Sequential location equilibria under incomplete information

Summary We consider a simple model of incomplete information in location theory. Two firms compete in a two stage framework: a sequential location stage and a price competition stage. Firm 1 knows both its own constant marginal cost technology and that of Firm 2, whereas the latter has incomplete information about firm 1's technology. The location stage turns out to be a monotonic signaling game and theunique D1 equilibrium is a pure strategy separating equilibrium if firm 1's cost advantage is below some bound, and otherwise a pooling equilibrium if the prior probability that Firm 1 is of the low cost type is high, or a semi-pooling equilibrium if it is low. This surprising result is due to the fact that the location gap between the two types of Firm 1 is bounded because of natural economic reasons, which may prevent the separation of the two types. Hence, incomplete information matters: the equilibrium locations differ quite significantly from the full information equilibrium locations.We would like to thank an anonymous referee for very helpful comments and also the participants in seminars at GREQE (Marseille), Université de Montréal, UBC, HEC (Paris), in the Location Theory session of the World Congress of the Econometric Society (Barcelona) and in the Game Theory Conference at the University of Western Ontario for their comments. We remain, of course, solely responsible for the content of the paper. Financial support from FCAR (Québec), SSHRCC (Canada) and CNRS (France) is gratefully acknowledged.     

Environmental regulation and international trade

In this paper, we investigate how a country's choice of environmental policy instrument affects the international competitiveness of its firms. We show that in a Cournot-Nash equilibrium, the total market share of firms regulated through tradeable emission permits increases relative to that of the firms operating under command and control due to better allocation of total abatement among the firms in the country. Our work suggests that free trade situations should not only result in similar environmental standards but also in similar regulatory regimes. It may come as no surprise that the environmental authorities in Canada are seriously considering following the United States in instituting a tradeable emission permits mechanism.Most of the work was completed during the time that E.S. Sartzetakis was a post-doctoral fellow at the Department of Economics, Université Laval. He gratefully acknowledges the hospitality of the department during this period. Earlier, versions of the paper were presented at the fifth conference of the European Association of Environmental and Resource Economists and at the 1993 Rancontre Franco-Québécoise du GREEN. We would like to thank Joseph Doucet, Thomas Ross, and Aart de Zeeuw for extremely helpful suggestions. We would also like to thank two anonymous referees of this journal for their comments. Financial support from the LRSA of the Faculté des sciences de l'administration, Université Laval, the Groupe de rechearche en économie de l'énergie et des ressources naturelles (GREEN), Université Laval, and the Centre for International Business Studies (CIBS), University of British Columbia, is gratefully acknowledged. The responsibility for errors and omissions remains ours.     

Stabilization policy and indeterminacy in a small open economy

This paper studies the (de)stabilizing effects of income tax rules in a two-sector small open economy with production externalities. The paper shows that in the model with positive sector-specific externalities in the investment sector and negative sector-specific externalities in the consumption sector (or positive aggregate investment externalities), a regressive income tax rule can stabilize such an economy against indeterminacy, whereas a progressive income tax rule can increase the tendency for indeterminacy to occur. This paper also studies two variants that consider an imperfect world bond market and an endogenous labor supply, respectively, and shows that the qualitative results stated above remain valid. Moreover, increasing the level of sector-specific investment externalities can decrease (increase) the minimal level of tax progressivity required for indeterminacy if the investment externalities are below (above) a certain critical value and if the negative externalities in the consumption sector are taken as given.     

Small Firms and Unemployment in a Two-sector Model

This paper presents a two-sector model of an economy – one sector consisting of large firms with institutionally determined wage (the Formal sector) and the other sector consisting of small firms (the Informal sector). The paper examines the effects of changes in benefits, entrepreneurial zeal, and the institutionally determined wage in the Formal sector on unemployment. It concludes with brief comments on the role of aggregate demand and supply policies in reducing unemployment in this economy.     

Ramsey Equilibrium in a Two-Sector Model with Heterogeneous Households

We prove an existence theorem for a stationary perfect foresight equilibrium under borrowing constraints in a two-sector model with infinitely lived heterogeneous agents. The most patient agent holds all the capital in this solution. We also show that if the capital goods sector is capital intensive and capital income is increasing in the aggregate capital stock, then the aggregate capital stock eventually is monotonic and converges to the steady state stock. If the consumption goods sector is more capital intensive and capital income is increasing in aggregate capital we prove convergence to the steady state under more restrictive conditions. Periodic equilibria are shown to exist under weaker hypotheses. Journal of Economic Literature Classification Numbers: D52, D90, E13.     

