Economics Theses and Dissertations
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Item Dynamic competition with customer recognition and switching costs: theory and application(2010) Grozeva, Vesela Dimitrova; Vincent, Daniel R; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation aims to contribute to our understanding of dynamic interaction in duopoly markets. Chapter 1 motivates the study and offers a brief overview of the results. In Chapter 2 I study the dynamic equilibrium of a market characterized by repeat purchases. Such markets exhibit two common features: customer recognition, which allows firms to price discriminate on the basis of purchase history, and consumer switching costs. Both features have implications for the competitiveness of the market and consumer welfare but are rarely studied together. I employ a dynamic framework to model a market with customer recognition and switching costs. In contrast to earlier studies of dynamic competition with switching costs, these costs are explicitly incorporated in the demand functions. Two sets of market equilibria are characterized depending on the size of the switching cost. For all values of the switching cost, customer recognition gives rise to a bargain-then-ripoff pattern in prices and switching costs amplify the loyalty price premium. When switching costs are low, there is incomplete customer lock-in in steady state, firm profits increase in the magnitude of the switching cost and introductory offers do not fall below cost. When switching costs are high, there is complete customer lock-in in steady state, firm profits are independent of switching costs and introductory prices may fall below cost. Under incomplete lock-in and bilateral poaching, switching costs do not affect the speed of convergence to steady state; under complete customer lock-in and no poaching from either firm, convergence to steady state occurs in just one period. The model also suggests that imperfect customer recognition leads to lower profits relative to both uniform pricing and perfect customer recognition. In Chapter 3 I use the market framework developed in Chapter 2 to examine the perception that imperfect competition hinders information sharing among rivals in games of random matching. In contrast to previous studies of information sharing, I propose a new channel through which competition may deter information sharing. This approach reveals a key role for firm liquidity by showing that information sharing among rivals is more likely to arise in markets populated by more liquid firms. Employing a dynamic duopoly framework, in which competition intensity varies with the degree of product differentiation, consumer switching costs and consumer patience, I show that more intense market competition can weaken the disincentives associated with disclosing information to a rival. I test the model's predictions using firm-level data on the information-sharing practices of agricultural traders in Madagascar. As predicted by the model, traders operating in liquid markets are shown to be more likely to share information about delinquent customers. This result is robust to the use of two alternative measures of liquidity, of which one is credibly exogenous, and two alternative ways of defining market liquidity. Furthermore, traders who report more intense competition in their market are found to be significantly more likely to share information.Item Design of Discrete Auction(2010) Sujarittanonta, Pacharasut; Cramton, Peter; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Chapter 1: Efficient Design of an Auction with Discrete Bid Levels This paper studies one of auction design issues: the choice of bid levels. Full efficiency is generally unachievable with a discrete auction. Since there may be more than one bidder who submits the same bid, the auction cannot completely sort bidders by valuation. In effort to maximize efficiency, the social planner tries to choose the partition rule-a rule dictating how type space is partitioned to group bidders who submit the same bid together-to maximize efficiency. With the efficient partition rule, we implement bid levels with sealed-bid and clock auctions. We find that the efficient bid levels in the sealed-bid second-price auction may be non-unique and efficient bid increments in a clock auction with highest-rejected bid may be decreasing. We also show that revealing demand is efficiency-enhancing even in the independent private valuation setting where price discovery is not important. Chapter 2: Pricing Rule in a Clock Auction We analyze a discrete clock auction with lowest-accepted bid (LAB) pricing and provisional winners, as adopted by India for its 3G spectrum auction. In a perfect Bayesian equilibrium, the provisional winner shades her bid while provisional losers do not. Such differential shading leads to inefficiency. An auction with highest-rejected bid (HRB) pricing and exit bids is strategically simple, has no bid shading, and is fully efficient. In addition, it has higher revenues than the LAB auction, assuming profit maximizing bidders. The bid shading in the LAB auction exposes a bidder to the possibility of losing the auction at a price below the bidder's value. Thus, a fear of losing at profitable prices may cause bidders in the LAB auction to bid more aggressively than predicted assuming profit-maximizing bidders. We extend the model by adding an anticipated loser's regret to the payoff function. Revenue from the LAB auction yields higher expected revenue than the HRB auction when bidders' fear of losing at profitable prices is sufficiently strong. This would provide one explanation why India, with an expressed objective of revenue maximization, adopted the LAB auction for its upcoming 3G spectrum auction, rather than the seemingly superior HRB auction. Chapter 3: Discrete Clock Auctions: An Experimental Study We analyze the implications of different pricing rules in discrete clock auctions. The two most common pricing rules are highest-rejected bid (HRB) and lowest-accepted bid (LAB). Under HRB, the winners pay the lowest price that clears the