The B.E. Journal of Economic Analysis & Policy Volume 4 Issue 1

The B.E. Journal of Economic Analysis & Policy

Volume 4 Issue 1

Contents
Journal Overview

Contributions Article

Cash Constraints and Business Start-Ups: Deutschmarks Versus Dollars

Douglas Holtz-Eakin, Harvey S Rosen February 3, 2005 Page range: 1-26

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Abstract

In this paper we analyze microdata to explore differences in the rates at which American and German workers leave their salaried jobs to become self-employed. We document that the rate of self-employment is lower in Germany than in the United States, and the rate of transition from wage-earning to self-employment is lower as well. Our results suggest that German workers face liquidity constraints that are more severe than those of their American counterparts and an environment that discourages transitions to self-employment. The difference in transition rates cannot be attributed to observable differences between German and American workers.

On-the-Job Learning, Firing Costs and Employment

Pilar Díaz-Vázquez, Dennis J Snower, Luis E Arjona-Béjar April 4, 2005 Page range: 1-27

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Abstract

This paper explores the influence of on-the-job learning on the employment effect of firing costs. In the absence of on-the-job learning, the theoretical literature shows that firing costs may increase average employment (over the booms and recessions of the business cycle). We show that the existence of on-the-job learning weakens this effect. In fact, when the amount of on-the-job learning is sufficiently large, a rise in firing costs tends to reduce average employment.

The Effect of the Nonprofit Motive on Hospital Competitive Behavior

Teresa D. Harrison, Kristina M. Lybecker May 26, 2005 Page range: 1-15

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Abstract

In this paper, we employ three simple theoretical models of nonprofit hospitals to investigate equilibrium behavior when hospitals compete. Utilizing a differentiated Bertrand model, we examine how prices, quantity of patients served, service to the uninsured, and quality of care are affected as nonprofits place more weight on profit maximization. We find that the specification of the nonprofit motive greatly impacts the results. When the nonprofit motive is maximizing output, prices rise for both hospitals as the nonprofit moves away from its nonprofit motive. However, if the nonprofit cares about serving the uninsured, prices in the market fall. Finally, when hospitals compete on price and quality, more emphasis on profits results in an increase in price at the for-profit hospital and a decrease in price at the nonprofit hospital. These results suggest that the importance of the nonprofit motive has been underestimated and should be further investigated.

Electoral Competition and Redistribution with Rationally Informed Voters

Valentino Larcinese June 12, 2005 Page range: 1-26

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Abstract

In spite of the negligible probability that everyone has to cast a decisive vote, political information can be relevant for a number of private decisions. Under quite mild assumptions, the demand for information is increasing in income. Being informed affects responsiveness to electoral platforms and vote-seeking political parties should take this into account in their optimization process. As a consequence, redistribution is generally lower than what the median voter theorem predicts. Moreover, in contrast with what most literature takes for granted, an increase in inequality does not unambiguously increase redistribution. This is consistent with most empirical research in this field. Finally, an increase in the cost of information induces a reduction in redistribution.

The Environmental Kuznets Curve: Exploring a Fresh Specification

David F. Bradford, Rebecca A Fender, Stephen H. Shore, Martin Wagner June 14, 2005 Page range: 1-28

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Abstract

The objective of this paper is primarily methodological. Using a new specification, we reanalyze the data on worldwide environmental quality investigated by Gene Grossman and Alan Krueger in their well-known paper on the environmental Kuznets curve (which postulates an inverse U-shaped relationship between income level and pollution). This new specification avoids using nonlinear transformations of potentially nonstationary regressors in panel estimation, which is a major unresolved econometric problem plaguing much of the existing literature. We furthermore draw conclusions from fixed effects estimation, which had eluded Grossman and Krueger. Our estimation results indicate the presence of an EKC for only six of the fourteen pollutants, whereas Grossman and Krueger find support for all but one pollutant.

Uncertain R&D and the Porter Hypothesis

David Popp June 22, 2005 Page range: 1-14

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Abstract

Ever since Michael Porter proposed that environmental regulations can improve competitiveness, much economic research has examined the potential for such outcomes. Attempts to model Porter hypothesis outcomes in a way consistent with neoclassical economics have focused on things such as strategic relationships between firms, moral hazard problems, and economies of scale. In this paper, I offer a simpler alternative. The results of any R&D project are uncertain. Calibrating a simple model of induced R&D with uncertainty so that the expected value of research is only positive with environmental policy, I find that between 8 and 24 percent of simulations result in cases where post-regulation profits are higher than pre-regulation profits. This result is consistent both with Porter finding specific cases with complete innovation offsets and with macro-level findings that environmental policy is not costless. I conclude by discussing the implication of these results for environmental policy and future research.

