Economics

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    Replication Code for "Should We Expect Merger Synergies To Be Passed Through to Consumers?"
    (2024-07-01) Sweeting, Andrew; Lecesse, Mario; Tao, Xuezhen
    When reviewing horizontal mergers, antitrust agencies balance anticompetitive incentives, resulting from market power, with procompetitive incentives, created by efficiencies, assuming complete information and static, simultaneous move Nash equilibrium play. These models miss how a merged firm may prefer not to pass through efficiencies when rivals would respond by lowering their prices. We use an asymmetric information model, where rivals do not observe the size of the realized cost efficiency, to investigate how this incentive could affect post-merger prices. We highlight how the strength of this incentive will depend on the market structure of non-merging rivals and discuss alternative settings where similar issues arise.
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    Replication code for Dynamic Oligopoly Pricing with Asymmetric Information: Implications for Horizontal Mergers
    (2024-07-01) Sweeting, Andrew; Yao, Xinlu; Tao, Xuezhen
    We model repeated pricing by differentiated product firms when each firm has private information about its serially-correlated marginal cost. In a fully separating equilibrium of the dynamic game, signaling incentives can lead equilibrium prices to be signif icantly above those in a static, complete information game, even when the possible variation in the privately-observed state variables is very limited. We calibrate our model using data from the beer industry, and show that, without any change in conduct, our model can explain increases in price levels and changes in price dynamics and cost pass-through after the 2008 MillerCoors joint venture. The software in this repository allows all of the simulated numbers to be recalculated. It provides information on where the IRI dataset used in the empirical work can be found. Code to process the data is included.
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    Ex-ante Asymmetric Information in Credit Markets and Macroeconomic Fluctuations
    (2013) Ture, Hatice Elif; Aruoba, Boragan; Korinek, Anton; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
    This dissertation analyzes macroeconomic effects of ex-ante information acquisition problems between lenders and borrowers in credit markets. It examines the ways in which the costs associated with the screening of privately informed heterogeneous borrowers affect contractual arrangements, efficient allocation of credit and macroeconomic fluctuations. In the first chapter, screening can be achieved by collateral requirements and credit limits. We analyze how changes in collateral availability affect aggregate investment and output dynamics through the misallocation of credit across heterogeneous investors. Groups of investors with different observable quality finance investment projects through bank loans, pledging part of their projects. Borrower risk is private information within a group, which requires financial contracts that may pool or separate borrowers with common quality. Pooling contracts offer efficient loan amounts but entail cross subsidization of high-risk borrowers, while separating contracts offer efficient loan rates but entail credit rationing of low-risk borrowers. A financial shock that reduces the collateral capacity of investors may switch the financial contracts designed for low-quality investors from pooling to separating, which increases credit rationing and reallocates credit in favor of high-quality investors. This flight to quality in bank lending reduces aggregate investment efficiency and real economic activity. In the second chapter, screening can be achieved by incurring resource costs. We build a dynamic model featuring costly screening of borrowers to examine how aggregate shocks are amplified and propagated through net-worth effects compared to a standard model of ex-post monitoring costs. Costly screening is a way to economize on agency costs induced by cross subsidization, but is an agency cost itself, making investment dependent on borrower net-worth. Thus, costly screening can be an alternative to widely assumed monitoring costs in generating net-worth effects that enhance the propagation of aggregate shocks. One advantage of the screening framework is that it yields wealth effects that induce persistent dynamics especially in bad times when screening is more likely, which may create deeper and longer recessions than booms. Moreover, by yielding efficient risk pricing and quantity rationing endogenously, the screening framework constitutes an empirically plausible alternative to monitoring costs to motivate the agency costs in unsecured lending.