2008 Working Papers
Browse by year
To request a free hard copy of a paper, please contact Margaret Nash quoting the paper number.
884 - Simplified Implementation of the Heckman Estimator of the Dynamic Probit Model and a Comparison with Alternative Estimators
This paper presents a convenient shortcut method for implementing the Heckman estimator of the dynamic random effects probit model and other dynamic nonlinear panel data models using standard software. It then compares the estimators proposed by Heckman, Orme and Wooldridge, based on three alternative approximations, first in an empirical model for the probability of unemployment and then in a set of simulation experiments. The results indicate that none of the three estimators dominates the other two in all cases. In most cases all three estimators display satisfactory performance, except when the number of time periods is very small.
883 - Income Rank and Upward Comparisons
Many studies have argued that relative income predicts individual well-being. More recently, it has been suggested that the relative rank of an individual’s income, rather than how that income compares to a mean or reference income, is important. Here the relative rank hypothesis is examined along with the additional hypothesis that individuals compare their incomes predominantly with those of slightly higher earners. A study of over 12,000 British adults using the British Household Panel Survey (a) confirms the importance of rank and (b) finds evidence that individuals compare upwards and to those most similar. This paper appears to be the first to show in fixed effect well-being equations that the influence of rank is more important than the influence of relative pay.
882 - Happiness and Productivity
Little is known by economists about how emotions affect productivity. To make persuasive progress, some way has to be found to assign people exogenously to different feelings. We design a randomized trial. In it, some subjects have their happiness levels increased, while others in a control group do not. We show that a rise in happiness leads to greater productivity in a paid piece-rate task. The effect is large; it can be replicated; it is not a reciprocity effect; and it is found equally among males and females. We discuss the implications for economics.
881 - Intellectual Property Disclosure as 'Threat'
This paper models the disclosure of knowledge via licensing to outsiders or fringe …rms as a threat, useful in ensuring firms keep their commitments. We show that firms holding intellectual property are better able to enforce agreements than firms that don’t. In markets requiring innovation to make a product, IP disclosure presents a more powerful threat than entry by the punishing firm alone. Occasionally, a punishing firm won’t be able to translate its intellectual property into a full-blown product, making it impossible for it to enter the cheating firm’s market and punish. Even if it can’t make a product itself, the punishing firm can always credibly threaten to license the intellectual property it has on hand to someone else. With this intellectual property as a springboard, chances are at least one fringe firm will be able to do the translation, make the product and enter the cheating firm’s market. In short, the potential for licensing increases the likelihood of punishment for uncooperative behavior. In the model, firms contract explicitly to exchange knowledge and tacitly to coordinate the introduction of innovations to the marketplace. We find conditions under which firms can self-enforce both agreements. The enforcement conditions are weaker when (1) firms possess knowledge and (2) knowledge is easily transferable to other firms. The disclosure threat has implications for antitrust law generally, which are considered.
880 - Trust-Based Mechanisms for Robust and Efficient Task Allocation in the Presence of Execution Uncertainty
879 - The Frequency of Wars (updated)
Wars are increasingly frequent, and the trend has been steadily upward since 1870. The main tradition of Western political and philosophical thought suggests that extensive economic globalization and democratization over this period should have reduced appetites for war far below their current level. This view is clearly incomplete: at best, confounding factors are at work. Here, we explore the capacity to wage war. Most fundamentally, the growing number of sovereign states has been closely associated with the spread of democracy and increasing commercial openness, as well as the number of bilateral conflicts. Trade and democracy are traditionally thought of as goods, both in themselves, and because they reduce the willingness to go to war, conditional on the national capacity to do so. But the same factors may also have been increasing the capacity for war, and so its frequency.We need better understanding of how to promote these goods without incurring adverse side-effects on world peace
878 - On Risk Aversion in the Rubinstein Bargaining Game
We derive closed-form solutions for the Rubinstein alternating offers game for cases where the two players have (possibly asymmetric) utility functions that belong to the HARA class and discount the future at a constant rate. We show that risk aversion may increase a bargainers payoff. This result - which contradicts Roth’s 1985 theorem tying greater risk neutrality to a smaller payoff - does not rely on imperfect information or departures from expected utility maximization.
