Private labels, price rivalry, and public policy

The article examines (i) why low-quality private labels are introduced in some product categories and not in others, (ii) how the existence of a low-quality private label affects the pricing of a competing national brand, and (iii) how consumers’ surplus and welfare are affected by private labels. We find that the potential for private label introduction may—in return for national brand exclusivity in that particular retail store (exclusive dealing)—lead to price concessions from the producer of the national brand. If the national brand producer decides not to offer an exclusivity contract, a private label is introduced. In this case, private label introduction may lead to higher retail prices on national brands, which can be detrimental to consumer welfare as well as total welfare. We argue that our results have important implications for the interpretation of empirical results and the public policy towards national brands     

Warranty markets and public policy

Search equilibrium models in the Economics of Information concern themselves exclusively with consumer ignorance of the prices that different firms charge. Legal regulation dealing with information, on the other hand, concerns itself primarily with contact terms. In particular, firms are often required to warrant against product related defects on the supposed ground that firms respond to consumer ignorance only by degrading contract quality. This paper is the beginning of an attempt to make the Economics of Information useful to policymakers. It models a market for warranties under imperfect information and shows that firms are more likely to respond to consumer ignorance by raising prices for the warranties that consumers prefer rather than deleting warranties from consumer contracts. Hence, policymakers should be concerned more with reducing supracompetitive prices than with “improving” contract quality.     

The optimal public employment policy

This paper studies optimal public employment in a model with two types of labor, unskilled and skilled, and a single consumption good. A linear income tax is used to redistribute income. It is shown that, if the income tax and public employment levels are optimal, then there is less unskilled labor and more skilled labor in public production than is necessary to minimize costs at the prevailing gross wage rates. The robustness of this result is investigated by examining a second model.     

Export rivalry and exchange rate pass‐through

In this paper, we investigate the influence of market rivalry on firm‐level exchange rate pass‐through. Similar to Bloom et al. Econometrica, 80 , 1347–1393 (2013), we define market rivalry as product market proximity, and expect the cross market spillovers, that is, through leaked information or reputation, to affect firm‐level export price. Using a comprehensive dataset from Chinese exporters for the 2000–2007 period, we find that in response to a higher degree of market rivalry firms are less responsive to exchange fluctuations. This unresponsiveness suggests a higher degree of exchange rate pass‐through. The influence of market rivalry is stronger among firms that export consumption and heterogeneous products, and to developed countries. Our results are robust to different measures of market rivalry and specifications.     

Woodsy the optimal owl: Environmental campaigns, norms, and implications for public goods policy

Norms regarding private provision of a public good (e.g. cutting down on energy use, not littering) can affect the marginal gains from contributing to a public good and therefore people's decisions about contributing to the public good. A model is proposed in which norms of private contributions to a public good can be influenced by public policy, and these norms affect people's self-image, which derives from a comparison of one's own contribution with the norm contribution. In this context, we examine the conditions under which private contributions to a public good are efficient, and the conditions under which policy affecting these norms improves social welfare. We find that (1) a benevolent social planner who fails to account for private provision norms will underprovide the public good, and (2) public policy that attempts to raise the norm contribution of private provision can increase social welfare if the effect of raising the norm does not have an extreme negative effect - either extremely small or extremely large - on peoples' self-image.     

Labour markets, liquidity, and monetary policy regimes

Abstract.  We develop an equilibrium model of the monetary policy transmission mechanism that highlights information frictions in the market for money and search frictions in the labour market. The information friction increases the persistence in the response of interest rates following monetary policy regime shifts. This occurs because agents have incomplete information about the nature of the shifts and optimally update their inflation forecasts using an 'adaptive' expectations rule. The search friction transmits the interest rate movements to the labour market by affecting job creation activities; together, the two frictions imply that unemployment reacts very gradually to monetary policy shocks. JEL Classification: E4, E5     

Location and ownership of public goods

We introduce location choice for the public good in the property rights framework. We find that it can be optimal to separate location from ownership.     

Endogenous asset ownership structures in deregulated markets

This paper determines the equilibrium ownership structure in an emerging market deregulated by a joint privatization and investment liberalization. It is shown that bidding competition in the privatization stage is not sufficient for reaching an efficient equilibrium market structure. Competition in the ensuing entry stage is also required. Otherwise, one firm can induce another to take the role of the weak firm in the subsequent product market competition, by making concessions in the bidding in the privatization auction. It is also shown that Employment Guarantees may “help” the buyer of the privatized firm “abstain” from investing and thus create a less competitive market structure.     

Government spending, capital accumulation and the optimal policy rule: The role of public service capital

In this paper, we modify the Djajić [Djajić, S., 1987. “Government Spending and the Optimal Rates of Consumption and Capital Accumulation,” Canadian Journal of Economics 20, 544–554.] model in such a way that government consumption expenditure provides utility to households via the total stock of government services rather than the government consumption flow alone. By using such a framework, we show that the optimality condition for the public service capital stock is the marginal rate of substitution between public service capital and consumption that equals the intertemporal marginal rate of transformation between the two goods. In addition, we show that the relationship between private consumption and public service capital in a household's utility plays an important role in determining the transitional behavior of relevant variables. We also examine the second-best government consumption expenditure policy. By contrast, in the standard flow specification, e.g., Turnovsky and Brock [Turnovsky, S.J. and Brock, W.A., 1980. “Time Consistency and Optimal Government Policies in Perfect Foresight Equilibrium,” Journal of Public Economics 13, 183–212.], Ihori [Ihori, T., 1990. “Government Spending and Private Consumption,” Canadian Journal of Economics 23, 60–69.], and Turnovsky and Fisher [Turnovsky, S.J. and Fisher, W.H., 1995. “The Composition of Government Expenditure and its Consequences for Macroeconomic Performance,” Journal of Economic Dynamics and Control 19, 747–786.], the second-best government consumption expenditure is decided on the basis that the marginal utility of consumption is equal to the discounted sum of the marginal utility of the government's flow spending.     

