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In an oligopoly characterized by barriers to (re-)entry, a finite horizon, complete information, convex costs, and the presence of three identical firms, I show that in subgame-perfect equilibrium two of them (the predators) can choose to charge an initial price that is so low that the third (the prey) decides to exit immediately. In this predatory pricing equilibrium, the predators can enjoy higher profits than in the best collusive equilibrium with three firms. Thus, a coalition of two firms can benefit from colluding on excluding.

Inequality is often associated with negative societal consequences, but identifying a causal relationship is a daunting task. We provide evidence on the impact of unjust economic inequality on social interactions. Using a large-scale controlled experiment, we document that unjust inequality results in a significant decline in trust and trustworthiness. This erosion of social capital is associated with pessimistic beliefs about others' behavior and is muted if there is no direct link between the income-generating process and social interaction. Finally, our data do not support the view that higher status or wealth affects pro social attitudes: the successful are always more generous, whereas unsuccessful persons display the least efficient and generous behavior regardless of the status of the person who they interact with.

We examine whether optimization incentives — incentives to best-respond — have an effect on behavior in finitely repeated two-player dilemma games with strategic complements. We run an experiment in which we increase optimization incentives in two different ways compared to a baseline treatment with low strategic complementarity. In the first treatment, the increase in optimization incentives is created by an increase in payoffs on the best-response curve, while its slope remains unchanged. In the second treatment, the increase in optimization incentives takes the form of an increase in the slope of the best-response curve, while best-response payoffs remain unchanged. We find that the impact of optimization incentives is overshadowed by the effect of strategic complementarity. Although an increase in optimization incentives leads subjects to best-respond more frequently when the best-response curve is relatively flat, it leads to more cooperative behavior if the slope of the best-response function increases.

Assuming universal ambiguity aversion, an extensive theoretical literature studies how ambiguity can account for market anomalies from the perspective of expected utility-based theories. We provide a systematic experimental assessment of ambiguity attitudes in different likelihood ranges, and in the gain domain, the loss domain and with mixed outcomes. We draw on a unified framework to elicit preferences across these domains. We replicate the usual finding of ambiguity aversion for moderate likelihood gains. However, when introducing losses or lower likelihoods, we observe predominantly ambiguity neutrality or seeking, rejecting universal ambiguity aversion. (C) 2017 Elsevier B.V. All rights reserved.

Policymakers around the world are increasingly embracing the idea of a “circular economy” (CE), an economy built on the principle of reuse of materials and produced goods through recycling, refurbishing, and extended product life. By using less new materials per unit of value added, a CE is considered good for both the environment and the economy. Yet closing the material loop also changes the structure of the economy and the incentives for labor- and resource-productivity enhancing innovations. The overall economic impact is thus not so clear. This paper develops a two-sector endogenous growth model with Schumpeterian innovation, in which the primary sector continuously develops new products and uses primary resources in production, while the secondary sector refurbishes retired products for reuse. We show that increased refurbishing increases short-run consumption, but reduces resource prices (relative to wages) and crowds out the incentives for developing new, possibly less resource-intensive products. If innovations are strongly resource-saving, raising the refurbishing rate leads to a net economic loss.

Conventional wisdom argues that environmental policy is less costly if it induces the development of cleaner technologies. In contrast to this argument, we show that once the second-best nature of actual economies is taken into account, the cost of environmental policy may well be larger with induced technical change (ITC) than without. Thus, ITC may lower both the emissions reductions and the welfare gains associated with environmental policy. In an endogenous policy framework, ITC may reduce the desired stringency of the policy.

We show using detailed firm-level Chinese data that, among small exporters, firms selling to a more diversified set of countries have more volatile exports, while the opposite holds among large exporters. This result, which stands in marked contrast to standard portfolio theory for small exporters, is robust to a wide array of specifications and controls. Our theoretical explanation for these observations rests on the presence of fixed costs of exports per destination and short-run demand shocks. In this setup, the volatility of a firm’s exports depends not only on the diversification of its destination portfolio but also on whether it exports permanently to all markets. Among small exporters, a more diversified pool of destinations makes the firm more likely to export occasionally to some markets, thereby raising volatility. These results cast doubt on the commonly held belief that diversification must decrease volatility.