877 - The Optimal Choice of Pre-launch Reviewer: How Best to Transmit Information using Tests and Conditional Pricing
A principal who knows her type can face public testing to help attract endorsements from agents. Tests are pass/fail and have an innate toughness (bias) corresponding to a trade-off between the higher probability of passing a softer test and the greater impact on agents’ beliefs from passing a tougher test. Conditional on the test result, the principal also selects the price of endorsement. The principal always wants to be tested, and chooses the toughest or softest test available depending upon the precision of the agents’ and tests’ information. Applications abound in industrial organization, political economy and labor economics
876 - Testing for Smooth Transition Nonlinearity in Adjustments of Cointegrating Systems
This paper studies testing for the presence of smooth transition nonlinearity in adjustment parameters of the vector error correction model. We specify the generalized model with multiple cointegrating vectors and different transition functions across equations. Given that the nonlinear model is highly complex, this paper proposes an optimal LM test based only on estimation of the linear model. The null asymptotic distribution is derived using empirical process theory and since the transition parameters of the model cannot be identified under the null hypothesis bootstrap procedures are used to approximate the limit. Monte Carlo simulations indicate a good performance of the test.
875 - Family Labor Supply and Aggregate Saving
I study the impact of idiosyncratic risk on savings and employment in a small open economy populated by two-member families. Families incur a fixed cost of participation when both members are employed. Because of market incompleteness and information asymmetries, this cost coupled with labor market frictions can generate multiple equilibria. In particular, there might be one equilibrium with high employment and low saving and another one with low employment and high saving. The model predicts that aggregate saving and employment rates are negatively correlated across countries. I present empirical evidence that supports the general equilibrium prediction of the model.
874 - Testing Full Consumption Insurance in the Frequency Domain
Full consumption insurance implies that consumers are able to perfectly share risk by equalizing state by state their inter-temporal marginal rates of substitution in the presence of idiosyncratic endowment shocks. In this paper I test the implications of full consumption insurance using band spectrum regression methods. I argue that moving to the frequency domain provides a possible solution to many difficulties tied to tests of perfect risk sharing. In particular, it provides a unifying framework to test consumption smoothing, both over time and across states of nature. Full consumption insurance is soundly rejected at business cycle frequencies.
873 - Cash Breeds Success : The Role of Financing Constraints in Patent Races
This paper studies the impact of financing constraints on the equilibrium of a patent race. We develop a model where firms finance their R&D expenditures with an investor who cannot verify their effort. We solve for the optimal financial contract of any firm along its best-response function. In equilibrium, any firm in the race is more likely to win the more cash and assets it holds prior to the race, and the less cash and assets its rivals hold prior to the race. We use NBER evidence from pharmaceutical patents awarded between 1975 and 1999 in the US, patent citations, and COMPUSTAT to measure the effect of all the racing firms’ cash holdings on the equilibrium winning probabilities. The empirical findings support our theoretical predictions.
872 - Are Central Banks following a linear or nonlinear (augmented) Taylor rule?
The Taylor rule establishes a simple linear relation between the interest rate, inflation and output gap. However, this relation may not be so simple. To get a deeper understanding of central banks’ behaviour, this paper asks whether central banks are indeed following a linear Taylor rule or, instead, a nonlinear rule. At the same time, it also analyses whether that rule can be augmented with a financial conditions index containing information from some asset prices and financial variables. A forwardlooking monetary policy reaction function is employed in the estimation of the linear and nonlinear models. A smooth transition model is used to estimate the nonlinear rule. The results indicate that the European Central Bank and the Bank of England tend to follow a nonlinear Taylor rule, but not the Federal Reserve of the United States. In particular, those two central banks tend to react to inflation only when inflation is above or outside their targets. Moreover, our evidence suggests that the European Central Bank is targeting financial conditions, contrary to the other two central banks. This lack of attention to the financial conditions might have made the United States and the United Kingdom more vulnerable to the recent credit crunch than the Eurozone.
871 - Was Germany ever united? Evidence from Intra- and International Trade 1885 – 1933
When did Germany become economically integrated? Within the framework of a gravity model, based on a new data set of about 40,000 observations on trade flows within and across the borders of Germany over the period 1885 – 1933, I explore the geography of trade costs across Central Europe. There are three key results. First, the German Empire before 1914 was a poorly integrated economy, both relative to integration across the borders of the German state and in absolute terms. Second, this internal fragmentation resulted from cultural heterogeneity, from administrative borders within Germany, and from geographical barriers that divided Germany along natural trade routes into eastern and western parts. Third, internal integration improved, while external integration worsened after World War I and again with the Great Depression, in part because of border changes along the lines of ethno-linguistic heterogeneity. By the end of the Weimar Republic in 1933, Germany was reasonably well integrated.