Health investment, saving, and public policy

Abstract.  This paper develops an overlapping‐generations model in which agents invest in health to prolong life in both working and retirement periods. It explores how unfunded social security with or without health subsidies affects life expectancy, economic growth, and welfare. In particular, by extending life at a possible cost of capital accumulation, health subsidies and a pay‐as‐you‐go pension can improve welfare, especially in the short run. JEL classification: I12, J14, J18, O11     

Directed search, unemployment and public policy

Abstract .  We examine the effects of public policy parameters in a simple directed search model of the labour market, and contrast them with those in standard random matching models with Nash bargaining. Both finite and limit versions of the directed search model are considered, and the value of the limit model as an approximation of the finite one is assessed. As with the random matching model, job creation is the key channel through which the policy parameters affect the equilibrium of the directed search model. Both comparative static effects of the policy parameters and optimal configurations are identified.     

Optimal ownership of public goods reconsidered

Consider a non-governmental organization (NGO) that can invest in a public good. Should the government or the NGO own the public project? In an incomplete contracting framework with split-the-difference bargaining, Besley and Ghatak (2001) argue that the party who values the public good most should be the owner. We demonstrate the robustness of their insight when the split-the-difference rule is replaced by the deal-me-out solution. Our finding is in contrast to the private good results of Chiu (1998) and De Meza and Lockwood (1998), who show that the optimal ownership structure crucially depends on whether the split-the-difference rule or the deal-me-out solution is used.     

Domestic rivalry and export performance: theory and evidence from international airline markets

Abstract .  The much studied relationship between domestic rivalry and export performance consists of those supporting a national-champion rationale, and those supporting a rivalry rationale. While the empirical literature generally supports the positive effects of domestic rivalry, the national-champion rationale actually rests on firmer theoretical ground. We address this inconsistency by providing a theoretical framework that illustrates three paths via which domestic rivalry translates into enhanced international exports. Furthermore, empirical tests on the world airline industry elicit the existence of one particular path – an enhanced firm performance effect – that connects domestic rivalry with improved international exports.     

Infant mortality,relative income and public policy

Do health outcomes depend on relative income as well as on an individual's absolute level of income? We use infant mortality as a health status indicator and find a significant and positive link between infant mortality and income inequality using cross-national data for 93 countries. Holding constant the income of each of the three poorest quintiles of a country's population, we find that an increase in the income of the upper 20% of the income distribution is associated with higher, not the lower infant mortality. Our results are robust and not just caused by the concave relationship between income and health. The estimates imply a decrease in infant mortality by 1.5% for a one percentage point decrease in the income share of the richest quintile. The overall results are sensitive to public policy: public health care expenditure, educational outcomes, and access to basic sanitation and safe water can explain the inequality–health relationship. Thus, our findings support the hypothesis of public disinvestment in human capital in countries with high income inequality. However, we are not able to determine whether public policy is a confounder or mediator of the relationship between income distribution and health. Relative deprivation caused by the income distance between an individual and the individual's reference group is another possible explanation for a direct effect from income inequality to health.     

News shocks,nonseparable preferences,and optimal monetary policy

Extending and modifying the canonical New Keynesian (NK) model by embedding a nonseparable Jaimovich/Rebelo (2009)-type utility function, this study provides a novel approach to examine the impact of anticipated shocks, called “news shocks”, on business cycles. It can be shown that news shocks cause larger economic fluctuations than unanticipated shocks of the same form and thus behave in a welfare-reducing manner. Given this, the paper explores how (optimal) monetary policy should be conducted. In line with earlier studies, the investigation of several Taylor-type interest rate rules shows that the lowest welfare losses can be achieved based on rules that respond to both contemporaneous and expected future macroeconomic conditions.     

Uncertainty shocks,precautionary pricing,and optimal monetary policy

Existing studies show that, in standard New Keynesian models, uncertainty shocks manifest as cost-push shocks due to the precautionary pricing channel. We study optimal monetary policy in response to uncertainty shocks when the precautionary pricing channel is operative. We show that, in the absence of real imperfections, the optimal monetary policy fully stabilizes the output gap and inflation, implying no policy trade-offs. Our result suggests that precautionary pricing matters only insofar as expected inflation is volatile. Thus, a simple Taylor rule that places high weight on inflation leads to a stabilized output gap, thereby attaining the “divine coincidence”.     

Price rules, wage indexing, and optimal monetary policy

There has been a recent increased interest in a monetary price rule. This paper analyzes the efficiency of such a monetary rule within the context of a rational expectations macro model. We compare the price rule with the standard money rule and interest rate rule. We find that as the supply shock variance approaches zero the price rule dominates both a money and interest rate rule. We then investigate the efficiency of these alternative money rules when we allow wage indexation to the price level.