Showing papers in "Bulletin of Economic Research in 2003"
TL;DR: In this article, the authors investigate Stackelberg mixed duopoly models where a state-owned public firm and a foreign private firm compete and examine a desirable role (either leader or follower) of the public firm.
Abstract: We investigate Stackelberg mixed duopoly models where a state-owned public firm and a foreign private firm compete. We examine a desirable role (either leader or follower) of the public firm. We also consider endogenous roles by adopting the observable delay game of Hamilton and Slutsky (1990). We find that, in contrast to Pal (1998) discussing a case of domestic competitors, the public firm should be the leader and that it becomes the leader in the endogenous role game. We also find that in contrast to Ono (1990) eliminating a foreign firm does not improve domestic welfare in mixed oligopolies.
158 citations
TL;DR: This paper showed that the Malmquist productivity index overestimates productivity changes, since it provides productivity measures that are nearly twice those given by the Luenberger productivity index looking for simultaneous contractions of inputs and expansions of outputs.
Abstract: This contribution establishes, from a theoretical viewpoint, the relations between the Malmquist productivity indices, that measure in either input or output orientations, and the Luenberger productivity indices, that can simultaneously contract inputs and expand outputs, but that can also measure in either input or output orientations. The main result is that a Malmquist productivity index overestimates productivity changes, since it provides productivity measures that are nearly twice those given by the Luenberger productivity index looking for simultaneous contractions of inputs and expansions of outputs. This relationship is empirically illustrated using data from 20 OECD countries over the 1974–97 period.
147 citations
TL;DR: In this paper, three different empirical methodologies are used: variance bounds tests, bubble specification tests, and cointegration tests based on both ex post and ex ante data, and they find that stock prices diverged significantly from their fundamental values during the late 1990's, and that this divergence has all the characteristics of a bubble.
Abstract: In recent years, a sharp divergence of London Stock Exchange equity prices from dividends has been noted. In this paper, we examine whether this divergence can be explained by reference to the existence of a speculative bubble. Three different empirical methodologies are used: variance bounds tests, bubble specification tests, and cointegration tests based on both ex post and ex ante data. We find that, stock prices diverged significantly from their fundamental values during the late 1990's, and that this divergence has all the characteristics of a bubble.
85 citations
TL;DR: This paper verified the existence of the favourite-longshot bias in a variety of sports betting markets where odds are set by bookmakers, but the precise pattern of the bias is not identical.
Abstract: This paper verifies the existence of the favourite-longshot bias in a variety of sports betting markets where odds are set by bookmakers, but the precise pattern of the bias is not identical. Evidence is found to support a central prediction of the Shin (1993) model, which asserts that bookmakers are impelled to create a bias in their odds because of the presence of insider traders: that margins increase with the number of competitors.
60 citations
TL;DR: In this paper, the authors explain the endowment effect, whereby sellers generally demand considerably more for a good than buyers are prepared to pay, and related anomalies, and propose positive or negative reactions to unlikely prospects to explain commonly observed behaviour in the presence of ambiguity.
Abstract: This paper explains the endowment effect, whereby sellers generally demand considerably more for a good than buyers are prepared to pay, and related anomalies. Many decisions, including nominating buying or selling prices, involve uncertainty, and we assert that people experience negative psychological reactions to uncertainty. These reactions can affect a person's valuation of the various options, biasing the person's actions towards the status quo, thus producing the endowment effect. Our model also proposes positive or negative reactions to unlikely prospects, which are able to explain commonly observed behaviour in the presence of ambiguity.
40 citations
TL;DR: In this paper, the authors present some evidence for the presence of temporal asymmetry in the price-volume relationship in the crude oil futures market, showing that negative price and volume changes have stronger effects (on each other) than positive changes.
