Carbon sequestration and permit trading on the competitive fringe

This paper makes two contributions to the carbon-sequestration policy literature. First and foremost, we develop a theoretical framework in which sequestration and permit-trading markets are analyzed jointly in the context of a competitive fringe model. Our framework formalizes the linkage between regulatory policy changes (as they manifest themselves in the permit market) and subsequent equilibrium allocations in the sequestration market. Second, we perform a numerical analysis demonstrating the role market structure, or market power, might play in the determination of the equilibrium sequestration allocation and carbon price. Both our analytical and numerical results demonstrate the importance of incorporating into empirical supply-side models demand-side information that is reflective of an underlying market structure.     

The top-dog and the lean and hungry look strategies in endogenous entry

This paper examines the strategic commitment behavior of heterogeneous leaders in an endogenous market structure. We demonstrate that each leader's investment level is independent of the other leaders' characters. Furthermore, we show that a leader over-invests (resp. under-invests) when an investment increases (resp. decreases) the leader's marginal profitability. Such an investment always makes leaders employ aggressive strategies in the competition relative to those in a no-commitment case. This result implies that aggressiveness of leaders is a robust observation in an endogenous market structure.     

How strong is the global integration of emerging market regions? An empirical assessment

This paper attempts to evaluate the time-varying integration of emerging markets from a regional perspective based on a conditional version of the International Capital Asset Pricing Model (ICAPM) with DCC-GARCH parameters that allows for dynamic changes in the degree of market integration, global market risk premium, regional exchange-rate risk premium, and local market risk premium. Our findings reveal several interesting facts. First, the time-varying degree of integration of four emerging regions under consideration, satisfactorily explained by the regional level of trade openness and the term premium of US interest rates, has recently tended to increase, but these markets still remain substantially segmented from the world market. Second, the local market risk premium is found to explain more than 50% of the total risk premium for emerging market returns. Finally, we show that conditional correlations usually underestimate and overstate the measure of time-varying market integration. The empirical results of this study have some important implications for both global investors and policymakers with respect to dedicated portfolio investments in emerging markets and policy adjustments.     

Industry dynamics: Foundations for models with an infinite number of firms

This paper explores the connection between three important threads of economic research offering different approaches to studying the dynamics of an industry with heterogeneous firms. Finite models of the form pioneered by Ericson and Pakes (1995) capture the dynamics of a finite number of heterogeneous firms as they compete in an industry, and are typically analyzed using the concept of Markov perfect equilibrium (MPE). Infinite models of the form pioneered by Hopenhayn (1992), on the other hand, consider an infinite number of infinitesimal firms, and are typically analyzed using the concept of stationary equilibrium (SE). A third approach uses oblivious equilibrium (OE), which maintains the simplifying benefits of an infinite model but within the more realistic setting of a finite model. The paper relates these three approaches. The main result of the paper provides conditions under which SE of infinite models approximate MPE of finite models arbitrarily well in asymptotically large markets. Our conditions require that the distribution of firm states in SE obeys a certain “light-tail” condition. In a second set of results, we show that the set of OE of a finite model approaches the set of SE of the infinite model in large markets under a similar light-tail condition.     

Industry equilibrium with outside financing and moral hazard: Implications for market integration

In this paper, we study industry equilibrium under the assumptions that (1) firms need outside financing and (2) they have a moral hazard problem in taking potentially excessive risks. We characterize an industry equilibrium with credit rationing, where firms choose not to take risks, and compare this to the industry equilibrium in the absence of credit rationing. In both cases, we show that competition increases and prices decline as markets integrate. However, in markets with credit rationing there is typically more exit, a smaller decline in prices and, most strikingly, the market value of the industry increases rather than decreases.     

