Showing papers in "The Japanese Economic Review in 2019"

Excess burden of taxation and environmental policy mix with a consumer-friendly firm

Abstract: This study examines environmental policy mix of tradable emission permits and emission taxes in a duopoly model with a consumer-friendly firm. In the presence of excess burden of taxation, we analyze the interplay of the two policies in the non-equivalent conditions for welfare consequences. We show that emission tax can be redundant and thus policy mix is degenerated when both the excess burden of taxation and the degree of consumer-friendliness are insignificant. However, when the excess burden of taxation is significant, tradable permits policy with tax treatment should be accompanied to enhance welfare in the presence of a consumer-friendly firm. Finally, under the tax revenue-neutral case where the excess burden of taxation does not matter, environmental policy mix is also efficient if the degree of consumer-friendliness is sufficiently high.

School Choice with General Constraints: A Market Design Approach for the Nursery School Waiting List Problem in Japan

Abstract: This study considers a school choice problem with general feasibility constraints. Each student belongs to a grade; and 2 students belonging to the same grade are symmetric, whereas those belonging to different grades can be asymmetric with respect to the feasibility constraint of a school. We introduce five requirements of a matching and a polynomial-time algorithm to derive a matching satisfying them. Because the algorithm is inspired by the nursery school system of Yokohama City, we introduce the system and compare it with the algorithm of this study.

Relational Contracting in Developed Economies: Lessons From Slot Exchanges in the US Airline Industry

Abstract: This paper highlights the widespread use of relational contracting in developed economies. While the number of empirical studies on relational practices in developing countries is increasing rapidly, evidence from industries and countries characterised by strong institutions is lagging behind due to data constraints. We argue that technological progress and strong institutions do not diminish the use of relational contracting, and use the US airline industry as a case in point. In particular, we discuss a number of factors (including transaction complexity, existence of collaborative relationships and data availability) that make this industry an ideal setting to study relational contracting in a developed economy. Moreover, we argue that other industries in developed countries share the properties of the US airline industry and, hence, can be used as a basis to investigate relational contracting in future work.

Growth Model with Financial Deepening and Productivity Heterogeneity

Abstract: This paper studies the effects of financial deepening on growth dynamics and productivity in an economy where heterogeneous entrepreneurs face endogenous borrowing constraints. Quantitative results from a calibrated model suggest that 38% of Japan’s total factor productivity from 1961 to 1991 can be explained by the financial deepening effects and the convergence speed is 29% slower than that implied by neoclassical models. The present paper also theoretically shows that an economy with a higher degree of productivity heterogeneity is more likely to avoid the poverty trap and converge with a slower speed to its steady state.

Foreign‐Owned Firms and Partial Privatisation of State Holding Corporations

Abstract: We consider a state holding corporation with two plants producing heterogeneous goods. In the partially foreign-owned private sector, firms may be organized as uniplant or multiplant. We find that the stake that the government retains in the state corporation depends on whether goods are substitutes or complements, whether private firms are uniplant or multiplant and the percentage of foreign ownership in private firms. The main result is that when foreign ownership is high, there is more privatization with uniplant (multiplant) private firms if goods are substitute (complements). However, when foreign ownership is low, the opposite result is obtained.

Patent Statistics as an Innovation Indicator? Evidence from The Hard Disk Drive Industry

Abstract: We assess the usefulness of patent statistics as an indicator of innovation, using a direct measure of innovation in the hard disk industry (1976–1998). Three findings emerge: (i) patents “predict” innovations better than a random guess, and a simple refinement makes them more useful; (ii) conditional on actually innovating, conglomerates and larger firms patent more than specialised startups and smaller firms; and (iii) patent reforms seem to make the patent—innovation relationship nonstationary. These results suggest that researchers should use caution when comparing patents of different types of firms and across years.

Geography and Demography: New Economic Geography with Endogenous Fertility

Abstract: To explain the links between demographics and economic integration, we construct a new economic geography model with endogenous fertility. Labour mobility across regions results in more people flowing into highly populated regions, but lowers fertility rates there. Finally, regions are divided into one very large region with a higher real wage and another small region with a lower real wage, a higher fertility rate and a supply of workers to the large region. The population growth path resembles a logistic curve in the early phase, but population decreases in the last phase. Economic integration leads to population concentration and decreases population size.