Abstract: This paper presents some evidence for the presence of temporal asymmetry in the price-volume relationship in the crude oil futures market. By using threshold models we show that there is bidirectional causality between volume and prices, whereas the conventional model that assumes symmetry can only detect unidirectional causality. The results also show that the price-volume relationship is asymmetric, in the sense that negative price and volume changes have stronger effects (on each other) than positive changes. Some explanations for asymmetry in the price-volume relationship are suggested.
38 citations
TL;DR: In this article, it was shown that gamblers in the market for Major League Baseball games reveal the opposite behavior, and the strength of the reverse favourite-longshot bias is virtually identical to the original paper.
Abstract: Racetrack and sports betting markets have been researched extensively with respect to the question of market efficiency. In contrast to the consistently observed favourite–longshot bias found in racetrack betting markets, it has been shown that gamblers in the market for Major League Baseball games reveal the opposite behaviour. This paper updates the previous study with ten years of additional data for the 1990–99 seasons. The strength of the reverse favourite–longshot bias is virtually identical to the original paper. The result suggests that, contrary to most reported inefficiencies in gambling markets, this bias appears to be permanent.
29 citations
TL;DR: In this paper, the authors consider the optimal central banker contract derived in 1995 and show that if the government's objective function places weight (value) on the cost of the contract, then the optimal inflation contract does not completely neutralize the inflation bias.
Abstract: We reconsider the optimal central banker contract derived in Walsh (1995). We show that if the government's objective function places weight (value) on the cost of the contract, then the optimal inflation contract does not completely neutralize the inflation bias. That is, a fraction of the inflation bias emerges in the resulting inflation rate after the central banker's monetary policy decision. Furthermore, the more concerned the government is about the cost of the contract or the less selfish (more benevolent) is the central banker, the smaller is the share of the inflation bias eliminated by the contract. No matter how concerned the government is about the cost of the contract or how unselfish (benevolent) the central banker is, the contract always reduces the inflationary bias by at least half. Finally, a central banker contract written in terms of output (i.e., incorporating an output target) can completely eradicate the inflationary bias, regardless of concerns about contract costs.
25 citations
TL;DR: In this article, the authors show that the high-quality advantage may fail to hold if there is variable cost of production that is dependent on quality, which is not the case in this paper.
Abstract: It is well established in vertical product differentiation models that the high–quality firm reaps a larger profit in a two–stage quality–price game as long as the cost of quality improvement is zero or is borne as fixed cost in the first stage quality choice. This note shows that the high–quality advantage may fail to hold if there is variable cost of production that is dependent on quality.
19 citations
TL;DR: In this article, the authors investigate whether the presence of imperfect income tax compliance affects the optimal provision of public goods within a framework in which public expenditure is financed by a general income tax that also accomplishes redistributive goals.
Abstract: Our aim in this paper is to investigate whether the presence of imperfect income tax compliance affects the optimal provision of public goods within a framework in which public expenditure is financed by a general income tax that also accomplishes redistributive goals. We first derive the income tax structure, and then a generalized Samuelson rule. We argue that, under imperfect income tax compliance, it is desirable to distort public–good supply downwards, in the sense that the sum of marginal rates of substitution between public and private consumption must exceed their marginal rate of transformation.
18 citations
TL;DR: The authors empirically examined whether greater enrolment rates in higher education are associated with increases or decreases in subsequent income inequality as measured by the Gini coefficient and found a negative association between the two, suggesting that countries with larger enrolment rate saw their income inequality decrease relative to other countries.
Abstract: Using a cross-section of countries, this paper empirically examines whether greater enrolment rates in higher education are associated with increases or decreases in subsequent income inequality as measured by the Gini coefficient. It finds a negative association between the two, suggesting that countries with larger enrolment rates saw their income inequality decrease relative to other countries. These findings are robust to the inclusion of several control variables and to limiting the sample to non-OECD countries.
TL;DR: In this paper, a model aiming at decomposing the Net Final Value of a project under certainty is proposed, which makes use of a systemic outlook: the investor's net worth is regarded as a dynamic system whose structure changes over time.
