Interest Groups, Trade Liberalization, and Environmental Standards

In considering a country that imposes a minimum standard on an imported polluting good, which generates negative consumption externalities, we construct a common-agency model, in which a domestic environmental group and a foreign industrial lobby can influence the formation of the minimum standard by providing political contributions to the government. This paper investigates the effects of trade liberalization on the political equilibrium environmental standard, the pattern of trade, environmental disutility, and social welfare. We find that trade liberalization tightens the minimum standard, decreases imports of the polluting good, and reduces environmental disutilities. The importing country’s social welfare, however, does not necessarily increase with trade liberalization. The weaker the environmental group’s lobbying efficiency, or the stronger the foreign firm’s lobbying efficiency, the more likely it is that trade liberalization will enhance the importing country’s welfare.     

Global environment and dynamic games of environmental policy in an international duopoly

This paper examines a differential game model of international pollution control in which polluting oligopolists compete in a third country market. Two alternative policy instruments (emission taxes and command-and-control regulations) are considered. A tougher emission policy in the home country enhances the foreign firm’s competitiveness because of the static “rent-shifting” effect. The foreign country also enjoys a future improvement of the global environmental quality by “free riding” on the home country’s emission reduction effort. Because of these strategic effects, the levels of environmental policy determined in the noncooperative policy game are distorted away from the socially optimal level. Moreover, the emission tax game produces a more distortionary outcome than that in the command-and-control game; it generates more pollution and lower welfare.      

The welfare effect of bargaining power in the licensing of a cost-reducing technology

This study considers licensing of a cost-reducing technology through bargaining between a technology-holding firm and its rival firm in a Cournot duopoly market. To consider the relative bargaining power of both firms, the asymmetric Nash bargaining solution is applied as our solution. Then, we specify the combinations of lump-sum fee and per-unit royalty that are realized through bargaining, and examine the effect on social welfare of the technology-holding firm’s bargaining power. The principal findings are as follows. Regardless of the technology-holding firm’s bargaining power, pure royalty licensing is carried out, and social welfare is non-increasing in its bargaining power. In our model, licensing through a take-it-or-leave-it offer, which is often assumed in the literature, is regarded as the case in which the technology-holding firm has full bargaining power. Thus, the result on social welfare implies that the take-it-or-leave-it offer licensing mechanism leads to the socially worst outcome.     

An Empirical Analysis of the Effects on Firms’ Economic Performance of Implementing Environmental Management Systems

This paper investigates whether environmental management system (EMS) implementation influences a firm’s value added, one of the indices of economic performance. Because it is expected that EMS implementation increases a firm’s value added through an increase in demand and an improvement in productivity, a simple model to identify how these effects influence a firm’s value added is developed and is empirically investigated using panel data for Japanese manufacturing firms in the period 1996–2007. The main findings are as follows. For the full sample, EMS implementation increases a firm’s value added through an increase in demand and improvement in productivity. Among these firms, however, the positive effect of the implementation through an increase in demand mainly exists for export-oriented firms. At the industry level, the effects of EMS implementation vary among different industries. These results empirically prove that there are plural paths for EMS implementation to improve a firm’s economic performance.     

Price cap regulation of a dominant firm facing competition

Price cap regulation is typically applied to natural monopolies operating with subadditive costs. Price caps are known to provide superior incentives for the regulated monopoly to pursue cost reduction and, in a multiservice/product context, undertake welfare enhancing price discrimination. It is well known that capping a Laspeyres index of the firm’s prices induces the monopoly to charge socially optimal “Ramsey” prices in the long run. This paper examines the suitability of the Laspeyres form of regulation when the regulated firm faces competition in the market for one of its services (outputs). We present the appropriately modified Ramsey pricing rule for the regulated dominant firm and demonstrate that capping a Laspeyres index of the dominant firm’s prices leads to prices that satisfy this pricing rule in the long run.     

