Welfare Reducing Research Articles

Broadband Openness Rules are Fully Justified by Economic Research

This paper responds to arguments made in filings in the FCC’s broadband openness proceeding (GN Dkt. 09-191) and incorporates data made available since my January 14th filing in that proceeding. Newly available data confirm that there is limited competition in the broadband access marketplace. Contrary to some others’ arguments, wireless broadband access services are unlikely to act as effective economic substitutes for wireline broadband access services (whether offered by telephone companies or cable operators) and instead are likely to act as a complement. Nor will competition in the Internet backbone marketplace constrain broadband providers’ behavior in providing “last mile” broadband access services. The last mile, concentrated market structure, combined with high switching costs, provides last mile broadband network providers with the ability to engage in practices that will reduce social welfare in the absence of open broadband rules. Furthermore, the effect of open broadband rules on broadband provider revenues is likely to be small and can be either positive or negative.Unfortunately, various filings have misstated or mischaracterized the results on the economics of two-sided markets. Contrary to what some have argued, allowing broadband providers to charge third party content providers will not necessarily result in lower prices being charged to residential Internet subscribers. This is true under a robust set of assumptions. Despite some parties’ mischaracterization of the economic literature, price discrimination by broadband providers against third party applications and content providers will reduce societal welfare for numerous reasons. This reduction in societal welfare is especially acute when price discrimination is taken to the extreme of exclusive dealing between broadband providers and content providers. Antitrust and consumer protection laws are insufficient to protect societal welfare in the absence of open broadband rules.

Double Marginalization in Performance-Based Advertising: Implications and Solutions

An important current trend in advertising is the replacement of traditional pay-per-exposure (pay-per-impression) pricing models with performance-based mechanisms in which advertisers pay only for measurable actions by consumers. Such pay-per-action (PPA) mechanisms are becoming the predominant method of selling advertising on the Internet. Well-known examples include pay-per-click, pay-per-call, and pay-per-sale. This work highlights an important, and hitherto unrecognized, side effect of PPA advertising. I find that, if the prices of advertised goods are endogenously determined by advertisers to maximize profits net of advertising expenses, PPA mechanisms induce firms to distort the prices of their goods (usually upward) relative to prices that would maximize profits in settings where advertising is sold under pay-per-exposure methods. Upward price distortions reduce both consumer surplus and the joint publisher–advertiser profit, leading to a net reduction in social welfare. They persist in current auction-based PPA mechanisms, such as the ones used by Google, Yahoo!, and Microsoft. In the latter settings they also reduce publisher revenues relative to pay-per-exposure methods. I show that these phenomena constitute a form of double marginalization and discuss a number of enhancements to today's PPA mechanisms that restore equilibrium pricing of advertised goods to efficient levels, improving both consumer surplus as well as the publisher's expected profits. This paper was accepted by Lorin Hitt, information systems.

Financing Constraints for Industrial Innovation: What do We Know?

This article provides an overview of the most important insights from economic literature on private investment into research and development activity and how it may be constrained by market failure. The focus is on implications from empirical studies for the identification of financially constrained firms with respect to their innovative activities. The empirical evidence for incentive and financing problems for private sector investment in innovation projects has provided ground for governmental interventions to prevent welfare reducing underinvestment in innovation. However, the survey of the literature shows that designing efficient policy schemes is not straightforward as government funds are scarce, and the impact of financial constraints on investment may differ substantially across firms, types of R&D projects and the organization of financial markets in different countries.

Finanzhilfen bei internationalen Verschuldungskrisen?

Summary The present paper focuses on the trade-off between official liquidity provision and debtor moral hazard in sovereign debt problems. The financial crisis is caused by the interaction of bad fundamentals, self-fulfilling runs of private investors and optimal policies of the national government and the official lender. Building on the global games approach of Morris and Shin (2006), we extend their analysis by calculating numerical solutions for different values of fundamental and strategic uncertainty. Our results indicate that limited financial support may even strengthen government efforts and improve welfare when fundamentals are weak but not too weak. On the other hand, we are also able to identify debtor moral hazard and welfare reducing catalytic effects with stronger fundamentals.

