Prices and Deadweight Loss in Multiproduct Monopoly

The paper investigates prices and deadweight loss in multiproduct monopoly with linear interrelated demand and constant marginal costs. We show that, with commonly used models for linear demand such as the Bowley demand and vertically or horizontally differentiated demand, the price for each good is independent of demand cross‐effects and of the characteristics and number of other goods. This contrasts with the oft‐expressed view that prices critically depend on demand cross‐effects. We also show that for these linear models, the deadweight loss due to monopoly amounts to half the total monopoly profit. Finally, we show how a production subsidy might restore social efficiency.     

Efficiency and surplus bounds in Cournot competition

We derive bounds on the ratios of deadweight loss and consumer surplus to producer surplus under Cournot competition. To do so, we introduce a parameterization of the degree of curvature of market demand using the parallel concepts of ρ-concavity and ρ-convexity. The “more concave” is demand, the larger the share of producer surplus in overall surplus, the smaller is consumer surplus relative to producer surplus, and the lower the ratio of deadweight loss to producer surplus. Deadweight loss over total potential surplus is at first increasing with demand concavity, then eventually decreasing.     

RAMSEY TAXES MEET PRICE RIGIDITY

‘Ramsey taxes’ are commodity taxes that minimize deadweight loss. Evidence has shown dramatic differences in the extent of price rigidity across goods: while the prices of some goods change frequently, the prices of other goods seldom change. This paper examines Ramsey taxes in the presence of heterogeneous price rigidity. We find that, to minimize deadweight loss, lower (higher) tax rates should be imposed on goods with rigid prices if their relative prices are too high (low) relative to the would‐be situation of no price stickiness. Intuitively, Ramsey taxes remedy the relative price distortion caused by the price rigidity of some goods. We calibrate our model to data from Taiwan and the USA, showing a significant cut in welfare cost if Ramsey rather than uniform taxes are applied.     

Taxing a monopolist

We consider a simple, self-financing and informationally undemanding scheme to reduce the deadweight loss due to a monopolist's market power. Essentially, we propose taxing the monopolist and applying the tax revenue to generate a public demand for his output. It turns out that a favorable scenario for such a reform to generate an ‘efficiency increase’ (i.e. to increase total output) is an elasticity of market demand with an absolute value of less than 3 (a seemingly ‘realistic’ condition). We also consider the case for the implementation of the first best, and compare specific and ad-valorem taxes as a way to finance the public demand.     

‘Expressive’ obligations in public good games: Crowding-in and crowding-out effects

We study individual contributions in a repeated linear public good experiment in which, in each period, subjects are required to contribute a minimum amount and face a certain probability of being audited. Audited subjects who contribute less than the required amount are convicted to pay the difference between the obligation and the voluntary contribution. We investigate the ‘expressive’ force of the obligations. While at early stages subjects contribute the minimum level, with repetition contributions decline below the required amount. We observe that expressive obligations exert a rather robust crowding-out effect on voluntary contributions as compared to a linear public good game. Crowding-out is stronger when payments collected through the auditing procedure are distributed to subjects rather than when they are a deadweight loss.     

Strategic Manipulation and Information Market Microstructure

This paper presents a model of strategic manipulation in the context of an informational duopoly. The fact that market manipulation by these duopolists may affect their cost and demand structures implies that they can strategically manipulate the market in order to influence the information market equilibrium. This paper derives an equilibrium manipulation and establishes important comparative-static properties that may characterise such markets. The informational duopoly is beset with two types of inefficiency: first, market imperfections drive a wedge between the marginal cost and the market price leading to the usual deadweight loss. Secondly, an act of manipulation raises the marginal cost of production and, thereby, causes further welfare loss in such markets. We provide a complete characterisation of an optimal mechanism that can stem the welfare loss in informational markets.     

Welfare analysis of tax reforms using household data

This paper discusses a methodology for calculating the distribution of gains and losses from a policy change using data for a large sample of households. Estimates are based on the equivalent income function, which is money metric utility defined over observable variables. This enables calculations to be standardised and a computer program to compute the statistics presented in the paper is available for a general demand system. Equivalent income is related to measures of deadweight loss, and standard errors are computed for each of the welfare measures. An application to U.K. data for 5,895 households is given which simulates a reform that involves eliminating housing subsidies.     

