Growth,deficits and uncertainty: Theoretical aspects and empirical evidence from a panel of 27 countries

We examine the relationship between fiscal deficits and per-capita income growth in a panel of 27 European countries, allowing for perceived risks, in terms of fiscal sustainability, associated with additional government spending. Such risks are proxied by the conditional variability of manufacturing production and stock market returns and by the unconditional variability of two survey-based economic-sentiment indicators. To help clarifying how fiscal variables impact on growth and to provide a point of reference for the interpretation of the empirical results a structural growth model is first identified. We find evidence of an asymmetric relationship, in that fiscal deficits give rise to adverse growth effects if they coincide with high uncertainty regarding the prospects of the economy and no significant negative growth effects in the low-uncertainty case.     

Inflation contract,central bank transparency and model uncertainty

Using a New-Keynesian model subject to misspecifications, we examine how the robust monetary policy could be modified by a linear inflation contract when a central bank is opaque about its preference for model robustness. It is shown that a central bank must limit this preference and opacity about it to ensure the dynamic stability of the economy. An optimal inflation contract with a zero penalty rate provides no incentive for a central bank to be opaque. The latter must rebalance the benefit of avoiding very bad outcomes in worst case scenarios and the economic costs due to higher macroeconomic volatility.     

Product line pricing in a vertically differentiated oligopoly

Abstract This paper examines the joint pricing decision of products in a firm’s product line. When products are distinguished by a vertical characteristic, those with higher values of that characteristic will command higher prices. We investigate whether, holding the value of the characteristic constant, there is an additional price premium for products on the industry and/or the firm frontier, that is, for the products with the highest value of the characteristic in the market or in a firm’s product line. We also investigate the existence of price premia for lower‐ranked products and other product line pricing questions. Using personal computer price data, we show that prices decline with the distance from the industry and firm frontiers, even after holding absolute quality constant. We find evidence that consumer tastes for brands is stronger for the consumers of frontier products (and thus competition between firms weaker in the top end of the market). There is also evidence that a product’s price is higher if a firm offers products with the immediately faster and immediately slower computer chip (holding the total number of a firm’s offerings constant), possibly as an attempt to reduce cannibalization. Finally, a product’s price declines with the time it is offered by a firm, suggesting intertemporal price discrimination.     

Using the allocation of emission permits for strategic trade purposes

We show that the presence of transaction costs in emission permit markets challenges the common presumption that grandfathering permits corresponds to lump-sum transfers with no strategic effects on output. Fixed transaction-costs influence firms’ decision to participate in the permits market, while variable transaction-costs affect firms’ output choice by creating a wedge between buyers’ and sellers’ opportunity cost of using permits. Thus, permit grandfathering can be used as a strategic trade instrument even when firms are price takers in the permit markets. Grandfathered permits differ from subsidies in that the stimulus they provide is bounded exogenously and rather limited.     

Firm entry,product repositioning and welfare

We show that the entry of a second firm in a horizontally differentiated market (ala Hotelling) may harm consumers as prices increase and consumer’s surplus possibly decrease. We first derive the price and the consumer’s surplus of a monopoly which is located at the center of the market. When a second firm enters the market the first firm repositions and the two firms locate at their equilibrium points. Although competition adds to variety and increases consumer’s surplus, the post entry increase in price may outweight the gains from extra variety and make consumers worse off.     

ACCOUNTABILITY AND TRANSPARENCY ABOUT CENTRAL BANK PREFERENCES FOR MODEL ROBUSTNESS

Using a New Keynesian model subject to misspecifications, we examine the accountability issue in a framework of delegation where government and private agents are uncertain about the central bank's preference for model robustness. We show that, in the benchmark case of full transparency, the optimal inflation targeting weight (or penalty) is decreasing with the preference for robustness. Departing from the benchmark equilibrium, the central bank has then incentive to be less transparent in order to reduce the optimal inflation targeting weight and thus to become more independent vis‐à‐vis the government. We also find that greater opacity will increase the sensibility of inflation and model misspecification to the inflation shock but will decrease that of output‐gap. Since macroeconomic volatility could be increased or decreased under more opacity, there could exist in some cases a trade‐off between the level and the variability of inflation (and output gap). Persistent inflation shocks could be associated with a higher inflation targeting weight as well as a higher sensibility of inflation and output gap to the inflation shock but a lower sensibility of model misspecification.     

Predicting SME loan delinquencies during recession using accounting data and SME characteristics: The case of Greece

The objective of this paper is the comparison of various credit‐scoring models (i.e. binomial logistic regression, decision tree, multilayer perceptron neural network, radial basis function, and support vector machine) in evaluating the risk of small and micro enterprises' (SMEs') loan delinquencies based on accounting data and applicants' specific attributes. Exploiting a representative large data set of SMEs' loans granted by a large Greek commercial bank in the expansion period, we track the evolution of SMEs' delinquencies over the recession period August 2010 to July 2012. This time frame encompasses a period of manageable levels of delays (early recession period: August 2011–July 2012) and a period when delays were increased to a very high degree (deep recession period: August 2011–July 2012). Comparison of the employed credit‐scoring models during the early recession period shows that the multilayer perceptron neural network produces the highest predicting capacity, followed by the support vector machine model. As the crisis deepens, the support vector machine model presents the highest predicting accuracy, followed by the decision tree and then the multilayer perceptron model. Generally, the predictive performance of all credit‐scoring models seems to be substantially reduced as the recession escalates. Our paper has important implications for the proper financing of SMEs given their importance for the European economy.     

The effect of digital signage on shoppers' behavior: The role of the evoked experience

This paper investigates the role of digital signage as experience provider in retail spaces. The findings of a survey-based field experiment demonstrate that digital signage content high on sensory cues evokes affective experience and strengthens customers' experiential processing route. In contrast, digital signage messages high on “features and benefits” information evoke intellectual experience and strengthen customers' deliberative processing route. The affective experience is more strongly associated with the attitude towards the ad and the approach behavior towards the advertiser than the intellectual experience. The effect of an ad high on sensory cues on shoppers' approach to the advertiser is stronger for first-time shoppers, and therefore important in generating loyalty. The findings indicate that the design of brand-related informational cues broadcast over digital in-store monitors affects shoppers' information processing. The cues evoke sensory and affective experiences and trigger deliberative processes that lead to attitude construction and finally elicit approach behavior towards the advertisers.     

Location Decisions of Competing Networks

Early entrants in markets with network effects usually occupy a “central location” and serve agents with “intermediate tastes,” whereas later entrants are niche players. Why would the first entrant choose to become a “general” network, given that later entrants will not have enough room for differentiation, resulting in a more intense competition for market share? In a Hotelling model with two rival networks, we show that for intermediate values of the network externality parameter the location equilibrium is indeed asymmetric: the first entrant locates at the center whereas the second entrant chooses an extreme (niche) location.