The B.E. Journal of Economic Analysis & Policy

Published by De Gruyter

Volume 13 Issue 2 -

October 2013

Issue of The B.E. Journal of Economic Analysis & Policy

Contents
Journal Overview

Masthead

October 17, 2013

Masthead

Page range: i-vi

Advances

August 1, 2013

When Does Inter-School Competition Matter? Evidence from the Chilean “Voucher” System

Francisco Gallego

Page range: 525-562

Abstract

I investigate the effects of voucher-school competition on educational outcomes. I test whether voucher-school competition (1) improves student outcomes and (2) has stronger effects when public schools face a hard-budget constraint. Since both voucher-school competition and the degree of hardness of the budget constraint for public schools are endogenous to public school quality, I exploit (i) the interaction of the number of Catholic priests in 1950 and the institution of the voucher system in Chile in 1981 as a potentially exogenous determinant of the supply of voucher schools and (ii) a particular feature of the electoral system that affects the identity of the mayors of different counties (who manage public schools) as a source of exogenous variation in the degree of hardness of the public schools’ budget constraints. Using this information, I find that (1) an increase of one standard deviation of the ratio of voucher-to-public schools increases test scores by just around 0.10 standard deviations; and (2) the effects are significantly bigger for public schools facing more binding minimum enrollment levels.

August 10, 2013

Investment, Dynamic Consistency and the Sectoral Regulator’s Objective

Duarte Brito, Pedro Pereira, João Vareda

Page range: 563-594

Abstract

This article explores the possibility of distorting the regulator’s objective function as a way of overcoming the dynamic consistency problem of regulatory policy toward investment. We derive general conditions under which having the legislator distort the regulator’s objective function away from social welfare allows increasing the range of parameter values for which it is possible to induce socially desirable investment. In particular, we show that when the regulator cannot commit to a regulatory policy, the legislator should give a relatively higher weight to the incumbent’s profit in the regulator’s objective function, if the incumbent invests, and a relatively higher weight to consumer surplus, if the incumbent does not invest.

Contributions

October 9, 2013

Vertical Contracts and Mandatory Universal Distribution

Larry S. Karp, Jeffrey M. Perloff

Page range: 595-626

Abstract

An upstream monopoly that provides a new good to a downstream oligopoly might prefer to sell to a single rather than to multiple downstream firms. For example, Apple initially sold its iPhone through one vendor. If a monopoly uses a single vendor, the government may impose a mandatory universal distribution (MUD) requirement that forces the monopoly to sell to all downstream vendors. However, if the income elasticity of demand for the new good is greater than the income elasticity of the existing generic good, the MUD requirement leads to a higher equilibrium price for both the new good and the generic and lowers consumer welfare.

September 6, 2013

Ticket Pricing and Scalping: A Game Theoretical Approach

Nelson Sá, Evsen Turkay

Page range: 627-653

Abstract

Ticket scalping is frequently related to the economic puzzle of underpricing by promoters. It is also disputed whether event promoters benefit from scalper participation or not. Our article explores two questions: can promoters benefit from scalpers’ activities and what are the resulting consumer welfare effects? We address these questions by developing a three period game where the secondary market is supported by an auction mechanism, interacting with primary market decisions. We find that participation by scalpers can lead to underpricing in the primary market and that this may benefit small or credit-constrained promoters. This requires the scalper’s discount factor to be higher than the promoter’s discount factor. The necessary premium on the discount factor increases with the fraction of early buyers and decreases with market size. Finally, the effect of scalper participation on aggregate consumer welfare is shown to be positive for a large enough market size or discount rate for the scalper.

September 26, 2013

Loyalty Discounts

Uğur Akgün, Ioana Chioveanu

Page range: 655-685

Abstract

This article analyses the use of loyalty inducing discounts in vertical supply chains. An upstream supplier and a competitive fringe sell differentiated products to a retailer who has private information about the stochastic demand. We compare the market outcomes, when the supplier uses two-part tariffs (2PT), all-unit quantity discounts (AU), and market-share discounts (MS). We show that the retailer’s risk attitude affects supplier’s preferences over these pricing schemes. When the retailer is risk neutral, it bears all the risk and the three schemes lead to the same outcome. When the retailer is risk averse, a 2PT performs the worst from the supplier’s perspective, but it leads to the highest welfare. For a wide range of parameter values (but not for all), the supplier prefers MS to AU. By limiting the retailer’s product substitution possibilities, MS makes the demand for the manufacturer’s product more inelastic. This reduces the amount (share of total profits) the supplier needs to leave to the retailer for the latter to participate in the scheme.

