Optimal Drug Policy in Low‐Income Neighborhoods

The control of drug activity currently favors supply‐side policies: drug suppliers in the United States face a higher arrest rate and longer sentences than demanders. We construct a simple model of drug activity with search and entry frictions in labor and drug markets. Our calibration analysis suggests a strong “dealer replacement effect.”  As a result, given a variety of community objectives, it is beneficial to lower supplier arrests and raise the demand arrest rate from current values. A 10% shift from supply‐side to demand‐side arrests can reduce the population of potential drug dealers by 22–25,000 and raise aggregate local income by $380–$400 million, at 2002 prices.     

EXPECTATIONS AND CONTAGION IN SELF‐FULFILLING CURRENCY ATTACKS*

Self‐fulfilling expectations are commonly believed to play an important role in the transmission of currency crises across countries. Formal models of contagion based on multiple equilibria, however, have been criticized for failing to explain basic patterns observed in the data; these criticisms have been taken as evidence against the self‐fulfilling view. This article argues that the importance of self‐fulfilling beliefs is not so easily dismissed. A slightly richer model, based on the incomplete‐information framework of Morris and Shin (American Economic Review 88 (1998), 587–97) , can generate contagion due to self‐fulfilling beliefs while placing restrictions on observable variables that are broadly consistent with the empirical evidence.     

The supply of non‐renewable resources

There exists no formal treatment of non‐renewable resource (NRR) supply, systematically deriving quantity as function of price. We establish instantaneous restricted (fixed reserves) and unrestricted NRR supply functions. The supply of a NRR at any date and location depends not only on the local contemporary price of the resource but also on prices at all other dates and locations. Besides the usual law of supply, which characterizes the own‐price effect, cross‐price effects have their own law. They can be decomposed into a substitution effect and a stock compensation effect. We show that the substitution effect always dominates: a price increase at some point in space and time causes NRR supply to decrease at all other points. Our new—although orthodox—setting takes into account not only NRR supply limitations but also the heterogeneity of NRR deposits, and the endogeneity of their development and opening. Our analysis extends to NRRs the partial‐equilibrium analysis of demand and supply policies. Thereby, it provides a generalization of results about policy‐induced changes on NRR markets.     

A MODEL OF SELF‐FULFILLING FINANCIAL CRISES*

This paper combines the structural weakness and the self‐fulfilling panic view to explain the cause of the East Asian crises. In this model economy, the diversification strategies induce conglomerate firms to overinvest. They accumulate losses due to their unprofitable sectors and then compensate by obtaining bank loans. Domestic banks, which borrow from foreign banks, lend money as long as the total amount of accumulated loans remains within the firms’ collateral value. The model shows that if the debt to collateral value ratio belongs to a certain range a self‐fulfilling crisis can occur due to the self‐fulfilling expectations of foreign investors.     

Exporting and labour demand: Micro‐level evidence from Germany

It is widely believed that globalization increases the extent of employment and wage responses to economic shocks. In this paper, we investigate the effect of firms’ exporting activities on the wage elasticity of labour demand. Using rich, administrative linked employer–employee panel data from Germany and destination‐specific industry‐level information on trade flows, we explicitly control for self‐selection into exporting and endogeneity concerns. Overall, we find that exporting has a significant positive effect on the (absolute value of the) unconditional wage elasticity of labour demand. In line with our hypothesis, we further show that the effect is particularly strong for those plants that export a significant share of their output to low‐ and medium‐income countries, hence face relatively more price‐elastic product demand.     

MODELING THE INCIDENCE OF SELF‐EMPLOYMENT: INDIVIDUAL AND EMPLOYMENT TYPE HETEROGENEITY

Modeling the incidence of self‐employment has traditionally proved problematic. Although the supply‐side characteristics of the self‐employed are well documented, we argue that the literature has neglected demand‐side aspects. We explore the determinants of self‐employment using the U.S. Survey of Consumer Finances. We present results from an econometric framework that allows us to model, separately and simultaneously, the influences of individual heterogeneity (i.e., supply‐side factors) and employment type heterogeneity (i.e., demand‐side factors) on the probability of self‐employment. Our findings suggest that while individual characteristics are important determinants of self‐employment, there are factors specific to the type of employment that influence self‐employment. (JEL J23, J33, C25, C10)     

Long‐Term Contracts,Irreversibility, and Uncertainty

Long‐term contracting implies contracting based on expected future demand. In this paper, I develop a multiperiod procurement model where, once the actual level of demand is realized, the irreversible initial provision level may be supplemented by additional provisions. This paper shows that, with the possibility of additional upward adjustments, the first‐period provision level will be lower than when no additional adjustments are possible. This reduction in first‐period provision level is higher under complete contracting than under incomplete contracting, and because of the reduction in information rents it yields a higher expected utility to the principal but lower total welfare.     

