The B.E. Journal of Economic Analysis & Policy Volume 8 Issue 1

The B.E. Journal of Economic Analysis & Policy

Volume 8 Issue 1

Contents
Journal Overview

Frontiers Article

The Causal Effect of Studying on Academic Performance

Ralph Stinebrickner, Todd R. Stinebrickner June 17, 2008

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Abstract

While a substantial amount of recent attention has been paid to understanding the determinants of educational outcomes, little is known about the causal impact of the most fundamental input in the education production function - a student's study effort. In this paper, we examine the causal effect of studying on grade performance by taking advantage of unique, new data that has been collected specifically for this purpose. Important for understanding the potential impact of a wide array of education policies, the results suggest that human capital accumulation is far from predetermined at the time of college entrance.

The Market: Catalyst for Rationality and Filter of Irrationality

John A. List, Daniel L Millimet November 26, 2008

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Abstract

Assumptions of individual rationality and preference stability provide the foundation for a convenient and tractable modeling approach. While both of these assumptions have come under scrutiny in distinct literatures, the two lines of research remain disjointed. This study begins by explicitly linking the two literatures while providing insights into whether market experience mitigates one specific form of individual rationalityconsistent preferences. Using field experimental data gathered from more than 800 experimental subjects, we find evidence that the market is a catalyst for this type of rationality. The study then focuses on aggregate market outcomes by examining empirically whether individual rationality of this sort is a prerequisite for market efficiency. Using a complementary field experiment, we gathered data from more than 380 subjects of age 6-18 in multi-lateral bargaining markets at a shopping mall. We find that our chosen market institution is a filter of irrationality: even when markets are populated solely by irrational buyers, aggregate market outcomes converge to the intersection of the supply and demand functions.

Advances Article

Incompatibility, Product Attributes and Consumer Welfare: Evidence from ATMs

Christopher R. Knittel, Victor Stango January 4, 2008

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Abstract

Incompatibility in markets with network effects reduces consumers' ability to "mix and match" components offered by different sellers, but can also spur changes in product attributes that might benefit consumers. In this paper, we estimate the effects of incompatibility on consumers in a classic hardware/software market: ATM cards and machines. We find that ATM fees ceteris paribus reduce the network benefit from other banks' ATMs. However, a surge in ATM deployment accompanies the shift to surcharging. Even under conservative assumptions regarding how much of the surge is directly attributable to surcharging, greater deployment often completely offsets the harm from higher fees. The results suggest that policy discussions of incompatibility must consider not only its direct effect on consumers, but also its effect on product attributes.

Risk Attitude in Real Decision Problems

Fabrizio Botti, Anna Conte, Daniela Teresa Di Cagno, Carlo D'Ippoliti March 6, 2008

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Abstract

We use data from 298 showings of the television program "Affari Tuoi," which involves contestants making decisions between risky prospects with possible prizes of up to half a million euros, to estimate three models of decision-making under risk: Expected Utility, Rank-Dependent Expected Utility and Regret-Rejoice. We find that Regret-Rejoice does not significantly improve upon Expected Utility, while Rank-Dependent outperforms it. Interestingly, we find that the CARA specification fits significantly better than the conventionally-adopted CRRA specification. Crucially, we find a significant role for unobserved heterogeneity, implying that our estimates provide more superior estimates of risk attitude and of probability weighting than other studies.

The Effect of FDI on Job Security

Sascha O Becker, Marc-Andreas Muendler April 2, 2008

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Abstract

Novel linked employer-employee data for multinational enterprises and their global workforces show that multinational enterprises that expand abroad retain more domestic jobs than competitors without foreign expansions. Propensity-score estimation demonstrates that the foreign expansion itself is a dominant explanatory factor for reduced worker separation rates. Bounding, concomitant variable tests, and further robustness checks show competing hypotheses to be less plausible. The finding is consistent with the hypothesis that, given global wage differences, a prevention of enterprises from outward FDI would lead to more domestic job losses. FDI raises domestic-worker retention more pronouncedly among highly educated workers.

On the Optimal Allocation of Students and Resources in a System of Higher Education

James M Sallee, Alexandra M Resch, Paul N Courant June 5, 2008

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Abstract

We model the social planner's decision to establish universities and populate them with students and resources, given a distribution of student ability and a limited pool of resources for higher education. If student ability and school resources are complements, and if there is a fixed cost to establishing a school, then the optimal allocation will involve a tiered system of higher education that sorts students by ability. In contrast to previous research, we show this tiered system is optimal even in the absence of peer effects. In considering where to locate students, the planner balances the benefit of providing students with more resources against the congestion costs of overcrowding schools. Nearly identical students who are close to the margin of entry to a higher or lower tier will experience discrete gaps in education quality. In considering how many universities to establish, the planner will balance the value of more precise tailoring against the cost of establishing additional schools. The planner's inability to perfectly tailor education quality will result in both winners and losers. Our model also makes predictions about how university systems that serve different populations should vary. Larger systems will produce more per dollar of expenditures and more education per student, due to economies of scale.

