Strategic bargaining in the variable threat game

Summary. In this paper the alternating offer model with an exogenous risk of breakdown is taken to explicitly model the bargaining process underlying the variable threat game (Nash, Econometrica, 1953). A modified version of the variable threat game without commitment is also analysed within a dynamic context. The limit set of subgame perfect equilibria is characterized in both dynamic versions. The analysis gives rise to different results than in the two standard models. By making additional assumptions the original results can be regained, indicating that these are implicitly present in the standard analysis.Received: August 29, 1995; revised version: November 11, 1996This revised version was published online in February 2005 with corrections to the cover date.     

On Lumpiness in the Replacement and Expansion of Capital*

We estimate a model of homogeneous capital investment with two installation possibilities – replacement and expansion using observations at the establishment level. We find that regime switches identified by ad hoc measures of lumpy investment do not adequately distinguish expansionary from replacement activities. In fact, during periods of expansion, firms spend just as much on replacement capital. Also, using the common 20% rule would not assign a spike to almost 65% of all observations that include expansionary investment in this dataset. Finally, replacement although less responsive to fundamentals than expansions cannot be regarded as an autonomous part of investment.     

Economic Policy, Model Uncertainty and Elections

We analyse a game theoretical model in which policy makers have superior knowledge about the working of the economy relative to voters. We show that parties increase their chances of reelection by basing their policies on the model that best fits in with their preferences. Moreover, we show that if parties care much about holding office, they may deliberately base their policies on a model that is electorally attractive, even if this model does not describe the working of the economy correctly. Our paper provides an explanation for the observation that different political parties subscribe to different economic philosophies.     

The Timing of Investment Episodes in the Netherlands

Summary We investigate the timing of large investment episodes at the micro level. On examination of a large sample of Dutch firms we find considerable lumpiness in the accumulation of fixed capital. We therefore define investment spikes and estimate the probability of these spikes, conditional on time since the last spike. We also control for unobserved heterogeneity. Our first result is that the probability of a spike is very high the year following an investment spike. We also find some evidence the hazard rate does increase as time since the previous spike passes by. Therefore, our results indicate the presence of convex adjustment costs or time to build lags. In addition, a tentative conclusion is that fixed adjustment costs are relevant.We like to thank two referees of this journal for their helpful and stimulating comments. The authors gratefully acknowledge the financial support of METEOR at Maastricht University and the PIONIER program (grant number 400-10-041) of the Netherlands Foundation for Scientific Research (NWO). This work was carried out at the Centre for Research of Economic Microdata (CEREM) and we would like to thank Bert Balk, Ellen Hoogenboom-Spijker and Hans Pijpers for their help with the data. The views herein expressed are those of the authors and do not necessarily reflect the policies of Statistics Netherlands. All errors remain our own.     

Retail Payments in the Netherlands: Facts and Theory

Summary Over the last decade, the Netherlands observed a rapid shift from cash and paper-based payment instruments toward electronic payment instruments. Banks are well aware that transaction pricing can speed up the shift to low-cost electronic payments. But payment pricing is a complex matter, due to strong network externalities. Recent theory on two-sided markets has led to a better understanding of the payment industry, in terms of optimal payment pricing and payment network competition. Under two-sidedness, it is shown that payment pricing is not just a question of choosing the right price level but rather of choosing the right price structure.The author would like to thank Lex Hoogduin, Rein Kieviet, Carlo Winder and two anonymous referees for critical comments and valuable remarks. Obviously, the usual disclaimer applies. Views expressed are those of the author and do not necessarily reflect official positions of De Nederlandsche Bank or the European System of Central Banks.     

Better Monetary Control May Decrease the Distortion of Stabilisation Policy: A Comment

Higher uncertainty about the effects of policy instruments reduces a policymaker's inclination to actively engage in shaping economic policy. If a credibility problem exists, then this is beneficial. However, in the case where the policymaker has private information about an economic shock, higher uncertainty is costly. Hence, the policymaker faces a trade-off when he decides on the degree of control of monetary instruments. It is shown that the optimal degree of uncertainty about the effects of policy depends on the economic preferences of the policymaker and the magnitude of the variance of the shock which is private information.     

Size matters: Economies of scale in European payments processing

This paper investigates the existence and extent of economies of scale in the European payment processing industry. It is expected that the creation of a single European payments area (SEPA) will spur consolidations and mergers among European payment processors to more fully realize payment economies of scale. We find evidence for the existence of significant economies of scale using data of eight European payment processors during the years 1990–2005. The analysis also reveals that ownership structure is an important factor to explain cost differences across European processing centers.     

Pricing of payment cards, competition, and efficiency: a possible guide for SEPA

This paper analyzes equilibrium pricing of payment cards and welfare consequences of payment card competition. In particular, we model competition between debit and credit cards. The paper argues that optimal consumer and merchant fees must take safety, income uncertainty, default risk, and the merchant’s handling cost of cash into account. Market segmentation where debit and credit cards serve different merchant segments yields a preferred “payment mix”. However, when markets are segmented, payment card fees do not necessarily reach their socially efficient levels. Hence, thoughtful regulatory intervention regarding merchant fees may still be necessary to raise total surplus.     

The Delaying Effect of Financing Constraints on Investment

We develop a simple model in which a firm considers a number of investment projects. Because of limited financial resources, the firm can undertake at most one project. In line with the literature on real options we stress features like irreversibility, uncertainty and the possibility of postponing the investment decision and show under which conditions limited availability of funds tends to increase the value of waiting.