Exclusive contents and next generation networks

This paper analyzes the interaction between the market of contents and the development of the next generation network (NGN) industry. We assume structural separation between the network and service operators and the comparative advantage of the service operators depends on the access to premium contents. On one side, we analyze how the structure of the market of contents (the scope of exclusivity contracts) may affect deployment and competition in a NGN setting. On the other side, we endogenize the structure of the market of contents given the presence of NGNs, where a content provider can sell contents directly to consumers, by-passing telecom operators (disintermediation, over-the-top content). In this context, we show that exclusivity only occurs when the content is not highly valued by consumers. Finally, the implication of our analysis for the evolution of the telecommunications industry is discussed.     

Endogenous market power

In this paper we develop a framework to study markets with heterogeneous atomic traders. The competitive model is augmented as we provide traders with correct beliefs about their price impacts to define equilibrium with endogenously determined market power and show that such equilibrium exists in economies with smooth utility and cost functions and is generically determinate. Traders? price impacts depend positively on the convexity of preferences or cost functions of the trading partners and are subject to mutual reinforcement. Compared to the competitive model, the volume of trade is reduced, and hence is Pareto inefficient. The price effects of non-competitive trading depend on the convexity of marginal utility or cost function.     

How globally contagious was the recent US real estate market crisis? Evidence based on a new contagion test

This paper utilizes a new contagion test based on case-resampling bootstrap technique to investigate whether there is any contagion effect in the interaction of the US real estate market with those of Australia, Japan and the UK arising out of the recent US real estate crisis or subprime crisis. Contrary to expectations, it is found that the relationship of the US market with the other markets following the US real estate market crisis cannot be characterized as one with contagion effect. Its relationship with the other markets is rather characterized by dependency behavior that prevails regardless whether the markets are under distress or not.     

Return spillovers around the globe: A network approach

We study the connectedness of a sample of 40 stock markets across five continents using daily closing prices and return spillovers based on Granger causality. All possible 1560 return spillovers between 40 markets create a complex network of relationships between equity markets around the world. Apart from analyzing the topological and time-varying properties of the created networks, we also identify the determinants of the connectedness of equity markets over time. Adjusting for non-synchronous trading, our modelling approach leads to evidence that the probability of return spillover from a given stock market to other markets increases with market volatility and market size and decreases with higher foreign exchange volatility. We empirically show that the temporal proximity between closing hours is important for information propagation; therefore, choosing markets that trade during similar hours bears an additional risk to investors because the probability of return spillovers increases.     

Pricing flexibility under rate-of-return regulation: Effects on network infrastructure investment

When a commodity market relies upon a regulated network service industry—e.g., telecommunications, electricity, or natural gas transmission—economic efficiency in that commodity market is a crucial consideration for regulatory design. This is because insufficient infrastructure investment relative to network demand results in congestion. The extraction of associated rents has distortionary effects on commodity spot market prices. Greater regulatory flexibility in network pricing can alleviate such issues by cultivating the incentives needed for stakeholders to invest in transmission capacity. To illustrate this effect I derive and numerically solve stylized optimality conditions for access and usage prices for a gas pipeline operator under alternative regulatory models. My results have general implications for regulation in network infrastructure industries, as energy and telecommunications markets are expected to expand considerably over the coming decades.     

Strategic interactions and airline network morphology under demand uncertainty

In this paper, we examine how strategic interactions affect airline network under demand uncertainty. We develop a three-stage duopoly game: at stage 1 airlines determine their network structure (linear versus hub-and-spoke); at stage 2 they decide on their capacities; at stage 3 firms compete in quantities. The main feature of the model is that firms have to decide on network structure and capacities while facing demand uncertainty. We show that while hubbing is efficient, airlines may choose a linear network for strategic reasons. Furthermore, we show that this structure softens competition by preventing contagion of competition across markets.     

COMPETITION,REGULATION AND WELFARE IN THE PRESENCE OF NETWORK EXTERNALITIES*

In this paper we consider a simple model of an industry with network externalities, where a benefit to each consumer from network services depends on the size of the network. We first consider a single network and cover the cases with and without fixed cost of entry. We then turn to the two‐network industry, where the incumbent network and a new entrant network compete for the market and may differ both in their marginal costs and demand structures. In addition, we identify several situations where public policy may play a crucial role in sustaining socially advantageous network service provision.     

