Markups and the Business Cycle: Evidence from Italian Manufacturing Branches

This paper investigates the markup of price over marginal cost in Italian manufacturing branches. The approach used is an extension of Hall's model that addresses some measurement shortcomings and theoretical limitations that may affect this class of model. The hypothesis of perfect competition is rejected in the majority of sectors over the period 1977–1995. The cyclical behavior of markups is found to vary significantly across branches, thereby helping to explain the contradictory evidence regarding the whole manufacturing sector reported in the literature. At branch level, industry concentration is found to be associated with countercyclical markups, providing scope for real effects of aggregate demand shocks. Finally, the size of the markup is negatively affected by both domestic and foreign competitive pressure.     

Earnings Reported under IFRS Improve the Prediction of Future Cash Flows? Evidence from European Banks

This paper examines the relative costs and benefits of International Financial Reporting Standards (IFRS) adoption in the European Union by testing the ability of earnings computed under IFRS to predict future cash flows. The study considers the contribution of net income, comprehensive income and other comprehensive income to the usefulness of earnings to predict cash flows, and it compares IFRS with domestic Generally Accepted Accounting Principles (GAAP). Evidence from a sample of Continental European banks shows that IFRS improve the ability of net income to predict future cash flows. Comprehensive income, too, provides relevant information to predict future cash flows, although with a measurement error which is higher than that in net income for greater lags of time. In our interpretation, these findings are consistent with unrealised gains and losses recognised in other comprehensive income being more transitory and volatile in nature. Overall, our results are relevant to academics and standard setters debating the merits of IFRS adoption and to those who use financial statements and adopt reported earnings to form expectations about future cash flows.     

Business fluctuations and bankruptcy avalanches in an evolving network economy

We analyze the properties of a three-sector network economy characterized by credit relationships connecting downstream and upstream firms (inside credit) and credit relationships connecting firms and banks (outside credit). The network topology changes over time due to an endogenous process of partner selection (the preferred-partner choice rule). The output of simulations shows that a business cycle at the macroeconomic level can develop as a consequence of the complex interaction of the heterogeneous financial conditions of the agents involved. In this paper we focus on the emergence of bankruptcy crises: the bankruptcy of one agent can bring about the bankruptcy of one or more other agents in a snowball effect of more or less large size, depending on the network structure and the incidence of non-performing loans on balance sheets of agents involved.     

Product market competition with differentiated goods and social welfare in the presence of an industry-wide union

Mainstream locus communis indicates that a more competitive product market leads to higher social welfare levels. Using a Conjectural Variation (CV) model, this research note analyzes the effects on welfare of different degrees of product market competition in a duopoly with differentiated goods. Bargaining between the firms and the industry-wide union occurs under the Efficient Bargaining (EB) model. The work indicates that, with close substitute goods, social welfare is maximized for the intermediate levels of market competition, whereas more independent goods lead to the standard result of a high welfare level under competitive markets.     

The ‘wrong skewness’ problem: a re-specification of stochastic frontiers

In this paper, we study the ‘wrong skewness phenomenon’ in stochastic frontiers (SF), which consists in the observed difference between the expected and estimated sign of the asymmetry of the composite error, and causes the ‘wrong skewness problem’, for which the estimated inefficiency in the whole industry is zero. We propose a more general and flexible specification of the SF model, introducing dependences between the two error components and asymmetry (positive or negative) of the random error. This re-specification allows us to decompose the third moment of the composite error into three components, namely: (i) the asymmetry of the inefficiency term; (ii) the asymmetry of the random error; and (iii) the structure of dependence between the error components. This decomposition suggests that the wrong skewness anomaly is an ill-posed problem, because we cannot establish ex ante the expected sign of the asymmetry of the composite error. We report a relevant special case that allows us to estimate the three components of the asymmetry of the composite error and, consequently, to interpret the estimated sign. We present two empirical applications. In the first dataset, where the classic SF has the wrong skewness, an estimation of our model rejects the dependence hypothesis, but accepts the asymmetry of the random error, thus justifying the sign of the skewness of the composite error. More importantly, we estimate a non-zero inefficiency, thus solving the wrong skewness problem. In the second dataset, where the classic SF does not yield any anomaly, an estimation of our model provides evidence for the presence of dependence. In such situations, we show that there is a remarkable difference in the efficiency distribution between the classic SF and our class of models.     

Strategic trade policy with bargaining over managerial contracts

This paper re‐examines the well‐known activist regime's inefficiency (governments set export subsidies) in a sales–delegation game with owner–manager bargaining over contracts. Contrary to the received literature, this bargaining process may (a) induce governments to set a tax if products are not too substitute or complements and (b) lead to an efficient (inefficient) equilibrium provided that products are sufficiently differentiated (not too complements). Therefore, unilateral public intervention can be optimal: in case of rival governments' retaliation, under appropriate product competition degrees, welfares are larger than under free trade even for small managers' power. Thus, managerial delegation practices are crucial also for international trade issues.     

Environmental innovation policy and international competition

We consider one polluting industry in an open economy. The national government implements a policy of industrial pollution control, by inducing appropriate technological innovation to reduce toxic emissions. The emission-reducing innovations are developed through firm-specific costly investments. Under different hypotheses on market structure (perfect competition, Bertrand and Cournot oligopoly), international competition forces the national government to subsidize innovation. The appropriate subsidy scheme varies according to the information available to the government and according to market structure. If information is asymmetric, the subsidy must include the information premium necessary to separate different types of firms.     

Optimal two-object auctions with synergies

We design the revenue-maximizing auction for two objects when each buyer has bi-dimensional private information and a superadditive utility function (i.e., a synergy is generated if a buyer wins both goods). In this setting the seller is likely to allocate the objects inefficiently with respect to an environment with no synergies (see Armstrong, RES (2000)). In particular, the objects may be bundled too rarely or a buyer may win the bundle even though her valuations for the goods are weakly dominated by the values of another buyer.Received: 29 October 2001, Accepted: 29 October 2002, JEL Classification: D44, D82This paper has been written while the author was a member of the Dipartimento di Statistica e Matematica Applicata alle Scienze Umane "Diego De Castro", Universitá degli Studi di Torino, Italy. Valuable comments and suggestions were provided by Antonio Cabrales, Massimo Marinacci, three anonymous referees and, especially, by Mark Armstrong. The usual disclaimer applies.     

Profit sharing as entry deterrence mechanism

In a right-to-manage framework, this paper analyzes the optimal choice of the pay scheme (profit sharing vs. fixed wage) in a unionized duopoly with potential market entry and decentralized bargaining. The paper shows that, depending on the institutional features, both pay systems can arise as equilibria in Nash strategies. Under duopoly with committed bargaining, the fixed wage is the Nash equilibrium; with flexible bargaining, an agreement between the incumbent firm and its union about profit sharing arises as Nash equilibrium, if the union is not too strong. A monopoly with threat of entry reinforces the selection of profit sharing as a deterrent mechanism.