A Hotelling–Downs model of electoral competition with the option to quit

We study a variant of the multi-candidate Hotelling–Downs model that recognizes that politicians, even after declaring candidacy, have the option of withdrawing from the electoral contest before the election date and saving the cost of continuing campaign. We find that this natural variant significantly alters equilibrium predictions. We give conditions for the existence of an equilibrium for an arbitrary finite number of candidates and an arbitrary distribution of single-peaked preferences of voters. We also provide a partial characterization of the equilibrium outcomes that addresses whether policy convergence can be a feature of equilibrium outcomes when more than two candidates enter the electoral contest.     

Existence of a Condorcet Winner When Voters Have Other‐Regarding Preferences

In standard political economy models, voters are “self‐interested” that is, care only about “own” utility. However, the emerging evidence indicates that voters often have “other‐regarding preferences” (ORP), that is, in deciding among alternative policies voters care about their payoffs relative to others. We extend a widely used general equilibrium framework in political economy to allow for voters with ORP, as in Fehr and Schmidt (1999) . In line with the evidence, these preferences allow voters to exhibit “envy” and “altruism,” in addition to the standard concern for “own utility.” We give sufficient conditions for the existence of a Condorcet winner when voters have ORP. This could open the way for an incorporation of ORP in a variety of political economy models. Furthermore, as a corollary, we give more general conditions for the existence of a Condorcet winner when voters have purely selfish preferences.     

Entry Solicitation and Deterrence in R&D Competition with Spillovers

The purpose of this note is to examine incumbent behaviour and patterns of entry under R&D competition with spillovers. We find that, in addition to blockading, deterring and accommodating entry, the incumbent may also solicit entry. Entry solicitation occurs when the incumbent strategically alters its R&D commitment in order to take advantage of the spillover generated by the entrant's subsequent R&D investment. Although our results are placed in the context of R&D with spillovers, they are applicable to a wider class of models involving positive externalities, particularly network externalities.
JEL Classification Numbers: L12, O31.     

Comment on ‘Competition Tests with a Non‐Structural Model: The Panzar–Rosse Method Applied to Germany's Savings Banks’

Abstract. In a recent issue of this journal Gischer and Stiele (2009) applied the ‘Test for “Monopoly” Equilibrium’ advanced by Panzar and Rosse (1987) to German savings banks and came up with the claim that savings banks maximize profits under conditions of monopolistic competition in the meaning of Edward Chamberlin. Their proposition is not conclusive since it would require free entry and for savings banks to operate under increasing returns to scale. Available evidence, however, shows them being subject to constant or decreasing returns to scale. The empirical findings of Gischer and Stiele can more convincingly be explained by assuming savings banks abide by their legal goals to pursue the public interest.     

Entry in a Dynamic Model with Equilibrium Price Dispersion with an Application to the Market for Long-Distance Telephone Services

Models of entry based on the traditional models of oligopoly do not allow for price dispersions on homogenous products. Yet, such price dispersions do exist for homogenous products, and a firm does not lose its entire market share when it fails to charge the lowest price. Existing models of equilibrium price dispersion are not designed to analyze entry in a dynamic framework. A dynamic model is developed that allows an analysis of the effects of entry into a previously monopolized market. Despite asymmetric initial shares, the market shares of equally efficient firms tend to equalize over time. An application is the market for long‐distance telephone services following the divestiture of the bell operating companies from AT&T.     

A Simple Extension of the Dasgupta–Maskin Theorem,with an Application

This paper generalizes the classical existence results for games with discontinuous payoffs, developed by Dasgupta and Maskin in 1986. This new existence result is then applied to a simple duopoly model with quantity precommitment and Bertrand competition.     

Imputing rent in consumption measures,with an application to consumption poverty in Canada, 1997–2009

We consider two econometric problems in the measurement of poverty, both relating to rent imputation. First, we account for quality differences correlated with selection into owner‐occupied versus rental tenure. This correction increases estimated household consumption by 5% over uncorrected estimates and decreases estimated poverty rates quite dramatically. Second, we propose that measurement error induced by the imputation be corrected by imputing a consumption distribution, rather than a consumption level, for each household. This correction increases estimated poverty rates slightly. We use our methods to measure consumption poverty in Canada, and find that the imputation strategy used influences the patterns observed. For example, measured poverty among the elderly barely declines when one uses our methods, in contrast to the almost 6 percentage point reduction we find using traditional methods. In our assessment of the over‐time evolution of consumption poverty, we find that substantial progress has been made on overall poverty and on child poverty, but that poverty among the elderly hardly changed.     

Competition Tests with a Non-Structural Model: the Panzar–Rosse Method Applied to Germany's Savings Banks

Abstract. In this paper we adopt the Panzar–Rosse approach to assess the competitive conditions in the German banking market for the period from 1993 to 2002. We suggest several improvements to the empirical application of the approach and show that frequently used empirical models that apply price rather than revenue functions lead to biased results. Using disaggregated annual data from more than 400 savings banks (Sparkassen) the empirical findings indicate monopolistic competition, the cases of monopoly and perfect competition are strongly rejected. Furthermore, small banks seem to enjoy even more market power than larger institutions.     

A solution to the Lucas–Uzawa model with increasing returns to scale: Note

Chilarescu [2008, An analytical solutions for a model of endogenous growth, Economic Modelling.] claims that he determines a solution path to the Lucas–Uzawa model with increasing returns to scale. However, the path is not a closed-form since it depends on the initial consumption and the initial time for goods production, that are unknown. Moreover, the production function is nonconcave and then the first order conditions and the transversality conditions are not sufficient for the optimality. This note converts the model to a problem in which the Hamiltonian is available and derives a fully-closed form solution.     

