Economics Commons^™

Trade Mechanism Selection In Markets With Frictions, Gabriele Camera, Alain Delacroix

Economics Faculty Articles and Research

We endogenize the trade mechanism in a search economy with many homogeneous sellers and many heterogeneous buyers of unobservable type. We study how heterogeneity and the traders' continuation values—which are endogenous—influence the sellers' choice of trade mechanism. Sellers trade off the probability of an immediate sale against the surplus expected from it, choosing whether to trade with everyone and how quickly. In equilibrium sellers may simply target one buyer type via non-negotiable offers (price posting), or may price discriminate (haggling). We also study when haggling generates trading delays. A price setting externality arises because of a strategic complementarity in the …

Human Nature: An Economic Perspective, Vernon L. Smith

Economics Faculty Articles and Research

An economist writing on the topic of human nature is surely expected to talk about decision making by narrowly self-interested rational agents.

The Distribution Of Money And Prices In An Equilibrium With Lotteries, Aleksander Berentsen, Gabriele Camera, Christopher Waller

Economics Faculty Articles and Research

We construct a tractable ‘fundamental’ model of money with equilibrium heterogeneity in money balances and prices. We do so by considering randomized monetary trades in a standard search-theoretic model of money where agents can hold multiple units of indivisible ‘tokens’ and can offer lotteries on monetary transfers. By studying a simple trading pattern, we can analytically characterize the monetary distribution. Interestingly, such distributions match those observed in numerically simulated economies with fully divisible money and price heterogeneity.

Organizing In The Garment Industry In Mexico: Implications For New Social Movement Theory, Victoria Carty

Sociology Faculty Articles and Research

This paper examines attempts to improve workers' rights in the Maquila Industry in Mexico by using two case studies. It analyzes the struggles that recently occurred at the Kukdong and Duro plants. The underlying question of the research is how to balance the co-existence of market economies with effective means to ensure adequate conditions for workers, and most importantly, ensuring their right to freedom of association. Under recent forms of global economic restructuring, the state is often unwilling or unable to uphold workers' rights. To combat the present form of corporate-driven global capitalism, workers in the South, in solidarity with …

Currency Competition In A Fundamental Model Of Money, Gabriele Camera, Ben Craig, Christopher Waller

Economics Faculty Articles and Research

We study how two fiat monies, one safe and one risky, compete in a decentralized trading environment. The currencies' equilibrium values, their transaction velocities and agents' spending patterns are endogenously determined. We derive conditions under which agents holding diversified currency portfolios spend the safe currency first and hold the risky one for later purchases. We also examine when the reverse spending pattern is optimal. Traders generally favor dealing in the safe currency, unless trade frictions and the currency risk is low. As risk increases or trading becomes more difficult, the transaction velocity and value of the safe money increases.

Transnational Labor Mobilizing In Two Mexican Maquiladoras: The Struggle For Democratic Globalization, Victoria Carty

Sociology Faculty Articles and Research

The struggle to improve workers' rights in Mexican maquiladoras and export processing zones elsewhere in the world is central to the politics of global economic integration. State-centered development is increasingly compromised by supranational institutions and trade agreements. Meanwhile, multinational corporations are relocating at an unprecedented rate to overseas locations. Export processing zones are notorious for poor working conditions and result in a "race to the bottom." The maquila sector in Mexico is a prime example of this phenomenon. This article uses two case studies to examine ways in which grassroots organizing has successfully resisted low wages and poor working conditions …

Rjvs In Product Innovation And Cartel Stability, Luca Lambertini, Sougata Poddar, Dan Sasaki

Economics Faculty Articles and Research

We characterise the interplay between firms' decision in product development undertaken through a research joing venture (RJV), and the nature of their ensuing market behaviour. Participant firms in an RJV face a trade-off between saving the costs of product innovation by developing similar products to one another, e.g. by sharing most of the basic components of their products, and investing higher initial efforts in product innovation in order to develop more distinct products. We prove that the more the fims' products are distinct and thus less substitutable, the easier their collusion is to sustain in the marketing supergame, either in …

Excess Capacity: A Note, Sougata Poddar

Economics Faculty Articles and Research

In a two period model of strategic entry deterrence where the incumbent firm moves before the entrant by installing capacity for production, Dixit (1980) argued that in a (perfect) equilibrium excess capacity would not be observed, contradicting Spence's (1977) result on the same issue. In this note, we show that Dixit may not always remain true when we allow for demand uncertainty.

