Optimal cartel trigger price strategies

A dynamical model of industry equilibrium is described in which a cartel deters deviations from collusive output levels by threatening to produce at Cournot quantities for a period of fixed duration whenever the market price falls below some trigger price. In this model firms can observe only their own production level and a common market price. The market demand curve is assumed to have a stochastic component, so that an unexpectedly low price may signal either deviations from collusive output levels or a “downward” demand shock.     

Delivering endogenous inertia in prices and output

This paper presents a DGE model in which aggregate price level inertia is generated endogenously by the optimizing behavior of price-setting firms. All the usual sources of inertia are absent here i.e., all firms are simultaneously free to change their price once every period and face no adjustment costs in doing so. Despite this, the model generates persistent movements in aggregate output and inflation in response to a nominal shock. Two modifications of a standard one-quarter pre-set pricing model deliver these results: learning-by-doing and habit formation in leisure. While the model delivers persistence, simulations based on estimated shocks to tfp and money growth suggest both output and inflation are too volatile relative to the data and fail to closely follow the historical time series.     

Efficient regulation of a labor managed monopolistic firm

Labor managed firms are known to be inefficient in two respects. They produce an output which is too small from the social point of view and this output is produced inefficiently. More specifically, labor managed firms overcapitalize. We suggest a regulatory measure to be implemented through a ‘wage’ control. This kind of regulation has the advantage that it forces the firm to increase output and to use a more efficient input mix.     

OUTPUT CONTINGENT SECURITIES AND EFFICIENT INVESTMENT BY FIRMS

We analyze competitive economies with risky investments. Unlike the classic Arrow–Debreu framing, firms and agents cannot contract upon the exogenous states underlying production risks. They can trade equities and any security written on the endogenous aggregate output. This financial structure is rich enough to promote efficient risk sharing among consumers. However, markets are incomplete from the production perspective, and the absence of prices for each primitive state of nature raises the question about the objective of firms. We show that output‐contingent asset prices convey sufficient information to compute the competitive shareholder value that leads to efficient investment by firms.     

Making Sense of Safeguards

The ASG was negotiated in response to the use of extralegal measures and inappropriate use of legal measures to restrict imports. More effective disciplines regarding implementation of Article XIX was recognized as an important unilateralism deterrent in policy implementation. These disciplines are subjective and objective. Disciplines that are quantifiable are more effective. Utilizing both balances rules and discretion. A home and foreign producer are used to assess SG in the context of adverse shocks. This framework entails a novel feature appropriate to SG. Firms are permitted to select optimal levels of downward flexibility in output in response to a possible shock. The extent of adjustment is directly related to the cost incurred. Firms choose flexibility in stage one and output in stage two. Without SG, firms will not insulate themselves completely from the conditional expectation of an adverse shock. Introducing the ASG increases the relative adjustment burden for the foreign firm.     

Adverse Selection and Pigou Taxes

It id assumed that firms have different technologies, and that an environment protection agency knows which technologies exist, but not which is used by which firms. Neither the emissions of individual firms nor their total emissions are observable. The output of each individual firm, however, can be monitored without cost. Based on this information tax schemes are constructed which induce firms to produce the socially efficient output quantities. Conditions about cost functions are derived which ensure the existence of tax schemes which yield first best solutions.     

TAX COMPETITION IN A SIMPLE MODEL WITH HETEROGENEOUS FIRMS: HOW LARGER MARKETS REDUCE PROFIT TAXES*

We set up a simple two‐country model of tax competition where firms with different productivity decide in which location to produce and sell output. In this model, a unique, asymmetric Nash equilibrium is shown to exist, provided that countries are sufficiently different with respect to their exogenous market size. Sorting of firms occurs in equilibrium, as the smaller country levies the lower tax rate and attracts the low‐cost firms. A simultaneous expansion of both markets that raises the profitability of firms intensifies tax competition and causes both countries to reduce their tax rates, despite higher corporate tax bases.     

Production and financial linkages in inter-firm networks: structural variety, risk-sharing and resilience

The paper analyzes how (production and financial) inter-firm networks can affect firms’ default probabilities and observed default rates. A simple theoretical model of shock transfer is built to investigate some stylized facts on how firm-idiosyncratic shocks are allocated in the network, and how this allocation changes firm default probabilities. The model shows that the network works as a perfect “risk-pooling” mechanism, when it is both strongly connected and symmetric. But the “risk-sharing” does not necessarily reduce default rates, unless the shock firms face is lower on average than their financial capacity. Conceived as cases of symmetric inter-firm networks, industrial districts might have a comparative disadvantage in front of heavy crises.     

