Recursive smooth ambiguity preferences

This paper axiomatizes an intertemporal version of the Smooth Ambiguity decision model developed in [P. Klibanoff, M. Marinacci, S. Mukerji, A smooth model of decision making under ambiguity, Econometrica 73 (6) (2005) 1849-1892]. A key feature of the model is that it achieves a separation between ambiguity, identified as a characteristic of the decision maker's subjective beliefs, and ambiguity attitude, a characteristic of the decision maker's tastes. In applications one may thus specify/vary these two characteristics independent of each other, thereby facilitating richer comparative statics and modeling flexibility than possible under other models which accommodate ambiguity sensitive preferences. Another key feature is that the preferences are dynamically consistent and have a recursive representation. Therefore techniques of dynamic programming can be applied when using this model.     

Recursive preferences,learning and large deviations

We estimate the relative contribution of recursive preferences versus adaptive learning in accounting for the tail thickness of price–dividends/rents ratios. We find that both of these sources of volatility account for volatility in liquid (stocks) but not illiquid (housing) assets.     

Recursive utility and preferences for information

Summary. This paper presents an axiomatic foundation for recursive utility that captures the role of the timing of resolution of uncertainty without relying on exogenously specified objective beliefs. Two main representation results are proved. In the first one, future utility enters the recursion through the type of general aggregators considered in Skiadas (1997a), and as a result the formulation is purely ordinal and free of any probabilities. In the second representation these aggregators are conditional expectations relative to subjective beliefs. A new recursive representation incorporating disappointment aversion is also suggested. The main methodological innovation of the paper derives from the fact that the basic objects of choice are taken to be pairs of state-contingent consumption plans and information filtrations, rather than the temporal (objective) lotteries of the existing literature. It is shown that this approach has the additional benefit of being directly applicable to the continuous-time version of recursive utility developed by Duffie and Epstein (1992). Received: February 18, 1997; revised version: July 18, 1997     

An experimental investigation of wage taxation and unemployment in closed and open economies

We investigate experimentally the economic effects of wage taxation to finance unemployment benefits for a closed economy and an international economy. The main findings are the following. (i) There is clear evidence of a vicious circle in the dynamic interaction between the wage tax and unemployment. (ii) Employment is boosted by budget deficits but subsequent tax rate adjustments to balance the budget lead to employment levels substantially lower than theoretically predicted. (iii) A sales risk for producers due to price uncertainty on output markets appears to cause a downward pressure on factor employment. For labor the wage tax exacerbates this adverse effect.     

On negative time preferences

Survey data show that subjects positively discount both gains and losses but discount gains more heavily than losses. This holds for monetary and non-monetary outcomes. These results do not confirm the findings of two earlier studies about negative time preferences for non-monetary outcomes.     

Equilibrium portfolios in the neoclassical growth model

This paper studies equilibrium portfolios in the standard neoclassical growth model under uncertainty with heterogeneous agents and dynamically complete markets. Preferences are purposely restricted to be quasi-homothetic. The main source of heterogeneity across agents is due to different endowments of shares of the representative firm at date 0. Fixing portfolios is the optimal equilibrium strategy in stationary endowment economies with dynamically complete markets. However, when the environment displays changing degrees of heterogeneity across agents, the trading strategy of fixed portfolios cannot be optimal in equilibrium. Very importantly, our framework can generate changing heterogeneity if and only if either minimum consumption requirements are not zero or labor income is not zero and the value of human and non-human wealth are linearly independent.     

Growth and financial liberalization under capital collateral constraints: The striking case of the stochastic AK model with CARA preferences

We consider a small-open, collateral-constrained AK economy. We show that the combination of CARA preferences and uncertainty on capital inflows generates long-term growth while the deterministic counterpart does not: long-term growth is entirely driven by precautionary savings, and the asymptotic growth rate of the expected capital stock is increasing in both the risk magnitude and the Arrow–Pratt absolute risk aversion parameters.     

Trade openness reduces growth volatility when countries are well diversified

This paper addresses the mechanisms by which trade openness affects growth volatility. Using a diverse set of export concentration measures, we present strong evidence pointing to an important role for export diversification in conditioning the effect of trade openness on growth volatility. Indeed, the effect of openness on volatility is shown to be negative for a significant proportion of countries with relatively diversified export baskets.     

Price discrimination of buyers with identical preferences and collusion in a model of advertising

A model of advertising and price distributions is investigated whereby each seller can contact different buyers, whose preferences are identical, with different probabilities. The model features a continuum of equilibria parametrized by the ratio of the buyers contacted by one seller—differing across “market segments”—and by the other sellers. In general, the sellers practice price discrimination across segments. More asymmetric equilibria correspond to higher volumes of transactions and higher expected transaction prices. This results in a lower expected utility for the buyers and higher expected profits; thus, identifying areas of influence can help the sellers to support collusion.     

