# 2003 publications

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#### Hard copy

To request a free hard copy of a paper, please contact Margaret Nash quoting the paper number.

#### 693 - Learning and Location

*Joanne Sault, Otto Toivanen and Michael Waterson*

In this paper we study whether learning from rivals affects within-market location decisions between competing firms. We show it does, using detailed locational data from two leading hamburger chains in the UK. Using four different tests, we demonstrate that alternative explanations - pre-emption and product differention- have less bite than between firm learning.

#### 692 - Higher Education Outcomes, Graduate Employment and University Performance Indicators

*Massimiliano Bratti, Abigail McKnight, Robin Naylor & Jeremy Smith*

Official employment-related Performance Indicators in UK Higher Education are based on the population of students responding to the First Destination Supplement (FDS). This generates potentially biased performance indicators as this population of students is not necessarily representative of the full population of leavers from each institution. University leavers not obtaining qualifications and those not responding to the FDS are not included within the official analysis. We compare an employment-related performance indicator based on those students responding to the FDS with alternative approaches which address the potential non-random nature of this sub-group of university leavers.

#### 691 - Laws of Scarcity for a Finite Game: Exact Bounds on Estimations

*Alexander Kovalenkov and Myrna Wooders*

A "Law of Scarcity" is that scarceness is rewarded. We demonstrate laws of scarcity for cores and approximate cores of games. Furthermore, we show that equal treatment core payoff vectors satisfy a condition of cyclic monotonicity. Our results are developed for parameterized collections of games and exact bounds on the maximum possible deviation of approximate core payoff vectors from satisfying a law of scarcity are stated in terms of the parameters describing the games. We note that the parameters can, in principle, be estimated. (Paper to appear in Economic Theory)

#### 690 - The KPSS Test with Outliers

*Jesus Otero and Jeremy Smith*

We investigate the effects of outliers on the KPSS tests. We find that for nonstationary series outliers induce spurious stationarity by lowering the power of these tests. The empirical size of these tests is also found to be sensitive to the location of the outlier.

#### 689 - Networks and Farsighted Stability

*Frank H. Page Jr, Myrna Wooders & Samir Kamat*

We make two main contributions to the theory of economic and social network formation. First, we introduce the notion of a network formation network or a supernetwork. Supernetworks provide a framework in which we can formally define and analyze farsightedness in network formation. Second, we introduce a new notion of equilibrium corresponding to farsightedness. In particular, we introduce the notion of a farsightedly basic network as well as the notion of a farsighted basis, and we show that all supernetworks possess a farsighted basis. A farsightedly basic network contained in the farsighted basis of a given supernetwork represents a possible final resting point (or absorbing state) of a network formation process in which agents behave farsightedly, Given the supernetwork representation of the rules governing network formation and the preferences of the individuals, a farsighted basis contains networks which are likely to emerge and persist of individuals behave farsightedly.

#### 688 - Decentralised Job matching

*Guillaume Haeringer and Myrna Wooders*

This paper studies a decentralized job market model where firms (academic departments) propose sequentially a (unique) position to some workers (Ph.D. candidates). Successful candidates then decide whether to accept the offers, and departments whose positions remain unfilled propose to other candidates. We distinguish between several cases, depending on whether agents’ actions are simultaneous and/or irreversible (if a worker accepts an offer he is immediately matched, and both the worker and the firm to which she is matched go out of the market). For all these cases, we provide a complete characterization of the Nash equilibrium outcomes and the Subgame Perfect equilibria. While the set of Nash equilibria outcomes contain all individually rational matchings, it turns out that in most cases considered all subgame perfect equilibria yield a unique outcome, the worker-optimal matching

#### 687 - Conformity and Bounded Rationality in Games with many Players

*Edward Cartwright and Myrna Wooders*

Intepret a set of players all playing the same pure strategy and all with similar attributes as a society. Is it consistent with self interested behaviour for a population to organise itself into a relatively small number of societies? In a companion paper we characterized how large " must be, in terms of parameters describing individual games, for an equilibrium to exhibit conformity in pure strategies. In this paper we provide a wide class of games where such conformity is boundedly rational, that is, where " can be chosen to be small

