Regulatory policies toward local exchange companies under emerging competition: guardrails or speed bumps on the information highway?

The Telecommunications Act of 1996 provides a fundamental shift in the policy parameters within which regulators are to implement telecommunications policy. Within the parameters established by the Act, however, considerable discretion remains on the part of those charged with the task of implementing the law. In this paper, we identify a set of policy guideposts based on sound economic principles that can be used by regulators to implement the Act. Specifically, these competition-enabling policies will foster the goals of promoting and protecting competition.     

Evolutionary selection of ‘chivalrous’ conventions in coordination games without common expectations

We study an evolutionary game-theoretic model where players have to choose within a predetermined set of mixed strategies in a coordination game. Players are of two different kinds, male and female. No common expectations assumption is made; players tend therefore to adopt the strategy that yields larger than average expected payoffs for their kind. In this framework, every stable stationary point of the population dynamics can be interpreted as the emergence of a particular convention. A classification of the possible conventions is provided; conditions for their emergence are determined.     

Using inflation to erode the US public debt

Projections indicate the US Federal debt held by the public may exceed 70–100% of GDP within 10 years. In many respects, the temptation to inflate away some of this debt burden is similar to that at the end of World War II. In 1946, the debt ratio was 108.6%. Inflation reduced this ratio by more than a third within a decade. Yet there are some important differences – shorter debt maturities today reduce the temptation to inflate, while the larger share of debt held by foreigners increases it. This paper lays out an analytical framework for determining the impact of a large nominal debt overhang on the temptation to inflate. It suggests that when economic growth is stalled, the US debt overhang may induce an increase in inflation of about 5% for several years that could significantly reduce the debt ratio.     

Heterogeneity and convergence of regional inflation (prices)

It is generally thought that members in a monetary union experience a similar level of inflation. This paper verifies this conventional belief. Using regional data, we present statistical evidence of heterogeneous inflation in Japan. Not only does the average inflation differ significantly across regions, but regional inflation responds differently to common economic and monetary factors. Furthermore, we show no evidence of price convergence in the entire group of regions although there is some evidence of convergence in subgroups. These results suggest that diversified regional inflation can exist within a monetary union.     

A dynamic model of unsecured credit

We study the terms of credit in a competitive market in which sellers (lenders) are willing to repeatedly finance the purchases of buyers (borrowers) by engaging in a credit relationship. The key frictions are: (i) the lender cannot observe the borrower?s ability to repay a loan; (ii) the borrower cannot commit to any long-term contract; (iii) it is costly for the lender to contact a borrower and to walk away from a contract; and (iv) transactions within each credit relationship are not publicly observable. The lender?s optimal contract has two key properties: delayed settlement and debt forgiveness. Finally, we study the impact of changes in the initial cost of lending on the contract terms.     

Tests of Financial Intermediation and Banking Reform in China

We develop tests of financial intermediation by national banking systems based on the expectation that, in commercial systems, financial intermediation should not be overly influenced by policy variables; should be greater in richer, faster growing industrial areas; and should direct funds to the best projects regardless of where deposits originate. Using Chinese provincial data from 1991 to 1997, we test whether financial reforms in the mid-1990s increased efficient intermediation by different financial institutions. We find that the importance of policy lending by state banks did not fall during the recent period and that lending by financial institutions did not respond to economic fundamentals. J. Comp. Econ., December 2001, 29(4), pp. 608–644. University of Michigan, Ann Arbor, Michigan 48109; and Department of Government, Dartmouth College, Hanover, New Hampshire 03755. © 2001 Elsevier ScienceJournal of Economic Literature Classification Numbers: G21, O16, O53, P34.     

