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Item Intergenerational Intermediation and Altruistic Preferences(Vanderbilt University, 2011) Eden, BenjaminThe paper analyzes the intermediation role of government under the assumption that it has an advantage over the private sector in collecting uncollateralized loan payments. It isshown that a government loan program may improve the welfare of all generations (including the current old generation) if agents care about future generations in the time inconsistent manner originally proposed by Phelps and Pollak (1968). Numerical examples suggest that the welfare gains from intervention may be quite large and depends on the degree of altruism as defined by Phelps and Pollak. The welfare gains are large when agents are relatively “egoistic†because in this case the time inconsistency problem is more severe and there is more room for intervention.Item Social Conflict and the Stolper-Samuelson Theorem(Vanderbilt University, 2011) Zissimos, BenThis paper presents a new theory of trade policy-making based on the possibility of social conflict, and determines the conditions under which it will apply. In a setting where property rights are poorly enforced, the paper shows that the Stolper-Samuelson theorem embodies a set of sufficient conditions for a revolution to occur. By pinpointing a conflict of interest between the ruling elite and workers over trade policy, the theorem implies that workers may have an incentive to mount a revolution. However, this also implies that the elite can use trade policy to make concessions to the workers and hence avert a revolution. In an extended framework, a set of sufficient conditions for revolution to occur are provided even when the Stolper-Samuelson theorem fails to hold. Among other uses, the new theory presents a resolution to the long-standing puzzle over why Britain repealed the Corn Laws.Item Economic Analysis of Products Liability: Theory(Vanderbilt University, 2011) Daughety, Andrew F.; Reinganum, Jennifer F. ReinganumThis chapter provides a survey of much of the recent theoretical analysis of products liability. We start by describing an idealized model and providing the specific economic assumptions which underpin it. Later sections examine the effects of relaxing these assumptions, which has been the focus of much of the theoretical work over the last few decades. These modifications include: informational differences between producers and consumers that arise over the life of a product; incorporation of endogenously-determined costs, such as those that arise from investment in care; and evaluating contractual versus mandatory liability.Item Pampered Bureaucracy, Political Stability, and Trade Integration(Vanderbilt University, 2011) Stroup, Caleb; Zissimos, BenjaminThis paper shows how, under threat of revolution, a nation's elite are able to maintain political stability and hence ownership of their wealth by creating or expanding a `pampered bureaucracy.' The elite thus divert part of an otherwise entrepreneurial middle class from more productive manufacturing activities, reducing economic efficiency. If the country has a comparative advantage in primary products, trade integration is potentially destabilizing since it raises the payoff to the lower classes of mounting a revolution and challenging the elite for their wealth. In that case trade integration mandates expansion of the pampered bureaucracy. Therefore, trade integration may actually reduce economic efficiency. The econometric results provide supportive evidence for our model.Item Search, Bargaining, and Agency in the Market for Legal Services(Vanderbilt University, 2011) Daughety, Andrew F.; Reinganum, Jennifer F.We show that, in the context of the market for a professional service, adverse selection problems can sufficiently exacerbate moral hazard considerations so that even though all agents are risk neutral, welfare can be reduced by allowing the agent to “buy the firm” from the principal. In particular, we model the game between an informed seller of a service (a lawyer) and an uninformed buyer of that service (a potential client) over the choice of compensation for the lawyer to take a case to trial, when there is post-contracting investment by the lawyer (effort at trial) that involves moral hazard. Clients incur a one-time search cost to contact a lawyer, which parametrically influences the market power of the lawyer when he makes a demand of the client for compensation for his service. The client uses the demand to decide whether to contract with the lawyer or to visit a second lawyer so as to seek a second option, which incurs a second search cost. Seeking a second option shifts the bargaining power to the client because she can induce the lawyers to bid for the right to represent her. We allow for endogenously-determined contingent fees alone (that is, the lawyer covers all costs and obtains a percentage of any amount won at trial) or endogenously-determined contingent fees and transfers; in this latter analysis, lawyers could buy the client’s case.Item The Advantages of Association: Know-How Sharing and Innovation Adoption in Four Brazilian Cities(Vanderbilt University, 2011) Zissimos, Isleide R.This paper investigates the role of social learning in the diffusion of different types of innovation in four urban areas of Brazil. A unique database of small sized firms in 19 economic sectors is used to show evidence that entrepreneurs who are members of trade associations (TAs) tend to adopt and