COMPETITION, PARALLEL IMPORTS AND COST-REDUCING INNOVATION

Incorporating parallel imports (PI), we develop a two‐country two‐firm model which relates to the incentives for cost‐reducing innovation. We show that PI may facilitate or inhibit the manufacturers' incentives to innovate. In particular, PI could encourage both firms' innovations. The difference between the manufacturer's profits under successful innovation and failed innovation is either a U‐shaped curve or an inverted U‐shaped curve in terms of the cost of engaging in PI. As these differences reflect the manufacturers' incentive to innovate, the variations in R&D investment depend on transportation cost, and firms' marginal costs before and after successful innovations.     

Job search and mobility in developing countries. Theory and policy implications

A labor market model is developed in which the formal sector is characterized by search frictions whereas the informal sector is competitive. We show that there exists a unique steady-state equilibrium in this dual economy. We then consider different policies financed by a tax on firms' profits. We find that reducing the unemployment benefit or the firms' entry cost in the formal sector induces higher job creation and formal employment, reduces the size of the informal sector but has an ambiguous effect on wages. We also find that an employment/wage subsidy policy and a hiring subsidy policy have different implications. In particular, the former increases the size of the informal sector while the latter decreases it.     

Standardization in electronic money

Abstract

Electronic money services are provided by the combination of Integrated Circuit (IC) cards and terminals. The compatibility of different brands of electronic money can be enabled by firms' joint adoption of standard terminals. In this paper, we analyse the effect of achieving compatibility among different brands of electronic money. We show that, if the unit production cost of a standard terminal is not so much different from that of a non-standard one, firms' joint adoption of standard terminals will increase the total sales of IC cards and the network size of terminals, thus raising consumers' surplus and firms' profits. On the other hand, if the unit cost of a standard terminal is so high that firms are discouraged from voluntarily adopting standard ones, the government may employ subsides to enhance efficiency. However, if the duty of implementing standardization is placed solely on the firms without subsidies, all the agents, including consumers and retailers, will be left worse off.     

Alcohol consumption in the UK, 1955–85: a system-wide analysis

As a consequence of economic reforms in China, firms have ben affected by three essential changes. First, instead of surrendering all profits to the Government, firms now pay tax on their profits according to a contract between them and the Government and retain the balance as their own controllable surplus. Second, the central economic plan determines only part of firms' production. After fulfilling the command plan, firms are allowed to adjust their production scale by the availability of inputs and the profitability of production. Third, most consumer and investment goods have two prices, a plan price and a market price. As most of the plan prices are always lower than the market prices, the latter play a basic role in determining firms' profits. After a decade of economic reforms, the important question is: can Chinese state enterprises perform like market entities? The analysis shows that Chinese firms in transition domimic the production behaviour of market-based, efficiency-oriented firms.     

Properties of knowledge base and firm survival: Evidence from a sample of French manufacturing firms

The paper analyzes the effects of the properties of firms' knowledge base on the survival likelihood of firms. Drawing upon the analysis of the patterns of co-occurrence of technological classes in patent applications, we derive the coherence, variety and cognitive distance indexes, accounting respectively for technological complementarity, differentiation and dissimilarity in the firms' patent portfolios. The results of our analysis are in line with the previous literature, showing that innovation enhances the survival likelihood of firms. In addition, we show that the search strategies at work in the development of firms' knowledge base matter in reducing the likelihood of a failure event. Knowledge coherence and variety appear to be positively related to firms' survival, while cognitive distance exerts a negative effect. We conclude that firms able to exploit the accumulated technological competences have more chances to be successful in competing durably in the market arena, and derive some policy implications concerning the role of public intervention in the orientation of search efforts in local contexts.     

Competition and confidentiality: Signaling quality in a duopoly when there is universal private information

We model non-cooperative signaling by two firms that compete over a continuum of consumers, assuming each consumer has private information about the intensity of her preferences for the firms' respective products and each firm has private information about its own product's quality. We characterize a symmetric separating equilibrium in which each firm's price reveals its respective product quality. We show that the equilibrium prices, the difference between those prices, the associated outputs, and profits are all increasing functions of the ex ante probability of high safety. If horizontal product differentiation is sufficiently great then equilibrium prices and profits are higher under incomplete information about quality than if quality were commonly known. Thus, while signaling imposes a distortionary loss on a monopolist using price to signal quality, duopolists may benefit from the distortion as it can reduce competition. Finally, average quality is lower since signaling quality redistributes demand towards low-quality firms.     

