Aggregative games and oligopoly theory: short-run and long-run analysis

We compile an IO toolkit for aggregative games with positive and normative comparative statics results for asymmetric oligopoly in the short and long run. We characterize the class of aggregative Bertrand and Cournot oligopoly games, and the subset for which the aggregate is a summary statistic for consumer welfare. We close the model with a monopolistically competitive fringe for long-run analysis. Remarkably, we show strong neutrality properties in the long run across a wide range of market structures. The results elucidate aggregative games as a unifying principle in the literature on merger analysis, privatization, Stackelberg leadership, and cost shocks.     

Community-Based Tradable Permits for Localized Pollution

This paper considers the assignment of tradable permits—representing property rights of an environmental good—to community members who are harmed by pollution generated by firms. These community members can in turn sell permits to polluters according to their personal preferences. For a special case with a sole household, market transactions between the household and polluters achieve an efficient pollution level. However, for a group of households, the decentralized market solution fails to yield social efficiency because of competitive consumption of the environmental goods. We design a revenue-sharing mechanism akin to unitization, under which market transactions also achieve efficient resource allocation. Importantly, in some cases, efficiency can be achieved even when regulators are ignorant of the private valuation of the environmental good.     

The Economic Impact of Brexit: Evidence from Modelling Free Trade Agreements

This paper assesses the economic implications of the United Kingdom (UK) leaving the European Union (EU). The basic data on trade in goods and services and investment between the two parties suggest that the cost of “Brexit” could be substantial. Trade between the UK and the EU-27 is large and of a similar order of magnitude as transatlantic trade (between the EU and the U.S.). The precise nature of the (hopefully free) trade agreement UK-EU-27 is still being negotiated. All available studies concur that a significant disruption of trade links will impose economic costs on both sides. However, the EU-27 would bear only a disproportionally small share of the total cost, not just because it is about five times larger than the UK in economic terms, but also for fundamental reasons such as greater market power of its enterprises. Other studies on different free trade arrangements confirm the general proposition that the smaller party has more to gain from eliminating trade barriers (and more to lose from imposing them). This implies that the EU will have a stronger negotiating position.     

Reanalyzing Zero Returns to Education in Germany

Pischke and von Wachter (Review of Economics and Statistics 2008; 90 (3): 592–598) find zero earnings returns to compulsory schooling in the basic school track in Germany. We reanalyze their study using a different dataset. In an extension, we use additional instruments which allow estimation of heterogeneous effects for different groups of compliers. We can confirm the previous result and also find zero returns for other compliers in higher track schools. Moreover, we do not find a causal effect of schooling on cognitive skills. This is in line with a potential reason Pischke & von Wachter (2008) give for their result, namely that basic skills are learned earlier in Germany and additional years of schooling are no longer effective. Copyright © 2015 John Wiley & Sons, Ltd.