Comparative dynamics in a productive asset oligopoly

We build a subgame perfect Nash equilibrium of a common property productive asset oligopoly and analyze separately the impact of a change in the implicit growth rate of the asset and a change in the number of firms exploiting the asset. We show that the steady state level of asset can be a decreasing function of the asset's implicit growth rate. This phenomenon arises when the initial stock of asset is below a certain threshold. In the short-run we show that firms’ exploitation rate can be a decreasing function of the implicit growth rate. We study the impact of a change in the number of firms that share access to the asset. Reducing the number of firms can result, in the long-run, in higher industry production. In the short-run, it can result in an increase of the industry's exploitation and a decrease of the level of the asset's stock.     

Capital-accumulation games under environmental regulation and duopolistic competition

In a differential game between two symmetric firms, provided with a clean and a dirty production activity, it is analyzed how investment and emissions are affected by environmental regulation. If both firms face the same environmental policy, a stricter policy reduces long-run investment in the dirty activity, while the impact on the clean activity is ambiguous. Both long-run emissions of each firm and total emissions decrease. This result does not necessarily hold if both firms face different policy instruments: Each firm's investment levels increase with a stricter environmental policy towards its rival, which causes more emissions by this firm.     

Profit persistence and stock returns

This article attempts to assemble further empirical evidence on the relationship between the product and the financial market. Drawing back on work in industrial organization, we analyse the relationship between profit persistence and factor-adjusted stock returns looking at about 2000 listed US firms over the last 34 years. While the relationship between (current, lagged and unexpected) profits/earnings and returns has been extensively analysed before, to our knowledge this is the first study to look at the relationship between stock returns and profit persistence. We interpret profit persistence as a result of market competition and innovation of the firm. It is shown that firm-specific long-run profit persistence after correction for other additional economic fundamentals of the firm has a positive impact on four-factor adjusted returns and a negative impact on their volatility.     

Cournot competition and endogenous firm size

The paper studies the dynamics of firm size in a repeated Cournot game with unknown demand function. We model the firm as a type of artificial neural network. Each period it must learn to map environmental signals to both a demand parameter and its rival’s output choice. However, this learning game is in the background, as we focus on the endogenous adjustment of network size. We investigate the long-run evolution of firm/network size as a function of profits, rival’s size, and the type of adjustment rules used.

Unilateral disclosure of private information by a regulated firm

It is common practice for regulators to depend on regulated firms for self-monitoring and self-reporting in spite of incentives for misrepresentation. Our analysis provides some justification for such dependence. We study disclosure of information in a game theoretic model of regulation, in which both the regulator and the firm are players in the game. Instead of designing a regulation scheme that compels disclosure, we study unilateral disclosure in a given regulatory framework (a framework which we believe has counterparts in current regulatory practice). The results provide insight to informal relationships between firms and regulators. Because the game is a single period game, the informal relationship in which the disclosures occur cannot be attributed to the existence of reputations and long term relationships.     

A dynamic model of advertising by the regulated firm

A profit-maximizing firm subject to price regulation typically seeks alternative variables to control if the regulatory constraint is binding. Advertising may be one such variable. By shifting the demand curve inward or outward between rate hearings, the firm may increase its earnings above the allowed level. Here, a simple discrete-time optimal-control model is proposed to examine the dynamic implications of advertising by the regulated firm. Our results indicate that, in the long run, the combined effect of regulation and advertising leads to a steady-state equilibrium that is closer to the minimum point on the firm's long-run average-cost curve than the original output level. Thus, an invisible-hand property is established that pushes the regulated firm to shift its demand curve toward the minimum point on its long-run average-cost curve in the presence of regulation. As a result, the well-known allocative inefficiency created by rate-of-return regulation (PMC), on which so much has been written over the past 100 years, is reduced (and, under certain conditions, eliminated) if the regulated firm is allowed to advertise.     

The evolution of markets and the revolution of industry: a unified theory of growth

This paper puts forth a theory of the Industrial Revolution whereby an economy transitions from Malthusian stagnation to modern economic growth as firms implement cost-reducing production technologies. This take-off of industry occurs once the market reaches a critical size. The mechanism by which market size affects process innovation relies on two overlooked facts pre-dating England??s Industrial Revolution: the expansion in the variety of consumer goods and the increase in firm size. We demonstrate this mechanism in a dynamic general equilibrium model calibrated to England??s long-run development, and explore how various factors affected the timing of its industrialization.     

