Cournot-Nash and Lindahl equilibria in pure public “bad” economies

Summary. Using a general equilibrium framework, this paper analyzes the equilibrium provision of a pure public bad commodity (for example pollution). Considering a finite economy with one desired private good and one pure public “bad” we explicitly introduce the concept of Lindahl equilibrium and the Lindahl prices into a pure public bad economy. Then, the Lindahl provision is analyzed and compared with the Cournot-Nash provision. The main results for economies with heterogeneous agents state that the asymptotic Lindahl allocation of the pure public bad is the null allocation. In contrast, the asymptotic Cournot-Nash provision of the public bad might approach infinity. Other results were obtained in concert with the broad analysis of the large finite economies with pure public bad commodities. Received: July 26, 2001; revised version: March 12, 2002 RID="*" ID="*" We are indebt to Nicholas Yannelis and anonymous referee for their valuable comments and suggestions. Correspondence to: B. Shitovitz     

Are input prices irrelevant for make-or-buy decisions?

The 1996 Telecommunications Act requires incumbent providers to lease network inputs to rivals at cost-based prices in order to jump-start competition. Sappington (Sappington, D. (2005). American Economic Review, 95(5), 1631–1638) uses the Hotelling model to show that input prices are irrelevant for an entrant’s decision to make or buy an input required for downstream production. We show that this result depends upon the particular model of competition employed. Specifically, input prices are not necessarily irrelevant in the Bertrand vertical differentiation model and are not irrelevant in the Cournot model. It follows that departures from cost-based input prices may distort entrants’ make-or-buy decisions in settings of practical interest.      

Nash and Walras equilibrium via Brouwer

Summary. The existence of Nash and Walras equilibrium is proved via Brouwer's Fixed Point Theorem, without recourse to Kakutani's Fixed Point Theorem for correspondences. The domain of the Walras fixed point map is confined to the price simplex, even when there is production and weakly quasi-convex preferences. The key idea is to replace optimization with “satisficing improvement,” i.e., to replace the Maximum Principle with the “Satisficing Principle.” Received: July 9, 2001; revised version: February 25, 2002 RID="*" ID="*" I wish to thank Ken Arrow, Don Brown, and Andreu Mas-Colell for helpful comments. I first thought about using Brouwer's theorem without Kakutani's extension when I heard Herb Scarf's lectures on mathematical economics as an undergraduate in 1974, and then again when I read Tim Kehoe's 1980 Ph.D dissertation under Herb Scarf, but I did not resolve my confusion until I had to discuss Kehoe's presentation at the celebration for Herb Scarf's 65th birthday in September, 1995. RID="*" ID="*"Correspondence to: C. D. Aliprantis     

Spillovers in R&D activities: An empirical analysis of the Nordic countries

This paper analyzes the impact of public research and development (R&D) on private sector output. It is argued that giving away public R&D will increase the input supply of private R&D and, accordingly, will enlarge business sector output. A model based on panel data for all five Nordic countries is estimated by a maximum likelihood procedure allowing for nonlinear relationships. The hypothesis is also tested within a cointegration methodology framework. Evidence is present concerning national spillovers from public R&D to private R&D in Denmark, Finland, and Iceland. For Norway and Sweden, international spillover effects seem to be more dominant. An earlier version of this paper was presented at the International Atlantic Economic Conference, October 7–10, 1999, Montreal, Canada. The authors are grateful to conference discussants and an anonymous referee for useful comments.     

Enhancing Vertical Efficiency Through Horizontal Licensing

This paper examines the role of patent licensing in the age of outsourcing. When firms rely on outsourced inputs, a patent holder’s decision to license has both competitive and supplier pricing effects. By issuing a license, the firm increases competition in the product market. At the same time, the need to make royalty payments “weakens” the firm’s rival, making it more sensitive to supplier pricing. The supplier responds by softening pricing terms, and the firm benefits by siphoning some of these gains via the license fee. Not only can the licensor gain, but all other parties (the licensee, supplier, and consumers) can also benefit. This role of licensing presents additional considerations for regulators shaping patent laws. We thank Michael Crew, John Fellingham, Sharon Oster, David Sappington, Doug Schroeder, and two anonymous referees for helpful comments. Anil Arya acknowledges support from the John J. Gerlach Chair.     