Double Marginalization in Performance-Based Advertising: Implications and Solutions

An important current trend in advertising is the replacement of traditional pay-per-exposure (pay-per-impression) pricing models with performance-based mechanisms in which advertisers pay only for measurable actions by consumers. Such pay-per-action (PPA) mechanisms are becoming the predominant method of selling advertising on the Internet. Well-known examples include pay-per-click, pay-per-call and pay-per-sale. This work highlights an important, and hitherto unrecognized, side-effect of PPA advertising. I find that, if the prices of advertised goods are endogenously determined by advertisers to maximize profits net of advertising expenses, PPA mechanisms induce firms to distort the prices of their goods (usually upwards) relative to prices that would maximize profits in settings where advertising is sold under pay-per-exposure methods. Upward price distortions reduce both consumer surplus and the joint publisher-advertiser profit, leading to a net reduction in social welfare. They persist in current auction-based PPA mechanisms, such as the ones used by Google and Yahoo. In the latter settings they always reduce publisher revenues relative to pay-per-exposure methods. In extreme cases they also lead to rat-race situations where, in their effort to outbid one another, advertisers raise the prices of their products to the point where demand for them drops to zero. I show that these phenomena constitute a form of double marginalization and discuss a number of enhancements to today's PPA mechanisms that restore equilibrium pricing of advertised goods to efficient levels.

Winners and losers of conservation policies for European eel, Anguilla anguilla: an economic welfare analysis for differently specialised eel anglers

Abstract Recreational specialisation theory was coupled with a discrete choice experiment to understand eel, Anguilla anguilla L., angler’s heterogeneity in their reaction to regulatory changes and the associated welfare changes. Differently specialised eel anglers exhibited distinct preferences for catch variables and eel angling regulations. All anglers preferred slightly to moderately stricter regulations than are currently in place; however, such policies particularly benefited casual eel anglers. In contrast, advanced eel anglers would be most penalised by highly restrictive regulations as indicated by substantial reductions in economic welfare. Aversions to stricter regulations found for advanced anglers contradicted predictions from specialisation theory. From an eel management perspective, the implementation of some simple tools such as increased minimum‐size limits will reduce angling mortality on eel and simultaneously increase the welfare of anglers. By contrast, highly restrictive eel angling regulations will result in considerable economic welfare losses of several million € per year for northern Germany alone.

The Neolithic Revolution from a Price-Theoretic Perspective

The adoption of agriculture during the Neolithic period triggered the first demographic explosion in history. When fertility returned to its original level, agriculturalists were more numerous, more poorly nourished, and worked longer hours than their hunter-gatherer ancestors. We develop a dynamic price-theoretic model that rationalizes these events. In the short run, people are lured into agriculture by the increased labor productivity of both adults and children. In the long run, the growth in population overrides the productivity gains, and the later generations of agriculturalists end up being worse off than the hunter-gatherers. Counter-intuitively, the increase in the labor productivity of children causes the long-run reduction in welfare. In the long run, the increase in adult labor productivity only contributes to population growth.

The Economic Impacts of Climate Change in Sub-Saharan Africa

The aim of this study is to investigate the impact of climate change on trade and competitiveness in Sub-Saharan African (SSA) countries and to address the implications for managing the impacts, including the options for mitigation and adaptation. The African continent is particularly vulnerable to climate change for a variety of reasons including the fact that the majority of the countries are reliant on agriculture, which is particularly sensitive to climate change and variability. Furthermore, the low per capita incomes and the existing stresses present unique challenges to adapting to climate change. Forecasts indicate that agricultural productivity decline for SSA as a whole could be about 28% on average without carbon fertilisation by the 2080s, and about 18% with carbon fertilisation. However, these figures mask the extreme nature of the losses for some countries. For example, for countries that are dependent on dryland agriculture, productivity losses could be as much as 100%. The study simulated the macroeconomic implications of the decline in agricultural productivity using a computable general equilibrium model of the world economy. It was found that GDP increases for the EU, Japan and the US but decreases by significant amounts in the SSA region. The terms of trade declines in SSA, leading to a reduction of disposable incomes and hence a reduction in welfare. Issues and challenges relating to adaptation and mitigation, as well as options for managing the impact of climate change and the role of key stakeholders, are discussed.

'The Voracity Effect' and Climate Change: The Impact of Clean Technologies

We show that a technological breakthrough that reduces CO2 emissions per output can exacerbate the climate change problem: countries may respond by raising their emissions resulting in an increase of the stock of pollution that may reduce welfare. Using parameter values based on empirical evidence we obtain that any 'new technology' that reduces the emissions of CO2 per dollar of GDP by less than 76% from their current level is welfare reducing. Developing clean technologies as well as transferring “cleaner” technologies to developing countries make a global post-Kyoto agreement over the control of emissions all the more urgent.