On modeling task,skill and technology upgrading effects of globalization with heterogeneous labor

We adapt Yeaple's (2005) heterogeneous agent framework to model firms in the North as making explicit offshore outsourcing decisions to cheap-labor economies. We highlight how firms' technology transformations due to globalization will induce skill upgrading in the North, increase aggregate productivity, average wages and therefore total welfare at the cost of increased wage inequalities. We analytically derive conditions under which all consumers – including lower-skilled workers – might nevertheless gain from the surge of offshore outsourcing. We also show that extending the model to the more realistic case of multi-product firms tends to boost the potential welfare gains.     

Finance constraints and technology spillovers from foreign to domestic firms

Scholars have suggested that externalities such as technology spillovers to domestic firms from the entry and presence of foreign firms – i.e., Foreign Direct Investment (FDI) spillovers – arise only when domestic firms possess adequate absorptive capacity. But they have also maintained a predominantly technological focus in their conceptualization of absorptive capacity, treating it mostly as a function of domestic firms' technological investments. Yet, several anecdotes point to finance constraints being equally important hurdles to absorbing technology. Given the comparatively scant attention to finance constraints in the FDI spillover literature, we present theoretical arguments and a counterfactual simulation for how finance constraints influence firms' realization of FDI spillovers. In the process, we identify two mechanisms underlying why firms facing high finance constraints experience lower FDI spillovers. (125 words).     

Local linkages: The interdependence of foreign and domestic firms in Ireland

This paper contributes to the literature on backward linkages—the degree of localization in input usage, focusing on the potential interdependence between foreign and domestic producer firms. Drawing on Irish sectoral data during 2000–2013, our main objective is to empirically examine how foreign and domestic producer firms' backward linkages might dynamically influence each other, and the extent to which they respond to export intensity and productivity levels from the two groups of firms. We find an interesting asymmetric interdependence pattern: (1) domestic firms' backward linkages are not impacted by the backward linkages of foreign firms; (2) more robust backward linkages of domestic firms can potentially induce more backward linkages from foreign firms; and (3) domestic firms' productivity shocks could generate a dynamic crossover impact on foreign firms' backward linkage status, but similar shocks originating from foreign firms generate little crossover impact on domestic firms’ backward linkage status. Our result on interdependent local linkages points to a potentially important role for domestic-to-domestic backward linkage formation in promoting foreign-to-domestic backward linkages.     

Tax compliance and firms' strategic interdependence

We focus on a relatively neglected area of the tax-compliance literature in economics, the behaviour of firms. We examine the impact of alternative audit rules on receipts from a tax on profits in the context of strategic interdependence of firms. The enforcement policy can have an effect on firms' behaviour in two dimensions — their market decisions as well as their compliance behaviour. An appropriate design of the enforcement policy can thus have a “double dividend” by manipulating firms in both dimensions.     

Emission taxes vs. environmental standards under partial ownership arrangements

This paper analyzes two pollution control instruments, uniform taxes and absolute standards, when polluting firms engage in partial ownership arrangements (POAs). Specifically, we examine the case of a bilateral POA between competing firms in which both hold equity shares on each other's profits as silent investments. We show that taxes and standards are equally efficacious in affecting the firms' output decisions and pollution emissions. Compared to the social planner's solution, a bilateral POA results in suboptimal outcomes with lower industrial output and consumer surplus. Firm profits are higher and environmental quality improves (since emissions decline), but social welfare decreases. We compare the equilibrium results associated with two different types of POAs (bilateral vs. unilateral), and examine their differences in welfare implications for the choice of policy options between taxes and standards.     

THE POTENTIAL FOR SHORT‐RUN SHIFTING OF A CORPORATE PROFITS TAX

Can the owners of a firm shift a corporate profits tax to consumers? Not in the short run if the tax is stated as a proportion of profits and the firm is a profit maximizer. But what if the firm wishes to pursue a strategy other than profit maximization, say revenue maximization subject to a profit constraint? Under such a condition the firm's reaction to a tax or tax increase might be a price rise that captures part of the foregone profits. We show that firms which operate at a point on their demand curve that differs from profit maximization have an incentive to raise price in response to the tax – and that high cost firms have a greater incentive to raise price than do low cost firms. Our empirical analysis of the US beer industry confirms this finding, and sheds light on the Krzyzaniak–Musgrave analysis of the 1960s which suggested that the corporation income tax produced significant short‐run shifting.     

Are the Energy Efficiency Technologies efficient?

