Corporate social responsibility and strategic trade policy: An endogenous timing game and its policy implications

This study incorporates the corporate social responsibility (CSR) initiatives of a domestic firm and analyses strategic trade policy towards a foreign firm in a different market structure. We show that the tariff rate under a foreign (domestic) firm's leadership is lowest when the degree of CSR is large (small). We also show that the foreign firm's leadership yields the highest welfare when the degree of CSR is intermediate, while the domestic firm's leadership yields the highest welfare otherwise. In an endogenous‐timing game, we show that a simultaneous‐move outcome is the unique equilibrium when the degree of CSR is small; thus, it is never socially desirable. We also show that the domestic firm's leadership can be an equilibrium, which results in the highest welfare when the degree of CSR is large. Finally, when the degree of CSR is large, collusive behaviours between the domestic and foreign firms can increase welfare.     

The Impact of Foreign Aid Linked to Infrastructure and Pollution Abatement

This paper studies the macroeconomic effects of foreign aid taking into account environmental quality. We develop a dynamic equilibrium model in which public investments in both infrastructure and pollution abatement can be co‐financed using domestic resources and international aid. We consider untied aid, aid fully tied to either infrastructure or abatement and aid equally tied to both expenditures. We find that when the extent to which agents are affected by environmental problems is taken into account, then, regardless of the chances of substitution between factors, transfers linked to both infrastructure and pollution abatement may be the best welfare‐enhancing alternative.     

International Technology Transfer and Welfare

We investigate the welfare effect of international technology transfer in a quality model. A foreign innovator with a new quality product can license its innovation to the domestic firm(s) via a fixed fee. Findings show that the foreign innovator will license exclusively to the high‐quality firm under Bertrand competition, whereas it may exclusively license to the high‐quality firm, the low‐quality firm, or non‐exclusively to both firms under Cournot competition. Non‐exclusive licensing is necessarily welfare‐enhancing whereas exclusive licensing is welfare‐reducing if the quality of the new technology is not sufficiently superior to that of the domestic ones.     

ANTIDUMPING,INTRA‐INDUSTRY TRADE,AND QUALITY REVERSALS

We examine an export game where two (home and foreign) firms produce vertically differentiated products. The foreign firm is more R&D efficient and is based in a larger and richer market. The unique (risk‐dominant) Nash equilibrium exhibits intra‐industry trade, and the foreign producer manufactures a higher‐quality product. When transport costs are low, unilateral dumping by the foreign firm arises; otherwise, reciprocal dumping occurs. For some parameters, a domestic antidumping policy leads to a quality reversal in the international market whereby the home firm becomes the quality leader. This policy is desirable for the implementing country, though world welfare decreases.     

Cross‐border Lobbying in Preferential Trading Agreements: Implications for External Tariffs and Welfare

This paper examines the effect of cross‐border lobbying on domestic lobbying and on external tariffs in both Customs Union (CU) and Free Trade Area (FTA). We do so by developing a two‐stage game which endogenizes the tariff formation function in a political economic model of the directly unproductive rent‐seeking activities type. We find that cross‐border lobbying un‐ambiguously increases both domestic lobbying and the equilibrium common external tariffs in a CU. The same result also holds for FTA provided tariffs for the member governments are strategic complements. We also develop a specific oligopolistic model of FTA and show that tariffs are indeed strategic complements in such a model.     

Testing and the Composition of the Labor Pool

We consider a continuous‐time labor matching model with endogenous separation. Firms initially lack information about the quality of workers with whom they are matched. They acquire information both from pre‐employment testing and, in the case in which a labor relationship is established, on‐the‐job performance. Testing provides a signal of a worker's quality. A firm can pick the accuracy level of its test, but it pays a cost that increases in the accuracy. Workers who perform poorly on the test are not offered employment; those who perform poorly on the job are eventually fired (after some delay). Worker quality is not match‐specific; low‐quality workers are less productive with all firms. We show that, in equilibrium, there is an inverse and complementary relation between the level of testing that firms optimally perform and the overall quality of the workers in the matching pool. We consider the properties of a steady‐state, stable equilibrium in such an environment. The complementarity between testing and the composition of the unemployed pool introduces the possibility of multiple equilibria.     

PRICE FLOORS AND QUALITY CHOICE

This paper studies effects of price floors in a simple model of vertical product differentiation. We find that even non‐binding price floor (i.e., minimum price set below the lowest Nash equilibrium price in the baseline model) can increase quality on the market, if the cost of quality is sufficiently low. Where a binding price floor does not increase the equilibrium quality, it makes consumers worse off. There is also a possibility of over‐investment into quality as a result of the binding minimum price.     

