iDEA Collection: Faculty Research and Publications (Economics & International Business)

Will competitive bidding decrease medicare prices?

Mon, 29 Oct 2007 22:58:59 GMT

Title: Will competitive bidding decrease medicare prices?

Authors: Katzman, Brett; McGeary, Kerry Anne

Abstract: Recent measures to reduce Medicare spending include the use of competitive bidding in determining reimbursement prices. Several competitive bidding experiments have been conducted by the Centers for Medicare and Medicaid Services (CMS) to determine reimbursement prices. This paper investigates the use of competitive bidding to set reimbursement prices for durable medical equipment, prosthetics, orthotics, and supplies. First, the competitive bidding process is examined on a theoretical level. It is shown that the CMS competitive bidding process (auction) is inefficient, leads to price increases, and may cause decreases in the quality of services. Next, data supporting the theoretical predictions are presented. Finally, we suggest that a descending variant of the Ausubel, Cramton, and Milgrom (2006) clock-proxy auction be used.

Rent protection as a barrier to innovation and growth

Sun, 29 Jul 2007 22:58:59 GMT

Title: Rent protection as a barrier to innovation and growth

Authors: Dinopoulos, Elias; Syropoulos, Constantinos

Abstract: This paper builds a model of R&D-based growth in which the discovery of higher-quality products is governed by sequential stochastic innovation contests. Incumbent firms producing state-of-the-art-quality products expend resources in activities to protect their rents; challengers raise claims to these rents by engaging in R&D to discover better-quality products. Rent-protecting activities create barriers to innovation and increase the expected duration of an incumbent’s monopoly power; R&D investments reduce it. The model (i) offers a novel explanation for the observation that the difficulty of conducting R&D has been increasing over time, (ii) generates endogenous scale-invariant long-run innovation and growth, and (iii) identifies a new structural barrier to innovation and growth. In the present model, long-run growth depends positively on proportional R&D subsidies, the population growth rate, and the size of innovations, but negatively on the market interest rate and the effectiveness of rent-protecting activities. The presence of rent-protecting activities causes the market rate of innovation to rise by amplifying the welfare distortion associated with the intertemporal spillover effect.

Information technology and bilateral FDI: theory and evidence

Mon, 28 Nov 2005 22:58:59 GMT

Title: Information technology and bilateral FDI: theory and evidence

Authors: Jeon, Bang Nam; Tang, Linghui; Zhu, Lei

Abstract: This paper investigates the impact of communication cost on the FDI activities of multinational corporations (MNCs). First, we provide a theoretical foundation for a gravity-type FDI model, which shows that physical distance and communication technology are important determinants of FDI activities. Second, we apply the IT-augmented gravity model to bilateral FDI data for a total of 47 OECD and non-OECD countries from 1980 to 1997 and find that distance is negatively related to inward FDI stocks while the growth of IT, measured by teledensity and celldensity, has encouraged FDI significantly. The impact is found to be more prominent on FDI from G7 countries to OECD countriesthan to non-OECD countries, and more prominent in the 1990s than in the 1980s. Moreover, IT plays a more effective role by reducing communication cost when distance is beyond a threshold range.

A currency union or an exchange rate union: evidence from Northeast Asia

Sun, 29 Oct 2006 22:58:59 GMT

Title: A currency union or an exchange rate union: evidence from Northeast Asia

Authors: Jeon, Bang Nam; Zhang, Hongfang

Abstract: This paper examines whether or not Northeast Asia economies, namely, China, Japan, Korea, and Taiwan, can form a currency union, where a single currency and a uniform monetary policy are adopted, or an exchange rate union where all the currencies are pegged to an internal or external currency or an optimum currency basket. The analysis of correlations of supply shocks, exchange rate shocks, monetary shocks, and demand shocks, which are estimated applying the structural VAR model with identification restrictions imposed, to the data for the period from 1970 through 2004, shows that shocks of these economies are not symmetric, in general, implying that the Northeast Asian economies are not ready yet to form a common currency union. However, it is found that the Northeast Asian countries can form an exchange rate union with a major currency basket, which consists of the U.S. dollar, the euro and the Japanese yen, as an anchor currency. The paper also examines the option of pegging to a basket of regional currencies, similar to the Asian Currency Unit (ACU), and discusses policy implications.

