Income distribution and exchange in a dynamic search model

This paper studies the link between income distribution and trade mechanisms in a dynamic search model with two-sided asymmetric information. Buyers and sellers have imperfect information about the income levels of the other group. Furthermore, asymmetry of information about incomes is the source of price dispersion. In such a frictional environment, we capture the effects of a change in inter- and intra-class income distribution on the trade mechanism, which is represented by the expected trade volume and the flux of buyers and sellers in the market.     

Eco-Labeling and Stages of Development

The paper examines the effectiveness of eco-labeling in providing a market-based solution to the under-consumption of eco-friendly products in developing and developed countries. The authors show that whether labeling is an effective device in solving the problem of asymmetric information between sellers and buyers, or whether false labeling severs the link between willingness to pay and environmental conscious production choices, depends crucially on how monitoring intensities respond endogenously to economic growth, openness to trade, and technology transfers. In particular, by accounting for endogenous policy responses to economic growth, it is shown that an inverted-U relationship exists between consumer spending on eco-unfriendly products and national income. In addition, while international trade unambiguously benefits the environment in the presence of eco-labeling with perfect enforcement, trade openness may nevertheless delay the turning point of the growth and environment relationship, when the cost of enforcement falls disproportionately on developing countries, and when environmental policies are employed to reap terms-of-trade gains.     

COMMITMENT AND COSTLY SIGNALING IN DECENTRALIZED MARKETS

I propose a search model of a decentralized market with asymmetric information in which sellers are unable to commit to asking prices announced ex ante. Relaxing the commitment assumption prevents sellers from using price posting as a signaling device to direct buyers' search. Private information about the gains from trade and inefficient entry on the demand side then contribute to market illiquidity. Endogenous sorting among costly marketing platforms can facilitate the search process by segmenting the market to alleviate information frictions. Seemingly irrelevant but incentive compatible listing fees are implementable provided that the market is not already sufficiently active.     

Simple Reputation Systems*

We develop a model of simple “reputation systems” that monitor and publish information about the behavior of sellers in a search market with asymmetric information. The reputations created influence the equilibrium search patterns of buyers and thus provide for market‐based “punishment” of bad behavior. We show that a reputation system that rewards honesty can enhance welfare by allowing good sellers to truthfully signal their type. However, the same system can be prone to strategic manipulation by sellers who always have low‐quality products. In that case, we show that an alternative system which assigns reputations based on product quality rather than honesty can be superior.     

No trade

We investigate a common value bilateral bargaining model with two-sided private information and no aggregate uncertainty. A seller owns an asset whose common valuation is a deterministic function of the two traders' private signals. We first establish a no-trade theorem for this environment, and proceed to study the effect of the asset valuation structure and the trading mechanism on extent to which asymmetric information induces individuals to engage in mutually unprofitable exchange. A laboratory experiment is conducted, where trade is found to occur between 19% and 35% of the time, and this depends in systematic ways on both the asset valuation function and the trading mechanism. Both buyers and sellers adapt their strategy to changes in the asset valuation function and to changes in the trading mechanism in clearly identifiable ways. An equilibrium model with naïve belief formation accounts for some of the behavioral findings, but open questions remain.     

Formation of buyer-seller trade networks in a quality-differentiated product market

Abstract .  We examine the formation of buyer-seller links when exchange can take place only if such a link exists. Sellers produce products of different qualities, and multiple sellers can form a sellers' association to pool their customers setting uniform prices. Buyers form trade links with individual sellers or sellers' associations. We show which buyer-seller links will form and find the set of links that are stable and show how these links influence prices. We also show that a trade network mismatch may occur where a high-quality good remains unsold even without an economy-wide excess supply of goods.     

Search costs and the severity of adverse selection

In view of some recent empirical evidence, I suggest a relationship between the magnitude of search costs and the severity of adverse selection in the context of a dynamic model with asymmetric information. In markets with small search costs sellers with low quality products misrepresent their quality and demand a high price. If search costs are not negligible, sellers׳ price offers are truthful and all product qualities are traded over time. In markets with small search costs, a budget balanced mechanism can mitigate adverse selection: sellers should pay a per period market participation tax and receive a rebate after trading.     