Welfare, Tax Burden and Fiscal Balance in Artificial Societies

Japan's social security system is facing a crisis by short-sighted policies to balance of the accounts in a financial crisis. However, such a balance of accounts does not necessarily bring remedy of financial difficulties. If it is possible to reduce the social security payments because the weak become independent, it is considered that short-sighted reforms cause a further financial crisis.This study explores how welfare and tax burden influence fiscal balance using multi-agent simulations. The results of simulation show that fiscal balance is improved by high-welfare than a cut in fiscal expenditures, and that welfare reducing is impossible unless the three relations of social configuration (market, obligatory, and communal relations) function in balance with each other.

Transparency and Monetary Policy with Imperfect Common Knowledge

Is it desirable that central banks be more transparent in the communication of sensible information when agents have diverse private information? In practice, there exists some consensus about the benefits of acting in this way. However, other studies warn that increasing the precision of public information may raise the volatility of some aggregate variables - in particular, the price level - due to the disproportionate influence that it exerts on agents' decisions, and that this, in turn, will have negative effects on welfare. This paper studies the welfare effects of varying levels of transparency in a model of price-setting under monopolistic competition and imperfect common knowledge. Our results indicate that more precise public information never leads to a reduction of welfare in this framework. We find that the beneficial effects of decreased imperfect common knowledge due to a more precise common signal always compensates the potential rise in aggregate volatility. Moreover, we show that, in contrast to what has previously been assumed, the variability of the aggregate price level has no detrimental welfare effects in this model.

Transparency and Monetary Policy with Imperfect Common Knowledge

Is it desirable that central banks be more transparent in the communication of sensible information when agents have diverse private information? In practice, there exists some consensus about the benefits of acting in this way. However, other studies warn that increasing the precision of public information may raise the volatility of some aggregate variables - in particular, the price level - due to the disproportionate influence that it exerts on agents' decisions, and that this, in turn, will have negative effects on welfare. This paper studies the welfare effects of varying levels of transparency in a model of price-setting under monopolistic competition and imperfect common knowledge. Our results indicate that more precise public information never leads to a reduction of welfare in this framework. We find that the beneficial effects of decreased imperfect common knowledge due to a more precise common signal always compensates the potential rise in aggregate volatility. Moreover, we show that, in contrast to what has previously been assumed, the variability of the aggregate price level has no detrimental welfare effects in this model.

Financing Constraints for Industrial Innovation: What Do We Know?

This article provides an overview of the most important insights from economic literature on private investment into research and development activity and how it may be constrained by market failure. The focus is on implications from empirical studies for the identification of financially constrained firms with respect to their innovative activities. The empirical evidence for incentive and financing problems for private sector investment in innovation projects has provided ground for governmental interventions to prevent welfare reducing underinvestment in innovation. However, the survey of the literature shows that designing efficient policy schemes is not straightforward because government funds are scarce, and the impact of financial constraints on investment may differ substantially across firms, types of R&D projects and the organization of financial markets in different countries.

Hospital closure and economic efficiency

We present a new framework for assessing the effects of hospital closures on social welfare and the local economy. While patient welfare necessarily declines when patients lose access to a hospital, closures also tend to reduce costs. We study five hospital closures in two states and find that urban hospital bailouts reduce aggregate social welfare: on balance, the cost savings from closures more than offset the reduction in patient welfare. However, because some of the cost savings are shared nationally, total surplus in the local community may decline following a hospital closure.

Returns policy, new model introduction, and consumer welfare

This paper investigates how economic outcomes differ for new model introduction between two extreme contracts: outright sales contract and returns policy contract with full credit. Under the outright sales contract, we show that the retailer's incentive to introduce a new model can lead to a reduction of consumer welfare when the retailer is moderately risk averse. The primary conclusion from this study is that the returns policy contract resolves this conflict between firms and consumers, and that the supply chain introduces the new model only when consumer surplus from the new model is higher than that from the old model.