Networks in markets and the propensity of companies to collaborate: An empirical test of three mechanisms

We propose and test hypotheses about three endogenous mechanisms that may be driving the observed network structure of producers’ markets. We use data that we have collected on collaborative network ties among producers. Estimates of Exponential Random Graphs Models (ERGM) support our hypotheses.     

Knowledge appropriability, firm size, and growth

Empirical evidence shows that the number of patents per R&D dollar declines with firm size. In this paper, we propose a Schumpeterian growth model that accounts for this evidence. We analyze an economy with firms that engage in cost-reducing innovation resulting from the accumulation of both codified and tacit knowledge: the former occurs through the purchase of patents, while the latter is the result of R&D conducted in-house by firms. We study the relation between knowledge appropriability and market structure, and we show that a shift from patents to in-house research occurs as firm size gets larger. Since innovation statistics concentrate mainly on patents, this process of research reallocation results into an under-estimation of innovative activity and is responsible for the declining ratio of patents to R&D expenditure. Survey data on UK-based firms provide support to our results.     

Co-movements of Shanghai and New York stock prices by time-varying regressions

We use time-varying regression to model the relationship between returns in the Shanghai and New York stock markets, with possible inclusion of lagged returns. The parameters of the regressions reveal that the effect of current stock return of New York on Shanghai steadily increases after the 1997 Asian financial crisis and turns significantly and persistently positive after 2002 when China entered WTO. The effect of current return of Shanghai on New York also becomes significantly positive and increasing after 2002. The upward trend has been interrupted during the recent global financial crisis, but reaches the level of about 0.4–0.5 in 2010 for both markets. Our results show that China’s stock market has become more and more integrated to the world market in the past twenty years with interruptions occurring during the recent global economic downturn.     

Markets and the non‐monotonic relation between productivity and establishment size

Abstract A model of monopolistic competition is presented in which the relation between the productivity and input size of producers is non‐monotonic and bell‐shaped. The model predicts that markets matter and the average size of the producers is directly scaled by the size of the market. An indirect effect increases the cutoff productivity, making the bell narrower in larger markets or when the transportation cost falls. Empirical evidence from the concrete industry and a few other 4‐digit industries supports the model’s predictions. The bell‐shaped relation has especially important implications on how size distributions are formed across localized versus globalized market industries.     

Health insurer market power and primary care consolidation

This paper analyzes how health insurance market concentration impacts the market structure of primary care physicians. In more concentrated insurance markets, physicians are found to work in larger practices and their practices are more likely to have a hospital with an ownership interest. Physicians are also less likely to report being in a competitive physician market, consistent with practice consolidation. Our results suggest that consolidation in insurance markets impacts the competitive structure of physician markets.     

Market Sharing Agreements and Collusive Networks*

We analyze reciprocal market sharing agreements by which firms commit not to enter each other's territory in oligopolistic markets and procurement auctions. The set of market sharing agreements defines a collusive network. We characterize stable collusive networks when firms and markets are symmetric. Stable networks are formed of complete alliances, of different sizes, larger than a minimal threshold. Typically, stable networks display fewer agreements than the optimal network for the industry and more agreements than the socially optimal network. When firms or markets are asymmetric, stable networks may involve incomplete alliances and be underconnected with respect to the social optimum.     

Barriers to entry, deregulation and workplace training: A theoretical model with evidence from Europe

We study the impact of regulatory barriers to entry on workplace training. We develop a model of training in imperfectly competitive product and labour markets. The model indicates that there are two contrasting effects of deregulation on training. As stressed in the literature, with a given number of firms, deregulation reduces the size of rents per unit of output that firms can reap by training their employees. Yet, the number of firms increases following deregulation, thereby raising output and profit gains from training and improving investment incentives. The latter effect prevails. In line with the predictions of the theoretical model, we find that the substantial deregulation in the 1990s of heavily regulated European industries (energy, transport and communication) increased training incidence.