Recognizing Macroeconomic Fluctuations In Value Based Management, Lars Oxelheim, Clas Wihlborg

Business Faculty Articles and Research

Value Based Management (VBM) has become a common tool for evaluating corporate strategies and projects from the perspective of shareholder value maximization, and can be an important input for corporate compensation systems. But traditional VBM frameworks make no systematic effort to distinguish between changes in performance attributable to macroeconomic fluctuations beyond management's control and changes in performance that reflect the intrinsic competitive position of the firm.

The authors have developed an approach for “filtering out” the impact of macroeconomic fluctuations on cash flows for purposes of performance evaluation. Such fluctuations are captured by changes in exchange rates, interest rates, and …

The Evolution Of Human Life Expectancy And Intelligence In Hunter-Gatherer Economies, Hillard Kaplan

ESI Publications

The economics of hunting and gathering must have driven the biological evolution of human characteristics, since hunter-gatherer societies prevailed for the two million years of human history. These societies feature huge intergenerational resource flows, suggesting that these resource flows should replace fertility as the key demographic consideration. It is then theoretically expected that life expectancy and brain size would increase simultaneously, as apparently occurred during our evolutionary history. The brain here is considered as a direct form of bodily investment, but also crucially as facilitating further indirect investment by means of learning-by-doing.

Jack Of All Trades Or Master Of One? Specialization, Trade And Money, Gabriele Camera, Robert R. Reed, Christopher Waller

Economics Faculty Articles and Research

We consider a model of decentralized exchange where individuals choose the set of goods they produce. Specialization involves producing a smaller set of goods and doing it more proÞciently. In doing so, agents reduce production costs, but also reduce the ease of trading their output. We derive the equilibrium degree of specialization and examine how it is affected by underlying fundamentals. Due to the existence of a hold-up problem, individuals specialize too little relative to the social optimum. Introducing money leads to more specialization relative to barter and increases welfare.

Can Monetizing Trade Lower Welfare? An Example, Gabriele Camera, Robert R. Reed, Christopher Waller

Economics Faculty Articles and Research

In decentralized trade individuals self-insure against consumption risk via costly diversification of skills. Although money acts as consumption insurance, it may lead to a moral hazard problem. If the problem is severe, monetizing trade can lower welfare relative to barter.

On The Macroeconomic Effects Of Establishing Tradability In Weak Property Rights, Gunnar Eliasson, Clas Wihlborg

Business Faculty Articles and Research

The New Economy is closely associated with computing & communications technology, notably the Internet. We discuss property rights to, and trade in, the difficult-to-define intangible assets increasingly dominating the New Economy, and the possibility of under-investment in these assets. For a realistic analysis we introduce a Schumpeterian market environment (the experimentally organized economy). Weak property rights prevail when the rights to access, use, andtrade in intangible assets cannot be fully exercised. The trade-off between the benefits of open access on the Internet, and the incentive effects of strengthened property rights, depend both on the particular strategy a firm employs to …

New Social Movements And The Struggle For Worker’S Rights In The Maquila Industry, Victoria Carty

Sociology Faculty Articles and Research

"Campaigns to improve worker’s rights in export processing zones (EPZs), also referred to the maquila industry in Latin America, is an important topic analytically and politically. On theoretical and practical levels, the co-existence of market economies with effective means to ensure adequate working conditions for workers is a critical question. Underlying the issue is a vigorous debate regarding how the global economy should be governed; who or what should govern it, and whose interest is should serve (Faux, 2002)."

Research Joint Ventures, Product Differentiation, And Price Collusion, Luca Lambertini, Sougata Poddar, Dan Sasaki

Economics Faculty Articles and Research

We investigate the interplay between firms’ decisions in product development, either joint or independent, and their ensuing repeated pricing, either collusive or Bertrand–Nash. A joint venture develops a single product, whereas independent ventures develop their respective products which can be differentiated. We prove that joint product development and the resulting lack of horizontal product differentiation may destabilise collusion, whilst firms’ R&D decisions have no bearings on collusive sustainability if differentiation is vertical. We also discover the non-monotone dependence of firms’ venture decisions at the development stage upon their time preferences, as well as upon consumers’ willingness to pay.