870 - Explanations of the inconsistencies in survey respondents'forecasts
A comparison of the point forecasts and the central tendencies of probability distributions of in‡ation and output growth of the SPF indicates that the point forecasts are sometimes optimistic relative to the probability distributions. We consider and evaluate a number of possible explanations for this finding, including the degree of uncertainty concerning the future, computational costs, delayed updating, and asymmetric loss. We also consider the relative accuracy of the two sets of forecasts
869 - Rounding of probability forecasts : The SPF forecast probabilities of negative output growth
We consider the possibility that respondents to the Survey of Professional Forecasters round their probability forecasts of the event that real output will decline in the future. We make various assumptions about how forecasters round their forecasts, including that individuals have constant patterns of responses across forecasts. Our primary interests are the impact of rounding on assessments of the internal consistency of the probability forecasts of a decline in real output and the histograms for annual real output growth, and on the relationship between the probability forecasts and the point forecasts of quarterly output growth.
868 - Herding and Contrarianism in a Financial Trading Experiment with Endogenous Timing
We undertook the first market trading experiments that allowed heterogeneously informed subjects to trade in endogenous time, collecting over 2000 observed trades. Subjects’ decisions were generally in line with the predictions of exogenous-time financial herding theory when that theory is adjusted to allow rational informational herding and contrarianism. While herding and contrarianism did not arise as frequently as predicted by theory, such behavior occurs in a significantly more pronounced manner than in comparable studies with exogenous timing. Types with extreme information traded earliest. Of those with more moderate information, those with signals conducive to contrarianism traded earlier than those with information conducive to herding.
867 - The Celtic Tiger In Historical And International Perspective
When Economic Development was published in 1958, Ireland was a growth failure but thirty years later it became the Celtic Tiger. This paper places this remarkable development in the context of long-run economic growth in Western Europe and establishes the distinctive features of Irish experience and policy. This enables an assessment of the diagnosis and policy proposals that Whitaker provided fifty years ago. The central roles in the Celtic Tiger of foreign direct investment, ICT production, and an elastic labour supply are highlighted while the importance of globalization and the abandonment of misguided autarchic policies is made clear.
866 - Noncooperative Oligopoly in Markets with a Continuum of Traders
In this paper, we study three prototypical models of noncooperative oligopoly in markets with a continuum of traders: the model of Cournot-Walras equilibrium of Codognato and Gabszewicz (1991), the model of Cournot-Nash equilibrium of Lloyd S. Shapley, and the model of Cournot-Walras equilibrium of Busetto et al. (2008). We argue that these models are all distinct and only the Shapley's model with a continuum of traders and atoms gives an endogenous explanation of the perfectly and imperfectly competitive behavior of agents in a one-stage setting. For this model, we prove a theorem of existence of a Cournot-Nash equilibrium.
865 - Testing for seasonal unit roots in heterogeneous panels using monthly data in the presence of cross sectional dependence
This paper generalises the monthly seasonal unit root tests of Franses (1991) for a heterogeneous panel following the work of fiIm, Pesaran, and Shin (2003), which we refer to as the F-IPS tests. The paper presents the mean and variance necessary to yield a standard normal distribution for the tests, for different number of time observations, T, and lag lengths. However, these tests are only applicable in the absence of cross-sectional dependence. Two alternative methods for modifying these F-IPS tests in the presence of cross-sectional dependency are presented: the first is the cross-sectionally augmented test, denoted CF-IPS, following Pesaran (2007), the other is a bootstap method, denoted BF-IPS. In general, the BF-IPS tests have greater power than the CF-IPS tests, although for large T and high degree of cross-sectional dependency the CF-IPS test dominates the BF-IPS test.
864 - Sequential Innovations and Intellectual Property Rights
We analyze a two-stage patent race. In the first phase firms seek to develop a research tool, an innovation that has no commercial value but is necessary to enter the second phase of the race. The firm that completes the second phase of the race first obtains a patent on the final innnovation and enjoys its profits. We ask whether patent protection for the innovator of the research tool is beneficial from the ex ante point of view. We show that there is a range of values of the final innovation such that firms prefer to have no Intellectual Property Rights for research tools.
863 - Monopoly, Non-linear Pricing, and Imperfect Information : A Reconsideration of the Insurance Market
I reconsider Stiglitz’s (1977) problem of monopolistic insurance with a continuum of types. Using a suitable transformation of control variables I obtain an analytical characterization of the optimal insurance policies. Closed form solutions and comparative statics results for special cases are provided.