#### 686 - On Equilibrium in Pure Strategies in Games with many Players

*Edward Cartwright and Myrna Wooders*

We introduce a framework of noncooperative games, allowing both countable sets of pure strategies and player types, in which players are characterized by their attributes and demonstrate that for all games with sufficiently many players, every mixed strategy Nash equilibrium can be used to construct a Nash "-equilibrium in pure strategies that is ‘"-equivalent’. Our framework introduces and exploits a distinction between crowding attributes of players (their external effects on others) and their taste attributes (their payoff functions). The set of crowding attributes is assumed to be compact; this is not required, however, for taste attributes. For the special case of at most a finite number of crowding attributes, we obtain analogs, for finite games, of purification results due to Pascoa (1993a,b,1998) for games with a continuum of players. Our main theorems are based on a new mathematical result, in the spirit of the Shapley-Folkman Theorem but applicable to a countable (not necessarily finite dimensional) strategy space.

#### 685 - Unhappiness and Crime:Evidence from South Africa

*Nattavudh Powdthavee*

This paper is the first of its kind to study quality of life responses of crime victims. Using cross-sectional data from the OHS97 survey of South Africa, we show that victims report significantly lower well-being than the non-victims, ceteris paribus. The calculated ‘compensating variation’ suggests that it would take, on average, an extra $10,000 per month to offset the psychological costs of crime. Happiness is lower for nonvictimized respondents currently living in higher crime areas. However, we find a strong evidence for females that criminal victimization hurts, but hurts less if the crime rate on our reference group is high.

#### 684 - Imitation and the Emergence of Nash Equilibrium Play in Games with Many Players

*Edward Cartwright*

We model a learning dynamic in which players imitate and innovate. Of interest is to question whether Nash equilibrium play emerges, and if so, the role that imitation plays in this emergence. Our main result provides a general class of coordination games for which approximate Nash equilibrium play does emerge. Important conditions include that players imitate "similar" individuals. The role of imitation in learning is discussed in the context of two examples where it is shown that imitation can lead to pareto superio outcomes.

#### 683 - Viable Tax Constitutions

*Carlo Perroni and Kimberley A. Scharf*

Taxation is only sustainable if the general public complies with it. This observation is uncontroversial with tax practitioners but has been ignored by the public finance tradition, which has interpreted tax constitutions as binding contracts by which the power to tax is irretrievably conferred by individuals to government, which can then levy any tax it chooses. However, in the absence of an outside party enforcing contracts between members of a group, no arrangement within groups can be considered to be a binding contract, and therefore the power of tax must be sanctioned by individuals on an ongoing basis. In this paper we offer, for the first time, a theoretical analysis of this fundamental compliance problem associated with taxation, obtaining predictions that in some cases point to a re-interptretation of the theoretical constructions of the public finance tradition while in others call them into question.

#### 682 - Social Conformity in Games with Many Players

*Myrna Wooders, Edward Cartwright and Reinhard Selton*

#### 681 - Dynamic Price Competition with Price Adjustment Costs and Product Differentiation

*Gianluigi Vernasca*

We study a discrete time dynamic game of price competition with spatially differentiated products and price adjustment costs. We characterise the Markov perfect and the open-loop equilibrium of our game. We find that in the steady state Markov perfect equilibrium, given the presence of adjustment costs, equilibrium prices are always higher than prices at the repeated static Nash solution, even though, adjustment costs are not paid in steady state.This is due to intertemporal strategic complementarity in the strategies of the firms and from the fact that the cost of adjusting prices adds credibility to high price equilibrium strategies. On the other hand, the stationary open-loop equilibrium coincides always with the static solution. Furthermore, in contrast to continuous time games, we show that the stationary Markov perfect equilibrium converges to the static Nash equilibrium when adjustment costs tend to zero. Moreover, we obtain the same convergence result when adjustment costs tend to infinity.

#### 680 - Fiscal Interactions among European Countries

*Michaela Redoano*

In this paper we investigate whether there is empical evidence that EU Countries set their public expenditure and their taxes interdependently. We use a panel of data across European countries, years and fiscal variables to estimated countries’ reactions functions. We find evidence of intedependences consistent with the literature on tax and yardistick competition

#### 679 - Consumers and Competition

*Michael Waterson*

This paper shows that even if all consumers face search costs, if these are below a certain level dependent upon the firm numbers and demand elasticity, the Diamond-type equilibrium with all prices at the monopoly level fails to exist.