Household inequality, social welfare, and trade

Working with Sen social welfare functions (meaning explicit separability between mean income and income dispersion), we develop a generalized dual approach to tracking household inequality aspects of social welfare in general equilibrium. We highlight how household equity can be examined analytically alongside production efficiency in duality-based models, using our dual framework to explore potential trade-offs between efficiency and equity effects of trade policy. Our results complement the set of standard inequality results in trade theory focused on functional rather than household inequality. We also find that the relative distributional impact of tariffs on welfare is conditional on the initial level of inequality.     

Price discrimination of buyers with identical preferences and collusion in a model of advertising

A model of advertising and price distributions is investigated whereby each seller can contact different buyers, whose preferences are identical, with different probabilities. The model features a continuum of equilibria parametrized by the ratio of the buyers contacted by one seller—differing across “market segments”—and by the other sellers. In general, the sellers practice price discrimination across segments. More asymmetric equilibria correspond to higher volumes of transactions and higher expected transaction prices. This results in a lower expected utility for the buyers and higher expected profits; thus, identifying areas of influence can help the sellers to support collusion.     

Dynamic price competition

We consider the model of price competition for a single buyer among many sellers in a dynamic environment. The surplus from each trade is allowed to depend on the path of previous purchases, and as a result, the model captures phenomena such as learning by doing and habit formation in consumption.We characterize Markovian equilibria for finite and infinite horizon versions of the model and show that the stationary infinite horizon version of the model possesses an efficient equilibrium where all the sellers receive an equilibrium payoff equal to their marginal contribution to the social welfare.     

Redistributing Gains from Globalisation*

This paper analyses the effects of redistribution in a model of international trade with heterogeneous firms in which a fair‐wage effort mechanism leads to firm‐specific wage payments and involuntary unemployment. The redistribution scheme is financed by profit taxes and gives the same absolute lump‐sum transfer to all workers. International trade increases aggregate income and income inequality, ceteris paribus. If, however, trade is accompanied by a suitably chosen increase in the profit tax rate, it is possible to achieve higher aggregate income and a more equal income distribution than in autarky, provided that the share of exporters is sufficiently high.     

Human capital and income inequality in India: is there a non-linear and asymmetric relationship?

The article attempts to provide empirical evidence on the relationship between human capital and income inequality in India in a non-linear and asymmetric framework. To capture both long-run and short-run asymmetries, we have employed the non-linear autoregressive distributed lag approach using the relevant data from 1970 to 2016. Findings of the article suggest that education expansion acts as a major factor in reducing prevailing high income inequality, that is an increase in average years of schooling results in more equal distribution of income. In contrast, high economic growth, inflation and trade openness create unequal distribution of income. The asymmetric causality test results indicate that there is unidirectional causality running from female human capital, economic growth and inflation to income inequality. From a policy perspective, we suggest that education expansion should be used as a powerful tool to mitigate income inequality by emphasizing the quality of education. At the same time, policies geared towards social benefits, inclusive education, training for unskilled workers and price stability should be encouraged to attain fair income distribution in India.     

Trade mechanism selection in markets with frictions

We endogenize the trade mechanism in a search economy with many homogeneous sellers and many heterogeneous buyers of unobservable type. We study how heterogeneity and the traders' continuation values—which are endogenous—influence the sellers' choice of trade mechanism. Sellers trade off the probability of an immediate sale against the surplus expected from it, choosing whether to trade with everyone and how quickly. In equilibrium sellers may simply target one buyer type via non-negotiable offers (price posting), or may price discriminate (haggling). We also study when haggling generates trading delays. A price setting externality arises because of a strategic complementarity in the sellers' pricing choices.     

Price discovery and intermediation in linked emissions trading markets: A laboratory study

Many new and proposed emissions trading systems involve multiple countries and regions. The introduction of interregional trading raises questions about how flexible state- or national-level authorities should be in allowing individual firms to trade with firms or authorities in other states or countries. This paper uses laboratory methods to evaluate the efficiency and pricing performance of linking trading across regions at the firm-to-firm level. In one treatment, individual firms trade directly with firms or authorities in other regions. We compare performance in this treatment to an intergovernmental trading treatment, where emissions trading is restricted to occur only between intermediaries. A baseline treatment of autarky, where firms only trade with other firms in their country or region, provides a benchmark to assess the efficiency benefits of allowing linking. Although efficiency and price discovery are both improved by allowing intermediation in linked permit markets, we find that further gains can be realized through direct firm to firm trading. Buyers in high cost regions and sellers in low cost regions benefit the greatest from linking.     

