Showing papers in "International Economic Review in 2010"
TL;DR: In this article, the authors developed a framework to analyze the incentives to form a patent pool or engage in cross-licensing arrangements in the presence of uncertainty about the validity and coverage of patents that makes disputes inevitable.
Abstract: This paper develops a framework to analyze the incentives to form a patent pool or engage in cross-licensing arrangements in the presence of uncertainty about the validity and coverage of patents that makes disputes inevitable. It analyzes the private incentives to litigate and compares them with the social incentives. It shows that pooling arrangements can have the effect of sheltering invalid patents from challenges. This result has an antitrust implication that patent pools should not be permitted until after patentees have challenged the validity of each other’s patents if litigation costs are not too large.
187 citations
TL;DR: In this article, a dynamic model of the life cycle decisions of young women is used to perform counterfactual simulations designed to shed light on three questions: (1) How much of observed minority-majority differences in behavior can be attributed to differences in labor market opportunities, marriage market opportunities and preference heterogeneity.
Abstract: Using data from the NLSY79, we structurally estimate a dynamic model of the life cycle decisions of young women. The women make sequential joint decisions about school attendance, work, marriage, fertility, and welfare participation. We use the model to perform counterfactual simulations designed to shed light on three questions: (1) How much of observed minority–majority differences in behavior can be attributed to differences in labor market opportunities, marriage market opportunities, and preference heterogeneity? (2) How does the welfare system interact with these factors to augment those differences? (3) How can new cohorts that grow up under the new welfare system (Temporary Aid for Needy Families) be expected to behave compared to older cohorts?
152 citations
TL;DR: In this article, the authors show that these two roles may easily consict and preferences induced from bids may signiÞcantly differ from the true preferences, which is a potential source of efficiency loss part of which can be avoided simply by asking students to state their preferences in addition to bidding.
Abstract: Mechanisms that rely on course bidding are widely used at Business Schools in order to allocate seats at oversubscribed courses. Bids play two key roles under these mechanisms: Bids are used to infer student preferences and bids are used to determine who have bigger claims on course seats. We show that these two roles may easily consict and preferences induced from bids may signiÞcantly differ from the true preferences. Therefore while these mechanisms are promoted as market mechanisms, they do not necessarily yield market outcomes. The two consicting roles of bids is a potential source of efficiency loss part of which can be avoided simply by asking students to state their preferences in addition to bidding and thus “separating” the two roles of the bids. While there may be multiple market outcomes under this proposal, there is a market outcome which Pareto dominates any other market outcome.
123 citations
TL;DR: In this article, the authors investigate the capacity of a structural job search model with productivity shocks to replicate salient properties of these dynamics, such as the covariance structure of earnings, the evolution of individual earnings mean and variance with the duration of uninterrupted employment, or the distribution of year-to-year earnings changes.
Abstract: Individual labor earnings observed in worker panel data have complex, highly persistent dynamics We investigate the capacity of a structural job search model with iid productivity shocks to replicate salient properties of these dynamics, such as the covariance structure of earnings, the evolution of individual earnings mean and variance with the duration of uninterrupted employment, or the distribution of year-to-year earnings changes Specifically, we show within an otherwise standard job search model how the combined assumptions of on-the-job search and wage renegotiation by mutual consent act as a quantitatively plausible “internal propagation mechanism” of iid productivity shocks into persistent wage shocks The model suggests that wage dynamics should be thought of as the outcome of a specific acceptance/rejection scheme of iid productivity shocks This offers an alternative to the conventional linear ARMA-type approach to modelling earnings dynamics Structural estimation of our model on a 12-year panel of highly educated British workers shows that our simple framework produces a dynamic earnings structure which is remarkably consistent with the data
118 citations
TL;DR: In this paper, consumer learning and heterogeneity are incorporated into a dynamic oligopoly model for the prescription drug market, where both firms and patients need to learn the generic qualities via patients' experiences, generic firms' entry decisions are endogenous, but their entry timings depend on a random approval process.