862 - Debt Bailouts and Constitutions
A demand based theory of sub-national debt bailouts is presented. It is shown that revenue sharing (RS) arrangements alter the demand for bailouts among politicians with regional constituencies as a bailout usually implies a shift of taxation to the federal tier. Automatic RS may lead to the formation of pro-bailout coalitions formed by indebted states and states that are net recipients of the RS arrangement. Also, RS can act as a commitment device for compensating payments among state representatives, making a bailout politically rational. The model shows that the state debt bailouts approved by the Brazilian Senate prior to the enactment of the Fiscal Responsibility Act were fully consistent with politicians that maximize the proceeds accruing to their constituencies.
861 - Gravity Redux: Measuring International Trade Costs with Panel Data (updated 2011)
Barriers to international trade are known to be large but due to data limitations it is hard to measure them directly for a large number of countries over many years. To address this problem I derive a micro-founded measure of bilateral trade costs that indirectly infers trade frictions from observable trade data. I show that this trade cost measure is consistent with a broad range of leading trade theories including Ricardian and heterogeneous firms models. In an application I show that U.S. trade costs with major trading partners declined on average by about 40 percent between 1970 and 2000, with Mexico and Canada experiencing the biggest reductions.
860 - The duration of economic expansions and recessions: More than duration dependence
One widespread idea in the business cycles literature is that the older is an expansion or contraction, the more likely it is to end. This paper tries to provide further empirical support for this idea of positive duration dependence and, at the same time, control for the effects of other factors like leading indicators, the duration of the previous phase, investment, price of oil and external influences on the duration of expansions and contractions. This study employs for the first time a discrete-time duration model to analyse the impact of those variables on the likelihood of an expansion and contraction ending for a group of industrial countries over the last fifty years. The evidence provided in this paper suggests that the duration of expansions and contractions is not only dependent on their actual age: the duration of expansions is also positively dependent on the behaviour of the variables in the OECD composite leading indicator and on private investment, and negatively affected by the price of oil and by the occurrence of a peak in the US business cycle; the duration of a contraction is negatively affected by its actual age and by the duration of the previous expansion.
859 - How Good was the Profitability of British Railways, 1870-1912? (revised August 2009)
This paper provides new estimates of the return on capital employed (ROCE) for major British railway companies. It shows that ROCE was generally below the cost of capital after the mid-1870s and fell till the turn of the century. Addressing cost inefficiency issues could have restored ROCE to an adequate level in the late 1890s but not in 1910. Declines in ROCE hit share prices and investors made little or no money in real terms after 1897. Optimal portfolio analysis shows that, whilst railway securities were attractive to investors before this date, they would have been justified in rushing to the exits thereafter.
858 - Regulating a Monopolist with unknown costs and unknown quality capacity
We study the regulation of a firm with unknown demand and cost information. In contrast to previous studies, we assume demand is influenced by a quality choice, and the firm has private information about its quality capacity in addition to its cost. Under natural conditions, asymmetric information about the quality capacity is irrelevant. The optimal pricing is weakly above marginal costs for all types and no type is excluded.
857 - Aversion to Price Risk and the Afternoon Effect
Many empirical studies of auctions show that prices of identical goods sold sequentially follow a declining path. Declining prices have been viewed as an anomaly, because the theoretical models of auctions predict that the price sequence should either be a martingale (with independent signals and no informational externalities), or a submartingale (with affiliated signals). This paper shows that declining prices, the afternoon effect, arise naturally when bidders are averse to price risk. A bidder is averse to price risk if he prefers to win an object at a certain price, rather than at a random price with the same expected value. When bidders have independent signals and there are no informational externalities, only the effect of aversion to price risk is present and the price sequence is a supermartingale. When there are informational externalities, even with independent signals, there is a countervailing, informational effect, which pushes prices to raise along the path of a sequential auction. This may help explaining the more complex price paths we observe in some auctions.
856 - Financial Systems, Micro-Systemic Risks and Central Bank Policy : An Analytical Taxonomy of the Literature
This paper reviews and categorises the literature on micro-systemic risks and on optimal policies designed to mitigate these risks. Micro-systemic risks are risks to the financial system that occur when the interaction of a bank with other banks or with financial markets, can propagate an initially localised shock to the whole financial system and can prevent the latter from fulfilling its intermediation and distributional roles. The severe episodes of financial crises that have plagued economies - developed and emerging markets alike - have made more compelling, the need for policymakers such as central banks, to develop prudential tools as part of crisis prevention and crisis management policies. We review the success of these policies under different theoretical paradigms. The paper ends with a brief synopsis of financial accelerator models which stress on how imperfections in financial markets may magnify the swings and intensity of business cycles and have a more entrenched impact on the macroeconomy.