Giving It Away for Free? The Nature of Job-Market Signaling by Open-Source Software Developers

Wafa Hakim Orman June 11, 2008

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Abstract

Much work has been done in recent times to answer the question of why people contribute, and continue to contribute to open-source and free software, despite the lack of immediate financial gain in most cases. Lerner and Tirole (2002) hypothesize that open-source contributions act as a form of job-market signaling they permit prospective employers to judge a person's ability directly. This paper tests the nature of this signaling using a complementarity framework. Do developers use open source software as a way to enhance the signal from a college education, or to substitute for it, in a form of learning by doing? I find evidence that they are complements, while conclusively rejecting the idea that they are substitutes.

Coping with Disaster: The Impact of Hurricanes on International Financial Flows, 1970-2002

Dean Yang June 17, 2008

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Abstract

How well do countries cope with the aftermath of natural disasters? Do international financial flows buffer countries in the wake of disasters? This paper examines the impact of hurricanes on resource flows to developing countries. Using meteorological data, I construct a time-varying storm index taking into account the fraction of a country's population exposed to storms of varying intensities. Overall, hurricanes lead to large increases in foreign aid. For other types of international financial flows, the impact of hurricanes varies according to income level. For poorer countries, hurricanes lead to increases in migrants' remittances, so that total inflows from all sources in the three years following hurricane exposure amount to roughly four-fifths of estimated damages. For richer countries, by contrast, hurricanes stimulate inflows of new lending from multilateral institutions, but offsetting declines in private financial flows are so large that the null hypothesis of zero damage replacement cannot be rejected.

Lucky Last? Intra-Sibling Allocation of Child Labor

Tatyana Chesnokova, Rhema Vaithianathan July 17, 2008

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Abstract

This paper has two objectives. First, we construct a theoretical model which explains the empirical evidence that in developing countries, first-born children are more likely to be child laborers than later-born. Second, we explore the long-run consequences of child labor regulations within our framework. In our model, credit-constrained parents use the labor income from their first-born child to fund the schooling of later-born children. In the presence of such intra-sibling effects, child labor laws which decrease work opportunities for children may backfire, increasing child labor and reducing human capital in the long run.

Technological Proximity and Exclusive Buyer-Supplier Relationships

Chrysovalantou Milliou July 30, 2008

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Abstract

This paper provides a new rationale for why some final product manufacturers develop exclusive relationships with their input suppliers, highlighting the role of investment incentives. It shows that exclusivity can encourage firms' investments in tailoring their technologies to their trading partners. This holds both for the buyer's and the supplier's investments. Furthermore, this paper argues against claims that exclusive dealing agreements are detrimental to welfare by demonstrating that their positive impact on efficiency translates into both higher consumers' surplus and total welfare.

The Internet and the Market for Daily Newspapers

Lisa M George July 31, 2008

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Abstract

A growing literature documents that electronic media draw consumers from traditional media markets. Less work examines how the internet has altered the audience for traditional media. Using zipcode-level newspaper circulation and market-level internet penetration, this paper provides evidence that the internet differentially attracts younger, educated, urban individuals away from daily newspapers. Greater internet penetration is associated with higher newspaper circulation among blacks and Hispanics, who thus far are less likely to connect. Evidence suggests the spread of the internet is also associated with changes in newspaper coverage, with greater emphasis on minorities, education, crime and investigative reporting.

Optimal Policy with Heterogeneous Preferences

Louis Kaplow September 12, 2008

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Abstract

Optimal policy rulesincluding those regarding income taxation, commodity taxation, public goods, and externalitiesare typically derived in models with homogeneous preferences. This article reconsiders many central results for the case in which preferences for commodities, public goods, and externalities are heterogeneous. When preference differences are observable, standard second-best results in basic settings are unaffected, except those for the optimal income tax. Optimal levels of income taxation may be higher, the same, or lower on types who derive more utility from various goods, depending on the nature of preference differences and the concavity of the social welfare function. When preference differences are unobservable, all policy rules may change. The determinants of even the direction of optimal rule adjustments are many and subtle.

A Representation Index: Measuring the Representation of Minorities in the Income Distribution

Krishna Pendakur, Ravi Pendakur, Simon D. Woodcock October 27, 2008

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Abstract

The existence of glass ceilings and sticky floors suggests that disadvantaged workers will be under-represented in some parts of the income distribution, and over-represented in others. We present a representation index that measures the prevalence of population subgroups in different regions of the income (or any other) distribution. Our representation index is easily generalized to condition on characteristics (such as age, education, etc). Further, it generalizes naturally to an index of the severity (or cost) of under-representation to group members, which is based on dollar-weighted representation. Both representation and severity indices are easily calculated via existing regression techniques. We illustrate the approach using Canadian Census data on the earnings of ethnic minorities.