The effect of prenatal exposure to radiation on birth outcomes: exploiting a natural experiment in Taiwan

Abstract: We estimate the effect of prenatal exposure to radiation on infant health. By exploiting the 1983 Taiwanese radiation-contaminated buildings accident as a natural experiment, we compare birth outcomes between siblings and cousins exposed to different radiation levels. Given the 1983 accident was unanticipated and exposed cohorts were unaware of the risk until 1992, our design isolates the effect of radiation exposure during pregnancy from other effects. We provide the first evidence that prenatal exposure to a continuous low-level dose of radiation significantly reduces gestational length and increases the probabilities of prematurity and low birth weight.

Review of Solution and Estimation Methods for Nonlinear Dynamic Stochastic General Equilibrium Models with the Zero Lower Bound

Abstract: We review solution and estimation methods for nonlinear dynamic stochastic general equilibrium models and their application, with a special focus on the zero lower bound on the nominal interest rate. In a fully nonlinear setting, both the solution and estimation methods involve iterative procedures, and their computational expense grows rapidly with an increase in the dimensionality of state variables and parameters. We describe how the procedures deal with the dimensionality problem.

Heterogeneous Jobs and the Aggregate Labour Market

Abstract: This paper analyses a simple search-and-matching model with heterogeneous jobs. First, I derive an explicit formula that ensures the social efficiency of the equilibrium outcome. This formula generalises the well-known Hosios condition and clarifies the role of externalities across labour markets for different types of jobs. Second, business cycle fluctuations with heterogeneous jobs are analysed. Heterogeneity in productivity and job stability plays an important role in generating strong labour-market responses to productivity shocks.

Effects of Pregnancy and Birth on Smoking and Drinking Behaviours: A Comparative Study Between Men and Women

Abstract: Using panel data obtained from monthly surveys for 3 years, we examined how the effects of life events on smoking and drinking behaviours differ between men and women. The key findings were that: (i) consumption of alcohol and cigarettes by men and women were lower during pregnancy and after childbirth than before pregnancy; (ii) pregnancy and childbirth led women to stop drinking and led men to reduce their alcohol consumption but not to stop drinking; and (iii) marriage, pregnancy and childbirth led women to stop smoking and marriage and birth led men to stop smoking but the effects of pregnancy on men are unclear.

Unit Root Tests for Dependent Micropanels

Abstract: This paper proposes a new test for the null hypothesis of panel unit roots for micropanels with short time dimensions (T) and large cross-sections (N). There are several distinctive features of this test. First, the test is based on a panel AR(1) model allowing for cross-sectional dependency, which is introduced by a factor structure of the initial condition. Second, the test employs the panel AR(1) model with AR(1) coefficients that are heterogeneous for finite N. Third, the test can be used both for the alternative hypothesis of stationarity and for that of explosive roots. Fourth, the test does not use the AR(1) coefficient estimator. The effectiveness of the test rests on the fact that the initial condition has permanent effects on the trajectory of a time series in the presence of a unit root. To measure the effects of the initial condition, the present paper employs cross-sectional regressions using the first time-series observations as a regressor and the last as a dependent variable. If there is a unit root in every individual time series, the coefficient of the regressor is equal to one. The t-ratios for the coefficient are this paper’s test statistics and have a standard normal distribution in the limit. The t-ratios are based on the OLS estimator and the instrumental variables estimator that uses reshuffled regressors as instruments. The test proposed in this paper makes it possible to test for a unit root even at T = 2 as long as N is large. Simulation results show that test statistics have reasonable empirical size and power. The test is applied to college graduates’ monthly real wage in South Korea. The number of time-series observations for this data is only two. The null hypothesis of a unit root is rejected against the alternative of stationarity.

Income Tax Reforms and Redistribution by Age Group: Evidence From Japan

Abstract: In the 1980s, tax policy changes mitigated the redistributive effect of income tax. The present study attempts to explore how different the redistributive effect of the income tax reforms in Japan is among age groups, using Japanese household microdata for the period 1984–2009. The following results are obtained. First, the overall redistributive effect was greatest for the elderly group, followed by the middle-aged group, and then the young group. Furthermore, this trend increased steadily over time. Second, the difference in total redistributive effects between the young and elderly increased owing to a large reduction in the base effect for the young.

Experiments on lotteries for shrouded and bundled goods: Investigating the economics of fukubukuro

Abstract: Fukubukuro (or lucky bag) is a familiar institution in Japan and elsewhere in which the exact contents of a New Year sales item are hidden from the consumer before purchase. Motivated by the fukubukuro example and the lack of evidence on risk attitudes in lotteries involving goods, we conduct a laboratory experiment in which the outcomes are bundled or unbundled goods. The implied gains to a monopoly seller for marketing goods in lottery form rather than separately are only clearly positive for lotteries where there is a higher probability of obtaining the more highly valued good.