Internet Technology and the Extensive Margin of Trade: Evidence from eBay in Emerging Economies

Online platforms such as eBay offer technologies that make it easier for firms to export. This paper dissects a new firm‐level dataset that covers sales made through eBay by sellers based in 21 emerging economies to provide a new lens through which to look at the effect of trade costs on the extensive margin of trade. Comparing eBay sellers with “offline” firm‐level data from the World Bank's Exporter Dynamics Database allows us to test whether the observed trade patterns on eBay fit with the trade‐liberalization predictions of heterogeneous‐firm models. We find that eBay firms export to more destinations, suggesting low destination‐specific fixed costs on eBay. We then show that the distribution of export destinations across eBay sellers is well approximated by a balls‐and‐bins model of frictionless trade, suggesting eBay indeed lowers fixed export costs. Finally, we compare the gravity of eBay with that of offline trade and find geographic distance, languages, and trade agreements to matter less for online trade.     

Asymmetric information in bilateral trade and in markets: An inversion result

I consider bilateral trade between a seller and a buyer with private valuations. The seller makes a take-it-or-leave-it price offer. If the seller observes the buyer?s valuation (symmetric information), bilateral trade is trivially efficient. If the seller cannot observe the valuation (asymmetric information), bilateral trade is inefficient. This bilateral trading game is embedded into a large matching market. In the steady-state equilibrium of the market game, the relation between the informational regime and efficiency is inverted: With small frictions efficiency obtains if information is asymmetric. If information is symmetric, however, the trading outcome can be very inefficient—even if frictions vanish.     

Sunk costs and fairness in incomplete information bargaining

We study a bilateral trading relationship in which one agent, the seller, can make a nonrecoverable investment in order to generate potential gains from trade. Afterwards, the seller makes a price offer that the buyer can either accept or reject. If agents are fairminded, sellers who are known by the buyer to have high investment costs are predicted to charge higher prices. If the investment cost is private information, low-cost sellers should price more aggressively and high-cost sellers less aggressively than under complete information, giving rise to disagreement and/or underinvestment. Our experiment support these predictions.     

INEQUALITY AND POVERTY IN JAPAN*

This paper presents a brief survey of inequality and poverty in Japan. It shows empirical evidence on the extent of both inequality in income distribution and of poverty rates; the paper discusses the cause of increases in both these variables, and the implication of such trends. The paper goes on to argue the difference between inequality of opportunity and inequality of outcome and shows some related empirical evidence. Finally, the paper investigates the relationship between economic efficiency and equity, supposed to be in a trade‐off relationship, and presents my personal view of that relationship and policy recommendations.     

DEPRIVATION,INEQUALITY AND WELFARE*

Welfare ranking of income distributions involves a trade‐off between equity and efficiency. A person's feeling of deprivation about higher incomes may be of a relative or absolute type. We consider an intermediate notion of deprivation, a convex mix of relative and absolute deprivations. We then look at the problem of welfare ranking of income distributions when welfare increases under a globally equitable redistribution and under an income increase that keeps intermediate deprivation fixed. All deprivation indices can be regarded as inequality indices but the converse is not true. We also provide a numerical illustration of our results.     

Quality undersupply and oversupply

I analyze a market in which a price-taking buyer buys a variable-quality good from a population of sellers, contrasting the case where quality is a seller's private information to that where it is public information. Average quality traded under private information can be either higher (quality oversupply) or lower (quality undersupply) than under public information, depending on sellers’ preferences. We are likely to see quality undersupply if (i) sellers’ preferences exhibit substitutability between the variable-quality good and the numéraire good, and/or (ii) sellers view the numéraire good as a luxury good relative to the variable-quality good. Reverse arguments hold for quality oversupply.