Does a Switch of Budget Regimes Affect Investment and Managerial Discretion of State-Owned Enterprises? Evidence from Italian Firms

We investigate the investment decisions of Italian state-owned enterprises (SOEs) across budget constraint regimes and carry out a natural experiment that exploits a regime switch in 1987. Drawing on the theory of capital market imperfections, we apply an empirical framework for investment analysis to a panel of manufacturing SOEs in competitive industries. We identify parallels between SOEs and widely held, quoted companies afflicted by agency problems, managerial discretion, and overinvestment. We argue that, in the case of SOEs, the soft budget regime increases managerial discretion, facilitates collusion with vote-seeking politicians, and results in wasteful investment. Consistent with our predictions, we find that the regime switch disciplines SOE's investment behavior. Following a hardening of the budget constraint, managers lose discretion to indulge in collusion and overinvestment. J. Comp. Econ., June 2002 30(4), pp. 787–811. London School of Economics and Political Science, Houghton Street, London WC2A 2AE, United Kingdom; and CERIS–CNR, Institute for Economic Research on Firms and Growth, National Research Council, Via Avogadro, 8, 10121 Turin, Italy. © 2002 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.Journal of Economic Literature Classification Numbers: E32, G31, G32, L32, M40.     

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.     

Explaining the US–EU productivity growth gap: Structural change vs. intra-sectoral effect

This paper proposes a decomposition of labour productivity growth in the EU15 and the the US since the mid 1990s. The results suggest that the EU's relative slowdown is due to modest “pure” gains of productivity within sectors.     

The money-age distribution: Empirical facts and the limits of three monetary models

The money-age distribution is hump-shaped for the US post-war economy. There is no clear-cut relation between the variation of money holdings within generations and age. Furthermore, money is found to be only weakly correlated with both income and wealth. We analyze three motives for money demand in an overlapping generations setup in order to explain these observations: (1) money-in-the-utility, (2) an economy with costly credit service, and (3) limited-participation. All three models are consistent with the hump-shaped relation between average money holdings and age, yet they predict a much closer association between money holdings, income, wealth, and age than we find in the data. Only the limited-participation model partly replicates the low bivariate correlation between money and income as well as between money and interest-bearing assets. None of the three models satisfactorily explains these stylized facts.     

Efficiency Wages and Work Incentives in Urban and Rural China

This paper examines incentive-wage effects for production and for managerial/technical workers in both urban and rural Chinese nonagricultural enterprises. We report strong evidence of productivity-enhancing wage behavior among enterprises in all ownership categories. There is also evidence that firms paying higher efficiency wages experience less shirking among their employees. We find that the profit-maximizing potential of incentive-wage setting is not fully exploited, although there is weak evidence that joint ventures come closer to profit-maximizing behavior at this margin of wage/employment behavior than do collectives or state-owned enterprises. J. Comp. Econ., December 2001, 29(4), pp. 645–662. The Ohio State University, 1945 North High St., Columbus, OH 43210 and University of Hawaii at Manoa, Honolulu, Hawaii 96822. © 2001 Elsevier ScienceJournal of Economic Literature Classification Numbers: P23, J31, O15.     

Stochastic evolutionary selection in finite populations

We primarily focus on a wide range of stochastic evolutionary game dynamics between two strategies which are characterized by a condition we call monotonicity: the sign of the difference between the probabilities of increasing and decreasing an A-individual completely depends on the difference of payoffs based on different strategies. When mutations are excluded, we provide sufficient conditions for selection to favor one strategy over the other and necessary conditions for selection to favor or oppose change, respectively. Moreover, we discuss which strategy will be favored in case of rare mutations and give a simple rule to determine evolutionary selection of strategies for large populations under some specific stochastic mutation–selection dynamics.     

Optimal size, optimal timing and optimal financing of an investment

Corporate investment is an important determinant of economic well-being. The existing literature identifies optimal investment size and timing without the possibility of debt financing, as well as the effect of debt financing on investment timing without the option to choose investment size. This paper contributes to the literature by identifying the optimal size, optimal timing and optimal financing for an investment when the firm controls all three decisions (as it usually does in practice). The investment size and investment trigger are generally positively related: when investment is delayed (accelerated) it is larger (smaller) in size, thus the overall effect on investment is ambiguous. However, when tax rate or bankruptcy cost is increased, the trigger rises and size falls, hence the effect on investment is unambiguously negative. The effect of debt financing on investment depends on the amount of debt used; with the optimal amount of debt, investment is delayed relative to the no-debt case, and this delay can be economically significant; however, the investment, when eventually made, will be larger in size. Overall, it is not appropriate to ignore either the firm’s ability to choose investment size or its option to use debt financing, when modeling the investment decision.     

