On the mark(s): Optimum currency areas in Germany

In the wake of unification, the former GDR became a member of the DM monetary zone. We evaluate whether unified Germany satisfies the criteria defining an optimal monetary area. We conclude that the primary criterion, similarity of shocks, is not satisfied even by the western states, a reflection of the importance of sector-specific relative to geographic shocks coupled with different sectoral structures. Extending this argument, we conclude that the correlation of shocks to the eastern states with western states is also likely to be small. A case for monetary unification must, in consequence, be based on political rather than narrowly economic calculations.     

An experimental investigation of entry cost effects in sealed-bid dollar auctions

We experimentally study the effect of entry costs on bidding and entry behavior in common value auctions. We find, with entry costs, players bid lower in first price and higher in second price auctions, compared to no entry fee auctions.     

Existence of Bertrand equilibrium revisited

In this paper we reconsider existence of Bertrand equilibrium in a symmetric‐cost, homogenous‐product oligopoly. We prove the following main results. (a) If the cost function is strictly superadditive on [0, ∞) then there exists a pure strategy Bertrand equilibrium. Such Bertrand equilibria are necessarily non‐unique. (b) If the cost function is strictly subadditive on [0, ∞) then there exists no Bertrand equilibrium, either in pure strategies or in mixed strategies.     

Does Financial Liberalization Lower Problem Loans in Banks?

The paper explores whether financial liberalization promotes improved credit risk management in Indian banking in the form of fewer problem loans. Using annual data on state-owned banks for the period 1996–2005, the paper finds that, after controlling for a myriad of factors, financial liberalization is influential in lowering banks' problem loans. Robustness tests reinforce these findings .     

International Trade,Technology, and the Wage Gap: Evidence from Granger‐causality Tests*

In this paper, we propose an alternative approach under which to examine the source of the increased wage gap between skilled and unskilled workers in US manufacturing. Rather than imposing the assumptions inherent in a given structural form, we posit a long‐run equilibrium relationship between international trade, technology, and the wage premium using a vector error‐correction model. We first test for the existence of a long‐run relationship using cointegration tests. If a cointegrating relationship is found, we then conduct tests on the direction of the long‐run relationship and of Granger causality. We apply our approach to each two‐digit and four‐digit SIC industry and find evidence in support of international trade being an important source of the wage gap. Our results suggest that it is premature to dismiss international trade as a possible suspect behind the rising wage premium.     

Endogenous trading bloc formation in a North-South global economy

Abstract .  The majority of the trading blocs to date are between similar countries, rather than between developed and developing countries. This paper provides a rationale for why trading blocs among similar countries may arise as an equilibrium phenomenon. It develops a model of an asymmetric world economy in which there are at least four countries. The countries are differentiated with respect to their market size and they choose their trading partners. In the coalition-proof Nash equilibrium, either there is global free trade or free trade areas are formed among similar countries.     

Trade and wage inequality: Are they related?

The objective of this paper is to investigate the relationship between net exports and wage inequality in the U.S. The short- and long-run analyses of the U.S. trade and wage data are undertaken. Cointegration test results indicate that net exports and wage inequality are related in the long run. The main contribution of this paper lies in its focus on the short-run investigation of the relationship between net exports and wage inequality. This investigation was conducted using the vector error correction (VEC) testing framework. Contrary to the prevailing view, the VEC test results indicate that trade has no statistically significant impact on wage inequality in the U.S. Instead, the empirical evidence shows a negative causal impact of wage inequality on net exports.     

The Babu and the Boxwallah: Managerial Incentives and Government Intervention in a Developing Economy

In developing economies a firm's strategy is directed more often at the government than at other competing firms. As an initial step towards modeling such interactions this paper considers a situation where a government confronts a monopoly. The latter chooses price and maximizes profit and the former chooses a tax rate and maximizes tax revenue. The government and the monopoly can delegate the final decision-making to, respectively, a bureaucrat and a manager. The incentive equilibrium of the model is characterized. It is shown that this kind of industrial setting is likely to exhibit greater inefficiencies than that which arises in standard models.