A Comparison Of Auctions And Multilateral Negotiations, Charles J. Thomas, Bart J. Wilson

Economics Faculty Articles and Research

We compare first-price auctions to an exchange process that we term 'multilateral negotiations.' In multilateral negotiations, a buyer solicits price offers for a homogeneous product from sellers with privately known costs, and then plays the sellers off one another to obtain additional price concessions. Using the experimental method, we find that with four sellers, transaction prices are statistically indistinguishable in the two institutions, but with two sellers, prices are higher in multilateral negotiations than in first-price auctions. The institutions are equally efficient with two sellers, but multilateral negotiations are slightly more efficient with four sellers.

The New Basel Capital Accord: Making It Effective With Stronger Market Discipline, Harald Benink, Clas Wihlborg

Business Faculty Articles and Research

In January 2001 the Basel Committee on Banking Supervision proposed a new capital adequacy framework to respond to deficiencies in the 1988 Capital Accord on credit risk. The main elements or ‘pillars’ of the proposal are capital requirements based on the internal risk-ratings of individual banks, expanded and active supervision, and information disclosure requirements to enhance market discipline. We discuss the incentive effects of the proposed regulation. In particular, we argue that it provides incentives for banks to develop new ways to evade the intended consequences of the proposed regulation. Supervision alone cannot prevent banks from ‘gaming and manipulation’ of …

Dirty Money, Gabriele Camera

Economics Faculty Articles and Research

An inter-governmental body is encouraging the replacement of currency with the objective of discouraging illegal economic activities. This policy is analyzed in a search-theoretic model where individuals choose legal or illegal production, settle trades via monetary or costly intermediated exchange, and where the government imperfectly monitors monetary transactions. Stationary monetary equilibria with both legal and illegal production exist, in which case the over-provision of currency may increment the extent of illegal production. This result holds also in the presence of intermediated exchange of legal goods. Equilibria with differing transaction patterns and degrees of illicit activities coexist.

Search, Dealers, And The Terms Of Trade, Gabriele Camera

Economics Faculty Articles and Research

I study a search-theoretic model with pairwise meetings where dealers arise endogenously. The extent of intermediation depends on its cost, trade frictions, and the dealers’ ability to negotiate favorable terms of trade. Under Nash bargaining, there is a unique equilibrium where dealers buy and hold the low-storage-cost good and, depending on their relative bargaining power, resell it at a premium or a discount. The distribution of the terms of trade is non-degenerate unless storage cost and frictions vanish. Due to an externality created by intermediation, the efficient allocation can be achieved only if dealers can charge a positive markup.

Money, Search And Costly Matchmaking, Gabriele Camera

Economics Faculty Articles and Research

I examine the robustness of monetary equilibria in a random matching model where a more efficient mechanism for trade is available. Agents choose between two trading sectors: the search and the intermediated sector. In the former, trade partners arrive randomly and there is a trading externality. In the latter a costly matching technology provides deterministic double-coincidence matches. Multiple equilibria exist with the extent of costly matching endogenously determined. Money and “mediated” trade may coexist. This depends on the size of the probability of a trade, relative to the cost of deterministic matching. This outcome is inferior for an increasing returns …

Strategic Flexibility In Information Technology Alliances: The Influence Of Transaction Cost Economics And Social Exchange Theory, Candace Ybarra, Margarethe Wiersema

Business Faculty Articles and Research

Utilizing a model drawn from both transaction cost economics and social exchange theory, we analyze determinants of strategic flexibility in a sample of strategic alliances involved in joint development agreements or joint research pacts. Findings indicate that, in general, determinants suggested by transaction cost economics provided flexibility in modification and inflexibility in exit. From social exchange theory, trust was found to be positively related to both types of flexibility while another component of social exchange theory, dependence, was found to be negatively related to the strategic flexibility of the alliance. Results also found that factors suggested by both transaction cost …

Money And Price Dispersion, Gabriele Camera, Dean Corbae

Economics Faculty Articles and Research

We relax restrictions on the storage technology in a prototypical monetary search model to study price dispersion. When multiple units of currency can be stored, buyers and sellers enter matches with potentially different willingness to buy or sell. Across the distribution of possible bilateral matches, prices will generally differ even though agents have identical preferences and technologies. We provide existence conditions for a particularly simple equilibrium pattern of exchange and prices. We prove that in the limiting case where search frictions are eliminated, equilibrium prices are uniform. We also prove that a higher initial money stock raises the average price …

Standardization And The Stability Of Collusion, Luca Lambertini, Sougata Poddar, Dan Sasaki

Economics Faculty Articles and Research

We characterize the interplay between firms' decision in terms of product standardization and the nature of their ensuing market behaviour. We prove the existence of a non-monotone relationship between firms' decision at the product stage and their intertemporal preferences.