market; under LAB, the winners pay the highest price that clears the market. Both the HRB and LAB auctions maximize revenues and are fully efficient in our setting. Our experimental results indicate that the LAB auction achieves higher revenues. This also is the case in a version of the clock auction with provisional winners. This revenue result may explain the frequent use of LAB pricing. On the other hand, HRB is successful in eliciting true values of the bidders both theoretically and experimentally.Item Essays on Optimal Aid and Fiscal Policy in Developing Economies(2010) Banerjee, Ryan Niladri; Mendoza, Enrique G; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Essay I: Which countries receive aid as insurance and why? A theory of optimal aid policy Empirical evidence shows that developing countries with opaque institutions receive procyclical Official Development Aid (ODA) while developing countries with transparent institutions receive acyclical or countercyclical ODA. This paper provides a dynamic equilibrium model of optimal aid policy that quantitatively accounts for this fact. In the model, the donor wants to (a) encourage actions by the aid receiving government that increase output and (b) smooth out economic fluctuations. The transparency of institutions in the country affects the donor's ability to distinguish downturns caused by exogenous shocks, from those caused by government actions. The solution to the donor's mechanism design problem is dependent on the transparency of government actions. If the donor has good information about government actions, aid policy is countercyclical and aid acts as insurance. However, if the donor is unable to infer perfectly the cause of the downturn, aid policy is procyclical to encourage unobservable good actions. The model predicts a similar pattern for ODA commitments for the following year which is supported by the data. For countries with opaque institutions procyclical aid is the result of optimal policies given the information constraints of donors. Essay II: New Evidence on the Relationship Between Aid Cyclicality and Institutions This paper documents a new fact: the correlation between official development assistance (ODA) and GDP is negatively related to the quality of institutions in the receipient country. Differences in institutional indicators that measure corruption, rule of law, government effectiveness and government transparency are particularly important. The results are robust to several modifications. The results hold for both pooled and within regressions specifications and for different sources of institutional quality measures. This fact also reconciles conflicting empirical results about the correlation between ODA and GDP in the literature. For instance, Pallage and Robe (2001) find a positive correlation in two thirds of African economies and half of non-African developing economies, but Rand and Tarp (2002) find no correlation in a different set of developing countries. First, once institutions are accounted for, African economies are not treated differently by donors. Second, the sample in Rand and Tarp (2002) comprises developing economies which have relatively good institutions, therefore, those countries receive acyclical or countercyclical aid. \\ Essay II: Optimal Procyclical Fiscal Policy Without Procyclical Government Spending Procyclical fiscal policy can be caused by either procyclical government expenditure, countercyclical taxes or both. The majority of models which try to explain procyclical fiscal policy as the result of optimal policy have procyclical government expenditures. This paper develops a model which optimally generates procyclical fiscal policy while keeping government expenditures acyclical. Instead, taxes are optimally countercyclical. The model uses endogenous sovereign default to generate an environment where interest rates are lower in booms than in recessions. If household's have insufficient access to financial instruments it is optimal for the government to lower taxes and borrow during booms. This enables impatient households to benefit from the lower interest rates in booms by helping the consumer bring consumption forward.Item Two Essays in Macroeconomics(2010) Wu, Dong; Shea, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Castro and Coen-Pirani (2008) document that aggregate skilled hours and employment both became more volatile after the mid-1980s, in contrast to the simultaneous volatility decline of most aggregates, including overall hours and employment and unskilled hours and employment. In chapter 1, I propose that rising efficiency in matching skilled workers to vacancies accounts for this change. The rise of general-purpose information technology made the skills of well-educated workers more transferable across firms and industries, and this increased the suitability of unemployed skilled workers for a broader range of job vacancies. In turn this implies a larger increase in the flow of skilled labor into employment during economic booms. This causes skilled aggregates to be more volatile. I embed a simple search and matching mechanism in a typical dynamic general equilibrium model to demonstrate this idea. The purpose of chapter 2 is to explore the contribution of capital-skill complementarity to short-run employment fluctuations. Given that such complementarity is a leading explanation for long-run changes in the skill premium, it is interesting to check its short-run implications for employment volatility. The numerical results show that complementarity can make skilled employment more volatile than the unskilled, but it can not improve standard DSGE models' implications for overall labor market' volatility.Item Stable Firms and Unstable Wages(2010) Abras, Ana Luisa; Haltiwanger, John C; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)In this work I study recent developments in …rm employment and earnings instability in the US economy over the last 30 years. Despite the decline in aggregate and …rm level volatility, earnings instability has increased steadily for job stayers since the late seventies. I measure and model