Starting School at Four: The Effect of Universal Pre-Kindergarten on Children's Academic Achievement

Maria D Fitzpatrick November 18, 2008

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Abstract

Universal Pre-Kindergarten (Pre-K) programs differ from widely known and extensively evaluated programs like Head Start and Perry Preschool because access is open to all children of the appropriate age. To estimate the intent-to-treat effects of these programs on the long term educational achievement of children, I use a differences-in-differences framework and individual-level data from the National Assessment of Educational Progress. For disadvantaged children residing in small towns and rural areas, Universal Pre-K availability increases both reading and mathematics test scores at fourth grade as well as the probability of students being on-grade for their age. Increases in some measures of achievement also were seen among other groups, though the patterns were less uniform across outcome measures. The results correspond with other work showing children living in less densely populated areas are those most likely to enroll in preschool because of the program's availability.

Contributions Article

The Economics of Workaholism: We Should Not Have Worked on This Paper

Daniel S. Hamermesh, Joel B Slemrod January 16, 2008

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Abstract

A large literature examines the addictive properties of such behaviors as smoking, drinking alcohol, gambling and eating. We argue that for some people addictive behavior may apply to a much more central aspect of economic life: working. Although workaholism raises some of the same health-related concerns as other addictions, compared to most of the more familiar addictions it is more likely to be a problem of higher-income individuals and is more likely to generate negative spillovers onto individuals around the workaholic. Using the Retirement History Survey and the Panel Study of Income Dynamics, we show that high-income, highly educated people exhibit behavior that is consistent with workaholism with regard to retiringthey are more likely to postpone earlier plans for retirement. The theory and evidence suggest that the presence of workaholism calls for a more progressive income tax system than otherwise, although other more targeted policies may be part of optimal policy.

Millers, Commission Agents and Collusion in Grain Markets: Evidence from Basmati Auctions in North India

A. Banerji, J.V. Meenakshi February 3, 2008

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Abstract

This paper undertakes structural estimation of asymmetric auction models in a market for basmati, and detects the presence of a cartel consisting of a large (in market share) local miller and commission agents purchasing for large distant millers. The contracts between the distant millers and their commission agents help to explain the specific form that collusion takes. Simulations indicate that (i) the cartel gains considerably by colluding, over the competitive outcome; (ii) however, sellers (farmers) do not lose significantly under collusion when the commission agents bid. The paper also shows that efficient collusion, the form of collusion commonly assumed in the literature, does not explain the data well.

Resources for Sale: Corruption, Democracy and the Natural Resource Curse

Erwin Bulte, Richard Damania February 13, 2008

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Abstract

A puzzling piece of empirical evidence suggests that resource-abundant countries tend to grow slower than their resource-poor counterparts. We attempt to explain this phenomenon by developing a lobbying game in which rent seeking firms interact with corrupt governments. The presence or absence of political competition, as well as the potential costs of political transitions, turn out to be key elements in generating the 'resource curse.' These variables define the degree of freedom that incumbent governments have in pursuing development policies that maximize surplus in the lobbying game, but put the economy off its optimal path.

Partners in Crime: Collusive Corruption and Search

Munirul Haque Nabin, Gautam Bose April 28, 2008

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Abstract

This paper analyzes corruption as a collusive act which requires the participation of two willing partners. An agent intending to engage in a corrupt act must search for a like-minded partner. When many people in the economy are corrupt, such a search is more likely to be fruitful. Thus when an agent engages in a search, he raises the net benefit of searching for other similar agents in the economy, creating an externality. This introduces a non-convexity in the model, which consequently has multiple equilibria. The economy can be in stable equilibrium with a high or low level of corruption.Starting from the high-corruption equilibrium, a sufficient increase in vigilance triggers a negative cascade, leading the economy to a new equilibrium in which no agent finds it profitable to search for corrupt partners. The no-corruption equilibrium continues to be stable if vigilance is then relaxed. This suggests that the correct way to deal with corruption is to launch a ``big push'' with large amounts of resources. Once the level of corruption declines, these resources can be withdrawn.

An Empirical Study of Happiness in Italy

Vincenzo Scoppa, Michela Ponzo June 19, 2008

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Abstract

This study analyzes the determinants of individual subjective well-being (happiness) in Italy by estimating microeconometric happiness equations in order to examine the effects of socio-demographic characteristics and economic conditions on subjective evaluations of happiness. Consistent with the findings in other advanced countries we find that income and wealth increase happiness and that unemployment is extremely bad for subjective well-being. In addition, we obtain some novel and interesting results for Italy including the following: income obtained by public transfers has a limited impact on subjective well-being; education increases happiness, even when controlling for income; Southern residents and individuals living in large cities are less happy; and social capital makes people happier. Finally, individuals care about relative income, in the sense that their happiness is negatively influenced by the income of others in their group of reference. Our results show that several non-economic variables are extremely important for subjective well-being.

