Agglomeration in a vertically-related oligopoly

This paper examines the location of three vertically-linked firms. In a spatial economy composed of two regions, a monopolist firm supplies an input to two consumer goods firms that compete in quantities. It is concluded that agglomeration is more likely to occur when the ratio between the transport cost of the intermediate good and the transport cost of the final good is higher. If this proportion is low, the likelihood of an agglomeration decreases with transport costs. If the ratio has an intermediate value, a non-monotonic pattern is obtained that is different from Krugman and Venables (1995).Received: October 2004, Accepted: March 2005, JEL Classification: C68, F12, F15, R12, R13This paper had the support of the Research Unit on Complexity in Economics (UECE). The author wishes to thank Masahisa Fujita, Armando Pires and an anonymous referee for helpful comments. The usual disclaimer applies.     

Market potential and welfare: evidence from the Iberian Peninsula

We present a methodology to quantify market potential in the context of an economic geography model. The model is then applied to the NUTS 2 regions of Portugal and Spain. Some results can be pointed out. First, the Iberian Peninsula presents a clear centre-periphery pattern. The market potential pike is situated in the region of Madrid, followed very closely by Cataluña and Pais Vasco. Also all Portuguese regions are at the bottom of the market potential rank, i.e.: Portugal is at the periphery of Spain. Second, the regional welfare index confirms market potential results. There is therefore a direct correlation between market potential and regional welfare. Third, a scenario of complete integration between the Portuguese and the Spanish economy is favourable to the most laggard regions. On the contrary, the most advanced regions of each country loose a little. However, ‘lock-in’ effects allow the most central regions to continue in the forefront of development and welfare.Received: Received: July 2004 / Accepted: January 2005, Accepted: Received: July 2004 / Accepted: January 2005, JEL Classification: C68, F12, F15, R12, R13The author is in debt to Renato Flôres and Paula Fontoura for helpful discussions during the preparation of this work. A first version of this paper was presented at the conference “Portuguese Economic Development in the European Context” organized by the Portuguese Central Bank. I am thankful to José Braga de Macedo, Pedro Duarte Neves and to all participants for very useful observations and comments. This version benefited greatly from the remarks and suggestions by Mahahisa Fujita, Alireza Naghavi and two anonymous referees. I am also in debt to José Pedro Pontes for inviting me to the “Luso-Japanese Workshop in Geographical Economics” and for encouraging me to submit this paper to this special issue of the Portuguese Economic Journal. The research conducted here was supported by a grant from Fundação para a Ciência e a Tecnologia(Praxis XXI/BM/17786/98). The usual disclaimer however applies.     

On the evolution of the spatial economy with multi-unit · multi-plant firms: the impact of IT development

This paper examines how the decline of communication costs between management and production facilities within firms and the decrease in trade costs of manufactured goods affect the spatial organization of a two-region economy with multi-unit·multi-plant firms. The development of information technology decreases the costs of communication and trade costs. Thus, the fragmentation of firms is promoted. Our result indicates that, with decreasing communication costs, firms producing low trade-cost goods (such as electronics products) tend to concentrate their manufacturing plants in low wage countries. In contrast, firms producing high trade-cost products (such as automobiles) tend to have multiple plants serving to segmented markets, even in the absence of wage differentials.Received: November 2004, Accepted: March 2005, JEL Classification: F12, L13, R13Masahisa Fujita: Correspondence toWe are very grateful to J. Vernon Henderson, J. Pedro Pontes and Koumei Sasaki for helpful comments.     

Campaign spending regulation in a model of redistributive politics

Summary. We consider a model in which parties that differ in perceived valence choose how to allocate electoral promises (money, pork-barrel projects) among voters. The party perceived to be less valent has a greater incentive to “sell out” to a favored minority and completely expropriate a fraction of the electorate. By reducing the difference in perceived valence, campaign-finance regulations may reduce the extent of the expropriation and achieve a more equitable political outcome. We analyze various instruments of campaign-finance regulation from this perspective.Received: 20 Februay 2003, Revised: 25 January 2005, JEL Classification Numbers: D72, H2.Nicolas Sahuguet: Correspondence toWe thank Alessandro Lizzeri, George Mailath, and Andrew Postlewaite for their comments. We also thank the editor Dan Kovenock and an anonymous referee. The second author is grateful to the National Science Foundation for financial support under grant SES-0078870.     

