SAFETY FIRST, BANKRUPTCY, AND THE PRICING AND INVESTMENT DECISIONS OF THE FIRM

The paper analyzes the impact of imposing a constraint on the probability of bankruptcy for the pricing and investment choices of firms. Two models are presented in which a firm faces stochastic demand; in one costs are known with certainty, and in the other costs of production are probabilistic. In both cases the constraint induces a reduction in optimal price if demand is elastic. For less elastic demand, price increases may be indicated. With constant costs, the constraint lowers optimal investment. The results are applicable to the analysis of rating agencies' behavior, or to the design of bond covenants, especially for public utilities.     

Electricity Cost as a Driver of Competitiveness in Northern Europe: The Case of Estonia

The Estonian electricity market will be fully opened in 2013. Given ever-stricter environmental standards limiting the use of domestically available oil shale as main fuel for electricity generation and expansion of regional power pools, it is widely believed that Estonia’s currently low electricity prices are set to increase. Authors argue that cost differentiation and regional competition will be based on transmission charges and add-on fees. Measuring exporting industry’s total electricity costs as a share of total production costs shows that for the majority of Estonian producers electricity costs make up only around 1–2 % of production costs, but noteworthy exceptions exist.     

Effects of Global Democracy on Women's Reproductive Health: 1970–2005, Cross-World Analysis

ABSTRACT

Despite many trends that have been commonly assumed to enrich societal well-being, this article posits that in addition to benefits there are also costs associated with democratization. This article comparatively analyzes the effects of democratic transition on women's health in democratizing well-developed as compared with developing countries across the world. Considering the junction of positive and negative outcomes of democratization, the author argues that to women the costs of democratization are much more substantial than to men because their societal roles are less valued and life for most women is centered at home and, hence, is not considered to be of public concern. Thus far, democratization's costs to women have been largely overlooked, not only in terms of economic opportunities but also in terms of their impact on women's health. These costs cannot be ignored as they limit women's empowerment and endanger national health.     

AGENT COMPENSATION AND THE LIMITS OF BONDING

Agents in positions of trust may engage in malfeasance which is difficult to detect. This paper develops a model in which employers seek to control malfeasance by paying wages contingent on imperfect monitoring and agents may be required to pay entry fees or post bonds. We conclude that entry fees which exceed agents' assets are ineffective in controlling malfeasance. As a result, conditions exist in which it is optimal to pay agents more than their opportunity cost. Such conditions lead to an excess supply of applicants and allow employers to engage in discrimination at zero cost to themselves.     

TRANSACTION COST, TWO-PART TARIFFS, AND COLLUSION

When two goods exhibit demand complementarity, the sellers would generally charge lower prices under collusion than under rivalry–a cartel internalizes cross effects that independent firms ignore. For the particular case of "two-part" tariffs consisting of entrance fees and per-unit prices, this paper shows that entrance fees are indeed lower under collusion than under rivalry, but that per-unit prices are unaffected. The demand complementarity arises from transaction costs borne by consumers who enter the market. The policy implication is that collusion can be socially preferable to competition in the presence of such transaction costs.     

The Effects of Merit-Based Scholarships on Educational Outcomes

This paper analyzes the effect of a statewide merit-based scholarship program on educational outcomes in Arizona. It tests whether Arizona’s Instrument to Measure Standards (AIMS) scholarship has an effect on a comprehensive set of educational outcomes such as the number of applicants, student admissions, first-year first-time enrollment, ACT scores of entering freshman, retention rates, as well as on the level of tuition and fees at the three schools targeted by the program; Arizona State University, University of Arizona and Northern Arizona University. Both difference-in-differences estimation as well as synthetic control methods shows that AIMS has an economically and statistically significant effect enrollment. Enrollment effects are greatest among African American and Hispanic students and are significant for both men and women. While point estimates suggest that AIMS also lead to increases in tuition and fees, these results are not robust to placebo tests.     

ENTRY COORDINATION AND AUCTION DESIGN WITH PRIVATE COSTS OF INFORMATION ACQUISITION

Auction design with endogenous entry is complicated by entry coordination among bidders due to multiple entry equilibria issue. This article studies auction design when information acquisition costs are private information of bidders. We show that this problem can be resolved by sufficient dispersion in these costs. First, we find that a simple second‐price auction with no entry fee and a reserve price equal to the seller's valuation is ex ante efficient, while a revenue‐maximizing auction involves personalized entry fees, which are determined by the hazard rates of their information acquisition cost distribution. Second, we show that sufficient dispersion in the information acquisition costs (more dispersion than a particular uniform distribution by the Bickel‐Lehman dispersive order) can coordinate bidders and implement uniquely the desirable entry. The dispersion in information acquisition costs is also necessary for this “unique implementation” result. (JEL D44, D82)     

Pensions and the uses of ignorance by unions and firms

Pensions are contingent claims contracts that are often fashioned by collective bargaining under conditions of asymmetric information and market power. Pensions are not an employer’s or a union’s optimal contract; they represent compromise. Employers use pensions to minimize labor costs and to adjust to market changes. Pensions help unions improve and protect their members’ work lives and help unions to survive as institutions. When workers’ estimations of their pensions differ from their employers’ estimations a moral hazard can exist. Less mobile workers and those with less influence subsidize the pension benefits of other workers or reduce an employer’s costs. Econometric results based on data from the President’s Commission on Pension Policy show that certain workers, namely women, overvalue their plans, which provides an opportunity to lower labor costs and redistribute benefits. Unions have a contradictory effect on information. The author thanks participants in the Cornell University Collective Bargaining workshop and the Harvard Labor Economics workshop. I especially thank James Medoff for his comments.     

