nep-mic New Economics Papers
on Microeconomics
Issue of 2011‒05‒14
nineteen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Materialistic Genius and Market Power: Uncovering the best innovations By Tirole, Jean; Weyl, Glen
  2. Remanufacturing. By Sophie Bernard
  3. The new Keynesian Phillips curve: Does it fit Norwegian data? By Pål Boug, Ådne Cappelen and Anders R. Swensen
  4. Whom to Send to Doha? The Shortsighted Ones! By Mario Larch; Wolfgang Lechthaler
  5. Electoral Cycles in Active Labor Market Policies By Mechtel, Mario; Potrafke, Niklas
  6. Developing a step-by-step effectiveness assessment model for customer-oriented service organizations By Brissimis, Sophocles; Zervopoulos, Panagiotis
  7. Institutions and Contract Enforcement By Armin Falk; David Huffman; W. Bentley Macleod
  8. Do markets perceive sukuk and conventional bonds as different financing instruments? By Godlewski, Christophe J.; Turk-Ariss, Rima; Weill, Laurent
  9. Hazardous Activities and Civil Strict Liability: The Regulator’s Dilemma By Gérard Mondello
  10. Monitoring and Pay: An Experiment on Employee Performance under Endogenous Supervision By Dittrich, Dennis A. V.; Kocher, Martin G.
  11. Global Imbalances, Declining Hegemony and the Need for a New Global Governance By Pasquale Tridico
  12. On the importance of sectoral and regional shocks for price-setting By Guenter W. Beck; Kirstin Hubrich; Massimiliano Marcellino
  13. Reference Points and Effort Provision By Johannes Abeler; Armin Falk; Lorenz Goette; David Huffman
  14. Zeit- und Einkommensarmut von Freien Berufen und Unternehmern By Joachim Merz; Tim Rathjen
  15. Dynamic Portfolio Optimization with a Defaultable Security and Regime Switching By Agostino Capponi; Jose E. Figueroa-Lopez
  16. Cabinet Approves Bill to Protect Children Against Sexual Crimes By Chetan Chauhan
  17. Crime, Prosecutors, and the Certainty of Conviction By Entorf, Horst
  18. Sequential Monte Carlo Methods for Estimating Dynamic Microeconomic Models By Jason R. Blevins
  19. Aggregate fluctuations and the cross-sectional dynamics of firm growth By Sean HOLLY; Ivan PETRELLA; Emiliano SANTORO

  1. By: Tirole, Jean (University of Toulouse); Weyl, Glen (Harvard University)
    Abstract: What is the best way to reward innovation? While prizes avoid deadweight loss, intellectual property screens out projects generating low consumer surplus per unit sold. We build a model that formalizes this trade-off and develop tools for solving the resulting multidimensional screening problem. Optimal policy generally calls for some market power but never full monopoly pricing. The appropriate degree of market power is determined by a value-weighted average of the innovation supply elasticity multiplied by the log-variance of innovation quality. This quantifies the value of the materialistic genius long associated with entrepreneurship, opening it to empirical calibration. Our results also apply to the pricing of platforms and public infrastructure.
    Date: 2010–08–15
  2. By: Sophie Bernard (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: This paper presents a theoretical model of remanufacturing where a duopoly of original manufacturers produces a component of a final good. The specific component that needs to be replaced during the lifetime of the final good creates a secondary market where independent remanufacturers enter the competition. An environmental regulation imposing a minimum level of remanufacturability is also introduced. The main results establish that, while collusion of the firms on the level of remanufacturability increases both profit and consumer surplus, a social planner could use collusion as a substitute for an environmental regulation. However, if an environmental regulation is to be implemented, collusion should be repressed since competition supports the public intervention better. Under certain circumstances, the environmental regulation can increase both profit and consumer surplus. Part of this result supports the Porter Hypothesis, which stipulates that industries respecting environmental regulations can see their profits increase.
    Keywords: Remanufacturing, competition, environmental regulation, Porter hypothesis.