Fairness in Extended Dictator Game Experiments

Felix Oberholzer-Gee, Reiner Eichenberger July 7, 2008

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Abstract

We test the robustness of behavior in dictator games by offering allocators the choice to play an unattractive lottery. With this lottery option, mean transfers from allocators to recipients substantially decline, partly because many allocators now keep the entire endowment for themselves (without playing the lottery). In our standard dictator game, the median transfer amounts to 41% of the dictators' endowment. Once the lottery option is present, the median transfer falls to zero. Introducing an additional unattractive choice thus leads subjects to violate the weak axiom of revealed preference (WARP).

Income Insecurity and Youth Emancipation: A Theoretical Approach

Ana Fernandes, Sascha O Becker, Samuel Bentolila, Andrea Ichino July 17, 2008

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Abstract

In this paper, we propose a theoretical model to study the effect of income insecurity of parents and offspring on the child's residential choice. Parents are partially altruistic toward their children and will provide financial help to an independent child when her income is low relative to the parents'. We find that children of more altruistic parents are more likely to become independent. However, first-order stochastic dominance (FOSD) shifts in the distribution of the child's future income (or her parents') have ambiguous effects on the child's residential choice. Parental altruism is the very source of ambiguity in the results. If parents are selfish or the joint income distribution of parents and child places no mass on the region where transfers are provided, a FOSD shift in the distribution of the child's (parents') future income will reduce (raise) the child's current income threshold for independence.

Pay Peanuts and Get Monkeys? Evidence from Academia

Glenn Boyle July 18, 2008

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Abstract

In most countries, academic pay is independent of discipline, thus ignoring differences in labor market opportunities. Using some unique data from a comprehensive research assessment exercise undertaken in one such country -- New Zealand -- this paper examines the impact of discipline-independent pay on research quality. I find that the greater the difference between the value of a discipline's outside opportunities and its New Zealand academic salary, the weaker its research performance in New Zealand universities. The latter apparently get what they pay for: disciplines in which opportunity cost is highest relative to the fixed compensation are least able to recruit high-quality researchers. Paying peanuts attracts mainly monkeys.

Entry and Exit in the Nonprofit Sector

Teresa D. Harrison, Christopher A Laincz July 21, 2008

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Abstract

We study the entry and exit dynamics of nonprofit public charities using 1989-2003 tax return data. The observed patterns can be understood using a dynamic industry model based on Jovanovic (1982) that incorporates profit-deviation and a non-redistribution constraint. Both features generate a high exit threshold which implies high net entry rates and low exit rates. The data reveal that nonprofit gross entry rates are lower than those of for-profits in services, while extremely low exit rates (across both sectors and time) result in net entry rates nearly 3 times larger than that of for-profit firms. We find that the behavior of new public charities is remarkably similar to that found in studies of private firms (e.g. new firms begin smaller than the industry mean, but grow faster). However, exit patterns diverge sharply. Besides relatively low exit rates, the survival rate of new nonprofit firms greatly exceeds those found in studies on services and manufacturing. In addition we find that the hazard rate of exit declines with age and size, and with size conditional on age.

Discrimination as a Competitive Device: The Case of Local Television News

Caitlin Knowles Myers August 7, 2008

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Abstract

Previous studies of discrimination have explored the role that customer prejudice may play in lowering the marginal revenue product of minority employees and, hence, lowering their equilibrium wages. I observe that variation in these types of customer preferences creates an incentive for firms to respond strategically by engaging in product differentiation via the characteristics of their employees. Analysis of data collected for local television news stations supports the predictions of this model of "competitive discrimination." There is a negative correlation between the racial, gender, and age compositions of competing news stations. Moreover, Nielsen ratings for station broadcasts indicate that viewers of stations with more black employees are less discriminatory than viewers of stations with fewer blacks. A similar result is found when examining the age and gender composition of employees.

Predicting Resource Policy Outcomes via Meta-Regression: Data Space, Model Space, and the Quest for 'Optimal Scope'

Klaus Moeltner, Randall S Rosenberger August 13, 2008

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Abstract

Resource-managing agencies are increasingly relying on secondary data to predict economic benefits for planned policy interventions. This `transfer of benefits' is often based on a quantitative synthesis of aggregate results for similar past interventions via Meta-Regression Models. However, this approach is generally plagued by the paucity of available studies and related small sample problems. A broadening of scope of the Meta-Regression Model by adding data from ``related, yet different" contexts or activities may circumvent these issues, but may not necessarily enhance the efficiency of transfer functions if the different contexts do not share policy-relevant parameters. We illustrate how different combinations of contexts can be interpreted as `data spaces' which can then be explored for the most promising transfer function using Bayesian Model Search techniques. Our results indicate that model-averaged benefit predictions for scope-augmented data spaces can be more robust and efficient than those flowing from the baseline context and data.

Functional Distribution, Land Ownership and Industrial Takeoff: The Role of Effective Demand

Ennio Bilancini, Simone D'Alessandro August 19, 2008

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Abstract

In this paper we analyse how the distribution of land property rights affects industrial takeoff and aggregate income through its impact on effective demand. We apply a modified version of the model provided in Murphy et al. (1989, QJE) which allows us to analyse the role of land distribution when it is independent of the distribution of firm ownership. We extend the result of Murphy et al. (1989, QJE) by showing that industrialization and income depend non-monotonically on the distribution of land and by demonstrating that this result is due to the way land distribution affects the distribution of profits among firms. Moreover, we show that there may be a tradeoff between industrialization and income, the latter being associated with a distribution of land which is more equal than that associated with maximum industrialization.