Computing equilibria in finance economies with incomplete markets and transaction costs

Summary. Transaction costs on financial markets may have important consequences for volumes of trade, asset pricing, and welfare. This paper introduces an algorithm for the computation of equilibria in the general equilibrium model with incomplete asset markets and transaction costs. We show that economies with transaction costs can be analyzed with differentiable homotopy techniques and thus in the same framework as frictionless economies despite the existence of non-differentiabilities of agents asset demand functions and the existence of locally non-unique equilibria. We introduce an equilibrium selection concept into the computation of economic equilibria that picks out a specific equilibrium in the presence of a continuum of equilibria.Received: 2 December 2002, Revised: 15 November 2004, JEL Classification Numbers: C61, C62, C63, C68, D52, D58, G11, G12. Correspondence to: P. Jean-Jacques HeringsThis research started when Jean-Jacques Herings enjoyed the generous hospitality of the Cowles Foundation for Research in Economics at Yale University. His research has been made possible by a fellowship of the Royal Netherlands Academy of Arts and Sciences and a grant of the Netherlands Organisation for Scientific Research. We thank audiences at Stanford University, UC San Diego, and Venice for discussions on the subject. We are very grateful to an anonymous referee for very helpful comments on an earlier draft.     

Social learning with private and common values

Summary. We consider an environment where individuals sequentially choose among several actions. The payoff to an individual depends on her action choice, the state of the world, and an idiosyncratic, privately observed preference shock. Under weak conditions, as the number of individuals increases, the sequence of choices always reveals the state of the world. This contrasts with the familiar result for pure common-value environments where the state is never learned, resulting in herds or informational cascades. The medium run dynamics to convergence can be very complex and non-monotone: posterior beliefs may be concentrated on a wrong state for a long time, shifting suddenly to the correct state.Received: 6 January 2005, Revised: 5 May 2005, JEL Classification Numbers: C72, D82.Jacob K. Goeree: Correspondence toFinancial support from the National Science Foundation NSF (SBR-0098400 and SES-0079301) and the Alfred P. Sloan Foundation is gratefully acknowledged. We thank Richard McKelvey posthumously for insights and conjectures about information aggregation that helped shape our thinking about the problem. We also acknowledge helpful comments from Kim Border, Tilman Börgers, Bogachen Celen, Luis Corchon, Matthew Jackson and seminar participants at University College London, the University of Arizona, Universitat Autonoma de Barcelona, the California Institute of Technology, the 2003 annual meeting of ESA in Pittsburgh, the 2003 Malaga Workshop on Social Choice and Welfare Economics, the 2003 SAET meetings in Rhodos, and the 2003 ESSET meetings in Gerzensee.     

Market clearing and derivative pricing

Summary. We develop a method of assigning unique prices to derivative securities, including options, in the continuous-time finance model developed in Raimondo (2001). In contrast with the martingale method of valuing options, which cannot distinguish among infinitely many possible option pricing processes for a given underlying securities price process when markets are dynamically incomplete, our option prices are uniquely determined in equilibrium in closed form as a function of the underlying economic data.Received: 14 April 2003, Revised: 7 January 2004, JEL Classification Numbers: G13, D52.This paper is dedicated to Birgit Grodal, whose strength and character we greatly admire. We are very grateful to Darrell Duffie, Steve Evans, Botond Koszegi, Roger Purves, Jacob Sagi, Chris Shannon, Bill Zame and an anonymous refereee for very helpful discussions and comments. The work of both authors was supported by Grant SES-9710424, and Andersons work was supported by Grant SES-0214164, from the National Science Foundation.     

A note on conspicuous leisure,animal spirits and endogenous cycles

This paper investigates general equilibrium effects of conspicuous leisure. It finds that leisure externalities reduce the degree of other market imperfections needed to generate indeterminacy or sunspot equilibria - endogneous cycles become empirically more plausible. Sunspot equilibria are possible with a downward-sloping labor demand schedule. The economic reasoning behind the result is that with conspicuous-externalities, labor is drawn more easily in and out of leisure to help fulfill agents expectations.Received: June 2003, Accepted: January 2004, JEL Classification: E32Mark Weder: I thank Paulo Brito (the Editor), Michael Burda and an anonymous referee for very helpful comments and suggestions. All remaining errors are my own. Support by the Deutsche Forschungsgemeinschaft in the form of a Heisenberg Fellowshipis gratefully acknowledged.     

Factor price equalization beyond a “cubic” world

Summary. The importance of factor price equalization (FPE) is widely recognized in economics. The FPE theorem states that, absent any factor intensity reversal, factor prices are equal across countries with identical technologies and product mixes. In a two-factor-two-good-two-country Heckscher-Ohlin model this is equivalent to countries factor endowments being contained in the diversification cone defined by goods factor intensities. This paper identifies a condition, stated in terms of the allocation of factor endowments across countries relative to the demand for and the factor intensities of goods, that is necessary and sufficient for FPE in a world with arbitrary number of countries, goods and factors.Received: 16 July 2004, Revised: 10 January 2005, JEL Classification Numbers: F1.     

