Collusion through Joint R&D: An Empirical Assessment

Abstract:

This paper tests whether upstream  R&D cooperation leads to downstream
collusion. We consider an oligopolistic setting where firms enter in research joint ventures (RJVs) to lower production costs or coordinate on collusion in the product market. We show that a sufficient condition for identifying collusive behavior is a decline in the market share of RJV-participating firms, which is also necessary and sufficient for a decrease in consumer welfare. Using information from the US National Cooperation Research Act, we estimate a market share equation correcting for the endogeneity of RJV participation and R&D expenditures. We find robust evidence that large networks between direct competitors – created through firms being members in several RJVs at the same time – are conducive to collusive outcomes in the product market which reduce consumer welfare. By contrast, RJVs among non-competitors are efficiency enhancing.

Keywords: Research Joint Ventures, Innovation, Collusion, NCRA

JEL Classification: K21, L24, L44, D22, O32

Full text in pdf format:

343.pdf

Two-sided Certification: The market for Rating Agencies

Abstract:

Certifiers contribute to the sound functioning of markets by reducing a symmetric information. They, however, have been heavily criticized during the 2008-09 financial crisis. This paper investigates on which side of the market a monopolistic profit-maximizing certifier offers his service. If the seller demands a rating, the certifier announces the product quality publicly, whereas if the buyer requests a rating it remains his private information. The model shows that the certifier offers his service to sellers and buyers to maximize his own profit with a higher share from the sellers. Overall, certifiers increase welfare in specific markets. Revenue shifts due to the financial crisis are also explained.

Keywords: Certification, Rating Agencies, Asymmetric Information, Financial Markets.
JEL Classification Numbers: G14, G24, L15, D82.

October 2010

Full text in pdf format:

338.pdf

An Empirical Assessment of the 2004 EU Merger Policy Reform

Abstract:

Based on a database of 326 merger cases scrutinized by the European Commission between 1990 and 2007, we evaluate the economic impact of the change in European merger legislation in 2004. We ?rst propose a general framework to assess merger policy effectiveness, which is based on standard oligopoly theory and makes use of stockmarket reactions as an external assessment of the merger and the merger control decision. We then focus on four different dimensions of effectiveness: 1) legal certainty; 2) frequency and determinants of type I and type II errors; 3) rent-reversion achieved by different merger policy tools; and 4) deterrence of anti-competitive mergers. To infer the economic impact of the merger policy reform, we compare the results of our four tests before and after its introduction. Our results suggest that the policy reform seems to have been only a modest improvement of European merger policy.

Keywords: merger control, regulatory reform, EU Commission, event-study

JEL-Classification: L4, K21, C13, D78

Full text in pdf format:

337.pdf

Infinitely Repeated Games with Public Monitoring and Monetary Transfers

Abstract:

In this paper, we study infinitely repeated games with imperfect public monitoring and the possibility of monetary transfers. We develop an effcient algorithm to compute the set of pure strategy public perfect equilibrium payoffs for each discount factor. We also show how all equilibrium payoffs can be implemented with a simple class of stationary equilibria that use stick-and-carrot punishments.

July 2010

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332.pdf

Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs

Abstract:

The so called flat-rate bias is a well documented phenomenon caused by consumers' desire to be insured against fluctuations in their billing amounts. This paper shows that expectation-based loss aversion provides a formal explanation for this bias. We solve for the optimal two-part tariff when contracting with loss-averse consumers who are uncertain about their demand. The optimal tariff is a flat rate if marginal cost of production is low compared to a consumer's degree of loss aversion and if there is enough variation in the consumer's demand. Moreover, if consumers differ with respect to the degree of loss aversion, firms' optimal menu of tariffs typically comprises a flat-rate contract.

Keywords: Consumer Loss Aversion; Flat-Rate Tariffs; Nonlinear Pricing; Uncertain Demand

JEL classification: D11; D43; L11

July 2010

Full text in pdf format:

330.pdf

Who Should Pay for Certification?

Abstract:

Who does, and who should initiate costly certification by a third
party under asymmetric quality information, the buyer or the seller?
Our answer — the seller — follows from a non–trivial analysis revealing
a clear intuition. Buyer–induced certification acts as an inspection
device, whence seller–induced certification acts as a signalling device.
Seller–induced certification maximizes the certifier’s profit and social
welfare. This suggests the general principle that certification is, and
should be induced by the better informed party. The results are reflected
in a case study from the automotive industry, but apply also
to other markets – in particular the financial market.

JEL Codes: D40, D82, L14, L15
Keywords: asymmetric information, certification, information acquisition,
inspection, lemons, middlemen, signaling

Full text in pdf format:

323.pdf

Using Forward Contracts to Reduce Regulatory Capture

Abstract:

A fully unbundled, regulated network firm of unknown efficiency level can untertake unobservable effort to increase the likelihood of low downstream prices, e.g. by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the firm contingent on realized downstream prices. Alternatively, the regulator can force the firm to sell the following forward contracts: the firm pays the downstream price to the owners of a contract, but recieves the expected value of the contracts when selling them to a competivitve financial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic propability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only.

Keywords: incentive regulation, regulatory capture, virtual power plants

Classification-JEL: L42, L51, K23, L94

Full text in pdf format:

320.pdf

Consumer Loss Aversion and the Intensity of Competition

Abstract:

Consider a differentiated product market in which all consumers are fully informed about match value and price at the time they make their purchasing decision. Initially, consumers become informed about the prices of all products in the market but do not know the match values. Some consumers have reference-dependent utilities—i.e., they form a reference-point distribution with respect to match value and price that will make them realize gains or losses if their eventually chosen product performs better or, respectively, worse than their reference point in both dimensions. Loss aversion in the match-value dimension leads to a less competitive outcome, while loss aversion in the price dimension leads to a more competitive equilibrium than a market in which consumers are not subject to reference dependence. Depending on the weights consumers attach to the price and the match-value dimension, a market with loss-averse consumers may be more or less competitive than a market with consumers that do not have reference-dependent utilities. We also show that consumer loss aversion tends to lead to higher prices if the market accommodates a larger number of firms.

Keywords: Loss Aversion, Reference-Dependent Utility, Behavioral Industrial Organization, Imperfect Competition, Product Differentiation

JELClassification: D83,L13,L41,M37.

Full text in pdf format:

319.pdf

Centralizing Information in Networks

Abstract:

Abstract: In the dynamic game we analyze, players are the members of a fixed network. Everyone is initially endowed with an information item that he is the only player to hold. Players are offered a finite number of periods to centralize the initially dispersed items in the hands of any one member of the network. In every period, each agent strategically chooses whether or not to transmit the items he holds to his neighbors in the network. The sooner all the items are gathered by any individual, the better it is for the group of players as a whole. Besides, the agent who first centralizes all the items is offered an additional reward that he keeps for himself. In this framework where information transmission is strategic and physically restricted, we provide a necessary and suffcient condition for a group to pool information items in every equilibrium. This condition is independent of the network structure. The architecture of links however affects the time needed before items are centralized in equilibrium.

JEL Classification: D83, C72, L22

Keywords: communication network, communication dilemma, dynamic network game, strategic

Full text in pdf format:

313.pdf

Pricing and Information Disclosure in Markets with Loss-Averse Consumers

Abstract:

Abstract: We develop a theory of imperfect competition with loss-averse consumers. All consumers are fully informed about match value and price at the time they make their purchasing decision. However, a share of consumers are initially uncertain about their tastes and form a reference point consisting of an expected match value and an expected price distribution, while other consumers are perfectly informed all the time. We derive pricing implications in duopoly with asymmetric firms. In particular, we show that a market may exhibit more price variation the larger the share of uninformed, loss-averse consumers. We also derive implications for firm strategy and public policy concerning firms’ incentives to inform consumers about their match value prior to forming their reference point.