Variable Specific Factors and the “X-Efficiency Cost” of Protection *

This paper analyzes the effects of protection on X-efficiency using a general equilibrium Ricardo-Viner model with variable sector-specific effort. As in earlier models, it is found that protection only reduces effort if the income effect is sufficiently strong. It is also shown that, provided the correct compensated import demand curve is used, all welfare effects attributable to changes in effort are captured in the standard “triangle” measure of deadweight loss. Moreover, any protection-induced fall in effort will reduce the overall cost of protection, suggesting that policy-induced “X-inefficiency” may be beneficial.     

Concessional Amnesty and the Politics of Immigration Reforms

This paper establishes a political support model of immigration reforms. The analysis highlights the distinction between border enforcement and employer sanction measures in that the former can be more aptly characterized as an income transfer from employer to native labor interests, whereas the latter generates deadweight losses that are borne entirely by producers. We show that while amnesty may appear to run contrary to the original intent of the immigration reform, it may nevertheless facilitate rent capture by the politician by "wiping the slate clean" and reducing the deadweight loss of employer sanction measures.     

Trade Restrictiveness and Deadweight Loss in China’s Imports

China is believed to have gained immensely from its admission into to the World Trade Organization (WTO) in 2001. One of the direct gains comes from the lessening of deadweight loss (DWL) due to tariff reduction. Conventional measures for DWL, however, are too aggregate to capture the trade policies, which are determined at a much higher disaggregated level, and ignore the interactions between tariff and corresponding import demand as suggested by theories. In this paper, we first systematically estimate the import demand elasticities at a highly disaggregated level and then match them with the most detailed lines of the applied tariff for the most favored nations as reported by the WTO. Using the detailed matching data, we construct Feenstra’s (1995) simplified trade restrictiveness index (TRI), which captures the covariance of tariff and the corresponding demand elasticity. Finally, we use the TRI to compute the DWL from1997 to 2008 and find that the DWL due to the tariff barrier was reduced to 0.73% of GNI in 2008, noticeably lower than the highest previous mark of 4.58% of GNI in 2001.     

SOME EMPIRICAL EVIDENCE ON DEMAND SYSTEM* AND OPTIMAL COMMODITY TAXATION

We have two major tasks in this paper. The first is to obtain a reasonable estimate of the Japanese demand system, which includes leisure, income and commodity choices. The second is to compute and evaluate the optimal tax equilibrium. The estimation result, based on the Almost Ideal Demand System, is found to be consistent with the microeconomic theory. We evaluate the optimal commodity tax structure by calculating the equilibria under lump‐sum, optimal commodity and uniform commodity taxation schemes. The deadweight losses under uniform taxation are very small, and the optimal commodity tax rates are strikingly close to uniform.     

The Efficiency Effects of Removing the Diesel Fuel Rebate Scheme

The diesel fuel rebate scheme which returns most of the excise on diesel fuel used off-road by agricultural and mineral producers has been debated. Removal could cause three inefficiencies (input choice distortion. deadweight losses on reduced exports, and flowon inefficiencies in domestic processing) and two efficiencies (from reducing other taxes and savings on administrative and compliance costs). Empirical studies suggest high net efficiency costs from removal, but while business input taxes have no place in an efficient taxation structure, a small reduction in the rebate could yield some revenue at a low marginal deadweight loss.     

The Potential Compensation Principle and Constant Marginal Utility of Income

In policy applications, industrial economists are wont to invoke the Kaldor–Hicks potential compensation principle to justify the use of deadweight loss as a measure of the welfare cost of market power. This usage rests on two assumptions. One of these assumptions, that changes in consumer and producer surplus are weighted equally, is well understood. The other assumption, that the marginal utility of income is constant, receives less attention. In a simple model, I show that if there is decreasing marginal utility of income, the use of deadweight loss as an index of market performance rests on shaky ground.     

How effective are level-based R&D tax credits? Evidence from the Netherlands

This article examines the impact of the R&D fiscal incentive programme on R&D by Dutch firms. Taking a factor demand approach, we measure the elasticity of firm R&D capital accumulation to its user cost. Econometric models are estimated using a rich unbalanced panel of firm data covering the period 1996 to 2004 with firm specific R&D user costs varying with tax incentives. Using the estimated user cost elasticity, we perform a cost–benefit analysis of the R&D incentive programme. We find some evidence of additionality suggesting that the level based programme of R&D incentives in the Netherlands is effective in stimulating firms’ investment in R&D. However, the hypothesis of crowding out can be rejected only for small firms. The analysis also indicates that the level based nature of the fiscal incentive scheme leads to a substantial social deadweight loss.     