Do Economists Recognize an Opportunity Cost When They See One? A Dismal Performance from the Dismal Science

Paul J Ferraro, Laura O Taylor September 9, 2005 Page range: 1-12

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Abstract

One expects people with graduate training in economics to have a deeper understanding of economic processes and reasoning than people without such training. However, as others have noted over the past 25 years, modern graduate education may emphasize mathematics and technique to the detriment of economic reasoning. One of the most important contributions economics has to offer as a discipline is the understanding of opportunity cost and how to apply this concept to all forms of decision making. We examine how PhD economists answer an introductory economics textbook question that requires identifying the relevant opportunity cost of an action. The results are not consistent with our expectation that graduate training leads to a deeper understanding of the concept. We explore the implications of our results for the relevance of economists in policy, research, and teaching.

A Theory of Health Disparities and Medical Technology

Dana P Goldman, Darius N. Lakdawalla September 16, 2005 Page range: 1-30

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Abstract

Better-educated people are healthier, although the sources of this relationship remain unclear. Starting with basic principles of consumer theory, we develop a model of how health disparities are determined that does not depend on the precise causal mechanism. Improvements in the productivity of health care disproportionately benefit the heaviest health care users. Since richer patients tend to use the most health care, this suggests that new technologiesby making more diseases treatable, reducing the price of health care, or improving health care productivitycould widen socioeconomic disparities in health. An exception to this rule, however, is a simplifying technology, which can contract health disparities, since richer patients are more likely to invest effort in adhering to complex treatment regimens. We present a few empirical case studies to help illustrate the theoretical results. First, we show that a complicated treatment regimen (antiretroviral therapy for HIV) benefited well-educated patients disproportionately. In contrast, simplifying drugs for hypertension coincided with a contraction in cardiovascular disparities not seen in other diseases. Finally, nationally representative data suggest that there are wider disparities by education among the chronically ill populationsprecisely the population one would expect to be the heaviest health care users.

Entry-Level Products with Consumer Learning

Justin P Johnson September 17, 2005 Page range: 1-31

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Abstract

Dynamic motivations for the use of product line extensions in the form of entry-level products are considered. When consumers are uncertain of their valuations for products, and their purchasing power evolves over time, firms competing in a lucrative luxury market may try to influence the future buying decisions of young consumers. Offering entry-level products allows young consumers to experiment and thereby make better future decisions. Despite this efficiency, so providing information to consumers need not benefit a firm. The dynamic motivations for offensive product introductions differ discretely from defensive introductions.

A Test for Collusion between a Bidder and an Auctioneer in Sealed-Bid Auctions

Allan T Ingraham September 20, 2005 Page range: 1-32

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Abstract

This paper derives a regression-based test to detect bidder-auctioneer cheating in sealed bid auctions. I apply this regression test to data from the New York City School Construction Authority auctions, an approximate one billion dollar per year auction market in which an auctioneer engaged in bidder-auctioneer cheating. Using the regression analysis to compare lots where bid rigging occurred with certainty to all other auctions allows one to conclude that bidder-auctioneer cheating significantly distorted the bid distribution. Comparing specific auctioneer lots before news of the cheating scandal became public with those after the scandal, I find significant differences in bidding, at the 10 percent level of significance, for two auctioneers. Therefore, bidder-auctioneer cheating may not have been limited to the one auctioneer charged with rigging bids.

Fatalistic Tendencies: An Explanation of Why People Don't Save

Stephen Wu September 30, 2005 Page range: 1-21

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Abstract

This paper uses data from the 2001 Survey of Consumer Finances (SCF) and the 2000 World Values Survey (WVS) to analyze the role of fatalism in determining household savings behavior. SCF respondents who feel that luck has played an important role in their financial affairs are more likely to realize their need to save, but are less likely to actually do so. Cross-country evidence from the WVS shows that those who believe they have little freedom and control over their lives are also less likely to save. The results hold after controlling for a number of demographic and behavioral factors, and are consistent across income and wealth levels.