On Mergers and Agglomeration

We formulate a model of mergers and acquisitions assuming a monopolistic competitive industry that exhibits agglomeration economies. We provide the conditions for the existence of a non‐trivial Nash equilibrium in the acquisition market at which the most productive firm acquires a range of less‐productive firms. Most importantly, we show that domestic merger and acquisition activities are international trade promotionary. We also show that such types of mergers and acquisition will improve the competitive position of foreign firms leading to an increase in their market share. In addition, domestic mergers and acquisitions will increase the number of imported varieties.     

A Model of Trade Liberalization in Services*

This paper develops an intra‐industry service trade model taking into account important features of services. We find that service trade liberalization between identical economies is welfare enhancing when the pre‐trade domestic market liberalization is limited. This holds regardless of the degree of trade liberalization and of the mode of supply. However, if the pre‐trade environment is characterized by a free‐entry equilibrium, then service trade liberalization is not necessarily welfare improving. It is welfare enhancing if the trade liberalization is full and the mode of supply is cross‐border. The gain from trade in our model comes from the improvement in service quality—better matching between consumers’ ideal varieties and firms’ product specificity. The implications for the mode of supply in service trade are also explored.     

Elections,Information, and State‐Dependent Candidate Quality

The quality of political candidates often depends on the current state of the world, for example because their personal characteristics are more valuable in some situations than in others. We explore the implications of state‐dependent candidate quality in a model of electoral competition where voters are uncertain about the state. Candidates are fully informed and completely office‐motivated. With a reasonable restriction on voters' beliefs, an equilibrium where candidates' positions reveal the true state does not exist. Nonrevealing equilibria always exist. Some main findings are that candidates' positions can diverge more in equilibrium when they differ more in state‐dependent quality and when the electorate is less well informed.     

Sovereign Debt Capacity and the Distribution of Domestic Wealth: A Common Agency Model*

This paper proposes a stylized two‐period, two‐country model illustrating the role of distribution of domestic wealth in determining a country's level of access to international lending. We model sovereign debt redemption policy in a common agency framework. Within this framework, policy is the outcome of the interaction between government and local and foreign interest groups with conflicting preferences on debt repayment. Our main result is that in full lobby competition, when all interests are represented, the only equilibrium solution is repudiation and the consequent inability of government to access international capital markets. Conversely, when the ability to lobby depends on wealth, governments can access international credit up to a given maximum external debt capacity, determined by the skew in the distribution of domestic wealth.     

A Simple Model of Contract Enforcement Institutions

We demonstrate that in highly productive economies contract enforcement institutions are endogenously established, and partnership contracts correct inefficient land allocation. In less productive economies, however, such institutions are not established, and partnership contracts are not formed. In economies with intermediate productivity levels, multiple Nash equilibria exist; that is, contract enforcement institutions are established in the high Nash equilibrium whereas they are not formed in the low Nash equilibrium. In this case, institutional quality can be diverse across economies. We also prove that improvement in institutional quality reduces within‐country inequality. All these outcomes are consistent with cross‐country observations.     

Should Mobile Marketers Collect Data Other Than Geo‐Location?*

We take today's mobile marketing data landscape as a starting point and consider a duopoly model of third‐degree price discrimination in which firms can complement geo‐location information with data on consumer flexibility of varying quality. We show that, depending on consumer heterogeneity, higher‐quality flexibility data affect profits according to three different patterns. In equilibrium, both firms tend to acquire data if the data are of high quality, while only one acquires data if the data quality is low. Firms are likely to gain from additional data if consumers have similar preferences and/or when data are precise. Although social welfare (weakly) improves, consumers can be harmed.     

MIDDLEMEN AND THE ADVERSE SELECTION PROBLEM

We demonstrate that the coexistence of an uncoordinated search market and a middleman market may alleviate adverse selection in the trade of goods of different quality. Inability to conduct trade penalizes sellers of low‐quality goods disproportionately, encouraging them to trade via middlemen. A semi‐separating equilibrium exists when a sufficient number of sellers of low‐quality goods choose the middleman market to allow high‐quality goods to be successfully traded in the search market. The result may explain why a search market can survive alongside a coordinated market, a phenomenon characteristic, for example, of markets for used cars, housing and labour.     