Insecure property rights and growth: the role of appropriation costs, wealth effects, and heterogeneity

Summary. We extend the model from Tornell and Velasco [13] and Tornell and Lane [12] by adding three features: (i) extracting the common property asset involves a private appropriation cost, (ii) agents derive utility from wealth as well as from consumption, and (iii) agents can be heterogeneous. We show that both an increase in the appropriation cost and, when appropriation costs vary across agents, an increase in the degree of heterogeneity of these costs reduce the growth rate of the public capital stock. We also show that, in the interior equilibrium, the private asset can have either a lower or a higher money rate of return than the common property asset.Received: 22 June 2004, Revised: 20 April 2005, JEL Classification Numbers: C73, O40.This research is supported by SSHRC, FQRSC, and the Austrian Science Fund (FWF). Thanks are due to Hassan Benchekroun, Parkash Chander, Gerard Gaudet, Basant Kapur, Kim Long, Colin Rowat, Koji Shimomura, and an anonymous referee for comments and discussions.     

集聚与扩散:异质性劳动力和多样化贸易成本的空间经济效应

文章将异质性劳动力及地区内和地区间的多样化贸易成本同时引入空间经济模型,建立了一般均衡模型。分析结果表明,低成本约束的人力资本比高成本约束的普通劳动力流动更容易打破空间经济集聚和扩散的对称均衡,促使产业空间结构稳定地向人力资本丰富的地区集聚。文章还从福利最优化的角度分析了政府对空间经济结构的规划选择,结论显示降低普通劳动力在地区间流动的成本有利于形成分散均衡的经济格局,实现社会公平。     

Associated consistency and equal allocation of nonseparable costs

Summary. We modified the definition of associated game with respect to Hamiache (2001) to characterize the equal allocation of nonseparable costs (EANS) by means of Pareto Optimality(PO), Translation Covariance (TC), Symmetry (SYM), Associated Consistency(AC) and Continuity(CONT).Received: 8 April 2004, Revised: 9 May 2005, JEL Classification Numbers: C71.The author is indebted to Clement Wen for many helpful comments and he is also very grateful to a referee who proposed several helpful comments to improve the paper.     

Theory and practice of monetary policy

Summary. We consider an optimally managed renewable resource with stochastic non-concave growth function. We characterize the conditions under which the optimal policy leads to global extinction, global conservation and the existence of a safe standard of conservation. Our conditions are specified in terms of the economic and ecological primitives of the model: the biological growth function, the welfare function, the distribution of shocks and the discount rate. Our results indicate that, unlike deterministic models, extinction and conservation in stochastic models are not determined by a simple comparison of the growth rate and the discount rate; the welfare function plays an important role.Received: 20 October 2004, Revised: 28 February 2005, JEL Classification Numbers: D90, O11, O41, Q32.Santanu Roy: Correspondence toResearch on this paper was completed when the second author visited Cornell University in July, 2003. We thank the Center for Analytic Economics and the Department of Economics at Cornell University for making this research visit possible. The current version has gained considerably from the comments made by an anonymous referee.     

Self-organized agglomerations and transport costs

This paper investigates the impact of the shape of transport costs on the structure of spatial equilibria. We consider a racetrack economic model in which firms and workers freely locate on the continuous space of a circumference. We present “reasonably” weak conditions on the shape of transport costs under which continuous distributions of firms and workers are never stable equilibria. We also characterize conditions on the shape of transport costs under which discrete distributions are stable equilibria. The results confirm the idea that agglomeration of firms and workers in few cities is a natural outcome of economic interactions.     

Irreversible investment in alternative projects

Summary. We study the problem of a risk-neutral decision-maker who has to choose among two alternative investment projects of different scales under output price uncertainty. We provide parameter restrictions under which the optimal investment strategy is not a trigger strategy and the optimal investment region is dichotomous. Whenever the decision-maker has the opportunity to switch from the smaller scale to the larger scale project, the dichotomy of the investment region can persist even when the volatility of the output price process becomes large.Received: 6 July 2004, Revised: 23 March 2005, JEL Classification Numbers: C61, D83.Jean-Paul Décamps: Correspondence toWe would like to thank Marco A.G. Dias for many stimulating discussions. Financial support from FNS is gratefully acknowledged.     