The cyclical behavior of bank price-cost margins

Sun, 29 Oct 2006 22:58:59 GMT

Title: The cyclical behavior of bank price-cost margins

Authors: Aliaga-Diaz, Roger; Olivero, Maria Pia

Abstract: When price-cost margins vary endogenously in response to aggregate shocks, their variation becomes an additional channel through which such shocks can affect economic activity. This was first recognized by Rotemberg and Woodford (1991 and 1992) and its implications have been widely studied in goods markets. Bernanke and Gertler (1989) and Bernanke, Gertler and Gilchrist (1998) study this accelerator effect in financial markets in theoretical frameworks. However, the cyclical behavior of price-cost margins in the market for credit has been given only scant empirical attention so far. The literature still lacks empirical evidence on this cyclicality as a necessary condition for the existence and importance of this financial accelerator. In this paper we attempt to start filling this gap and study the cyclical behavior of banks’ price-cost margins in the United States banking sector, using time series quarterly data for the period 1984-2005 and applying the methodology proposed by den Haan (2000) to study the comovement between variables. We find empirical evidence in support of the countercyclicality of margins, and are able to show that it is robust to controlling for the effects of credit risk and the term structure of interest rates. As a mechanism for the propagation of macroeconomic shocks, this cyclical behavior can have important implications for both stabilization policy and RBC theory.

Twin crises in emerging markets: The role of liability dollarization and imperfect competition in banking

Thu, 29 Mar 2007 22:58:59 GMT

Title: Twin crises in emerging markets: The role of liability dollarization and imperfect competition in banking

Authors: Luca, Alina C.; Olivero, Maria Pia

Abstract: Recent currency crises in emerging markets have been accompanied by banking crises, with concentration in the market for bank credit increasing after large devaluations. In this paper we study the role of imperfect competition and liability dollarization in banking in shaping the real effects of twin crises. We do so by introducing currency mismatches in a modified version of the Schargrodsky and Sturzenegger (2000) model of imperfect competition in the banking industry with endogenous product differentiation, and then embedding it in an otherwise standard general equilibrium model of a small open economy. We show that both imperfections-currency mismatches and imperfect competition in banking-can generate a banking crisis in the presence of an exogenous currency crisis. We then discuss the contribution of each distortion to the magnitude of crises.

Probabilistic equilibria for evolutionarily stable strategies

Mon, 29 Jan 2007 22:58:59 GMT

Title: Probabilistic equilibria for evolutionarily stable strategies

Authors: McCain, Roger A.

Abstract: This comment suggest that an equilibrium framework may be retained, in an evolutionary model such as Gintis’ and with far more realistic results, if rationality is relaxed in a slightly different way than he proposes: decisions are assumed to be related to rewards probabilistically, rather than with certainty. This relaxed concept of rationality gives rise to probabilistic equilibria.

Systematic risk, and oil price and exchange rate sensitivities in Asia-Pacific stock markets

Wed, 27 Sep 2006 22:58:59 GMT

Title: Systematic risk, and oil price and exchange rate sensitivities in Asia-Pacific stock markets

Authors: Nandha, Mohan; Hammoudeh, Shawkat

Abstract: This paper examines the relationship between beta risk and realized stock index return in the presence of oil and exchange rate sensitivities for fifteen countries in the Asia-Pacific region using the international factor model. Thirteen of the 15 countries have the expected beta signs and show significant sensitivity to domestic risk when the world stock market is in both up and down modes. In terms of oil sensitivity, only the Philippines and South Korea are oil-sensitive to changes in the oil price in the short run, when the price is expressed in local currency only. Basically no country shows sensitivity to oil price measured in US dollar regardless whether the oil market is up or down. Nine countries are affected by changes in the exchange rate. In terms of relative factor sensitivity distribution, one is willing to conclude that these stock markets are more conditionally sensitive to local currency oil price changes than to beta risk wherever the relationships are significant.