Endogenous timing in a mixed oligopoly with semipublic firms

An endogenous order of moves is analyzed in a mixed market where a firm jointly owned by the public sector and private domestic shareholders (a semipublic firm) competes with n private firms. We show that there is an equilibrium in which firms take production decisions simultaneously. This result is strikingly different from that obtained by Pal (Econ Lett 61:181–185, 1998), who shows that when a public firm competes with n private firms all firms producing simultaneously in the same period cannot be sustained as a Subgame Perfect Nash Equilibrium outcome. Our result differs from that of Pal (Econ Lett 61:181–185, 1998) for two reasons: firstly, we consider that there is a semipublic firm rather than a public firm. Secondly, Pal (Econ Lett 61:181–185, 1998) considers that the public firm is less efficient than private firms while in our paper all firms are equally efficient.     

When will a Dictator be Good?

Dictatorship is the predominant political system in many developing countries. However, different dictators act quite differently: a good dictator implements growth-enhancing economic policies, e.g., investment in public education and infrastructure, whereas a bad dictator taxes her citizens for her own consumption. The present paper provides a theoretical model by deriving underlying determinants of dictatorial behavior. We assume that the engine of economic growth is private investment. It can increase the productivity of individuals who invest, as well as the aggregate technological level. A good dictator encourages this investment in order to tax more. However, the cost of this encouragement is that the ensuing higher growth rate will induce earlier democratization. In this paper we will illustrate the risk of choosing a growth-enhancing policy, while leading to additional tax revenues in the short-run will also increase the likelihood of a revolution resulting in the eventual overthrow of the dictator. Furthermore, we will find that the higher the return from private investments the less likely the dictator will be a good one. Contrary to McGuire and Olson (J Econ Lit 34:72–96, 1996) we find that a long life-time does not always induce positive incentives among dictators. I wish to thank Monika Merz, who carefully read the earlier version of this paper and provided many valuable suggestions. I also would like to thank the editor, the anonymous referee, Uwe Sunde, Philipp Kircher and participants at the 4th international annual conference of JEPA for helpful comments. I am grateful to Stephan Heim for his assistance. All possible errors are, of course, mine.     

Public-good valuation and intra-family allocation

I derive values of marginal changes in a public good for two-person households, measured alternatively by household member i’s willingness to pay (WTP) for the good on behalf of the household, WTP _i (H), or by the sum of individual WTP values across family members, WTP(C). Households are assumed to allocate their resources in efficient Nash bargains over private and common household goods. WTP _i (H) is then defined by trade-offs between the public good and the household good, and WTP(C) by trade-offs of between the public good and private goods. WTP _i (H) is found to be higher (lower) than WTP(C) when member i has a relatively high (low) marginal valuation of the public good, but tends on average to equal WTP(C). As a consequence, individuals tend to represent households correctly on average when questioned about the household’s WTP for a public good, even when they are purely selfish and answer truthfully. Adding all members’ WTP answers on behalf of the household then leads to double counting. Pure and paternalistic altruism (the latter attached to consumption of the public good) move each member’s WTP on behalf of the household closer to the true sum of individual WTP, but only paternalistic altruism raises this sum.      

Private provision of a discrete public good: efficient equilibria in the private-information contribution game

We study the voluntary provision of a discrete public good via the contribution game. Players independently and simultaneously make nonrefundable contributions to fund a discrete public good, which is provided if and only if contributions cover the cost of production. We characterize nonconstant continuous symmetric equilibria, giving sufficient conditions for their existence. We show the common normalization by which players’ values are distributed over [0, 1] is not without loss of generality: if the distribution over this interval has continuous density f with f(0) >  0, then no (nonconstant) continuous symmetric equilibrium exists. We study in detail the case in which players’ private values are uniformly distributed, showing that, generically, when one continuous equilibrium exists, a continuum of continuous equilibria exists. For any given cost of the good, multiple continuous equilibria cannot be Pareto ranked. Nevertheless, not all continuous equilibria are interim incentive efficient. The set of interim incentive efficient equilibria is exactly determined. The authors thank Manfred Dix, George Mailath, Andrew Postlewaite, and an anonymous referee for their comments.     