Keywords: Loss Aversion, Reference-Dependent Utility, Information Disclosure,
Price Variation, Advertising, Behavioral Industrial Organization, Imperfect Competition, Product Differentiation

JEL Classification: D83, L13, L41, M37

Full text in pdf format:

312.pdf

Returns to Inventors

Abstract:

A key input to inventive activity is human capital. Hence it is important to understand the monetary incentives of inventors. We estimate the effect of patented inventions on individual earnings by linking data on U.S. patents and their inventors to Finnish employer-employee data. Returns are heterogeneous: Inventors get a temporary reward of 3% of annual earnings for a patent grant and for highly-cited patents a longer-lasting premium of 30% in earnings three years later. Similar medium-term premia accrue to inventors who initially hold the patent rights, although they forego earnings at the time of the grant.

JEL codes: O31, J31

Keywords: citations, effort, incentives, inventors, intellectual property, patents, performance pay, return, wages

March 2010

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309.pdf

Market Share Dynamics in a Model with Search and Word-of-Mouth Communication

Abstract:

This paper analyzes price competition in an infinitely repeated duopoly game. In each period, consumers remember the existence and location of their previous supplier. New information is gathered via search or word-of-mouth communication. Market outcomes are history-dependent, and the Markov perfection refinement is used to narrow the set of equilibria. Firms are shown to use mixed pricing strategies in equilibrium. The resulting price dispersion generates non-trivial market share dynamics. The goal of the paper is to characterize these dynamics, and to reveal the driving forces behind them.

Classification-JEL:D43, D83, L11

Keywords: repeat purchasing, search, customer loyalty, lock-in, mixed pricing

Full text in pdf format:

301.pdf

Carbon leakage: Grandfathering as an incentive device to avert relocation

Abstract:

Emission allowances are often distributed for free in an early phase of a cap-and-trade scheme (grandfathering) to reduce adverse effects on the profitability of firms. If the grandfathering scheme is phased out over time, firms may nevertheless relocate to countries with a lower carbon price once the competitive disadvantage of their home industry becomes sufficiently high. We show that this is not necessarily the case. A temporary grandfathering policy can be a sufficient instrument to avert relocation in the long run, even if immediate relocation would be profitable in the absence of grandfathering. A necessary condition for this is that the permit price triggers investments in low-carbon technologies or abatement capital.

Classification-JEL:Q55, Q58, L51

Keywords: climate policy, emissions trading, grandfathering, leakage, cap-and-trade

Full text in pdf format:

300.pdf

Deterrence in Competition Law

Abstract:

This paper provides a comprehensive discussion of the deterrence properties of a
competition policy regime. On the basis of  the economic theory of law enforcement
we identify several factors that are likely to affect its degree of deterrence: 1)
sanctions and damages; 2) financial and human resources; 3) powers during the
investigation; 4) quality of the law; 5) independence; and 6) separation of power. We then discuss how to measure deterrence. We review the literature that use surveys to solicit direct information on changes in the behavior of firms due to the threats posed by the enforcement of antitrust rules, and the literature based on the analysis of hard data. We finally argue that the most  challenging task, both theoretically and empirically, is how to distinguish between “good” deterrence and “bad” deterrence.
 

JEL classification: K21, K42, L4

Keywords: Competition Policy, Law Enforcement, Deterrence

October 2009

Full text in pdf format:

285.pdf

Measuring the deterrence properties of competition policy: the Competition Policy Indexes

Abstract:

The aim of this paper is to describe in detail a set of newly developed indicators of the quality of competition policy, Competition Policy Indexes, or CPIs. The CPIs measure the deterrence properties of a competition policy in a jurisdiction, where for competition policy we mean the antitrust legislation, including the merger control provisions, and its enforcement. The CPIs incorporate data on how the key features of a competition policy regime score against a benchmark of generally-agreed best practices and summarise them so as to allow cross-country and cross-time comparisons. The  CPIs have been calculated for a sample of 13 OECD
jurisdictions over the period 1995-2005.

JEL classification: K21, K42, L40

Keywords: Competition Policy, Indicator, Deterrence, Competition Law

October 2009

Full text in pdf format:

284.pdf

Competition Policy and Productivity Growth: An Empirical Assessment

Abstract:

This paper empirically investigates the effectiveness of competition policy by estimating its impact on Total Factor Productivity (TFP) growth for 22 industries in 12 OECD countries over the period 1995-2005. We find a robust positive and significant effect of competition policy asmeasured by newly created indexes. We provide several arguments and results based on instrumental variables estimators as well as non-linearities to support the claim that the established link can be interpreted in a causal way. At a disaggregated level, the effect on TFP growth is particularly strong for specific aspects of competition policy related to its institutional setup and antitrust activities (rather than merger control). The effect is strengthened by good legal systems, suggesting complementarities between competition policy and the efficiency of law enforcement institutions.

JEL classification: L4, K21, O4, C23

Keywords: Competition Policy, Productivity Growth, Institutions, Deterrence, OECD

October 2009

Full text in pdf format:

283.pdf

The Effects of Entrepreneurship Education

Abstract:

Entrepreneurship education ranks highly on policy agendas in Europe and the US, but little research is available to assess its impacts. In this context it is of primary importance to understand whether entrepreneurship education raises intentions to be entrepreneurial generally or whether it helps students determine how well suited they are for entrepreneurship. We develop a theoretical model of Bayesian learning in which entrepreneurship education generates signals which help students to evaluate their own aptitude for entrepreneurial tasks. We derive predictions from the model and test them using data from a compulsory entrepreneurship course at a German university. Using survey responses from 189 students ex ante and ex post, we find that entrepreneurial propensity declined somewhat in spite of generally good evaluations of the class. Our tests of Bayesian updating provide support for the notion that students receive valuable signals and learn about their own type in the entrepreneurship course.

JEL Classification: D83, J24, L26, M13
Keywords: entrepreneurship, entrepreneurship education, Bayes’ Rule, learning, signals

August 2009

Full text in pdf format:

269.pdf

How does entry regulation influence entry into selfemployment and occupational mobility?

Abstract:

We analyze how an entry regulation that imposes a mandatory educational standard affects entry into self-employment and occupational mobility. We exploit the German reunification as a natural experiment and identify regulatory effects by comparing differences between regulated occupations and unregulated occupations in East Germany with the corresponding differences in West Germany after reunification. Consistent with our expectations, we find that entry regulation reduces entry into selfemployment and occupational mobility after reunification more in regulated occupations in East Germany than in West Germany. Our findings are relevant for transition or emerging economies as well as for mature market economies requiring large structural changes after unforeseen economic shocks.

JEL: J24, J62, K20, L11, L51, M13
Keywords: Entry Regulation, Self-Employment, Occupational Mobility

July 2009

Full text in pdf format:

267.pdf

Renegotiation-Proof Relational Contracts with Side Payments

Abstract:

We study infinitely repeated two player games with perfect information, where each period consists of two stages: one in which the parties simultaneously choose an action and one in which they can transfer money to each other. We first derive simple conditions that allow a constructive characterization of all Pareto-optimal subgame perfect payoffs for all discount factors. Afterwards, we examine different concepts of renegotiation-proofness and extend the characterization to renegotiation-proof payoffs.