The Effects of Macroeconomic Policy with a Disparity in Price Elasticity Between Private‐ and Public‐ Sector Demands

We introduce a disparity in price elasticity between government demand and consumption demand into a simple money‐in‐the‐utility‐function model. This extension demonstrates that the effect of fiscal policies on production may be positive, negative, or neutral depending on the disparity in price elasticity between sectors. Because the effect of an increase in nominal money supply with constant nominal government expenditure is the opposite to that of a fiscal policy, a fiscal policy financed by seigniorage can have positive, negative, or no effects depending on parameter values. Moreover, the effect of simultaneous implementation of expansionary–contractionary policies depends on how they are combined.     

Learning‐by‐Exporting Revisited: The Role of Intensity and Persistence*

Two non‐mutually exclusive hypotheses can explain the empirically established export premium: self‐selection of more productive firms into export markets and learning‐by‐exporting. This paper focuses on how the temporal dimension of firms' exporting activities and the intensity of exports influence the scope of learning effects. Using a panel of Swedish firms and dynamic generalized method of moments estimation, we find a learning effect among persistent exporters with high export intensity, but not among temporary exporters or persistent exporters with low export intensity. For small firms, exports boost productivity among persistent exporters with both high and low export intensity, but the effect is stronger for persistent export‐intensive small firms.     

Third‐degree price discrimination in the presence of congestion externality

This paper analyzes third‐degree price discrimination of a monopoly airline in the presence of congestion externality when all markets are served. The model features the business‐passenger and leisure‐passenger markets where business passengers exhibit a higher time valuation, and a less price‐elastic demand, than leisure passengers. Our main result is the identification of the time‐valuation effect of price discrimination, which can work in the opposite direction as the well‐known output effect on welfare. This time‐valuation effect clearly explains why discriminating prices can improve welfare even when this is associated with a reduction in aggregate output.     

Valuing Options in Water Markets: A Laboratory Investigation

Risk and reliability dominate water supply discussions in the arid western United States due to increasing demand and finite, weather-dependent supply. Water markets have evolved in this region so agencies could meet this growing demand. In a few instances, water agencies turned to contractual mechanisms such as options to manage supply. As demand continues to grow option markets and other novel approaches to allocating water may become increasingly popular. We utilize experimental economics to analyze the effect of annual options on water markets in the absence of sufficient real-world data for conventional econometric analysis. We find gains from trade are higher when options can be traded. Additionally, gains are more evenly distributed, particularly with a dominant buyer and many sellers. Findings suggest option markets may be a viable choice as policymakers prepare for future droughts.     

Entrepreneurship in post‐conflict transition1

We examine new self‐employment entry and its viability in Bosnia and Herzegovina, using a rich household survey for the years 2001–2004. We find that wealthier households are more likely to engage in viable self‐employment and create employment suggesting an important role for financing constraints. Specifically, although having an existing bank relationship is not significantly related to the entry decision, it is positively related to the survival for new entrepreneurs and their employment creation. We also find a non‐linear relationship between remittances and entry in that individuals not receiving remittances are more likely to enter self‐employment; but, if they do receive them, the likelihood of starting a business increases in the fraction of wealth received from domestic remittances. Finally, people working in the informal sector are more likely to become viable entrepreneurs, particularly those provided with loans from micro‐credit organizations. These findings support the perception of the informal sector as an incubator for formal self‐employment in the early years of transition.     

When trade liberalization is self‐fulfilling: Population aging and uncertainty

Expectation about future trade liberalization induces sectoral adjustment in advance. As a result, the extent of opposition to trade liberalization decreases, and liberalization becomes self‐fulfilling. We analyze this mechanism from two aspects: population aging and uncertainty. Then, we show that (1) the effect of expectation formation is non‐monotonic across ages, and (2) the effect of population aging of workforce varies depending on its driving force. In addition, we analyze uncertainty about future trade liberalization. Then, we show that (3) the mechanism cannot work due to strategic delay even under small uncertainty, but (4) a subsidy scheme can resolve this problem.     

Mortgage‐backed Securitization and SME Lending During the Financial and Economic Crisis: Evidence from the Italian Cooperative Banking System

I investigate the determinants of the securitization activities of Italian cooperative banks during the financial and economic crisis (2007–2014) and the impact of securitization on the supply of loans to SMEs. The less deposit‐funded, less profitable and less capitalized cooperative banks are, the more likely they are to securitize and the more likely it is that they will securitize to a larger extent. Furthermore, I find that securitization has not directly affected the supply of new SME loans. However, there is strong evidence of a risk‐rebalancing effect of securitization on the balance sheet, especially in the period 2010–2014.     

