Demand shocks,capacity coordination,and industry performance: lessons from an economic laboratory

Antitrust exemptions granted to businesses under extenuating circumstances are often justified by the argument that they benefit the public by helping producers adjust to otherwise difficult economic circumstances. Such exemptions may allow firms to coordinate their capacities, as was the case of the post‐September 11, 2001, antitrust immunity granted to Aloha and Hawaiian Airlines. We conduct economic laboratory experiments to determine the effects of explicit capacity coordination on oligopoly firms' abilities to adjust to negative demand shocks and on industry prices. The results suggest that capacity coordination speeds the adjustment process, but also has a clear procollusive effect on firm behavior.     

Time preferences and commitment devices: evidence from ROSCAs and funeral groups in Benin

Drawing on first-hand data collected from a household survey in urban Benin, we examine membership in two types of informal groups that display the characteristics of a commitment device: Rotating Savings and Credit Associations (ROSCAs) and funeral groups. We investigate whether agents displaying time preferences with a present bias are more likely to commit themselves through participation in such groups. Our results provide evidence indicating that women who display such preferences are more likely to join funeral groups, but not ROSCAs, and to save more through them. These results hold for women but not for men. We also ensure that our results cannot be explained by intra-household conflict issues.     

Climate Forecasts and Flood Mitigation

There is growing evidence that flood mitigation is often inefficient because individuals misestimate flood risk. The propensity to misestimate flood risk is expected to rise because climate change ensures the past will be a poor predictor of the future. Greater reliance on downscaled climatological and hydrological forecasts has been suggested to address these information failures. This article combines stochastic dynamic programming with historical data and climate‐driven streamflow projections to determine how changes in flood risk forecasts influence optimal investments in flood mitigation infrastructure. Using upgrades in California's levee system as an example, we show that climate change is causing benefit–cost analysis to become increasingly biased in favor of flood mitigation infrastructure projects. We also show that using downscaled hydroclimate forecasts to achieve more accurate estimates of flood risk can decrease the efficiency of flood mitigation infrastructure investments, if flood risk is currently overestimated. JEL Classification: D81 Q25 Q54     

The Single Market in Pharmaceuticals

Review of Industrial Organization - This paper examines the state of the single market in the European Union (EU) for pharmaceuticals. As with other products, the EU has adopted a number of...     

The economics of trade agreements in the linear Cournot delocation model

Existing theories of trade agreements suggest that GATT/WTO efforts to reign in export subsidies represent an inefficient victory for exporting governments that comes at the expense of importing governments. Building on the Cournot delocation model first introduced by Venables (1985), we derive new results from this model and use these results to develop a more benign interpretation of efforts to restrain export subsidies in trade agreements. And we suggest that the gradual tightening of restraints on export subsidies that has occurred in the GATT/WTO may be interpreted as deriving naturally from the gradual reduction in import barriers that member countries have negotiated. Together with existing theories, the Cournot delocation model may help to provide a more nuanced and complete understanding of the treatment of export subsidies in trade agreements.     

Are Important Innovations Rewarded? Evidence from Pharmaceutical Markets

This paper focuses on the relationship between therapeutic value and different measures of market rewards: the number of patents, price, market share, and revenues. Using an assessment of therapeutic value that is provided by the French Haute Authorité de Santé (HAS), I find a weak relationship between most measures of rewards and this assessment of therapeutic value, which suggests that the returns to developing a “me-too” product are not very different from developing treatments with greater therapeutic effects. One interpretation is that the HAS score is a poor assessment of therapeutic value, in which case the use of similar health technology assessments by governments and other payers should be re-examined. Alternatively, if the HAS score is informative, the results suggest that countries are overspending on less innovative products, and that a re-balancing of innovation incentives may be worth considering if therapeutic value is highly related to social welfare.     

Incorporating emotion into social exchange: considering distinct resident groups’ attitudes towards ethnic neighborhood tourism in Osaka,Japan

While numerous studies have utilized SET to examine the residents’ attitudes towards tourism, relatively scant from the literature is a discussion regarding the influence of emotion generated through SET among residents on their attitudes towards tourism. In addition, past studies mainly explored the social exchange between visitors and locals, while neglecting the social exchange within a local community. The goal of this study is to examine the influence individuals’ emotions toward their ethnic counterparts within a community can have on residents’ (i.e., members of the dominant ethnic group—Japanese and members of the ethnic minority group—Koreans) attitudes toward ethnic neighborhood tourism within the Korean neighborhood of Ikuno, Osaka, Japan. Ikuno has the highest concentration of Korean residents in Japan, and the town has become a destination of cultural tourism centered on Korean culture. Analysis of 640 completed questionnaires revealed while attitudes of Korean residents, who are more likely to perceive economic benefits from tourism have more favorable attitudes towards tourism, Japanese residents form their particular attitudes towards tourism based on the emotional solidarity they experience with their Korean neighbors. These findings indicate both utility of economic approach of social exchange theory and significant role of emotion in social exchange.     

Backward stealing and forward manipulation in the WTO

Motivated by the structure of WTO negotiations, we analyze a bargaining environment in which negotiations proceed bilaterally and sequentially under the most-favored-nation (MFN) principle. We identify backward-stealing and forward-manipulation problems that arise when governments bargain under the MFN principle in a sequential fashion. We show that these problems impede governments from achieving the multilateral efficiency frontier unless further rules of negotiation are imposed. We identify the WTO nullification-or-impairment and renegotiation provisions and its reciprocity norm as rules that are capable of providing solutions to these problems. In this way, we suggest that WTO rules can facilitate the negotiation of efficient multilateral trade agreements in a world in which the addition of new and economically significant countries to the world trading system is an ongoing process.     

Contagion as a Wealth Effect

Financial contagion is described as a wealth effect in a continuous-time model with two risky assets and three types of traders. Noise traders trade randomly in one market. Long-term investors provide liquidity using a linear rule based on fundamentals. Convergence traders with logarithmic utility trade optimally in both markets. Asset price dynamics are endogenously determined (numerically) as functions of endogenous wealth and exogenous noise. When convergence traders lose money, they liquidate positions in both markets. This creates contagion, in that returns become more volatile and more correlated. Contagion reduces benefits from portfolio diversification and raises issues for risk management.