855 - Issues on the choice of Exchange Rate Regimes and Currency Boards –An Analytical Survey
854 - When Herding and Contrarianism Foster Market Efficiency: A Financial Trading Experiment
While herding has long been suspected to play a role in financial market booms and busts, theoretical analyses have struggled to identify conclusive causes for the effect. Recent theoretical work shows that informational herding is possible in a market with efficient asset prices if information is bi-polar, and contrarianism is possible with single-polar information. We present an experimental test for the validity of this theory, contrasting with all existing experiments where rational herding was theoretically impossible and subsequently not observed. Overall we observe that subjects generally behave according to theoretical predictions, yet the fit is lower for types who have the theoretical potential to herd. While herding is often not observed when predicted by theory, herding (sometimes irrational) does occur. Irrational contrarianism in particular leads observed prices to substantially differ from the efficient benchmark. Alternative models of behavior, such as risk aversion, loss aversion or error correction, either perform quite poorly or add little to our understanding.
853 - Financial Fragility, Systemic Risks and Informational Spillovers: Modelling Banking Contagion as State-Contingent Change in Cross-Bank Correlation
We consider banking panic transmission in a two-bank setting, in which the main propagator of a shock across banks is the informational spillover channel. Banks are perceived to be positively connected to some unobserved acroeconomic fundamental. Depositors in each bank are assumed to noisily observe their bank’s idiosyncratic fundamental. The game takes a dynamic bayesian setting with depositors of one bank, making their decision to withdraw after observing the event in the other bank. We show that, if this public event is used for bayesian inference about the state of the common macroeconomic fundamental, then, in the equilibrium profile of the game, contagion and correlation both occur with positive probability, with contagion modeled as a state-contingent change in the cross-bank correlation. Such endogenous characterisation of probabilistic assessments of contagion and correlation, has the appealing feature that it enables us to distill between these two concepts as equilibrium phenomena and to assess their relative importance in a given banking panic transmission setting. We show that contagion is characterised by public informational dominance in depositors’decision set.
852 - Commercialisation, Factor Prices and Technological Progress in the Transition to Modern Economic Growth
851 - Fertility Response to Financial Incentives - Evidence from the Working Families Tax Credit in the UK
850 - The Debt-Adjusted Exchange Rate for China
849 - Financial Integration of Stock Markets among New EU Member States and the Euro Area
The paper considers the empirical dimension of financial integration among stock markets in four new European Union member states (the Czech Republic, Hungary, Poland and Slovakia) in comparison with the euro area. The main objective is to test for the existence and determine the degree of the four states’ financial integration relative to the euro currency union. The analysis is performed at the country level (using national stock exchange indices) and at the sectoral level (considering banking, chemical, electricity and telecommunication indices). Our empirical evaluation consists of (1) an analysis of alignment (by means of standard and rolling correlation analysis) to outline the overall pattern of integration; (2) the application of the concept of beta convergence (through the use of time series, panel and state-space techniques) to identify the speed of integration; and (3) the application of so-called sigma convergence to measure the degree of integration. We find evidence of stock market integration on both the national and sectoral levels between the Czech Republic, Hungary, Poland and the euro area.
848 - Resolving the Anglo-German Industrial Productivity Puzzle, 1895-1935: A Response to Professor Ritschl
This paper offers a critical appraisal of the claim of Ritschl (2008) to have found a “possible resolution” to what he calls the “Anglo-German industrial productivity puzzle”.
847 - Did the Single Market Cause Competition in Excise Taxes? Evidence from EU Countries
846 - The Effect of the Exchange Rates on Investment in Mexican Manufacturing Industry
This paper, considering revenue and cost exposure channels, investigates the effects of exchange rate behaviour on fixed capital investment in Mexican manufacturing sector over 1994-2002. We find that i) currency depreciation has a positive (negative) effect on fixed investment through the export (import) channel; ii) exchange rate volatility impacts mostly export oriented sectors; iii) the sensitivity of investment to exchange rate movements is stronger in non-durable goods sectors and industries with low mark-up ratios.