JEL classification: C73, L14

Keywords: renegotiation, infinitely repeated games, side payments, optimal penal codes

April 2009

Full text in pdf format:

259.pdf

Indirect Taxation in Vertical Oligopoly

Abstract:

This paper analyzes the effects of specific and ad valorem taxation in an indus-
try with downstream and upstream oligopoly. We find that in the short run, i.e.
when the number of firms in both markets is exogenous, the results concerning tax incidence tend to be qualitatively similar to models where the upstream market is perfectly competitive. However, both over- and undershifting are more pronounced, potentially to a very large extent. Instead, in the long run under endogenous entry and exit overshifting of both taxes is more likely to occur and is more pronounced under upstream oligopoly. As a result of this, a tax increase is more likely to be welfare reducing. We also demonstrate that downstream and upstream taxation are equivalent in the short run while this is not true for the ad valorem tax in the long run. We show that it is normally more efficient to tax downstream.
JEL classification: D43, H21, H22, L13
Keywords: Specific Tax, Ad Valorem Tax, Value-Added Tax, Tax Incidence,
Tax Efficiency, Indirect Taxation, Imperfect Competition, Vertical Oligopoly.

Febuary 2009

Full text in pdf format:

255.pdf

To Be Financed or Not... - The Role of Patents for Venture Capital Financing

Abstract:

This paper investigates how patent applications and grants held by new ventures improve their ability to attract venture capital (VC) financing. We argue that investors are faced with considerable uncertainty and therefore rely on patents as signals when trying to assess the prospects of potential
portfolio companies. For a sample of VC-seeking German and British biotechnology companies we have identified all patents filed at the European Patent Office (EPO). Applying hazard rate analysis, we find that in the presence of patent applications, VC financing occurs earlier. Our results also show
that VCs pay attention to patent quality, financing those ventures faster which later turn out to have high-quality patents. Patent oppositions increase the likelihood of receiving VC, but ultimate grant decisions do not spur VC financing, presumably because they are anticipated. Our empirical results
and interviews with VCs suggest that the process of patenting generates signals which help to overcome the liabilities of newness faced by new ventures.
Keywords: patents, venture capital, intellectual property rights, R&D, biotechnology
JEL classification: O30, O34, L20, L26, G24

January 2009

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253.pdf

On the Stability of Research Joint Ventures: Implications for Collusion

Abstract:

Though there is a body of theoretical literature on research joint ventures (RJV) participation facilitating collusion, empirical tests are rare. Even more so, there are few empirical tests on the general theme of collusion. This note tries to fill this gap by assuming a correspondence between the stability of research joint ventures and collusion. By using data from the US Nation Cooperation Research Act, we show that large RJVs in concentrated industries are more stable and hence more suspect to collusion.
Keywords: research joint ventures, product market collusion, empirical test
JEL classification: L24, L44, L52
March 2008

Full text in pdf format:

240.pdf

The impact of horizontal mergers on rivals: Gains to being left outside a merger

Abstract:

It is commonly perceived that firms do not want to be outsiders to a merger between competitor firms. We instead argue that it is beneficial to be a non-merging rival firm to a large horizontal merger. Using a sample of mergers with expert-identification of relevant rivals and the event-study methodology, we find rivals generally experience positive abnormal returns at the merger announcement date. Further, we find that the stock reaction of rivals to merger events is not sensitive to merger waves; hence, 'future acquisition probability' does not drive the positive abnormal returns of rivals. We then build a conceptual framework that encompasses the impact of merger events on both merging and rival firms in order to provide a schematic to elicit more information on merger type.
Keywords: rivals, mergers, acquisitions, event-study
JEL classification: G14, G34, L22, M20
June 2008

Full text in pdf format:

239.pdf

In Search of Workers' Real Effort Reciprocity - A Field and a Laboratory Experiment

Abstract:

updated version of paper no 55

We present a field experiment to assess the effect of own and peer wage variations on actual work effort of employees with hourly wages. Work effort neither reacts to an increase of the own wage, nor to a positive or negative peer comparison. This result seems at odds with numerous laboratory experiments that show a clear own wage sensitivity on effort. In an additional real-effort laboratory experiment we show that explicit cost and surplus information that enables to exactly calculate employer’s surplus from the work contract is a crucial pre-requisite for a positive wage-effort relation. This demonstrates that employee’s reciprocity requires a clear assessment of the surplus at stake.
Keywords: efficiency wage, reciprocity, fairness, field experiment, real effort
JEL classification: C91, C92, J41
June 2008

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238.pdf

Domestic Rivalry and Export Performance: Theory and Evidence from International Airline Markets

Abstract:

The much-studied relationship between domestic rivalry and export performance consists of those supporting a national-champion rationale, and those supporting a rivalry rationale. While the empirical literature generally supports the positive effects of domestic rivalry, the national-champion rationale actually rests on firmer theoretical ground. We address this inconsistency by providing a theoretical framework that illustrates three paths via which domestic rivalry translates into enhanced international exports. Furthermore, empirical tests on the world airline industry elicit the existence of one particular path - an enhanced firm performance effect - that connects domestic rivalry with improved international exports.
JEL classification: L52, L40, L93
February 2008

Full text in pdf format:

225.pdf

The Dynamics of Research Joint Ventures: A Panel Data Analysis

Abstract:

The aim of this paper is to test the determinants of Research Joint Ventures’ (RJVs) group dynamics. We look at entry, exit and turbulence in RJVs that have been set up under the US National Cooperative Research Act, which allows for certain antitrust exemptions in order to stimulate firms to cooperate in R&D. Accounting for unobserved project characteristics and controlling for inter-RJV interactions and industry effects, the Tobit panel regressions show the importance of group and time features for an RJV’s evolution. We further identify an average RJV’s long-term equilibrium size and assess its determining factors. Ours is a first attempt to produce robust stylized facts about cooperational short- and long-term dynamics, an important but neglected dimension in research cooperations.
Keywords: research joint ventures, dynamics, panel data
JEL classification: C23, L24, O32
October 2007

Full text in pdf format:

221.pdf

The Actual Structure of eBay’s Feedback Mechanism and Early Evidence on the Effects of Recent Changes

Abstract:

eBay’s feedback mechanism is considered crucial to establishing and maintaining trust on the world’s largest trading platform. The effects of a user’s reputation on the probability of sale and on prices are at the center of a large number of studies. More recent theoretical work considers aspects of the mechanism itself. Yet, there is confusion amongst users about its exact institutional details, which also changed substantially in the last few months. An understanding of these details, and how the mechanism is perceived by users, is crucial for any assessment of the system. We provide a thorough description of the institutional setup of eBay’s feedback mechanism, including recent changes to it. Most importantly, buyers now have the possibility to leave additional, anonymous ratings on sellers on four different criteria. We discuss the implications of these changes and provide first descriptive evidence on their impact on rating behavior.
Keywords: eBay, reputation mechanism, strategic feedback behavior, informational content, reciprocity, fear of retaliation
JEL classification: D44, L15, L86
November 2007

Full text in pdf format:

220.pdf

Remedy for Now but Prohibit for Tomorrow: The Deterrence Effects of Merger Policy Tools

Abstract:

Antitrust policy involves not just the regulation of anti-competitive behavior, but also an important deterrence effect. Neither scholars nor policymakers have fully researched the deterrence effects of merger policy tools, as they have been unable to empirically measure these effects. We consider the ability of different antitrust actions – Prohibitions, Remedies, and Monitorings – to deter firms from engaging in mergers. We employ cross-jurisdiction/pan-time data on merger policy to empirically estimate the impact of antitrust actions on future merger frequencies. We find merger prohibitions to lead to decreased merger notifications in subsequent periods, and remedies to weakly increase future merger notifications: in other words, prohibitions involve a deterrence effect but remedies do not.
JEL classification: L40, L49, K21
September 2007

Full text in pdf format:

218.pdf

Which Reputations Does a Brand Owner Need? Evidence from Trade Mark Opposition

Abstract:

