Quality Competition and Social Welfare in Markets with Partial Coverage: New Results*

We use a vertical product differentiation model under partial market coverage to study the social welfare optimum and duopoly equilibrium when convex costs of quality provision are either fixed or variable in terms of production. We show the following new results. First, under fixed costs, the social planner charges a uniform price for the single variant that just covers costs of quality provision. Like the duopoly equilibrium, this socially optimal pricing entails a partially uncovered market, but a smaller share of the market is served compared with the duopoly equilibrium. Second, for the variable cost case, it is socially optimal to provide both high‐ and low‐quality variants, but market shares need not be equal. This differs from the result in fully covered markets. Third, in the duopoly equilibrium, the quality spread is too wide under variable costs relative to the social optimum. Under fixed costs, the duopoly produces two variants, but quality is too low relative to the social optimum, which has only one variant.     

Stone–Geary preferences in overlapping generations economies under pure exchange: A note

We incorporate Stone–Geary preferences into an overlapping generations economy under pure exchange, and explore stability, indeterminacy, and cycles with positive levels of saving and nonnegative public debt. A stable nontrivial steady state exists for parameter values, for which there does not exist equilibrium in the model with purely logarithmic utility function. We also show the possibility of a period-doubling bifurcation (a two-cycle).     

Green Tax Reform and Competitiveness

This paper studies a revenue-neutral green tax reform that substitutes energy for wage taxes in an open economy with unemployment. As long as the labour tax rate exceeds the energy tax rate, such a reform will increase employment, reduce the domestic firms' unit cost of production and hence increase international competitiveness and output of the economy. The driving force behind these results is the technological substitution process that a green tax reform will bring about. The resulting reduction in unemployment is welfare increasing since energy, which the country has to buy at its true national opportunity cost, is replaced with labour, whose price is above its social opportunity cost.     

Outsourcing of Unionized Firms and the Impact of Labor Market Policy Reforms

This paper shows that outsourcing of parts of the workforce in unionized firms leads to wage moderation both in the case of strategic and flexible outsourcing. As long as the share of the outsourced workforce is not too large, this wage‐moderation effect on domestic employment outweighs the direct substitution effect so that domestic employment increases in unionized firms as outsourcing costs fall. With respect to the impact of labor tax reform changes in the wage tax rate, the tax exemption and the unemployment benefit payments affect domestic wage setting in the same way as in the absence of outsourcing. Furthermore, increasing the degree of tax progression by keeping the relative tax burden per worker constant continues to be good for employment. However, except for low outsourcing activities, the impact of these policy measures will become smaller as outsourcing costs fall.     

Equilibrium unemployment with outsourcing under labour market imperfections

We study the effects of international outsourcing on equilibrium unemployment in a high-wage economy with labour market imperfections. We demonstrate, consistent with empirical results, that the wage elasticity of labour demand is increasing as a function of outsourcing. Furthermore, we show that a production mode with more outsourcing reduces the negotiated wage in a high-wage country with labour market imperfections if the relative bargaining power of the labour union is sufficiently high. Under such circumstances outsourcing reduces equilibrium unemployment. Finally, we characterize the optimal production mode showing that stronger labour market imperfections induce a production mode with more outsourcing.     

Do cash flows reported by firms articulate with their income statements and balance sheets? Descriptive evidence from Finland

Using data for a sample of listed Finnish firms for 1995–97 this paper examines the coincidence of reported cash flows with corresponding cash flows estimated from income statement and balance sheet data. The issue is important in light of prior empirical studies that have analysed the properties and usefulness of cash flow information derived from income statements and balance sheets. In addition, financial analyses of firms not disclosing cash flow statements are implicitly based on the assumption that income statements and balance sheets are useful in producing unbiased and efficient estimates of cash flows. The overall findings indicate that reported cash flows do not always articulate with income statements and balance sheets and that non-articulation can be observed in cash flows from operating, investing and financing activities. The differences between reported and estimated cash flows prove to be mostly random. The findings on cash flows from operating activities indicate that differences attributable to operating income and working capital are partially countervailing. The findings also suggest that the differences do not materially affect firms' relative rankings based on financial ratios. A detailed analysis of an individual company indicates that differences arising from the allocation of short-term liabilities to operating and financing activities can be important. Overall, the results call for the refinement of the standards and guidelines of cash flow reporting practices.     

Is there a Laffer curve between aggregate output and public sector employment?

This paper develops a model of the relationship between public sector employment, total output and aggregate real demand in market prices, where public employment has a positive productivity effect on private output. Public employment crowds out private employment and output because its increase induces higher wages and taxes. The valuation of government output is also taken into account. While public employment affects total output and aggregate real demand in an a priori ambiguous way, numerical simulations suggest that the relationship may be nonlinear; positive, when public sector is “small” and negative, when it is “large”. Using the annual data from 22 OECD countries over the period 1960–1996 and estimating and testing for threshold models and more commonly used specifications with multiplicative interaction terms give support to this nonlinearity hypothesis between public employment and private sector output. First version received: October 1996/Final version received: April 2000     

Royalty reform and illegal reporting of harvest volumes under alternative penalty schemes

We study royalty reform in a timber concessions framework. Illegal logging in the form of underreporting of harvesting is modeled. Harvesters can be either risk neutral or risk averse. Detection of illegal logging by the government is imperfect and costly. We focus on the government’s policy problem, solving first for socially optimal royalty and auditing levels, and then examining a revenue-neutral reform toward this benchmark. We find that higher royalty progression will always decrease actual harvest volume regardless of risk preferences for the harvester, but the effect of a reform on reported harvest volume is sensitive to the penalty scheme imposed by the government. If the fine is levied on evaded royalty payments, then higher royalty progression may increase reported harvest volume. But when the fine is levied on undeclared harvest volume, the reverse happens. Higher royalty regression increases actual harvest volume under both penalty schemes, but it may decrease reported harvest volume. Higher regression will increase undeclared harvest volume when the fine is levied on evaded royalty payments.      

Flexible and Committed Profit Sharing with Wage Bargaining: Implications for Equilibrium Unemployment

We analyze the relationship between profit sharing, employee effort, wage formation and unemployment under different relative timings of the wage and profit sharing decisions. The optimal profit share under commitment exceeds that under flexibility, because through a profit share commitment the firm can induce wage moderation. The negotiated profit sharing depends positively on the bargaining power of trade union and it has both effort-enhancing and wage-moderating effects. Higher profit sharing is shown to reduce equilibrium unemployment under ``sufficiently rigid' labor market institutions, but it can harm employment when labor market ``rigidities' are ``small enough'.