these phenomena as a result of a decline in labor market institutions that compress wage volatility, and an increase in the incidence of compensation schemes that attach wages to worker performance.Item ESSAYS ON MACROECONOMIC VOLATILITY AND MONETARY ECONOMICS(2010) Menkulasi, Jeta; Aruoba, Boragan; Haltiwanger, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)My dissertation consists of two independent essays on macroeconomic volatility and monetary economics respectively. The first essay explores the implications of imperfect information on macroeconomic volatility. It offers a micro-founded theory of time variation in the volatility of aggregate economic activity based on rational inattention. I consider a dynamic general equilibrium model in which firms are limited in their ability to process information and allocate their limited attention across aggregate and idiosyncratic states. According to the model, a decrease in the volatility of aggregate shocks causes the firms optimally to allocate less attention to the aggregate environment. As a result, the firms' responses, and therefore the aggregate response, becomes less sensitive to aggregate shocks, amplifying the effect of the initial change in aggregate shock volatility. As an application, I use the model to explain the Great Moderation, the well-documented significant decline in aggregate volatility in the U.S. between 1984 and 2006. The exercise is disciplined by measurements of the changes in aggregate and idiosyncratic volatilities. The model can account for 90% of the observed decline in aggregate output volatility. 67% of the decline is due to the direct effect of the drop in the volatility of aggregate technology shocks and the other 23% captures the volatility amplification effect due to the optimal attention reallocation from aggregate to idiosyncratic shocks. A version of the model without rational inattention can capture the former effect but not the latter. The second essay examines the redistributive effects of monetary policy using a dynamic general equilibrium model with heterogenous agents. I study the long-run effects of inflation on output, consumption and welfare, as well as the distribution of wealth in the economy. Unlike in representative agent models, heterogeneity can potentially allow for beneficial effects of inflation. Increases in the growth rate of money supply can reduce wealth dispersion, increasing output and welfare.Item The Macroeconomics of Rare Events(2010) Olaberria, Eduardo Augusto; Vegh, Carlos; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)People in developing countries are more often affected by rare events, such as natural disasters and epidemics, than people in developed nations. Furthermore, the intensity of these events is usually higher in poor countries. Among policymakers, these rare events and other external shocks, such as terms-of-trade fluctuations and changes in international conditions, are often explicitly or implicitly blamed for the bad performance of growth. Do these rare events affect economic growth? Are the frequency and intensity of these rare events helpful in explaining the gap in income between rich and poor countries? The answer to this question is important not only for evaluating policies aimed at preventing these events and mitigating its consequences, but also for understanding the reasons why some countries are rich and some poor. Although there has been a steady increase in the number of researchers tackling these questions, the effects of rare events on economic development and long-run growth remains unclear. There are some studies reporting negative, and others indicating no, or even positive effects. The purpose of this dissertation is to show that these seemingly contradictory findings can be reconciled by exploring the effects of disasters on growth separately by type of disaster. This study examines the long- term economic impact of natural disasters and epidemics and shows that these rare events (natural disasters and epidemics) appear to be associated with different patterns of economic vulnerability and so entail different options for reducing risk. A few main conclusions emerge. Rare events significantly affect economic development but not always negatively, and differently across disasters and economic sectors. Hence, in order to understand and assess the economic consequences of natural disasters and epidemics and the implications for policy, it is necessary to consider the pathways through which different types of events affect economic development, the different risks posed, and the ways in which economies can respond to these threats.Item ESSAYS ON HOUSING INVESTMENTS IN EMERGING MARKETS(2009) Qi, Zhikun; Vegh, Carlos; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)New residential construction is significantly more procyclical in emerging markets than in developed countries, although the correlation between aggregate investment and output is similar across emerging and developed countries. This paper shows that a multi-sector stochastic growth model with a housing production sector can explain this fact. The key feature of the model is that housing demand depends on the cyclical behavior of consumption of tradable goods, which is much more volatile in emerging markets. Therefore, when a positive productivity shock hits the economy, the larger response of consumption of tradable goods implies that it is more attractive for consumers in emerging markets to purchase housing than it is for consumers in developed countries. This paper considers various factors that contribute to the large variability of consumption in emerging markets, and finds that larger trend growth rate shocks in emerging markets than in developed countries are quantitatively important. The reason is that a positive productivity shock signals even higher productivity in the future with large growth rate shocks, so the current consumption response is large and the return to housing investment is high. While qualitatively the model matches the differences in the cyclicality of new residential construction across emerging