Locational efficiency in a federal system

A number of recent studies have concluded that differing local government tax and expenditure packages necessarily create incentives for households to locate in a non-optimal fashion. This paper shows, on the contrary, that the locational equilibrium may be optimal. For example, if migration produces no congestion costs, then as long as localities tax the locationally-fixed commodity, land, the equilibrium will be optimal. In fact, there are only two reasons why non-optimality may result: local taxes may be distortionary (by taxing the mobile rather than immobile factor), or there may be non-internalized externalities.     

Profit,productivity, and profit-sharing

This study is an investigation of the effect of profit-sharing on labor productivity. When monitoring labor performance is costly for management, a regular wage/salary contract is insufficient to induce profit-maximizing behavior from the worker. The authors demonstrate that when this profit-maximizing behavior can be induced only through profit-sharing, a linear profit-sharing program will increase productivity and the welfare of both management and labor. The benefit from profit-sharing is increasing up to the point where the utility of additional income is offset by the negative utility of extraordinary effort (working harder or providing higher quality work). The income effect, i.e., the change in negative utility of extraordinary effort given a change in income, can potentially either increase or decrease the point at which the income-effort tradeoff-reaches zero.     

Regulatory incentive policies and abuse

We examine the incentives for abuse under rate-of-return (ROR) and incremental surplus subsidy (ISS) regulation. Abuse consists of expenditures by the regulated firm that provide private benefits, but do not reduce production costs. We show that ISS regulation provides efficient incentives for owners of the regulated firm to limit abuse by subordinates. We also prove that abuse by owners of the firm will generally be greater (smaller) under ROR regulation than under ISS regulation when consumer demand for the regulated product is inelastic (elastic). Furthermore, we show that to limit abuse and improve welfare under ROR regulation, it can be advantageous to ignore available information about consumer demand.     

Roads, Land Use, and Deforestation: A Spatial Model Applied to Belize

Rural roads promote economic development, but they also facilitatedeforestation. To explore this tradeoff, this article developsa spatially explicit model of land use and estimates probabilitiesof alternative land uses as a function of land characteristicsand distance to market using a multinomial logit specificationof this model. Controls are incorporated for the endogeneityof road placement. The model is applied to data for southern Belize, an area experiencingrapid expansion of both subsistence and commercial agriculture,using geographic information system (GIS) techniques to selectsample points at 1-kilometer intervals. Market access, landquality, and tenure status affect the probability of agriculturalland use synergistically, having differential effects on thelikelihood of commercial versus semisubsistence farming. Theresults suggest that road building in areas with agriculturallypoor soils and low population densities may be a "lose-lose"proposition, causing habitat fragmentation and providing loweconomic returns.     

Selected Economic Analysis at the Antitrust Division: The Year in Review

Of the many activitiesof the Antitrust Division of theU.S. Department of Justice, we havesummarized some that raise interestingeconomic issues. We describe recentimprovements in the methodology to beused in ``coordinated effects' analysisof mergers. We also discuss four casesbrought by the DOJ that raise issues ofmarket definition, the influence ofcommon partial ownership of competitors,and the effects of fringe suppliers inconstraining collusion by large firms.     

Controlling for the Impact of Variable Liquidity in Commercial Real Estate Price Indices

Liquidity in private asset markets is notoriously variable over time. Therefore, indices of changes in market value that are based on asset transaction prices will systematically reflect intertemporal differences in the ease of selling a property. We define and develop a concept of "constant-liquidity value" in the context of a model that is characterized by pro-cyclical volume of trading. We then present an econometric model that allows for estimation of both a standard transaction-based price index and a constant-liquidity index. Our application to the NCREIF database reveals that, in the case of institutional commercial real estate investment, constant-liquidity values tend to lead transaction-based and appraisal-based indices in time, and also to display greater volatility and cycle amplitude. The differences can be significant for strategic investment policy viewed from a mean-variance portfolio optimization perspective.