The efficiency costs of the postal monopoly: The case of third-class mail

This paper provides an estimate of the efficiency costs of the letter monopoly for third-class bulk advertising, the Postal Service's second largest category of mail. Using market data from private mail carriers, excess costs to mailers in 1992 are estimated to be about $2.5 billion, almost one-third of the Postal Service's third-class mail revenues. These costs are the sum of (1) the allocative efficiency loss due to reduced output ($237 million); (2) the increased production costs due to non-cost-minimizing behavior ($712 million); and (3) transfers to postal labor ($1.511 billion). Total efficiency costs-the sum of (1) and (2)—are estimated to be about $950 million.The author would like to thank Roger Sherman and an anonymous referee for helpful comments and Monica Bettendorf and Stephen McGonegal for their assistance in preparing this paper.     

Ecological discounting

Which rates should we use to discount costs and benefits of different natures at different time horizons? We answer this question by considering a representative agent consuming two goods whose availability evolves over time in a stochastic way. We extend the Ramsey rule by taking into account the degree of substitutability between the two goods and of the uncertainty surrounding the economic and environmental growths. The rate at which environmental impacts should be discounted is in general different from the one at which monetary benefits should be discounted. We provide arguments in favor of an ecological discount rate smaller than the economic discount rate. In particular, we show that, under certainty and Cobb-Douglas preferences, the difference between the economic and the ecological discount rates equals the difference between the economic and the ecological growth rates. Using data about the link between biodiversity and economic development, I estimate that the rate at which changes in biodiversity should be discounted is 1.5%, whereas changes in consumption should be discounted at 3.2%.     

Optimal Worksharing Discounts

Forty percent of first-class mail is workshared, meaning that mailers perform part of the postal service work, such as sorting, in exchange for a price discount. Here the optimal discount is shown to depend on whether mailers workshare all their mail. If they do, their marginal decisions will affect usage of the mail, and the normal Ramsey inverse-elasticity rule will apply. If they do not, and their marginal decision involves the amount of their worksharing, then worksharing supply elasticities play a role in the optimal discount. In the latter case, margins will be greater for workshared letters. Problems in balancing these solutions, and in estimating cost savings from worksharing, are also discussed.     

The Ramsey Discounting Formula for a Hidden-State Stochastic Growth Process

The long term discount rate is critically dependent upon projections of future growth rates that are fuzzier in proportion to the remoteness of the time horizon. This paper models such increasing fuzziness as an evolving hidden-state stochastic process. The underlying trend growth rate is an unobservable random walk hidden by noisy transitory shocks and recoverable only as a probability distribution via Bayesian updating. A simple expression is derived for the time-declining Ramsey discount rate. The components of this hidden-state Ramsey discounting formula are then analyzed, followed by a few remarks about possible implications and applications.     

The effects of ageing and an environmental trust fund in an overlapping generations model on carbon emission reductions

Most currently employed Integrated Assessment Models for climate change are of a dynastic nature. They employ the Ramsey rule linking the interest rate, economic growth, and the rate of pure time preference. This paper argues that, although a dynastic framework might be convenient for economic analysis, it is restrictive and can be misleading. Overlapping Generations models, which do not employ the Ramsey rule, are more flexible and may give results different from those derived from dynastic models. With the Integrated Assessment Model ALICE 2.0, it is shown how various assumptions on demographic change and public institutions can affect the interest rate, thereby influencing the efficient greenhouse gas emission reductions. It is concluded that dynastic Integrated Assessment Models are in many respects inappropriate for providing policy makers with quantitative figures about the costs of carbon dioxide emissions and their desirable reduction levels.     

Why equity cannot be separated from efficiency: the welfare economics of progressive social pricing

Applied neoclassical microeconomists maintain that when profits are constrained, and average costs are higher than marginal costs, Ramsey “inverse elasticity” pricing optimizes static consumer welfare. However, when weighted, instead of unweighted, consumer surplus aggregation is used, the Ramsey pricing rule becomes a “progressive social pricing rule,” which suggests that under plausible conditions “direct-elasticity” rather than “inverse-elasticity” pricing is consumer welfare optimal.     

Time-Consistent Public Policy

In this paper we study how a benevolent government that cannot commit to future policy should trade off the costs and benefits of public expenditure. We characterize and solve for Markov-perfect equilibria of the dynamic game between successive governments. The characterization consists of an inter-temporal first-order condition (a "generalized Euler equation") for the government, and we use it both to gain insight into the nature of the equilibrium and as a basis for computations. For a calibrated economy, we find that when the only tax base available to the government is capital income—an inelastic source of funds at any point in time—the government still refrains from taxing at confiscatory rates. We also find that when the only tax base is labour income the Markov equilibrium features less public expenditure and lower tax rates than the Ramsey equilibrium.     