Network Structure And Entry In The Deregulated Airline Industry, Joseph Berechman, Sougata Poddar, Oz Shy

Economics Faculty Articles and Research

We explore how an incumbent airline firm structures its route network under the threat of entry caused by deregulation. We show that entry induces the incumbent firm to strategically alter its flight operating network from a fully connected network (FC) to a hub-and-spoke network (HS). While most of the literature always assumed that the use of of HS network is primarily for the purpose of cost reduction, we show that hub-and-spoke operation can be used as a strategic device by the incumbent firm when it faces a threat of entry in its operating zone.

Exchange Rate Regimes And International Trade, Reuven Glick, Clas Wihlborg

Business Faculty Books and Book Chapters

The existing evidence on the volume effects of exchange rate risk and exchange rate regime choice is examined. The analysis involves estimating the effects of cross-country differences in exchange rate regime on export and import elasticities using a continuous measure of the degree of exchange rate flexibility. It is argued that risk for firms involved in international trade tends to decrease with greater exchange rate flexibility. In formulating our hypotheses we argued that the cross-country variation in U.S. export elasticities with respect to the real exchange rate and foreign GDPs is primarily attributable to the cross- country variation in bilateral …

Gatt, Dispute Settlement And Cooperation: A Reply, Dan Kovenock, Marie Thursby

Economics Faculty Articles and Research

In our 1992 paper, we analyzed GATT and its dispute settlement procedure (DSP) in the context of a supergame model of international trade featuring both explicit (GATT) and implicit (non-GATT) agreements. Our paper departed from the previous economics literature on GATT enforcement (see, for instance Hungerford (1991) and Ludema (1990)) by incorporating the ``twin engines of international obligation and retaliation'' (Hudec, 1990). International obligation imposed a cost of violating an explicit international agreement, such as GATT, while retaliation could take place either within the rules stipulated by the international agreement or by punishment outside of the agreement. In Section 2 …

Demand Fluctuations And Capacity Utilization Under Duopoly, J. J. Gabszewicz, Sougata Poddar

Economics Faculty Articles and Research

This paper studies the impact of uncertain demand on firms' capacity decisions when they operate in an oligopolistic environment. We define a two-stage game where firms choose capacity in the first stage without knowing which state of nature is going to realize, and output levels in the second, knowing which state is realized. We prove the existence of a symmetric subgame perfect equilibrium at which firms are in excess capacity compared with the capacity they would choose in the Cournot certainty equivalent game.

An International Survey Of Free Banking Periods: Us, California, France, Australia, Switzerland, And Scotland, Frank Doti, David Cassell

Economics Faculty Articles and Research

This article studies free banking periods worlwide.

Effect Of Regulation On Banking: California 1879-1929, Lynne Doti, Richard Runyon

Economics Faculty Articles and Research

California had a virtually unregulated banking environment until the first comprehensive banking regulations were passed in 1905. These regulations, and subsequent changes in 1909, required reserves and paid-up capital. Several tests of commonly accepted measures of safety, such as bank reserves, paid-up capital, bank failures, and real estate loans that resulted in foreclosure, are compared for selected years before and after the regulations. Results do not clearly demonstrate that regulation enhanced the safety of individual banks, but do support the conclusion that regulation enhanced the safety of the banking system as a whole.

The All-Pay Auction With Complete Information, Michael R. Baye, Dan Kovenock, Casper G. De Vries

Economics Faculty Articles and Research

In a (first price) all-pay auction, bidders simultaneously submit bids for an item. All players forfeit their bids, and the high bidder receives the item. This auction is widely used in economics to model rent seeking, R&D races, political contests, and job promotion tournaments. We fully characterize equilibrium for this class of games, and show that the set of equilibria is much larger than has been recognized in the literature. When there are more than two players, for instance, we show that even when the auction is symmetric there exists a continuum of asymmetric equilibria. Moreover, for economically important configurations …