Abstract: This paper proposes a model aiming at decomposing the Net Final Value of a project under certainty. It makes use of a systemic outlook: the investor's net worth is regarded as a dynamic system whose structure changes over time. On this basis, a profitability index is presented, here named Systemic Value Added (SVA), which lends itself to a periodic decomposition: the periodic shares formally translate the economic concept of residual income (or excess profit). While as an overall index the Systemic Value Added coincides with the Net Final Value (NFV) of an investment, the systemic partition of a SVA is shown to differ from the NFV decomposition model proposed by Peccati (1987, 1991, 1992), which in turn bears a strong resemblance to Stewart's (1991) EVA model. The SVA model and the NFV–based model bear interesting relations: by introducing the concept of a shadow project the SVA model can be re–shaped so that the decomposition of the SVA can be accomplished by applying Peccati's argument to the shadow project, or, which is the same, by computing the shadow project's Economic Value Added. The paper then generalizes the approach allowing for a portfolio of projects, multiple debts and multiple synchronic opportunity costs of capital, for which a tetra–dimensional decomposition is easily obtained.
TL;DR: In this article, a Heckman two-stage selection model is combined with an extension of Gomulka-Stern nonlinear decompositions to explain how re-employment selection generates indirect discrimination.
Abstract: This paper looks at unemployed individuals and investigates wage differences generated by re–employment selection. It shows that discriminatory re–employment selection can result, indirectly, in discriminatory re–employment pay. A Heckman two–stage selection model is combined with an extension of Gomulka–Stern non–linear decompositions to explain how re–employment selection generates indirect discrimination. The paper uses data from pre–unification Germany in the late 1980s and finds that female human capital suffers more from unemployment and that the market is harsher to males for becoming unemployed. New policies should encourage a regime where the hiring process is more transparent and hiring decisions are monitored on a regular basis.
TL;DR: In this paper, the authors construct a model integrating the efficiency wage model of Shapiro-Stiglitz (1984) (SS), with an individual wage bargaining model in the Diamond-Mortensen-Pissarides (DMP) tradition where firms and workers form pairwise matches.
Abstract: We construct a model integrating the efficiency wage model of Shapiro–Stiglitz (1984) (SS), with an individual wage bargaining model in the Diamond–Mortensen–Pissarides (DMP) tradition where firms and workers form pairwise matches. We show that when workers may threaten to shirk on the job and there is individual wage bargaining, the wage is always higher and employment lower than in either the SS model, or the (appropriately modified) DMP model. When firms determine workers’ efforts unilaterally, efforts are set inefficiently low in the SS model. In the bargaining model, effort is higher, and is first best when the worker non–shirking constraint does not bind. The overall equilibrium allocation may then be more or less efficient than in the SS model, but is always less efficient than in a pure bargaining model with no moral hazard.
TL;DR: In this paper, the authors present a sufficient condition that guarantees the uniqueness of the welfare-maximizing number of firms to attain the global maximum level of welfare by implementation of a piecemeal policy.
Abstract: Under Cournot oligopoly with a homogeneous product, we present a sufficient condition that guarantees the uniqueness of the welfare–maximizing number of firms to attain the global maximum level of welfare by implementation of a piecemeal policy changing the number of firms gradually. We adopt Selten's (1973) ‘fitting–in function’ method, which relates an individual firm's output to an industry's output. When the number of firms is unique, then introducing a lump–sum profit tax (subsidy) can attain the optimal level of welfare. Indirect entry regulation is superior to direct entry regulation from the standpoint of welfare if each entrant engages in rent–seeking activities.
TL;DR: In this paper, comparative static results for a firm that sells a single output domestically and abroad when prices in both markets are uncertain are obtained for both constant absolute risk aversion and for Ross decreasing absolute risk avoidance, using a diagrammatic analysis which exploits the properties of expected marginal utility contours.