On Pollution Permit Banking and Market Power

We consider a pollution permit market with a large firm and fringe of competitive firms. To smooth compliance towards a long-run emissions goal, firms are initially allocated a stock (i.e., bank) of permits that can be gradually consumed. We first show how the large firm can credibly manipulate the spot market in subgame-perfect equilibrium. Motivated by features observed in the US market for sulfur dioxide emissions, we then show that the introduction of stock transactions has no effects on market power, but that forward trading and incomplete observability of stock holdings do have pro-competitive effects. Both authors are also Research Associates at the MIT Center for Energy and Environmental Policy Research.     

Macroeconomic shocks and stock market returns: the case of Korea

This study examines the effects of macroeconomic shocks on key macro variables, including stock market returns in Korea, using the structural vector autoregression (SVAR) model. We suggest a three-variable SVAR model incorporating inflation, output growth and stock returns. We adopt a nonzero z-ratio restriction for the long-run identifying assumption to allow for economically meaningful relationships among variables. While our results support the negative (positive) relation of demand (supply) shocks to stock returns, we also find that demand shocks influence stock market variance more significantly than supply shocks do. The sub-period analysis finds that global market fluctuations during the global financial crisis have relatively little effect on Korean stock market performance. We also examine a generalized five-variable model that includes the foreign exchange rate and interest rate, confirming the results from the three-variable case.     

Capital as a commitment: Strategic investment to deter mobility

This paper analyzes how an early entrant in a market can exploit its head start by strategic investment. The analysis is based on Spence's paper, Investment strategy and growth in a new market, (Bell J. Econ., 10 (1979), 1–19). We frist study the investment game in the no-discounting case, which embodies the key features of mobility deterrence. We establish the existence of a set of perfect equilibria and suggest that one particular equilibrium is most reasonable. This equilibrium, also valid with discounting, involves the follower firm being forever deterred from investing to its steady-state reaction curve, in contrast to Spence's proposed solution.     

Long-run money demand in OECD countries: what role do common factors play?

This article examines the long-run money demand function for 11 OECD countries from 1983Q1 to 2006Q4 using panel data. The distinction between common factors and idiosyncratic components using principal component analysis allows for the detection of cross-member cointegration and the determination as to whether national or international sources are responsible for the non-stationarity of money and its determinants. Indeed, the finding that the common factors are I(1) while the idiosyncratic components are I(0) indicates that cross-member cointegration may exist and non-stationarity in the variables is primarily driven by common international trends. Furthermore, it is found that the impact of income on money demand is positive, whereas it is negative for the interest rate, exchange rate and stock prices. Except for the income elasticity of money demand, all estimated long-run coefficients are larger for the common factors of the variables than for the variables themselves. This article provides evidence that the exchange rate is an important determinant of money demand, whereas the results for the stock prices are ambiguous. Finally, the results of a panel-based error-correction model suggest that several domestic money stocks converge to a common international equilibrium relationship between the common factors.     

On the long-run wealth distribution in a simple Ramsey model with heterogeneous households

This paper analyzes the long-run wealth distribution in a Ramsey model where individuals have a common rate of time preference but different intertemporal elasticities of substitution. As a result, it is shown that heterogeneity among households in intertemporal substitution is sufficient for the existence of a non-degenerate long-run wealth distribution. We also investigate the properties of the long-run wealth distribution and the transition of capital and consumption using the phase diagram.     

Environmental groups in monopolistic markets

We examine a market in which a monopolistic firm supplies a good. The production of the good causes damage to the environment. Consumers are heterogeneous with respect to their disutility of the environmental damage. An environmental group can enter the market and set up a campaign in order to influence consumers’ preferences. We characterize the equilibrium of the resulting entry-deterrence game and investigate its properties. It turns out that the aggregated environmental damage is lowest if the firm is able to deter entry of the environmental group and, moreover, the fixed entry cost of the environmental group is small enough.      

The number of commodities required to represent a market game

An n-person game with side payments that can arise from an economic market is called a market game. It is proved here that any n-person market game can be obtained from a market with at most n ? 1 commodities. Moreover, no smaller number will suffice in some cases (e.g., the unanimity game). This result is then applied to settle a question regarding market games with a continuum of traders.     