diversify types of innovation more often than entrepreneurs who are not members. This is tested against two rival hypotheses. The first involves controls for human capital. The second controls for policy and institutional factors, and for internal characteristics of the firms. In both cases membership to TAs is significant. This set of results is robust across different specifications and in different subsamples. In addition, the urban areas where firms are located are also significant predictors of innovation adoption, which is consistent with the literature on geographic clusters of firms. Because membership of a TA can be endogenous, an instrumental variable is introduced.Item Dominant Strategy Implementation with a Convex Product Space of Valuations(Vanderbilt University, 2011) Cuff, Katherine; Hong, Sunghoon; Schwartz, Jesse; Weymark, John A.A necessary and sufficient condition for dominant strategy implementability when preferences are quasilinear is that, for any individual i and any choice of the types of the other individuals, all k-cycles in i's allocation graph have nonnegative length for every integer k ≥ 2 . Saks and Yu (Proceedings of the 6th ACM Conference on Electronic Commerce (EC'05), 2005, 286-293) have shown that when the number of outcomes is finite and i's valuation type space is convex, nonnegativity of the length of all 2-cycles is sufficient for the nonnegativity of the length of all k-cycles. In this article, it is shown that if each individual's valuation type space is a convex product space and a mild domain regularity condition is satisfied, then (i) the nonnegativity of all 2-cycles implies that all k-cycles have zero length and (ii) all 2-cycles having zero length is necessary and sufficient for dominant strategy implementability.Item Director Histories and the Pattern of Acquisitions(Vanderbilt University, 2011) Rousseau, Peter L.; Stroup, CalebWe trace directors through time and across firms to study whether acquirers' exposure to non-public information about potential targets through board service histories affects the market for corporate control. In a sample of publicly-traded U.S. firms from 1996 through 2006, we find that acquirers are about five times more likely to buy firms at which their directors once served. These effects are stronger when the acquirer has better corporate governance, the director has a larger ownership stake at the acquirer, or the director played an important role during past service at the target. The findings are robust to endogeneity of board composition and to controls for network connectivity and conventional inter-firm interlocks.Item Cumulative Harm and Resilient Liability Rules for Product Markets(Vanderbilt University, 2011) Daughety, Andrew F.; Reinganum, Jennifer F.In the traditional model of the law and economics of torts, harm accrues proportional to use. This has the remarkable implication for products-generated torts that product performance concerns (e.g., issues of care and of liability for harm) can be considered independently of market performance concerns (e.g., market structure and competition). Moreover, the classical analysis finds that all liability regimes (strict liability, no liability, and negligence based on the socially-efficient due care standard) yield the same choice of care by the firm in the unilateral care tort model. We modify the standard model to allow for cumulative harm (that is, the per-unit expected harm is increasing in the level of use); examples from pharmaceuticals, environmental risks, privacy, food products, and mechanical systems are provided. We show that, when expected harm is cumulative, the separation between the level of care and the level of output does not occur. We further show that the different possible liability regimes now produce different outcomes and yield different implications for social efficiency. This implies an interaction between law concerned with liability and law concerned with market performance. Since these generally governmental (and private law) responsibilities are divided among relevant agencies and institutions, and are the subjects of different bodies of law, this presents a challenge to the correct design of rules for agents in the economy. We argue for selection among alternative liability regimes based upon what we refer to as “resilience:” a resilient policy is robust to the incentives for agents to undermine it and flexible with respect to outside influences (e.g., from antitrust authorities or regulators). Strict liability is a resilient policy; no liability and negligence are not resilient. Thus, we provide a new argument for strict liability with respect to product-generated harms.Item Turning Points in Leadership: Shipping Technology in the Portuguese and Dutch Merchant Empires(Vanderbilt University, 2011) Rei, ClaudiaThis paper focuses on the implications of organizational control on the race for economic leadership across merchant empires. Poor organizational choices reduce incentives to invest, which in turn stifle technological improvements and make leading empires lag behind new entrants. Using historical evidence on shipping technology, I show that this may have been a factor behind the loss of leadership of the Portuguese merchant empire in the late sixteenth century.Item Do Sticky Prices Increase Real Exchange Rate Volatility at the Sector Level?