Abstract: This article incorporates consumer learning and heterogeneity into a dynamic oligopoly model for the prescription drug market. In the model, both firms and patients need to learn the generic qualities via patients' experiences, generic firms' entry decisions are endogenous, but their entry timings depend on a random approval process. I apply the model to examine the impact of shortening the expected generic approval time. Although this policy experiment brings generics to the market sooner, it increases a potential entrant's likelihood of entering a crowded market and hence could reduce the total number of generic entrants and consumer welfare.
111 citations
TL;DR: In this paper, a preference structure consistent with this empirical regularity was introduced into a simple model of product and process innovation and it was shown that the elasticity channel is critical for innovation.
Abstract: The empirical literature in trade and industrial organization has documented that bigger markets are associated with more elastic demand. This paper introduces a preference structure consistent with this empirical regularity into a simple model of product and process innovation and …nds that the elasticity channel is critical for innovation. Bigger markets, in the sense of larger populations or more open trade,
104 citations
TL;DR: In this paper, the authors present a model of economic development where the importance of financial differences caused by limited enforcement can be measured, and they find that in countries where enforcement is poor, less capital is allocated to the production sector and employ less efficient technologies.
Abstract: We present a model of economic development where the importance of financial differences caused by limited enforcement can be measured. Economies where enforcement is poor direct less capital to the production sector and employ less efficient technologies. Calibrated simulations reveal that the resulting effect on output is large. Furthermore, the model correctly predicts that the average scale of production should rise with the quality of enforcement. Finally, we find that the importance of limited enforcement rises with the importance of capital in production.
97 citations
TL;DR: In this paper, the optimal repatriation tax systems look like in a world where investment involves a change of ownership, instead of a reallocation of real capital, and the standard results of international taxation do not carry over to the case of international mergers and acquisitions.
Abstract: A large part of border crossing investment takes the form of international mergers and acquisitions. In this article, we ask how optimal repatriation tax systems look like in a world where investment involves a change of ownership, instead of a reallocation of real capital. We find that the standard results of international taxation do not carry over to the case of international mergers and acquisitions. The deduction system is no longer optimal from a national perspective and the foreign tax credit system fails to ensure global optimality. The tax exemption system is optimal if ownership advantage is a public good within the multinational firm. However, the cross-border cash-flow tax system dominates the exemption system in terms of optimality properties.
92 citations
TL;DR: In this article, optimal income taxation under asymmetric information in a two-type OLG model when individuals' relative consumption matters was investigated, and the policy choices via position concerns were made.
Abstract: This article concerns optimal income taxation under asymmetric information in a two-type OLG model when individuals' relative consumption matters. Positional concerns affect the policy choices via ...
84 citations
TL;DR: Barro-Becker et al. as mentioned in this paper show that simple dynastic models can reproduce observed changes in fertility in response to decreased mortality and increased productivity growth if the intertemporal elasticity of substitution is low enough.
Abstract: Demographers emphasize decreased mortality and “economic development” as the main contributors generating the demographic transition. Contrary to previous findings, we show that simple dynastic models ` a la Barro‐Becker can reproduce observed changes in fertility in response to decreased mortality and increased productivity growth if the intertemporal elasticity of substitution is low enough. We show that this is largely due to number and welfare of children being substitutes in the utility of parents in this case. We find that with an IES of one-third, model predictions of changes in fertility amount to two-thirds of those observed in U.S. data since 1800. Between 1800 and 2000, fertility choice in the United States underwent a dramatic transition. Depending on estimates, it fell from about six children per woman to around two children per woman. This demographic transition—from a state of high fertility and high mortality to low fertility and low mortality—has been documented by demographers and historians in the United States, and in every other developed country in the world. Over this same period, natural rates of population growth (net of immigration) also fell, but less substantially. Demographers have not reached a consensus on the root causes of this transformation, but list several changes as likely main contributors. These include reductions in Infant and Child Mortality Rates (IMRs and CMRs) and the process of industrialization and economic development. The work in demography and history on this topic has largely been limited to empirical studies with almost no choice-based modeling of the type seen in economics. Even there, issues of the timing of changes
79 citations
TL;DR: In this paper, the authors test the usefulness of the neoclassical growth model for assessing the macroeconomic impact of fiscal shocks using data from World War II, which is by far the largest fiscal shock in the history of the United States.