On the Invariance of the Rate of Return to Convex Adjustment Costs

The modified golden rule, which relates the rate of return on capital and the growth rate of the capital stock along long-run growth paths that maximize the utility of a representative infinitely lived consumer, is invariant to the introduction of convex capital adjustment costs. Therefore, along balanced growth paths in neoclassical optimal growth models with an exogenous long-run growth rate of capital, the rate of return is invariant to the introduction of convex adjustment costs, though the capital–labor ratio is reduced along such paths. In AK models, convex adjustment costs reduce the growth rate and rate of return on capital. Journal of Economic Literature Classification Number: E2.     

Stock Price Effects of Mandatory Exchangeable Debt

We study mandatory exchangeable debt offerings. A firm that issues mandatory exchangeable debt requires bondholders to exchange their bonds for shares of the underlying firm in which the issuing firm has a stake. We find significant announcement (−3.3%) and long-run (−13%) abnormal price declines for underlying companies. The evidence is consistent with the hypothesis that mandatory exchangeable debt issuers exploit private information that they possess to issue mandatory exchangeable debt when the underlying stock is overvalued.     

Natural gas prices and stock prices: Evidence from EU-15 countries

This study investigates the long-run relationship between natural gas prices and stock prices by using the Johansen and Juselius cointegration test and error–correction based Granger causality models for the EU-15 countries. We employ quarterly data covering the period from 1990:1 to 2008:1. Empirical findings suggest that there is a unique long-term equilibrium relationship between natural gas prices, industrial production and stock prices in Austria, Denmark, Finland, Germany and Luxembourg. However, no relationship is found between these variables in the other ten EU-15 countries. Although we detect a significant long-run relationship between stock prices and natural gas prices, Granger causality test results imply an indirect Granger causal relationship between these two variables. In addition, we investigate the Granger causal relationship between stock returns, industrial production growth and natural gas price increase for Austria, Denmark, Finland, Germany and Luxembourg. As a result, increase in natural gas prices seem to impact industrial production growth at the first place. In turn, industrial production growth appears to affect stock returns.     

Trade policy in the face of price and non-price strategies

When selling their products domestically or internationally, firms rely on more than just price as a strategic variable. They also rely on non-price instruments such as advertising and/or R&D investments. Any trade policy that affects or limits the use of one variable will likely have strategic consequences for the use of all the others. Using a Hotelling model with vertical differentiation we focus on how trade policy barriers alter price and non-price competition on the goods market. The main results are as follows: first, no matter whether the trade restriction (tariff) is placed on the non-price instrument or on the good itself, the foreign (domestic) firm prefers to increase (decrease) its use of its pricing tool and give up some of (increase) its use of the non-price instrument. Second, in the presence of a non-price instrument, tariffs do not always lead both firms to increase their price: it can lead the foreign firm to decrease its (final) price.     

Consistency and optimality in a dynamic game of pollution control II: Monopoly

This paper continues a line of research begun in Batabyal (1995a). I model the interaction between a regulator and a monopolistic, polluting firm as a Stackelberg differential game in which the regulator leads. The firm creates pollution, which results in a stock externality. I analyze the intertemporal effects of alternate pollution control measures. The principal issue here concerns the dynamic inconsistency of the optimal solution. Inter alia, I compare the steady state levels of pollution under optimal and under dynamically consistent policies.     

Advertising and Competition for Market Share between a New Good Producer and a Remanufacturer

We study the strategic interaction between a new good producer and a remanufacturer who use advertising campaigns to compete for a dominant share of the market for a certain good. Each firm chooses one of three possible strategies for running its advertising campaign. The two rival firms care only about capturing a dominant share of the relevant market. Hence, if a firm expects to capture dominant market share with probability p ∈ [0, 1], then its payoff in the game we study is also p. Our analysis leads to four results. First, we provide the normal form representation of the game between the new good producer and the remanufacturer. Second, we specify the game in matrix form. Third, we indicate what happens at each stage of the elimination of strictly dominated strategies. Finally, we show that the iterated elimination of strictly dominated strategies yields a clear and unique prediction about the outcome of the advertising game.