Asymmetric effects of financial development on export price and quality across countries

We derive two novel predictions: financial development has a more pronounced effect on quality in countries with greater labor productivity, and its effect on export prices is U‐shaped in labor productivity. We confirm our predictions empirically and show that the negative effect of financial development on export prices is greatest in middle‐productivity countries, while its positive effect on quality is strongest in the most productive countries. Our findings contribute to the literature on the poverty trap: we argue that improving the quality of financial institutions alone is unlikely to boost quality or lower prices of the poorest countries.     

Information Shocks and the Dynamics of the Housing Market*

In this paper, we analyze housing‐market reactions to the release of previously unpublished information on school quality. Using high‐quality housing data, which precisely bracket the timing of the information shock, we investigate housing‐price dynamics within school‐catchment areas. We find a robust short‐term housing‐market reaction to the publication of school‐quality indicators, suggesting that this information was new to the households, and that households are willing to pay for better schools. The publication effect does not seem to be permanent as prices revert to pre‐publication levels after two to three months.     

Income inequality and export prices across countries

This paper provides theory and evidence on the links between income inequality within a destination country and the patterns of trade and export prices. The theoretical framework relates income inequality to product quality and prices using a simple demand composition effect. The model predicts that a more unequal income distribution in a destination country leads to higher average prices, though the effect is nonlinear and disappears for rich enough countries. The predictions are tested using detailed firm‐level data. Controlling for income per capita, prices are systematically higher in more unequal destinations, and the strength of this effect depends on income per capita. Results are particularly important for middle‐income countries and hold only for differentiated goods, and in particular for products with a high degree of vertical differentiation.     

Subcontractors for tractors: Theory and evidence on flexible specialization,supplier selection,and contracting

Buyer–Seller networks are pervasive in developing economies yet remain relatively understudied. Using primary data on contracts between the largest tractor assembler in Pakistan and its suppliers we find large variations in prices and quantities across suppliers of the same product. Surprisingly, “tied” suppliers – those that choose higher levels of specific investments – receive lower and more unstable orders and lower prices. These results are explained by developing a simple model of flexible specialization under demand uncertainty. A buyer faces multiple suppliers with heterogeneous types to supply customized parts. Specific investments raise surplus within the relationship but lower the seller's flexibility to cater to the outside market. Higher quality suppliers have a greater likelihood of selling outside and so this cost is greater for them. Therefore even if a buyer typically prefers high types, some low type suppliers might be kept as marginal suppliers because of their greater willingness to invest more in buyer-specific assets. Further empirical examination shows that the more tied suppliers are indeed of lower quality.     

PRICE,PRODUCT QUALITY,AND EXPORTER DYNAMICS: EVIDENCE FROM CHINA

This article develops a model of heterogeneous firms that endogenously choose prices and product quality to build demand in export markets. New exporters optimally charge relatively low prices and produce low‐quality goods upon entry. Product quality, prices, and sales increase as demand grows. We structurally estimate model parameters using Chinese customs data. The estimated incentive to build future demand reduces average export prices by 0.7% and increases export sales by 4% upon entry. Endogenous demand accumulation causes estimated export prices, product quality, and sales to grow by 2.2%, 12%, and 79%, respectively, over the following five years.     

Import prices,income, and inequality

We compare three theoretical explanations for the positive empirical relationship between importer income per capita and traded goods prices. A first explanation is that consumers with higher incomes demand higher quality goods with higher prices. A second explanation is that wealthier people exhibit an increased willingness to pay for necessary goods as more goods enter the consumption set in a hierarchic demand system, and can thus be charged higher markups. A third explanation is that consumers with higher incomes are more finicky regarding their preferred variety in an ideal variety framework and can thus be charged higher markups. We discriminate between these three theories by focusing on the effect of income inequality on trade prices. Based on a large dataset with bilateral HS6 level data on 1260 final goods categories from more than 100 countries between 2000 and 2004, we find a highly significant negative effect of income inequality on unit values. This contradicts both the demand for quality and finickyness theories, while providing support for the increased willingness to pay theory linked to hierarchic demand. These findings on income inequality do not falsify the quality expansion model and the ideal variety model per se. However, the results do argue for place of importance of hierarchic demand.     