Abstract: This paper obtains comparative static results for a firm that sells a single output domestically and abroad when prices in both markets are uncertain. Results are obtained for both constant absolute risk aversion and for Ross decreasing absolute risk aversion, using a diagrammatic analysis which exploits the properties of expected marginal utility contours. The results depend crucially on whether foreign and domestic sales are net substitutes or complements. The model is more complex and yields fewer unambiguous results – particularly in the case of substitutes – than when there is price uncertainty in only one market.
TL;DR: In this paper, the authors characterize a new class of utility functions whose risk parameters depend upon initial wealth and obtain several desirable results, in particular, investors with quadratic and exponential utility functions can have decreasing risk aversion.
Abstract: Conventional one-period utility functions in Economics assume that initial wealth only enters preferences through the definition of final wealth. Consequently, those utility functions most utilized (i.e., exponential and quadratic) have implausible risk characteristics. The authors characterize a new class of utility function whose risk parameters depend upon initial wealth and obtain several desirable results. In particular, investors with quadratic and exponential utility functions can have decreasing risk aversion, and risky assets in a quadratic utility multi-asset environment do not have to be inferior as implied by the traditional framework.
TL;DR: The authors developed a simple model to illustrate how the effects of turnover costs on wages can be reinforced by an efficiency wage effect, which explains why turnover costs allow insiders to earn higher wages than outsiders.
Abstract: We develop a simple model to illustrate how the effects of turnover costs on wages can be reinforced by an efficiency wage effect. The insider–outsider theory explains why labour turnover costs allow the insiders to earn higher wages than outsiders. According to the efficiency wage theory, higher wages enhance the insiders’ productivity. Therefore, the costs of replacing an insider by a low–paid, low–productivity outsider are increased, which allows the insiders to raise their wages further. Again, higher wages increase insiders’ productivity, which allows them to earn still higher wages, and so on. Thus, the existence of a link between effort and wages can reinforce the effects of labour turnover costs on wages.
TL;DR: In this article, a model that incorporates two key features of business cycles, comovement among economic variables and switching between regimes of boom and slump, to quarterly U.K. data for the last four decades is presented.
Abstract: We estimate a model that incorporates two key features of business cycles,
comovement among economic variables and switching between regimes of boom and
slump, to quarterly U.K. data for the last four decades. A common factor, interpreted
as a composite indicator of coincident variables, and estimates of turning points from
one regime to the other, are extracted from the data by using the Kalman filter and
maximum likelihood estimation. Both comovement and regime switching are found
to be important features of the U.K. business cycle. The composite indicator produces
a sensible representation of the cycle and the estimated turning points agree fairly
well with independently determined chronologies. These estimates are sharper than
those produced by a univariate Markov switching model of GDP alone. A fairly
typical stylised fact of business cycles is confirmed by this model - recessions are
steeper and shorter than recoveries.
TL;DR: In this paper, paradoxical conclusions similar to those emerging from reasonings of backward induction can arise also in simultaneous move games with incomplete information, and a way out of the paradoxes, which hinges on a (possibly endogenous) uncertainty over the past behaviour of the players and does not call for a long time-horizon.
Abstract: We show that paradoxical conclusions similar to those emerging from reasonings of backward induction can arise also in simultaneous move games with incomplete information.
In a static setting, these paradoxes are particularly puzzling, because the usual attempts to avoid the backward induction solution do not work.
In a dynamic setting, there is a way out of the paradoxes, which hinges on a (possibly endogenous) uncertainty over the past behaviour of the players and does not call for a long time–horizon.
TL;DR: In this article, the implications of alternative monetary targeting procedures for real interest rates and economic activity were studied and it was shown that countercyclical monetary policy rules lead to higher real interest rate, higher average tax rates, lower output but lower variability of tax rates and consumption relative to procyclical rules.