    JEL: H23 L10 L51 Q53 Q58
    Date: 2011–04
  3. By: Pål Boug, Ådne Cappelen and Anders R. Swensen (Statistics Norway)
    Abstract: We evaluate the empirical performance of the new Keynesian Phillips curve (NKPC) for a small open economy using cointegrated vector autoregressive models, likelihood based methods and general method of moments. Our results indicate that both baseline and hybrid versions of the NKPC as well as exact and inexact formulations of the rational expectation hypothesis are most likely at odds with Norwegian data. By way of contrast, we establish a well-specified dynamic backward-looking imperfect competition model (ICM), a model which encompasses the NKPC in-sample with a major monetary policy regime shift from exchange rate targeting to inflation targeting. We also demonstrate that the ICM model forecasts well both post-sample and during the recent financial crisis. Our findings suggest that taking account of forward-looking behaviour when modelling consumer price inflation is unnecessary to arrive at a well-specified model by econometric criteria.
    Keywords: The new Keynesian Phillips curve; imperfect competition model; cointegrated vector autoregressive models (CVAR); equilibrium correction models; likelihood based methods and general method of moments (GMM).
    JEL: C51 C52 E31 F31
    Date: 2011–05
  4. By: Mario Larch; Wolfgang Lechthaler
    Abstract: Why are empirically observed tariffs so much lower than theoretically calculated Nash-equilibrium tariffs? We argue that this gap can be narrowed by using a dynamic model instead of a static model. This approach has two advantages. (i) It allows us to take account of the transitional process after a change in tariffs. (ii) It allows us to take account of the shortsightedness of policy makers. We show that Nash-equilibrium tariffs based on a dynamic trade model are lower than Nash-equilibrium tariffs based on a static model. We also show that shortsighted politicians tend to set lower tariffs than politicians with a long planning horizon
    Keywords: Bubbles, fiscal theory of the price level, collateral constraints, neutrality, transversality conditions
    JEL: F11 F12 F13
    Date: 2011–04
  5. By: Mechtel, Mario; Potrafke, Niklas
    Abstract: We examine how electoral motives influence active labor market policies that promote job-creation. Such policies reduce unemployment statistics. Using German state data for the period 1985 to 2004, we show that election-motivated politicians pushed job-promotion schemes before elections. --
    Keywords: political business cycles,opportunistic politicians,active labor market policies
    JEL: P16 J08 H72 E62 H61
    Date: 2011
  6. By: Brissimis, Sophocles; Zervopoulos, Panagiotis
    Abstract: Effectiveness involves more than simple efficiency, which is limited to the production process assessment of peer operational units. Effectiveness incorporates both endogenous and exogenous variables. It is a fundamental driver for the success of an operational unit within a competitive environment in which either the liquidity of money in the market and the customers are considered to be scarce sources, or the New Public Management (NPM) is citizen/customer and goal-oriented. Additionally, with respect to short-run production constraints, the resources available and controllable by the operational units, as well as the legal status, we go beyond the traditional effectiveness assessment techniques by developing a modified or “rational” Quality-driven – Efficiency-adjusted DEA (MQE-DEA) model. This particular model provides a feasible effectiveness attainment path for every disqualified unit in order to meet high-perceived quality and high-efficiency standards. The input-output mix restructuring targets estimated by the original QE-DEA model are provided on a step-by-step basis in order to have realistic managerial implications.
    Keywords: Effectiveness; Efficiency; Perceived Quality; Data Envelopment Analysis (DEA); context-dependent DEA
    JEL: C14 C02 C61
    Date: 2011–04–13
  7. By: Armin Falk (University of Bonn and IZA); David Huffman (Swarthmore College and IZA); W. Bentley Macleod (Columbia University and IZA)
    Abstract: We provide evidence on how two important types of institutions – dismissal barriers, and bonus pay – affect contract enforcement behavior in a market with incomplete contracts and repeated interactions. Dismissal barriers are shown to have a strong negative impact on worker performance, and market efficiency, by interfering with firms' use of firing threat as an incentive device. Dismissal barriers also distort the dynamics of worker effort levels over time, cause firms to rely more on the spot market for labor, and create a distribution of relationship lengths in the market that is more extreme, with more very short and more very long relationships. The introduction of a bonus pay option dramatically changes the market outcome. Firms are observed to substitute bonus pay for threat of firing as an incentive device, almost entirely offsetting the negative incentive and efficiency effects of dismissal barriers. Nevertheless, contract enforcement behavior remains fundamentally changed, because the option to pay bonuses causes firms to rely less on long-term relationships. Our results show that market outcomes are the result of a complex interplay between contract enforcement policies and the institutions in which they are embedded.