July 3, 2013

Age, Human Capital, and the Quality of Work: New Evidence from Old Masters

Thomas Bayer, John Page, Yaron Raviv, Joshua Rosett

Page range: 687-708

Abstract

The links between individual ability, human capital investment, and quality of output are generally hard to examine because in most situations output results from multiple inputs and often through complex contracting processes. We overcome these problems by examining life-cycle artistic output quality as reflected in art auction prices. First, we observe an inverted U-shaped age-quality of work profile similar to the conventional age–wage profile. Second, we find that the degree of concavity increases for those with higher native ability. Third, we find that working for a patron rather than selling directly to the market is associated with a flatter age profile. Fourth, we find evidence that formal education increases the concavity of the age-quality of work profile. These results are consistent with the theory and demonstrate that artists respond to incentives to invest in human capital.

July 6, 2013

Effects of the Endogenous Scope of Preferentialism on International Goods Trade

Peter Egger, Georg Wamser

Page range: 709-731

Abstract

Previous empirical research has assumed that goods trade responds to goods trade preferentialism only, while other forms of preferentialism — such as services trade or investment preferentialism — are irrelevant for goods trade. This article provides novel evidence for the gains from a broader scope of preferentialism (in terms of the number of dimensions covered: goods, services, and investment) at the intensive and extensive country margins of bilateral goods trade.

July 24, 2013

Fiscal Decentralization and Environmental Infrastructure in China

Antung Liu, Junjie Zhang

Page range: 733-759

Abstract

This article provides new evidence that fiscal decentralization has supported economic development by incentiving cities to provide more sewage infrastructure. As a result of the 1994 tax reform, Chinese cities retained different shares of their value-added tax (VAT). Exploiting the persistence of this sharing system, we use the VAT share in 1995 as an instrument for the present fiscal incentives. We find that cities with higher fiscal incentives built significantly more sewage treatment capacity between 2002 and 2008. This result suggests that fiscal incentives can play a strong role in the development of city-level infrastructure.

August 6, 2013

Declining Equivalence Scales and Cost of Children: Evidence and Implications for Inequality Measurement

Fabrizio Balli, Silvia Tiezzi

Page range: 761-782

Abstract

This article estimates expenditure-dependent equivalence scales for Italian couples with and without children. Following Donaldson and Pendakur (2006), the generalised absolute equivalence-scale exactness (GAESE) restrictions are incorporated into a translated quadratic almost ideal demand system. We obtain declining-with-expenditure equivalence scales, a pattern that tends to strengthen when the number of children increases. Thus, scale economies in current consumption are lower for families with poor expenditure capacities. We also show that families living in the South bear a substantial additional cost to achieve the same well-being of those living in the North. Finally, we find that ignoring the declining with expenditure pattern may involve a relevant understatement of measured inequality.

August 10, 2013

Political Parties, Candidate Selection, and Quality of Government

Fernando M. Aragón

Page range: 783-810

Abstract

This article explores empirically the relation between political parties’ institutions and quality of government. I focus on procedures used to nominate presidential candidates given the importance of candidate selection in party politics. Using a panel dataset of Latin American countries, I find robust evidence of a positive relation between the use of democratic procedures, such as primaries, and quality of government. To shed light on the mechanism, I examine why parties use primaries. I find evidence suggestive that the results are mostly driven by the increase in political competition and candidates’ pre-electoral incentives.

August 21, 2013

Professors’ Beauty, Ability, and Teaching Evaluations in Italy

Michela Ponzo, Vincenzo Scoppa

Page range: 811-835

Abstract

Using data from an Italian University, we relate student evaluations of teaching quality to the physical attractiveness of instructors (as evaluated by external raters using photos), controlling for a number of teacher and course characteristics. We first show that teachers’ beauty significantly affects evaluations of their teaching. We carry out a number of checks to tackle threats to internal validity: course fixed effects and individual research productivity are controlled for; an IV estimation strategy is undertaken using a second measure of beauty as an instrument; and measures of grooming and fastidiousness are introduced. Notwithstanding these controls, we find that more attractive teachers receive much better evaluations.