#### 678 - The Utility of the Voting Power Approach

*Dennis Leech*

This paper argues that the voting power approach is much more general than is portrayed by Albert (“The Voting Power Approach: Measurement without Theory”, European Union Politics, 4:3, 2003) and is therefore capable of generating important insights about voting systems, such as qualified majority voting in the EU Council. The voting power approach focuses on understanding the properties of voting systems by analysing outcomes and thereby is able to generate empirical facts that are not otherwise obvious. That the approach is so general has not previously been pointed out in the relevant literature; it has usually been taken as coinciding with power indices. Albert’s criticism is directed at one aspect of the theory of voting power indices: the assumption of probabilistic voting that underlies conventional power indices. It is argued that he fails to take account of the different uses of power indices and that the probabilistic voting assumptions he derides may or may not be useful depending on this. It is necessary to emphasise the key distinction between a priori power indices and measure of empirical voting power. Albert misrepresents the voting power approach and is not willing to allow that it encompasses a diversity of methods as well as a research agenda.

#### 677 - Chain Store Pricing for Stragegic Accommodation

*Paul W. Dobson and Michael Waterson*

Chain-stores now dominate most areas of retailing. While retailers may operate nationally or even internationally, the markets they compete in are largely local. How should they best operate pricing policy in respect of the different markets served - price uniformly across the local markets or on a local basis according to market conditions? We model this by allowing local market differences, with entry being inevitable in certain markets while being naturally or institutionally blockaded in others. We show that practising price discrimination is not always best for the chain-store. Competitive conditions exist under which uniform pricing can raise profits.

#### 676 - The Impacts of Liberalisation on a Brazilian Air Shuttle Market

*Alessandro V.M. Oliveira*

This paper aims at assessing the impacts of recent economic liberalisation on an important subset of the Brazilian airline industry: the air shuttle market on the route Rio de Janeiro – São Paulo, a pioneer service created in 1959. In order to estimate structural relationships of the competition model, a product differentiated setting with conduct parameter was designed. Results permitted inferring about a rupture in the degree of firms' heterogeneity and in the extent of the deviation from Nash behaviour due to regulatory reform, as well as estimation of pertinent route-level cost information.

#### 674 - Does Centralisation Affect the Number and Size of Lobbies?

*Michaela Redoano*

Previous research has shown that if countries "merge", (i.e. move to centralized policy choices) the effect is to reduce lobbying. However empirical evidence suggests that this is not the case. This paper explains the empirical evidence in a two-jurisdiction political economy model of public good provision under policy centralization and policy decentralization, where the policy choice can be affected by the pressure of endogenously formed lobbies. We measure lobbying in three ways:(i) the number of lobbies formed under the two settings, (ii) their impact on policy decisions and (iii) the amount of resources transferred to the policy makers. We show that preference heterogeneity and lobby formation are positively related and that moving from decentralization to centralization can affect both the number and the type of lobbies. We develop some examples; among them: under centralization, compared to decentralization, the size of lobbies can be higher but the impact on policy can be smaller. Moreover we show how the majority groups try to o.set lobbying by strategic voting for a candidate of a different group.

#### 673 - Analytical Results for Model of Periodic Consumption

*Clare Kelly*

This paper presents the partial analytical solution to a model of periodic consumption that incorporates imperfect capital markets and uncertainty. Our model assumes that consumption decisions occur more frequently than income receipt. We show that the week specific consumption functions can be ordered. At low levels of wealth these functions exhibit a “ushaped”pattern between income receipts. We show analytically that changes in the level of the borrowing constraint affect only the level of consumption function and not the MPC whilst mean preserving changes in uncertainty affect both.

#### 672 - Social Conformity and Bounded Rationality in Arbitrary Games with Incomplete Information: some first results

*Edward Cartwright and Myrna Wooders*

Intepret a set of players all playing the same pure strategy and all with similar attributes as a society. Is it consistent with self interested behaviour for a population to organise itself into a relatively small number of societies? By introducing the concept of approximate substitute players in non-cooperative games we are able to put a bound on the rationality of such social conformity for an arbitrary game and arbitrary number of societies.