Populism, Fairness and Competition: Should We Care and What Could We Do?

Abstract: The rise of populism in a number of countries is one of the most visible signs of the weakening of enthusiasm for trade liberalization and market competition. Market competition is increasingly denounced as leading to unfair results by those who lose jobs, and in some cases risk losing their employment prospects because of the pressure of competition, or those who see their wages stagnate or be reduced. Their perception is that procompetitive policies benefit capitalists and a small coterie of highly skilled workers to the detriment of the low-skilled majority. In a number of countries there have been calls by politicians to reconsider the trade liberalization policy which was actively pursued in recent decades and to change the standard applied by competition law enforcers from a strict consumer welfare standard to a consideration of the trade-off between efficiency and fairness. The competition community has, to a large extent, strongly resisted such possibilities, arguing that protectionist policies had failed in the past and that the concept of fairness is at best vague, lack economic foundation, and could lead to a weakening of incentives to achieve efficient static and dynamic performances. The article examines three issues related to this debate. First, we examine the theoretical and practical reasons for which some categories of workers lose in the competitive process. Second, we discuss the relationship between inequality and fairness and the contribution of behavioural economics to the exploration of what people consider to be fair or unfair in vertical relationships (i.e. between employees and employers or between consumers and suppliers). Third, we discuss alternative ways in which competition authorities could reconcile fairness and efficiency in their advocacy or enforcement activities.

Inefficiency in rice production and land use: a panel study of Japanese rice farmers

Abstract: An empirical analysis was conducted on the behavior of Japanese rice producers from the standpoint of efficiency in production using the panel data of the Rice Production Cost Statistics by the Ministry of Agriculture, Forestry and Fisheries. The stochastic frontier production function was estimated and the inefficiency indices of production were calculated. Based on this information, the efficient and inefficient rice producers were identified, and the factor demand behavior and characteristics of the land use for rice production were compared. We find that the production-efficient certified farmers lowered the land utilization rate of paddy for rice production greatly.

What Should Society Maximise Under Uncertainty

Abstract: This paper overviews the research on social decision criteria under uncertainty and attempts to provide insights for future directions.

The Potential Compensation Principle and Constant Marginal Utility of Income

Abstract: In policy applications, industrial economists are wont to invoke the Kaldor—Hicks potential compensation principle to justify the use of deadweight loss as a measure of the welfare cost of market power. This usage rests on two assumptions. One of these assumptions, that changes in consumer and producer surplus are weighted equally, is well understood. The other assumption, that the marginal utility of income is constant, receives less attention. In a simple model, I show that if there is decreasing marginal utility of income, the use of deadweight loss as an index of market performance rests on shaky ground.

Free Trade Agreement with Endogenous Market Structure

Abstract: We examine the incentives of free trade agreement (FTA) formation between two countries under endogenous market structure with leaders and followers. We demonstrate that establishing a FTA is neither an equilibrium outcome nor socially optimal when consumer demand and fixed cost are intermediate, products are close substitutes and countries are asymmetrical. This is because the FTA induces exit of followers, which makes the market less competitive and shrinks the leader’s production both in the domestic and foreign markets. We also show that large developing countries are less likely to establish a FTA than small developed countries.

Using The Tools of Industrial Organisation to Illuminate The Credit Rating Industry

Abstract: Until slightly more than a decade ago, the credit rating industry was largely a little-recognised and little-understood part of the financial system “plumbing”. This obscurity changed with the financial crisis of 2008 and its aftermath. After a few years of intensive attention, however, the CRAs have retreated back to semi-obscurity and attract little media or political attention. The tools of industrial organisation can help us understand this industry: its structure; its behaviour; and its outcomes; and the public policies that are likely to improve its functioning.

The returns to postgraduate education in Japan

Abstract: Using three household surveys, the Japanese Panel Survey of Consumers (JPSC), the Working Person Survey (WPS), and the Survey of Adult Skills (PIAAC), this study estimates the returns to postgraduate education in Japan, considering potential self-selection bias. To mitigate the bias, workers’ undergraduate majors, types of university, and level of cognitive skills are controlled for. These factors explain 6.3–29.2% of the postgraduate wage premium for women, but at most 10.9% for men. Even after controlling for them, the postgraduate wage premium remains positive and significant, ranging from 16.5 to 23.7% for men and 13.5–26.4% for women.

Some Economics of the Movie Industry

Abstract: A progress report is provided on a long-term research project, joint with Gabriel Natividad, on the economics and strategy of the movie industry. Specifically, a series of empirical papers dealing with demand estimation, pricing and movie-release strategies is surveyed.