Abstract: Much debate surrounds the usefulness of the neoclassical growth model for assessing the macroeconomic impact of fiscal shocks. We test the theory using data from World War II, which is by far the largest fiscal shock in the history of the United States. We take observed changes in fiscal policy during the war as inputs into a parameterized, dynamic general equilibrium model and compare the values of all variables in the model to the actual values of these variables in the data. Our main finding is that the theory quantitatively accounts for macroeconomic activity during this big fiscal shock.
TL;DR: The authors used elicited choice probabilities to estimate random utility models and reports estimates of preferences for electricity reliability, and reported that respondents expressed uncertainty about their behavior about what they would choose in choice scenarios.
Abstract: When choice data are not available, researchers studying preferences sometimes ask respondents to state the actions they would choose in choice scenarios. Data on stated choices are then used to estimate random utility models, as if they are data on actual choices. Stated and actual choices may differ because researchers typically provide respondents less information than they would have in actuality. Elicitation of choice probabilities overcomes this problem by permitting respondents to express uncertainty about behavior. This article shows how to use elicited choice probabilities to estimate random utility models and reports estimates of preferences for electricity reliability.
TL;DR: In this article, the authors explore the implications of Unified Growth Theory for the origins of existing differences in income per capita across countries, and identify the factors that have governed the pace of the transition from stagnation to growth and have thus contributed to contemporary variation in economic development.
Abstract: This article explores the implications of Unified Growth Theory for the origins of existing differences in income per capita across countries. The theory sheds light on three fundamental layers of comparative development. It identifies the factors that have governed the pace of the transition from stagnation to growth and have thus contributed to contemporary variation in economic development. It uncovers the forces that have sparked the emergence of multiple growth regimes and convergence clubs, and it underlines the persistent effects that variations in prehistorical biogeographical conditions have generated on the composition of human capital and economic development across the globe.
TL;DR: The authors developed a search model of the labor market with matching, bargaining, and employers' taste discrimination in which it is possible to separately identify gender discrimination and unobserved productivity differences, and an affirmative action policy is implemented resulting in a redistribution of welfare from men to women at no cost for employers' welfare.
Abstract: This article develops a search model of the labor market with matching, bargaining, and employers’ taste discrimination in which—under necessary but standard distributional assumption—it is possible to separately identify gender discrimination and unobserved productivity differences. The equilibrium shows that both prejudiced and unprejudiced employers wage discriminate. Maximum likelihood estimates on CPS data indicate that half of the employers are prejudiced, average female productivity is 6.5% lower, and two-third of the gender earning differential may be explained by prejudice. An affirmative action policy is implemented resulting in a redistribution of welfare from men to women at no cost for employers’ welfare.
TL;DR: In this paper, the effect of illiquid assets and collateral credit frictions on the level of wealth inequality in a standard model of exante heterogenous agents with idiosyncratic uncertainty was studied.
Abstract: This paper studies the effect that illiquid assets and collateral credit frictions have on the level of wealth inequality in a standard model of ex-ante heterogenous agents with idiosyncratic uncertainty. We calibrate our model so that its steady state statistics match selected aggregate statistics of the U.S. economy and data on the earnings distribution. We find that adding illiquid assets and collateral credit frictions decreases wealth inequality decreases slightly relative to an economy with liquid assets and no credit frictions. The effect is small because these frictions mostly affect poor households that account for a small fraction of aggregate wealth. Nevertheless, our richer model allows us to study other dimensions of wealth inequality. In particular, our model replicates the fact that financial assets are more concentrated than total wealth, while residential assets are less concentrated. Furthermore, we document that, in the U.S., the earnings and housing distributions are remarkably similar. Our model can account for this fact so long as the earnings process is fairly persistent.
TL;DR: In this paper, a circular city model is developed in order to access quantitatively the contribution of automobiles and rising incomes to suburbanization, and 60 percent of postwar (1940-1970) suburbanization can be explained by these factors.