The Impact of Performance-Based Advertising on the Prices of Advertised Goods

An important current trend in advertising is the replacement of traditional pay-per-exposure (aka pay-per-impression) pricing models with performance based mechanisms in which advertisers pay only for measurable actions by consumers. Such pay-per-action mechanisms are becoming the predominant method of selling advertising on the Internet. Well-known examples include pay-per-click, pay-per-call and pay-per-sale. This work highlights an important, and hitherto unrecognized, side-effect of pay-per-action advertising. I find that, if the prices of advertised goods are endogenously determined by advertisers to maximize profits net of advertising expenses, pay-per-action mechanisms induce firms to distort the prices of their goods (usually upwards) relative to the prices that would maximize profits in settings where advertising is sold under pay-per-exposure methods. Upward price distortions reduce consumer surplus and one or both of advertiser profits and publisher revenues, leading to a net reduction in social welfare. They persist in current quality-weighted pay-per-action schemes, such as the ones used by Google and Yahoo. In the latter settings they always reduce publisher revenues relative to pay-per-exposure methods. I propose enhancements to today’s quality-weighted pay-per-action schemes that resolve these problems and show that the steady state limit of my enhanced mechanisms has identical allocation and revenue properties to those of an optimal pay-per-exposure mechanism.

Time-Varying Capital Requirements in a General Equilibrium Model of Liquidity Dependence

This paper attempts to quantify business cycle effects of bank capital requirements. The authors use a general equilibrium model in which financing of capital goods production is subject to an agency problem. At the center of this problem is the interaction between entrepreneurs' moral hazard and liquidity provision by banks as analyzed by Holmstrom and Tirole (1998). They impose capital requirements on banks and calibrate the regulation using the Basel II risk-weight formula. Comparing business cycle properties of the model under this procyclical regulation with those under hypothetical countercyclical regulation, the authors find that output volatility is about 25 percent larger under procyclical regulation and that this volatility difference implies a 1.7 percent reduction of the household's welfare. Even with more conservative parameter choices, the volatility and welfare differences under the two regimes remain nonnegligible.

Dealing with the Proliferation of Bilateral Free Trade Agreements

AbstractBilateral free trade agreements (BTAs) have been proliferating. The outcome of this proliferation of often overlapping BTAs and plurilateral free trade agreements (PTAs) is described as the spaghetti bowl effect or, in the Asian region, the noodle bowl effect. This is costly, and welfare reducing. How do we remedy the situation? In this paper, we consider the various options proposed in dealing with the spaghetti bowl, and assess their ability to do so. A general limitation of these proposals is their tendency to group all kinds of BTAs together, treating them as a homogeneous group. Thus, the proposals ignore underlying differences in motivation in forming BTAs. To overcome this, we develop a taxonomy for classifying BTAs by motivation before considering the effectiveness of the different remedies proposed. We find that each proposal has its pros and cons, and can cater for different types of BTAs. Thus, a combination of the various proposals may be warranted, even in the event of an expeditious and bona fide conclusion to the Doha Round.

Isolation and Subjective Welfare: Evidence from South Asia

Using detailed geographical and household survey data from Nepal, this article investigates the relationship between isolation and subjective welfare. We examine how distance to markets and proximity to large urban centers are associated with responses to questions about income and consumption adequacy. Results show that isolation is associated with a significant reduction in subjective assessments of income and consumption adequacy, even after controlling for consumption expenditures and other factors. The reduction in subjective welfare associated with isolation is much larger for households that are already relatively close to markets. These findings suggest that welfare assessments based on monetary income and consumption may seriously underestimate the subjective welfare cost of isolation.

Strategic Disclosure of Research Results: The Cost of Proving Your Honesty

In situations where a biased sender provides verifiable information to a receiver, I study how strategic reporting affects the incentives to search for information. Research provides series of signals that can be used selectively in reporting. I show that the sender is strictly worse off when his research effort is not observed by the receiver: he has to conduct more research than in the observable case and in equilibrium, discloses all the information he obtained. However this extra research can be socially beneficial and mandatory disclosure of results can thus be welfare reducing. Finally I identify cases where the sender withholds evidence and for which mandatory disclosure rules become more attractive. In 2002, editors of eleven of the most prestigious medical journals, announced that they would only publish the results of studies that were entered at their start in a publicly available database.1 Pharmaceutical firms conduct clinical trials to test the efficacy and potential side-effects of their drugs and to compare them to competitors' products. Publishing results of studies is an efficient way to influence doctors' prescriptions and patients' tastes. However, firms can conduct multiple trials and select the most favourable results. The system of mandatory disclosure adopted by medical journals is a response to the fear of such selective publishing.2 It makes the research effort of pharmaceutical firms more observable and will influence both the information they disclose and the amount of research they perform. In the present article I study the interaction between the research and disclosure decisions, which is an essential element in many settings. The adoption of mandatory disclosure rules has subtle effects and I discover that leaving the research effort unobservable can sometimes be socially beneficial.3 I study the interaction between research and disclosure in a model where a biased sender searches for information and communicates it strategically to a receiver who will