Peril of the Inflation Exit Condition

Abstract: Recent empirical evidence on monetary policy in Japan suggests that exits from the zero-interest-rate policy triggered by policy shocks can be expansionary. This paper provides theoretical examples of such expansionary policy-induced exits. The examples suggest that the exit condition (the Bank of Japan’s stated commitment of not exiting from the zero-rate regime unless the inflation rate rises above a certain threshold) may have made it difficult for the economy to escape from the liquidity trap.

Mix‐and‐match divestitures and merger harm

Abstract: We consider the effects of a merger combined with a divestiture that mixes and matches the assets of the two pre-merger suppliers into one higher-cost and one lower-cost post-merger supplier. Such mix-and-match transactions leave the number of suppliers in a market unchanged but, as we show, can be procompetitive or anticompetitive depending on whether buyers are powerful and on the extent of outside competition. A powerful buyer can benefit from a divestiture that creates a lower-cost supplier, even if it causes the second-lowest cost to increase. In contrast, a buyer without power is always harmed by a weakening of the competitive constraint on the lowest-cost supplier.

Fake Sales: A Dynamic Pricing Perspective

Abstract: Some sellers display high “regular” prices, but mark down these prices the vast majority of the time, advertising the good as “on sale” or “discounted”. This note suggests a framework for understanding the practice, emphasising the role of buyer uncertainty about their future valuations for the good. We argue that so-called “regular” prices set buyers’ expectations regarding future prices, expectations that need not be tethered to the prices actually set. By manipulating upwards buyers’ expectations of future prices, the seller can increase demand for the good at the current “sale” price, increasing profits.

Price Effects of Target Ratcheting: A Progress Report on Medical Devices

Abstract: Regulators, who have asymmetric information concerning the technology of regulated firms, often rely on incentive-based regulation. While such a scheme is well known to be vulnerable to the adverse incentives of regulated firms, empirical research that quantifies the magnitude of distortion caused by incentive regulation is scarce. This paper is a progress report of our recent project on target ratcheting with an application to medical devices in Japan. A casual observation of detailed product-level transaction data and reduced-form analyses indicate the existence of pricing distortion in the wholesale market. The paper also proposes a two-period bilateral bargaining model to match the data. A preliminary analysis finds evidence consistent with the hypothesis that target ratcheting distorts the pricing of regulated firms, but the magnitude of the distortion is estimated to be economically small.

A Mixed Duopoly with Switching Costs

Abstract: We examine the effects of switching costs in a two-period Hotelling-type model where a profit-maximising private firm competes with a welfare-maximising public firm. We show that, in contrast with the case in which both firms are private, where switching costs raise prices in both periods, in the mixed duopoly they raise prices in the second period but reduce them in the first period. Moreover, the first-period price reduction is of such magnitude that switching costs reduce firms’ profits and raise consumer welfare. We also find that switching costs affect the consequences of privatisation in favour of firms and against consumers.

Does marriage improve subjective health in Japan

Abstract: This study employs Keio Household Panel Survey data to examine the effect of marriage on health. On the basis of the analysis, five key points are identified. First, respondents who get married have better initial health than those who remain single. Second, marriage improves several health indicators. Third, health improvements following marriage are caused by decreased smoking and the improvement of mental health. Fourth, the effects of health improvements following marriage are larger for men than for women. Fifth, the sources of improved health following marriage differ between men and women.

Forensic Econometrics: Demand Estimation When Data are Missing

Abstract: Often empirical researchers face many data constraints when estimating models of demand. These constraints can sometimes prevent adequate evaluation of policies. In this article, we discuss two such missing data problems that arise frequently: missing data on prices and missing information on the size of the potential market. We present some ways to overcome these limitations in the context of two recent research projects. Jacobi and Sovinsky (2018), which addresses how to incorporate unobserved price heterogeneity, and Hidalgo and Sovinsky (2018), which focuses on how to use modelling techniques to estimate missing market size. Our aim is to provide a starting point for thinking about ways to overcome common data issues.

Single Object Auctions With Externalities: A Tractable Model

Abstract: We consider the single object auction model with allocative externalities in a private valuation and quasi-linear setting. We model externalities by assuming that every agent has a private valuation (for the object) and a strict ranking of other agents. The utility for an agent when another agent receives the object is the product of his own valuation and a real number that depends on the rank of this agent in his ranking. When the only private information is the valuation of the agents, we characterise the implementable allocation rules and use these to derive the optimal auction. The optimal auction collects payments from agents who do not receive the object.