We study monopolistic competition with symmetric directly additive preferences (generating variable mark-ups) and an endogenous technology choice. Each firm chooses an investment in R&D to decrease its marginal cost. We prove that the equilibrium R&D investment increases with market size (a larger population or trade) only if the price-elasticity of demand is an increasing function. Together with the output levels, such equilibrium investments may be socially excessive or insufficient, depending on whether the elasticity of the subutility is increasing or decreasing. The main implication is that opening up to free trade can foster R&D through variable mark-ups.
This paper compares the market equilibria in a differentiated industry under Cournot, Bertrand, and monopolistic competition. This is accomplished in a one-sector economy where consumers are endowed with separable preferences. When firms are free to enter the market, monopolistically competitive firms charge lower prices than oligopolistic firms, while the mass of varieties provided by the market is smaller under the former than the latter. If the economy is sufficiently large, Cournot, Bertrand and Chamberlin solutions converge toward the same market outcome, which may be a competitive or a monopolistically competitive equilibrium, depending on the nature of preferences.
We study how technological progress in manufacturing and transportation to-gether with migration costs interact to shape the space-economy. Rising labor productivity in the manufacturing sector fosters the agglomeration of activities, whereas falling transport costs associated with technological and organizational in-novations fosters their dispersion. Since these two forces have been at work for a long time, the final outcome must depend on how drops in the costs of producing and trading goods interact with the various costs borne by migrants. Finally, when labor is heterogeneous, the most efficient workers of the less productive region are the first to move to the more productive region.
We study the relationship between income and environmental quality based on modern Russian city-level data. The paper aims at testing whether the environmental Kuznets curve relationship between air pollution and average monthly wages holds in Russian cities and towns. Our preliminary results support the presence of an inverted U-shaped function of wages and reveal significant spatial autocorrelation of air pollution indicators of Russian cities and towns.
We derive a simple necessary and sufficient condition on preferences for the market outcome to be socially optimal under monopolistic competition with input-output (IO) linkages. Preferences that satisfy this condition are typically non-CES and display pro-competitive effects, although they converge to the CES when IO linkages become negligibly weak. We show that the equilibrium with pro-competitive effects may deliver both excess and insufficient entry of firms in equilibrium.
We study a general model of multi-dimensional screening for discrete types of consumers without the single-crossing condition or any other essential restrictions. Such generality motivates us to introduce graph theory into optimization by treating each combination of active constraints as a digraph. Our relaxation of the constraints (a slackness parameter) excludes bunching and cycles among the constraints. Then, the only possible solution structures arerivers, which are acyclic rooted digraphs, and the Lagrange multipliers can be used to characterize the solutions. Relying on these propositions, we propose and justify an optimization algorithm. In the experiments, its branch-and-bound version with a good starting plan shows fewer iterations than a complete search among all rivers.
This chapter addresses the economics of regional disparities and transport policies in the European Union, offering an explanation for the uneven development of regions. We show that recent developments in spatial economics highlight the fact that trade is costly and location still matters. Since the drop in transport costs and the emergence of a knowledge-based economy, the proximity to natural resources has been replaced by new drivers of regional growth that rely on human capital and cognitive skills. Regions with a high market potential – those where demand is high and transport costs low – are likely to attract more firms and pay higher wages, which leads to sizable and lasting regional disparities. As a consequence, investments in interregional transport policies may not deliver their expected effects. In addition, new information and communication devices foster the fragmentation of the supply chain and the decentralization of activities.
We consider the repeated zero-sum bidding game with incomplete information on one side with non-normalized total payoff. De Meyer, Marino (2005) and Domansky, Kreps (2005) investigated a game $G_n$ modeling multistage bidding with asymmetrically informed agents and proved that for this game $V_n$ converges to a finite limit $V_\infty$, i.e., the error term is $O(1)$. In this paper we show that for this example $V_n$ converges to the limit exponentially fast. For this purpose we apply the optimal strategy $\sigma_\infty$ of insider in the infinite-stage game obtained by Domansky (2007) to the $n$-stage game and deduce that it is $\varepsilon_n$-optimal with $\varepsilon_n$ exponentially small.
