Exchange rates and perfect competition

The purpose of this note is to demonstrate that the commonly held belief that incomplete and perverse pass-through are incompatible with perfect competition is wrong! To this end, we consider two types of firms both operating in two countries. The demand sides of the markets of the two countries are separated and each type of firm produces its good in one of these countries. We study the effect of an exchange-rate change on the competitive equilibrium prices in each country. When producing for the foreign market causes the same costs as producing for the home market then the law of one price holds and an exchange-rate change is completely offset by price changes. Furthermore, when cost functions neither exhibit economies nor diseconomies of scope between producing for the home and producing for the foreign market then prices move in the right directions in response to an exchange-rate change. However, with general cost structures, even in this simple perfectly competitive model, perverse directions of price changes can result from an exchange-rate change.     

A Note on the Poll Tax

A poll tax is usually seen as the standard example of a lump sum tax and therefore as allocationally efficient. In this paper, it is shown that in a dynamic setting with endogenous fertility, a poll tax may yield a Pareto‐inferior outcome as compared to a percentage consumption tax.     

Entrepreneurial Saving Practices and Reinvestment: Theory and Evidence

We use a novel enterprise survey to gauge the relationship between saving instruments and entrepreneurial reinvestment. We show that while most informal saving practices are not associated with a lower likelihood of reinvestment when compared with formal saving practices, there is a significantly lower association of saving within the household with the likelihood of reinvesting profits than other savings form, most importantly, formal saving forms. This result is robust to the model specification and controlling for a large array of variables including district‐level fixed effects. We also provide empirical tests to address reverse causation and omitted variable concerns. Our work contributes to the debate on the implications of different saving instruments in developing countries and expands the entrepreneurial financing constraints literature by focusing on internal rather than external funding constraints.     

Arbitrage Opportunities in Diverse Markets via a Non-equivalent Measure Change

We study arbitrage opportunities in diverse markets as introduced by Fernholz (J Math Econ 31:393–417, 1999). By a change of measure technique we are able to generate a variety of diverse markets. The construction is based on an absolutely continuous but non-equivalent measure change which implies the existence of instantaneous arbitrage opportunities in diverse markets. For this technique to work, we single out a crucial non-degeneracy condition. Moreover, we discuss the dynamics of the price process under the new measure as well as further applications.Both authors gratefully acknowledge financial support by the National Centre of Competence in Research “Financial Valuation and Risk Management” (NCCR FINRISK). The NCCR FINRISK is a research program supported by the Swiss National Science Foundation. The first author also thanks Credit Suisse Group for financial support.