Volume 3, Issue 1

We analyze a model of repeated franchise bidding for natural monopoly with contestable licensing -- a franchisee holds an (exclusive) license to operate a franchise until another firm offers to pay more for it. In a world where quality is observable but not verifiable, the simple regulatory scheme we describe combines market-like incentives with regulatory oversight to generate efficient outcomes.

Several different theoretical models of economic growth and environmental quality each generate inverse-U-shaped pollution-income paths, or "environmental Kuznets curves." They rely on different assumptions to generate the reversal of pollution trends, with correspondingly different policy implications. While the empirical implications for pollution are indistinguishable (by design), the models have distinct implications for the pattern of people's marginal willingness to pay (MWTP) for environmental improvements as a function of income. In this paper we demonstrate those different implications theoretically, and test for them empirically using data from the World Value Survey (WVS). We find strong relationships between MWTP and individual characteristics, such as age, income, and education, but little evidence that MWTP varies systematically with economic growth.

The benefits of competition among the long-distance interexchange carriers (IXCs) are not realized equally by all their customers. Despite the declines in rates under the discount plans, we document that basic message toll service (MTS) rates have been rising for several years. We show that poorer and less educated customers pay more than better educated and more affluent customers. We suspect that the reason for this correlation is that they are more apt to pay the MTS rates or other high rates, and we present some preliminary evidence that this tendency explains the correlation that we find. We also present evidence that the payment differences exist even after controlling for usage. These findings are significant because it seems likely to us that these two patterns (rising MTS rates and higher payments by the poor and the less educated) will each be ameliorated by the entry of the regional Bell operating companies (RBOCs) into long-distance markets—a state-by-state regulatory process that was nearly complete as of the beginning of 2004.

While it is typically taken for granted that settlement of lawsuits increases social welfare, this paper shows that settlement can lower welfare. If the defendant has private information about the harm from his action both at the time of the action and the time of settlement bargaining, then defendants who cause different levels of harm can pay the same settlement amount in a partial pooling equilibrium. Settlement acts as a damage cap, preventing the defendant's liability from increasing with the harm over the full range of possible harms, leading to under-deterrence. This result holds even though the social planner can choose the socially optimal damage rule.

This paper estimates the extent to which reduced employment following job loss among older workers can be explained as a response to altered pension incentives and earnings opportunities. Using data from the Health and Retirement Study, we first examine how workers’ earnings, assets, pensions and the resulting financial incentive to retire are affected by job loss. We find important effects of job loss on the main financial components of workers’ incentive to retire. We then examine retirement behavior after job loss, controlling for these changed retirement incentives, along with any additional effects of displacement not captured by retirement incentives. We find that the observed increased rates of retirement among displaced workers go far beyond these purely financial considerations. Very little of the reduced employment among older job losers can be explained by changes in wages and pension-related retirement incentives. Other barriers to reemployment may be more important explanations for the low employment rates of recently displaced older workers.

This study investigates the issue of whether part of the increase in total IRA contributions from 1997 to 1998 can be attributed to increased advertising due to the introduction of Roth IRAs in 1998. In this study, the use of a tax preparer will proxy for exposure to information regarding IRAs. A preparer is expected to have less of an influence on IRA participation in 1998 relative to 1997. I find evidence supporting this prediction amongst taxpayers eligible for an IRA contribution in both 1997 and 1998. However, I also find evidence suggesting that more information would have led to a potentially sizable increase in participation for taxpayers newly eligible for an IRA contribution in 1998.

This paper models investment/entry decisions in a competitive industry that is subject to a quantity control, either on output or on a production input. The quantity control is implemented via the sale of licenses for the restricted output/input. We show that liberalizing the quantity control could reduce investment in the industry under certain circumstances. Furthermore, the level of investment in the industry is different depending on whether the licenses are tradable or not. Key factors to consider are the elasticity of demand for the final good and the degree of input substitutability. Two examples are presented to illustrate the results.