Abstract: We study the implications of alternative monetary targeting procedures for real interest rates and economic activity. We find that countercyclical monetary policy rules lead to higher real interest rates, higher average tax rates, lower output but lower variability of tax rates and consumption relative to procyclical rules. For a country with a high level of public debt (e.g. Italy), the adoption of a countercyclical procedure such as interest rate pegging may conceivably raise public debt servicing costs by more than half a percentage point of GNP. Our analysis suggests that the current debate on the targeting procedures of the European Central Bank ought to be broadened to include a discussion of the fiscal implications of monetary policy.
TL;DR: The existence of an important equilibrium path overlooked in the literature on monetarist arithmetic is discussed in this article, where the authors show that the tight-money paradox is an equilibrium path when the government's commitment to low money growth is conditional on inflation remaining below its previous level.
Abstract: This note demonstrates the existence of an important equilibrium path overlooked in the literature on monetarist arithmetic. Pleasant monetarist arithmetic is possible when the interest-elasticity of money demand exceeds unity. In this case, tight money may lead to a transitory increase in seigniorage, the retirement of government debt, and lower inflation in both the short run and the long run. The set of equilibrium paths is sensitive, however, to the form of the policy rule. Pleasant monetarist arithmetic is not an equilibrium if the policy rule fixes the share of the fiscal deficit financed by seigniorage. Both pleasant monetarist arithmetic and the tight-money paradox are equilibrium paths when the government's commitment to low money growth is conditional on inflation remaining below its previous level.
TL;DR: In this paper, the authors consider an n-person non-zero-sum non-cooperative game in normal form, where the strategy sets are some closed intervals of the real line and show that if the pay-off functions are continuous on the whole space, and if for each payoff function the smallest local maximum in the strategy variable is a global maximum, then the game possesses a pure strategy Nash equilibrium.
Abstract: We consider an n-person non-zero-sum non-cooperative game in normal form, where the strategy sets are some closed intervals of the real line. It is shown that if the pay-off functions are continuous on the whole space and if for each pay-off function the smallest local maximum in the strategy variable is a global maximum, then the game possesses a pure strategy Nash equilibrium.
TL;DR: In this article, the retroactive most-favoured-customer pricing policy examined by Cooper (1986) was extended with a variable, which enabled both firms in a duopoly to offer higher prices and enjoy higher profits.
Abstract: This paper extends the retroactive most-favoured-customer pricing policy examined by Cooper (1986). He showed that the policy enabled both firms in a duopoly to offer higher prices and to enjoy higher profits. This paper introduces a variable into the most-favoured-customer pricing policy. Then, it shows that there is an equilibrium in which the duopolists can further increase their profits.
TL;DR: In this paper, the authors show that delegating the decision on the magnitude of realignment to an inflation-averse central banker reduces the range of re-alignments for which the policy-maker necessarily devalues.
Abstract: This paper shows that, in a fixed exchange-rate system with an escape clause, delegating the decision on the magnitude of realignment to an inflation-averse central banker reduces the range of realignment costs for which the policy-maker necessarily devalues. Stressing the influence of devaluation expectations on currency crises, it is also shown that this strategy of delegation reduces the width of the multiple equilibria zone within which self-fulfilling crises occur, thus promoting further the exchange-rate system's stability. The higher the central banker's degree of inflation aversion, the greater is this reduction.
TL;DR: In this paper, the authors examined the production and hedging decisions of a competitive firm under output price uncertainty when a forward market for its output is available, and showed that the firm optimally acquires a higher level of capacity investment than an otherwise identical firm with no production flexibility.
Abstract: This paper examines the production and hedging decisions of the competitive firm under output price uncertainty when a forward market for its output is available. The firm possesses production flexibility in that it makes its production decision after the resolution of the output price uncertainty, albeit subject to a capacity constraint on production. We show that the firm optimally acquires a higher level of capacity investment than an otherwise identical firm with no production flexibility. We further show that production flexibility allows the firm to implicitly hedge against its output price risk exposure by the ex post production decision. The firm as such under-hedges its output price risk exposure in the forward market wherein the forward price contains a non-positive risk premium.