Multiplier effects in economies with missing risk markets

The paper analyses the impact of pecuniary externalities in a two-sector economy with an incomplete market structure. Agents in each sector choose their proportion of risky investment. Sector specific risks are assumed to be perfectly negatively correlated. It is shown that the economy is more volatile if risk markets do not exist. With a complete set of risk markets, shocks in one sector will be dampened on the aggregate level. In contrast, when risk markets are absent, pecuniary externalities arising from higher risky investment in one sector can create feedback effects in the other sector. When agents are sufficiently risk averse (their coefficient of relative risk aversion being greater than one), an individually optimal response to the increased riskiness of the price distribution will result in an even riskier price distribution: an increase in risky activity in one sector will lead to an increase in risky activity in the other sector, and this gives multiplier effects.Part of this work has been done while I was visiting assistant professor at the University of Western Ontario, London, Canada.I am grateful to Hans-Werner Sinn for helpful comments. The suggestions of the two referees have contributed to improve the paper considerably.     

Quasi-linear preferences in the macroeconomy: Indeterminacy,heterogeneity and the representative consumer

We use aggregation theory to investigate the link between one-consumer and multi-consumer economies under a quasi-linear class of preferences. Our study is carried out in the context of the neoclassical growth model. The quasi-linear preferences considered are additive in consumption and leisure and linear in leisure. We first show that in a homogeneous agents economy, the individual hours worked are not uniquely determined. We then demonstrate that the indeterminacy can be resolved by introducing heterogeneity. For example, idiosyncratic shocks to productivities or imperfect substitutability of labor restore the uniqueness of equilibrium. As a special case, our analysis includes the indivisible labor model by Hansen (1985).JEL Classification: C73, D90, E21We are grateful to Morten Ravn for his guidance. We have benefited from the comments of an anonymous referee, Jordi Caballé, Finn Kydland, Franck Portier, Michael Reiter, Xavier Sala-i-Martin, William Schworm and Andrew Scott. Any remaining errors are ours. This research was supported by the Instituto Valenciano de Investigaciones Económicas and the Ministerio de Ciencia y Tecnología de España, the Ramón y Cajal program, and BEC 2001-0535.     

Economic (dis)integration in the presence of evolutionary learning

We use a two-factor, two-sector model to study the effects of economic integration and its reversal in the presence of input-generated external economies in one of the sectors. The equilibrium selection problem that arises is solved by applying a simple trial-and-error learning rule. Economic integration can take individual economies ridden with coordination failures to better equilibria, i.e., can solve the coordination problem. We show that integration (and disintegration) may generate cycles in wages, rentals and the sectoral allocation of factors.JEL Classification: F15, F16, F37 Corespondence to: Diego Méndez-Carbajo     

A two-sector Kaleckian model of growth and distribution with endogenous productivity dynamics

This study extends a two-sector Kaleckian model of output growth and income distribution by incorporating endogenous labour productivity growth. The model is composed of investment goods and consumption goods production sectors. The impact of a change in wage and profit shares on capacity utilisation and output growth rates at the sectoral and aggregate levels are identified. The study reveals short-run cyclical capacity utilisation rates and productivity growth dynamics. Even if the short-run steady state is stable, the capital accumulation rate in the consumption goods sector must decrease more than that in the investment sector for long-run stability. When simultaneous rises in profit shares in both the sectors affect long-run aggregate economic growth differently at a steady state, the distributional interests between the same class in different sectors may hamper the long-run economic growth. A policy message is that the effect of income distribution on industrial output growth is not always beneficial. These phenomena are specific to two-sector models and cannot be observed when using conventional aggregate growth models.     

Consumption and income smoothing

This article presents a two-sector dynamic general equilibrium model in which income smoothing takes place within the households (intra-temporally), and consumption smoothing takes place among the households (inter-temporally). Idiosyncratic risk-sharing within the family is based on an income smoothing contract. There are two-sectors in the model, the regular sector and the underground sector, and the smoothing comes from the underground sector, which is countercyclical with respect to aggregate GDP. The article shows that the simulated disaggregated consumption and income series (that are the regular and underground consumption flows) are more sensitive to exogenous changes in sector-specific productivity and tax rates than regular and underground income flows, and that this picture is reversed when the aggregate series are considered.     