Collateral constraints and the amplification mechanism

Kiyotaki and Moore (J. Polit. Economy 105 (1997) 211) have offered a theory for how common shocks to credit-constrained firms are amplified through changes in collateral values and transmitted as fluctuations in output. I clarify and extend their model by showing that their collateral amplification mechanism is not robust to the introduction of markets that allow these firms to hedge against common shocks. A theory of incomplete hedging is proposed in which the supply of hedging available in the economy is constrained by the aggregate value of collateral. I illustrate how the constraint reinstates amplification effects and discuss empirical implications of this new mechanism.     

FIRM SIZE AND EFFICIENCY IN THE SOUTH AFRICAN MOTOR VEHICLE INDUSTRY*

The South African motor vehicle industry has historically been considered a critical industry in the South African economy and the target of numerous government policies designed to protect it and/or increase its international competitiveness. This study examines the cost performance of firms in this industry according to their size, using data categorised by output level. The results are consistent with statistically significant economies of scale at the lowest output levels and a cost inefficiency averaging from about seven to nine per cent for all firms. The findings also suggest that all else equal, the smallest firms and the largest firms have lower unit costs than mid‐sized firms. While this work suggests that policies that would give incentives for the smallest firms to increase their scale of operations might help to reduce their unit costs, further investigation needs to be done with respect to why firms in the mid‐level size categories appear to be less efficient.     

Reviving and assessing the Kuznets law on innovation

We apply a panel vector autoregression model to a firm-level longitudinal database to observe the co-evolution of sales growth, employment growth, profits growth and the growth of research and development (R&;D) expenditure. Contrary to expectations, profit growth seems to have little detectable association with subsequent R&;D investment. Instead, firms appear to increase their total R&;D expenditure following growth in sales and employment. In a sense, firms behave ‘as if’ they aim for a roughly constant ratio of R&;D to employment (or sales). We observe heterogeneous effects for growing or shrinking firms, however, suggesting that firms are less willing to reduce their R&;D levels following a negative growth shock than they are willing to increase R&;D after a positive shock.     

Hedge fund activism and corporate innovation

This paper investigates the impact of hedge fund activism on corporate innovating activities. It finds that innovative firms are as likely to be targeted by activist hedge funds as non-innovative firms. Activist hedge funds tend to target innovative firms with low innovation efficiency. Hedge fund interventions are associated with significant improvements in innovation output in both highly competitive and less competitive industries. The improvement is more pronounced in active intervention events. Our results suggest that activist hedge funds are not myopic investors and their interventions enhance innovative activities that benefit innovative firms’ long-term performance.     

Financial structure and the effectiveness of pollution control in an oligopolistic industry

This paper explores the link between pollution taxes and the financial and output decisions of firms in an oligopolistic industry facing demand uncertainty. It is shown that environmental regulations such as pollution taxes may induce firms to alter their financial structure, which in turn influences both output levels and the effectiveness of the tax in controlling pollution emissions. It is demonstrated that there exist circumstances in which highly leveraged firms may respond to pollution taxes by expanding output and emission levels. This possibility arises in a leveraged oligopoly since the tax acts as a credible commitment device which leads to more aggressive competition in output markets.     

Average-cost pricing: Some evidence and implications

We present new survey evidence on pricing behavior for more than 14,000 European firms, and study its macroeconomic implications. Among firms that are price setters, roughly 75% respond that their prices are set as a markup on total costs, a business practice termed “full cost pricing”. Only 25% set prices as markups over variable or marginal costs. Moreover, using industry data for the U.S., we find that the correlation between changes in output prices and changes in variable input prices is significantly lower when fixed costs are likely to be more important.Since our results are similar to the findings in the classic and controversial paper of Hall and Hitch (1939) and subsequent survey evidence, we believe it worth studying the implications of full cost pricing for macroeconomics. We first propose a problem for the firm where full cost pricing can arise as optimizing behavior. We embed this problem, featuring an occasionally binding constraint, into a simple general equilibrium model. We show that when the model is hit by a shock that makes the constraint binding, the response of endogenous variables is amplified significantly more than it would be under the unconstrained regime.     

Regulating a Polluting Oligopoly: Emission Tax or Voluntary Agreement?

