Crowding out: A test of some direct substitutability hypotheses

The crowding-out effect has received considerable attention in recent years. Models of crowding out can be categorized into ex-ante and ex-post theories. Within the category of ex-ante theories are those models that rely upon direct substitution effects [e.g., Bailey (1972), David and Scadding (1974)). This paper presents a theoretical model that includes different theories of direct substitution effects as special cases. Once parameter restrictions are associated with the various forms of direct substitutability, the paper performs tests of the alternative hypotheses.     

Prediction of financial distress for multinational corporations: Panel estimations across countries

This research predicts ex-ante financial distress and analyses the link between financial distress, performance, employment, `and research and development (R&D) investment in the case of multinational companies (MNCs). The conditional logit and hazard models are employed to predict financial distress, while a conditional mixed process model is employed to obtain consistent and efficient estimates. Financial distress generates contractions in performance, employment, and R&D investment. Hedging against risk mitigates the effect of financial distress on R&D. Our findings vary across countries, for example, we find MNCs in Canada, Israel and the U.S. benefit from hedging against risk. The findings also indicate that ex-ante financial distress is detrimental to employment for Canada, the U.K., the Netherlands and the U.S. The findings indicate the MNCs play different roles across countries in contributing jobs, investment in R&D during the distress period.     

Cooperation in R&D and production: a three-firm analysis

The paper analyzes, in a model of quantity-setting three firms, the interaction between cooperation decisions at the R&D stage and merger decisions at the production stage. We assume that only two of the three firms are capable of doing cost-reducing research. Two types of cooperative research, viz., the knowledge-sharing agreement and research joint venture are considered. Cost reduction in the case of a successful research joint venture is larger compared to knowledge sharing or independent research, due to possible synergies. We show that allowing mergers can change the organization of the R&D process, and admitting cooperative research can affect the occurrence and nature of mergers at the production stage.     

Sorting versus screening: Search frictions and competing mechanisms

In a market where sellers compete by posting trading mechanisms, we allow for a general search technology and show that its features crucially affect the equilibrium mechanism. Price posting prevails when meetings are rival, i.e., when a meeting by one buyer reduces another buyer's meeting probability. Under price posting buyers reveal their type by sorting ex-ante. Only if the meeting technology is sufficiently non-rival, price posting is not an equilibrium. Multiple buyer types then visit the same sellers who screen ex-post through auctions.     

Belief flipping in a dynamic model of statistical discrimination

The literature on statistical discrimination shows that ex-ante identical groups may be differentially treated in discriminatory equilibria. This paper constructs a dynamic model of statistical discrimination and explores what happens to the individuals who nonetheless overcome the initial discrimination. If an employer discriminates against a group of workers in her initial hiring, she may actually favor the successful members of that group when she promotes from within the firm. The worker's welfare implications (i.e. who benefits from an employer's discriminatory hiring practices) are unclear. Even though agents face discrimination initially, some may be better off because of it.     

Inter-firm knowledge diffusion, market power, and welfare

We propose an infinite-horizon quantity-setting differential game with learning spillovers and organizational forgetting to analyze the optimal management decisions affecting the evolution of the stock of know-how, and, in turn, the dynamics of productive efficiency. Specifically, we study the long run impact of inter-firm knowledge diffusion on market power, i.e. the ability of a firm to raise the price above the marginal cost, and welfare. We consider two types of processes through which knowledge is acquired: (i) passive learning, or learning-by-doing, where managers do not actively invest in information and (ii) active learning, or learning-by-investing, where managers acquire new and additional information through specific investments in human capital. We show that: under (i), knowledge diffusion reduces market power; under (ii), knowledge diffusion reduces market power as long as learning spillovers are sufficiently important. From a welfare viewpoint, we also show that: under (i), knowledge diffusion is always welfare-enhancing; under (ii), weak spillovers are required in order for knowledge diffusion to be welfare-enhancing.     

Strategic commitment and Cournot competition with labor-managed and profit-maximizing firms

This paper examines the behavior of a labor-managed income-per-member-maximizing firm and a profit-maximizing firm in a quantity-setting model with a strategic commitment. First, each firm independently decides whether or not to make a commitment to capacity. This capacity may subsequently be increased, but cannot be decreased. Hence, each firm’s investment choice changes its capital cost from a variable one into a fixed one. Second, each firm independently chooses its actual output. The paper examines the equilibrium of the quantity-setting mixed model and shows whether or not capacity investment is effective for the labor-managed firm and the profit-maximizing firm.     