Endogenous Choice of Strategic Contracts in a Mixed Duopoly with Bargaining Over Managerial Delegation Contracts

We revisit the endogenous choice problem of strategic contracts for the public firm and the private firm in a managerial mixed duopoly with differentiated goods. We consider the situation wherein the managerial delegation contracts are determined by maximising social welfare within the public firm, which is equal to the objective function of its owner, and through bargaining over the content of managerial delegation contracts between the owner and manager within the private firm. We show that, in equilibrium, when the manager of the private firm has high bargaining power relative to that of the owner, the public firm chooses a price contract, while the private firm chooses a quantity contract. However, there is no equilibrium market structure under the pure strategic contract class when the manager has sufficiently low bargaining power relative to that of the owner.     

COOPERATIVE MANAGERIAL DELEGATION,R&D AND COLLUSION

Existing literature on managerial delegation indicates that collusive outcomes can be obtained in an oligopoly game through cooperative managerial delegation. In contrast, this paper shows that, if managers are delegated to choose R&D, in addition to choosing production levels, full‐collusive outcomes cannot be achieved through cooperative delegation. Moreover, (i) under cooperative delegation, semi‐collusion always yields lower profit, higher R&D, higher price and lower social welfare than that in the case of competition and (ii) cooperative delegation leads to a higher profit lower R&D, higher price and lower social welfare than the no delegation case, irrespective of product market conduct.     

The quiet life of a monopolist: The efficiency losses of monopoly reconsidered

We study the efficiency losses of monopoly in a model where the firm’s total cost of production decreases with the manager’s effort to control cost. In contrast to the existing analyses of oligopolistic and monopolistically competitive markets that find an ambiguous relationship between competition intensity and managerial slack, we demonstrate that, under the same kind of cost condition, monopoly unambiguously reduces effort level and, in the case where ownership and control are separate, magnifies the effects of the moral hazard problem. Furthermore, under an alternative cost condition monopoly raises effort level rather than reducing it. In such a situation the separation of ownership and control may mitigate the productive inefficiency of monopoly.     

On the social optimality of make-or-buy decisions

This article examines the impact of input prices on an entrant’s make-or-buy decision and on the subsequent social welfare level for three alternative models of downstream competition. For each particular model, it derives the range of input prices that induce the entrant to undertake: (a) the productively efficient make-or-buy decision; and (b) the socially optimal make-or-buy decision. The main conclusion of this article is that the entrant’s efficient make-or-buy decision is always socially optimal in the case of the Hotelling model, is socially optimal for the set of input prices that induce the entrant to undertake the efficient decision in the case of Cournot competition and is not necessarily socially optimal in the Bertrand vertical differentiation model. Last, this article examines the conditions under which the efficient and/or socially optimal make-or-buy decision undertaken by an entrant fulfills the regulatory two-fold goal of promoting service-based competition and encouraging facilities-based competition. Therefore, this article also provides the optimal access pricing policy that results in the best feasible outcome in terms of social welfare, productive efficiency, competition level and investment level for a given downstream competition model.     

Economic liberalization and urban–rural inequality in India: a quantile regression analysis

We examine India’s urban–rural inequality in welfare in 1993–1994 and 2004, a period which coincides with the country’s economic liberalization reforms and rapid economic growth. Using real monthly per capita household consumption expenditure as our measure of welfare, we estimate quantile regressions to analyze the urban–rural welfare gap across the entire welfare distribution. While the urban–rural welfare gap was fairly convex across the welfare distribution in 1993–1994, it became more concave in 2004, with the gap narrowing for the lowest and highest quintiles and widening for the middle three quintiles. The urban–rural gap in returns to all levels of education widened substantially for the bottom four quintiles but became increasingly negative for the top quintile. Applying the Machado and Mata (J Appl Econom 20:445–465, 2005) decomposition technique to decompose the urban–rural welfare gap at each percentile, we find that for the bottom 40% of the distribution, differences in the distribution of covariates became less important while differences in the distribution of returns to covariates became more important in explaining the gap. The opposite was true for the top 40% of the distribution. Our analysis suggests that while the rural poor appear to be catching up with their urban counterparts in terms of labor market characteristics, ten years of economic reforms have intensified the urban–rural gap in returns to these characteristics. On the other hand, the rural rich lag even further behind the urban rich with respect to their labor market characteristics even though the urban–rural gap in the returns to these characteristics has diminished during the reform period. Future efforts to generate urban–rural equality may require policies that seek to equalize returns to labor market characteristics between the two sectors at the lower half of the distribution and improve rural labor market characteristics at the top half of the distribution.     