845 - Auctions in which Losers Set the Price
We study auctions of a single asset among symmetric bidders with affiliated values. We show that the second-price auction minimizes revenue among all efficient auction mechanisms in which only the winner pays, and the price only depends on the losers’bids. In particular, we show that the k-th price auction generates higher revenue than the second-price auction, for all k > 2. If rationing is allowed, with shares of the asset rationed among the t highest bidders, then the (t + 1)-st price auction yields the lowest revenue among all auctions with rationing in which only the winners pay and the unit price only depends on the losers’ bids. Finally, we compute bidding functions and revenue of the k-th price auction, with and without rationing, for an illustrative example much used in the experimental literature to study …first-price, second-price and English auctions.
844 - Democracy, Collective Action and Intra-elite Conflict
This paper studies the conditions under which intra-elite conflict leads to a democracy. There are two risk averse elites competing for the appropriation of a unit of social surplus, with an ex-ante uncertainty about their future relative bargaining power, and a large non-elite class unable to act collectively. We characterize a democracy as consistng of both franchise extension to, and lowering the cost of collective political activity for, individuals in the non-elite. In the absence of democracy, the stronger elite is always able to appropriate the entire surplus. We show that in a democracy, the newly enfranchised non-elite organize and always prefer to form a coalition with weaker elite against the stronger resulting in a more balanced surplus allocation between the two elites. Accordingly, the elites choose to democratize if they are sufficiently risk averse. Our formal analysis can account for stylized facts that emerge from a comparative analysis of Indian and Western European democracies.
843 - The Impact of (In)Equality of Opportunities on Wealth Distribution: Evidence from Ultimatum Games
We study the impact on payo¤ distribution of varying the probability (opportunity) that a player has of becoming the proposer in an ultimatum game (UG). Subjects’assignment to roles within the UG was randomised before the interactions. Subjects played 20 rounds anonymously and with random re-matching at each round. We compare the outcomes of four di¤erent settings that di¤ered according to the distribution of opportunities between the pair of players in each round, and across the whole 20 rounds. The results clearly point to the existence of a discontinuity in the origin of the opportunity spectrum. Allowing a player a 1% probability of becoming the proposer brings about signicantly lower o¤ers and higher acceptance rates with respect to the benchmark case where a player has no such a chance. As such probability is raised to 20% and 50%, this same trend continues, but the effects are generally no longer signicant with respect to the 1% setting. In one case the monotonic pattern is violated. We conclude that subjects in our experiment appear to be motivated mostly by the purely symbolic aspect of opportunity rather than by the actual fairness in the allocation of opportunities.
842 - Isolation, Assurance and Rules: Can Rational Folly Supplant Foolish Rationality? (updated)
Consider an \isolation paradox" game with many identical players. By definition, conforming to a rule which maximizes average utility is individually a strictly dominated strategy. Suppose, however, that some players think \quasi-magically" in accordance with evidential (but not causal) decision theory. That is, they act as if others' disposition to conform, or not, is aeffected by their own behavior, even though they do not actually believe there is a causal link. Standard game theory excludes this. Yet such \rational folly" can sustain \rule utilitarian" cooperative behavior. Comparisons are made with Newcomb's problem, and with related attempts to resolve prisoner's dilemma.
841 - Some Evidence on the Future of Economics
This short paper collects and studies the CVs of 112 assistant professors in the top-ten American departments of economics. The paper treats these as a glimpse of the future. We find evidence of a strong brain drain. We find also a predominance of empirical work.
840 - Chain-Store Competition: Customized vs. Uniform Pricing
Retail chains essentially practice one of two broad strategies in setting prices across their stores. The more straightforward is to set a chain- or country- wide price. Alternatively, managers of retail chains may customize prices to the store level according to local demand and competitive conditions. For example, a chain may price lower in a location with lower demand and/or more competition. However, despite having the ability to customize prices to local market conditions, some choose instead to commit to uniform pricing with a “one price policy” across their entire store network. As an illustration, we focus on UK supermarket chains. Is there an advantage to be gained from deliberately choosing not to price discriminate across locations? We show generally and illustrate through means of a specific model that there exists a strategic incentive to soften competition in competitive markets by committing not to customize prices at the store level and instead adopt uniform pricing across the store network, and to raise overall profits thereby. Furthermore, we characterize quite precisely the circumstances under which uniform pricing is, and is not, profitable and illustrate that under a range of circumstances uniform pricing may be the preferable strategy.
839 - On the Curvature of the Reporting Function from Objective Reality to Subjective Feelings?
I suggest the idea of a reporting function, r(.), from reality to feelings. The ‘happiness’ literature claims we have demonstrated diminishing marginal utility of income. I show not, and that knowing r(.)’s curvature is crucial. A quasiexperiment on heights is studied.
838 - Are immigrants so stuck to the floor that the ceiling is irrelevant?