This paper investigates a rather neglected issue regarding the impact of Energy Efficiency Technologies (EETs) on firms' productive performance. Possible influences may arise in the context of internal cost of adjustment, learning by doing effects and the capital vintage. A unique dataset was used which has resulted from a survey carried out among a sample of Greek EET adopters in the manufacturing sector. An econometric framework based on nested non-neutral frontiers, was developed to estimate the influence and the decomposition of EETs on firms' productive performance. The empirical findings reveal that the EETs affect positively the firms' technical efficiency and negatively the deterministic part of the frontier. Significant variations among industries and size groups appear to be present. Some policy implications are derived based on the empirical evidence supporting a mix of energy and technology directions.     

Commercialization of a demand-enhancing innovation: The release of a new apple variety by a public university

The upsurge of patented fruit varieties developed by university plant-breeding programs motivated this re-examination of optimal commercialization strategies when an innovator cares about profits for both itself and the licensees. Our theoretical findings suggest that the optimal licensing arrangement that maximizes weighted joint profits depends on the innovation level size, number of firms, and the weights assigned to the innovator and licensee profits. We designed an experiment to test the case with a small number of firms and found that the joint profits are the greatest under an exclusive per-unit royalty scheme. However, when the number of firms is large, as may be the case for a varietal introduction into the U.S. apple industry, our model suggests that the joint profits will be the largest under a nonexclusive contract, either with a two-part tariff, if the innovation level is high, or a per-unit royalty if the innovation level is low.     

Tax compliance and firm response to electronic sales monitoring

This paper analyzes how firms respond to an Internet of Things technology that reduces significantly the tax authorities' marginal cost of monitoring firm activity. More precisely, we analyze how mandating every restaurant of a single Canadian province to have sales recording modules (SRMs) affects restaurant sales, expenses and profits. We estimate that SRMs increase reported sales by 5.8% to 9.8% on average and that this increase is almost completely offset by an equal increase in expenses, including wages. As a result, the firms' taxable income remains mostly unchanged. Our results suggest that sales tax remittance enforcement at the firm level spills over to other firm stakeholders, such as employees and suppliers. Overall, the one-time cost of the device needed to monitor sales more efficiently is small compared with the recurring benefits for tax authorities.     

Asymmetric knowledge flows and localization with endogenous R&D: A dynamic analysis

Empirical evidence suggests that technological spillovers also depend on the mode chosen by firms to serve the foreign market, since a closer location increases the degree of knowledge transmission. Therefore multinationals may want to locate subsidiaries near sources of technological innovation and domestic firms may take advantage of this closer location by absorbing more easily technological knowledge. Within this context we analyse the interaction between firms' international strategy and innovative performance by using a dynamic oligopoly model where knowledge flows increase with geographical proximity. Our results illustrate the relationship between firms' innovation and foreign expansion strategy when localized spillovers are considered.     

The deductibility of provincial business taxes in a federation with vertical fiscal externalities

Should provincial business taxes be deductible under a federal profit tax? We show that the ‘optimal deductible,’ which neutralizes the vertical fiscal externality between the federal and provincial government, is the change in the federal tax base per dollar of tax revenue collected by the provincial government. The optimal payroll tax deductibility rate depends on the extent to which it is shifted to workers and on the difference between the federal tax rates on profits and on labour income. Two apparently contradictory positions – full deductibility of a payroll tax and non‐deductibility – are special cases of our model. La déductibilité des taxes provinciales imposées aux entreprises dans une fédération où il y a des externalités fiscales verticales. Est‐ce que les taxes provinciales imposées aux entreprises devraient être déductibles de l'impôt fédéral sur les profits? Les auteurs montrent que l'optimum de déductibilité qui neutralise les externalités fiscales verticales entre le fédéral et les provinces est le changement dans la base d'imposition fédérale par dollar de revenu fiscal collecté par le gouvernement provincial. Le taux de déductibilité optimal d'un impôt sur les salaires dépend de la portion du fardeau fiscal qui est déportée vers les travailleurs et de la différence entre les taux d'imposition du fédéral sur les profits et sur le revenu du travail. Deux positions apparemment contradictoires – pleine déductibilité d'un impôt sur les salaires et déductibilité nulle – sont des cas spéciaux du modèle général.     

THE PRICE OF SILENCE: MARKETS FOR NOISE LICENSES AND AIRPORTS*

This article presents a market design for the management of noise pollution created by aircraft traffic around airports. A local market for noise licenses allows noise generators to compensate noise victims and to meet social acceptability. We show that the market allows the market designer to implement the social planner's optimal allocation of flights as long as the latter does not put too high a weight in his/her objective function on firms' profits compared to the disutility of noise pollution. The fact that local representatives of noise victims may be strategic players does not fundamentally alter this finding. Because of the market auctioneer's information constraints, noise licenses are likely to distribute windfall gains to residents, which alters the urban structure in the long run.