Fiscal policy rules,budget deficits,and forecasting biases

In this paper, we analyze the impact fiscal policy rules have on budget deficits and forecasting biases in official budget outlooks. Persistent budget deficits and over-optimistic budget forecasts have been observed in many countries in the past, especially in the euro area. To prevent such developments from happening in the future, fiscal rules have been revised or implemented with the aim to strengthen both preventive (ex-ante) and corrective (ex-post) elements of fiscal rules frameworks. Do such ex-ante and ex-post rules differ in their effects? In an attempt to answer this question, we build a two-period model and distinguish between ex-ante rules that apply to budget forecasts and ex-post rules that apply to realized budget deficits. Our model indicates that effectively enforced ex-post rules are more effective than ex-ante rules at reducing budget deficits. Interestingly, ex-ante rules differ from ex-post rules in their effects on forecasting biases. Only ex-post sanctions reduce forecasting biases, while ex-ante rules have no impact on such biases. In addition, we show that political stability and the size of government increase the effectiveness of fiscal rules. If, however, financial markets have a disciplining effect on governments, the effectiveness of fiscal rules is reduced. Our results imply that if fiscal policy rules cannot be effectively enforced, reforming other areas such as electoral rules or financial market regulations might be a more promising approach to ensuring sound public finances than fiscal policy rules.     

On the role of money in a business cycle model of a small open economy: The case of Spain

This paper examines the consequences of introducing a cash-in-advance constraint into a small open economy business cycle model for the Spanish case. A business cycle model is built extending Correia, Neves and Rebelo's (1995) small open economy framework and Cooley and Hansen's (1995) monetary economy. Money is introduced through a cash-in-advance constraint. The stochastic simulation of the model and its comparison to Spanish data show that the model is able to mimic i) the Dolado et al. puzzle, that is, the high volatility of private consumption for this economy; ii) the Dunlop-Tarshis observation, i.e., the negative correlation between real wages and hours worked; and iii) some cyclical features of the nominal dimension.     

Low-quality leadership in a vertically differentiated duopoly with Cournot competition

We model a vertically differentiated duopoly with quantity-setting firms as an extended game in which firms noncooperatively choose the timing of moves at the quality stage, to show that at the subgame, perfect equilibrium sequential play obtains, with the low-quality firm taking the leader’s role.     

外部选择与关系专用性投资激励——基于GHM模型的研究

现实中的契约总是不完全的,当自然状态被参与人观察到之后,为了保证交易有效率,通常会对事前契约进行再谈判.首先,论文研究了事后再谈判时参与人的外部选择对事后合作租金的分配影响及事前关系专用性投资激励问题;其次,根据外部选择是否具有约束力,将外部选择区分为威胁点和现状点.研究结果显示:当外部选择为现状点时,不完全契约会导致事前关系专用性投资不足;而如果事后外部选择为威胁点时,投资方会作出有效率投资或投资过度     

Equilibrium in a decentralized market with adverse selection

Summary. This paper deals with trade volume and distribution of surplus in markets subject to adverse selection. In a model where two qualities of a good exist, I show that if trade is decentralized (i.e. conducted via random pairwise meetings of agents), then all units of the good are traded, and all agents have positive ex-ante expected payoffs. This feature is present regardless of the quality distribution, and persists in the limit as discounting is made negligible. This offers a sharp contrast to models of centralized trade with adverse selection (Akerlof, Wilson). Received: April 2, 2001; revised version: March 29, 2002 RID="*" ID="*" This research was funded by a grant from UQAM. I wish to thank Roberto Serrano and seminar participants at UQAM, Queen's University at Kingston, the 2001 CEME General Equilibrium Conference (Brown University), and the 2001 North American Summer Meeting of the Econometric Society (University of Maryland) for comments.     

Measuring market power in multi-product oligopolies: the US meat industry

This paper develops and estimates an economic model for measuring market power in a quantity-setting oligopoly engaged in the joint production of demand-related goods. The model, which allows for firms' conjectures about both same and cross-market responses to own output variation, is applied to the US meat (beef and pork) industry. He hypothesis that the industry's equilibrium reflects price taking behaviour is rejected. The hypothesis of no cross effects cannot be rejected. Roughly, half of the farm-to-retail price spreads for beef and pork appear to be attributable to market power.     