Regularity of pure strategy equilibrium points in a class of bargaining games

Summary. We develop an index theory for the Stationary Subgame Perfect (SSP) equilibrium set in a class of n-player sequential bargaining games with probabilistic recognition rules. For games with oligarchic voting rules (a class that includes unanimity rule), we establish conditions on individual utilities that ensure that for almost all discount factors, the number of SSP equilibria is odd and the equilibrium correspondence lower-hemicontinuous. For games with general, monotonic voting rules, we show generic (in discount factors) determinacy of SSP equilibria under the restriction that the agreement space is of dimension one. For non-oligarchic voting rules and agreement spaces of higher finite dimension, we establish generic determinacy for the subset of SSP equilibria in pure strategies. The analysis also extends to the case of fixed delay costs. Lastly, we provide a sufficient condition for uniqueness of SSP equilibrium in oligarchic games.Received: 13 May 2004, Revised: 1 March 2005, JEL Classification Numbers: C62, C72, C78.I thank John Duggan and participants of the 2003 annual meeting of the American Political Science Association, Philadelphia, PA, the Political Economy Seminar at Northwestern University, and the Economic Theory seminar at the University of Rochester for helpful comments.     

Stock market volatility of regulated industries: an empirical assessment

This paper analyses stock market volatility for the regulated electricity, gas and water utility industries in the UK for the period 1991 - 2002. Using a conditional approach, we decompose stock market volatility in components characterised by different degrees of persistence and bearing different economic interpretations. In particular, we identify common and idiosyncratic persistent volatility features of regulated industries and offer an interpretation of the findings in terms of industrial structure and regulatory activity.Received: September 2003, Accepted: March 2004, JEL Classification: L51, L97 Correspondence to: Claudio Morana     

A competitive model of economic geography

Summary. Most of the literature argues that competitive analysis has nothing interesting to say about location. This paper argues, to the contrary, that a competitive model can have something interesting to say about location, provided that locations are not identical and transportation costs are not zero. To do this, it constructs a competitive intertemporal general equilibrium model and applies it to a suggestive example of migration.Received: 25 August 2003, Revised: 18 December 2003, JEL Classification Numbers: D5, R0.Our interest in this topic has been stimulated over the years by many conversations with Marcus Berliant. We thank an anonymous referee for exceptionally careful and useful comments. Financial support from the UCLA Academic Committee on Research (Ellickson, Zame) and the National Science Foundation (Zame) is gratefully acknowledged. Views expressed here are those of the authors and do not necessary reflect the views of any funding agency.     

Do city–county mergers in China promote local economic development?

Municipal mergers have become a worldwide phenomenon in the past few decades, primarily advanced to exploit economies of scale. While most evaluations of municipal mergers have focused on the efficiency of local public goods provision, it is rare in the literature to explore how such mergers promote economic growth in a developing country context. This research investigates the economic consequences of a policy experiment of city–county mergers (che xian she qu) in China during the period 2000–2004. Using comprehensive datasets at city, county and firm levels, we present evidence that the merger significantly increases local economic development, and the magnitude of the effect depends on local endowments related to agglomeration forces. The results are robust to a number of different model specifications. We further verify that improved transport infrastructure and urban agglomeration economies after merger are potential contributors to the positive merger effects.     

Exclusive contracts and the institution of bankruptcy

Summary. The paper studies the institution of bankruptcy when exclusive contracts cannot be enforced ex ante, e.g., a bank cannot monitor whether the borrower enters into contracts with other creditors. The institution of bankruptcy enables the bank to enforce its claim to any funds that the borrower has above a fixed bankruptcy protection level. Bankruptcy improves on non-exclusive contractual relationships but is not a perfect substitute for exclusivity ex ante. We characterize the effect of bankruptcy provisions on the equilibrium contracts which borrowers use to raise financing.Received: 6 December 2004, Revised: 15 January 2005, JEL Classification Numbers: D82, G33, K29. Correspondence to: Adriano A. RampiniWe thank the seminar participants at Carnegie Mellon, Columbia, Illinois, Minnesota, Northwestern, Pompeu Fabra, Stanford, the CEPR European Summer Symposium in Financial Markets, the NBER Corporate Finance Program Meeting, the SED Annual Meeting, the Texas Finance Festival, the WFA Annual Conference, the Workshop on Information, Financial Markets and the Business Cycle in Rome and the Federal Reserve Bank of Richmond and in particular Marco Bassetto, Alberto Bennardo, Philip Bond, Peter DeMarzo, Andrea Eisfeldt, Michael Fishman, Zsuzsanna Fluck, Denis Gromb, Oliver Hart, Eugene Kandel, John Kareken, Narayana Kocherlakota, Stephan Krasa, Arvind Krishnamurthy, Deborah Lucas, Thomas Noe, Onur Ozgur, Mitchell Petersen, Artur Raviv, Anne Villamil, Jeffrey Zwiebel, and an anonymous referee for helpful comments, and Nisan Langberg for research assistance. Bisin gratefully acknowledges the research support of the National Science Foundation under Grant No. SES-9818844 and the C.V. Starr Center for Applied Economics.