Strategic incentive in mixed oligopoly

This paper develops a two stage game model with two competing firms in a mixed oligopolistic market, a public firm and a private firm, and only the public firm giving its manager an incentive contract. The paper presents three types of public firm owner’s objective function and each objective function corresponds to three types of delegation, either of a profit-revenue type, or of a relative performance, or, finally, of a market share one. In an equilibrium, the public firm owner has a dominant strategy to reward his manager with an incentive contract combining own profits and competitor’s profits. Different from Manasakis et al. (2007), this paper suggests that the dominant strategy of the public firm owner is to reward his manager with a profit-revenue type of contract or a market-share type of contract, that is to say profit-revenue is identical with market-share. Using relative-performance type of contract will move the manager away from the owner’s true objective function when the public firm owner only pursues maximizing the social welfare. The private firm will be crowded out and the public firm is the only producer of the market. Under profits-revenues type of contract, the owner’s objective of maximizing the summation of the profit and consumer surplus leads the manager more aggressive. Different combinations give us different results. By comparing the results, each type of incentive contract is an owner’s best response to his decision.     

Validity of the “Principle of Maximum Product Differentiation” in a unionized mixed-duopoly

Developing a location-price spatial model in a unionized mixed-duopoly, we find that the welfare-maximizing nature of the public firm implies a lower degree of product differentiation such that, in contrast to the private duopoly, the “Principle of Maximum Product Differentiation” is not reproduced. Considering two different wage-regimes for the public firm, this paper examines the effects of wage regulation imposed on civil servants. It is shown that, when a public firm’s union is prohibited from collective bargaining, the firm is more competitive, and the degree of differentiation is less. Moreover, regulation always reduces both the private firm’s profit and the level of social welfare.     

Do cost efficiency gap and foreign competitors matter concerning optimal privatization policy at the free entry market?

In this paper, we demonstrate that in contrast to the case with exogenous number of foreign private firms, partial privatization is always the best policy for the public firm in long-run equilibrium, which casts doubt on the robust result in Matsumura and Kanda (J Econ 84(1):27–48, 2005) who argued that welfare-maximizing behavior by the public firm is always optimal in mixed markets. Critical cost gap determines that long-run degree of privatization is larger than the short-run one. In particular, regarding the scenario wherein one public firm competes with domestic private firms and foreign private firms, equilibrium price is lower than marginal cost of public firm instead of being equivalent to marginal cost of the public firm, and that public firm’s outputs, profit, and social welfare is the smallest in the concerned mixed oligopoly models.     

Multi-Sector Model of Tradable Emission Permits

This paper presents a multi-sector model of tradable emission permits, which includes oligopolistic and perfectly competitive industries. The firms in oligopolistic industries are assumed to exercise market power in the tradable permit market as well as in the product market. Specifically, we examine the effects of the initial permit allocation on the equilibrium outcomes, focusing on the interaction among these product and permit markets. It is shown that raising the number of initial permits allocated to one firm in an oligopolistic industry increases the output produced by that firm. Under certain conditions, raising a “clean” (less-polluting) firm’s share of the initial permits can lead to reductions in both the product and permit prices. We discuss criteria for the socially optimal allocation of initial permits, considering the trade-off between production inefficiency and consumer benefit.     

Bad Eggs,Learning-by-doing,and the Choice of Technology

We model long-run economic development through technology adoption under scientific uncertainty about environmental effects. There are four possible long-run equilibria in a socially planned economy: ‘High-growth’, adopt rapidly, but abandon damaging technologies once revealed (DDT, CFCs); ‘Cautious’, brake the introduction of new technologies to avoid mistakes (genetically modified organisms); ‘No-growth’, halt technological progress to preserve secondary knowledge; and ‘Collapse’, adopt rapidly without ever abandoning damaging technologies. In the base parameterization a short-sighted social planner chooses the cautious strategy. A far-sighted planner chooses the high-growth strategy, unless damages are irreversible in which case the cautious strategy again dominates. Regulatory options in the market economy are investigated. Pollution taxes do not affect the firm’s level of precaution if they can only be applied after the adopting firm has reaped the benefits; however, they do encourage the abandonment of damaging technologies. Liability rules do affect precaution, but may lead to excessive caution, or even a no-growth trap.     