At least two: the reputation of their brand and a reputation for being tough on imitators of this brand. Sustaining a brand requires both investment in its reputation amongst consumers and the defence of the brand against followers that infringe upon it. I study the defence of trade marks through opposition at a trade mark office. A structural model of opposition and adjudication of trade mark disputes is presented. This is applied to trade mark opposition in Europe. Results show that brand owners can benefit from a reputation for tough opposition to trade mark applications. Such a reputation induces applicants to settle trade mark opposition cases more readily.
Keywords: trade marks, opposition, intellectual property rights, reputation
JEL classification: K41, L00, O31, O34
July 2007

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215.pdf

Unawareness, Beliefs and Games

Abstract:

We define a generalized state-space model with interactive unawareness and probabilistic beliefs. Such models are desirable for many potential applications of asymmetric unawareness. We develop Bayesian games with unawareness, define equilibrium, and prove existence. We show how equilibria are extended naturally from lower to higher awareness levels and restricted from higher to lower awareness levels. We use our unawareness belief structure to show that the common prior assumption is too weak to rule out speculative trade in all states. Yet, we prove a generalized “No-trade” theorem according to which there can not be common certainty of strict preference to trade. Moreover, we show a generalization of the “No-agreeing-to-disagree” theorem.
Keywords: unawareness, awareness, type-space, Bayesian games, incomplete information, equilibrium, common prior, agreement, speculative trade, interactive epistemology
JEL classification: C70, C72, D80, D82
March 2007

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196.pdf

Internet Peering as a Network of Relations

Abstract:

We apply results from recent theoretical work on networks of relations to analyze optimal peering strategies for asymmetric ISPs. It is shown that - from a network of relations perspective – ISPs’ asymmetry in bilateral peering agreements need not be a problem, since when these form a closed network, asymmetries are pooled and information transmission is faster. Both these effects reduce the incentives for opportunism in general, and interconnection quality degradation in particular. We also explain why bilateral monetary transfers between asymmetric ISPs (Bilateral Paid Peering), though potentially good for bilateral peering, may have rather negative effects on the sustainability of the overall peering network.
November 2006

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191.pdf

The Impact of ISO 9000 Diffusion on Trade and FDI: A New Institutional Analysis

Abstract:

The effects of ISO 9000 diffusion on trade and FDI have gone understudied. We employ panel data reported by OECD nations over the 1995-2002 period to estimate the impact of ISO adoptions on country-pair economic relations. We find ISO diffusion to have no effect in developed nations, but to positively pull FDI (i.e., enhancing inward FDI) and positively push trade (i.e., enhancing exports) in developing nations.
Keywords: FDI, trade, transaction costs, institutions
JEL classification: C51, F23, L31
November 2006

Full text in pdf format:

179.pdf

Bankintermediation bei der Kreditvergabe an junge oder kleine Unternehmen

Abstract:

Loan financing, especially long term bank loan financing, is important for young or small firms in Germany. A large share of all small business lending in Germany originates in public financing programs and cooperative banks, (non-cooperative) private sector credit banks as well as savings banks mediate in the assignment of loans from these programs. Our empirical analyses of this loan type provide insights into the small business loan assignment behavior of the three different bank groups in general. Using various econometric techniques, observation periods and data sources – including detailed data on 6.880 firms – we find three robust, originate results: Not only recently, but already at the beginning of the 1990s credit banks played no substantial, statistically significant role in small business lending. Cooperative and savings banks have, in contrast, a strong, significant positive influence on young, small firms’ loan access. In addition, the loan assignment behavior of the two latter groups is found to be very similar. This is an important result given the ongoing controversial discussion on reforming the German savings bank sector.
Keywords: Kreditvergabeverhalten von Genossenschaftsbanken, Kreditbanken und Sparkassen, Finanzierung junger, kleiner Unternehmen, langfristige Kredite und öffentliche Förderprogramme, Reformierung des deutschen Sparkassensektors
August 2006

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178.pdf

Bailouts in a common market: a strategic approach

Abstract:

Governments in the EU grant Rescue and Restructure Subsidies to bail out ailing firms. In an international asymmetric Cournot duopoly we study effects of such subsidies on market structure and welfare. We adopt a common market setting, where consumers from the two countries form one market. We show that the subsidy is positive also when it fails to prevent the exit. The reason is a strategic effect, which forces the more efficient firm to make additional cost-reducing effort. When the exit is prevented, allocative and productive efficiencies are lower and the only gaining player is the rescued firm.
Keywords: subsidies, asymmetric oligopoly, exit, European Union
JEL classification: F13, L13, L52
October 2005

Full text in pdf format:

177.pdf

Effectiveness of bailouts in the EU

Abstract:

Governments in the EU frequently bail out firms in distress by granting state aid. I use data from 86 cases during the years 1995-2003 to examine two issues: the effectiveness of bailouts in preventing bankruptcy and the determinants of bailout policy. The results are threefold. First, the estimated discrete-time hazard rate increases during the first four years after the subsidy and drops after that, suggesting that some bailouts only delayed exit instead of preventing it. The number of failing bailouts could be reduced if European control was tougher. Second, governments’ bailout decisions favored state-owned firms, even though state-owned firms did not outperform private ones in the survival chances. Third, subsidy choice is an endogenous variable in the analysis of the hazard rate. Treating it as exogenous underestimates its impact on the bankruptcy probability. Several policy implications of the results are discussed in the paper.
Keywords: State aid, European Union, Discrete-time hazard, Bivariate probit
JEL classification: K2, G3, L5
October 2006

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176.pdf

Causes, consequences, and cures of myopic loss aversion - An experimental investigation

Abstract:

Myopic loss aversion (MLA) has been established as one prominent explanation for the equity premium puzzle. In this paper we address two issues related to the effects of MLA on risky investment decisions. First, we assess the relative impact of feedback frequency and investment flexibility (via the investment horizon) on risky investments. Second, given that we observe higher investments with a longer investment horizon, we examine conditions under which investors might endogenously opt for a longer investment horizon in order to avoid the negative effects of MLA on investments. We find in our experimental study that investment flexibility seems to be at least as relevant as feedback frequency for the effects of myopic loss aversion. When subjects are given the choice to opt for a long or short investment horizon, there is no clear preference for either. Yet, if subjects face a default horizon (either long or short), there is rather little switching from the one to the other horizon, showing that a default might work to attenuate the effects of MLA. However, if subjects switch, they are more often willing to switch from the long to the short horizon than vice versa, suggesting a preference for higher investment flexibility.
Keywords: loss aversion, risk, investment, experiment
JEL classification: C91, D80, G11
June 2005

Full text in pdf format:

171.pdf

Modeling the Duration of Patent Examination at the European Patent Office

Abstract:

We analyze the duration of the patent examination process at the European Patent Office (EPO). Our data contain information related to the patent’s economic and technical relevance, EPO capacity and workload as well as novel citation measures which are derived from the EPO’s search reports. In our multivariate analysis we estimate competing risk specifications in order to characterize differences in the processes leading to a withdrawal of the application by the applicant, a refusal of the patent grant by the examiner or an actual patent grant. Highly cited applications are approved faster by the EPO than less important ones, but they are also withdrawn less quickly by the applicant. The process duration increases for all outcomes with the application’s complexity, originality, number of references (backward citations) in the search report and with the EPO’s workload at the filing date. Endogenous applicant behavior becomes apparent in other results: more controversial claims lead to slower grants, but faster withdrawals, while relatively well-documented applications (identified by a high share of applicant references appearing in the search report) are approved faster and take longer to be withdrawn.
Keywords: patents, patent examination, survival analysis, patent citations, European Patent Office
JEL classification: C15, C41, D73, O34
October 2006