    Keywords: incomplete contracts, bonus pay, efficiency wages, employment protection, firing costs, experiment
    JEL: J41 J3 C9 D01
    Date: 2011–05
  8. By: Godlewski, Christophe J. (BOFIT); Turk-Ariss, Rima (BOFIT); Weill, Laurent (BOFIT)
    Abstract: The last decade witnessed a proliferation in issues of sukuk, Islamic financial instruments structured to replicate the cash flows of conventional bonds. Using a market-based approach on Malaysian data, we consider whether investors react differently to the announcements of sukuk and conventional bond issues. Our findings suggest the stock market is neutral to announcements of conventional bond issues, but reacts negatively to announcements of sukuk issues. We attribute this finding to the excess demand for Islamic investment certificates and explain the difference in stock market reactions as an adverse selection mechanism that favors sukuk issuance by lower-quality debtor companies. Unlike previous studies, our findings indicate markets readily distinguish between sukuk and conventional bonds.
    Keywords: financial instruments; Islamic finance; sukuk; event studies
    JEL: G14 P51
    Date: 2011–05–06
  9. By: Gérard Mondello (University of Nice Sophia Antipolis, CREDECO, GREDEG, UMR 6727, CNRS)
    Abstract: This paper addresses the conditions for setting up strict civil liability schemes. For that it compares the social efficiency of two main civil liability regimes usually enforced to protect the environment: the strict liability regime and the “capped strict liability scheme”. First, it shows that the regulator faces an effective dilemma when he has to enforce one of these schemes. This because the social cost of a severe harm (and the associated optimum care effort) is determined independently of any liability regime. This independency has economic consequences. First, victims and polluters pit one against another about the liability regime that the government should enforce. Hence, financially constrained polluters prefer the ceiling of responsibilities while victims wish to extend the amount of redress under a “standard” strict liability. Economic criteria for enforcing a regime rather than another one are lacking. Second, the paper shows that implementing civil strict liability rules may be done by setting up care standards as for instance in the nuclear or the maritime sectors and demanding to the injurers to comply with them. We show that this goal can be achieved by resorting to some friendly monitoring corresponding to frequent random controls with low fines rather than few controls that should involve heavy fines.
    Keywords: Environment, Strict Liability, Ex-Ante Regulation, Ex-Post Liability, Judgment-Proof, Environment Law, CERCLA, Environmental Liability
    JEL: K0 K32 Q01 Q58
    Date: 2011–02
  10. By: Dittrich, Dennis A. V.; Kocher, Martin G.
    Abstract: We present an experimental test of a shirking model where monitoring intensity is endogenous and effort a continuous variable. Wage level, monitoring intensity and consequently the desired enforceable effort level are jointly determined by the maximization problem of the firm. As a result, monitoring and pay should be complements. In our experiment, between and within treatment variation is qualitatively in line with the normative predictions of the model under standard assumptions. Yet, we also find evidence for reciprocal behavior. Our data analysis shows, however, that it does not pay for the employer to solely rely on the reciprocity of employees.
    Keywords: incentive contracts; supervision; efficiency wages;experiment; incomplete contracts; reciprocity
    JEL: C91 J31 J41
    Date: 2011–01
  11. By: Pasquale Tridico
    Abstract: The objective of the paper is to show that the recovery from the current economic crisis in US and in EU requires a new policy paradigm and a new global governance. I argue that, contrary to the recent austerity policies in EU and US, a new level of government involvement is required in order to keep aggregate demand stable, make full employment possible, and create a transparent financial sector, serving the real economy and encouraging productive investments. Moreover, at global level, two main issues seem to affect negatively the markets: first the lack of an independent international currency, and second the instability of one of the biggest market, the Eurozone. The first needs a wider international solution, the latter needs a political responses at EU level in order to deepen integration
    Keywords: global imbalances, global governance, international currency
    JEL: F02
    Date: 2011–05
  12. By: Guenter W. Beck (University of Siegen, Hölderlinstr. 3, 57076 Siegen, Germany and CFS.); Kirstin Hubrich (Research Department, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Massimiliano Marcellino (European University Institute, Via Roccettini, 9, I-50014 Fiesole, Florenz, Italy; Bocconi University and CEPR.)