In this paper, the immigrant-native wage differential is explained through quantile regression estimations. Using repeated cross-sections of the British Labour Force Survey from 1993-2005, we analyse the returns to covariates across the conditional earnings distribution. We estimate a pooled model with an immigrant dummy and separate models for immigrants and natives of the UK. Our results show that the positive wage gap in favour of immigrants is attributed to those at higher quantiles. Returns to education and experience vary wider for natives than for immigrants. We decompose the wage gap in the Blinder-Oaxaca framework and apply quantile regression techniques to see if immigrants simply have more viable labour market characteristics than natives or if there is a preference for immigrant workers (reverse discrimination). Our findings suggest immigrants should actually be earning more and there is sufficient evidence of discrimination. This finding is, however, not symmetric across the conditional wage distribution and immigrants at the bottom face more discrimination than those at the top.
837 - Cournot-Walras Equilibrium as a Subgame Perfect Equilibrium
In this paper, we investigate the problem of the strategic foundation of the Cournot-Walras equilibrium approach. To this end, we respecify µa la Cournot-Walras the mixed version of a model of simultaneous, noncooperative exchange, originally proposed by Lloyd S. Shapley. We show, through an example, that the set of the Cournot-Walras equilibrium allocations of this respecification does not coincide with the set of the Cournot-Nash equilibrium allocations of the mixed version of the original Shapley's model. As the nonequivalence, in a one-stage setting, can be explained by the intrinsic two-stage nature of the Cournot-Walras equilibrium concept, we are led to consider a further reformulation of the Shapley's model as a two-stage game, where the atoms move in the first stage and the atomless sector moves in the second stage. Our main result shows that the set of the Cournot-Walras equilibrium allocations coincides with a specific set of subgame perfect equilibrium allocations of this two-stage game, which we call the set of the Pseudo-Markov perfect equilibrium allocations.
836 - Moral hazard, bank runs and contagion
We study banking with ex ante moral hazard. Resolving the misalignment of the incentives between banks and depositors requires early liquidation with positive probability: efficient risk-sharing between depositors is no longer implementable. In a closed region with a single bank, we show that (i) with costless and perfect monitoring, contracts with bank runs off the equilibrium path of play improve on contracts with transfers, (ii) when the bank’s actions are non-contractible, equilibrium bank runs driven by incentives are linked to liquidity provision by banks. With multiple regions linked via an interbank market, with local moral hazard, we show that implementing second-best allocations requires both ex-ante trade in inter-bank markets and contagion after realization of liquidity shocks.
835 - Beyond Normal Form Invariance: First Mover Advantage in Two-Stage Games with or without Predictable Cheap Talk
Von Neumann (1928) not only introduced a fairly general version of the extensive form game concept. He also hypothesized that only the normal form was relevant to rational play. Yet even in Battle of the Sexes, this hypothesis seems contradicted by players' actual behaviour in experiments. Here a rened Nash equilibrium is proposed for games where one player moves first, and the only other player moves second without knowing the first move. The refinement relies on a tacit understanding of the only credible and straightforward perfect Bayesian equilibrium in a corresponding game allowing a predictable direct form of cheap talk.
834 - Behavioural Decisions and Welfare
We study decision problems where (a) preference parameters are defined to include psychological/moral considerations and (b) there is a feedback effect from chosen actions to preference parameters. In a standard decision problem the chosen action is required to be optimal when the feedback effect from actions to preference parameters is fully taken into account. In a behavioural decision problem the chosen action is optimal taking preference parameters as given although chosen actions and preference parameters are required to be mutually consistent. Our framework unifies seemingly disconnected papers in the literature. We characterize the conditions under which behavioural and standard decisions problems are indistinguishable: in smooth settings, the two decision problems are generically distinguishable. We show that in general, revealed preferences cannot be used for making welfare judgements and we characterize the conditions under which they can inform welfare analysis. We provide an existence result for the case of incomplete preferences. We suggest novel implications for policy and welfare analysis.