(Vanderbilt University, 2011) Crucini, Mario J.; Shintani, Mototsugu; Tsuruga, TakayukiWe introduce the real exchange rate volatility curve as a useful device to understand the relationship between price stickiness and the fluctuations in Law of One Price deviations. In the presence of both nominal and real shocks, the theory predicts that the real exchange rate volatility curve is a U-shaped function of the degree of price stickiness. Using sector-level US-European real exchange rate data and frequency of price changes, we estimate the volatility curve and find the predominance of real effects over nominal effects. Good-by-good variance decompositions show that the relative contribution of nominal shocks is smaller at the sector level than what previous studies have found at the aggregate level. We conjecture that this is due to significant averaging out of good-specific real microeconomic shocks in the process of aggregation.Item International Risk-Sharing and Commodity Prices(Vanderbilt University, 2011) Berka, Martin; Crucini, Mario J.; Wang, Chih-WeiCole and Obstfeld (1991) exposited a classic result where equilibrium movements in the terms of trade could make ex ante risk-sharing arrangements unnecessary: a unity elasticity of substitution across goods and production specialization. This paper extends their model to N countries and M commodities (N > M). Here the terms of trade provides insurance against commodity-specific shocks, not country-specific shocks. Using commodity-level production data at the national level and world commodity prices we document significant terms of trade variability and positive responses of nation-specific production to terms of trade improvements. The endogenous terms of trade insurance mechanism highlighted in CO is virtually non-existent.Item Incentives and the Effects of Publication Lags on Life Cycle Research Productivity in Economics(Vanderbilt University, 2011) Conley, John P.; Crucini, Mario J.; Driskill, Robert A.; Onder, Ali SinaWe investigate how increases in publication delays have affected the life-cycle of publications of recent Ph.D. graduates in economics. We construct a panel dataset of 14,271 individuals who were awarded Ph.D.s between 1986 and 2000 in US and Canadian economics departments. For this population of scholars, we amass complete records of publications in peer reviewed journals listed in the JEL (a total of 368,672 observations). We find evidence of significantly diminished productivity in recent relative to earlier cohorts when productivity of an individual is measured by the number of AER equivalent publications. Diminished productivity is less evident when number of AER equivalent pages is used instead. Our findings are consistent with earlier empirical findings of increasing editorial delays, decreasing acceptance rates at journals, and a trend toward longer manuscripts. This decline in productivity is evident in both graduates of top thirty and non-top thirty ranked economics departments and may have important implications for what should constitute a tenurable record. We also find that the research rankings of the faculty do not line up with the research quality of their students in many cases.Item Developing Country Second-Mover Advantage in Competition over Environmental Standards and Taxes(Vanderbilt University, 2011) Groenert, Valeska; Zissimos, BenWe show that, in competition between a developed country and a developing country over environmental standards and taxes, the developing country may have a `second-mover advantage.' In our model, firms do not unanimously prefer lower environmental-standard levels. We introduce this feature to an otherwise familiar model of fiscal competition. Four distinct outcomes can be characterized by varying the marginal cost to firms of an environmental externality: (1) the outcome may be efficient; (2) the developing country may be a `pollution haven;' a place to escape excessively high environmental standards in the developed country; (3) the developing country may `undercut' the developed country and attract all firms; (4) the developed country may be a pollution haven.Item The Economics of Cloud Computing(Vanderbilt University, 2011) Bayrak, Ergin; Conley, John; Wilkie, SimonCloud computing brings together several existing technologies including service oriented architecture, distributed grid computing, virtualization, and broadband networking to provide software, infrastructure, and platforms as services. Under the old IT model, companies built their own server farms designed to meet peak demand using bundled hardware and software solutions. This was time consuming, capital intensive and relatively inflexible. Under the cloud computing model, firms can rent as many virtual machines as they need at any given time, and then either design or use off-the-shelf solutions to integrate company-wide data in order to easily distribute access to users both within and outside of the company firewall. This converts fixed capital costs into variable costs, prevents under and over provisioning, and allows minute by minute flexibly. Consumers are also increasingly turning to the cloud for computing service through such applications as Gmail, Pandora, and Facebook. The purpose of this paper is to discuss this new and transformative technology, survey the existing economics literature on the subject, and suggest potential directions for new research.Item Strategic Competition and Optimal Parallel Import Policy(Vanderbilt University, 2011) Saggi, Kamal; Roy, SantanuThis paper shows that parallel import policy can act as an instrument of strategic trade policy. We demonstrate this result in two-country international duopoly