Growth and Inequality in Closed and Open Economies: The Role of the Product Cycle

Priya Ranjan September 10, 2008

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Abstract

The product cycle literature suggests that new goods have a higher skill intensity in the early phase of production, which declines once the production process becomes standardized. Using this insight it is shown how an increase in the rate of neutral technological progress, which frees up resources tied in the production of existing goods, leads to increased production of skill intensive new goods and consequently an increase in wage inequality. When technological progress is exogenous, a decrease in skill endowment or trade liberalization with a skill scarce country increases wage inequality but leaves the composition of production between new and standardized goods unaltered. When the rate of technological progress depends on research effort, trade between a skill-abundant Northern economy and a skill-scarce Southern economy can raise wage inequality in both countries and increase productivity growth in the latter. North-North trade increases both wage inequality and productivity growth.

Before and After: Gender Transitions, Human Capital, and Workplace Experiences

Kristen Schilt, Matthew Wiswall September 11, 2008

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Abstract

We use the workplace experiences of transgender people individuals who change their gender typically with hormone therapy and surgery to provide new insights into the long-standing question of what role gender plays in shaping workplace outcomes. Using an original survey of male-to-female and female-to-male transgender people, we document the earnings and employment experiences of transgender people before and after their gender transitions. We find that while transgender people have the same human capital after their transitions, their workplace experiences often change radically. We estimate that average earnings for female-to-male transgender workers increase slightly following their gender transitions, while average earnings for male-to-female transgender workers fall by nearly 1/3. This finding is consistent with qualitative evidence that for many male-to-female workers, becoming a woman often brings a loss of authority, harassment, and termination, but that for many female-to-male workers, becoming a man often brings an increase in respect and authority. These findings challenge the omitted variables explanations for the gender pay gap and illustrate the often hidden and subtle processes that produce gender inequality in workplace outcomes.

Love on the Rocks: Domestic Violence and Alcohol Abuse in Rural Mexico

Manuela Angelucci October 26, 2008

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Abstract

I use experimental data for the evaluation of Oportunidades to study the determinants of domestic violence and alcohol abuse. The program, a combination of cash transfers to women and human capital investments, decreases husbands' alcohol abuse by 15% and changes their aggressive behavior depending on transfer size, husbands' education, and spousal age gap. While small transfers decrease violence by 37% for all households, large transfers increase the aggressive behavior of husbands with traditional views of gender roles, probably because their wife's entitlement to a large transfer threatens their identity. This evidence rejects standard unitary, collective, and bargaining models for this latter group of households. It also shows that, while targeting women as recipients of micro-credit or other welfare programs may have additional beneficial effects by reducing alcoholism and domestic violence in most households, the risk of violence may increase for some.

Entrepreneurial First Movers, Brand-Name Fast Seconds, and the Evolution of Market Structure

George Norman, Lynne Pepall, Daniel J Richards October 29, 2008

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Abstract

We analyze the interaction between entrepreneurs who open new markets and established, `fast second' firms to develop them. We use a spatially differentiated model in which early entry is traditionally excessive. However, the anticipated later entry by the `fast second' brand can potentially reverse this result. We show that conditions that make for the most initial competitive market are precisely those that result in the least optimal amount of initial entry and in which entrepreneurial entry is typically well below the efficient level. We also show that asymmetric oligopoly is a natural market equilibrium.

Crossing the Line: Direct Estimation of Cross-Border Cigarette Sales and the Effect on Tax Revenue

Lesley Chiou, Erich Muehlegger December 6, 2008

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Abstract

Differences in excise taxes across jurisdictions create incentives for consumers to cross the border and to purchase in lower-tax jurisdictions. This paper introduces a discrete choice model to examine tax avoidance and state border crossing in the market for cigarettes. We exploit a rich dataset of consumer location choices and demographics to estimate a consumer's tradeoff between distance and price when choosing a location to maximize utility. Using the estimates from our location and demand models, we reconsider a recent public policy issue among states and simulate tax avoidance under alternative cigarette excise tax levels.

Corruption and Openness

Zvika Neeman, M. Daniele Paserman, Avi Simhon December 12, 2008

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Abstract

We report an intriguing empirical observation. The relationship between corruption and output depends on the economy's degree of openness: in open economies, corruption and GNP per capita are strongly negatively correlated, but closed economies display no relationship at all. This stylized fact is robust to a variety of different empirical specifications. In particular, the same basic pattern persists if we use alternative measures of openness, if we focus on different time periods, if we restrict the sample to include only highly corrupt countries, and if we restrict attention to specific geographic areas or to poor countries. We find that the degree of financial openness is primarily what determines whether corruption and output are correlated. Moreover, corruption is negatively related to capital accumulation in open economies, but not in closed economies. We present a model, consistent with these findings, in which the main channel through which corruption affects output is capital drain.