Oil prices,growth, and remittance outflows from the Gulf Cooperation Council

How does a decline in oil prices and its impacts on growth affect remittance outflows from the Gulf Cooperation Council (GCC) countries? This paper carries out an empirical analysis of the relationship between oil prices, oil‐ and non‐oil GDP, and remittances outflows from the GCC. The findings of our paper are three folds. First, we find that non‐oil GDP is a key determinant of remittance outflows and that oil GDP is a significant driver of non‐oil GDP in the GCC only in the long term. Second, we document that historically oil prices and remittances tend to broadly move in the same direction but that remittances have been much less volatile than oil prices. An analysis of the past large oil price declines shows that remittance flows to major remittance recipients in Mashreq, Pakistan, and Yemen fell only modestly following large declines in oil prices and recovered quickly in line with oil prices. Finally, we estimate the elasticity of remittance outflows with respect to non‐oil GDP in the GCC using various techniques. Estimates of short‐term elasticity vary between 0.5 and 0.8, while estimates of long‐term elasticity vary between 0.6 and 1.1. We find that construction and government services are two non‐oil GDP components that are strongly associated with remittance outflows.     

Hospital Competition with Soft Budgets

We study the incentives for quality provision and cost efficiency for hospitals with soft budgets, where the payer can cover deficits or confiscate surpluses. While a higher bailout probability reduces cost efficiency, the effect on quality is ambiguous. Profit confiscation reduces both quality and cost efficiency. First‐best is achieved by a strict no‐bailout and no‐profit‐confiscation policy when the regulated price is optimally set. However, for suboptimal prices, a more lenient bailout policy can be welfare‐improving. When we allow for heterogeneity in costs and qualities, we also show that a softer budget can raise quality for high‐cost patients.     

Exporters in cross‐section: Direct versus intermediated trade

How do producers that export their goods directly differ from those that export through trade intermediaries? We take a standard model of trade with heterogeneous firms and add heterogeneity in quality to the usual heterogeneity in productivity. Modeling trade intermediaries as increasing marginal costs but decreasing fixed costs of exporting, we find that only firms with the highest quality‐adjusted productivity levels choose to export directly. Under certain parameter restrictions, the model shows that direct exporters tend to be larger and charge higher prices for their goods. In contrast to the literature, using Chinese customs data, we confirm that direct exporters do charge higher prices for their goods.     

QUALITY-CORRECTED PRICE CAPS

Although price caps have desirable efficiency properties, it is well known that they may create incentives for a regulated firm to attempt to lower its costs via reductions in service quality. Thus, the regulators often employ quality standards or other methods designed to have allowed prices reflect delivered service quality levels. In this paper, we present a system of quality‐corrected price caps that results in efficient pricing and quality provision.     

Quality,quantity, spending and prices

One measure of the change in the “quality” of consumption is the degree to which the consumption basket as a whole moves towards more luxurious goods, away from necessities. We introduce two related measures based on the luxury/necessity distinction. One is an index of the extent to which the prices of luxuries change as compared to necessities, while the second indexes the change in spending. These two measures are interpreted as the price of and spending on quality. The “volume” of quality is then spending deflated by its price. Using the recent International Comparison Program data for 100+ countries, we find that, on average, quality increases with income, but at a slower rate; luxuries are relatively more expensive in richer countries, necessities cheaper; and approximately 75 percent of additional spending on quality flows into a volume component, with the remaining 25 percent accounted for by prices.     

Interfirm Bundling and Vertical Product Differentiation

In this paper, we study the competitive effects of bundled discounts offered by pairs of independent firms. In a setting with vertically differentiated goods, where firms decide whether to participate in a discounting scheme before prices are set, it is shown that, in equilibrium, all pairs of firms producing goods of the same quality level offer bundled discounts. Relative to the no‐bundling benchmark, we find that (i) all headline prices rise, (ii) all bundle prices, net of the respective discount, decrease, and (iii) only high‐quality sellers will obtain higher profits. Furthermore, this equilibrium corresponds to the worst scenario in terms of consumer welfare, and it and decreases social welfare.     