September 12, 2013

Pass-through of Per Unit and ad Valorem Consumption Taxes: Evidence from Alcoholic Beverages in France

Clément Carbonnier

Page range: 837-863

Abstract

Economic theory states that in a market with imperfect competition, per unit consumption taxes should induce a greater increase in prices than ad valorem consumption taxes. This implies that consumers bear a greater share of the tax burden with per unit consumption taxes than that with ad valorem consumption taxes. This article seeks to test this theoretical result empirically using the French market for alcoholic beverages, which is subject to both per unit (excise taxes) and ad valorem (value-added tax, VAT) consumption taxes. Econometric analysis is applied to two consumption tax reforms affecting two distinct French markets for alcoholic beverages, those for beer and for aperitif. In 1995, the full rate of VAT increased from 18.6 to 20.6%; excise taxes on alcoholic beverages increased in 1997. Graphical evidence and econometric results confirm the statements of economic theory. For both classes of alcoholic beverages – beer and aperitif – the change in prices due to per unit excise taxes was significantly larger than that due to ad valorem VAT.

October 9, 2013

The Tuesday Advantage of Politicians Endorsed by American Newspapers

Fernanda Leite Lopez de Leon

Page range: 865-886

Abstract

This article documents the electoral advantage of candidates who have a newspaper endorsement published on Election Day compared to other endorsed candidates. I provide evidence that this advantage is not driven by a selection effect, suggesting that it is instead explained by readers deciding how to vote based on endorsements read on Election Day. Moreover, candidates who have a different political orientation from their endorsing newspapers benefit more from this endorsement than other candidates. These results are based on a newly-compiled dataset matching county-level data of 826 endorsed candidates’ election results with newspaper and county characteristics.

Topics

August 27, 2013

The Effects of Medicaid Earnings Limits on Earnings Growth among Poor Workers

Sarah Hamersma

Page range: 887-919

Abstract

Strict earnings limits for public health insurance eligibility may distort work incentives for low-earning workers. Since 1996, states may vary their parental Medicaid eligibility criteria independently of other assistance programs. The result is substantial variation across states and over time in the earnings thresholds to which workers must adhere to maintain eligibility. Utilizing this variation, I identify the effects of Medicaid earnings thresholds on labor force behavior of low-income single mothers, examining both static and dynamic patterns. I find some evidence that allocating government funds to increasing these thresholds could be used as a policy lever to help drive increased earnings among low-income women.

August 28, 2013

Opportunities Denied, Wages Diminished: Using Search Theory to Translate Audit-Pair Study Findings into Wage Differentials

Jonathan A. Lanning

Page range: 921-958

Abstract

This article proposes a framework with which to estimate the impact on labor market outcomes implied by audit-pair study findings. I present a search model with discrimination and calibrate the model with experimental data from audit studies of the U.S. labor market and the NLSY79 to estimate the wage and unemployment implications of documented hiring disparity. All simulated results are highly consistent with the hypothesis that hiring discrimination may be an important component of the observed labor market disparity between African American and white workers in the U.S. Additionally, while the simulations only generate a small proportion of the observed gaps in unemployment, it proves to be one of the few models capable of explaining simultaneous wage in unemployment gaps. The most robust finding of the article is that non-trivial wage gaps can result even from the seemingly small differences in hiring rates documented in these studies.

August 24, 2013

Horizontal Mergers, Firm Heterogeneity, and R&D Investments

Noriaki Matsushima, Yasuhiro Sato, Kazuhiro Yamamoto

Page range: 959-990

Abstract

We investigate the incentive and welfare implications of a merger when heterogeneous oligopolists compete both in process R&D and on the product market. We examine how a merger affects the output, investment, and profits of firms. In addition, we examine whether firms have merger incentives, and, if so, whether such mergers are desirable from the viewpoint of social welfare. If R&D is not expensive and if large cost differences between efficient and inefficient firms exist, a merger between homogeneous firms tends to occur even though it harms welfare.

August 28, 2013

Product Differentiation and Consumer Surplus in the Microfinance Industry

Darrell J. Glaser, Ahmed S. Rahman, Katherine A. Smith, Daniel W. Chan

Page range: 991-1022

Abstract

During the last 15 years, high repayment rates of up to 96% have drawn many new lending institutions to the microfinance industry. While a decade ago, the industry was dominated primarily by monopolies ostensibly focused on social welfare, the current market is filled with various types of financial institutions offering a variety of lending arrangements. The goal of this article is to capture the degree to which consumers have benefitted from these structural changes within the microfinance industry. Using a Bertrand differentiated product framework, we model the price setting and demand functions of Microfinance Institutions (MFIs). With a 7 year panel data set covering over 70 countries, we empirically estimate parameters of the Nash price equilibrium and simulate the shape and structure of the underlying demand equation. We use simulated demand parameters to derive and compare measures of consumers’ surplus across regions and countries. Our research indicates that growth in the MFI industry has brought about declines in market concentration, and furthermore that each 0.01 unit change in the Hirschman–Herfindahl index correlates with a 2% increase in consumers’ surplus.