833 - Trade Credit, International Reserves and Sovereign Debt
We present a unified model of sovereign debt, trade credit and international reserves. Our model shows that access to short-term trade credit and gross international reserves critically affect the outcome of sovereign debt renegotiations. Whereas competitive banks do optimally lend for the accumulation of borrowed reserves that strengthen the bargaining position of borrowers, they also have incentives to restrict the supply of short-term trade credit during renegotiations. We first show that they effectively do so and then derive propositions that: I) establish the size of sovereign debt haircuts as a function of economic fundamentals and preferences; II) predict that defaults occur during recessions rather than booms, contrary to reputation based models; III) provide a rationale for holding costly borrowed reserves and, IV) show that the stock of borrowed international reserves tends to increase when global interest rates are low
832 - On the Lowest-Winning-Bid and the Highest-Losing-Bid Auctions
Theoretical models of multi-unit, uniform-price auctions assume that the price is given by the highest losing bid. In practice, however, the price is usually given by the lowest winning bid. We derive the equilibrium bidding function of the lowest-winning-bid auction when there are k objects for sale and n bidders with unit demand, and prove that it converges to the bidding function of the highest-losing-bid auction if and only if the number of losers n - k gets large. When the number of losers grows large, the bidding functions converge at a linear rate and the prices in the two auctions converge in probability to the expected value of an object to the marginal winner.
831 - A Behavioural Power Index (updated 2009)
We propose an empirically informed measure of the voting power that relaxes the assumptions of equally probable and independent votes. The behavioral power index measures the voter’s ability to swing a decision based on the probability distributions of the others’ behavior. We apply it to the Supreme Court of the United States using roll-call data to estimate voting probability distributions, which lead us to refute the assumption of equally probable and independent votes, and estimate the equivalent number of independent Justices for the Warren, Burger and Rehnquist benches, which turns out to be very low.
830 - An Interview with Avinash Dixit
In this interview, which was recorded in 2007 to celebrate the receipt of an honorary doctorate from Warwick University, Avinash Dixit of Princeton University discusses why he is an economist and how he approaches economic research. He argues, among other things, for doing what you enjoy rather than what you feel you ought to do.
829 - How Much Control is Enough? Monitoring and Enforcement under Stalin.
In hierarchies, agents’ hidden actions increase principals' transactions costs and give rise to a demand for monitoring and enforcement. The fact that the latter are costly raises questions about their scope, organisation, and type. How much control is enough? The paper uses historical records to examine Stalin’s answers to this question. We find that Stalin's behaviour was consistent with his aiming to maximise the efficiency of the Soviet system of control subject to the loyalty of his inspectors and the risk of a “chaos of orders” arising from parallel centres of power.
828 - Hypertension and Happiness across Nations
In surveys of well-being, countries such as Denmark and the Netherlands emerge as particularly happy while nations like Germany and Italy report lower levels of happiness. But are these kinds of findings credible? This paper provides some evidence that the answer is yes. Using data on 16 countries, it shows that happier nations report systematically lower levels of hypertension. As well as potentially validating the differences in measured happiness across nations, this suggests that blood-pressure readings might be valuable as part of a national well-being index. A new ranking of European nations’ GHQ N6 mental-health scores is also given.
827 - Death, Happiness and the Calculation of Compensatory Damages
This paper studies the mental distress caused by bereavement. The largest emotional losses are from the death of a spouse; the second-worst in severity are the losses from the death of a child; the third-worst is the death of a parent. The paper explores how happiness regression equations might be used in tort cases to calculate compensatory damages for emotional harm and pain-and-suffering. We examine alternative well-being variables, discuss adaptation, consider the possibility that bereavement affects someone’s marginal utility of income, and suggest a procedure for correcting for the endogeneity of income. Although the paper’s contribution is methodological, and further research is needed, some illustrative compensation amounts are discussed.
826 - Is Well-being U-Shaped over the Life Cycle?
We present evidence that psychological well-being is U-shaped through life. A difficulty with research on this issue is that there are likely to be omitted cohort effects (earlier generations may have been born in, say, particularly good or bad times). First, using data on 500,000 randomly sampled Americans and West Europeans, the paper designs a test that can control for cohort effects. Holding other factors constant, we show that a typical individual’s happiness reaches its minimum -- on both sides of the Atlantic and for both males and females -- in middle age. Second, evidence is provided for the existence of a similar U-shape through the life-course in East European, Latin American and Asian nations. Third, U-shape in age is found in separate well-being regression equations in 72 developed and developing nations. Fourth, using measures that are closer to psychiatric scores, we document a comparable well-being curve across the life cycle in two other data sets: (i) in GHQ-N6 mental health levels among a sample of 16,000 Europeans, and (ii) in reported depression and anxiety levels among 1 million U.K. citizens. Fifth, we discuss some apparent exceptions, particularly in developing nations, to the U-shape. Sixth, we note that American male birth-cohorts seem to have become progressively less content with their lives. Our paper’s results are based on regression equations in which other influences, such as demographic variables and income, are held constant.