Volume 18, Issue 4:

Jonathan Haskel and Amparo Sanchis

"A bargaining model of Farrell Inefficiency

JEL codes: L10; J24
Keywords: technical efficiency, competition, X-inefficiency, effort

Abstract: An enormous number of empirical papers have estimated technical efficiency, the distance of firms inside a frontier, following the model of Farrell (1957). We propose a theory that explains the distance these empirical papers seek to measure. The theory is based on the idea that workers can bargain low "effort" (high crew sizes, etc.) if they and the firm have some monopoly power. We provide simple theoretical expressions for the empirical measures of technical and allocative efficiency and compare them to those in the statistical literature. We consider the relation between competition and efficiency and show how the model extends readily to address public sector inefficiency, increasing returns and manager/firm agency

Yuji Honjo

"Business failure of new firms: an empirical analysis using a multiplicative hazards model"

JEL codes: G33, L11, M13
Keywords: New firm; Business failure; Multiplicative hazards model

Abstract: This paper investigates business failure of new firms. Using a multiplicative hazards model, we estimate the determinants of business failure among new manufacturing firms in Tokyo during the period 1986 to 1994. It is found that a new firm without sufficient capital or a sufficient size has confronted a higher risk of business failure. It is also found that the new firm tends to be more difficult to survive in an industry characterized by a high entry rate. With respect to the timing of entry, the new firm that entered just before or after the collapse of the so-called bubble economy has been more likely to fail. Furthermore, we estimate the regression model based not only on age but also on calendar time. By using the regression model on calendar time, it is found the firm's age has been related to business failure.

Jean Gabszewicz and A. Turrini

"Workers skills, product quality and industry equilibrium"

JEL codes: D4, J24, L13, L15
Keywords: quality competition, strategic effects, endogenous market structure, skills investments, multiple equilibria

Abstract: In this paper we develop a model of a vertically differentiated industry where the production of higher quality goods needs a higher fraction of specialized labour. In the first stage, firms choose the quality of their products, in the second, both good prices and skilled workers' wages are determined. We show that in duopoly, though supplying different variants of the product, firms tend to cluster either at the bottom or at the top of the quality ladder, depending on skilled labour availability. This switch in equilibrium qualities creates a discontinuous behaviour for the wage rate of skilled workers. When the supply of skilled labour is made endogenous, two equilibria are simultaneously possible: one with low-skill, low-quality, the other with high-skill, high-quality.

Claudio Piga

"Competition in a duopoly with sticky price and advertising"

JEL codes: C72, C73, L13, M37
Keywords: Differential games, advertising, sticky price, Markov strategy, linear and nonlinear

Abstract: This paper develops a differential duopolistic game where price is sticky and firms can invest in market-enlarging promotional activities which have a public good nature. One finding indicates that advertising, and not output as in Fershtman and Kamien ("Dynamic duopolistic competition with sticky prices," Econometrica, Volume 55, 1987, pp. 1151-64), is responsible for the higher stationary price found in the open loop equilibrium relative to the linear feedback one. That is, free-riding is more intense when firms play linear Markov feedback strategies. However, the collusive outcome can be approximated, and opportunism eliminated, if firms can engage in preplay negotiations where they select a nonlinear Markov perfect strategy for output and advertising. Achieving the collusive outcome requires (as in the Folk Theorem for infinitely repeated games) the discount rate to be sufficiently small.

José Luis Moraga-González

"Quality uncertainty and informative advertising"

JEL codes: L15, D82
Keywords: informative advertising, quality uncertainty, signaling

Abstract: We consider a single period model where a monopolist introduces a product of uncertain quality. Before pricing and informative advertising decisions take place, the producer observes the true quality of the good while consumers receive an independent signal which is correlated with the true quality of the product. We show that if informative advertising occurs in equilibrium, there must exist some pooling. Further, we prove that for an advertising full pooling equilibrium to exist, (a) consumers' valuation for the high quality, advertising cost and consumers' prior probability of high quality must be sufficiently high and (b) informativeness of the market signal must be sufficiently low. Existence of an advertising semi-separating equilibrium requires similar conditions. When informative advertising appears in equilibrium, the adverse selection problem is partially mitigated.

Tore Nilssen

"Consumer Lock-In with Asymmetric Information"

JEL codes: D82; G22; L14
Keywords: Asymmetric information; Insurance market; Short-term contracts; Consumer lock-in.

Abstract: A two-period version of the Rothschild-Stiglitz (QJE, 1976) model of competitive screening in an insurance market is presented. Its features include: repeat purchase of insurance among consumer; no commitment among insurers or consumers; asymmetric information among insurers about a consumerīs accident history; and state-contingent contracts. An equilibrium may exist in this model with full pooling in period one and consumer lock-in in period two. In such an equilibrium, high-risk consumers are experience-rated and firms earn negative profits in period one and positive profits in period two.

Claudio Mezzetti and Theofanis Tsoulouhas

"Gathering information before signing a contract with a privately informed principal"

JEL codes:
Keywords: information gathering, contracts, asymmetric information

Abstract: We show that precontractual gathering of information by the uninformed party in a transaction benefits the favorable types of the informed party by allowing them to separate from the unfavorable types. Complete separation of types can only occur if the informed party detects an unfavorable type. Paradoxically, the uninformed party would benefit if the informed party were constrained to make a take-it-or-leave-it offer.