Optimal pricing and investment for resources with alternative uses and capacity limits

Airport runways, radio spectrum, and hospital beds are resources with capacity limits used to provide multiple services with specific capacity requirements in separate markets, which contribute to recover capacity investment costs. A welfare-maximizing and (possibly) budget-constrained firm, whose operating costs significantly increase as total capacity use presses against capacity, chooses prices and capacity. When the equilibrium capacity is reached, second-best Ramsey prices must be adjusted, and mark-ups on marginal costs may be higher for services with higher demand elasticities, if they intensively use capacity. Moreover, for a given output vector, the firm invests more than in first best. Instead, the equilibrium capacity may be first best when there is excess capacity to reduce operating costs and thus improve welfare. Our model can be used as a benchmark to evaluate the efficiency of market mechanisms for resource allocation and pricing, or when market mechanisms are not adopted.

     

Homeownership,Mobility, And Local Income Redistribution

Regions are characterized by different homeownership rates. Homeowners and renters differ in their mobility costs, renters having lower mobility costs. This paper analyses how the presence of those different types of households affects income sorting and tax differences between local jurisdictions. To this aim, we analyze a model of local income redistribution with mobile (renter) and immobile (homeowner) households. Linear income taxes finance a lump sum transfer. Policies are determined endogenously through voting. In such a framework, if there are no or only few homeowners, no income‐sorting equilibrium exists. Above a certain threshold for the homeownership rate we find an inverted U‐shaped relationship between tax differences and homeownership rates, such that tax differences between jurisdictions are highest for intermediate homeownership rates.     

The persistence of profits in the Greek manufacturing industry, 1963–88

The objective of this article is to evaluate empirically the profit rate persistence in the case of the Greek manufacturing industry (1963–88). More specifically, we address ourselves to two questions: first, do industrial profit rates eventually converge on a common rate? and secondly, what are the factors that affect the speed of adjustment of industrial profit rates? Our results suggest: a high persistence of profit rates for most industrial sectors; a generally high permanent component of the profit rates with substantial variations among sectors; and a similarity with other studies of industrialized countries with regards to the factors (concentration ratio, advertising intensity, export intensity, capital intensity etc.) affecting the speed of adjustment.     

A laboratory study of advertising and price competition

We use a laboratory experiment to study advertising and pricing behavior in a market where consumers differ in price sensitivity. Equilibrium in this market entails variation in the number of firms advertising and price dispersion in advertised prices. We vary the cost to advertise as well as varying the number of competing firms. Theory predicts that advertising costs act as a facilitating device: higher costs increase firm profits at the expense of consumers. We find that higher advertising costs decrease demand for advertising and raise advertised prices, as predicted. Further, this comes at the expense of consumers. However, advertising strategies are more aggressive than theory predicts with the result that firm profits do not increase.     

Manufacturer's pricing strategy in a two-level supply chain with competing retailers and advertising cost dependent demand

The paper studies a two-echelon supply chain comprising one manufacturer and two competing retailers with advertising cost dependent demand. The manufacturer acts as the Stackelberg leader who specifies wholesale price for each retailer. The two retailers compete with each other in advertising and they have different sales costs. The manufacturer uses one of the following two pricing strategies: (i) setting the same wholesale price for both the retailers irrespective of the difference in their sales costs; (ii) setting different wholesale prices for the retailers depending on their sales costs. Two models are developed. In the first model, the manufacturer shares a fraction of each retailer's advertising cost while in the second model, the manufacturer does not share any retailer's advertising expenses. In both the models, we derive the retailers' and manufacturer's optimal strategies. A numerical example is given to illustrate the theoretical results developed in each model. Computational results show that it is always beneficial for the manufacturer to adopt different wholesale pricing strategy for the retailers.     

Remittances,transaction costs,and informality

Recorded workers' remittances to developing countries reached $167 billion in 2005, bringing increasing attention to these flows as a potential tool for development. In this paper, we explore the determinants of remittances and their associated transaction costs. We find that recorded remittances depend positively on the stock of migrants and negatively on transfer costs and exchange rate restrictions. In turn, transfer costs are lower when financial systems are more developed and exchange rates less volatile. The negative impact of transactions costs on remittances suggests that migrants either refrain from sending money home or else remit through informal channels when costs are high. We provide evidence from household surveys supportive of a sizeable informal sector.     

