes to help the migrants. To do so they need migrant groups to invest effort in helping their country-folk. Migrant groups compete against one another by helping their country-folk and to win grants from the foundation. We develop a model that considers how such a competition affects the resources invested by the groups’ supporters and how beneficial it is to immigrants. We consider two alternative rewards systems for supporters – absolute and relative ranking – in achieving their goals.
    Date: 2010–08
  18. By: Rosa Branca Esteves (Universidade do Minho - NIPE); Joana Resende (Universidade do Porto - FEP)
    Abstract: This paper investigates the effects of price discrimination by means of targeted advertising in a duopolistic market where the distribution of consumers' preferences is discrete and where advertising plays two major roles. It is used by firms as a way to transmit relevant information to otherwise uninformed consumers, and it is used as a price discrimination device. We compare the firms' optimal marketing mix (advertising and pricing) when they adopt mass advertising/non-discrimination strategies and targeted advertising/price discrimination strategies. If firms are able to adopt targeted advertising strategies, we find that the symmetric price equilibrium is in mixed strategies, while the advertising is chosen deterministically. Our results also unveil that as long as we allow for imperfect substitutability between the goods, ?rms do not necessarily target more ads to their own market. In particular, firms' optimal marketing mix leads to higher advertising reach in the rival's market than in the firms' own market, provided that advertising costs are sufficiently low in relation to the consumer's reservation value. The comparison of the optimal marketing-mix under mass advertising strategies and targeted advertising strategies reveals that targeted advertising might constitute a tool to dampen price competition. In particular, if advertising costs are sufficiently low in relation to the value of the goods, we obtain that average prices with non-discrimination (mass advertising) are below those with price discrimination and targeted advertising (regardless of the market segment). Accordingly, when (i) goods are imperfect substitutes, (ii) advertising is not too expensive, and (iii) targeted advertising constitutes an effective price discrimination tool, price discrimination through targeted advertising may be detrimental to social welfare since it boosts industry profits at the expense of consumer surplus.
    Date: 2011

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