Informality Traps

Yusufcan Masatlioglu, Jamele Rigolini December 17, 2008

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Abstract

Despite large deregulation efforts, informal economic activity still represents a large share of GDP in many developing countries. In this paper we look at incentives to reduce informal activity when capitalists in the formal sector regulate entry. We consider a dual economy with a formal sector employing educated workers and an informal sector with unskilled workers. We show that high costs of education make labor migration and profits in the formal sector an increasing function of its size. Therefore, incentives to allow capital to be reallocated to the formal sector increase with the size of the formal economy, and unless the formal sector has reached a "critical mass" countries remain in a highly informal equilibrium. We conclude by reviewing policies that can push countries with large informal economies towards formalization.

Topics Article

Conflict and Production: An Application to Natural Resources

Katharina Wick January 10, 2008

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Abstract

I present a Stackelberg model of conflict, in which contestants have limited endowments to be put in two separate sectors, thus incorporating salient features of many conflicts. The model is applied to the case of conflict over natural resources. Consistent with amounting empirical evidence regarding a so-called "resource curse," I find that the relation between conflict intensity and resource rents is non-monotonous, and that the economy's income growth rate may be negatively affected by resource abundance.

Strategic Behavior and Social Norms in Tipped Service Industries

Ofer H Azar March 26, 2008

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Abstract

Tipping is a multi-billion-dollar phenomenon that traditional economic theory finds hard to explain. Why do people leave money as tips when service has already been provided? Two main potential reasons are that tipping is a social norm, and a strategic behavior aimed to assure good future service. A game-theoretical model is developed which allows the analysis of how tipping behavior should depend on patronage frequency if strategic motivations affect tipping. Thus, the model provides predictions that can be combined with empirical data on tipping behavior to answer the fundamental question, why do people tip?

Trade Liberalization and New Exporters' Size: A Test of Heterogeneous Firm Models

Rosen Marinov, Nadia Rocha, Virginia DiNino May 1, 2008

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Abstract

This paper tests an empirical implication of heterogeneous firm models along the lines of Melitz (2003) in the context of falling trade costs. Using the EU's intensive liberalization phase (1993-2002) as a natural experiment, we investigate freer trade's impact on the frequency of market reorientation across the productivity distribution of active firms to shed light on the presence of a minimum productivity (size) threshold for profitable sales abroad. Contrary to the models' predictions, firms that switch from non-exporting to exporting over the studied period are not concentrated in a particular size range. Our findings, based on a rich data set of French manufacturing enterprises, suggest a scope for fine-tuning of the theoretical framework.

An Evolutionary Race to the Top: Trade, Oligopoly and Convex Pollution Damage

Matthew McGinty July 17, 2008

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Abstract

A two nation, two sector oligopoly trade model is presented in which one sector creates a negative production externality. Firms switch sectors in response to profit differentials until these are exhausted in the long run evolutionary equilibrium (EE). Under autarky, the optimal EE pollution tax is greater than standard partial equilibrium analysis since the output distortion associated with the tax is mitigated by firms migrating to the non-taxed sector. In a free trade area the pollution haven hypothesis is obtained when nations choose exogenous tax rates that differ. However, with endogenous taxation a prisoners' dilemma is obtained. The Nash equilibrium of the tax game exceeds the social planner's tax, generating a race to the top.

Determinants of Business Tax Compliance

Kanybek D Nur-tegin July 17, 2008

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Abstract

This paper provides empirical evaluation of a number of determinants of tax evasion by firms. The analysis includes both standard determinants, such as tax rates and probability of detection, and non-traditional factors, such as trust in government, compliance costs, and corruption. Firm-level survey data from 4,538 firms in 23 transition economies are analyzed. One of the main findings is that fighting corruption is more important in deterring tax evasion than conventional measures.

Entry into a Network Industry: Consumers' Expectations and Firms' Pricing Policies

Angelo Baglioni July 23, 2008

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Abstract

Entry into a network industry is modeled focusing on consumers' expectations formation through higher order beliefs. Equilibrium expectations are endogenous and depend on prices, acting as a coordination device among consumers. The model is able to account for aggressive pricing policies by the incumbent and by the entrant. Both exclusion and entry are possible outcomes (depending on parameter values). The threat of entry is beneficial to consumers, even when unsuccessful.