Tenures That Shook the World: Worker Turnover in Russia, Poland, and Britain

We study worker turnover to investigate to what extent the length of time a worker has been employed by a firm shapes the turnover process in a transition economy. Using survey data, we compare the pattern of turnover with a Western economy, Britain. We show that tenure-turnover rates are higher in Russia and lower in Poland than in Britain. The characteristics of workers hired in the state and private sectors do not look very different. State and private sector firms in Poland offer the same wages to new recruits, but new private sector jobs in Russia appear to offer wage premia relative to new state jobs. We argue that these observations are consistent with a framework in which the value of seniority in jobs begun under the old order may be small and the value of a continued job match unsure, offset, in Poland at least, by insider resistance to layoffs.J. Comp. Econom., December 2000, 28(4), pp. 639–664. Heriot-Watt University, Edinburgh, IZA, Bonn, The William Davidson Institute, University of Michigan Business School, Ann Arbor, and EERC, Kiev; Centre for Economic Performance, London School of Economics, Royal Holloway College, University of London, IZA, Bonn, and The William Davidson Institute, University of Michigan Business School, Ann Arbor.     

Saving Rates, Trade, Technology, and Stochastic Dynamics

This paper develops a framework for analyzing the stochastic dynamics of small growing trading economies with CES sector technologies. The open neoclassical two-sector growth model with a diffusion process (uncertainty) for the aggregate saving/investment ratio is demonstrated with sample paths and long-run probability distributions of the overall factor endowment ratio. Stochastic endogenous growth and cycles require a combination of fundamental growth parameter values: saving rates, terms of trade, and sectorial substitution elasticities.     

Market power in input purchase and trade

Market power in the input purchase is becoming increasingly common because of growing consolidation and mergers and also due to multinational firms establishing a stronghold in buying inputs in the developing countries. In this study, we formulate a general equilibrium model consisting of a competitive sector and an oligopsony sector which exercises market power over inputs. Our results indicate that if the oligopsony sector incurs a higher marginal factor cost for the intensive factor, basic results of the standard two-sector model continue to hold. But if the marginal factor cost is higher for the non-intensive factor, then factor intensities in the physical and value sense differ and traditional trade propositions such as the Stolper–Samuelson theorem do not hold.     

Equilibrium determinacy and inflation measures for interest rate rules

Empirical evidence suggests that goods are highly heterogeneous with respect to the degree of price rigidity. We develop a two-sector dynamic general equilibrium model to study the equilibrium determinacy properties of interest rate rules that respond to inflation measures differing in their degree of price rigidity. We find that rules responding to a headline measure, which puts some weight on the inflation of the sector with low price stickiness, are more prone to generate endogenous aggregate instability—in the form of fluctuations driven by self-fulfilling expectations and equilibria where fluctuations are unbounded—than rules that respond exclusively to a core measure, which includes only the inflation of the sector with high price stickiness. We discuss how our results depend on the elasticity of substitution across goods, the timing of the policy rule, and reacting to aggregate activity.     

Does it matter (for equilibrium determinacy) what price index the central bank targets?

What inflation rate should the central bank target? We address determinacy issues related to this question in a two-sector model in which prices can differ in equilibrium. We assume that the degree of nominal price stickiness can vary across the sectors and that labor is immobile. The contribution of this paper is to demonstrate that a modified Taylor Principle holds in this environment. If the central bank elects to target sector one, and if it responds with a coefficient greater than unity to price movements in this sector, then this policy rule will ensure determinacy across all sectors. The results of this paper have at least two implications. First, the equilibrium-determinacy criterion does not imply a preference to any particular measure of inflation. Second, since the Taylor Principle applies at the sectoral level, there is no need for a Taylor Principle at the aggregate level.     

Efficiency wages and union-firm bargaining with private information

We consider efficiency wage effects in a union-firm bargaining model with private information. We show that an increase in the efficiency wage effects does not necessarily increase the wage level at equilibrium, even when the wage bargaining with private information is close to one with complete information. However, if it is commonly known that the firm is stronger than the union and the demand is sufficiently elastic, then an increase in the efficiency wage effects increases for sure the wage at equilibrium.JEL Classification: J41, J50, J52We thank Juan Dolado and two anonymous referees for valuable comments. Vincent Vannetelbosch is Chercheur Qualifié at the Fonds National de la Recherche Scientifique. The research of Ana Mauleon has been made possible by a fellowship of the Fonds Européen du Développement Economique Régional (FEDER). Financial support from the Belgian French Communitys program Action de Recherches Concertée 99/04-235 (IRES, Université catholique de Louvain) is gratefully acknowledged.     

