When does aggregation reduce risk aversion?

We study the problem of risk sharing within a household or syndicate. A household shares risky prospects using a social welfare functional. We characterize the social welfare functionals such that the household is collectively less risk averse than each member, and satisfies the Pareto principle and an invariance axiom. We single out the sum of certainty equivalents as the unique member of this family which is quasiconcave over riskless allocations.     

Traffic fatalities: does income inequality create an externality?

Abstract .  Responsible for 20 million severe injuries and/or deaths annually, few epidemics receive less attention than traffic accidents. Going beyond confirming an inverted U-shaped relationship between mean income and fatalities, we show theoretically that income inequality can positively affect fatalities in two ways. Each operates through heterogeneity between road users, and while the direct effect can be expected to evaporate with rising income, the indirect effect may prove to be an externality in that the relationship remains regardless of the level of income. Our model is supported by evidence from 79 countries between 1970 and 2000.     

How does wealth distribution affect firm's incentive to innovate better quality goods?

The paper contributes to the literature relating to inequality and economic growth, in particular, we investigate the effects of wealth distribution on the kind of growth driven by innovation, i.e. Schumpeterian growth. Since two types of individuals are assumed, the poor and the rich, Gini-coefficient is treated in two variables, namely the relative wealth of the poor and the population share of the poor, each having a different effect on economic performance. Particularly in the separating equilibrium, an improvement in the relative wealth of the poor impedes economic growth, but a decline in the population share of the poor enhances economic growth. Furthermore, the current paper combines the Schumpeterian quality improvement model and the neoclassic production function. Thus, the impact of wealth inequality on economic growth is through the supply of human capital as well as the demand for better quality goods. Our results suggest that empirical research on the base of Gini-coefficient cannot generate a general relationship between wealth inequality and economic growth.     

Does an incumbent monopolist have an incentive to invite new entry through granting a free patent license?

We examine whether an incumbent monopolist has an incentive to invite a new entry. In particular, we demonstrate the condition of a profit-raising entry effect in the presence of network externalities. Here the incumbent monopolist grants a free patent license for a perfectly compatible product for a new firm when it can choose the level of compatibility.     

The role of rare earth prices for consumer prices: an ignored factor?

The article explores the role of a new determinant that accounts for driving consumer prices, i.e. rare earth prices. Rare earths are used for many advanced manufacturing and military technologies. Performing a number of panel methodological approaches, panel cointegration findings support the initial insight of the authors and illustrate a positive effect on consumer prices across all rare earths.     

When does the cost channel pose a challenge to inflation targeting central banks?

In a sticky-price model where firms finance their production inputs, there is both a lower and an upper bound on the central bank's inflation response necessary to rule out the possibility of self-fulfilling inflation expectations. This paper shows that real wage rigidities decrease this upper bound, but coefficients in the range of those on the Taylor rule place the economy well within the determinacy region. However, when there is time-variation in the share of firms who finance their inputs (i.e. Markov-switching) then inflation targeting interest rate rules frequently result in indeterminacy, even if the central bank also targets output. Adding a nominal growth target to the policy rule can often alleviate this indeterminacy and therefore anchor inflation expectations.     

Prices for cash and cash for prices? Theory and evidence on convenient pricing

A transaction between a seller and a buyer incurs a payment cost. The payment cost is borne by the seller, depending on the payment instrument the buyer chooses, cash or card. Card payment is more costly than cash payment, so the seller prefers that the buyer pays cash. In this article, we study the strategy of the seller setting a convenient price, which simplifies transactions and pushes the buyer to pay cash. The theoretical analysis, which models both the seller and the buyer in a game setting, derives two propositions: (1) the seller is more likely to set a more convenient price and (2) the buyer is more likely to pay cash a more convenient price. The empirical analysis supports both propositions. Thus, sellers adopt a convenience pricing strategy – prices for cash – and this strategy pushes buyers to pay cash – cash for prices.     

Do stock prices react to immigration restrictions? Evidence from an event study in Switzerland

This article tests the effects of sudden immigration restrictions on stock prices of firms in industries with high shares of immigrants. It estimates the abnormal returns as a function of the share of migrants by industry. To do so, one specific event – a referendum on migration policy with an unexpected outcome – that will potentially cut off Swiss listed companies from the supply of foreign labour is studied. Although operating in an industry with a high share of immigrants is associated with lower returns, the effect is not very strong, which indicates that investors seem to trust the government to leave some leeway in the implementation of the constitutional amendment that was voted on.     

Global apparel production and sweatshop labour: can raising retail prices finance living wages?

This paper provides some empirical evidence on issues raisedby the global anti-sweatshop movement. We first consider therelationship between wage and employment growth, finding noconsistent trade-off between them. We then measure the shareof labour costs in the production of garments in the US andMexico. We find that the retail price increases necessary toabsorb the costs of raising wages substantially are small, wellwithin the range of price increases that polls suggest US consumersare willing to pay. We close by considering some implicationsof these results.     