Abstract: Suburbanization in the U.S. between 1910 and 1970 was concurrent with the rapid diffusion of the automobile. A circular city model is developed in order to access quantitatively the contribution of automobiles and rising incomes to suburbanization. The model incorporates a number of driving forces of suburbanization and car adoption, including falling automobile prices, rising real incomes, changing costs of traveling by car and with public transportation, and urban population growth. According to the model, 60 percent of postwar (1940-1970) suburbanization can be explained by these factors. Rising real incomes and falling automobile prices are shown to be the key drivers of suburbanization.
TL;DR: In this paper, the authors build an empirical measure of international R&D rivalry tracking down these changes in international competition for innovation, and evaluate the quantitative effects of the observed increase in competition on U.S. welfare.
Abstract: International technological competition implied by the global distribution of R&D investment changes dramatically in the 1970s and 1980s. In the early 1970s the distribution is very skewed: U.S. firms are the uncontested world leaders in R&D investment in most manufacturing sectors. Later, led by Japan and Europe, foreign firms start challenging American leadership in many sectors of the economy. What is the effect on U.S. national welfare of foreign innovators entering sectors previously dominated by American firms? What are the implications for the optimal U.S. R&D subsidy? In his paper I build an empirical measure of international R&D rivalry tracking down these changes in international competition for innovation. In a version of the quality-ladders growth model I evaluate the quantitative effects of the observed increase in competition on U.S. welfare. Using estimates of the effective R&D subsidy rate in the U.S., and the international R&D rivalry index, I compute the distance from optimality of the observed U.S. subsidy at each level of competition in the period 1979-91, and quantify the welfare gains associated with the optimal subsidy.
TL;DR: In this paper, the authors build and estimate a two-sector (goods and services) dynamic stochastic general equilibrium model with two types of inventories: materials (input) inventories facilitate the production of consumed goods, while consumed goods yield utility services.
Abstract: We build and estimate a two-sector (goods and services) dynamic stochastic general equilibrium model with two types of inventories: materials (input) inventories facilitate the production of …nished goods, while …nished goods (output) inventories yield utility services. The model is estimated using Bayesian methods. The estimated model replicates the volatility and cyclicality of inventory investment and inventory-to-target ratios. Although inventories are an important element of the model’s propagation mechanism, shocks to inventory e¢ ciency or management are not an important source of business cycles. When the model is estimated over two subperiods (pre and post 1984), changes in the volatility of inventory shocks or in structural parameters associated with inventories, such as the input inventory to output ratio, play a small role in reducing the volatility of output.
TL;DR: In this article, the authors take the view that financial liberalization is a government policy that alters the path of financial deepening, while financial deepening is endogenously chosen by agents given a policy and occurs in transition towards a distant steady state.
Abstract: Financial liberalization has been a controversial issue, as empirical evidence for growth enhancing effects is mixed. Here, we find sizable welfare gains from liberalization (cost to repression), though the gain in economic growth is ambiguous. We take the view that financial liberalization is a government policy that alters the path of financial deepening, while financial deepening is endogenously chosen by agents given a policy and occurs in transition towards a distant steady state. This history-dependent view necessitates the use of simulation analysis based on a growth model. Our application is a specific episode: Thailand from 1976 to 1996.
TL;DR: In this paper, the authors introduce risk-aversion, labor-leisure choice, capital, individual productivity shocks, and market incompleteness to the standard model of labor search and matching and investigate the model's cyclical properties.
Abstract: I introduce risk-aversion, labor-leisure choice, capital, individual productivity shocks, and market incompleteness to the standard model of labor search and matching and investigate the model’s cyclical properties. I find that the model can generate the observed large volatility of unemployment and vacancies with a reasonable replacement rate of unemployment insurance benefits of 64%. Labor-leisure choice plays a crucial role through additional utility from leisure when unemployed and further amplification from adjustments of hours worked. On the other hand, the borrowing constraint or individual productivity shocks do not significantly affect the cyclical properties of unemployment and vacancies.
TL;DR: In this paper, the properties of generalized stochastic gradient (GSG) learning in forward-looking models were studied and the conditions for stability of SG learning both differ from and are related to E-stability, which governs stability under least squares learning.
Abstract: We study the properties of generalized stochastic gradient (GSG) learning in forward-looking models. We examine how the conditions for stability of standard stochastic gradient (SG) learning both differ from and are related to E-stability, which governs stability under least squares learning. SG algorithms are sensitive to units of measurement and we show that there is a transformation of variables for which E-stability governs SG stability. GSG algorithms with constant gain have a deeper justification in terms of parameter drift, robustness and risk sensitivity.