THE EXISTENCE OF EQUILIBRIUM IN A DIFFERENTIATED DUOPOLY WITH NETWORK EXTERNALITIES*

The existence of a pure‐strategy subgame‐perfect equilibrium in qualities and prices is investigated in a duopoly model of vertical differentiation where quality improvements require a quadratic variable cost and network externalities operate. We show that there exists a parameter region where the incentive to predate at the quality stage prevents firms from reaching a pure‐strategy non‐cooperative equilibrium with prices above marginal costs. If network externalities are sufficiently large, a Bertrand equilibrium with zero profits may arise, although the amount of product differentiation is strictly positive.     

Nursing home choice,family bargaining,and optimal policy in a Hotelling economy

We develop a model of family bargaining to study the impact of the distribution of bargaining power within the family on the choice of nursing homes by families, and on the locations and prices chosen by nursing homes in a Hotelling economy. In the baseline (static) model, where the dependent parent cares only about the location of the nursing home, the markup of nursing homes is increasing in the bargaining power of the dependent parent, and nursing homes are located at the extreme periphery. We compare the laissez‐faire with the social optimum (which involves more central locations of nursing homes), and examine its decentralization in first‐best and second‐best settings. We explore the robustness of our results to introducing a bequest motive in a dynamic overlapping generations model, which allows us to study the joint dynamics of wealth accumulation and nursing home prices. If the bequest motive is strong, the markup is decreasing in the bargaining power of the dependent. However, wealth accumulation, by reducing interest rates, raises markup rates and nursing homes prices.     

Functionality development dynamism in a diffusion trajectory: A case of Japan's mobile phones development

While it is generally accepted that Information Technology (IT) has a self-propagating function which ensures that the more widespread its use, the greater its functionality, its emerging dynamism remains a black box.This paper attempts to shed some light on this dynamism through utilizing monthly trend data for the number of Japan's mobile phone subscribers over the last 12 years. A bi-logistic growth model demonstrating the diffusion trajectory initiated by both generations of mobile phones was constructed, with the goal of identifying the increase in the functionality development in the transition from traditional mobile phones with a simple communication function (1st wave mobile phone) to mobile phones with an Internet protocol function (2nd wave mobile phone).Through an empirical analysis utilizing the bi-logistic growth model, it was determined that the 2nd wave mobile phone emerged at an earlier stage of diffusion trajectory than the 1st stage mobile phone, which enabled a sustainable functionality development in Japan's mobile phones over the decade.Factors governing a dramatic decrease in mobile phones prices were analyzed, utilizing the result of the measurement of functionality development. This led to the discovery that while an increase in functionality development enhanced the price of mobile phones, this increase accelerated self-propagating diffusion, thereby enabling a dramatic reduction in prices through the effects of learning exercise and economies of scale.Based on the foregoing findings, the driving forces of self-propagating functionality development were analyzed, and it was determined that effective utilization of potential resources in innovation (e.g., assimilation of spillover technology and learning effects) is the key driving forces behind self-propagating functionality development.     

The distributive impact of terms of trade shocks: The case of the oil price changes in Russia

The halving of oil prices, during a short period between 2014 and 2015, has generated major terms of trade losses for oil exporting countries. This terms of trade shock has economy‐wide effects and significant distributive impacts. This paper, using a macro‐micro simulation model, describes and quantifies the channels of transmission from the drop of oil prices, to changes in welfare distribution at the household level for the case of the Russian Federation. The oil price reduction generates a reverse Dutch disease impacting sectoral employment, factor returns and consumption prices. It causes a contraction of employment and wages in more skill‐intensive (non‐tradable) sectors, and a reduction in consumption prices that is more pronounced for non‐food than for food goods. When these shifts are mapped to changes in incomes at the micro level, all households are affected. Poverty rates increase by 1 to 4 percentage points, depending on the poverty line used. At the US$ 10 a day threshold, 4.1 million additional people fall into poverty. Along the consumption distribution, richer people are affected more than those in the bottom 40%. However, this minor progressive impact may be reversed due to increases in unemployment and cuts in social programmes.     