markets and developed countries, quantitatively the model underestimates this comovement and the volatilities in housing investment in emerging markets. Furthermore, international interest rate shocks highly correlated with productivity shocks are very important in explaining the large swings in housing investment in emerging markets. Interest rate shocks work through three channels to affect housing investment: the direct `mortgage rate' effect, the indirect effect through increasing non-housing consumption and the supply effect due to the working capital constraint. Quantitatively, the direct `mortgage rate' effect is the most important channel. When the housing asset acts as collateral to reduce household's financing costs, it provides an empirically important mechanism to amplify and propagate interest rate shocks over the business cycle. The reason is that housing prices and interest rates reinforce with each other to generate more procyclical housing investment and more volatile consumption and output.Item Essays on Self-Employment and Entrepreneurship(2009) Rasteletti, Alejandro Gabriel; Haltiwanger, John; Shea, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation consists of three chapters studying different issues related to self-employment and entrepreneurship. The first chapter studies the effects of labor market frictions and credit constraints in an economy with self-employment. Two types of self-employed workers emerge in the model: (i) entrepreneurs and (ii) workers using self-employment as a stopgap. I show that labor market frictions generate a motive not to transition into self-employment, by making selfemployment a choice that takes time to reverse. At the aggregate level, these frictions also reduce the average size of entrepreneurs' businesses. Meanwhile, even if credit constraints are of particular importance for entrepreneurs, they also affect the stopgap self-employed. When credit constraints are tighter, fewer vacancies are posted, which increases the number of workers using self-employment as a stopgap in equilibrium. In the second chapter, I use data from the PSID to study the characteristics of workers using selfemployment as a stopgap while searching for another job, vis-à-vis those of other self-employed workers. The data reveals that stopgap self-employment is relatively high among young workers and those who experienced unemployment. Furthermore, the probability of entering self-employment increases monotonically with wealth for those not using self-employment as a stopgap, while it has an inverted U shape for those using self-employment as a stopgap. I also find that being unemployed increases the probability of becoming stopgap self-employed, but has no effect on the probability of becoming self-employed for other reasons. The third chapter examines the impact of exogenous technological growth on entrepreneurship and unemployment. The model developed in that chapter predicts that in the absence of labor market frictions, technological growth has an effect on entrepreneurship if and only if it affects an entrepreneur's capacity to manage workers. When labor market frictions are present, technological growth may have a positive or negative impact on entrepreneurship and unemployment. The desirable outcome of an increase in the rate of technological growth enhancing entrepreneurship and dampening unemployment is more likely to be obtained when the interest rate does not increase significantly with growth, technological change is disembodied, and growth enhances entrepreneurial ability at managing workers.Item Product Differentiation in International Trade(2009) Gervais, Antoine; Limao, Nuno; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This thesis is concerned with the role of product quality in explaining observed price and trade patterns. The first chapter introduces the topic, summarizes the main findings of the dissertation and contrasts them to other results in the literature. The second chapter develops a tractable general equilibrium model that includes quality differentiation among heterogeneous firms. The theory explicitly demonstrates how heterogeneity in a single exogenous parameter, productivity, can produce dispersion in product quality and price. The framework predicts that relatively productive firms will choose to produce high quality varieties. This finding accords well with the observation that the unit value of exported varieties increases with exporter's income, capital- and skill- abundance. The model is used to analyze how international trade policy and quality differentiation interact to shape patterns of production and trade flows. In particular, the model predicts a positive relationship between product quality and export status at the firm level and that trade liberalization decreases the average quality of a country's exports. The third chapter evaluates the importance of vertical product differentiation in explaining price and export status patterns observed in microdata on U.S. manufacturing plants. The main difficulty in exploring the impact of vertical product differentiation is that product quality is not directly observable. The analysis tackles the problem from two angles. First, the chapter develops a novel empirical strategy to obtain a proxy for quality, which is then used to evaluate important conditional correlations. The results show that both quality and productivity are important determinants of price and export status pattern. Second, the simulated method of moments is used to obtain structural estimates of the parameters of the model and to assess the importance of quality differentiation. The estimates suggest that quality differentiation plays an important role in explaining the variation in price, size and export status across U.S. manufacturing plants. The fourth chapter briefly concludes by summarizing the main findings and suggesting avenues for future research. Overall the analysis presented in this dissertation implies that vertical product differentiation, or quality, plays an important role in explaining dispersion in producer output price and export status.