We explore the 2007-2008 noticeable liberalization of Russian labor immigration, perceived as a natural experiment. How it influenced the labor market equilibrium and especially wages of certain categories of Russian employees? We use various data, including remittances from Russia, and restore related hike in official and unofficial labor immigration. According to our rough estimate, the mass of gastarbeiters increased significantly, from 3.4 mln in 2006 to 4.3 mln (2006) and then to 4.9 mln (2008). This did not cause additional unemployment, but influenced wages. We follow the Borjas (2016) method of assessing the impact of natural experiments, and we are interested in (equilibrium) wage elasticities and interdependencies among the labor groups in Russia. To reveal the elasticity of equilibrium wages, responding to 2007-2008 inflow of (mostly unskilled) labor, we run difference-in-difference regressions on RLMS data. For some Russian residents, their wages responded to new policy noticeably. Namely, the most affected were the pre-established Asian migrants: they lost about 14-17.5% wages in response to 8%-14% increase in similar working force. The ethnic Russians with blue-collar or low qualification lost about 4.5-5.5% of wages, while the impact on white-collars was insignificant. Arguing about the macro-economic consequences of such liberalization policies for Russia, we thereby point out the negatively affected categories of employees and the degree of their losses, which can be compared with additional GDP generated.
This paper provides an empirical test of spatial wage convergence in Russian cities. Using geo-coded data covering 997 Russian cities and towns from 1996 to 2013, I show that real city wages (i) converge over time and (ii) are significantly affected by the initial levels of real wages in neighboring cities. I also find that cities of the Far North, where a special wage policy is implemented, were converging more slowly than the rest of the country. I find a significant negative impact of regional subsidies on real wages in cities outside the Far North, and that the effect of extractive industries on real wage has become weaker. These results are robust to the radius of spatial interaction, and my conclusions hold if remote settlements are not taken into account.
We propose a general model of monopolistic competition, which encompasses existing models while being flexible enough to take into account new demand and competition features. Even though preferences need not be additive and/or homothetic, the market outcome is still driven by the sole variable elasticity of substitution. We impose elementary conditions on this function to guarantee empirically relevant properties of a free-entry equilibrium. Comparative statics with respect to market size and productivity shocks are characterized through necessary and sufficient conditions. Furthermore, we show that the attention to the CES based on its normative implications was misguided: we propose a new class of preferences, which express consumers' uncertainty about their love for variety, that yield variable markups and may sustain the optimum. Last, we show how our approach can cope with heterogeneous firms once it is recognized that the elasticity of substitution is firm-specific.
We study the consequences of opening trade between developed and developing countries. To this end, we develop a two-factor general equilibrium model of international trade with variable markups and two countries which differ in relative factor endowments. We show that the more developed country (a country with a higher relative capital endowment) is characterized by higher wages and lower capital price while total individual income is higher in this country than in the less developed one. Deeper asymmetries in relative factor endowment between countries lead to more intensive trade. We also show that opening trade between two countries similar in factor endowments results in welfare gains for consumers in both countries. Contrast to that, opening trade is detrimental for residents of developing country if countries have big enough differences in factors endowments while consumers in developed country still gain from trade. This result arises due to high income inequality between two countries’ residents. The additional source of welfare losses in the developing country is the high production cost of imported commodities, which reduces their purchasing power for imported goods. Thus, market equilibrium with free trade is optimal only in the case of identical individual incomes between countries. Additional export regulations in the developing country may reduce differences in purchasing power between countries. Therefore, appropriate regulatory measures could result in reduction in income inequality which lead to gains from trade for consumers in both countries.
This paper identifies a new reason for giving preferences to the disadvantaged using a model of contests. There are two forces at work: the e§ort e§ect working against giving preferences and the selection e§ect working for them. When education is costly and easy to obtain (as in the U.S.), the selection e§ect dominates. When education is heavily subsidized and limited in supply (as in India), preferences are welfare reducing. The model also shows that unequal treatment of identical agents can be welfare improving, providing insights into when the counterintuitive policy of rationing educational access to some subgroups is welfare improving.
We examine an equilibrium concept for 2-person non-cooperative games with boundedly rational agents which we call Nash-2 equilibrium. It is weaker than Nash equilibrium and equilibrium in secure strategies: a player takes into account not only current strategies but also all profitable next-stage responses of the partners to her deviation from the current profile that reduces her relevant choice set. We provide a condition for Nash-2 existence in finite games and complete characterization of Nash-2 equilibrium in strictly competitive games. Nash-2 equilibria in Hotelling price-setting game are found and interpreted in terms of tacit collusion.