Is technological change biased towards the unskilled in services? An empirical investigation

I fit a two-sector general equilibrium model to U.S. data in 1963–2005 in order to infer technological processes that affect the college premium. In skill intensive services factor augmenting technological change is slower for college graduates relative to less skilled workers. I find the opposite in the rest of the economy. This indicates that technological change is more complex than what we observe at the aggregate level. The results are consistent with changes in occupational mixes: low-skill workers in services reallocate into computer complementary occupations to a greater extent than college graduates in that sector. Occupational mixes in the rest of the private sector shift in the opposite direction. Thus, theoretical treatments of the underlying mechanisms of skill biased technological change may be improved by taking into account occupational mixes within broad education-sector groups.     

Optimality of workfare with heterogeneous preferences

With the standard non-linear income taxation framework with heterogeneity of preferences, in this paper the optimality of workfare as a screening tool is examined. It is assumed that workfare does not serve as a human capital investment, participation is mandatory, and administrative costs are negligible. Imposing alternative cardinalizations on individuals utilities allows for the possibility that the government optimally redistributes income to or from high disutility of labour individuals. Under either case, it is never optimal to impose workfare on these individuals. It is also shown that non-productive workfare can be an efficient policy tool, in contrast to the results found in Besley and Coate (1995), Brett (1998), and Beaudry and Blackorby (1997). JEL Classification: H21, H23
Optimalité du workfare en présence de préférences hétérogènes. L'auteur examine l'timalité du workfare en tant qu'instrument de tamisage à l'aide du cadre conceptuel traditionnel d'imposition non-linéaire des revenus en présence de préférences hétérogènes. On postule que le workfare n'est pas un processus d'investissement en capital humain, que la participatioun est obligatoire, et que les coûts d'administration sont négligeables. Quand on postule aussi des utilités cardinales différentes pour les individus, il devient possible pour le gouvernement de redistribuer optimalement les revenus en faveur ou au détriment des individus pour qui le travail a une très grande désutilité. Dans l'un et l'autre cas, on montre que le workfare n'est jamais une politique optimale. On montre aussi que le workfare dans des activités non-productives peut être un instrument de politique publique efficient, contrairement a ce qu'affirment Besley et Coate (1995), Brett (1998) et Beaudry et Blackorby (1997).     

Entrepreneurial drain under moral hazard: A high-yield sector curse?

We describe a two-sector, general-equilibrium model of productive sorting under output risk and incomplete information. Risk-neutral (entrepreneurial) individuals can either produce alone, or - acting as employers/insurers - team up with risk-averse (non-entrepreneurial) individuals. Although the latter option has the potential to generate more surplus, when effort is unobservable and risk is high, the moral hazard problem in mixed matches may be too severe for mixing to be attractive to both risk-aversion types, leading to a segregated equilibrium in which risk-averse individuals select low-risk, low-yield activities. An increase in the profitability of the riskier sector can then trigger a switch from a mixed to a segregated equilibrium and cause aggregate output to fall. Evidence from a panel of non-OECD countries - showing that the presence of uninsured, small-scale mining firms has a negative impact on the relationship between natural resource exports and agrarian productivity - suggests that this ‘high-yield sector curse’ might be present in natural resource-rich, low-income countries.     

Candidate stability and probabilistic voting procedures

Summary. We extend the analysis of Dutta, Jackson and Le Breton (Econometrica, 2001) on strategic candidacy to probabilistic environments. For each agenda and each profile of voters preferences over running candidates, a probabilistic voting procedure selects a lottery on the set of running candidates. Assuming that candidates cannot vote, we show that random dictatorships are the only unanimous probabilistic voting procedures that never provide unilateral incentives for the candidates to withdraw their candidacy at any set of potential candidates. More flexible probabilistic voting procedures can be devised if we restrict our attention to the stability of specific sets of potential candidates.Received: 4 February 2003, Revised: 14 September 2004, JEL Classification Numbers: D71, D72.This is a revised version of a chapter of my Ph.D. Dissertation submitted to the Universitat Autónoma de Barcelona. I am indebted to my supervisor Salvador Barberá for his advice and constant support. I am grateful to Dolors Berga and an anonymous referee for their detailed comments and suggestions. I thank José Alcalde, Walter Bossert, Bhaskar Dutta, Lars Ehlers, Jordi Massó, Diego Moreno, Clara Ponsatí, Yves Sprumont, and William Thomson for many helpful comments and discussions. I thank the hospitality of the C.R.D.E. at the Université de Montréal and the Department of Economics of the University of Warwick where parts of this research were conducted. Financial support through Research Grant 1998FI00022 from Comissionat per Universitats i Recerca, Generalitat de Catalunya, Research Project PB98-870 from the Ministerio de Ciencia y Tecnología, and Fundación Barrié de la Maza is gratefully acknowledged.