Effects of Electoral Rules, Political Competition and Corruption on the Size and Composition of Government Consumption Spending: An Italian Regional Analysis

A. Laura Baraldi July 28, 2008

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Abstract

This paper analyses how proportionality of the electoral system, political competition and corruption affect the total amount of Italian regional public consumption expenditure and alter the public budget structure. The Italian case is particular: from 1993 the country underwent a change in the electoral system (from proportional to majoritarian) and, at the same time, a campaign was waged against the corruption of public bureaucrats. The aim of this work is to study the political determinants of public consumption spending, and more specifically the role played by political institutions (meaning electoral rules), the intensity of political competition in the "votes' market" and the corruption of public bureaucracy. We used panel data for 20 Italian regions from 1980 to 2003 in order to estimate a quantity effect and an allocation effect of the degree of proportionality of the electoral system, political competition and corruption of public bureaucracy on public consumption spending. The quantity effect of the proportionality of the electoral system and of the degree of political competition is positive; the same holds for corruption, meaning that corruption increases the total level of public spending. Analysis of the allocation effect shows that corruption, rather than the electoral system and political competition, alters the public budget structure towards social services and securities and general service sectors instead of education and health, leading to important policy implications.

Too Few Cooks Spoil the Broth: Division of Labor and Directed Production

Marisa Ratto, Wendelin Schnedler August 1, 2008

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Abstract

How can a manager influence workers' activity, while knowing little about it? This paper examines a situation where production requires several tasks, and the manager wants to direct production to achieve a preferred allocation of effort across tasks. However, the effort that is required for each task cannot be observed, and the production result is the only indicator of worker activity. This paper illustrates that in this situation, the manager cannot implement the preferred allocation with a single worker. On the other hand, the manager is able to implement the preferred allocation by inducing a game among several workers. Gains to workers from collusion may be eliminated by an ability-dependent, but potentially inefficient, task assignment. These findings provide a new explanation for the division of labor, and bureaucratic features such as ``over"-specialization and ``wrong" task allocation.

The Employment Effects of Mergers in a Declining Industry: The Case of South African Gold Mining

Alberto Behar, James Hodge August 7, 2008

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Abstract

With data from the South African gold mining industry, we find evidence consistent with theories that mergers and acquisitions allow for the shedding of excess labor. Mergers are arguably exogenous in our sample, while an industry in decline can provide a good setting for testing the theories. The data clearly portray rises in real wages and falling employment after the end of apartheid. We find evidence of a significant negative effect of mergers/acquisitions on employment. The magnitude is similar to the effect in Continental Europe and larger than the effect in the United States. This supports the view that negative employment impacts are more likely in rigid labor markets.

Environmental Policy and Uncertain Arrival of Future Abatement Technology

Andreas von Döllen, Till Requate August 11, 2008

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Abstract

We study long-term incentives for regulated polluting firms to invest in advanced abatement technologies when some new technology is available but even better technology is expected for the future. Firms can invest only once. We find that, depending on the cost of adoption, all possible investment patterns can occur in social optimum. Further, a regulator who anticipates the arrival of the new technology can decentralize the socially optimal allocations by announcing either a Pigouvian tax or tradable permits and by setting ex post optimal policy levels after firms have invested.

Political Altruism of Transboundary Water Sharing

Anik Bhaduri, Edward B Barbier August 18, 2008

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Abstract

In the paper, using a political altruism model, we make an attempt to explain why an upstream country might agree to a treaty that recognizes and enforces the water claims of a downstream country. In a natural extension of the standard economic model, it is possible to explain the above phenomena, by allowing for altruism between countries. The altruistic concerns of the countries are dependent on other country's willingness to have a good political relationship. If both the countries maintain favorable political relations with one another, then the upstream country will care about the impacts of its water diversion on the downstream country's welfare. The paper also illustrates the case of water sharing of the Ganges River between India and Bangladesh. The Ganges River, like many other rivers in the world, ignores political boundaries. In Bangladesh, the final downstream country along the Ganges, freshwater availability depends on the share of water diverted by the upstream country, India. For decades, India and Bangladesh failed to resolve the water-sharing issues of the Ganges River. However, in 1996, both India and Bangladesh signed a major new agreement on water sharing (Ganges River Treaty) in an effort to resolve the dispute. Using the political altruism model developed in the paper, we examine why despite needing more water than is available under the treaty, India has adapted to shortages instead of resorting to conflict with Bangladesh.

Equilibrium State Aid in Integrating Markets

Stephen Martin, Paola Valbonesi August 18, 2008

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Abstract

We present a model of the impact of state aid on equilibrium market structure and on market performance in an integrating market when the process of integration is driven by consumer inertia. In a partial equilibrium model, it is an equilibrium for governments to grant state aid, even though this reduces common market welfare.

Optimal Fiscal Policy When Migration Is Feasible

Filippo Occhino August 27, 2008

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Abstract

This paper investigates how the feasibility of migration affects governments' optimal fiscal policies. We assume that households migrate toward economies where their welfare is higher, governments choose taxes and public expenditures to maximize a weighted sum of the households' welfare, welfare is increasing in public expenditures, and only distortionary labor income taxes are available. In isolated economies, the optimal fiscal policy implies that some households are net fiscal contributors, while other households are net fiscal beneficiaries. When households can migrate, however, governments compete for the households which are net fiscal contributors, and modify the fiscal policy in their favor, lowering their taxes and net fiscal contribution, and increasing their welfare. The magnitude of the effect increases with the sensitivity of migration to welfare. In the limiting case of free mobility, all households are zero net fiscal contributors. As to the patterns of migration, the model predicts that, with high migration costs, all households migrate toward the same high-productivity countries, which benefits low-productivity households, whereas with low migration costs, households with different productivities migrate toward different countries, which benefits high-productivity households.