where a domestic monopolist competes with a rival firm in the foreign market if it chooses to incur the fixed investment cost of exporting. The two firms sell horizontally differentiated goods and compete in prices. When the foreign market is significantly larger than the domestic one, the home firm gains if it is unable to price discriminate; its desire to not deviate too far from its optimal monopoly price in the domestic market makes it (credibly) less aggressive in price competition abroad which softens price competition and raises profits. On the other hand, when the foreign market is not significantly larger, it is optimal for the home country to forbid parallel imports since international price discrimination yields higher profits to the home firm. We draw out the implications of the two types of parallel import policies for global welfare.Item Living with a Monetary System infected by Bubbles(Vanderbilt University, 2011) Eden, BenjaminI study the real effects of bubbles in a price-settingenvironment. Bubbles cause price dispersion and overinvestment in assets that are overvalued. And when they pop some goods are not sold and capacity is not fully utilized. I argue that a government monopoly on the creation of bubble assets is desirable but may be difficult to achieve. A non-linear tax on capital gains and a “high” interest rate policy can play a role in protecting the government’s monopoly on the creation of bubble assets.Item Market power in the global economy: the exhaustion and protection of intellectual property(Vanderbilt University, 2011) Saggi, KamalThis paper analyzes economic linkages between the exhaustion and protection of intellectual property. We consider a North-South model, where a firm that enjoys monopoly status in the North by virtue of an intellectual property right (IPR) -- such as a patent or a trademark -- has the incentive to price discriminate internationally because Northern consumers value its product more than Southern ones. The key intuition underlying the model is that while Northern policy regarding the territorial exhaustion of IPRs determines whether the firm can price discriminate internationally and therefore exercise market power across regions, Southern policy regarding the protection of IPRs determines the firm's monopoly power within the South. In equilibrium, each region's policy takes into account the firm's pricing behavior, its incentive to export, and the other region's policy stance. Major results are: (a) the North is more likely to prefer national exhaustion when the South does not protect IPRs whereas the South is more willing to protect intellectual property if the North chooses national exhaustion; (b) the firm values protection of intellectual property relatively more than the freedom to price discriminate internationally that exists under national exhaustion if and only if the quality gap between it and Southern imitators lies below a certain threshold; (c) except for the situation where the firm sells in the South regardless of the global policy environment, the two regions find themselves in a policy stand-off wherein each region takes into account whether or not the other would be willing to implement its less preferred policy to induce the firm to export and (d) requiring the South to protect IPRs increases global welfare iff (i) it induces the North to reverse its policy stance from national to international exhaustion and (ii) the quality gap between the Northern original and the Southern imitation exceeds a certain minimum threshold.Item Size Inequality, Coordination Externalities and International Trade Agreements(Vanderbilt University, 2011) Saggi, Kamal; Limao, NunoDeveloping countries now account for a significant fraction of both world trade and two thirds of the membership of the World Trade Organization (WTO). However, many are still individually small and thus have a limited ability to bilaterally extract and enforce trade concessions from larger developed economies even though as a group they would be able to do so. We show that this coordination externality generates asymmetric outcomes under agreements that rely on bilateral threats of trade retaliation---such as the WTO---but not under agreements extended to include certain financial instruments. In particular, we find that an extended agreement generates improvements in global efficiency and equity if it includes the exchange of bonds prior to trading but not if it relies solely on ex-post fines. Moreover, a combination of bonds and fines generates similar improvements even if small countries are subject to financial constraints that prevent them from posting bonds.Item Equilibrium parallel import policies and international market structure(Vanderbilt University, 2011) Roy, Santanu; Saggi, KamalIn a North-South vertically differentiated duopoly, we derive equilibrium government policies towards parallel imports (PIs). By incorporating strategic interaction at the policy-setting stage and the product market, the model sheds new light on (i) the effects of PI policies on pricing behavior of firms and (ii) the interdependence of national PI policies. If demand asymmetry across countries is sufficiently large, the North forbids PIs to ensure its firm sells in the South thereby generating international price discrimination -- the South's most preferred market outcome -- as the equilibrium. When demand structures are relatively similar across countries, the North permits PIs and uniform pricing -- its most preferred market outcome -- obtains.