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170.pdf

Is the Event Study Methodology Useful for Merger Analysis? A Comparison of Stock Market and Accounting Data

Abstract:

Using a sample of 167 mergers during the period 1990-2002 involving 544 firms either as merging firms or competitors, we contrast a measure of the merger’s profitability based on event studies with one based on accounting data. We find positive and significant correlations between them when using a long window around the announcement date and, for rivals, in case of anticompetitive mergers.
Keywords: Mergers, Merger Control, Event Studies, Ex-post Evaluation
JEL classification: L4, K21, G34
September 2006

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163.pdf

Optimal Degree of Public Information Dissemination

Abstract:

Financial markets and macroeconomic environments are often characterized by positive externalities. In these environments, transparency may reduce expected welfare from an ex-ante point of view: public announcements serve as a focal point for higher-order beliefs and affect agents’ behaviour more than justified by their informational contents. Some scholars conclude that it might be better to reduce the precision of public signals or entirely withhold information. This paper shows that public information should always be provided with maximum precision, but under certain conditions not to all agents. Restricting the degree of publicity is a better-suited instrument for preventing the negative welfare effects of public announcements than restrictions on their precision are.
Keywords: Transparency, public information, private information, coordination, strategic complementarity
JEL classification: C73, D82, F31
February 2006

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158.pdf

Speculative Attacks with Multiple Sources of Public Information

Abstract:

We propose a speculative attack model in which agents receive multiple public signals. It is characterised by its focus on an informational structure which sets free from the strict separation between public information and private information. Diverse pieces of public information can be taken into account differently by players and are likely to lead to different appreciations ex post. This process defines players’ private value. The main result is to show that equilibrium uniqueness depends on two conditions: (i) signals are sufficiently dispersed (ii) private beliefs about the relative precision of these signals sufficiently differ. We derive economic policy implications of such a result.
Keywords: Speculative attack, Private value game, Multiple equilibria, Public and private information
JEL classification: F31, D82
January 2005

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157.pdf

Measuring Risk Aversion and the Wealth Effect

Abstract:

Measuring risk aversion is sensitive to assumptions about the wealth in subjects’ utility functions. Data from the same subjects in low- and high-stake lottery decisions allow estimating the wealth in a pre-specified one-parameter utility function simultaneously with risk aversion. This paper first shows how wealth estimates can be identified assuming constant relative risk aversion (CRRA). Using the data from a recent experiment by Holt and Laury (2002), it is shown that most subjects’ behavior is consistent with CRRA at some wealth level. However, for realistic wealth levels most subjects’ behavior implies a decreasing relative risk aversion. An alternative explanation is that subjects do not fully integrate their wealth with income from the experiment. Within-subject data do not allow discriminating between the two hypotheses. Using between-subject data, maximum-likelihood estimates of a hybrid utility function indicate that aggregate behavior can be described by expected utility from income rather than expected utility from final wealth and partial relative risk aversion is increasing in the scale of payoffs.
Keywords: lottery choice, risk aversion, myopic risk aversion
JEL classification: C81, C91, D81
September 2005

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156.pdf

How Effective is European Merger Control?

Abstract:

This paper applies a novel methodology to a unique dataset of large concentrations during the period 1990-2002 to assess merger control’s effectiveness. By using data gathered from several sources and employing different evaluation techniques, we analyze the economic effects of the European Commission’s (EC) merger control decisions and distinguish between blockings, clearances with commitments (either behavioral or structural), and outright clearances. We run an event study on merging and rival firms’ stocks to quantify the profitability effects of mergers and merger control decisions. We back up our results and methodology by using alternative measures for the merger’s profitability effects based on balance sheet data and obtain consistent results. Our findings suggest that outright blockings solve the competitive problems generated by the merger. Remedies are not always effective in solving the market power concerns, at least not on average. Nevertheless, both structural (divestitures) and behavioral remedies do help restore effective competition when correctly applied to anticompetitive mergers during the first investigation phase. Yet, they are on the whole ineffective or even detrimental when applied after the second investigation phase. Finally, remedies - especially behavioral ones - seem to constitute a rent transfer from merging firms to rivals when mistakenly applied to pro-competitive mergers.
Keywords: Mergers, Merger Control, Remedies, European Commission, Event Studies, Expost Evaluation
JEL classification: L4, K21, G34, C2, L2
July 2006

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153.pdf

Umbrella Branding and the Provision of Quality

Abstract:

Consider a two-product firm that decides on the quality of each product. Product quality is unknown to consumers. If the firm sells both products under the same brand name, consumers adjust their beliefs about quality subject to the performance of both products. We show that if the probability that low quality will be detected is in an intermediate range, the firm produces high quality under umbrella branding whereas it would sell low quality in the absence of umbrella branding. Hence, umbrella branding mitigates the moral hazard problem. We also find that umbrella branding survives in asymmetric markets and that even unprofitable products may be used to stabilize the umbrella brand. However, umbrella branding does not necessarily imply high quality; the firm may choose low-quality products with positive probability.
Keywords: Umbrella branding, reputation transfer, signaling, experience goods.
JEL classification: L14, L15, M37, D82
June 2006

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132.pdf

Observable Reputation Trading

Abstract:

Is the reputation of a firm tradable when the change in ownership is observable? We consider a competitive market in which a share of owners must retire in each period. New owners bid for the firms that are for sale. Customers learn the owner’s type, which reflects the quality of the good or service provided, through experience. After observing an ownership change they may want to switch firm. However, in equilibrium, good new owners buy from good old owners and retain high-value customers. Hence reputation is a tradable intangible asset, although ownership change is observable.
Keywords: Reputation, ownership change, intangible assets, theory of the firm.
JEL classification: D40, D82, L14, L15
June 2006

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131.pdf

“Ineffective” competition: a puzzle?

Abstract:

Conventionally, we think of an increase in competition as weakly decreasing prices, increasing the number of consumers served, thus increasing consumer surplus, decreasing firms profits, etc. Here, we demonstrate that, under some tame circumstances, an increase in competition may lead to a price increase in a horizontally differentiated market. We show this relationship for the petrol market in German cities.
May 2006

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117.pdf

The Importance of Equity Finance for R&D Activity – Are There Differences Between Young and Old Companies?

Abstract:

This paper analyzes the importance of equity finance for the R&D activity of small and medium-sized enterprises. We use information on almost 6000 German SMEs from a company survey. Using the intensity of banking competition at the district level as instrument to control for endogeneity, we find that a higher equity ratio is conducive to more R&D for young but not for old companies. Equity may be a constraining factor for young companies which have to rely on the original equity investment of their owners since they have not yet accumulated retained earnings and can relay less on outside financing. The positive influence is found for R&D intensity but not for the decision whether to perform R&D. Equity financing is therefore especially important for the most innovative, young companies.
Keywords: R&D activity, equity finance, small and medium-sized enterprises
JEL classification: G32, O32
February 2006

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111.pdf

Information, Coordination, and the Industrialization of Countries

Abstract:

The industrialization process of a country is often plagued by a failure to coordinate investment decisions. Using the Global Games approach we can solve this coordination problem and eliminate the problem of multiple equilibria. We show how appropriate information provision enhances efficiency. We discuss extensions of the model and argue that subsidies may be a property of a signalling equilibrium to overcome credibility problems in information provision. In addition we point out possible problems with overreaction to public information. Furthermore, we suggest a new focus for development policy.
Keywords: Information, Coordination, Industrialization, Development, Global Games, Equilibrium Refinements, Big Push
JEL classification: C72, C79, D82, F21, O12, O14
February 2006