Dynamic Scoring in the Ramsey Growth Model

Ergete Ferede September 10, 2008

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Abstract

This paper extends the Mankiw and Weinzierl (2006) model and examines the revenue effects of capital and labor income tax cuts under alternative financing regimes. Our analysis suggests that the revenue losses from capital and labor income tax cuts are the highest when the tax cuts are productive spending-financed and the lowest when transfer payments are used to finance the tax cuts. For plausible parameter values consistent with the US economy, we find that about 47 percent of a transfer-financed capital income tax cut is self-financing. The corresponding result for a productive spending-financed capital income tax cut is only 6 percent.

Lobbying and Contract Delegation in Public Procurement

Bernd Theilen September 10, 2008

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Abstract

Interest groups exert influence on legislators' decisions about how to organize the contracting process in public procurement. Traditionally, centralized contracting structures have been favored to avoid allocative inefficiency. However, legislators have recently started to allow more and more contract delegation in public procurement projects. Different interest groups argue in favor and against this tendency. The objective of this paper is to judge from a normative perspective what socially efficient contracting structures are and from a positive perspective what contracting structure we can expect to find as equilibria of an endogenous lobby formation game. From the normative perspective, it is shown that both contracting structures can be socially efficient. Furthermore, the conditions under which a certain contracting structure is socially superior are identified. From the positive perspective the main result shows that we can have equilibria of the lobby formation game with socially efficient contracting structures and with socially inefficient contracting structures. Again, the circumstances under which the different equilibria occur are identified.

Measuring Hypothetical Bias in Choice Experiments: The Importance of Cognitive Consistency

Olof Johansson-Stenman, Henrik Svedsäter September 18, 2008

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Abstract

A choice experiment eliciting environmental values with both real and hypothetical trade-offs is set up in order to test for hypothetical bias. A larger hypothetical bias was found in a between-subject than in a within-subject design, using otherwise identical scenarios, which can explain previous diverging results in the literature. We argue that people strive for consistency between their attitudes and behaviors, leading them to act in ways that correspond with their prior hypothetical statements. People hence seem to prefer to do what they say they would do, although this may not always reflect their true preferences regarding the good being valued.

The Effect of Trade Facilitation on Sectoral Trade

Inma Martinez-Zarzoso, Laura Márquez-Ramos September 29, 2008

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Abstract

This paper aims to analyse the effect of trade facilitation on sectoral trade flows. We use data from the World Bank's Doing Business Database on the fees associated with completing the procedures to export or import goods in a country, on the number of documents needed and on the required time to complete all the administrative procedures to import and export. An augmented gravity equation is estimated for 13 exporters and 167 importers using a number of estimation techniques, namely OLS, PPML and the Harvey model. A common result is that trade flows increase by lowering transport costs and the number of days required to trade. The outcome supports multilateral initiatives, as that in the WTO, which encourages countries to assess their trade facilitation needs and priorities and to improve them. The measures adopted will not only benefit the country that improves trade facilitation, but also it's trading partners.

After-School Supervision and Children's Cognitive Achievement

David M. Welsch, David M. Zimmer December 12, 2008

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Abstract

This paper estimates the relationship between after-school supervision and cognitive achievement using a nationally-representative sample of children. The topic has important public policy implications due to the large role assumed by the government in providing childcare. The effects of family and nonfamily supervision are considered separately. Estimates suggest that adult supervision, regardless of whether it is provided by a family or nonfamily member, is not directly related to a child's cognitive performance. Instead, children who are likely to receive after-school adult supervision from a family member possess unmeasured personal- or family-specific traits that induce improved cognitive performance. In contrast, children who are likely to receive supervision from nonfamily members possess unmeasured traits that lead to lower cognitive outcomes.

Does Crime Affect Economic Decisions? An Empirical Investigation of Savings in a High-Crime Environment

Joao M De Mello, Eduardo Zilberman December 19, 2008

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Abstract

While most economic studies of crime have examined the determinants of criminal activity, this paper asks the reverse question: how does crime affect economic behavior? We study the relationship between crime and savings in the cities of São Paulo, a wealthy but crime-ridden state in Brazil. Our empirical results suggest that property crime is associated with an increase in savings. However, we do not observe a relationship between violent crime and savings, findings that are consistent with the theoretical explanation as to why crime induces thriftiness. These results are robust to an extensive sensitivity analysis that includes: 1) the inclusion of a large set of demographic covariates when examining cross-city variation; 2) accounting for city and period fixed effects when studying cross-city variation over time; 3) accounting for sample selection; and 4) splitting the sample by population size and income. We provide evidence that the association is not driven by reallocation towards bank deposits in general, which are safer assets in high-crime environments. Finally, we find a similar impact using household consumption and savings data.

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

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