A GM(1,1)–Markov chain combined model with an application to predict the number of Chinese international airlines

In this paper, we propose a new dynamic analysis model which combines the first-order one-variable grey differential equation model (abbreviated as GM(1,1) model) from grey system theory and Markov chain model from stochastic process theory. We abbreviate the combined GM(1,1)–Markov chain (MC) model as MCGM(1,1) model. This combined model takes advantage of the high predictable power of GM(1,1) model and at the same time take advantage of the prediction power of Markov chain modelling on the discretized states based on the GM(1,1) modelling residual sequence. For prediction accuracy improvements, Taylor approximation is applied to MCGM(1,1) model. We call the improved version as T-MCGM(1,1) model. As an example, we use the statistical data of the number of Chinese international airlines from 1985 to 2003 for a validation of the effectiveness of the T-MCGM(1,1) model.     

Cointegration modeling of interrelated factor demands: With an application to labor–import substitution in the European Union

In this paper we present techniques for cointegration modeling of interrelated factor demands. These techniques respect the non-stationary character of the price and quantity data, and permit specification of general, dynamic factor demand models based on error correction forms derived from cointegration. Therefore, we do not have to assume ad hoc dynamic forms. Moreover, we ensure that estimated relations are structural, and not spurious. Cointegrating vectors are estimated subject to all standard economic theory restrictions by using a procedure, which we call dynamic SUR. We show how consistent error correction models can be specified and estimated. In addition, we test the neoclassical restrictions both in the short- and the long run. The new methods are used to shed light on the major problem of the European Union (unemployment) and its relationship with imports. The empirical analysis is conducted for five countries of the European Union with an emphasis to the south: The UK, France, Greece, Italy, and Spain.     

Rules of Origin in North–South Preferential Trading Arrangements with an Application to NAFTA

All preferential trading agreements (PTAs) short of a customs union use rules of origin (ROO) to prevent trade deflection. ROO raise production costs and create administrative costs. This paper argues that in the case of the recent wave of North–South PTAs, the presence of ROO virtually limits the market access that these PTAs confer to the Southern partners. In the case of NAFTA, we find average compliance costs around 6% in ad valorem equivalent, undoing the tariff preference (4% on average) for a large number of tariff lines. Administrative costs amount to 47% of the preference margin. These findings are coherent with the view that North–South PTAs could well be viewed like a principal–agent problem in which the Southern partners are just about left on their participation constraint.     

Identifying Laffer Bounds: A Sufficient‐Statistics Approach with an Application to Germany

We derive a simple sufficient‐statistics test for whether a nonlinear tax‐transfer system is second‐best Pareto efficient. If it is not, then it is beyond the top of the Laffer curve and there exists a tax cut that is self‐financing. The test depends on the income distribution, extensive and intensive labor supply elasticities, and income effect parameters. A tax‐transfer system is likely to be inefficient if marginal tax rates are quickly falling in income. We apply this test to the German tax‐transfer system, and we find that the structure of effective marginal tax rates is likely to be inefficient in the region where transfers are phased out.     

R&D Activities In a Peripheral Region: an Empirical Study with Special Reference to the North East Region of the UK

This study examines the incidence of research and development (R&D) activities, type of R&D undertaken and the incidence of R&D co-operation among manufacturing firms located in a key urban area of the North East England, a peripheral region of the UK. We have found that over 62% of manufacturing firms in this urban growth area to be R&D active, suggesting that R&D active firms tend to be concentrated in urban area s in a peripheral region, as it is the case in the leading regions. However, the incidence of R&D co-operation was found to be relatively low among R&D active firms. It is also found that the key determinants of undertaking R&D to be the existence of a core competence/product and exporting activities. These findings might be of interest to policy makers promoting economic growth via firm’s R&D activities.     

The eye of the beholder. Reconsidering the notions of pro‐poor growth and progressivity,with an application to Vietnam

Both policymakers and economists have tried to find criteria to assess whether economic growth is pro‐poor. In this paper we reconsider the inequality‐oriented approach originally proposed by Jenkins and Van Kerm. They look at the changes in the whole income distribution, and decompose the change in income inequality, measured by the Gini coefficient, into a progressivity and a reranking component. They define a pro‐poor (or progressive) change as one where the changes in income are more to the benefit of those who are initially poor than to the benefit of those who are initially rich. We challenge this assumption, and maintain that also the point of view of the finally poor and the finally rich should be taken into account when evaluating whether growth is pro‐poor. We suggest a new decomposition method, based on an inequality index of the generalized entropy family, which allows the change in income inequality to be decomposed exactly into a forward‐looking and a backward‐looking progressivity component. Our empirical illustration, using data from household surveys in Vietnam, shows that economic growth in Vietnam has been pro‐poor from a forward‐looking perspective, but not from a backward‐looking perspective.     

A method for estimating the effect of a subsidy on the receiver's resource constraint: with an application to U.S. local governments 1964–1971

Most studies of the effects of subsidies or recipient behavior accept the nominal legal provisions of a grant as defining the actual effective resource constraint faced by the receiver. This paper argues that to the contrary the true effect of a subsidy on the receiver's resource constraint can not be read from nominal administrative requirements. Therefore, an indirect statistical method is required to discover the shape of the post subsidy budget line. This paper develops such a method, which is then applied to U.S. local government expenditure decisions on education for the period 1964–71.