Union-oligopoly bargaining and entry deterrence: a reassessment of limit pricing

This paper introduces wage bargaining in the framework of Milgrom and Roberts (Econometrica 50(2):443–459, 1982) where the workers’ reservation wage is the private information parameter critical for entry. We show that entry threat significantly distorts the wage, which in some cases adversely affects the firm’s ability to signal through price. Consequently, the separating equilibrium (in price) does not always exist. If, however, wage agreements are made public, signalling occurs with or without distortions in wage depending on whether the union’s bargaining power is high or low. Pooling equilibrium also exists and it features similar distortions. We also examine which signal, wage or price, generates greater social welfare. We would like to thank two referees for their helpful comments and suggestions. This paper is partially based on a chapter of Pal’s PhD thesis done at Indira Gandhi Institute of Development Research (IGIDR), India. For remaining errors we are solely responsible.     

Schumpeter’s ‘conduct model of the dynamic entrepreneur’: scope and distinctiveness

Schumpeter formulated a ‘conduct model’ of entrepreneurial behaviour. Received wisdom has emphasised the economic functions of Schumpeter’s entrepreneur, neglecting behavioural aspects. Schumpeter’s model is examined; it posits a continuum of behaviours which are ‘entrepreneurial’, that rely on socially situated, tacit knowledge and are expressions of conscious, subjective rationality. Schumpeter’s model excluded unconscious optimisation and decision rules derived from bounded rationality. Comparisons are drawn with modern neoclassical, Austrian, and the older behavioural characterisations of entrepreneurial behaviour. The newer ‘effectuation’ model of entrepreneurial behaviour is also contrasted with Schumpeter’s approach. We find, among other things, that modern Schumpeterian economics associated with Nelson and Winter is not a natural continuation of Schumpeter’s model. However, some developments in neo-Schumpeterian economics, including the effectuation model deriving from the older behavioural tradition, are congruent with both the original ‘conduct model’ and Schumpeter’s directions for further research.     

Strategic Delegation of Multiple Tasks

This paper studies both the owner–manager relationship and the union–firm relationship in a model of unionised duopoly to analyse whether a firm's owner delegates the task of wage bargaining to a manager along with the task of output determination. We also analyse the profit and welfare effects of multiple‐task delegation. It has been shown in the literature that, when there is only one delegation task – output determination – delegation of output decisions to managers leads to lower profits for owners than non‐delegation as pure profit‐maximisation. However, when there are two delegation tasks as in our model – output determination and wage bargaining – we show that owners are better off delegating both tasks than delegating only the output decision or not delegating at all. This result provides a rationale and managerial insight for strategically delegating multiple tasks to managers. Moreover, we show that union utility, consumer surplus and social welfare are all higher when owners do not delegate the task of wage bargaining than when they do. This result suggests that governments implement union contracts that require owners, rather than managers, to negotiate wages with unions in order to benefit unions and consumers and to improve social welfare as well.     

B2C—bubble to cluster: the dot-com boom, spin-off entrepreneurship, and regional agglomeration

This article studies entrepreneurial activities emerging out of one of Germany’s most prominent dot-com firms, Intershop, a maker of e-commerce software. We show that Intershop spawned about 40 new ventures. Most spin-offs entered locally, giving rise to a small but growing software cluster and counteracting the job losses that accompanied the parent firm’s drastic downsizing after 2000. We trace the knowledge transfer from Intershop to the spin-offs and relate it to recent theorizing on the spin-off process as well as spin-off-based cluster formation. The Intershop case suggests that temporarily successful dot-coms could exert lasting effects on regional development.     

Corporate social responsibility,profits and welfare with managerial firms

This paper analyses the equilibrium outcomes in a duopoly market where firms follow corporate social responsibility (CSR) behaviours under managerial delegation. It is shown that in the subgame perfect Nash equilibrium of the game, both firms emerge as CSR-type, and the firms’ profitability (resp. the welfare of consumers and society) are beneficiated (resp. harmed) by the CSR behaviour. This result is in sharp contrast with the conventional result (established under non-managerial firms) that the higher the CSR sensitivity to consumer surplus, the lower (resp. higher) the firms’ profitability (resp. the consumer surplus and social welfare).