RESERVE PRICE VERSUS ENTRY FEE IN STANDARD AUCTIONS

Analysis of standard auction rules when bidders are risk averse is usually carried out under the assumption that the seller is able to set an optimal reserve. The role of entry fees has been generally overlooked in that analysis. We consider bidders with constant absolute risk aversion and show that reserve price is an essential tool in the second price auction while entry fee is essential in the first price auction. Furthermore, setting a reserve price and entry fee combination optimally may change some of the rankings of the standard auctions that hold under optimal reserves. (JEL D44)     

Social Cost Pricing when Public Transport is an Option Value

A well-known principle of welfare economics states that an efficient allocation of resources can be achieved in a competitive economy when market prices are in line with social marginal costs. When applied to the transport sector, this implies that the price of the various transport modes should be made equal to the sum of marginal production and external costs, like congestion, accidents, pollution, and road maintenance. It is sometimes argued the internalization of external costs would bring about a change in demand patterns with a shift towards public transport and cleaner modes. But public transport is already favoured by discriminatory fiscal treatment. Whereas public services are normally (heavily) subsidized, private transport is taxed in several ways and, in some countries, quite substantially so. The application of the 'optimal pricing' principle, therefore, critically depends on how the subsidization of public services is interpreted. This paper addresses the issue of optimal pricing of urban transport, using different hypotheses concerning the treatment of public services. After reviewing some traditional arguments in favour of public transport subsidization, a new approach, based on uncertainty and option values, is discussed. The implications of this approach are investigated by means of an applied model, where optimal prices for urban transport services in the city of Bologna are computed under alternative assumptions.     

Physician Market Power—Evidence From the Allocation of Malpractice Premiums

Based on evidence from variations in malpractice premiums, physicians have local market power, at least in some dimensions. It is observed that higher-cost physicians pass on a significant portion of idiosyncratic costs to patients as higher prices. I test two hypothesized sources of this market power: barriers to entry from specialization and relatively inelastic firm-level demand for certain services. Examining the relationship of physician-specific malpractice premiums to fees, I find no observable difference in the ability of surgeons and nonsurgeons to pass on these costs; however, both types of physicians pass them on more to surgical than to nonsurgical patients.     

Implications of Collection of Excessive Brokerage Fees for Migrant Workers in the Domestic Care Sector in Israel

This research examines the implications of excessive brokerage fees collection for migrant workers in the domestic care sector in Israel. The findings reveal that migrant workers are forced to pay much higher brokerage fees than is permitted by Israeli law. These fees are are mainly financed by loans. Thus, workers are forced to devote a significant portion of their monthly income in Israel to repaying these loans. The research also examines the possibility of reducing the collection of excessive brokerage fees by signing bilateral agreements, with the countries of origin, which allow the state to supervise the recruitment process. Such agreements have already been implemented in the construction and agriculture sectors in Israel. The first agreement in the domestic care sector, signed in September 2018 with the Philippines, will apparently be implemented in the near future, and might solve some of the problematic issues addressed in this research.     

Publishers as elements of the scientific communication system

The author argues that the new digital possibilities in scientific communication do not imply, by any means, that many old requirements are becoming dispensable. The essential elements of the system, such as quality assurance, authenticity, orientation and navigation will still demand considerable expense. The overall system costs will rather be higher in a hybrid system. In the second part of his lecture, the author discusses the two fundamentally different open access models, the Golden Road, which is supposed to be able to operate, eventually, without any publishers, and the Green Road, whose functioning is based on primary publication through publishing houses. Finally, the basic issue of the indispensable qualitative stratigraphy of scientific documents is addressed. For this, the published journals, which also provide topical focus and, thus, orientation as well as active marketing in terms of optimal diffusion, still are a very capable tool. It is questionable to what extent these tasks could be fulfilled by university-based repositories. The publishing houses, on the other hand, have a proven track record of providing a wide range of useful value-adding services in digital publishing.     

Does Charging Nonprofit Volunteers Affect Their Satisfaction?