The economics of crowd out under mixed public/private health insurance

It is well known that public insurance sometimes crowds out private insurance. Yet, the economic theory of crowd out has remained unstudied. Here, I show that crowd out causes two countervailing effects: (a) the intensive margin effect-since high demanders are crowded out, the private market now has a larger proportion of low demanders on the intensive margin (The intensive margin are those who have already bought private insurance), and so will drop quality to lower the price to the low demanders liking; and (b) the extensive margin effect-before the public insurance expansion, the private sector had lowered quality to make insurance more affordable at the extensive margin (The extensive margin is the next group of people who would buy private insurance if the price decreased), but now that public insurance crowds out the extensive margin, quality can then be raised back up to the high demanders liking.If the extensive margin effect dominates, then a new phenomenon of push out occurs, in which crowd out causes the private sector to raise quality and to increase the number of uninsured low demanders not eligible for public insurance. If the intensive margin effect dominates, then crowd out will cause the private sector to lower quality, causing the phenomenon of crowd-in, in which the number of uninsured low demanders that take-up private insurance increases.These two countervailing effects have important implications for any government policy that desires to eradicate all uninsurance. First, if push out is dominant, then the private sector will respond to the public insurance by pushing out and leaving some people newly uninsured. If crowd-in is dominant, then all people can be insured and the government can do it at a lower-than-anticipated level of expansion due to the private sector crowding in.Received: April 2002, Accepted: February 2003, JEL Classification: I11, I38The views herein do not necessarily reflect the views or policies of AHRQ, nor the U.S. Department of Health and Human Services. I thank Pedro Pita Barros, Hugh Gravelle, and Lise Rochaix-Ranson, and participants at the 2nd Health Economics Workshop at the Universidade Nova de Lisboa for helpful comments.     

Research policy and endogenous growth

This paper studies the effects of different types of research policy on economic growth. We find that while subsidies to private research, public funding of private projects, and basic research performed at public institutions have unambiguously positive effects on growth, performing applied research at public institutions could have negative growth effects. This is due to the large crowding out of private research caused by public R&D when it competes with private firms in the patent race.JEL Classification: O31, O38, O40I thank the helpful comments of Jordi Caballé, David Pérez-Castrillo and two anonymous referees. I also aknowledge the financial support of Fundaci ón Séneca project PB/3/FS/02.     

Multi-lender coalitions in costly state verification models

The paper analyzes the endogenous formation of a financial intermediary, modelled as a multi-lender coalition, as the trade-off between economies of scale in monitoring and a ‘cost’ associated with the partial loss of control over the investments the multi-lender coalition makes. In contrast with previous contributions (e.g., Williamson in J Monet Econ 18:159–179, 1986), the model can account for the coexistence of financial intermediation and direct lending (a non-trivial equilibrium). We prove the existence of such non-trivial equilibria and provide a complete characterization of them. In particular, the stronger the diversity of opinions, the smaller the coalition size is. I owe Pierpaolo Battigalli and Larry Samuelson a special debt for their insightful comments and encouragements. I am also grateful to the co-editor, Stephen Williamson, and an anonymous referee for insightful comments. I also like to thank Rabah Amir, Francis Bloch, Guillaume Carlier, Pascal Courty, Martin Hellwig, Bart Lipman, Jean-Marc Tallon and Anne Villamil for helpful discussions. Finally, I thank the THEMA, University Cergy-Pontoise, where part of this paper was written, for their hospitality.     

Stable market structures from merger activities in mixed oligopoly with asymmetric costs

This paper examines endogenous merger formations in a mixed oligopoly. Applying the core as a solution concept, we analyze which market structure(s) remain(s) stable when three firms—two symmetric private firms and one inefficient public firm—are allowed to merge with each other in a mixed Cournot industry. We show that according to the value of the marginal cost of the public firm, there always exists a pair of share ratios of the owners of both the (pre-merged) public firm and the (pre-merged) private firm such that the market structure with the merger between the public firm and one private firm belongs to the core. When the initial market structure is a mixed triopoly, it can only be blocked when one public firm and one private firm merge. Furthermore, we conduct a similar analysis in a general mixed oligopoly with one public firm and n private firms.      

House money effects in public good experiments: Comment

We reconsider evidence from experiments that claim to show that using “house money” in standard public goods experiments has no effect on behavior. We show that it does have an effect when one examines the data using appropriate statistical methods that consider individual-level responses and account for the error structure of the panel data. JEL Classification D7 · C92 I am grateful for comments from two referees and an editor. All data and statistical code are available for public access at the ExLab Digital Library located at http://exlab.bus.ucf.edu.     

What You Don’t Know Might Hurt You: Some Unresolved Issues in the Design and Analysis of Discrete Choice Experiments

The papers and comments in this issue focus on four broad areas related to understanding and modeling choices: (1) The use of laboratory experiments to improve valuation methods; (2) The design of stated preference choice set and choice occasions; (3) Latent class models as means of identifying and accommodating preference heterogeneity; and (4) Accommodating uncertainty about the “true” model, modeling ranking and rating tasks and pooling data sources. In what follows I offer some comments on each area, and briefly discuss several unresolved issues associated with each area, closing with some comments about future research opportunities.     