#### 669 - Representing Games as Coalition Production Economies with Public Goods

*Antoni Meseguer-Artola, Myrna Holtz Wooders and Juan-Enrique Martinez-Legaz*

#### 668 - Hotelling Tax Competition

*Myrna Wooders and Ben Zissimos*

This paper shows how competition among governments for mobile firms can bring about excessive differentiation in levels of taxation and public good provision. Hotelling’s Principle of Minimum Differentiation is applied in the context of tax competition and shown to be invalid. Instead, when an equilibrium exists, differentiation of public good provision is maximized. Non-existence of equilibrium, which can occur, is a metaphor for intense tax competition. The paper also shows that, to some extent, perfect tax discrimination presents a solution to the existence problem created by Hotelling tax competition, but that the efficiency problem of Hotelling tax competition is exacerbated.

#### 667 - Candidate Stability and Probabilistic Voting Procedures

*Carmelo Rodriguez-Alvarez*

We extend the analysis of Dutta, Jackson and Le Breton (Econometrica 2001) on strategic candidacy to probabilistic environments. For each configuration of the agenda and each profile of voters' preferences over running candidates a probabilistic voting procedure selects a lottery on the set of candidates at stake. Assuming that candidates cannot vote, we show that random dictatorships are the only unanimous probabilistic voting procedures that never provide unilateral incentives for the candidates to leave the ballot independently of the composition of the agenda. However, more flexible rules can be divised if we focus on the stability of specific agendas.

#### 665 - Optimum Currency Area Theory: A Framework for Discussion about Monetary Integration

*Roman Horváth and Luboš Komárek**

In this paper the authors calculate OCA-indexes for industrial countries in an effort to estimate the benefit-cost ratio of adopting a common currency. The results correspond to the estimation of Bayoumi and Eichengreen (1997b) and show that the ranking of the economies suitable to form a monetary union stays the same in the 1980s as well as in the 1990s. In other words, the economies, which were structurally close to each other in the 1980s, remain close in the 1990s and the opposite is valid for the structurally different economies. This empirical estimation also does not provide evidence for views, which emphasise the seemingly striking difference between the core and the periphery of the European Union. The authors perform also an estimation of the same index by including the Czech Republic and find no support for the view that the economy of the Czech Republic could possibly structurally differ more than the EMU member countries between each other. Then they conclude that if the EMU is sustainable, the accession of the Czech economy should not change it.

#### 664 - Dynamics of Banking Technology Adoption: An Application to Internet Banking

*Yoonhee Tina Chang*

This paper is concerned with examining behaviour of firms (banks) and consumers (banks’customers) in the event of a new technology (internet banking) introduction. The determinants of consumer adoption of internet banking are characterised using survey data from Korea in both static and dynamic framework. I find evidence that adoption of internet banking is influenced by sex, age, marital status, degree of exposure to internet banking, and the characteristics of the banks. A duration analysis shows no evidence of first mover advantage (order effects) in internet banking whilst the largest bank (rank effects) in commercial banking remains dominant in internet banking. The results imply that the internet banking adoption is dominated by social norm effects.

#### 663 - The Performance of SETAR Models: A Regime Conditional Evaluaton of Point, Interval and Density Forecasts

*Gianna Boero and Emanuela Marrocu*

The aim of this paper is to analyse the out-of-sample performance of SETAR models relative to a linear AR and a GARCH model using daily data for the Euro effective exchange rate. The evaluation is conducted on point, interval and density forecasts, unconditionally, over the whole forecast period, and conditional on specific regimes. The results show that overall the GARCH model is better able to capture the distributional features of the series and to predict higher-order moments than the SETAR models. However, from the results there is also a clear indication that the performance of the SETAR models improves significantly conditional on being on specific regimes.

#### 662 - How Much did the Soviets Really Spend on Defence? New Evidence from the Close of the Brezhnev Era

*Mark Harrison*

The paper considers the influence of the budget for military spending in the Soviet command economy. A specific problem is that the Soviet strategy of concealment left us without good measures of the military burden on Soviet resources. The paper surveys previous western attempts to fill this gap alongside post-Brezhnev revelations. A new documentary source from 1982 that appears authoritative suggests much higher figures than anything proposed or revealed so far, and supports these higher figures in detail. However, the figures contain many puzzles and the authenticity of the document itself cannot be fully assured.