Nonprofits that offer volunteer experiences in foreign countries have long charged fees to their volunteers, but recently some other nonprofit organizations have begun to charge as well. Volunteer attitudes toward such fees have not previously been studied. Product marketing research has suggested that fees can sometimes improve participants’ evaluation of their experience, but public service motivation research seems to suggest that fees will diminish participants’ satisfaction. This study examines the attitudes toward fees of 4,400 volunteers who paid $310 to participate in a week‐long project that built and repaired housing in Appalachia. Although a third of volunteers believed that the fee enhanced their appreciation of the program, an equal proportion disagreed. An even larger percentage of the volunteers believed the fee discouraged some volunteers. Concerns with fees were more common among youth volunteers than adult volunteers and among those who volunteered for altruistic rather than for career reasons. Most volunteers, even those critical of fees, were positive about their volunteer experience, but those who were least positive about the fees were also somewhat less positive about their experience. These results suggest that decisions about volunteer fees must balance the benefits of additional funds for enhanced client services against the likelihood of discouraging some potential volunteers, especially younger or more altruistic volunteers.     

RISK, TRANSACTIONS CHARGES, AND THE MARKET FOR FOREIGN EXCHANGE SERVICES

This paper suggests that transactions charges in foreign exchange markets, rather than being solely brokerage fees, represent exchange rate uncertainty in periods of great fluctuations by including remuneration for the assumption of risk by foreign exchange dealers. Since most of the cost of exchange rate uncertainty may be largely endogenously included in the foreign exchange markets, attempts to examine the efficient market hypothesis in these markets should most appropriately include specific consideration of transactions costs. There appears to be empirical support for the premise that transactions charges are positively related to exchange rate risk, and, as well, inclusion of contemporaneous bid-ask spreads into the interest parity schedule leaves few unexplained profits from dollar-pound covered interest arbitrage during the 1970's and underscores the notion of classifying periods by degree of turbulence in analyzing covered interest arbitrage.     

THE EFFECT OF PROVIDER CONTROL OF BLUE SHIELD PLANS ON HEALTH CARE MARKETS

Blue Shield plans often are granted regulatory advantages by the states in which they operate. Run efficiently, such not-for-profit firms should use these lower costs to eliminate their less advantaged rivals, the commercial insurers. However, these higher-cost commercial providers have been able to offer insurance coverage at prices competitive with the Blues, as evidenced by the fact that Blue plans have, on average, less than 50 percent market share. Similar prices with lower overall costs implies that economic rents are being earned, rents which a not-for-profit firm cannot distribute to owners. In this paper we argue that when there are competing goals among the groups controlling the Blue Shield plans, the different possible "uses" of the regulatory advantage become endogenously determined, necessitating the use of simultaneous equation estimation. Testing this model we find the major effect of doctor-control of Blue Shield plans is to raise doctors' fees while lowering the amount of rents captured by both consumers and administrators.     

OPTIMAL 'MISMATCH' AND PROMOTIONS

Seeming 'mismatches' in which workers are either under-or overqualified, are shown to be optimal. From the firm's point of view, although turnover will be positively related to overqualification, training costs will be inversely related to overqualification. Further, overqualified workers constitute a pool from which promotions are made. Workers enter seeming mismatches due to search and mobility costs and because of opportunities for promotion. Estimates using a unique data set indicate that workers who are overqualified at hire receive less training and more promotions, and that workers overqualified for their current job are more likely to quit.     

Revenue-Sharing in Movie Exhibition and the Arrival of Sound

During the silent film era, film companies rented the vast majority of their films to exhibitors for flat per-day fees. A technology "shock" in the form of the coming of sound led to the widespread replacement of flat fees by revenue sharing. This article seeks to determine why. It finds that sound technology altered the structure of incentives in movie exhibition, significantly reducing the scope for exhibitor shirking, reducing the cost of dividing attendance revenue ex post (necessary for revenue sharing), and, initially at least, raising the difficulty of negotiating lump-sum rental fees. As a result, percent-of-gross pricing became the norm. These findings allow additional light to be shed on the reasons for share contracts in general—most previous studies have been limited to an examination a cross-section of contracts.     

EFFICIENCY WAGES AND SUBJECTIVE PERFORMANCE PAY

This paper studies optimal relational contracts in motivating workers in a market setting. We find that labor markets with higher turnover costs will use more subjective performance pay and less efficiency wages and that in those markets, the total wage payment is lower and the equilibrium employment level is higher. Surprisingly, under certain conditions, an increase in turnover costs leads to higher social welfare. Incorporating workers' search costs, we show that wages are procyclical in booms and are either rigid or countercyclical during recessions. The predictions of the model are consistent with some empirical evidence. ( JEL D82, J33, J41, J63)     

ECONOMIC SEARCH: AN EXPERIMENTAL STUDY

This paper presents results of experiments designed to test several of the hypotheses present in the theoretical literature on "optimal" economic search. First we test whether the subjects (searchers) actually search for wages in ways that are consistent with setting an optimal reservation wage. We then proceed to determine experimentally the effects of risk aversion, increased search costs, changes in risk (brought about by a mean-preserving transformation of the distribution of wage offers), the presence or absence of recall, the existence of a finite horizon, and the searcher's state of knowledge about the underlying distribution of wages. In general, we find that the searchers exhibit behavior that is consistent with that predicted by theory. Differences between risk neutral and risk averse searchers are found, and the responses of both groups to changes in search costs, in the degree of risk, or in the state of knowledge are consistent with theoretical predictions.