This paper compares, in a polluting oligopoly, an emission tax and a form of environmental policy called voluntary agreement (VA). Here there are two ways of reducing pollution: output contraction and end‐of‐pipe abatement. Given the imperfect competition, firms’ reaction to the tax is sub‐optimal. They reduce output excessively in order to raise the price and do not abate enough. The VA is a take‐it‐or‐leave‐it contract on abatement effort, offered to the firms with the threat of a tax. It has a limited effect on output and always allows higher abatement than the tax. We find that this kind of VA may be more efficient than the tax in a concentrated industry, when pollution is not too harmful and when the abatement technology is rather efficient and cheap.     

Multinational Firms and Strategic FDI Subsidies

A simple three‐stage game model of an international Cournot duopoly, consisting of domestic and foreign multinational firms, is exploited to examine strategic FDI subsidies. While in the first stage the governments decide the optimal FDI subsidies, the firms endogenously choose their FDI levels (or subsidiary plant sizes) in the second stage and their output–export levels in the third stage. Thus, this paper finds that while the outflow and inflow FDI subsidies have different effects on firms’ FDI choices, the FDI subsidies are used as tools for the implementation of strategic policies and that the optimal FDI subsidies vary, depending on whether the governments assess labor employment.     

Liquidity-profit rate cycles in a capitalist economy

A monetary economy consisting of independent capitalist firms, in which workers spend wages instantly and labor is not scarce, is studied The firms create demand for each other's output through their capital outlays, and create the backing for money through borrowing. When all firms are identical in behavior and initial conditions, and the rate of growth of money is constant, the economy may be unstable around the equilibrium steady state growth path due to strong accelerator effects, and follow a limit cycle trajectory.     

Duopoly signal jamming

Summary This paper examines a repeated duopoly market with heterogeneous outputs. Firms have (common) prior beliefs over the values of an unknown parameter of each firm's demand curve. Firms cannot observe rivals' quantities, but can observe market prices, which are subject to random disturbances and hence provide noisy information that firms use to update their beliefs concerning the unknown parameters' values. Each firm can potentially signal jam, or strategically vary its output level in order to manipulate the distribution of likely market prices and hence the likely inferences drawn by the opponent. We find that the opportunity to signal-jam introduces two conflicting effects, arising out of the desire to manipulate expectations concerning each of the two demand curves. Depending upon the relative magnitudes of these two effects, signal-jamming may lead firms to either increase or decrease period-one quantities. If the firms are symmetric, then the opportunity to signal jam induces both firms to increase output in order to induce their rival to conclude that demand is unfavorable. However, if the firms believe almost surely that one of the possible parameter values is true for firm 2's demand curve (for example), then firm 1 may signal-jam by producing less output.We thank two anonymous referees, an associate editor and Pieter Kop Jansen for helpful comments that corrected some errors. Larry Samuelson is grateful to the Center for Economic Research at Tilburg University and the Department of Economics at the University of Bonn for support. Financial support by the Deutsche Forschungsgemeinschaft (DFG) through Sonderforschungsbereich 303 is gratefully acknowledged.     

An Empirical Study on Corporate Governance and Market Valuation in China

This paper empirically studies the relationship between the governance mechanisms and the market valuation of publicly listed firms in China. The authors construct measures for corporate governance mechanisms and measures of market valuation for all publicly listed firms on the two stock markets in China by using data from the firm’s annual reports. They then investigate how the market-valuation variables are affected by the corporate governance variables while controlling for a number of factors commonly considered in market valuation analysis. A corporate governance index is also constructed to summarize the information contained in the corporate governance variables. The index is found to have statistically and economically significant effects on market valuation. The analysis indicates that investors pay a significant premium for well-governed firms in China, benefiting firms that improve their governance mechanisms. Translated from Economic Research Journal, 2005, 2 (in Chinese)     

Working capital requirement and the unemployment volatility puzzle

Shimer (2005) argues that a search and matching model of the labor market in which wage is determined by Nash bargaining cannot generate the observed volatility in unemployment and vacancy in response to reasonable labor productivity shocks. This paper examines how incorporating monopolistically competitive firms with a working capital requirement (in which firms borrow funds to pay their wage bills) improves the ability of the search models to match the empirical fluctuations in unemployment and vacancy without resorting to an alternative wage setting mechanism. The monetary authority follows an interest rate rule in the model. A positive labor productivity shock lowers the real marginal cost of production and lowers inflation. In response to the fall in price level, the monetary authority reduces the nominal interest rate. A lower interest rate reduces the cost of financing and partially offsets the increase in labor cost from a higher productivity. A reduced labor cost implies the firms retain a greater portion of the gain from a productivity shock, which gives them a greater incentive to create vacancies. Simulations show that a working capital requirement does indeed improve the ability of the search models to generate fluctuations in key labor market variables to better match the U.S. data.