Simple Reputation Systems*

We develop a model of simple “reputation systems” that monitor and publish information about the behavior of sellers in a search market with asymmetric information. The reputations created influence the equilibrium search patterns of buyers and thus provide for market‐based “punishment” of bad behavior. We show that a reputation system that rewards honesty can enhance welfare by allowing good sellers to truthfully signal their type. However, the same system can be prone to strategic manipulation by sellers who always have low‐quality products. In that case, we show that an alternative system which assigns reputations based on product quality rather than honesty can be superior.     

ENDOGENOUS TIMING IN QUALITY CHOICES AND PRICE COMPETITION

We modify the price‐setting version of the vertically differentiated duopoly model by Aoki (2003) by introducing an extended game in which firms noncooperatively choose the timing of moves at the quality stage. Our results show that there are multiple equilibria in pure strategies, whereby firms always select sequential play at the quality stage. We also investigate the mixed‐strategy equilibrium, revealing that the probability of generating outcomes out of equilibrium is higher than the probability of playing one Nash equilibria in pure strategies. In the alternative case with full market coverage, we show that the quality stage is solved in dominant strategies and therefore the choice of roles becomes irrelevant as the Nash and Stackelberg solutions coincide. With full market coverage and corner solution, the results show that the game has a unique subgame perfect equilibrium in pure strategies, where the high‐quality firm takes the lead in the quality stage.     

STRATEGIC EQUILIBRIA IN A MODEL OF ECONOMIC GROWTH WITH INPUT INTERDEPENDENCE

Two countries face a strategic interdependence in producing intermediate goods. Producing these intermediate goods requires both domestic capital and another imported intermediate good. Individually, both economies determine a balanced growth path by taking into account this interdependence in different grades of awareness. By allowing for strategic interactions in the analysis, we adapted a two‐agent dynamic setting and find an interior Markov perfect equilibrium as well as an open‐loop equilibrium reflecting these different degrees of reaction. We find that main results resemble each other but growth rates will be higher when strategies are dynamically updated.     

Legal rules as a source of comparative advantage: A case study of telecommunication equipment interconnection

Legal rules governing the interconnection of customer-premises equipment (CPE) to the telephone network have economic implications for both producers and users of such equipment. The United States instituted a free-interconnection policy between 1968 and 1976; Canada, Japan, and the United Kingdom adopted similar policies in the 1980s. A free-interconnection policy can impose costs on domestic producers as a result of increased competition among both foreign and domestic producers, but it can also provide benefits to domestic users who gain access to the world market in CPE. Interconnection rules can therefore provide a comparative advantage to countries that adopt the most favorable policy.It is shown here that free interconnection has been a favorable policy for the United States. Costs to domestic CPE producers have been small, and benefits to large users appear to have been large, both in terms of increased product diversity and in terms of price and quality of established products. The movement toward free interconnection in other countries appears to be based on the favorable experience in the countries that have already made this change.This CPE example suggests a generalization that can be expressed in terms of the “market for regulation” concept. It is suggested that an equilibrium in this market occurs at the point of maximum benefits minus costs, as experienced by the participants in this market. This equilibrium is a “rule equilibrium.” In the case of CPE, the old equilibrium was at the no interconnection point while the new equilibrium is at the free interconnection point toward which the world is presently moving.     

THE EXISTENCE OF EQUILIBRIUM IN A DIFFERENTIATED DUOPOLY WITH NETWORK EXTERNALITIES*

The existence of a pure‐strategy subgame‐perfect equilibrium in qualities and prices is investigated in a duopoly model of vertical differentiation where quality improvements require a quadratic variable cost and network externalities operate. We show that there exists a parameter region where the incentive to predate at the quality stage prevents firms from reaching a pure‐strategy non‐cooperative equilibrium with prices above marginal costs. If network externalities are sufficiently large, a Bertrand equilibrium with zero profits may arise, although the amount of product differentiation is strictly positive.     

Markups of Exporters and Importers: Evidence from Hungary

In this paper, we study the relationship between different proxies of firm‐level markups and trade status, using balance sheet information linked to detailed trade data from Hungary between 1995 and 2003. We find that importing is strongly positively correlated with markup measures, both across and within firms. We argue that this correlation can reflect three channels: self‐selection, higher physical productivity resulting from access to a larger variety of inputs, and quality upgrading based on high‐quality imported intermediate inputs. We present evidence for the relevance of the third channel by showing that importers’ markup premium is higher when inputs arrive from developed countries, and that importing is correlated with higher‐quality (price‐adjusted revenue) exports. We find no robust evidence for exporter premium when controlling for importing. We argue that the non‐existent exporter premium might result from the stronger competition in export markets relative to domestic markets.