When does coordination for free trade regimes fail?

This paper examines why the recent efforts to arrange free trade regimes have failed repeatedly focusing on the increased uncertainties in economic fundamentals and the asymmetric political economic characteristics of trading countries reflected in the hawkish trade retaliatory tendencies. We demonstrate that, under informational barriers due to economic uncertainties, a slight negative change in economic fundamentals as well as the signals about the economic fundamentals can lead to the collapse of free trade regimes. Moreover, the fear of a trading partner's deviation to protectionist policies might trigger preemptive protectionist measures resulting in a trade war when trade policies show strategic complementarity. However, a free trade regime is more likely to be sustained when it is commonly known that each country has strong symmetric retaliatory tendencies in case trade friction occurs. Nonetheless, if the asymmetry in retaliatory tendencies of trading countries increases the preemptive incentive, a free trade regime is more likely to collapse to a trade war.     

When does Learning by Doing generate current losses?

We study under which conditions a learning by doing effect in the industry causes a monopolist to operate at a loss for some initial periods. Those conditions involve a parameter of the learning process, the slope of inverse demand function and the discount parameter. In order to get results, we explore the analytical solution to a T-period learning by doing model, which is also a novelty. Numerical examples are presented.     

When does transition increase the gender wage gap?

In the context of underlying stability in female participation rates, the gender wagegap, measured by the log of monthly wages, more than doubled in Belarus from 1996 to 2006. In this respect, the country has experienced a variant of the transition which occurred in the former Soviet Union where relative female wages fell by more than female participation. We have used the Machado and Mata (2005) analysis of the gender gap distribution. This reveals that the effect of coefficients on observed characteristics in widening the gap was increasing over time, especially in the lower and middle deciles of the wage distribution. At the same time, the effect of the characteristics themselves in reducing the gap was shrinking. The decomposition of changes in the gap over time, based on Juhn et al. (1991) , confirms that the contraction of women’s relative wages has been caused both by a deterioration in the observed characteristics of female workers and by the associated remuneration. Changes in the residual wage distribution tend to slightly reduce the gap rather than, as is the case elsewhere, to increase it. The analysis carried out in line with Neuman and Oaxaca (2004) suggests that the increased gap was not caused by sample selection. Instead, two observed factors are found to be mainly responsible for the results: hours of work have increased for men more than for women and women have experienced segregation in low‐wage industries.     

Does an economically active population matter in housing prices?

This article examines the link between the population structure and housing prices. We use a panel of 23 countries from 1976 to 2013 in our empirical analysis. We find statistically significant impacts of the proportion of the economically active population aged 15–64 to the total population on housing-price growth. Our study supports a policy for stable population growth to moderate housing-price growth and economic cycles.     

Is the housing allowance shifted to rental prices?

This paper deals with the incidence of housing subsidies, which we analyze using Finnish panel data. The main data set includes 50,000 households that received housing allowances during the period 2000–2008. In addition, we utilize repeated cross-sections of all Finnish households for 1989–2008, the annual sample exceeding 10,000. Estimation results suggest that a part of the subsidies will indeed go into rental prices. A conservative estimate of the size of the shift is one-third, but it is certainly possible that the number is as high as 50 %. On the other hand, the subsidy seems to have increased housing demand more than the subsidy-induced income effect would have implied, which is in accordance with the goals of the subsidy program. Our results seem to be consistent with other studies, which have also indicated relatively large rent effects. If this is indeed the case, we are advised to reconsider the need for reforming the system of housing subsidies, at least with respect to the share of costs that remains on households’ own accounts and the implicit indexation of the system.     

Are stock prices excessively sensitive to current information?

The last few years has seen publication of evidence that stock prices overreact to current information. These studies have been criticized on several grounds, that the test statistics are biased and are invalid in the presence of non-stationary dividend series. This paper develops an extension of the variance bound test which is immune to these criticisms. The paper also presents evidence that the degree of excess volatility increases as the length of time the stock is held increases. Indeed, the variance bound test is satisfied for holding periods of less than two years.     

Does locational marginal pricing impact generation investment location decisions? An analysis of Texas’s wholesale electricity market

Journal of Regulatory Economics - Using data from Texas’s wholesale electricity market, we investigate the relationship between nodal prices and investment location decisions of utility-scale...     

Low prices cum selective distribution versus high prices: how best to signal quality?

We investigate the best signalling strategy for a monopoly introducing a new product with unobservable quality when second-period sales are linked to first-period ones and the firm may tailor its distribution network to exclude some consumers. When producing a high quality product rather than a low quality one is relatively costly with respect to the increase in quality, optimal signalling is by price alone. But when the cost differential is lower, it will be optimal to set a low first-period price, not to serve all would-be consumers at this price (selective distribution) and raise the price afterwards. Paradoxically, this strategy allows a larger customer base to be reached than in the case of pure price signalling.