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87.pdf

EU Merger Remedies: A Preliminary Empirical Assessment

Abstract:

Mergers that substantially lessen competition are challenged by antitrust authorities. Instead of blocking anticompetitive transitions straight away, authorities might choose to negotiate with the merging parties and allow the transactions to proceed with modifications that restore or preserve the competition in the involved markets. We study a sample of 167 mergers that were under the European Commission’s scrutiny from 1990 to 2002. We use an event study methodology to identify the potential anticompetitive effects of mergers as well as the remedial provisions on these transactions. Stock market reactions around the day of the merger’s announcement provide information on the first question, whereas the stock market reactions around the commission’s final decision day convey information about the outcome of the bargaining process between the authority and the merging parties. We first classify mergers according to their effects on competition and then we develop hypotheses on the effects that remedies are supposed to achieve depending on the merger’s competitive outcome. We isolate several stylized facts. First, we find that remedies were not always appropriately imposed. Second, the market seems to be able to predict remedies’ effectiveness when applied in phase I. Third, the market also seems able to produce a good prior to phase II’s clearances and prohibitions, but not to remedies. This can be due either to a measurement problem or related to the increased merging firms’ bargaining power during the second phase of the merger review.
Keywords: Merger Control, Remedies, European Commission, Event Studies
JEL classification: L4, K21, C12, C13
January 2006

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81.pdf

Leniency Policies and Illegal Transactions

Abstract:

Forthcoming in the Journal of Public Economics
We study the consequences of leniency – reduced legal sanctions for wrongdoers who spontaneously self-report to law enforcers – on sequential, bilateral, illegal transactions, such as corruption, manager-auditor collusion, or drug deals. It is known that leniency helps deterring illegal relationships sustained by repeated interaction. Here we find that - when not properly designed - leniency may simultaneously provide an effective governance mechanism for occasional sequential illegal transactions that would not be feasible in its absence.
Keywords: amnesty, corruption, collusion, financial fraud, governance, hold up, hostages, illegal trade, immunity, law enforcement, leniency, organized crime, self-reporting, whistleblowers
JEL classification: K42, K21
September 2005

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74.pdf

The Evolutionary Stability of Optimism, Pessimism and Complete Ignorance

Abstract:

We provide an evolutionary foundation to evidence that in some situations humans maintain optimistic or pessimistic attitudes towards uncertainty and are ignorant to relevant aspects of the environment. Players in strategic games face Knightian uncertainty about opponents’ actions and maximize individually their Choquet expected utility. Our Choquet expected utility model allows for both an optimistic or pessimistic attitude towards uncertainty as well as ignorance to strategic dependencies. An optimist (resp. pessimist) overweights good (resp. bad) outcomes. A complete ignorant never reacts to opponents’ change of actions. With qualifications we show that optimistic (resp. pessimistic) complete ignorance is evolutionary stable / yields a strategic advantage in submodular (resp. supermodular) games with aggregate externalities. Moreover, this evolutionary stable preference leads to Walrasian behavior in those classes of games.
Keywords: ambiguity, Knightian uncertainty, Choquet expected utility, neo-additive capacity, Hurwicz criterion, Maximin, Minimax, Ellsberg paradox, overconfidence, supermodularity, aggregative games, monotone comparative statics, playing the field, evolution of preferences
JEL classification: C72, C73, D01, D43, D81, L13
November 2005

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68.pdf

Labor Pooling in R&D Intensive Industries

Abstract:

We investigate firms’ incentives to locate in the same region to gain access to a large pool of skilled labor. Firms engage in risky R&D activities and thus create stochastic product and implied labor demand. Agglomeration in a cluster is more likely in situations where the innovation step is large and the probability for a firm to be the only innovator is high. When firms cluster, they tend to invest more and take more risk in R&D compared to spatially dispersed firms. Agglomeration is welfare maximizing, because expected labor productivity is higher and firms choose a more effcient, technically diversified portfolio of R&D projects at the industry level.
JEL classification: L13, O32, R12
09 2005

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64.pdf

Rage Against the Machines: How Subjects Learn to Play Against Computers

Abstract:

We use an experiment to explore how subjects learn to play against computers which are programmed to follow one of a number of standard learning algorithms. The learning theories are (unbeknown to subjects) a best response process, fictitious play, imitation, reinforcement learning, and a trial & error process. We test whether subjects try to influence those algorithms to their advantage in a forward-looking way (strategic teaching). We find that strategic teaching occurs frequently and that all learning algorithms are subject to exploitation with the notable exception of imitation. The experiment was conducted, both, on the internet and in the usual laboratory setting. We find some systematic differences, which however can be traced to the different incentives structures rather than the experimental environment.
Keywords: learning; fictitious play; imitation; reinforcement; trial & error; strategic teaching; Cournot duopoly; experiments; internet
JEL classification: C72, C91, C92, D43, L13
October 2005

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63.pdf

Last Minute Feedback

Abstract:

Feedback mechanisms that allow partners to rate each other after a transaction are considered crucial for the success of anonymous internet trading platforms. We document an asymmetry in the feedback behavior on eBay, propose an explanation based on the micro structure of the feedback mechanism and the time when feedbacks are given, and support this explanation by findings from a large data set. Our analysis implies that the informational content of feedback records is likely to be low. The reason for this is that agents appear to leave feedbacks strategically. Negative feedbacks are given late, in the "last minute," or not given at all, most likely because of the fear of retaliative negative feedback. Conversely, positive feedbacks are given early in order to encourage reciprocation. Towards refining our insights into the observed pattern, we look separately at buyers and sellers, and relate the magnitude of the effects to the trading partners' experience.
Keywords: eBay, reputation mechanism, strategic feedback behavior, informational content, reciprocity, fear of retaliation
JEL classification: D44, L15, L86
March 2006

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62.pdf

A Canonical Model for Interactive Unawareness

Abstract:

Heifetz, Meier and Schipper (2005) introduced a generalized state-space model that allows for non-trivial unawareness among several individuals and strong properties of knowledge. We show that this generalized state-space model arises naturally if states consist of maximally consistent sets of formulas in an appropriate logical formulation.
Keywords: unawareness, awareness, knowledge, interactive epistemology, modal logic, lack of conception, bounded perception
JEL classification: C70, C72, D80, D82
September 2005

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60.pdf

Ambiguity and Social Interaction

Abstract:

We present a non-technical account of ambiguity in strategic games and show how it may be applied to economics and social sciences. Optimistic and pessimistic responses to ambiguity are formally modelled. We show that pessimism has the effect of increasing (decreasing) equilibrium prices under Cournot (Bertrand) competition. In addition the effects of ambiguity on peace-making are examined. It is shown that ambiguity may select equilibria in coordination games with multiple equilibria. Some comparative statics results are derived for the impact of ambiguity in games with strategic complements.
Keywords: Ambiguity, Optimism, Pessimism, Strategic Games, Oligopoly, Strategic Delegation, Peace-making, Strategic Complements, Choquet Expected Utility
JEL classification: C72, D43, D62, D81
July 2005

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59.pdf

In Search of Workers' Real Effort Reciprocity - A Field and a Laboratory Experiment

Abstract:

We present a field experiment to assess the effect of own and peer wage variations on actual work effort of employees with hourly wages. Work effort neither reacts to an increase of the own wage, nor to a positive or negative peer comparison. This result seems at odds with numerous laboratory experiments that show a clear own wage sensitivity on effort. In an additional real-effort laboratory experiment we show that explicit cost and surplus information that enables to exactly calculate employer’s surplus from the work contract is a crucial pre-requisite for a positive wage-effort relation. This demonstrates that employee’s reciprocity requires a clear assessment of the surplus at stake.
Keywords: efficiency wage, reciprocity, fairness, field experiment, real effort
JEL classification: C91, C92, J41
July 2005