Auctions often involve goods exhibiting a common-knowledge ex-post risk. Insuch auctions, precautionary bidding predicts that under expected utility, DARA bidders reduce their bids by more than the appropriate risk premium. Because the degree of riskiness of an auctioned good and bidders’ levels of risk aversion are difficult to observe in field settings, we conduct experimental auctions that allow us to identify the precautionary premium directly. We find strong evidence for precautionary bidding. The effect is robust to changes in experimental design features. Our experiment provides the first empirical demonstration of precautionary motives in a strategic setting.

While fossil energy dependency has declined and energy supply has grown in the postwar world economy, future resource scarcity could cast its shadow on world economic growth soon if energy markets are forward looking. We develop an endogenous growth model that reconciles the current aggregate trends in energy use and productivity growth with the intertemporal dynamics of forward looking resource markets. Combining scarcity-rent driven energy supply (in the spirit of Hotelling) with profit-driven Directed Technical Change (in the spirit of Romer/Acemoglu), we generate transitional dynamics that can be qualitatively calibrated to current trends. The long-run properties of the model are studied to examine whether current trends are sustainable. We highlight the role of extraction costs in mining.

This discussion paper resulted in a publication in European Economic Review (2014), 164-180. We analyze the impact of product bundling in experimental markets. One firm has monopoly power in a first market but competes with another firm in a second market. We compare treatments where the multiproduct firm (i) always bundles, (ii) never bundles, and (iii) chooses whether or not to bundle. We also contrast the simultaneous and the sequential order of moves in the duopoly market. Our data indicate support for the theory of product bundling: with bundling and simultaneous moves, the multiproduct firm offers the predicted number of units. When the multiproduct firm is the Stackelberg leader, the predicted equilibrium is better attained with bundling, especially when it chooses to bundle, even though in theory bundling should not make a difference here. In sum, bundling works as a commitment device that enables the transfer of market power from one market to another.

Advocates of antidumping (AD) laws downplay their negative effects by arguing that the trade flows that are subject to AD are small and their distortions negligible. But while the adverse effect of AD on product-level trade has long been established, the question remains whether there are trade effects at the aggregate level. The recent proliferation wave of AD laws and their use provides us with a unique policy change to estimate the true trade effects of adopting and enforcing AD laws. For this purpose, we estimate the effect of AD on bilateral trade flows between the "new adopters" of AD laws and their trade partners. Using a gravity model of annual observations (1980-2000) our estimates show that AD has trade chilling effects on aggregate import volumes but the impacts are heterogeneous across sectors. We find that new tough users experience a chilling of their aggregate imports of 14 billion US$ a year (or 5.9%) as a result of AD measures. For some countries like Mexico and India, the dampening effects of AD laws on trade flows are found to substantially offset the increase in trade volumes derived from trade liberalization. © 2010 Elsevier B.V.

This paper presents the results of an experimental study on unemployment benefit sanctions. The experimental set-up allows us to distinguish between the effect of benefit sanctions once they are imposed (the ex post effect) and the threat of getting a benefit sanction imposed (the ex ante effect). We find that both effects matter. Moreover, the ex ante effect turns out to be substantial and bigger than the ex post effect. Benefits sanctions stimulate the outflow from unemployment.

Empirical tests of the relationship between international competitiveness and the severity of environmental regulations are hampered by the lack of pollution abatement cost data for non-U.S. countries. The theory of the firm suggests that environmental stringency can be measured by the difference between a polluting input's shadow price and its market price. We make a first attempt at quantifying such a measure for two industries located in nine European OECD countries. Overall, we provide (i) a new approach to measure cross-country regulatory differences in that we use a theoretically attractive measure of industry-specific private compliance cost, and (ii) empirical estimates that are an attractive tool for researchers and policymakers who are interested in examining how economic activity is influenced by compliance costs.

We study experimental two-sided markets in which the information structure is endogenous. When submitting an offer, a trader decides which other traders will be informed about the offer. This setup allows both a decentralized bargaining market (Chamberlin, J. Polit. Econ. 56 (1948) 95), and a double auction market (Smith J. Polit. Econ. 70 (1962) 111) as special cases. The results show that offers are typically directed to all traders of the other side of the market, but to none of the traders of the same side of the market. Even though traders receive much less information, the resulting market institution leads to the same outcomes in terms of prices and efficiency as a double auction market. In two additional treatments we examine the robustness of these results. First, it is found that the market institution adapts predictably, but not necessarily efficiently, to the imposition of transaction costs. Second, we find that the preference of sellers to conceal offers from competitors is strict. At the same time, sellers benefit collectively when they reveal offers to each other.