This note provides a simple exposition of what IV can and cannot estimate in a model with binary treatment variable and heterogenous treatment effects. It shows how linear IV is essentially a misspecification of functional form and the reason why linear IV estimates will generally depend on the instrument used is because of this misspecification. It shows that if one can estimate the correct functional form then the treatment effects are independent of the instruments used. However, the data may not be rich enough in practice to be able to identify these treatments effects without strong distributional assumptions. In this case, one will have to settle for estimations of treatment effects that are instrument-dependent.

Texas evaluates, accredits, and financially rewards schools based on student test scores. Test scores increased dramatically following this implementation of high stakes testing. This paper examines whether homebuyers valued these test score increases. The results show little or no relation between changes in test scores and changes in total housing value in a district. Strikingly, improved performance on college entrance exams is associated with increased total housing value. Using the college entrance exams as a benchmark, the results on the state test suggest that high stakes testing failed to increase perceived school quality.

Using data from more than 400 legal serials, I estimate the impact of six publisher mergers on law serial prices during the period, 1990-2000. The results suggest that merger-related price increases were substantial during this period, even after accounting for secular price trends. Furthermore, these merger effects occurred across a broadly-defined portfolio of serial titles consisting of legal encyclopedias and treatises. For other types of serials, such as newsletters and looseleaf services, these effects were not observed. Based on the portfolio demand behavior of buyers, I offer an explanation for this result based on the degree of product differentiation at the level of the individual title. Of particular interest is the purchase of West Publishing Company by Thomson Financial & Professional Publishing Group in 1996. Despite a government-mandated divestiture of more than 50 titles, the results indicate that titles published by West-Thomson experienced a significant post-merger price increase.

Knowles, Persico, and Todd (2001) develop a model of police search and offender behavior. Their model implies that if police are unprejudiced the rate of guilt should not vary across groups. Using data from Interstate 95 in Maryland, they find equal guilt rates for African-Americans and whites and conclude that the data is not consistent with racial prejudice against African-Americans. This paper generalizes the model of Knowles, Persico, and Todd by accounting for the fact that potential offenders are frequently not observed by the police, and by including two different levels of offense severity. We show that the data is consistent with prejudice against African-American males, no prejudice, and reverse discrimination, depending on the type of equilibrium that exists. Additional analyses, based on stratification by type of vehicle and time of day, do not shed any light on the nature of the equilibrium.

This paper shows how to take into account risk aversion when measuring poverty under income variability. An application to British panel data suggests that income and poverty comparisons between the self-employed and other groups of households are sensitive to assumptions on the degree of risk aversion. The results point to the importance of panel data in order to account for risk aversion and income variability in the measurement of poverty.

An important question that has continued to elude trade economists is why trade interventions are biased in favor of import-competing rather than exportable sectors. Indeed, as Philip Levy (1999) points out, under a set of neutrality assumptions, the dominant political-economy model, Grossman and Helpman (1994), predicts a pro-trade bias. We demonstrate that if we replace the almost partial equilibrium model with a general equilibrium model in the Grossman-Helpman political economy model, anti-trade bias may emerge even if we assume symmetric technologies, endowments and preferences across sectors provided that the elasticity of substitution in production exceeds unity. In addition, we show that ceteris paribus, in general equilibrium, increases in the imports-to-GDP ratio lower the endogenously chosen tariff and the production share of the import sector in GDP has an ambiguous effect.

In recent years, a plethora of public and private programs in the United States have been created to close the "Digital Divide." Interestingly, however, we know very little about the underlying causes of racial differences in rates of computer and Internet access. In this paper, I use data from the Computer and Internet Use Supplement to the August 2000 Current Population Survey (CPS) to explore this question. Estimates from the CPS indicate that Mexican-Americans are roughly one-half as likely to own a computer and one-third as likely to have Internet access at home as whites. The black home computer rate is 59 percent of the white rate and the black home Internet access rate is 51 percent of the white rate. Using Blinder-Oaxaca decompositions, I find that racial differences in education, income and occupation contribute substantially to the black/white and Mexican-American/white gaps in home computer and Internet access rates. The digital divide between races, however, is not simply an "income divide" as income differences explain only 10 to 30 percent of the gaps in access to technology. I do not find evidence that price or school differences are responsible for the remaining gaps. I find some evidence, however, that language barriers may be important in explaining low rates of computer and Internet access among Mexican-Americans.