    Abstract: We use a novel disaggregate sectoral euro area data set with a regional breakdown to investigate price changes and suggest a new method to extract factors from over-lapping data blocks. This allows us to separately estimate aggregate, sectoral, country-specific and regional components of price changes. We thereby provide an improved estimate of the sectoral factor in comparison with previous literature, which decomposes price changes into an aggregate and idiosyncratic component only, and interprets the latter as sectoral. We find that the sectoral component explains much less of the variation in sectoral regional inflation rates and exhibits much less volatility than previous findings for the US indicate. We further contribute to the literature on price setting by providing evidence that country- and region-specific factors play an important role in addition to the sector-specific factors. We conclude that sectoral price changes have a “geographical” dimension, that leads to new insights regarding the properties of sectoral price changes. JEL Classification: E31, C38, D4, F4.
    Keywords: Disaggregated prices, euro area regional and sectoral inflation, common factor models.
    Date: 2011–05
  13. By: Johannes Abeler (University of Nottingham); Armin Falk (University of Bonn); Lorenz Goette (University of Lausanne); David Huffman (Swarthmore College)
    Abstract: A key open question for theories of reference-dependent preferences is what determines the reference point. One candidate is expectations: what people expect could affect how they feel about what actually occurs. In a real-effort experiment, we manipulate the rational expectations of subjects and check whether this manipulation influences their effort provision. We find that effort provision is significantly different between treatments in the way predicted by models of expectation-based reference-dependent preferences: if expectations are high, subjects work longer and earn more money than if expectations are low.
    Keywords: Reference Points, Expectations, Loss Aversion, Disappointment, Experiment
    JEL: C91 D01 D84 J22
    Date: 2011–05
  14. By: Joachim Merz; Tim Rathjen (LEUPHANA University Lüneburg,Department of Economic, Behaviour and Law Sciences, Research Institute on Professions (Forschungsinstitut Freie Berufe (FFB)))
    Abstract: It is common sense that (liberal) professions and entrepreneurs (tradesmen) as self-employed are rich by money and, because of their independence and time sovereignty, are rich by time, too. This study tries to shed empirically based light on the issue and the well-being situation of the professions and entrepreneurs in particular by asking not only about income poverty but also about time poverty within the framework of a new interdependent multidimensional poverty approach. Database is the German Socio-Economic Panel (GSOEP) for the evaluation of the substitution/trade-off of genuine leisure time and income as well as the German Time Use Surveys (GTUS) 1991/92 and 2001/02 for the actual poverty analyses. Altogether, compared to employees a particular concernment of multidimensional time and income poverty of professions and notably entrepreneurs is identified; a result which is in contrast to common valuation. A remarkable percentage of the not income poor but time poor employees in general, and professions as well as entrepreneurs in particular, is not able to compensate their time deficit by income. These individuals are neglected in the poverty and well-being discussion so far, in the discussion about the “woorking poor” as well as in the discussion concerning time stress and time presure in generall, and for professions as well as entrepreneurs in particular.
    Keywords: Liberal professions (Freie Berufe), entrepreneurs, aelf-employed, interdependent multidimensional time and income poverty, time and income substitution, extended economic well-being, satisfaction/happiness, CES welfare function estimation, working poor, German Socio-Economic Panel, German Time Use Survey 2001/02
    JEL: D31 D13 J22
    Date: 2011–03
  15. By: Agostino Capponi; Jose E. Figueroa-Lopez
    Abstract: We consider a portfolio optimization problem in a defaultable market with finitely-many economical regimes, where the investor can dynamically allocate her wealth among a defaultable bond, a stock, and a money market account. The market coefficients are assumed to depend on the market regime in place, which is modeled by a finite state continuous time Markov process. We rigorously deduce the dynamics of the defaultable bond price process in terms of a Markov modulated stochastic differential equation. Then, by separating the utility maximization problem into the pre-default and post-default scenarios, we deduce two coupled Hamilton-Jacobi-Bellman equations for the post and pre-default optimal value functions and show a novel verification theorem for their solutions. We obtain explicit optimal investment strategies and value functions for an investor with logarithmic utility. We finish with an economic analysis in the case of a market with two regimes and homogenous transition rates, and show the impact of the default intensities and loss rates on the optimal strategies and value functions.