Quantity-setting games with a dominant firm

We consider a possible game-theoretic foundation of Forchheimer’s model of dominant-firm price leadership based on quantity-setting games with one large firm and many small firms. If the large firm is the exogenously given first mover, we obtain Forchheimer’s model. We also investigate whether the large firm can emerge as a first mover of a timing game.     

Additive versus multiplicative trade costs and the gains from trade liberalizations

This paper addresses welfare effects from trade liberalization in a Melitz ( 2003 ) heterogeneous‐firms trade model including the empirically important per‐unit (i.e., additive) trade costs in addition to the conventional iceberg (i.e., multiplicative) and fixed trade costs. The novel contribution of the paper is the result that the welfare gain for a given increase in trade openness is higher for reductions in per‐unit (additive) trade costs than for reductions in iceberg (multiplicative) trade costs. The ranking derives from differences in intra‐industry reallocations and, in particular, from dissimilar impacts on the number of exporters (i.e., the extensive margin of trade).     

Speculative attacks and defenses as wars of attrition

This paper extends the currency crisis models in Obstfeld [Obstfeld, M., 1994. The logic of currency crises. Cahiers Economiques et Monetaries], [Obstfeld, M., 1996. Models of currency crises with self-fulfilling features. European Economic Review 40, 1037–1047] by modeling both the government's side and speculators' side and introducing uncertainty about each party's payoff. We argue that a speculative attack (defense) can be well modeled as a war of attrition between the government and speculators under asymmetric information. We then solve for a pure strategy, weakly perfect, Bayesian rational expectation equilibrium in which each party's time until concession depends on her benefits from winning and her costs of fighting. Using this model, we are able to explain important facts of currency crises. First, the model shows that failed defenses (attacks) can be ex-ante rational for governments (speculators). Second, the model predicts systematic variations in the durations of defenses. Finally, we also show that currency crises can be self-fulfilling in the sense that there exist multiple rational expectation equilibria in our model.     

Outside vs. Inside Entrepreneurs: When Institutions Bind and Favors Blind

In some societies, entrepreneurs coming from outside of a community (i.e., outside entrepreneurs) are more active than entrepreneurs from within the community (i.e., inside entrepreneurs). Institutions and relationships that entrepreneurs entertain may hamper insiders from starting or succeeding. Institutional economics and anthropology suggest that, rather than outside entrepreneurs having more resources, the case may be that inside entrepreneurs could be hampered by existing institutions that blind and social relations that bind. Outsiders, however, may be less inclined to generate societal value in a community.     

Corporate social responsibility and marketing channel coordination

We analyze a simple linear demand bilateral monopoly situation where one of the firms, either the up-stream manufacturer or the down-stream retailer, is socially concerned in terms of its desire to enhance its end-customers’ welfare in addition to the traditional profit motive. Two cases are explored: the up-stream producer exhibits corporate social responsibility (CSR) in one case and the down-stream retailer in the other. In the two-stage game, the retailer makes their quantity-setting decision in stage-two, given the two-part tariff (wholesale price and fixed franchise fee) set by the stage-one producer. In this setting, among other things, we find that the optimal channel-coordinating tariff is very different from the standard pure profit-maximizing two-part tariff. For example, if either firm in the supply/marketing chain exhibits CSR, we show the optimal wholesale price does not equal the manufacturer’s marginal production cost, nor does the fixed fee equal the monopoly profit earned by the retailer. Finally, we find that our two-part tariff CSR model provides a theoretical rationale for the empirical finding of little to no correlation between CSR and firm profits.     

Social articulation as a condition for equitable growth: A Comment

This paper shows that the model of De Janvry and Sadoulet embodies the assumption of money illusion. When this assumption is removed in a particular way, this model is shown to be socially articulated, i.e., it exhibits equalising growth. Social disarticulation can, however, occur in modified versions of the original model. This is illustrated by a model incorporating a Cambridgian closure (i.e., exogenous investment).     

Monitoring and collusion with 'soft' information

In the standard principal-supervisor-agent model with collusion,Tirole (1986) shows that employing a supervisor is profitablefor the principal if the supervisor's signal of the agent'scost of production is 'hard' (i.e., verifiable but hideable).Anecdotal evidence suggests that information is sometimes 'soft'(i.e., unverifiable). We show that, in fact, it is profitableto employ a supervisor when information is 'soft' even thoughthe three parties can collude. Therefore, standard applicationsof the principal-supervisor-agent model to regulation and auditinghave more scope than previously thought.