TL;DR: In this paper, a consumers' search model with word-of-mouth communication is studied and it is shown that when search costs are low, an intensification in word of mouth communication decreases firms' competition.
Abstract: This paper studies a consumers’ search model with word of mouth communication. Firms market a homogeneous product and choose prices. Consumers obtain price information in two ways. They can search on their own, and they can talk to other consumers. In the basic model word of mouth communication is exogenous and the focus is on how the level of word of mouth communication shapes market equilibrium outcomes. When search costs are low an intensification in word of mouth communication decreases firms’ competition; the opposite holds when search costs are high. The model is then extended to allow for strategic word of mouth communication. Market equilibria with word of mouth communication have the feature that some consumers acquire information personally, while other consumers obtain their information by networking with others. A decrease in the costs of word of mouth communication relatively to the costs of searching reduces the fraction of consumers who acquire information personally. Consequently, it decreases firms’ competition.
TL;DR: The authors studied the responses of real and nominal prices to random flutuations in costs and money growth using a monetary search economy in which there are no costs or temporal restrictions on sellers' ability to change prices.
Abstract: We study the responses of real and nominal prices to random flutuations in costs and money growth using a monetary search economy in which there are no costs or temporal restrictions on sellers' ability to change prices. The economy exhibits a form of price stickiness in that the price level may react incompletely to either type of shock as a result of endogenous changes in the average mark-up driven by movements in consumers' search intensity. The average mark-up falls as inflation rises, a finding consistent with emprical observations. As a result of this reduction in market power, prices become more responsive to shocks as inflation rises. Our results are consistent with empirical findings that the degree of price adjustment in response to both cost and money growth shocks is increasing in the average rate of inflation, that the variance of inflation increases with its average level, and that positive and negative shocks to money growth have asymmetric effects.
TL;DR: In this paper, the authors studied the sexual revolution using an equilibrium matching model, where the costs of premarital sex fall over time due to technological improvement in contraceptives, and they found that people tend to circulate in social groups where prospective partners share their views on pre marital sex.
Abstract: In 1900 only six percent of unwed females engaged in premarital sex. Now, three quarters do. The sexual revolution is studied here using an equilibrium matching model, where the costs of premarital sex fall over time due to technological improvement in contraceptives. Individuals dier in their desire for sex. Given this, people tend to circulate in social groups where prospective partners share their views on premarital sex. To the extent that a society's customs and mores re‡ect the aggregation of decentralized decision making by its members, shifts in the economic environment may induce changes in what is perceived as culture.
TL;DR: In this article, a power struggle where competing factions have private financial assets and deplete a common stock of natural resources with no private property rights is analyzed, and a feedback Nash equilibrium to the dynamic common-pool problem is obtained.
Abstract: I analyze a power struggle where competing factions have private financial assets and deplete a common stock of natural resources with no private property rights. I obtain a feedback Nash equilibrium to the dynamic common-pool problem and obtain political variants of the Hotelling depletion rule and the Hartwick saving rule. Resource prices and depletion occur too fast, so substitution away from resources to capital occurs too fast and the saving rate is too high. The power struggle boosts output, but depresses sustainable consumption. Genuine saving is nevertheless zero in a fractionalized society. World Bank estimates may be too optimistic.
TL;DR: In this paper, the authors empirically analyzed the impact of decentralization on the occurrence of transnational terrorism, showing that expenditure decentralization reduces the number of terrorist events in a country, while political decentralization has no impact.
Abstract: Using panel data for a maximum of 109 countries over the years 1976–2000, we empirically analyze the impact of decentralization on the occurrence of transnational terror Our results show that expenditure decentralization reduces the number of transnational terror events in a country, while political decentralization has no impact These results are robust to the choice of control variables and method of estimation
TL;DR: The authors examined career choices using a dynamic structural model that nests a job search model within a human capital model of occupational and educational choices and found that both self-selection in occupational choices and mobility between firms account for a much larger share of total earnings and utility than the combined effects of firm and occupation specific human capital.