August 29, 2013

The Multitude of Alehouses: The Effects of Alcohol Outlet Density on Highway Safety

Meng-Chi Tang

Page range: 1023-1050

Abstract

This article reports the use of detailed panel data on alcoholic beverage outlet licensing in Texas to determine the effects of alcohol outlet density on highway safety. After controlling for county heterogeneity, county and year fixed effects, and county-specific time trends, this study shows that alcohol outlet density decreases expected alcohol-related traffic accidents and arrests for driving under the influence (DUI). The negative correlation can be explained according to the reduced travel distance between alcohol outlets and home, but this distance effect does not appear when the number of off-premise alcohol outlets increases. The empirical results of this study show that the off-premise alcohol outlet density is negatively related to the number of expected accidents and DUI arrests. These results indicate that on-premise consumption decreases according to the number of available off-premise outlets. The results also indicate that this effect originates mainly from the off-premise outlets that sell alcoholic products with a relatively low alcohol content.

September 7, 2013

Solving the Endogeneity Problem in Empirical Cost Functions: An Application to US Banks

Mark G. Lijesen

Page range: 1051-1070

Abstract

Empirical cost functions tend to ignore that firm differences in output levels depend on differences in cost levels and hence suffer from an endogeneity problem. We argue that traditional solutions for the endogeneity problem are insufficient for solving the problem and propose a structural approach to solve the problem. We apply both the traditional and the alternative models to panel data on large banks and found that a hybrid version yields results that are fully compatible with economic theory, whereas the traditional model provides theoretically incorrect in-sample predictions of scale elasticities.

September 20, 2013

The Internet, News Consumption, and Political Attitudes – Evidence for Sweden

Che-Yuan Liang, Mattias Nordin

Page range: 1071-1093

Abstract

We investigate the effects of the rise of the Internet as an additional mass medium on news consumption patterns and political attitudes. We use Swedish survey data from 2002 to 2007, the period during which high-speed Internet (broadband) emerged. We find that broadband access is associated with online media consumption. The crowd out of offline consumption is, however, small. Furthermore, these altered news consumption patterns have no or small effects on political attitudes.

October 1, 2013

A Cross-Cultural Real-Effort Experiment on Wage-Inequality Information and Performance

Hong Liu-Kiel, C. Bram Cadsby, Heike Y. Schenk-Mathes, Fei Song, Xiaolan Yang

Page range: 1095-1120

Abstract

We conduct a real-effort laboratory experiment to examine how disclosure of information about the pay received by co-workers affects work performance in Germany and China. We employ an individual piece-rate setting in which a piece rate is received for each unit of output successfully produced. We find that receiving information that one’s co-workers are all receiving the same piece rate as oneself has no significant effect on performance compared to non-disclosure. In contrast, learning that one co-worker is receiving a higher piece rate than oneself does significantly affect performance. In particular, receiving such information initially results in a larger performance increase than receiving information that others are all receiving the same piece rate as oneself. However, this performance gap decreases toward the end of the experiment.

October 17, 2013

Are Students Dropping Out or Simply Dragging Out the College Experience? Persistence at the Six-Year Mark

Leslie S. Stratton, James N. Wetzel

Page range: 1121-1142

Abstract

Standard analyses of college outcomes look at six-year graduation rates, treating all non-graduates alike as “failures”. However, we find that 36% of non-graduates are still enrolled. Using micro-level data with rich information on demographic and academic background, we employ a multinomial logit model to distinguish among graduates, persisters, and dropouts six years following matriculation. We find that there are significant differences across these populations. Separate evidence indicates that as many as half of those persisting at the six-year mark will graduate within a few years. Thus, six-year graduation rates understate “success,” but future success is not the same for all groups. Holding academic background constant, reported graduation rates are lower for Hispanics because they are taking longer to graduate and lower for first-generation college students because they are dropping out. The most important factor is academic background, suggesting that increased financial aid is unlikely to substantially increase graduation rates.

July 30, 2013

The Welfare Effects of Location and Quality in Oligopoly

Luis Carlos Corchón, Galina Zudenkova

Page range: 1143-1178

Abstract

In this article, we show that in models where location is endogenous, maximum welfare losses arising from non-optimal locations or from the lack of market coverage may be substantial. In contrast, maximum welfare losses arising from non-optimal quality choices are more modest, but they might vary discontinuously with the dispersion in consumer tastes. Very often, welfare losses can be inferred from 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

> Information on submission process