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55.pdf

Imitation - Theory and Experimental Evidence

Abstract:

We introduce a generalized theoretical approach to study imitation and subject it to rigorous experimental testing. In our theoretical analysis we find that the different predictions of previous imitation models are due to different informational assumptions, not to different behavioral rules. It is more important whom one imitates rather than how. In a laboratory experiment we test the different theories by systematically varying information conditions. We find significant effects of seemingly innocent changes in information. Moreover, the generalized imitation model predicts the differences between treatments well. The data provide support for imitation on the individual level, both in terms of choice and in terms of perception. But imitation is not unconditional. Rather individuals' propensity to imitate more successful actions is increasing in payoff differences.
Keywords: Evolutionary game theory; Stochastic stability; Imitation; Cournot markets; Information; Experiments; Simulations
JEL classification: C72; C91; C92; D43; L13
April 2005

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54.pdf

Imitators and Optimizers in Cournot Oligopoly

Abstract:

We analyze a symmetric n-firm Cournot oligopoly with a heterogeneous population of optimizers and imitators. Imitators mimic the output decision of the most successful firms of the previous round a l`a Vega-Redondo (1997). Optimizers play a myopic best response to the opponents’ previous output. Firms are allowed to make mistakes and deviate from the decision rules with a small probability. Applying stochastic stability analysis, we find that the long run distribution converges to a recurrent set of states in which imitators are better off than are optimizers. This finding appears to be robust even when optimizers are more sophisticated. It suggests that imitators drive optimizers out of the market contradicting a fundamental conjecture by Friedman (1953).
Keywords: profit maximization hypothesis, bounded rationality, learning, Stackelberg
JEL classification: C72, D21, D43, L13
March 2005

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53.pdf

Interactive Unawareness

Abstract:

The standard state-spaces of asymmetric information preclude non-trivial forms of unawareness (Modica and Rustichini, 1994, Dekel, Lipman and Rustichini, 1998). We introduce a generalized state-space model that allows for non-trivial unawareness among several individuals, and which satisfies strong properties of knowledge as well as all the desiderata on unawareness proposed this far in the literature.
Keywords: unawareness, awareness, knowledge, interactive epistemology, speculative trade, bounded perception.
JEL classification: C70, C72, D80, D82
February 2005

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52.pdf

A Characterization of the Distributions That Imply Existence of Linear Equilibria in the Kyle-Model

Abstract:

The existence of a linear equilibrium in Kyle's model of market making with multiple, symmetrically informed strategic traders is implied for any number of strategic traders if the joint distribution of the underlying exogenous random variables is elliptical. The reverse implication has been shown for the case in which the random variables are independent and have finite second moments. Here we extend this result to the case in which the underlying random variables are not necessarily independent and their joint distribution is determined by its moments.
Keywords: Market Microstructure, Kyle Model, Linear
JEL classification: G14, D82
May 2005

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43.pdf

Can Post-Grant Reviews Improve Patent System Design? A Twin Study of US and European Patents

Abstract:

This paper assesses the impact of adopting a post-grant review institution in the US patent system by comparing the “opposition careers” of European Patent Office (EPO) equivalents of litigated US patents to those of a control group of EPO patents. We demonstrate several novel methods of "twinning" US and European patents and investigate the implications of employing these different methods in our data analysis. We find that EPO equivalents of US litigated patent applications are more likely to be awarded EPO patent protection than are equivalents of unlitigated patents, and the opposition rate for EPO equivalents of US litigated patents is about three times higher than for equivalents of unlitigated patents. Patents attacked under European opposition are shown to be either revoked completely or narrowed in about 70 percent of all cases. For EPO equivalents of US litigated patents, the appeal rate against opposition outcomes is considerably higher than for control-group patents. Based on our estimates, we calculate a range of net welfare benefits that would accrue from adopting a post-grant review system. Our results provide strong evidence that the United States could benefit substantially from adopting an administrative post-grant patent review, provided that the post-grant mechanism is not too costly.
Keywords: patent system, post-grant review, opposition, litigation
JEL classification: K41, K11, L10
April 2006

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38.pdf

Is Silence Golden? Patents versus Secrecy at the Firm Level

Abstract:

In the 1990s, patenting schemes changed in many respects: upcoming new technologies accelerated the shift from price competition towards competition based on technical inventions, a worldwide surge in patenting took place, and the ‘patent thicket’ arose as a consequence of strategic patenting. This study analyzes the importance of patenting versus secrecy as an effective alternative to protect intellectual property in the inventions’ market phase. The sales figure with new products is introduced as a new measure for the importance of tools to protect IP among product innovating firms. Focusing on German manufacturing in 2000, it turns out that patents are important to protect intellectual property in the market, whereas secrecy seems to be rather important for inventions that are not commercialized yet.
Keywords: Innovation, Appropriation, Patents, Secrecy
JEL classification: C34, C35, O33, O34
March 2005

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37.pdf

An Economist's Guide to Digital Music

Abstract:

In this guide, we discuss the impact of digitalization on the music industry. We rely on market and survey data at the international level as well as expert statements from the industry. The guide investigates recent developments in legal and technological protection of digital music and describes new business models as well as consumers' attitude towards music downloads. We conclude the guide by a discussion of the evolution of the music industry.
Keywords: Music, Internet, File-sharing, Peer-to-peer, Piracy, Digital Rights Management, Copyright, E-commerce
December 2004

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32.pdf

File-Sharing, Sampling, and Music Distribution

Abstract:

The use of file-sharing technologies, so-called Peer-to-Peer (P2P) networks, to copy music files has become common since the arrival of Napster. P2P networks may actually improve the matching between products and buyers - we call this the matching effect. For a label the downside of P2P networks is that consumers receive a copy which, although it is an imperfect substitute to the original, may reduce their willingness-to-pay for the original - we call this the competition effect. We show that the matching effect may dominate so that a label’s profits are higher with P2P networks than without. Furthermore, we show that the existence of P2P networks may alter the standard business model: sampling may replace costly marketing and promotion. This may allow labels to increase profits in spite of lower revenues.
Keywords: ?le-sharing, P2P, sampling, information transmission, piracy, music
JEL classification: L11, L82
December 2004

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31.pdf

Networks of Relations

Abstract:

We model networks of relational (or implicit) contracts, exploring how sanctioning power and equilibrium conditions change under different network configurations and information transmission technologies. In our model, relations are the links, and the value of the network lies in its ability to enforce cooperative agreements that could not be sustained if agents had no access to other network members’ sanctioning power and information. We identify conditions for network stability and in-network information transmission as well as conditions under which stable subnetworks inhibit more valuable larger networks.
Keywords: Networks, Relational Contracts, Indirect Multimarket Contact, Social Capital.
JEL classification: L13, L29, D23, D43, O17
November 2004

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28.pdf

Trade, growth and geography: A synthetic

Abstract:

Economic integration affects economic development through two main channels: growth and localization of the economic activities. The theories of endogenous growth and economic geography enable us to understand these mechanisms. We study in this paper their similarities and specificities before suggesting their useful combination within a single model. Indeed, both theories are based on the same Spence-Dixit-Stiglitz monopolistic competition framework. However, they suggest two different approaches to deal with the impact of economic integration. We consider that a third path, by proposing a synthetic approach, better answers the issues raised in terms of economic convergence and divergence by these two sets of models.
Keywords: regional economic integration, endogenous growth, economic geography
JEL classification: F12, F15, F43, O18, O30, O41, R11, R12, R13
March 2004

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22.pdf

Regional integration and economic development: An empirical approach

Abstract:

This paper contributes to the empirical literature by providing a quantitative measurement of the influence of regional trade integration on productivity. For this purpose we address the link between trade and productivity thanks to knowledge spillovers in a multi-country model. The interdependence that connects countries in an international web promotes exchanges of goods, services, people, capital and hence ideas, knowledge, innovation, and technology. Economic integration encourages thus both new ideas and their diffusion. We observe that a country’s productivity depends on its own R&D efforts as well as the R&D efforts of its trading partners. These R&D spillovers can then spread across countries and sectors. Thanks to the transfer of technology allowed by bilateral trade and investment, regional trade integration has a positive impact on long-term growth.
Keywords: regional economic integration, endogenous growth, economic geography
JEL classification: F12, F15, F43, O18, O30, O41, R11, R12, R13
March 2004

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21.pdf

Regional integration and economic development: A theoretical approach

Abstract:

We use a model of combined endogenous growth and economic geography to study the impact of regional economic integration on the member and non-member countries of a regional union. Regional integration affects growth through interregional technology diffusion symbolized by knowledge spillovers generated at home and spreading to the partner countries. Spillovers flow from the leader to the follower. Following integration, the lagging country has access to a bigger stock of knowledge that fosters an increase in its rate of growth and extends the diversity of its products. Trade in goods - or in FDI - and flows of ideas are two faces of the same coin. We show that the progressive decrease in transaction costs through the phasing out of barriers to trade together with product imitation can foster growth and convergence in the member countries. However, in order to avoid eventual trade and investment diversions, the non-member should envisage to join the integrated zone.
Keywords: regional economic integration, endogenous growth, economic geography
JEL classification: F12, F15, F43, O18, O30, O41, R11, R12, R13
March 2004

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20.pdf

Integrating Industrial Organization and International Business to Explain the Cross-National Domestic Airline Merger Phenomenon

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

The domestic airline merger phenomenon of the late 1980s and early 1990s sparked a great deal of Industrial Organization literature; yet, that literature neglected non-US merger activity and the potential for international competitive incentives. Using an International Business perspective to complement a primarily Industrial Organization analysis, I argue that factoring international competitive gains helps explain the domestic airline merger phenomenon. A Cournot model of airline competition illustrates the international incentives behind integrating domestic with international routes and behind acquiring domestic competitors. Further, comprehensive panel data tests also support large domestic networks and actual mergers improving the international competitiveness of airlines.
Keywords: airline-mergers, imperfect-competition, international-determinants
July 2004

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19.pdf

Moral Hazard and the Internal Organization of Joint Research

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

We address the question of how the internal organization of partnerships can be affected by moral hazard behavior of their division(s)/agent(s). We explore cases where two entregreneurs, each employing one agent subject ot moral hazard, decide how to conduct a research project together. The project's success probability is affected by agent(s)' effort(s). A joint entity can take two configurations: either both, or only one agent is kept. If two agents are kept, all degrees of substitutability between agents' efforts are considered. We show that the privately optimal internal organization of the joint entity is also socially optimal, except when agents' efforts just start to duplicate each other. In this range, due to moral hazard, too few parterships keeping both agents occur as compared to what would be socially optimal. A restriction on the number of agents to be kept in a partnership would induce too few of them leading to socially worse outcomes.
Keywords: internal organization of partnerships, moral hazard, efforts' interactions, cost functions
JEL classification: D21, D23, L23
July 2004

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18.pdf

Banking Regulation and Financial Accelerators: A One-Period Model with Unlimited Liability

Abstract:

In this paper, we analyze the consequences of bank regulation on the size of the real sector. In particular, we address the question whether exogenous shocks on the return-risk characteristics of the technology and on the equity of the real sector are intensified or damped by a value-at-risk constraint on the credit portfolio of a bank. We consider a one-period model with three risk-averse agents, an investor, a bank, and a firm. The size of the markets for deposits and loans, their prices and the size of the real sector are endogenous. We find that stricter regulation results in higher loan rates, lower deposit rates, and lower activity in the real sector. A negative shock on the return-risk position or on the risk buffer of the real sector reduces the activities in the economy. Surprisingly, the sensitivity of the real sector's activities on negative shocks is smaller for a regulated financial sector than for a non-regulated one. Therefore, in our economy, imperfections in the financial sector do not result in procyclical or acceleration effects.
June 2004

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17.pdf

Platform Ownership

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

We develop a general theoretical framework of trade on a platform on which buyers and sellers interact. The platform may be owned by a single large, or many small independent or vertically integrated intermediaries. We provide a positive and normative analysis of the impact of platform ownership structure on platform size. The strength of network effects is important in the ranking of ownership structures by induced platform size and welfare. While vertical integration may be welfare-enhancing if network effects are weak, monopoly platform ownership is socially preferred if they are strong. These are also the ownership structures likely to emerge.
Keywords: Two-Sided Markets, Network Effects, Intermediation, Product Diversity
JEL classification: L10, D40
July 2004

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16.pdf

Herding and Contrarian Behavior in Financial Markets - An Internet Experiment

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

We report results of an internet experiment designed to test the theory of informational cascades in financial markets (Avery and Zemsky, AER, 1998). More than 6400 subjects, including a subsample of 267 consultants from an international consulting firm, participated in the experiment. As predicted by theory, we find that the presence of a flexible market price prevents herding. However, the presence of contrarian behavior, which can (partly) be rationalized via error models, distorts prices, and even after 20 decisions convergence to the fundamental value is rare. We also report some interesting differences with respect to subjects’ fields of study. Reassuringly, the behavior of the consultants turns out to be not significantly different from the remaining subjects.
Keywords: informational cascades, herding, contrarians, experiment, internet
JEL classification: C92, D8, G1
June 2004

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7.pdf

Measuring Strategic Uncertainty in Coordination Games

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

This paper explores predictability of behavior in coordination games with multiple equilibria. In a laboratory experiment we measure subjects' certainty equivalents for three coordination games and one lottery. Attitudes towards strategic uncertainty in coordination games are related to risk aversion, experience seeking, gender and age. From the distribution of certainty equivalents among participating students we estimate probabilities for successful coordination in a wide range of coordination games. For many games success of coordination is predictable with a reasonable error rate. The best response of a risk neutral player is close to the global-game solution. Comparing choices in coordination games with revealed risk aversion, we estimate subjective probabilities for successful coordination. In games with a low coordination requirement, most subjects underestimate the probability of success. In games with a high coordination requirement, most subjects overestimate this probability. Data indicate that subjects have probabilistic beliefs about success or failure of coordination rather than beliefs about individual behavior of other players.
JEL classification: C72, C91, D81, D84
May 2004

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6.pdf

Does Anonymity Matter in Electronic Limit Order Markets?

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

We develop a model of limit order trading in which some traders have better information on future price volatility. As limit orders have option-like features, this information is valuable for limit order traders. We solve for informed and uninformed limit order traders’ bidding strategies in equilibrium when limit order traders’ IDs are concealed and when they are visible. In either design, a large (resp. small) spread signals that informed limit order traders expect volatility to be high (resp. low). However the quality of this signal and market liquidity are different in each market design. We test these predictions using a natural experiment. As of April 23, 2001, the limit order book for stocks listed on Euronext Paris became anonymous. For our sample stocks, we find that following this change, the average quoted and effective spreads declined significantly. Consistent with our model, we also find that the size of the spread is a predictor of future price volatility and that the strength of the association between the spread and volatility is weaker after the switch to anonymity.
Keywords: Market Microstructure, Limit Order Trading, Anonymity, Transparency, Liquidity, Volatility Forecasts
JEL classification: G10, G14, G24
May 2004

Full text in pdf format:

3.pdf