Passthrough of Exchange Rate and Tariffs into Import Prices of India: Currency Depreciation versus Import Liberalization*

This paper examines the extent of passthrough of exchange rate and tariff changes into import prices using sectoral panel data (at the two‐digit SITC level) for the post‐reform period in India (1990–2001). After having controlled for unobserved effects that might have an impact on the import prices by using sector dummies, we find that on average exchange rate passthrough (ERPT) is a dominant effect compared to tariff rate passthrough (TRPT) in explaining changes in India's import prices. The sectoral panel results suggest that the passthrough of exchange rates and tariff rates varies across products. ERPT into import prices is significant in 12 industries, whereas TRPT is significant only in six industries, with full passthrough. However, ERPT is incomplete only in four industries, but TRPT is incomplete in 36 industries, which means that firms exporting to India more frequently adopt strategies to maintain their market share against tariffs than against exchange rate changes. The sectoral differences in passthrough seem to be related to the sector's share in total imports and the sector's effective protection rate. Hence, India's relatively high levels of protection have an impact on the behavior of foreign exporters.     

Legal Principles in Antitrust Enforcement

We study antitrust enforcement that aims to channel price‐fixing incentives of cartels through setting fine schedules and detection levels. Fines obey legal principles, such as the punishment should fit the crime, proportionality, bankruptcy considerations, and minimum fines. Bankruptcy considerations limit maximum fines, ensure abnormal cartel profits, and impose a challenge for optimal antitrust enforcement. We derive the fine schedule and detection level that are constrained‐optimal under legal principles and sustainability of cartel prices. This fine schedule lies below the maximum fine, makes collusion on lower prices more attractive than on higher prices, and, hence, relates to the body of literature on marginal deterrence.     

Global capital markets,housing prices,and partisan fiscal policies

In recent years, global imbalances have channeled the excess savings of surplus countries toward the real estate markets of deficit countries. By consequence, the deficit countries that attracted lots of foreign capital experienced large run‐ups in house prices, whereas most surplus countries that exported capital exhibited flat or slow house price growth. We first use new house price data and a novel instrumental variable design to show the causal relationship between housing prices and capital inflows, particularly through debt bonanzas. We then argue that international capital flows affect the fiscal policy preferences of both voters and political parties by way of their impact on housing prices. Where capital inflows are large and housing prices are rising, we expect voters to respond by demanding both lower taxes and less publicly‐provided social insurance because rising house prices allow homeowners to self‐insure against income loss. In contrast, declining house prices produce greater demands for social insurance, particularly among those most exposed to housing market risk. We present evidence from two cross‐national surveys that supports these claims, as well as a “before and after” analysis of the housing crash in Eastern Europe. We also show that the connection between house prices and social policy also manifests itself in government spending outcomes, mediated by partisan control.     

Overreactions,Momentum, Liquidity,and Price Bubbles in Laboratory and Field Asset Markets

Laboratory asset markets provide an experimental setting in which to observe investor behavior. Over more than a decade, numerous studies have found that participants in laboratory experiments frequently drive asset prices far above fundamental value, after which the prices crash. This bubble-and-crash behavior is robust to variations in a number of variables, including liquidity (the amount of cash available relative to the value of the assets being traded), short-selling, certainty or uncertainty of dividend payments, brokerage fees, capital gains taxes, buying on margin, and others.

This paper attempts to model the behavior of asset prices in experimental settings by proposing a "momentum model" of asset price changes. The model assumes that investors follow a combination of two factors when setting prices: fundamental value, and the recent price trend. The predictions of the model, while still far from perfect, are superior to those of a rational expectations model, in which traders consider only fundamental value. In particular, the momentum model predicts that higher levels of liquidity lead to larger price bubbles, a result that is confirmed in the experiments. The similarity between laboratory results and data from field (real-world) markets suggests that the momentum model may be applicable there as well.