    Date: 2011–04
  16. By: Chetan Chauhan
    Abstract: The Union Cabinet on Thursday approved a watershed bill to protect children below the age of 16 against sexual offences, aimed at speedy trail through special courts and having a legal regime at par with best international practices. The bill to be introduced in the budget session of Parliament defines sexual assault against children in five categories. Penetrative sexual assault has been defined as any sexual crime, with a jail term of minimum seven years, that can be extended up to life imprisonment. URL: [ children-sexual-offences-bill-comments-h aq].
    Keywords: bill, budget session, legal, penetrative, crime, mental balance, child rights, sexual crimes, children, protect, watershed, assualt, offences,
    Date: 2011
  17. By: Entorf, Horst (Goethe University Frankfurt)
    Abstract: This paper tests predictions of a structural, augmented supply-of-offenders model regarding the relative effects of police, public prosecution and courts, respectively, on crime. Using detailed data on the different stages of the criminal prosecution process in Germany, empirical evidence suggests that public prosecutors and their influence on the probability of conviction play a major role in explaining the variation of crime rates, while the impact of the severity of punishment is small and insignificant.
    Keywords: public prosecutors, certainty of punishment, general deterrence, informal punishment, panel data
    JEL: K14 K41 C23
    Date: 2011–04
  18. By: Jason R. Blevins (Department of Economics, Ohio State University)
    Abstract: This paper develops methods for estimating dynamic structural microeconomic models with serially correlated latent state variables. The proposed estimators are based on sequential Monte Carlo methods, or particle filters, and simultaneously estimate both the structural parameters and the trajectory of the unobserved state variables for each observational unit in the dataset. We focus two important special cases: single agent dynamic discrete choice models and dynamic games of incomplete information. The methods are applicable to both discrete and continuous state space models. We first develop a broad nonlinear state space framework which includes as special cases many dynamic structural models commonly used in applied microeconomics. Next, we discuss the nonlinear filtering problem that arises due to the presence of a latent state variable and show how it can be solved using sequential Monte Carlo methods. We then turn to estimation of the structural parameters and consider two approaches: an extension of the standard full-solution maximum likelihood procedure (Rust, 1987) and an extension of the two-step estimation method of Bajari, Benkard, and Levin (2007), in which the structural parameters are estimated using revealed preference conditions. Finally, we introduce an extension of the classic bus engine replacement model of Rust (1987) and use it both to carry out a series of Monte Carlo experiments and to provide empirical results using the original data.
    Keywords: dynamic discrete choice, latent state variables, serial correlation, sequential Monte Carlo methods, particle filtering
    JEL: C13 C15
    Date: 2011–05
  19. By: Sean HOLLY; Ivan PETRELLA; Emiliano SANTORO
    Abstract: This paper argues that important insights into the business cycle can be obtained by exploring the micro-structure of macroeconomic fluctuations. We fit firm-level growth data with the Asymmetric Exponential Power density, which accounts for asymmetric dispersion and kurtosis on either side of the modal rate. Three novel results are reported. First, firms in the left side of the distribution, that is firms that are growing more slowly or declining, are typically more responsive to aggregate shocks than those in the right side of the distribution. Second, trending behavior in the volatility of firm growth is predominantly driven by increasing dispersion in the growth of highly performing .rms. Last, we deliver evidence in support of the view that shifts in the probability mass on either side of the mode may act as important propagators of business fluctuations. The analysis points to .financial frictions as one of the mechanisms capable of inducing non-linear micro adjustment consistent with both aggregate and cross-sectional dynamics.
    Date: 2011–01

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