PLATFORM PRICING IN MIXED TWO‐SIDED MARKETS

When a consumer can appear on both sides of a two‐sided market, such as a user who both buys and sells on eBay, the platform may want to bundle the services it provides to two sides. I develop a general model for such “mixed” two‐sided markets and show that a monopolist platform's incentive to bundle and its optimal pricing strategy are determined by simple formulas using familiar price elasticities of demand, which embody the bundling effect, and price‐cost margins adjusted for network externalities, which incorporate “two‐sidedness.” The optimal pricing rule in such markets generalizes the familiar Lerner formula.     

On indeterminacy and growth under progressive taxation and productive government spending

We examine the theoretical interrelations between equilibrium (in)determinacy and economic growth in a one‐sector representative‐agent model of endogenous growth with progressive taxation of income and productive flow of public spending. We analytically show that, if the demand‐side effect of government purchases is weaker, the economy exhibits an indeterminate balanced‐growth equilibrium and belief‐driven growth fluctuations when the tax schedule is sufficiently progressive or regressive. If the supply‐side effect of public expenditures is weaker, indeterminacy and sunspots arise under progressive income taxation. In sharp contrast to traditional Keynesian‐type stabilization policies, our analysis finds that raising the tax progressivity may destabilize an endogenously growing economy with fluctuations driven by agents’ self‐fulfilling expectations.     

Job market signalling,stereotype threat and counter‐stereotypical behaviour

I introduce stereotype threat in a multiple‐productivity signalling model. Existence of multiple self‐fulfilling stereotypes, which can generate statistical discrimination, is more likely if there is less variance in the ability distribution. A low endogenously correct stereotype about a group forces higher‐ability group members to choose a higher‐productivity and a higher separating signal, thereby engaging in counter‐stereotypical behaviour. This counter‐stereotypical behaviour causes the remaining partially pooling group to have lower average productivity, reinforcing the negative stereotype. The co‐existence of stereotype threat and counter‐stereotypical behaviour can explain the simultaneity of lower wages and higher education attainment in a group facing labour‐market discrimination.     

Shocks and rigidities as determinants of CEE labour markets’ performance

In this article, the impact of real wage, productivity, labour demand and supply shocks on eight Central and Eastern European (CEE) economies from 1996–2007 is analysed with a panel structural vector error correction model. A set of long‐run restrictions derived from the dynamic stochastic general equilibrium (DSGE) model is used to identify structural shocks, and fluctuations in foreign demand are controlled for. We find that the propagation of shocks on CEE labour markets resembles that found for OECD countries. Labour demand shocks emerge as the main determinant of employment and unemployment variability in the short‐to‐medium run, but wage rigidities were equally important for observed labour market performance, especially in Poland, Czech Republic and Lithuania. We associate these rigidities with collective bargaining, minimum wage, active labour market policies and employment protection legislation.     

Land rental markets and rural poverty dynamics in Northern Ethiopia: Panel data evidence using survival models

There is growing interest in understanding the links between land reforms, land markets, and poverty reduction in Africa. The study uses four‐wave panel data from the northern highlands of Ethiopia to assess the dynamics of rural poverty taking into account the status of participation of rural households in the land rental market. Applying both nonparametric (Kaplan–Meier estimator) and semi‐parametric survival models that control for duration dependence of poverty transition, results show participation and degree of participation on the supply side of the tenancy market (landlords) have highly significant and positive effect on the chances of escaping poverty while the same cannot be said about the demand side of the tenancy market (tenants). The empirical evidence also confirms that households headed by older and literate people have relatively larger exit rates from poverty as compared with households headed by younger and illiterate ones. Though transacting farmers may engage themselves in win–win rental arrangements by the time they join the tenancy market, results indicate that gains are unequal as those tenants who enter the markets from low economic leverage (were poor) are liable to face a lower margin of net gains, which may limit their ability to move out of poverty.     

N‐FIRM OLIGOPOLY WITH GENERAL ISO‐ELASTIC DEMAND

In this note oligopoly with iso‐elastic demand is analysed. Unlike previous studies we consider general iso‐elastic demand rather than the case of unit elasticity. An n‐firm Nash‐Cournot equilibrium for the case of heterogeneous constant marginal costs is derived. The main result is a closed‐form solution that shows the dependency of the equilibrium on the elasticity of demand and the share of industry costs. The result has applications to a wide range of areas in oligopoly theory by allowing comparisons across markets with different elasticities of demand.