Sovereign default: Which shocks matter?

This paper analyses a small open economy that wants to borrow from abroad, cannot commit to repay debt but faces costs if it decides to default. The model generates analytical expressions for the impact of shocks on the incentive compatible level of debt. Debt reduction generated by severe output shocks is no more than a couple of percentage points. In contrast, shocks to world interest rates can substantially affect the incentive compatible level of debt.     

The empirical validity of the New Keynesian Phillips curve using survey forecasts of inflation

This paper investigates the performance of the New Keynesian Phillips curve when survey forecasts of inflation are used to proxy for inflation expectations. Previous authors such as Brissimis and Magginas (2008) have applied survey measures of inflation expectations to the NKPC, and have concluded that these estimates are superior to those estimated using actual data on future inflation. However this approach employs the use of the labor income share as the proxy for real marginal cost, something which is highly problematic once we consider the countercyclicality of this variable. This paper develops and tests a procyclical marginal cost variable alongside various survey measures of inflation forecasts in the NKPC, while recognizing the problem of weak instruments that occurs when estimating the model using conventional GMM. We find that the NKPC produces a counter-intuitive negative and significant coefficient on procyclical marginal cost when surveys of inflation forecasts are used, which casts serious doubt on the empirical viability of the NKPC model, even when estimated with survey inflation forecasts.     

Non-cooperative solutions for estate division problems

In an estate division problem an estate has to be divided among several players whose total entitlement to the estate exceeds its size. This paper extends the non-cooperative approach through a claim game, as initiated by O?Neill (1982), by allowing players to put multiple claims on the same part of the estate, and by considering the case where individual entitlements may exceed the estate. A full characterization of the set of Nash equilibria of the claim game is obtained both for restricted estate division problems, where individual entitlements do not exceed the estate, and for the general case. Variations on the claim game are considered, which result in proportional division in equilibrium.     

Public pricing of final and intermediate goods in the presence of externalities

The purpose of this paper is to investigate the impact of externalities on pricing decisions by a public or a private regulated firm selling both final and intermediate goods. The externalities generate feedbacks in demand that affect both consumers and producers. The model is very general in that it does not impose constant returns to scale on private production, allows for distributional effects of both the publicly determined prices and private sector profits, and captures the general equilibrium effects of public pricing. Socially optimal pricing rules are derived, and the relation of the results with previous models of pricing in the presence of externalities is investigated.     

Adult nutrition and growth

We provide microeconomic foundations for the commonly assumed subsistence constraint on consumption and demonstrate that the theory is consistent with several important features of development. In principle, subsistence is consistent with different combinations of food consumption, energy expenditure, body weight, and health. In practice, caloric intake has remained remarkably constant over the course of development, giving the appearance of a minimal subsistence constraint in consumption alone. We argue that the trendless nature of caloric intake results from a positive income effect on food consumption being offset by a reduction in the need for food as the energy requirements of work decrease with development. The theory helps explain the observed patterns in body mass, fertility, and economic growth rates for more than two centuries.     

On spatial equilibria in a social interaction model

Social interactions are at the essence of societies and explain the gathering of individuals in villages, agglomerations, or cities. We study the emergence of multiple agglomerations as resulting from the interplay between spatial interaction externalities and competition in the land market. We show that the geography of the spatial economy affects significantly the properties of spatial equilibria. In particular, when agents locate on an open land strip (line segment), a single city emerges in equilibrium. In contrast, when the spatial economy extends along a closed land strip (circumference), multiple equilibria with odd numbers of cities arise. Spatial equilibrium configurations involve a high degree of spatial symmetry in terms of city size and location, and can be Pareto-ranked.