The tax subsidy to owner-occupied housing: Who benefits?

This paper reexamines the question of the incidence and effects of the U.S. Federal income tax subsidy of owner-occupied housing. We demonstrate that supply elasticity considerations are crucial in determining the incidence and efficiency effects of the subsidy and that the hitherto neglected problem of the transfer of resources to subsidized owner-occupiers from unsubsidized renters is substantial. We provide estimates of the transfer and deadweight loss effects for the current program.     

Universal banking,asymmetric information and the stock market

This paper aims to explore the role of the universal banking system in contributing to the stock market bust in the wake of the financial crisis 2008–2009 when bankers might have incentive to hide information from shareholders. We set up a stylized model of consumption smoothing involving universal banks that undertake both investment and commercial banking activities. Banks have private information about the outcome of a project that it funds. In the wake of bad news about the project, the banker has an incentive to sell lemon shares in a secondary market with the pretence of a liquidity crunch. Our model shows that such an incentive results in (i) a sharp discounting of stock prices, (ii) greater loan demand (iii) higher fraction of bank ownership of the borrowing firms, and (iv) heightened consumption risk resulting in precautionary savings by households. The magnitude of these effects depends on the market's perception about the preponderance of lemons in the stock market. A credible punishment scheme implemented by the government in the form of fines may moderate the stock market decline and consumption volatility due to information friction. However, it imposes a deadweight loss on private citizens because of a fall in all banks' expected profit. On the other hand, a “ring-fenced” banking arrangement along the way suggested by the Vickers Commission may entail a first order welfare loss due to the lack of diversification opportunities.     

Distortionary company car taxation: deadweight losses through increased car ownership

We analyse the effects of distortionary company car taxation through increased household car consumption for the Netherlands. We use several identification strategies and demonstrate that for about 20 % of households company car possession increases car ownership. The annual welfare loss of distortionary company taxation through increased car ownership is generally rather small, maximally €120 per company car, and much less than the welfare loss through increased expenditure on the company car. However, for policies that exempt households from paying tax on their company car, the annual deadweight loss is likely higher. Our first-best tax policy recommendation is to increase company car tax rates. However, our current results suggest that a second-best policy, which keeps average company car taxation constant but which reduces the marginal tax on cheaper cars and increases the marginal tax on expensive cars, would be welfare improving as overconsumption of company cars will be reduced.     

Work costs and nonconvex preferences in the estimation of labor supply models

Works costs have not been adequately handled in labor supply estimation, likely due to their complexity. We show that, if work costs are not accounted for in the budget and time constraints in a structural labor supply model, they will be subsumed into the data generating preferences. Even if underlying preferences over consumption and leisure are convex, the presence of unobservable work costs can make these preferences appear nonconvex. However, we show that, under plausible conditions, policy relevant calculations, such as estimates of the effect of tax changes on labor supply and deadweight loss measures, are not affected by the fact that estimated preferences incorporate work costs.     

ORDERLY MARKETING ARRANGEMENT IN THE CONTEXT OF THE GATT REGIME*

When a country faces a sudden surge of import, GATT allows it to impose an import quota to protect its domestic import-competing firms. Nevertheless, various types of OMAs (orderly marketing arrangements) are often utilized instead of import quotas. This paper shows that the threat of the exporting country's retaliation approved by GATT makes it advantageous for both the exporting and importing countries to establish an OMA. By designing an OMA under which its deadweight loss is appropriately distributed to them, they avoid the retaliation approved by GATT which causes an additional deadweight loss.     

Retailers and consumers in sequential auctions of collectibles

Abstract.  We analyse an independent private-value model, where heterogeneous bidders compete for objects sold in sequential second-price auctions. In this heterogeneous game, bidders may have differently distributed valuations, and some have multi-unit demand with decreasing marginal values (retailers); others have a specific single-unit demand (consumers). By examining equilibrium bidding strategies and price sequences, we show that the presence of consumers leads to more aggressive bidding from the retailers on average and heterogeneous bidders is a plausible explanation of the price decline effect. The study of the expected revenue of the seller confirms the interest of auctioneers in inviting different types of bidders.