RAISING WAGES TO DETER ENTRY INTO UNIONIZED MARKETS*

This paper investigates entry under a unionized oligopoly when entry and wage negotiations are sequential. We find the incumbent has incentives to raise the wage, which strengthens the bargaining position of the union relative to the entrant at subsequent negotiations and thus discourages entry. We show that entry is more likely to be deterred (accommodated) if the union is wage (employment) oriented and that raising unemployment compensation during recession not only reduces the burden of the unemployed but also induces new entry, creating more employment opportunities. However, during a business boom, reducing unemployment compensation is a better policy.     

Trade flows in a spatial oligopoly: gravity fits well,but what does it explain?

Abstract .  Large distance and border effects on trade flows in some industries may result from the collusive division of geographic markets. In the Brazilian cement industry, traditional gravity equations fit the data well, yet limited regional flows are due to firms' strategic behaviour. Thanks to a unique institutional setting and an unusually rich data set, I directly control for trade costs, which – despite their importance – cannot account for the observed segmentation of local markets at current prices. The paper highlights how collusive behaviour can magnify the effects of distance, as firms use geography to coordinate on higher prices and less cross-hauling.     

Wealth inequality, preference heterogeneity and macroeconomic volatility in two-sector economies

We explore the link between wealth inequality, preference heterogeneity and macroeconomic volatility in a two-sector neoclassical growth model. First we prove that, if agents have homogeneous preferences, when the absolute risk tolerance is a strictly convex (concave) function, sufficiently high (low) levels of wealth inequality may lead to endogenous fluctuations in the neighborhood of the steady state. Second, we consider the effects of preference heterogeneity when agents are homogeneous with respect to their wealth. We show that when the utility function belongs to the HARA class, sufficiently high levels of preference heterogeneity may lead to endogenous fluctuations in the neighborhood of the steady state if the elasticity of intertemporal substitution in consumption is greater than one.     

Foreign direct investment,economic freedom and economic growth: International evidence

In this paper, we investigate the systemic link between economic freedom, foreign direct investment (FDI) and economic growth in a panel of 85 countries. Our empirical results, based on the generalized method-of-moment system estimator, reveal that FDI by itself has no direct (positive) effect on output growth. Instead, the effect of FDI is contingent on the level of economic freedom in the host countries. This means the countries promote greater freedom of economic activities gain significantly from the presence of multinational corporations (MNCs).     

Minimum wage, exports and growth

Using an endogenous growth model in an open economy, we study the impact of minimum wages on growth for an innovator country. We state that a minimum wage shifts efforts from production to R&D, but only in an open economy. Thus, it speeds up long-run growth in proportional to exports. Calibrations suggest the growth surplus can be significant. An empirical study on 11 OECD countries illustrates these results. The impact on welfare is ambiguous because the minimum wage induces unemployment. However, we show that in an open economy, a minimum wage associated with unemployment benefits can Pareto dominate laissez-faire.     

Trade costs, international production shifting, and growth

In this paper I present a North-South endogenous growth model in which the impact of globalization on production location and growth can be analyzed. In the model the skilled-labor abundant North is the only innovator in the world. Using the model, I illustrate a scenario that is particularly interesting. Globalization (a reduction in trade costs) leads to a relocation of production to the South in a differentiated-product sector. As a result, more resources are shifted to R&D in the North, and the growth rate in the world increases. The model has several empirically consistent implications, such as rising relative wages of skilled to unskilled labor under globalization in both the North and South. I also discuss the welfare impact of globalization in this model.     

The Cournot-Bertrand profit differential: A reversal result in a differentiated duopoly with wage bargaining

This paper compares Cournot and Bertrand equilibria in a downstream differentiated duopoly in which the input price (wage) paid by each downstream firm is the outcome of a strategic bargain with its upstream supplier (labor union). We show that the standard result that Cournot equilibrium profits exceed those under Bertrand competition - when the differentiated duopoly game is played in imperfect substitutes - is reversible. Whether equilibrium profits are higher under Cournot or Bertrand competition is shown to depend upon the nature of the upstream agents’ preferences and on the distribution of bargaining power over the input price. We find that the standard result holds unless unions are both powerful and place considerable weight on the wage argument in their utility function.     

Tariffs, licensing and market structure

This paper challenges the conventional wisdom that exclusive owners of an advanced technology are always better off when producing as a monopolist than when competing against another firm. Competition against a less-efficient firm weakens the power that a host country can exert on the incumbent in the form of its tariff policy. We show that this gives a motive for a monopolist to license its technology to another foreign firm. A host country gains more from increased competition if it can induce the foreign incumbent to transfer technology to the host country firm. We show that the host country can do so by tariff commitment. We also discuss the implications of bargaining under licensing and Bertrand competition in the product market. Hence, this paper qualifies and extends the recent work of Kabiraj and Marjit [Protecting consumers through protection: The role of tariff-induced technology transfer. European Economic Review 47, 113-124].