GROWTH,RENEWABLES, AND THE OPTIMAL CARBON TAX

Optimal climate policy is investigated in a Ramsey growth model of the global economy with exhaustible oil reserves, an infinitely elastic supply of renewables, stock‐dependent oil extraction costs, and convex climate damages. Four regimes can occur, depending on the initial social cost of oil being larger or smaller than that of renewables and depending on the initial oil stock being large or small. We also offer some policy simulations for the first and second regime, which illustrate that with a lower discount rate more oil is left in situ and renewables are phased in more quickly. We identify the conditions under which the optimal carbon tax rises or decreases. Subsidizing renewables (without a carbon tax) induces more oil to be left in situ and a quicker phasing in of renewables, but oil is depleted more rapidly initially. The net effect on global warming is ambiguous.     

Discounting and divergence of opinion

Agents impatience rate and their anticipations about the future of the economy, are two essential determinants of the equilibrium discount rate, as illustrated by the Ramsey formula. Heterogeneity in time preference rates and in anticipations is widely acknowledged. Our objective is to determine the equilibrium discount rate when this heterogeneity is taken into account. Among others we tackle the following questions: As an additional risk or uncertainty, can dispersion in agents' characteristics lead to lower discount rates? What is the asymptotic behavior of the discount rate in such a setting? More generally, what is the shape of the yield curve?     

Brand capital and firm value

We study the role of brand capital – a primary form of intangible capital – for firm valuation and risk in the cross section of publicly traded firms. Using an empirical measure of brand capital stock constructed from advertising expenditures accounting data, we show that: (i) firms with low brand capital investment rates have higher average stock returns than firms with high brand capital investment rates, a difference of 5.2% per annum; (ii) more brand capital intensive firms have higher average stock returns than less brand capital intensive firms, a difference of 5.1% per annum; and (iii) investment in both brand capital and physical capital is volatile and procyclical. A neoclassical investment-based model in which brand capital is a factor of production subject to adjustment costs matches the data well. The model also provides a novel explanation for the empirical links between advertising expenditures and stock returns around seasoned equity offerings (SEO) documented in previous studies.     

Advertising,consumer search costs and prices in a professional service market

Since stigler's (1961) seminal article on the economics of information it has been argued that producer advertising is a substitute for consumer search. This view of advertising has been implicit in recent liberalization of restrictions on advertising by professionals (e.g. lawyers, doctors, accountants, etc.). Using th e model of the price discriminating professional developed by Masson and Wu (1974) the impact of solicitor advertising on the level of conveyancing fees charged by a sample of Scottish Solicitors is estimated. The analysis distinguishes between different forms of advertising. The advertising-of-information theory cannot be rejected for some forms of advertising in one (property value) submarket but it can be in the other (higher property value) submarket. The evidence here rejects (i) the view that all advertising is a substitude for consumer search and (ii) the view that actions to reduce search costs (such as advertising) necessarily reduce price discrimination.     

Economic growth,corruption and tax evasion

In this paper, we explore tax revenues in a regime of widespread corruption in a growth model. We develop a Ramsey model of economic growth with a rival but non-excludable public good which is financed by taxes which can be evaded via corrupt tax inspectors. We prove that the relationship between the tax rate and tax collection, in a dynamic framework, is not unique, but is different depending on the relevance of the “shame effect”. We show that in all three cases — “low, middle and high shame” countries, the growth rate increases as the tax rate increases up to a threshold value, after which the growth rate begins to decrease as the tax rate increases. But, for intermediate tax rates, the rate of growth for “low shame” countries is lower than that of “uniform shame” countries which is, in turn, lower than that of “high shame” countries. This happens because the growth rate is more sensitive to variations of t in an honest country rather than in a corrupt country.     

Campaign Finance Levels as Coordinating Signals in Three-way, Experimental Elections

If (often costly) election campaigns are simply advertising, they do not increase social welfare directly. Given this, should we limit campaign expenditures? We propose that costly campaigns can inform voters about the strength of candidates. This may increase welfare indirectly by helping voters avoid coordination failures. In laboratory elections, we study campaign finance levels as coordinating signals and compare them with our earlier work on polls. Both coordinate majority voters effectively, allowing them to stop Condorcet losers from winning. Finance levels were rational in that the total benefits of coordination exceeded the costs. Further, benefits of typical incremental contributions exceeded costs ex-post, while the next typical increment's benefits would not have.