Abstract: This article examines career choices using a dynamic structural model that nests a job search model within a human capital model of occupational and educational choices. Wage growth occurs in the model because workers move between firms and occupations as they search for suitable job matches and because workers endogenously accumulate firm and occupation specific human capital. Simulations performed using the estimated model reveal that both self-selection in occupational choices and mobility between firms account for a much larger share of total earnings and utility than the combined effects of firm and occupation specific human capital.
TL;DR: In this article, the authors show that affiliation among potential bidders' private information (either private signals or entry costs) leads to affiliation among their entry decisions, and they propose a test for affiliation among the potential bidder's private information based on the implication of affiliation on the entry behavior.
Abstract: In this article, we show that affiliation among potential bidders' private information (either private signals or entry costs) leads to affiliation among their entry decisions. We propose a test for affiliation among potential bidders' private information based on the implication of affiliation on the entry behavior, which is general and widely applicable to various scenarios. The test is implemented using the simulation based method. We then apply our method to timber sales in the Oregon Department of Forestry and find a small but strongly significant level of affiliation among all timber companies.
TL;DR: In this article, the authors study a version of Akerlof's (1970) market for lemons in which trade is decentralized and show that both high and low-quality units trade, although with delay.
Abstract: In markets with adverse selection, only low-quality units trade in the competitive equilibrium when the average quality of the good held by sellers is low. We show that under decentralized trade, however, both high- and low-quality units trade, although with delay. Moreover, when frictions are small, the surplus realized is greater than the (static) competitive surplus. Thus, decentralized trade mitigates the lemons problem. Remarkably, payoffs are competitive as frictions vanish, even though both high- and low-quality units continue to trade, and there is trade at several prices. Markets differ in the degree to which trade is centralized. Call markets, used to set opening prices on the NYSE, are highly centralized, and all trade takes place at a single price (the market clearing price). In contrast, in housing, labor, or used car markets, trade is highly decentralized, and prices are determined by bilateral bargaining between buyers and sellers and may differ between trades. The competitive model abstracts away from these institutional aspects, thus providing a model suitable, in principle, for the study of both centralized and decentralized markets. Our results suggest that decentralized markets with adverse selection may perform better than anticipated by the static-competitive model, and therefore that these institutional features cannot be ignored. It is known that in markets for homogenous goods, decentralized trade tends to yield competitive outcomes when trading frictions are small. Because competitive equilibrium is efficient in these markets, this implies that decentralized trade generates nearly efficient outcomes. In markets with adverse selection, however, competitive equilibria (CE) need not be efficient, which raises the possibility that alternative market structures perform better. In this article, we study a version of Akerlof’s (1970) market for lemons in which trade is decentralized. Each period an equal measure of buyers and sellers enters the market; every seller is endowed with a unit of either high or low quality. At each period every agent in the market has a positive probability of meeting an agent of the opposite type. Once matched, a buyer, without observing the quality of the seller’s unit, makes a take-it-or-leave-it price offer. If the seller accepts, then they trade at the offered price and both agents exit the market. If the seller rejects the offer, then both agents remain in the market at the next period. Discounting of future gains and the possible delay in matching with a trading partner constitute trading “frictions.” When the average quality of the good held by entering sellers is low, the market has a unique competitive equilibrium (CE) in which the price equals the buyers’ value of a low-quality unit
TL;DR: This article examined the conditions under which subjects playing the game of chicken will condition their behavior on private third-party recommendations drawn from publicly announced distributions and found that when recommendations are given, behavior differs from both a mixed-strategy Nash equilibrium and behavior without recommendations.
Abstract: We report results from an experiment that explores the empirical validity of correlated equilibrium, an important generalization of Nash equilibrium. Specifically, we examine the conditions under which subjects playing the game of Chicken will condition their behavior on private third-party recommendations drawn from publicly announced distributions. We find that when recommendations are given, behavior differs from both a mixed-strategy Nash equilibrium and behavior without recommendations. In particular, subjects typically follow recommendations if and only if (1) those recommendations derive from a correlated equilibrium and (2) that correlated equilibrium is payoff-enhancing relative to the available Nash equilibria.