This paper describes a new method of utility pricing – Variable Unit Pricing (VUP) – that results in both economic efficiency and cost recovery for a variety of supply situations faced by water utilities. The main advantage of VUP – compared to Increasing Block Rates – is that its parameters can be objectively determined from demand and cost information.The theoretical support for VUP is a welfare economics paradigm that integrates pricing with economic organization. VUP is shown to achieve social efficiency for a fixed-fee contractual arrangement between a profit-maximizing water utility and a public agency.Public involvement is required to express equity concerns, demand for public goods such as water quality and security, and to identify appropriate supply limits for conservation.

This paper examines the importance of competition in innovation and the growth of firms. We make use of the large-scale natural experiment of the shift from an economic system without competition to a market economy to shed light on the factors that influence innovation by firms and their subsequent growth, thereby alleviating problems due to non-random clustering of innovation opportunities in mature market economies. We find evidence that monopolies innovate less and have weaker growth than firms facing a minimum of rivalry. The presence of competitors has both a direct effect on performance, and an indirect effect, through improving the efficiency with which the rents from market power in product markets are utilised to undertake innovation. There is also some less clear-cut evidence of an 'inverted-U', namely that the presence of a few rivals is more conducive to performance than the presence of many competitors.

We present a perfect Nash equilibrium in which the creator of a work, motivated by economic considerations, selectively enforces her own copyright. In fact, the creator may not only permit, but may strategically promote infringement of the copyright, thereby participating indirectly in predatory pricing, and so raising barriers to entry. Our model is highly applicable to the software industry, where relatively high entry costs and the relatively low cost of copyright infringement make this phenomenon likely. We further show the conditions under which exogenous intervention, through intensive enforcement of copyrights, increases social welfare. Finally, we explore some potential strategies for such legal intervention.

This paper analyses the consequences of an unusual type of land redistribution; we take land from the very rich, as usual, but give it to the rich instead of the poor. We show that such "moderate" reform reduces agency costs and thereby increases productivity, total surplus in the economy, and the welfare of rural workers. Compared to the classic redistribution "to the tiller", moderate reforms do worse in terms of equity and do not give the poor a collaterizable asset. They can however do equally well in terms of efficiency and might be more sustainable both financially and politically.

The rise of managed healthcare organizations (MCOs) and the associated increased integration among providers has transformed US healthcare and at the same time raised antitrust concern. This paper examines how competition among MCOs affects the efficiency gains of improved price coordination achieved through integration. MCOs offer differentiated services and contract with specialized and complementary upstream providers to supply these services. We identify strategic pricing equilibria under three different market structures: overlapping upstream physician-hospital alliances, upstream-downstream arrangements such as Preferred Provider Organizations, and vertically integrated Health Maintenance Organizations. The efficiency gains achieved depend not only on organizational form but also on the toughness of premium competition. We show that, contrary to popular thinking, providers and insurers do not earn maximum net revenue when they are monopolies or monopsonies, but rather at an intermediate level of market power. Furthermore, closer integration of upstream and downstream providers does not necessarily increase net revenues.

We introduce call externalities in the standard model of network competition with termination-based price discrimination under a CPP regime, and employ a simple graphical analysis to study the outcome of competition. In contrast to recent results in the literature we find that even under linear pricing, access charges below marginal cost may be used as a collusion device, while off-net calls are priced above on-net calls in equilibrium. Moreover, it turns out that "bill and keep" arrangements may be welfare improving compared with cost based access pricing.