Consistent House Allocation

In practice we often face the problem of assigning indivisible objects (e.g., schools, housing, jobs, offices) to agents (e.g., students, homeless, workers, professors) when monetary compensations are not possible. We show that a rule that satisfies consistency, strategy-proofness, and efficiency must be an efficient generalized priority rule; i.e., it must adapt to an acyclic priority structure, except – maybe – for up to three agents in each object’s priority ordering. We are grateful to the Editor and an anonymous referee for helpful comments and suggestions. L. Ehlers acknowledges financial support from the SSHRC (Canada)     

Mixed-strategy equilibria and strong purification for games with private and public information

This paper shows the existence of mixed-strategy equilibria for games with private and public information under general conditions. Under the additional assumptions of finiteness of action spaces and diffuseness and conditional independence of private information, a strong purification result is obtained for the mixed strategies in such games. As a corollary, the existence of pure-strategy equilibria follows. I am very grateful to Yeneng Sun, Nicholas C. Yannelis and M. Ali Khan for helpful discussions and suggestions. I also wish to thank an anonymous referee whose comments led to many improvements in the paper.     

Union-oligopoly bargaining and entry deterrence: a reassessment of limit pricing

This paper introduces wage bargaining in the framework of Milgrom and Roberts (Econometrica 50(2):443–459, 1982) where the workers’ reservation wage is the private information parameter critical for entry. We show that entry threat significantly distorts the wage, which in some cases adversely affects the firm’s ability to signal through price. Consequently, the separating equilibrium (in price) does not always exist. If, however, wage agreements are made public, signalling occurs with or without distortions in wage depending on whether the union’s bargaining power is high or low. Pooling equilibrium also exists and it features similar distortions. We also examine which signal, wage or price, generates greater social welfare. We would like to thank two referees for their helpful comments and suggestions. This paper is partially based on a chapter of Pal’s PhD thesis done at Indira Gandhi Institute of Development Research (IGIDR), India. For remaining errors we are solely responsible.     

On the dynamics of inequality

The dynamics of inequality are studied in a model of human capital accumulation with credit constraints. This model admits a multiplicity of steady state skill ratios that exhibit varying degrees of inequality across households. The main result studies equilibrium paths. It is shown that an equilibrium sequence of skill ratios must converge monotonically to the smallest steady state that exceeds the initial ratio for that sequence. Convergence is “gradual" in that the steady state is not achieved in finite time. On the other hand, if the initial skill ratio exceeds the largest steady state, convergence to a steady state is immediate.This paper is based on unpublished notes from 1990; see http://www.econ.nyu.edu/user/debraj/DevEcon/Notes/incdist.pdf. Two considerations suggest that these results may be worth reporting in print. First, the existence of a sizeable recent literature indicates that these relatively early notes may have value outside a filing cabinet or a private webpage. Second, Mukul Majumdar’s own research on economic growth with a nonconvex technology is an even earlier precursor to some of this literature, so the current outlet – a special issue in his honor – seems appropriate. Conversations with Glenn Loury simplified the proof of the main result. I thank Dilip Mookherjee for many useful discussions, and two anonymous referees for helpful comments on an earlier draft. Funding from the National Science Foundation under grant number 0241070 is acknowledged. This paper is dedicated with much affection and warm admiration to Mukul Majumdar – or to Mukulda, as I always think of him – on the occasion of his 60th birthday.     

Petty corruption

This paper analyzes a petty corruption model in which the entrepreneur’s type is drawn from an absolutely continuous probability distribution function F over [0, 1], and perfect Bayesian equilibrium is adopted as the solution concept for a one-stage game. In the one-stage game, if there is more than one bureaucrat, no project is approved with a strictly positive probability. For an infinitely repeated game, I show that the single window policy strictly increases the social benefits in a socially optimal equilibrium. I would like to thank Mukul Majumdar for valuable guidance and encouragement. I am also grateful to Kaushik Basu, Fernando Vega-Redondo, an anonymous referee, seminar participants at the international meeting for public economic theory (PET07) and especially Ani Guerdjikova and Roy Radner for helpful comments. Thanks are due to Hideaki Goto and Eunkyeong Lee for useful conversation.