Adjustment Costs and Irreversibility as Determinants of Investment: Evidence from African Manufacturing

Arne Bigsten, Paul Collier, Stefan Dercon, Marcel Fafchamps, Bernard Gauthier, Jan Willem Gunning, Remco Oostendorp, Catherine Pattillo, Måns Söderbom, Francis Teal October 24, 2005 Page range: 1-27

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Abstract

In this paper we investigate if the predictions of three different models of capital adjustment costs are consistent with the observed investment patterns among manufacturing firms in five African countries. We document a high frequency of zero investment episodes, which is consistent with both fixed adjustment costs and irreversibility and inconsistent with quadratic adjustment costs. We model the decision to invest using a dynamic discrete choice model and find evidence of irreversibility and not fixed costs. We finally model the investment rate as a function of the size of the capital disequilibrium. The results confirm that irreversibility is an important factor affecting the investment behaviour of African manufacturing firms. Some implications of this finding are discussed.

An Index For Venture Capital, 1987-2003

Min Hwang, John M. Quigley, Susan E. Woodward November 8, 2005 Page range: 1-43

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Abstract

In this paper we build an index of value for venture capital. Our approach overcomes the problems of intermittent, infrequent pricing of private company deals by using a repeat valuation model to build the index, and it corrects for selection bias in the reporting of values. We use a unique data set from Sand Hill Econometrics which reports 50,734 funding events, which include the contemporaneous valuations of 9,092 private equity firms disclosed 19,208 times over almost 17 years. The resulting index measures the return and risk for venture capital. Its covariance with other asset classes from 1987 through 2003 enables us to explore the role of venture capital in diversified portfolios during a period of increased importance of venture capital in the economy.

Environmental Information Provision as a Public Policy Instrument

Emmanuel Petrakis, Eftichios Sophocles Sartzetakis, Anastasios Xepapadeas November 14, 2005 Page range: 1-31

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Abstract

We examine information provision as a public policy instrument when products generate damages to consumers as well as environmental externalities. We show that information provision dominates taxation in terms of welfare, if information can be provided at low cost. This is because a uniform tax alone levies a heavier than optimal burden on informed consumers and allows the uninformed consumer to free ride partially on the informed consumers voluntary actions. If the cost of information provision is substantial, taxation is welfare superior. A policy regime that combines information provision and taxation leads to higher welfare relative to the use of either instrument alone.

Competition Policy and Exit Rates: Evidence from Switzerland

Stefan Buehler, Christian Kaiser, Franz Jaeger November 24, 2005 Page range: 1-28

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Abstract

This paper provides evidence on the relation between the intensity of product-market competition and the probability of exit. We adopt a natural experiment approach to analyze the impact of a tightening of Swiss antitrust legislation on exit probabilities. Based on a sample of more than 68,000 firms from all major sectors of the Swiss economy, we find that the exit probability of non-exporting firms increased significantly, whereas the exit probability of exporting firms remained largely unaffected. Our results support the notion that there is a positive relationship between the intensity of product-market competition and the probability of exit.

Political Variables as Instruments for the Minimum Wage

Sara Lemos December 28, 2005 Page range: 1-31

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Abstract

A number of recent empirical studies have found no evidence that the minimum wage adversely affects employment. Explanations for such non-negative estimates include new theoretical approaches, empirical identification and data issues. In this paper we examine the robustness of such estimates to concerns about bias arising from the simultaneous determination of employment and the minimum wage. We use a number of novel political variables as instruments to control for this source of endogeneity. We exploit the personal characteristics of the politicians voting on minimum wage bills, their voting behavior and their electoral process. Our main conclusion is that the weak relationship between minimum wages and employment does not appear to be driven by endogeneity.

About this journal

Objective
The B.E. Journal of Economic Analysis & Policy (BEJEAP) welcomes submissions that employ microeconomics to analyze issues in organizational economics, consumer behavior, and public policy. Articles submitted to BEJEAP can come in two formats: research papers and letters. Authors should bring to their analysis whatever microeconomic theoretical, experimental or econometric tools are helpful. We publish both empirical work and applied theory (though not more abstract forms of applied theory), and our aim is to disseminate papers that have practical implications for public policy, organizational or individual decision making.

Topics

Design of organizations and institutions
Industrial organization
Health economics
Public finance
Labour Economics
Economics of education, family, development, law, or the environment
Effects of domestic and international policy

Article formats
Research Papers, Letters

> Information on submission process